In re Harnischfeger Industries, Inc.

• Citation: 270 BR 188
• Decision Date: 05 December 2001
• Docket Number: Bankruptcy No. 99-2171-(PJW). Civ.A.No. 01-39-RRM.
• Parties: In re HARNISCHFEGER INDUSTRIES, INC., et al., Debtors. Harnischfeger Industries, Inc. et al., Plaintiffs, v. Wisconsin Department of Workforce Development, Defendant.
• Court: U.S. District Court — District of Delaware

270 B.R. 188 (2001)

In re HARNISCHFEGER INDUSTRIES, INC., et al., Debtors Harnischfeger Industries, Inc. et al., Plaintiffs, v. Wisconsin Department of Workforce Development, Defendant.

Bankruptcy No. 99-2171-(PJW). Civ.A.No. 01-39-RRM.

United States District Court, D. Delaware.

December 5, 2001.

Laura Davis Jones, Christopher J. Lhulier, Pachulski, Stang, Ziehl, Young & Jones, P.C., Wilmington, Delaware, Marty R. Howard, David F. Loeffler, Krukowski & Costello, Milwaukee, Wisconsin, James H.M. Sprayregen, Anne Marrs Huber, Kirkland & Ellis, Chicago, Illinois, for debtors.

Allison E. Reardon, Division of Revenue, Department of Finance, State of Delaware, Wilmington, Delaware, Richard Briles Moriarty, Wisconsin Department of Justice, Madison, Wisconsin, for Wisconsin Department of Workforce Development.

Robert J. Dehney, Jason W. Staib, Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware, Lewis Kruger, Wendell H. Adair, Jr., Curtis C. Mechling, Stroock & Stroock & Lavan, LLP, New York City, for Official Committee of Unsecured Creditors of Beloit Corporation.

OPINION

McKELVIE, District Judge.

This is a bankruptcy case. The debtors are Harnischfeger Industries, Inc. and Beloit Corporation. Harnischfeger is a holding company that owns 80% of the stock of Beloit. On June 7, 1999, both debtors filed their voluntary petitions for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101-1330. The assets of Beloit were eventually divided into separate business units and sold to various buyers during December 1999 and January 2000. Beloit terminated at least 306 non-union employees during and after the sale of its business units. On November 10, 2000, the defendant, the Wisconsin Department of Workforce Development (the "DWD"), filed a proof of claim against each of the debtors for severance benefits allegedly not paid to Beloit's former employees. DWD asserted the claims pursuant to its authority under Chapter 109 of the Wisconsin Statutes to prosecute causes of action for unpaid wages on behalf of Wisconsin employees. The debtors moved to withdraw the reference to the bankruptcy court for the DWD claims and this court granted that motion on February 15, 2001.

DWD's claim against Beloit seeks to recover unpaid severance pay due under a severance policy Beloit established in 1996. It is DWD's position that Beloit violated its contractual obligations under the 1996 policy when it amended the policy in 1999 to facilitate the transfer of its assets to the purchasers. DWD's claim against Harnischfeger proceeds under two theories. First, DWD seeks to recover the same unpaid severance pay from Harnischfeger under the theory that Beloit is Harnischfeger's alter ego and the cases should be substantively consolidated. Second, it seeks damages for Harnischfeger's alleged tortious interference with Beloit's 1996 severance policy.

The debtors moved for summary judgment on DWD's claims on the basis that they are preempted by the Employee Retirement Income and Security Act (ERISA) and not actionable under Wisconsin law. According to the debtors, ERISA preempts the DWD claims because Beloit's severance policy was an "employee welfare benefit plan" within the meaning of ERISA, 29 U.S.C. § 1002(1)(A), and the prosecution of DWD's claims are thus expressly preempted by § 514(a) of the Act, 29 U.S.C. § 1144(a). Even if DWD's claims are not preempted, the debtors argue that Beloit lawfully amended its 1996 severance policy in 1999 and thus the DWD cannot recover severance pay based on the 1996 policy for employees terminated when it was no longer in effect.

I. FACTUAL AND PROCEDURAL HISTORY

The court draws the following facts from the affidavits and documents submitted by the parties in support of, and in opposition to, the debtors' motion for summary judgment.

Prior to the debtors' Chapter 11 filing, Harnischfeger was a holding company that owned 80% of the stock of Beloit. Beloit was primarily a pulp and paper machine manufacturer and designer, with employees in Wisconsin and elsewhere. Mitsubishi Heavy Industries Inc. owned the remaining 20% of Beloit's stock.

On December 10, 1996, Beloit issued a severance policy that replaced an earlier policy existing since January 1, 1991. Entitled "Severance Policy," the document stated:

All U.S. non-union employees, who do not have recall rights, will be entitled to the following Severance benefits:

1. Severance pay in the amount of one week\'s pay for each full year of service, with a minimum of four weeks and a maximum of twenty six weeks.

2. Unused vacation for the current year and any accrued vacation required by law.

3. Continuation of group medical coverage through the end of the month of the severance pay, provided the employee continues the appropriate contribution. This extended coverage will be counted as coverage time under COBRA requirements.

Any exceptions to this policy requires sic the approval of the Corporate Vice President of Human Resources.

The severance policy contained no other provisions.

Dennis Winkleman, a former Senior Vice President of Human Resources for Beloit, and Timothy Monahan, a former Director of Human Resources for Beloit, have provided affidavits explaining the workings of the 1996 severance policy. Winkleman's affidavit explains that Beloit's Human Resources Department administered the 1996 severance policy by calculating the years of service and base salary of terminated employees. The years of service provision was calculated in the same manner as it was in the Beloit pension plan. Beloit would then pay the terminated employee the amount required by the severance policy. Winkleman exercised the discretion afforded to him by the policy to make some exceptions for particular employees. On occasion, he decided to give more severance pay than a terminated employee would typically be entitled in return for that employee entering a non-compete agreement or waiving certain statutory employment rights. Large layoffs required Winkleman and other Beloit executives to estimate the amount of severance pay that would be owed to its employees. Monahan's testimony confirmed Winkleman's explanation of the severance policy's workings.

The debtors filed their voluntary petitions for bankruptcy relief under Chapter 11 on June 7, 1999. Following the filing of the petitions, Harnischferger and Beloit operated their businesses as debtors in possession pursuant to 11 U.S.C. §§ 1107(a), 1108. In the fall of 1999, John Hanson, Chief Executive Officer of Beloit and Chairman of its Board, and Mark Readinger, President and Chief Operating Officer of Beloit, decided that a sale of Beloit's assets would maximize the value of the companies for their creditors. They divided Beloit into five operating units, including: (1) the Oasis division, (2) the Woodyard division, (3) the Pulping and Finishing division, (4) the Paper Machine Technology division, and (5) the Paper Machine Technology, aftermarket and Rolls division. During December 1999 and January 2000, Beloit entered agreements to sell each of its units to various buyers with the approval of the bankruptcy court.

In his affidavit, Winkleman explained that Beloit's management believed that the company could maximize the value it received in the asset sales by including the employees of each business unit in the sale. To accomplish this purpose, Beloit devised new severance policies to replace the 1996 policy. The debtors received the bankruptcy court's approval to change its severance policy as part of the court's September 30, 1999 Employee Order. According to Winkleman, Beloit attempted to preserve the employment of three groups of employees: (1) employees with experience and skills specific to one of Beloit's units for sale; (2) employees whose continued employment was important to the winding down of Beloit's business; and (3) employees who were working on the installation, maintenance or repair projects for Beloit's customers. According to Winkleman, Beloit would pay twelve weeks of severance pay to employees in the second and third groups, regardless of their length of service with Beloit. The debtors did not submit documentation in support of Winkleman's description of a twelve week severance payment policy for employees in the second and third of his three groups.

According to Winkleman, Beloit enacted two new severance policies on November 19, 1999. "Severance Policy # 2" addressed the first of his groups, employees with experience and skills specific to one the units being sold by Beloit. Severance Policy # 2 states the following:

1. This policy, adopted and approved by Beloit Corporation, replaces all existing severance and/or involuntary termination policies dated prior to November 19, 1999. It applies to all U.S.-based, non-union employees who are not covered by Severance Policy # 1 (Paper Group) dated November 19, 1999, and who are involuntarily terminated without right of recall for reasons other than misconduct.

2. Severance benefits provided by this policy amendment include the following:

a) Severance pay in the amount of one week\'s base salary for each full year of service, with a maximum of 2 week\'s severance pay and a maximum of twenty-six week\'s severance pay.

b) Payment for accrued unused vacation for the current year and any other accrued vacation as required by law;

c) Continuation of group medical coverage. . . .

3. Notwithstanding any provision of this Severance Policy to the contrary, an employee is not eligible to receive severance pay under Section 2 above if that employee receives an offer of comparable employment (as determined by Beloit Corporation) with a buyer of all or any portion of the Beloit businesses, whether or not the offer is accepted.

4. The severance benefits provided by this policy do not affect the benefits to which an employee may be eligible for under any applicable state or federal law.

At the bottom of Severance Policy # 2, a box includes the...