In re Manchester Gas Storage, Inc.

• Decision Date: 28 January 2004
• Docket Number: No. 00-04780-R.,No. 00-04781-R.,00-04780-R.,00-04781-R.
• Citation: 309 B.R. 354
• Parties: In re MANCHESTER GAS STORAGE, INC., an Oklahoma corporation, MGL, Inc., an Oklahoma corporation, Debtors.
• Court: U.S. District Court — Northern District of Oklahoma

309 B.R. 354

In re MANCHESTER GAS STORAGE, INC., an Oklahoma corporation, MGL, Inc., an Oklahoma corporation, Debtors.

No. 00-04780-R.

No. 00-04781-R.

United States District Court, N.D. Oklahoma.

January 28, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John Howland, Rosenstein, Fist & Ringold, Tulsa, OK, for Movant, William H. Davis.

Patrick O'Connor, Moyers, Martin, Santee, Imel & Tetrick, LLP, Tulsa, OK, for Steven A. Arnold.

ORDER SUSTAINING OBJECTION TO CLAIMS OF STEVEN A. ARNOLD

DANA L. RASURE, Bankruptcy Judge.

Before the Court is the Objection to Claims of Steven A. Arnold (Doc. 466)¹ filed by creditor and shareholder William H. Davis on May 14, 2003, and the Response and Objection of Steven A. Arnold to William H. Davis' Objection to Claims ("Arnold's Response to Objection") (Doc. 467) filed on June 16, 2003. An evidentiary hearing on this contested matter was held on August 28, 2003, at which William H. Davis ("Davis") appeared in person and through his counsel, John Howland, and Steven A. Arnold ("Arnold") appeared in person and through his counsel, Patrick O'Connor. The parties submitted Joint Stipulations of Fact ("Stipulation") (Doc. 477) and jointly submitted a set of exhibits. The Court heard the testimony of three witnesses. In further support of their positions, the parties also filed the following —

• Memorandum of Authorities of Steven A. Arnold in Connection With Entitlement to Post-Petition Interest and Attorney Fees ("Interest and Attorney Fee Memorandum") (Doc. 479), filed on August 27, 2003;

• Memorandum of Authorities of Steven A. Arnold in Connection With Issue of Consideration for December 14, 2000 Agreement ("Consideration Memorandum") (Doc. 478), filed on August 27, 2003;

• Post-Trial Brief of William H. Davis Supporting His Objection to the Claims of Steven A. Arnold ("Davis's Post-Trial Brief") (Doc. 488), filed on September 15, 2003;

• Response of Steven A. Arnold to Post-Trial Brief of William H. Davis (Doc. 497), filed on October 9, 2003 ("Arnold's Response to Post-Trial Brief"); and

• Brief of William H. Davis in Reply to New Matters Presented in the Response Brief of Steven A. Arnold to Post-Trial Brief of William H. Davis (Doc. 498), filed on October 24, 2003.

Upon consideration of the stipulations, the evidence and arguments presented at trial, the briefs and the applicable law, the Court finds and concludes as follows:

I. Jurisdiction

The Court has jurisdiction of this "core" proceeding by virtue of 28 U.S.C. §§ 1334, 157(a), and 157(b)(2)(A), (B) and (O); Miscellaneous Order No. 128 of the United States District Court for the Northern District of Oklahoma; Order of Referral of Bankruptcy Cases effective July 10, 1984, as amended; and Paragraphs A, B, C, E and J of Article VIII of the Second Amended Joint Plan of Reorganization, which was confirmed on July 12, 2001 (the "Plan"). Arnold Exhibit 17 (Docs. 316, 317).

II. Findings of fact

Debtors Manchester Gas Storage, Inc. ("MGS") and MSL, Inc. ("MGL") filed their petitions for relief under Chapter 11 of the Bankruptcy Code on December 18, 2000. Davis was president, sole director and sole shareholder of MGS and MGL. Stipulation at 6, ¶ 25. Pursuant to an Employment Contract dated March 13, 2000 (the "Employment Contract"), Arnold was vice president and chief operating officer of MGS and vice president and chief financial officer of MGL. Stipulation at 1, ¶¶ 1, 2; Arnold Exhibit 2 at 1, § 1. Under the same contract (and for the same compensation). Arnold served as vice president and chief financial officer for a non-debtor company also owned by Davis. Davis Operating Company ("DOC"). Arnold Exhibit 2 at 1, § 1. Although Arnold had duties to MGL and DOC, the parties to the Employment Contract stipulated that —

the relationship created by this Contract between MGS and ARNOLD is strictly that of employer and employee and nothing more. The parties further stipulate that DOC and MGL are third party beneficiaries to this Agreement, and can enforce all of the terms and conditions herein to the same extent as MGS....

Arnold Exhibit 2 at 13, ¶ 12.3.

The Employment Contract provided that Arnold would be employed for a term of five years at an annual base salary of $90,000 per year. Stipulation at 2, ¶ 3; Arnold Exhibit 2 at 2, ¶ 5.1. Arnold was required to "devote his full time and attention to the duties assigned to him and shall serve the Company [defined as MGS, MGL and DOC combined] exclusively." Stipulation at 3, ¶ 9; Arnold Exhibit 2 at 2, § 4. Section 8 of the Employment Contract provided that Arnold would receive medical and life insurance and other benefits "to the extent that the same or similar benefits are available to all employees of MGS" and that Arnold would be reimbursed for out of pocket expenses incurred in connection with his employment. Stipulation at 2, ¶ 4; Arnold Exhibit 2 at 10, § 8.

Arnold was also afforded the opportunity to earn additional compensation in the form of bonuses. Paragraph 5.2 of the Employment Contract provided for a signing bonus to Arnold, not to exceed the sum of $11.220 (the "Signing Bonus"). Arnold Exhibit 2 at 3, ¶ 5.2. Paragraph 5.3 of the Employment Contract provided that Arnold would be entitled to a trading bonus from MGL based upon a percentage of the net amount of trading gains (as defined in the Employment Contract) during each fiscal year ("MGL Trading Bonus"). Stipulation at 2, ¶ 6; Arnold Exhibit 2 at 3, ¶ 5.3. Paragraph 5.4(B) of the Employment Contract provided for a discretionary bonus to Arnold based upon Arnold's ability to make a significant impact on MGS's net profit prior to April 1, 2002 ("Discretionary Bonus"). Stipulation at 2, ¶ 7; Arnold Exhibit 2 at 4, ¶ 5.4(B). Davis had discretion to determine the amount of the Discretionary Bonus. Id.

Finally, paragraph 5.6 of the Employment Contract created a right to additional compensation —

[u]pon the sale of MGS, or upon sale of all of the assets of MGS, ... if such transaction: (i) arises on or after April 1, 2002, and (ii) is consummated during the term of ARNOLD's employment under this Contract, or any extensions or renewals thereof....

(the "MGS Sale of Business Bonus"). Arnold Exhibit 2 at 5, ¶ 5.6; Stipulation at 2, ¶ 8. The amount of the MGS Sale of Business Bonus was to be calculated as follows —

After payment (or repayment/return, as the case may be) of all MGS' liabilities and obligations not assumed by the purchaser in such sale, including but not limited to: (i) all current and long-term debt of any nature whatsoever (including both principal and interest), (ii) all sums (including both principal and interest) of any nature whatsoever, advanced by, or due to, [Davis], his successors or assigns, and/or (iii) cushion gas obligations. ARNOLD shall be entitled to receive the applicable percentage (which in no event shall exceed two and one-half percent (2 1/2%) shown immediately below [)] of the remaining net gain, if any. The product so determined shall be the "MGS Sale of Business Bonus." Said bonus to be in effect at the same percentages immediately listed below for a term of two (2) years from the date of Arnold's termination unless said termination is for the reasons described in sections 10.1 C. E & G.

                Year of Sale Percent of Net Gain
                4/1/02 & 12/31/02 (short year)          1%
                             2003                       1½%
                             2004                       2%
                             2005                       2½%
                

* * * * * *

F. Nothing contained herein shall limit MGS, in [Davis's] sole discretion, from waiving the time restriction in which ARNOLD becomes eligible to receive the MGS Sale of Business Bonus, if any.

Arnold Exhibit 2 at 5-6, ¶¶ 5.6(A) and (F). In addition, the Employment Contract provided that —

The parties agree hereto and recognize that the applicable percentages used to calculate ... the MGS Sale of Business Bonus may be modified, from time-to-time, by mutual agreement of the parties, during the term or any renewal or extension of this Contract, to reflect unanticipated changes in the corporate structure of the Company which could occur from time to time.

Arnold Exhibit 2 at 6, ¶ 5.7. To the extent that Arnold became eligible for the MGS Sale of Business Bonus, such bonus was to be "pro-rated in the event of termination for reasons as described in paragraphs 10.1 A. 10.1 B, 10.1 D and 10.1 F. Said bonus[ ] ... shall not be pro-rated for circumstances of termination as described in sections 10.1 C, 10.1 E and 10.1 G." Arnold Exhibit 2 at 2, ¶ 5.1.

The termination provisions of the Employment Contract state, in relevant part —

This Contract shall terminate upon occurrence (the "Termination Date") of the first of the following events:

* * * * * *

B. Upon thirty (30) days' prior written notice by MGS to ARNOLD (provided however, in such event ARNOLD shall be entitled to $60,000.00 in termination compensation, payable in six (6) monthly installments of $10,000. Arnold shall be entitled to same "additional benefits" as described in paragraph "A" of section 8[)]; or

* * * * * *

E. Upon breach of any condition or covenant contained herein; or

F. MGS may terminate ARNOLD's employment if any of the following events occur pursuant to an arm's length transaction:

1. The sale of all or substantially all of the MGS' assets to a single purchaser or group of associated purchasers;

2. The sale, exchange or other disposition, in one or more transactions, of Fifty Percent (50%) or more of MGS' outstanding shares:

3. MGS' decision, in its sole discretion, to terminate its business and liquidate its assets; or

4. The merger or consolidation of ... MGS into another entity, in a transaction in which the MGS' shareholders receive Fifty Percent (50%) or less of the outstanding and voting shares of the successor entity.

Arnold Exhibit 2 at 11-12, ¶ 10.1.

The Employment Contract provided that "[n]o amendment or modification of the terms of...