In re Ralph Lauren Womenswear, Inc.

• Decision Date: 10 July 1996
• Docket Number: Bankruptcy No. 95-B-43100 (TLB).
• Parties: In re RALPH LAUREN WOMENSWEAR, INC., now named Bidermann Womenswear Corp., Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

197 B.R. 771 (1996)

In re RALPH LAUREN WOMENSWEAR, INC., now named Bidermann Womenswear Corp., Debtor.

Bankruptcy No. 95-B-43100 (TLB).

United States Bankruptcy Court, S.D. New York.

July 10, 1996.

COPYRIGHT MATERIAL OMITTED

Stevens & Lee, P.C. by Joseph H. Huston, Jr., Robert Lapowsky, Wayne, Pennsylvania, for Debtor.

Otterbourg, Steindler, Houston & Rosen, P.C. by Richard J. Rubin, Scott L. Hazan, New York City, for Official Committee of Unsecured Creditors.

Stroock & Stroock & Lavan by Brian M. Cogan, Daniel Golden, Randy L. Shapiro, David P. Simonds, New York City, for Stuart L. Kreisler.

CORRECTED TEXT OF BENCH RULING OF JUNE 12, 1996 ESTIMATING CLAIM OF STUART L. KREISLER

TINA L. BROZMAN, Chief Judge.

Stuart L. Kreisler, the debtor's former chief executive officer, has moved to have any general unsecured claim he may have against Ralph Lauren Womenswear, Inc. (the "debtor" or "RLW") estimated for purposes of voting on the debtor's plan of reorganization. It is Kreisler's position that the great majority of his claim, which arose when he was terminated postpetition, represents an expense of administration and that he has a general unsecured claim of only $84,000, which in the context of this case would be unlikely to affect the outcome of the vote. However, because the debtor has denied that Kreisler has any claim at all, Kreisler has pleaded in the alternative that he has at least an unsecured claim for the full amount he says is due him. If Kreisler's claim is as large as he says it is and is unsecured, the debtor cannot win the affirmative vote of the unsecured class because Kreisler is not in favor of the plan. Because there is inadequate time to liquidate his claim before the scheduled confirmation hearing, I agreed to estimate the claim for voting purposes. To that end I conducted an evidentiary hearing at which some four witnesses testified live and others testified through their depositions.

Prior to 1988, Kreisler was the President and Chief Executive Officer of Ralph Lauren Womenswear, a debtor in these proceedings ("RLW"). RLW was engaged in the manufacture and distribution of women's clothing bearing the "Polo by Ralph Lauren" label, to which RLW held rights pursuant to a licensing agreement with Polo Fashions, Inc. ("Polo"). In 1988, Kreisler's employment with RLW was terminated. Kreisler testified that his termination came at the urging of Polo, and this assertion is not contested by the debtors.

In January 1993, Bidermann International U.S.A., Inc. (BIUSA), the debtor's parent, asked Kreisler to return to RLW. After extensive negotiations, Kreisler agreed, under terms and conditions set forth in a letter agreement. It was stipulated that Kega Sp. Ltd. Partnership ("Kega"), a partnership created by Kreisler for tax planning purposes, would receive an annual base fee of $500,000, a guaranteed bonus of $250,000, and an additional bonus of 15% of RLW's earnings before interest and taxes (EBIT), to the extent that this figure exceeded the guaranteed amount. Kreisler, as Kega's general partner, agreed to be a full time "consultant" to RLW. As a practical matter, however, Kreisler acted as RLW's chief executive officer. This consulting agreement, which expired by its terms at the end of 1994, was subsequently extended by the parties to cover 1995.

Kreisler's return to RLW was marked by a significant improvement in that entity's erst-while lagging fortunes. In 1992, the last full year before Kreisler's return, RLW suffered substantial operating losses. In 1994, the first full year subsequent to his return, RLW posted operating profits of over eleven million dollars. While the parties disagree over Kreisler's importance to this remarkable turnaround, it is undisputed that Kreisler did "a good job" at the helm of RLW. (Testimony of Bryan Marsal, Transcript of 5/13/96, at 94).

Despite RLW's revival, the overall financial condition of the related corporations was not good. As part of their efforts to restructure their operations, they contemplated selling RLW to its licensor, Polo, or possibly to a third party. In light of his previous experience with Polo, Kreisler was concerned for his own job security in the event of a sale of RLW. Accordingly, in March 1995, BIUSA and Kreisler (again, through Kega) entered into a severance agreement to compensate Kreisler in the event of his termination.

The relevant part of the severance agreement states:

In the event BIUSA or RLW is sold and (i) your employment with RLW is terminated without just cause at that time or within twelve months thereafter or (ii) you elect to terminate your employment because you are not maintained at that time or during the next twelve months in a job comparable to your present job and at not less than the same salary and at the same location or another location within a reasonable commuting distance therefrom, RLW will pay you, as a severance benefit, an amount equal to $1,750,000 such amount (less applicable withholdings) to be paid to you in full within thirty days of the termination of your employment. For purposes of this letter agreement, a sale of substantially all of the assets of BIUSA or RLW shall be deemed a sale of BIUSA or RLW, as the case may be.

BIUSA agreed to provide these benefits "in consideration of Kreisler's contribution to the Company and his continued work with" RLW given "the uncertainty that acquisition discussions always represent." (Severance Agreement, Kreisler Exh. 2).

Subsequent to the execution of the severance agreement, BIUSA and RLW determined that it would be in their interests to retain Kreisler as a direct employee rather than as a "consultant" as provided by their agreements. Kreisler had no objections as long as the material terms and conditions of his employment would not be altered. Accordingly, on July 11, 1995, the parties entered into another letter agreement converting Kreisler into a salaried employee of RLW but otherwise expressly leaving the severance agreement unaffected. The debtors filed their chapter 11 petitions on July 17, 1995, a mere six days later.

After the filings, RLW and Polo entered into intense negotiations regarding the possible purchase by Polo of all of RLW's assets. During that time, the debtors kept RLW's existing management team, headed by Kreisler, in place. According to Bryan Marsal, the then recently-installed chief executive officer of BIUSA, retaining Kreisler in the employment of the debtors during the post-petition period gave him valuable leverage in negotiating a sale of RLW to Polo. In Marsal's words, Kreisler was "the alternative to a sale." Because Polo recognized that the debtors' reorganization did not necessarily hinge on Polo's purchasing RLW's assets, the debtors were able to extract a higher price from Polo for those assets. (See Deposition of Marsal, Kreisler Exh. 12, at 32-37).

Eventually, an agreement for the sale of RLW's assets was reached and approved by the court. Shortly thereafter, the debtors moved to reject Kreisler's employment agreements. Kreisler, the debtors, and the creditors' committee then entered into a stipulation which I later approved providing that those agreements would be deemed rejected as of October 20.

The legal consequences of what occurred are vigorously disputed. Kreisler says his postpetition termination resulted in an administrative expense claim for the full amount due him under the severance agreement and for his substantial legal costs incurred in pursuing his claim. The debtors, in addition to denying that Kreisler's claim should be treated as an expense of administration, contend that his severance claim should be avoided as a fraudulent transfer.

The parties are divided not only by legal theories but by calculations as well. They disagree on the proper calculation of EBIT for 1995 and the amount due Kreisler in additional bonus. The debtors calculated EBIT for 1995 to be $3,575,000. Kreisler argues that this number wrongly includes a charge against EBIT for RLW's share of expenses associated with a management information system ("MIS") that was put into place for the benefit of all the debtors. He had opposed the adoption of the new MIS, and believes it did not benefit RLW. Correcting for this, Kreisler calculates EBIT at $4,525,000. Because Kreisler's bonus is derived from RLW's EBIT, a determination of the true amount of EBIT is obviously essential to the calculation of the bonus.

In addition, Kreisler asserts that the figure used to calculate his bonus should include sales that were booked prior to the sale of RLW to Polo, but not realized until afterwards. Pursuant to its sale agreement with Polo, RLW was paid some $1.125 million for these receivables, but did not include this amount in its EBIT, because the "proper accounting treatment" of that sum required that it be treated as a gain realized from the disposition of assets, rather than earnings. (Testimony of Colin Cooper, Trans. of 5/13/96 at 29-30).

1. Standards

Fed.R.Bankr.P. 3018(a) allows a court to "temporarily allow a claim or interest in an amount the court deems proper for the purpose of accepting or rejecting a plan." The statutory predicate to Rule 3018(a) is section 502(c) of the Code, which allows for the estimation of "any contingent or unliquidated claim, the fixing or liquidation of which would unduly delay the administration of the estate." Neither the Code nor the Rules prescribe any method for estimating a claim, and it is therefore committed to the reasonable discretion of the court, In re Hydrox Chemical Co., 194 B.R. 617, 623 (Bankr. N.D.Ill.1996), which should employ whatever method is best suited to the circumstances of the case. Id.; In re Thomson McKinnon Securities, Inc., 191 B.R. 976, 979 (Bankr. S.D.N.Y.1996).

The estimation of Kreisler's claim for voting purposes does not entail consideration on the merits of all the issues in dispute respecting that claim. Only those issues that affect the...