Restructuring

We recently blogged about Weinman v. Walker (In re Adam Aircraft Industries, Inc.), a decision from the U.S. Court of Appeals for the Tenth Circuit that discusses key gating issues for fraudulent transfer analysis.  Our prior post covered the court’s discussion of statutory and non-statutory insiders, as well as the Tenth Circuit’s finding that an officer of the debtor who made a “clean break” with the company upon termination was not an insider for purposes of a fraudulent transfer action.  Today’s post discusses the court’s analysis of whether the terminated officer’s severance payments were received for less than reasonably equivalent value.  
Background 
Our prior post sets forth a more complete description of the facts.  As our faithful readers will recall, Adam Aircraft undertook three separate obligations in the two separation agreements it entered into its former president, Walker, and which the trustee sought to avoid:  a March 2007 refund of plane deposit ($105,704, including interest), a July 2007 repurchase of Adam Aircraft stock ($100,002), and severance payments received between March 2007 and February 2008 ($250,000).  Walker asked for these payments and other benefits in return for refraining from taking a position with a competing business, for remaining supportive of Adam Aircraft at a time when it was negotiating financing, and for waiving potential wrongful claims against Adam Aircraft.
After determining that the payments to Walker were not avoidable under sections 548(a)(1)(B)(i) and 548(a)(1)(B)(ii)(IV) of the Bankruptcy Code because Walker was not an “insider” of the debtor, the appeals court then turned to the trustee’s attempt to avoid the payments under sections 548(a)(1)(B)(i) and 548(a)(1)(B)(ii)(I) of the Bankruptcy Code.  Under these sections, transfers made or incurred on or within two years before the petition date can be avoided if they are received for less than reasonably equivalent value and if the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer.
Reasonably Equivalent Value
As to the airplane deposit refund, the trustee argued that the “immediate” refund ahead of other creditors was not met with any similar value.  In addition, the trustee argued the stock was an investment that Walker made with no guaranty of repayment, so the stock repurchase was not made for reasonably equivalent value.  Walker countered that Adam Aircraft had a contractual obligation to refund his deposit and had paid him the exact same price he had paid for the stock months earlier.
The court sided with Walker on the airplane deposit refund and stock repurchase.  Once Walker requested a refund, Adam Aircraft was contractually required to refund his airplane deposit, plus interest; the transaction did not lack reasonably equivalent value just because he received this refund while others later did not.  Similarly, the court found that the amount Walker paid for the stock months before the repurchase was a fair estimated value for the stock.  That Walker had received money on account of his equity interests while others later did not had no bearing on the analysis.
The severance payments were more extensively disputed.  The trustee took the position that non-compete agreements such as the one between Walker and Adam Aircraft provide no value.  Walker argued that he provided value because he followed the contractual obligations and did not seek other employment until Adam Aircraft’s aircraft production was well underway.  He also pointed out that he resigned (without “drama”) because the Board indicated it did not want to jeopardize the company’s debt financing negotiations.
The Tenth Circuit determined that, based on the record, there was no basis to conclude Walker’s severance was not for reasonably equivalent value.  The facts did not support that the Board was giving Walker a “sweetheart” deal – the Board fired Walker with no notice (after he unwittingly gave a tour of the Adam Aircraft facility to his replacement) and then engaged in negotiations with Walker over the terms of his departure, ultimately agreeing to tie Walker’s payments to his noncompetition, goodwill, and waiver of claims.  The independent Board, which was comprised almost entirely of outside directors, including its lead director, would not have “granted Walker’s requests for anything less than what they perceived as reasonably equivalent value.”
In addition, at the time Adam Aircraft terminated Walker, it was in the middle of obtaining $80 million of debt financing that it needed to continue operations.  The Board worried that terminating Walker would disrupt the financing discussions.  Thus, paying Walker 18 months of severance to ensure that his termination did not jeopardize $80 million of capital seemed like a fair deal.
As to the non-compete agreement, the Tenth Circuit distinguished Walker’s situation from situations (in the leveraged buy-out context) where the party agreeing not to compete already owes a fiduciary duty to the company not to compete with it.  Walker did not have any such duty not to compete with Adam Aircraft before he entered into the separation agreements.  In addition, Walker had a high reputation in the aviation industry and could have found alternative employment easily.  Therefore, Walker was not getting “free money” but compensation for money he otherwise could have earned at a competitor.
In fact, the Tenth Circuit noted that, in retrospect, Walker received the short end of the stick – the company defaulted on the full amount of severance he was owed, whereas Walker gave up alternative employment and waived any right to sue for his termination.
In light of its findings, the Tenth Circuit did not need to consider the debtor’s solvency and affirmed the Bankruptcy Appellate Panel’s denial of the trustee’s remaining claims under section 548 of the Bankruptcy Code.
Conclusion
Weinman v. Walker makes clear that when it comes to analyzing non-compete agreements, the parties should ask how much value the agreement provides, and if the party agreeing not to compete is receiving separate consideration for an obligation that is already owed.  In addition, the court of appeals noted that it was a “classic Catch-22” if the only way for Walker to prove reasonably equivalent value was to show a later job he had to refuse; obtaining the competing offer would have violated his agreement not to seek to obtain other employment.  Instead, here, the court was satisfied that there was sufficient evidence in the record as to Walker’s high reputation to support that the non-compete was provided for value.