May 9, 2012
Bankruptcy Court: Holds Severance Payment is Fraudulent Transfer
– Broc Romanek, CompensationStandards.com
A long while back, the Fifth Circuit addressed in one opinion – In the Matter of: TransTexas Gas Corporation – two separate appeals arising from a company’s Chapter 11 bankruptcy. At the outset, the Court held that a severance payment to the former CEO was a fraudulent transfer. First, the court found that the former CEO was an insider, since he was still CEO when the severance agreement was signed, even though he was not employed when he received the actual payment.
The Court further held that the company did not receive equivalent value for the severance payment. Under the original employment agreement, the CEO was not entitled to any payment if he resigned – which is what the CEO did. In addition, evidence existed that the CEO could have been terminated for cause, in which case he was entitled to only half of what he received. Addressing the second appeal, the Fifth Circuit concluded that since the payment was a fraudulent transfer, it was not an insurable loss.