Article

Prior History: Young v. Condor Systems, Inc. (In re Condor Systems, Inc.), 296 B.R. 5 (B.A.P. 9th Cir. 2003), noted in the 2004 Annual Survey 349.

Note: Robert Young and John Taft (Beneficiaries) were terminated from their positions as chief executive officer and chief financial officer, respectively, of Condor Systems (Applicant/Debtor). As a "golden parachute" severance package, Applicant/Debtor caused two standby LCs to be issued for US$1,400,000 and US$500,000 by Bank of America, subject to ISP98 and payable in eight equal quarterly drawings. Applicant/Debtor filed for bankruptcy protection under Chapter 11 (reorganization) of the U.S. Bankruptcy Code twenty one months after the LC had been issued to Young and eleven months after it had been issued to Taft.

When Beneficiaries filed a claim against Applicant/Debtor in the bankruptcy proceedings for other debts resulting from their employment contract, Applicant/Debtor argued that the amount of the LCs should be deducted from the maximum amount that Beneficiaries could claim against it. As provided by11 U.S.C. Section 502(b) (7), the claims cap, as it applied to former employees and employers, equals the employee's annual salary plus annual benefits at the time of termination. Thus, if the amount of the LC was deducted, Beneficiaries' claims against Applicant/Debtor would be reduced to zero under the claims cap.

The U.S. Bankruptcy Court for the Northern District of California, Grube, J., sustained Applicant/Debtor's objection, ruling that the claimed "prepetiton severance payment and draws received under the LCs reduced the one-year total compensation caps." Applicant/Debtor then commenced an adversary proceeding to recover from Beneficiaries payments made in excess of this cap. Prior to the resolution of the adversarial claim, the Bankruptcy Appellate Panel for the Ninth Circuit, Klein, J., reversed the decision of the Bankruptcy Court. The Bankruptcy Appellate Panel distinguished between a claim's cap and the cap provided by 11USC Section 502(b)(7), rejecting an analogy to the cap permitted to be claimed by lessors of real estate against a security deposit. Applicant/Debtor appealed this decision.

The U.S. Court of Appeals for the Ninth Circuit, Alarcon, Silverman, and Bea, J., in an unpublished per curiam opinion, dismissed the appeal. The appellate court ruled that there was lack of appellate jurisdiction because the decision of the Bankruptcy Appellate Panel, which remanded the case to the Bankruptcy Court for further factual findings, was not a final decision. The opinion noted that the adversary action included not only claims for recovery of funds in excess of the cap, but also a claim against one of the former officers in receipt of a preferential transfer.

[JEB/dd]

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