Delaware Bankruptcy Court Rejects Per Se Premise that a Discretionary Bonus Payment Can Never Be on Account of “Value”

Jalbert v. Flanagan, et al. (In re F-Squared Investment Management, LLC), No. 15-11469 (LSS), 2019 WL 2051005 (Bankr. D. Del. May 7, 2019).

In this Opinion, Judge Silverstein granted in part and denied in part the motions of Brian Flanagan, Matthew Landon, Patrick Coyle, and Scott Kearney (collectively, the “Defendants”)  to dismiss certain fraudulent transfer and insider preference claims brought by the Trustee for the Debtors’ (defined below) liquidating trust (the “Trustee”).  In so doing, Judge Silverstein rejected the Trustee’s premise that an entirely discretionary bonus can never be made in exchange for value.

F-Squared Management, LLC and its subsidiaries (collectively, the “Debtors”) were formerly investment management and research firms.  Between December 2014 and March 2015 the Debtors paid each Defendant a bonus (each, a “Bonus Payment”).  The Bonus Payments were contemplated in the Debtors’ employee handbook, as well as in the Defendants’ respective employment offer letters.

The Debtors filed their chapter 11 petitions on July 8, 2015.  The Trustee was appointed effective January 22, 2016 pursuant to the Debtors’ and Official Committee of Unsecured Creditors’ joint plan of liquidation.  On October 29, 2017, the Trustee filed his amended complaints against the Defendants to recover the Bonus Payments on the grounds that they were (i) fraudulent transfers; and (ii) preferential transfers to “insiders” of the Debtors.  Judge Silverstein addressed the Trustee’s theories in turn.

Regarding the Trustee’s position that the Bonus Payments were fraudulent transfers, the Trustee made no argument that the Defendants did not perform their jobs at least adequately.  Further, counsel for the Trustee represented that the Trustee had no intent of producing any evidence that any value provided by the Defendants on account of the Bonus Payments was not at least “reasonably equivalent” to the value conferred by the Debtors via the Bonus Payments.  Instead, the Trustee posited that where a bonus is entirely discretionary, the debtor has no obligation to pay it, thereby rendering such bonus completely gratuitous. 

Judge Silverstein rejected this notion, opining that she could not “conclude as a matter of law that the payment of a bonus pursuant to an entirely discretionary bonus plan that does not contain any pre-enunciated performance or incentivizing metrics can never be for ‘value’.”  Judge Silverstein reasoned that a discretionary bonus serves to build employee loyalty and increase morale, if nothing else.  Failure to award such a bonus, Her Honor provided, could cause a company’s best employees to seek employment elsewhere.  The Trustee’s per se theory left no room for this outcome.  Her Honor opined that while satisfaction of a pre-existing obligation constitutes “value” under section 548 of the Bankruptcy Code, a finding of “value” does not necessitate the presence of a pre-existing obligation.  Instead Judge Silverstein looked to the Third Circuit decision in In re R.M.L., Inc. for the proposition that “value” includes any benefit, direct or indirect, tangible or intangible, including benefits that are not specifically contemplated in section 548(d)(2)(A). 92 F.3d 139, 18 (3d Cir. 1996).  As such, Judge Silverstein granted the motions to dismiss the fraudulent transfer claims.

Takeaway: Trustees beware.  When seeking to avoid and recoup a discretionary bonus payment as a fraudulent transfer, a Trustee will need to provide evidence showing either that (i) no value was conferred on account of the bonus payment; or (ii) any value conferred by the recipient of the bonus payment was not at least “reasonably equivalent” to the payment itself.  A per se theory that a purely discretionary bonus payment can never be made on account of value will not be sufficient to survive a motion to dismiss.

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