In Re: Gen Datacomm

Opinions of the United

2005 Decisions States Court of Appeals

for the Third Circuit

5-16-2005

In Re: Gen Datacomm

Precedential or Non-Precedential: Precedential

Docket No. 04-1710

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 04-1710

__________

IN RE: GENERAL DATACOMM INDUSTRIES, INC.,

Debtor

__________

GENERAL DATACOMM INDUSTRIES, INC.,

Appellant

v.

JAMES R. ARCARA, FREDERICK R. CRONIN,

ROBERT S. SMITH, and THOMAS L. THOMPSON

DAVID BUCHBINDER,

Trustee

On Appeal from the United States District Court

for the District of Delaware

(D.C. No. 02-cv-01373)

District Judge: Honorable Kent A. Jordan

___________

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Argued: December 15, 2004

___________

BEFORE: NYGAARD and GARTH, Circuit Judges

and POLLAK * , District Judge.

( Filed: May 16, 2005)

________

OPINION

_________

Joseph A. Malfitano, Esq.

Joel A. Waite, Esq.

Michael R. Nestor, Esq.

Young Conaway Stargatt & Taylor, LLP

The Brandywine Building

1000 West Street, 17 th Floor

Wilmington, Delaware 19801

John B. Sherman, Esq. (Argued)

Weisman Celler Spett & Modlin, P.C.

445 Park Avenue, 15 th Floor

New York, New York 10022

Counsel for Appellant

Eric G. Waxman III, Esq.

Daniel M. Kolko, Esq. (Argued)

*

Honorable Louis H. Pollak, District Judge for the

United States District Court for the Eastern District of

Pennsylvania, sitting by designation.

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Phillips Nizer LLP

600 Old Country Road, Suite 241

Garden City, New York 11530

Christopher S. Sontchi, Esq.

Ricardo Palacio, Esq.

Ashby & Geddes

222 Delaware Avenue, 17 th Floor

P.O. Box 1150

Wilmington, Delaware 19899

Counsel for Appellees

GARTH, Circuit Judge:

Both the Bankruptcy and District Courts here held that

Appellees James R. Arcara, Frederick R. Cronin, Robert S.

Smith and Thomas L. Thompson (collectively, the “Appellees”)

– former long-term senior executives of Appellant General

Datacomm Industries Inc. and its affiliates (“DataComm”) –

were “retired employees” within the meaning of 11 U.S.C. §

1114 and were therefore entitled to their retiree benefits.

Section 1114 of the United States Bankruptcy Code

(“Bankruptcy Code”) affords certain procedural protections to

“retired employees” of Chapter 11 debtors. See 11 U.S.C. §

1114(a), (e). When applicable, these procedural protections are

held to override the provisions of 11 U.S.C. § 365, which

generally allow a debtor in possession, subject to the court’s

approval, to reject any executory contract of the debtor in order

to relieve the estate of onerous and burdensome future

obligations. See 11 U.S.C. § 365(a).

The questions presented in this appeal are: (1) whether

the term “retired employees,” as contemplated by § 1114,

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encompasses the concept of “forced retirement,” at least in

situations where, as here, employees on the verge of voluntary

retirement are strategically and deliberately terminated without

cause by a debtor; and (2) if so, may DataComm’s executory

agreement providing benefits for retirees be rejected pursuant to

11 U.S.C. § 365. As stated, both courts rejected DataComm’s

attempt to terminate or otherwise modify the Appellees’ retiree

benefits without first complying with the mandates and

procedural requirements of § 1114.

We hold that involuntary termination of employees on the

verge of retirement cannot deprive such employees of the

procedural protections of § 1114. Accordingly, the District

Court did not err in affirming the Bankruptcy Court’s order,

which denied rejection of DataComm’s agreement to provide

such benefits.

I.

A.

The material facts on appeal are not in dispute. On or

about September 4, 1997, the Board of Directors of DataComm

approved a “Benefit Agreement for Long Term Senior

Executive Officers and Other Senior Level Employees” (the

“Benefit Plan”). DataComm originally entered into the Benefit

Plan with Appellees Arcara, Cronin, and Smith. Thompson, the

remaining Appellee, was added as an Eligible Executive 1

1

Eligible Executives included the individuals designated

in the Benefit Plan (i.e., Arcara, Cronin, Johnson), as well as any

other senior corporate officer elected to the office of Senior

Vice President or any higher office, and any other senior level

employee of DataComm designated by the Board of Directors

as an Eligible Executive who had been employed by the

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subsequent to the establishment of the Benefit Plan.

The Benefit Plan provided for two discrete forms of

benefits. First, DataComm was required to pay the annual

premiums of up to $7,000 for Long Term Care insurance

coverage for the lifetime of each Eligible Executive and his

spouse (“Long Term Care Benefits”).2 Second, the Benefit Plan

also provided that, upon retirement, each Eligible Executive and

his spouse would receive, at DataComm’s sole cost, a lifetime

continuation of the health insurance benefits that DataComm

was then furnishing to the Eligible Executive (“Retirement

Health Benefits”).3

company for more than 25 years, and was 60 years of age or

older. Benefit Plan ¶ 2(a).

2

“Long Term Care: Effective upon approval by the

Board of Directors of this Plan, the Corporation shall pay the

annual premiums of up to an annual maximum amount of

$7,000 (the ‘cap’), for Long Term Care insurance coverage in

the amount specified in Schedule A to the Plan, for each Eligible

Executive and his or her spouse for the remainder of their

respective lives.” Benefit Plan ¶ 3.

As more fully explained in note 13 infra, DataComm has

waived the argument that the Long Term Care Benefits are not

“retiree benefits” within the meaning of § 1114. Thus, while the

issue has been raised in this appeal, we neither consider nor

decide it here.

3

“Retirement Health Benefits: Upon an Eligible

Executive’s retirement, the Eligible Executive and his or her

spouse shall thereafter receive for the remainder of the lives of

the Eligible Executive and his or her spouse, a continuation of

the health insurance benefits the Corporation was then

furnishing the Eligible Executive, at the Corporation’s sole

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The Benefit Plan listed at least five actions which, if

taken by Eligible Executives, would lead to discharge and loss

of all benefits. It essentially provided that DataComm, in its

sole judgment, could effectively terminate all benefits

thereunder if, among other things, the Eligible Executive

violated any confidentiality agreement; disclosed any proprietary

information; refused cooperation with DataComm in litigation;

directly or indirectly became employed by, or purchased stock

of a competitor; brought suit against DataComm (except as to

claims relating to the Benefit Plan); or disparaged the company.

Benefit Plan ¶ 6.4 Aside from the grounds for terminating

cost.” Benefit Plan ¶ 4.

4

Paragraph 6 provides:

In the event in the sole judgment of the Board of

Directors of the Corporation, an Eligible

Executive or his or her spouse directly or

indirectly, (i) becomes employed by or performs

consulting or other services to, or becomes a

director of, or makes or retains any investment in

or loan to, a competitor of the Corporation

(provided the foregoing shall not be deemed a

breach if the eligible executive was unaware such

entity was a competitor provided he or she

promptly divests himself or herself of any such

investment upon learning of such event and

further provided the foregoing shall not apply to

an investment in securities listed on a national

securities exchange or NASDAQ where the

aggregate investment is less than $10,000), or, (ii)

violates any confidentiality or similar agreement

with the Corporation or discloses or uses any

confidential or proprietary information of the

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benefits specified in Paragraph 6 of the Benefit Plan,

DataComm reserved no other right to rescind or amend the

Benefit Plan.

B.

On November 2, 2001, DataComm filed for relief under

Chapter 11 of the Bankruptcy Code, and pursuant to Sections

1107 and 1108 of the Bankruptcy Code, DataComm continued

to possess its properties and manage its businesses as debtor(s)

in possession. Thereafter, on November 19, 2001, DataComm

advised the Appellees that they would be terminated on

Corporation other than on behalf of the

Corporation, or (iii) institutes or otherwise

participates or assists in any litigation or

proceedings against or on behalf of the

Corporation, its officers or directors, (other than

with respect to claims under this Plan or for

salaries or fees owed by the Corporation for

services actually rendered), or (iv) refuses to

reasonably cooperate at the Corporation’s

expense, with the Corporation in the prosecution

or defense of any litigation or proceeding, or (v)

uses, communicates, publishes or otherwise

transmits, in any manner whatsoever, negative

comments regarding the Corporation or otherwise

disparages the Corporation, its products, services,

officers or directors, then, in any such event, the

Board of Directors may terminate the status of

such person as an Eligible Executive hereunder

and all benefits hereunder for such Eligible

Employee and his or her spouse shall terminate.

Benefit Plan ¶ 6.

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November 30, 2001, and that the Benefit Plan would be

terminated on that same date.

Ten days later, on November 29, 2001, DataComm filed

its motion with the Bankruptcy Court to reject the Benefit Plan

pursuant to Section 365 of the Bankruptcy Code (the “365

Motion”). A day later, on November 30, 2001, the Appellees

were formally terminated. DataComm concedes that the

termination was without cause. At the time of their termination,

the Appellees were all over 65 years of age: Thompson was 71,

Cronin was nearly 70, Smith was over 68, and Arcara was near

67.

The Appellees objected to the 365 Motion, claiming that

the Benefit Plan qualified for treatment under § 1114 of the

Bankruptcy Code, and that DataComm was therefore required

to comply with the procedural requirements of that statute

before terminating or modifying the Benefit Plan. The

Bankruptcy Court conducted a hearing on April 25, 2002 to

determine whether § 365 or § 1114 governed the Benefit Plan.

The Bankruptcy Court held that § 1114 governed, and entered

an Order denying DataComm’s motion to reject the Benefit

Plan. The Bankruptcy Court stated that “[i]n the event . . .

[DataComm] seek[s] to terminate or otherwise modify any of the

benefits of [the Appellees] provided for in the [Benefit Plan] .

. . [DataComm] shall be required to first comply with the

mandates and procedural requirements of 11 U.S.C. § 1114.”

The District Court affirmed the decision of the

Bankruptcy Court, essentially holding that the Appellees were

retirees within the meaning of § 1114 because DataComm’s

action in terminating the Appellees the day after it purported to

reject the Benefit Plan constituted a “forced retirement”. This

timely appeal followed.

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II.

The Bankruptcy Court had jurisdiction under 28 U.S.C.

§§ 157(b) and 1334. The District Court had appellate

jurisdiction pursuant to 28 U.S.C. § 158(a)(1), and we have

jurisdiction under 28 U.S.C. §§ 158(d) and 1291. Exercising the

same standard of review as the District Court, “[w]e review the

bankruptcy court’s legal determinations de novo, its factual

findings for clear error and its exercise of discretion for abuse

thereof.” In re Trans World Airlines, Inc., 145 F.3d 124, 130-31

(3d Cir. 1998) (citing In re Engel, 124 F.3d 567, 571 (3d Cir.

1997); Fellheimer, Eichen & Braverman, P.C. v. Charter

Techs., Inc., 57 F.3d 1215, 1223 (3d Cir. 1995)). Inasmuch as

the parties agree that there are no relevant facts in dispute, our

review is limited to the legal determinations of the Bankruptcy

Court as affirmed by the District Court. We will thus employ a

de novo review of those legal determinations.III.

Section 365(a) of the Bankruptcy Code provides: “Except

as provided in sections 765 and 766 of this title and in

subsections (b), (c), and (d) of this section, the trustee, subject

to the court’s approval, may assume or reject any executory

contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a).

(The exceptions noted in § 365 have no relevance in this case).

On the other hand, section 1114 of the Bankruptcy Code

“was enacted to protect the interests of retirees of chapter 11

debtors.” 7 Collier on Bankruptcy, ¶ 1114.02[1] (15th ed.

2002). That section prohibits a debtor in possession or a trustee

from unilaterally modifying or terminating retirement benefits

unless (1) the court orders modification or (2) the trustee and the

authorized representative of the retired employees agree to

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modification. 11 U.S.C. § 1114(e)(1).5 Prior to filing an

application seeking court-imposed modification, the trustee must

engage in good faith negotiations with the authorized

representative of the trustee regarding the proposed

modification, and must provide the authorized representative

with relevant information to allow for fair evaluation of the

5

11 U.S.C. § 1114(e)(1) provides:

Notwithstanding any other provision of this title,

the debtor in possession, or the trustee if one has

been appointed under the provisions of this

chapter (hereinafter in this section "trustee" shall

include a debtor in possession), shall timely pay

and shall not modify any retiree benefits, except

that--

(A) the court, on motion of the trustee or

authorized representative, and after notice

and a hearing, may order modification of

such payments, pursuant to the provisions

of subsections (g) and (h) of this section,

or

(B) the trustee and the authorized

representative of the recipients of those

benefits may agree to modification of such

payments

after which such benefits as modified shall

continue to be paid by the trustee.

(emphasis added).

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proposal. Id. § 1114(f)(1).6 Only after the foregoing

requirements have been met, and such good-faith negotiations

have occurred, is the court empowered to grant the modification

motion, if, among other things, modification is necessary to

permit reorganization of the debtor. Id. § 1114(g).7

6

11 U.S.C. § 1114(f)(1) provides:

Subsequent to filing a petition and prior to filing

an application seeking modification of the retiree

benefits, the trustee shall--

(A) make a proposal to the authorized

representative of the retirees, based on the

most complete and reliable information

available at the time of such proposal,

which provides for those necessary

modifications in the retiree benefits that

are necessary to permit the reorganization

of the debtor and assures that all creditors,

the debtor and all of the affected parties

are treated fairly and equitably . . .

(emphasis added).

7

11 U.S.C. § 1114(g) provides:

The court shall enter an order providing for

modification in the payment of retiree benefits if

the court finds that--

(1) the trustee has, prior to the hearing,

made a proposal that fulfills the

requirements of subsection (f);

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Accordingly, a debtor in possession or the trustee must continue

to pay retiree benefits unless modification of such payments has

been ordered by the court or the trustee and the authorized

representative of the retired employees have agreed to such

modification. Id. § 1114(e)(1).8

The procedural protections of § 1114 apply to “retiree

benefits,” which are defined with reference to the class of

persons entitled to the benefits, i.e., “retired employees.” 9 As

(2) the authorized representative of the

retirees has refused to accept such

proposal without good cause; and

(3) such modification is necessary to

permit the reorganization of the debtor and

assures that all creditors, the debtor, and

all of the affected parties are treated fairly

and equitably, and is clearly favored by the

balance of the equities . . . ,

8

See note 5 supra for the statutory text of § 1114(e)(1).

9

Section 1114(a) defines “retiree benefits” as:

payments to any entity or person for the purpose

of providing or reimbursing payments for retired

employees and their spouses and dependents, for

medical, surgical, or hospital care benefits, or

benefits in the event of sickness, accident,

disability, or death under any plan, fund or

program (through the purchase of insurance or

otherwise) maintained or established in whole or

in part by the debtor prior to filing a petition

commencing a case under this title

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we have indicated, the overarching question here is whether the

provisions of § 1114 apply to the Benefit Plan. Stated

differently, the question is whether the Appellees constitute

“retired employees” for purposes of invoking the protections of

the statute.

DataComm’s main contention on appeal is that Appellees

never retired, but rather were still employed and were terminated

as employees without cause. As such, DataComm argues, the

provisions of § 1114, which accord protection only to “retired

employees,” never come into play here, leaving § 365

(permitting rejection of executory contracts) as the only

operative statute. We are persuaded that this contention elevates

form over substance, and is thus unavailing and unacceptable.10

(emphasis added).

10

DataComm also argues that the provisions of § 1114

do not apply here because Appellees were not retired at the time

the 365 Motion [to reject DataComm’s retirement Benefit Plan]

was filed. As we stated, Appellees were terminated the day

after the filing of the 365 Motion. While it is, of course, true

that only retired employees can invoke the protections of § 1114,

see, e.g. In re Crafts Precision Indus., Inc., 244 B.R. 178, 184

(1st Cir. B.A.P. 2000) (“The legislative history of [§ 1114]

clearly reveals that the statute is intended to benefit retirees

specifically.”) (emphasis added), we believe that this argument

suffers from multiple flaws. First, it ignores the fact that

DataComm had notified Appellees of their imminent

termination prior to filing the 365 Motion. The argument, then,

that the Appellees were still employed and not retired for

purposes of determining the application of § 1114 we regard as

specious. Such a result contravenes basic norms of fairness and

undermines the purposes of § 1114, which “was enacted to

protect the interests of retirees of Chapter 11 debtors.” 7 Collier

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Moreover, as a contractual matter, we note that

DataComm cannot escape its obligations under the Benefit Plan

by arguing that Appellees were terminated rather than retired.

As the District Court held, “retirement was the condition

precedent to the Appellees’ receipt of certain benefits under the

[Plan], and [DataComm] prevented the Appellees from

voluntarily retiring by discharging them without cause.” The

Benefit Plan explicitly and unambiguously states that only the

particular proscribed actions by an Eligible Executive could

result in the justifiable forfeiture of retirees’ benefits. We

on Bankruptcy, ¶ 1114.02[1] (15th ed. 2002).

Second, it rests upon a faulty premise. DataComm’s

contention here is that the relevant date for determining the

applicability of § 1114 is the date when the rejection of the Plan

would have become effective, which in this case would be either

the date immediately prior to the petition date, November 2,

2001, or, at the very latest, the filing date of the 365 Motion,

November 29, 2001. This contention fails for a few reasons.

Even assuming, without deciding, that the rejection of an

executory contract under § 365(a) becomes effective upon the

filing of the motion, but see In re Thinking Machines Corp., 67

F.3d 1021, 1028 (1st Cir. 1995) (“[W]e hold that a rejection of

a nonresidential lease under section 365(a) becomes legally

effective only after judicial approval has been obtained.”), that

merely begs the question of whether § 365 governs the Benefit

Plan in the first place. If, as Appellees maintain, § 1114 applies,

then DataComm’s 365 Motion was ineffective, and the decisive

date of any rejection, however defined, could not occur until

after the requirements of § 1114 have been satisfied.

Accordingly, we reject DataComm’s contention that

Appellees were still employed, rather than retired, albeit

involuntarily, at the filing of the 365 Motion and therefore

outside the protective ambit of § 1114.

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believe that the District Court’s reasoning was sound here – the

intent of both DataComm and the Appellees was that the

Appellees would receive the retirement benefits of the Plan

unless they were terminated for cause. They were not. See 13

Williston on Contracts § 39:3 (4th ed.) (“Where a promisor

prevents, hinders, or renders impossible the occurrence of a

condition precedent to his or her promise to perform, or to the

performance of a return promise, the promisor is not relieved of

the obligation to perform. . . .”).

Section 365, when it applies, allows DataComm to

terminate executory contracts, with the bankruptcy court’s

approval, notwithstanding any contractual obligations

thereunder. See, e.g., In re Spectrum Info. Techs., Inc., 190 B.R.

741, 745-46 (Bankr. E.D.N.Y. 1996). At issue then, is whether

Congress intended the term “retired employees” in § 1114 to

encompass the concept of “forced retirement.”

In contending that “forced retirement” does not implicate

the provisions of §1114, DataComm relies heavily on a reductio

ad absurdum. According to DataComm, the District Court’s

holding, taken to its logical conclusion, means that § 1114

would apply to a retirement health benefit when DataComm

discharged an employee without cause at the age of 25.

Recognizing that the employees affected here were all

over the age of 65 (Arcara 66; Smith 68; Cronin 70; Thompson

71), and were purposefully discharged only one day after

DataComm filed its 365 Motion, we can only conclude that

DataComm’s action was taken deliberately and was designed to

thwart the purposes of § 1114. Therefore, accepting the concept

of “forced retirement” does not and cannot lead to the absurd

result posited by DataComm that an employee could be retired

at age 25 if discharged without cause. The contours of such a

concept as “forced retirement” may receive appropriate

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interpretation, when it occurs, by a case-by-case development.

What matters here is that the particular facts of this case are

compelling enough to warrant the application of such a concept.

As the record reflects, the Appellees were on the verge of

retirement, 11 receiving a minimal paycheck for “basically

hanging around.” Tr. of Bankr. Hearing at 27. They were

founders and long-term senior executives of DataComm, and

each was of retirement age and was qualified to warrant

entitlement to the benefits prescribed by DataComm’s Benefit

Plan, which was designed to compensate long-term senior level

employees. See Benefit Plan ¶ 2a. As such, our holding in no

way countenances the 25 year old “horrible” scenario envisaged

by DataComm.

Under the circumstances presented here, to allow

DataComm to deliberately interfere with Appellees’ retirement

benefits would operate to frustrate and nullify the objectives of

§ 1114, which, as we have stated, was “enacted to protect the

interests of retirees of Chapter 11 debtors.” 7 Collier on

Bankruptcy, ¶ 1114.02[1] (15th ed. 2002).

IV.

We address one final issue – an issue not raised or

initially briefed by the parties. At oral argument, we asked the

question whether the Benefit Plan was an executory contract for

purposes of § 365 (which involves only contracts that are

executory in substance and which are not “trumped” by § 1114)

and so could be considered by the Bankruptcy Court for

11

We note that under the Employee Retirement Income

Security Act of 1974, the age of “[n]ormal retirement” is sixty-

five. Hlinka v. Bethlehem Steel Corp., 863 F.2d 279, 281 n.3 (3d

Cir. 1988) (citing 29 U.S.C. § 1002(24)).

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rejection on an appropriate application. If the Benefit Plan was

not executory, § 365 would have no application as it could not

be rejected under that section. We requested supplemental

briefing on the question. After reviewing the parties’

submissions, we are satisfied that the Benefit Plan is indeed an

executory contract.

We set forth the controlling definition of “executory

contract” in Sharon Steel Corp. v. National Fuel Gas

Distribution Corp., 872 F.2d 36 (3d Cir. 1989): “[An executory

contract is] a contract under which the obligation of both the

bankrupt and the other party to the contract are so far

unperformed that the failure of either to complete performance

would constitute a material breach excusing performance of the

other.” Id. at 39 (citations and internal quotations omitted).

The crucial issue for determining whether the instant

Benefit Plan was executory is whether the Appellees had

material obligations that remain unperformed at the time the

bankruptcy petition was filed. See In re Columbia Gas System

Inc., 50 F.3d 233, 240 (3d Cir. 1995) (“The time for testing

whether there are material unperformed obligations on both

sides is when the bankruptcy petition is filed.”) (citations

omitted). Thus, our focus is on the restrictive covenant

obligations of the Appellees, i.e., their obligations, set forth in

Paragraph 6 of the Benefit Plan (see note 4 supra). Paragraph

6, among other things, requires Eligible Executives: to not

compete; to maintain confidentiality; to refrain from instituting

litigation; to agree to participate in litigation initiated by

Datacomm; and to refrain from negative publicity.

While we have held that the determination of what

constitutes a material breach under the Sharon Steel definition

is governed by relevant state law, In re Columbia Gas System

Inc., 50 F.3d at 240 n.10, we need not look beyond the Benefit

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Plan itself to make that determination. The Benefit Plan

expressly defines certain acts or events as constituting material

breaches of the contract. It states that:

[i]n the event in the sole judgment of the Board of

Directors of the Corporation, an Eligible

Executive or his spouse directly or indirectly

[fails to comply with any of the covenants set

forth in Paragraph 6], then, in any such event, the

Board of Directors may terminate the status of

such person as an Eligible Executive hereunder

and all benefits hereunder for such Eligible

Employee and his or her spouse shall terminate.

Benefit Plan ¶ 6 and note 4 supra.12 Thus, if an Eligible

12

Our dissenting colleague has discussed the issue of

“materiality” at length, but he has made no reference to the very

terms of the Benefit Plan itself. It is that Plan, as we have

stated, which defines the “materiality” of the Appellees’

obligations – it explicitly provides that the failure of an Eligible

Executive to comply with the covenants of Paragraph 6 excuses

the future performance of DataComm. We are satisfied that the

parties intended the provisions of Paragraph 6 to be material.

No further analysis is therefore required. As such, the

dissenting opinion’s analysis, while perhaps thorough,

substitutes its own views on materiality for what the parties

explicitly and formally agreed to as being “material” and vital to

their contract.

We also find the dissent’s reliance on In re Columbia

Gas Sys., Inc., 50 F.3d 233 (3d Cir. 1995), to be misplaced.

That case stands for the proposition that where the remaining

obligations in a contract are mere conditions, not duties, a

contract cannot be considered executory for purposes of § 365.

The distinction between conditions and duties, essential to the

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Executive breached one of those provisions, it would excuse the

future performance of DataComm. By contractual definition,

therefore, such obligations are material. See generally

Restatement (Second) of Contracts § 237 (1981) (uncured

material breach by one party discharges other party’s duty under

contract); see also 23 Williston on Contracts § 63:3 (4th ed.)

(“Where the contract itself is clear in making a certain event a

material breach of that contract, a court must ordinarily respect

that contractual provision.”). We are thus satisfied that the

Appellees’ obligations are material, and that the Benefit Plan is

an executory contract.

V.

We conclude that deliberate and involuntary termination

of an employee on the verge of retirement, where the employee

has otherwise met all qualifications for retirement, cannot

deprive such an employee of the procedural protections of §

1114. We therefore hold that the DataComm Appellees are

“retired employees” within the meaning of § 1114. This being

so, DataComm’s Benefit Plan providing retirement benefits to

such employees was an executory agreement and could not be

rejected pursuant to § 365. Accordingly, we will affirm the

judgment of the District Court in favor of the Appellees.13

holding in In re Columbia Gas Sys., is simply inapposite here.

13

DataComm raises an additional issue for the first time

on appeal – whether § 1114 applies to the Long Term Care

Benefits in particular and, if it does not, whether DataComm can

sever them for purposes of proceeding under § 365.

DataComm’s position is that the Long Term Care Benefits did

not qualify as “retiree benefits” since they were payable during

Appellees’ employment. DataComm offers no exceptional

circumstances to excuse its failure to raise this argument in the

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Pollak, J., concurring

I concur in the court’s judgment in all but one small

particular. But I do not join the court’s opinion.

I arrive at substantially the same end-point as the court –

i.e., I agree with the court that the Bankruptcy Court and the

District Court were right in disallowing DataComm’s proposed

rejection of appellees’ Benefit Plan. But I arrive at the same

Bankruptcy Court and the District Court. Gleason v. Norwest

Mortgage, Inc., 243 F.3d 130, 142 (3d Cir. 2001) (“Generally,

barring exceptional circumstances, like an intervening change in

the law or the lack of representation by an attorney, this Court

does not review issues raised for the first time at the appellate

level.”) (citations omitted); Brown v. Philip Morris Inc., 250

F.3d 789, 799 (3d Cir. 2001) (“[A]rguments asserted for the first

time on appeal are deemed to be waived and consequently are

not susceptible of review in this Court absent exceptional

circumstances (e.g., the public interest requires that the issues be

heard or manifest injustice would result from the failure to

consider such issues).”) (citations omitted). Indeed, it appears

that DataComm became aware of the argument only after the

District Court alluded to the legal issue in its order affirming the

Bankruptcy Court. Although DataComm’s Reply Brief claims

that the District Court held that § 1114 is not applicable to the

Long Term Care Benefits contained in Paragraph 3 of the

Benefit Plan, it appears that DataComm has misstated the

District Court’s action. In fact, the District Court, in footnote 8

of its unpublished opinion, stated that it would not address the

issue because it had not been raised by DataComm. We, too,

express no opinion on this matter, as it has clearly been waived.

-20-

destination via a different route: I do not agree with the court

that 11 U.S.C. § 1114 protects the appellees from DataComm’s

intended unilateral rejection of the Benefit Plan; in my view,

appellees are not protected by § 1114 because they were not

“retired employees” – the category of persons sheltered by §

1114 – at the time DataComm undertook to terminate the

Benefit Plan. However, I conclude that DataComm could not

reject the Benefit Plan pursuant to 11 U.S.C. § 365, because that

provision authorizes rejection of an “executory contract” and, in

my view, the Benefit Plan was not an executory contract.

I.

The court affirms that portion of the Bankruptcy Court

order requiring DataComm to abide by the provisions of 11

U.S.C. § 1114, which provides procedural safeguards against

modification of benefits for “retired employees.” Adverting to

the purpose of § 1114, which was “enacted to protect the

interests of retirees of Chapter 11 debtors,” 7 Collier on

Bankruptcy, ¶ 1114.02[1] (15 th ed. 2002), and pointing to

appellees’ termination without cause, the court holds that

appellees ought to be considered retirees within the meaning of

§ 1114. The court’s argument in favor of treating appellees as,

in effect, constructive “retirees” cannot fail to strike a

sympathetic chord. Nonetheless, I am not persuaded that

appellees can properly be deemed as coming within the category

of individuals protected by the statute.

Section 1114 is entitled, “Payment of insurance benefits

to retired employees,” id. (emphasis added), signifying that it is

the status of the employee, and not the nature of the benefit, that

determines the scope of § 1114. The wording of § 1114 cannot

be said to give definitive guidance on whether, to claim § 1114's

protections, employees must have retired by the date that their

employer files for bankruptcy or, alternatively, whether they

-21-

must have retired by the date upon which the debtor seeks to

terminate retiree benefits.14 The relevant point for purposes of

14

Some of the statutory language can be said to support

the view that the drafters had in mind scenarios in which, after

filing for bankruptcy, an employer undertakes to reduce, or

entirely abrogate, benefits of employees who had retired prior

to the bankruptcy filing. Thus, § 1114(l) provides:

This section shall not apply to any retiree, or the

spouse or dependents of such retiree, if such

retiree's gross income for the twelve months

preceding the filing of the bankruptcy petition

equals or exceeds $ 250,000, unless such retiree

can demonstrate to the satisfaction of the court

that he is unable to obtain health, medical, life,

and disability coverage for himself, his spouse,

and his dependents who would otherwise be

covered by the employer's insurance plan,

comparable to the coverage provided by the

employer on the day before the filing of a petition

under this title.

11 U.S.C. § 1114(l) (emphasis added). A similar perspective is

to be found in the legislative history; see Senate Report 100-

119's statement that the “bill requires that such benefits,

provided to retired employees, their spouses and dependents

pursuant to a plan in effect at the time of [sic] a Chapter 11

proceeding is commenced, will continue to be paid when the

employer providing those benefits files ... a petition under

Chapter 11 of the Bankruptcy Code, until or unless a

modification is agreed to by the parties or ordered by the court.”

S. Rep. No. 100-119, at 3 (1988), reprinted in 1988

U.S.C.C.A.N. 683, 685 (May 26, 1988) (emphasis added).

On the other hand, it is not clearly apparent that Congress

would have had any policy reason to exclude from the protection

of § 1114 employees who had retired after the debtor-employer

-22-

this appeal, however, is that appellees had not retired by either

date: appellees were employees of DataComm when DataComm

filed under Chapter 11, and they remained employees until they

were dismissed one day after DataComm filed its 365 motion

seeking to terminate the Benefit Plan.

To be sure, the court does not argue that appellees had in

fact retired by either date. Instead, it adopts the District Court’s

argument, which relies on the prevention doctrine, and

concludes that appellees are constructive retirees who ought thus

to receive § 1114's protections. The prevention doctrine states

that “[i]t is a principle of fundamental justice that if a promisor

is himself the cause of the failure of performance, either of an

obligation due him or of a condition upon which his own

liability depends, he cannot take advantage of the failure.” 5

Williston, Contracts 677, at 224 (3d ed. 1961); see also Apalucci

v. Agora Syndicate, 145 F.3d 630, 634 (3d Cir. 1998) (“when

one party to a contract unilaterally prevents the performance of

a condition upon which his own liability depends, the culpable

party may not then capitalize on that failure.”). The court argues

that, since retirement was the condition precedent to receipt of

benefits, and since DataComm willfully thwarted fulfillment of

this condition when it dismissed appellees (who were at or near

retirement age) on the day after DataComm filed its 365 Motion,

appellees ought to be considered “retirees” within the meaning

of § 1114.

While the pedigree and wisdom of the prevention

doctrine are unquestionable, the conclusion that the court draws

from it – namely, that § 1114 ought to extend to appellees – is

unwarranted. The prevention doctrine entails that, where one

party to a contract takes an action that prevents the other party

filed for bankruptcy but before it moved to jettison its

retirement-benefits liabilities.

-23-

from being able to fulfill a condition precedent to that contract,

the first party may not use its own action as a mechanism for

avoiding performance of its contractual obligations. The

prevention doctrine does not entail that, as a result of the first

party’s culpable obstruction, that party is not entitled to avoid

performance of its obligations for any reason. There may well

be reasons other than the failure of the condition precedent that

would allow the first party to withdraw permissibly from the

duties it contracted to perform.

Applying the prevention doctrine here signifies that

DataComm could not use the fact that appellees had not retired

as a ground for withdrawing from its obligation to pay retiree

benefits, since DataComm, by firing appellees, prevented them

from retiring on the day of their dismissal or at any subsequent

time. On the basis of the prevention doctrine, then, the Benefit

Plan remained in place despite appellees’ non-retirement. But

there might have been other reasons lending support for

DataComm’s asserted entitlement to withdraw. (Indeed,

DataComm claims that § 365 provides one such reason.) Thus,

the prevention doctrine does not lead to the conclusion that

appellees are (or ought to be treated as) retirees or the

conclusion that § 1114 ought to apply to appellees. The

prevention doctrine can do no more than return the parties to the

situation that existed prior to appellees’ dismissal. Since, for the

reasons advanced above, that situation cannot be characterized

as one in which appellees had retired, the prevention doctrine

does not afford appellees the protections of § 1114.

In sum, § 1114 applies only if the beneficiaries of the

agreement in question have retired before their employer seeks

to terminate or otherwise modify that agreement. Since that is

not the situation here, I conclude that § 1114 is inapplicable.

II.

-24-

The court finds that § 1114 applies to appellees and

trumps 11 U.S.C. § 365. Accordingly, the court holds that the

protections conferred by § 1114 prohibit rejection of the Benefit

Plan pursuant to § 365, and require compliance with the terms

of § 1114 prior to any modification of the Plan. I agree that

DataComm may not reject the Benefit Plan, but I rest this

conclusion on the ground that the Benefit Plan was not an

“executory contract,” and hence fell outside the coverage of §

365.15

An executory contract is “‘a contract under which the

obligation of both the bankrupt and the other party to the

contract are so far unperformed that the failure of either to

complete performance would constitute a material breach

excusing the performance of the other.’” Sharon Steel Corp. v.

National Fuel Gas Distribution Corp., 872 F.2d 36, 39 (3d Cir.

1989) (citing V. Countryman, Executory Contracts in

Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973)). Thus, for

purposes of ascertaining the nature of the Benefit Plan, the

relevant question is whether the obligations enumerated in

Paragraph 6 of the Plan, which requires that the Plan’s

beneficiaries forbear from competing with or disparaging the

company, are material.

State law determines whether breach of a contract

provision is material. See, e.g., Fineman v. Armstrong World

Indus., 980 F.2d 171 (3d Cir. 1992). Delaware, where the

underlying dispute arose, incorporates the test of materiality

found in the Restatement. See BioLife Solutions, Inc. v.

Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003);

SLMsoft.com, Inc. v. Cross Country Bank, 2003 Del. Super.

15

See 11 U.S.C. § 365 (“[T]he trustee, subject to the

court's approval, may assume or reject any executory contract or

unexpired lease of the debtor.”).

-25-

LEXIS 112, 51-52 (Del. Super. Ct. 2003). To define

“materiality,” the Restatement provides a list of “circumstances”

deemed to be “significant” in an assessment of “whether a

failure to render or to offer performance is material,”

Restatement (Second) of Contracts § 241:

(a) the extent to which the injured party will be

deprived of the benefit which he reasonably expected;

(b) the extent to which the injured party can be

adequately compensated for the part of that

benefit of which he will be deprived;

(c) the extent to which the party failing to perform

or to offer to perform will suffer forfeiture;

(d) the likelihood that the party failing to perform

or to offer to perform will cure his failure, taking

account of all the circumstances including any

reasonable assurances;

(e) the extent to which the behavior of the party

failing to perform or to offer to perform comports

with standards of good faith and fair dealing. Id.

Taking these circumstances one by one, I conclude that

the balance of considerations lies on the side of non-materiality:

a) Benefit reasonably expected from the agreement: While

DataComm likely expected adherence to the restrictions

encompassed in Paragraph 6, it would have harbored this

-26-

expectation prior to and independent of the Benefit Plan. Some

of the obligations contained in this Paragraph simply incorporate

prior agreements – for example, the confidentiality agreements

in clause (ii)16 – and it would be these earlier agreements that

justified the expectation. Other obligations are so intertwined

with the executives’ pre-existing duties of good faith and loyalty

– e.g., forbearance from investing in a competitor (clause (i)) or

disparaging the company (clause (iii)) – that, here too,

DataComm’s expectation would not have been rooted in the

Benefits Plan. In sum, since DataComm would have received

the benefit flowing from appellees’ performance of these

obligations independent of the Benefit Plan, it does not make

sense to consider that performance a benefit that DataComm

reasonably expected from the agreement. Or, to put the point in

the terms the Restatement uses, performance of the obligations

was not a benefit of the agreement.

b) Adequacy of Compensation: The Restatement states that

“[t]he second circumstance, the extent to which the injured party

can be adequately compensated for his loss of benefit

(Subsection (b)), is a corollary of the first.” § 241 cmt. c. For the

reasons set forth in the previous paragraph, then, this

circumstance also does not support a finding of materiality.

c) Forfeiture: The Benefit Plan permits DataComm to terminate

the Plan’s benefits in the face of an eligible executive’s breach

of Paragraph 6; it does not state that termination will

automatically follow. The fact that an executive could fail to

comply with one of the restrictions in Paragraph 6 and still

continue to receive the benefits package further supports a

finding that the restrictions are not material.

16

Clause (ii) of Paragraph 6 references “violat[ions] of

any confidentiality or similar agreements with the Corporation

...”

-27-

d) Likelihood of cure: In describing this circumstance, the

Restatement states that “[t]he fact that the injured party already

has some security for the other party's performance argues

against a determination that the failure is material.” § 241 cmt.

e. Here, DataComm would have had some security for the

executives’ adherence to Paragraph 6: Again, some of the

obligations contained there (e.g., obligations of confidentiality)

hinge upon prior agreements, breach of which may entail

penalties rooted in those agreements. Similarly, legal sanctions

for breach of the duty of loyalty would motivate adherence to

some of the other restrictions (e.g., those against competition

and disparagement).

e) Good faith and fair dealing: The Restatement states that

“[a]dherence to the standards stated in Subsection (e) is not

conclusive, since other circumstances may cause a failure to be

material in spite of such adherence. Nor is non-adherence

conclusive, and other circumstances may cause a failure not to

be material in spite of such non-adherence.” § 241 cmt. f. In

other words, this is a less probative consideration than the

others. In the absence of an actual breach of Paragraph 6 by any

of the appellees, the implications of this consideration for the

materiality of the appellees’ obligations would be purely

speculative.

In sum, the circumstances supporting a finding of

materiality do not appear to be present here.

More generally, we can distill from the Restatement’s list

the defining feature of materiality – viz., the connection between

materiality and consideration. More to the point, the

Restatement will deem one party’s obligation material where it

serves as consideration for the other party’s promised

performance. Compare Frank Felix Assocs. v. Austin Drugs,

111 F.3d 284, 289 (2d Cir. 1997) (“Under New York law, for a

-28-

breach of a contract to be material, it must go to the root of the

agreement between the parties.”) (citation omitted). Thus, the

first element of § 241 of the Restatement is “the extent to which

the injured party will be deprived of the benefit which he

reasonably expected,” and “the benefit which he reasonably

expected” is the consideration that the contract provides, § 241;

see also § 241 cmt. b (“Since the purpose of the rules stated in

§§ 237 and 238 is to secure the parties' expectation of an

exchange of performances, an important circumstance in

determining whether a failure is material is the extent to which

the injured party will be deprived of the benefit which he

reasonably expected from the exchange (Subsection (a)). If the

consideration given by either party consists partly of some

performance and only partly of a promise (see Comment a to §

232), regard must be had to the entire exchange, including that

performance, in applying this criterion.”) (emphasis added); § 81

(“In most commercial bargains the consideration is the object of

the promisor's desire and that desire is a material motive or

cause inducing the making of the promise, and the reciprocal

desire of the promisee for the making of the promise similarly

induces the furnishing of the consideration.”). Cf. id. at § 162

cmt. c. (“a misrepresentation is material if it would be likely to

induce a reasonable person to manifest his assent ... [or] if the

maker knows that for some special reason it is likely to induce

the particular recipient to manifest his assent.”). Indeed, the

Reporter’s notes to the chapter of the Restatement containing

§241 explain that the term “failure of performance,” when used

in that chapter, see, e.g., id. at §237,17 replace the term “failure

17

Section 237 qualifies the phrase “failure of

performance” with the word “material.” See id. (“it is a

condition of each party's remaining duties to render

performances to be exchanged under an exchange of promises

that there be no uncured material failure by the other party to

render any such performance due at an earlier time.”) (emphasis

-29-

of consideration.” See Restat. (2d) Contracts, ch. 10,

Introductory Note. In sum, a party’s obligation to perform or

forbear will be material if it functioned as consideration, or as

the reason inducing the other party’s entry into the contract.

It seems improbable that the obligations contained in

Paragraph 6 functioned in some significant way as consideration

for the benefits conferred by the Benefit Plan. The appellees’

obligations are set forth in the Benefit Plan in a manner that

appears to make them subsidiary to the Plan’s central purpose.

More specifically, the bulk of this eight-paragraph contract is

devoted to setting forth DataComm’s obligations (Paragraphs 3,

4 and 7), describing the benefits that the eligible executives will

receive (Paragraphs 3 and 4), and specifying the protections

available to these executives in the event that DataComm

undergoes a change in control (Paragraph 5).18 Paragraph 6 is

the only paragraph addressing the executives’ obligations; it sets

forth a list of restrictions on the eligible executives’ conduct, but

it does so by embedding this list within a provision stating that

DataComm may terminate the benefits of an executive who fails

to fulfill one of these obligations. This placement of appellees’

obligations suggests that appellees’ forbearance is not what

added). Section 241 also pertains to material failures of

performance (i.e., what were formerly referred to as “failures of

consideration”), although its language is somewhat more

elaborate. See § 241 (describing “whether a failure to render or

to offer performance is material.”).

18

The remaining paragraphs specify the names of the

eligible executives (Paragraph 1), define terms used in the Plan

(Paragraph 2), permit DataComm to terminate an executive’s

benefits in the event that he violates a restriction described in

the Agreement (Paragraph 6), and provide for the severability of

any provision deemed unenforceable (Paragraph 8).

-30-

motivates or compensates DataComm’s performance. Instead,

the Plan memorialized a promise by DataComm to furnish its

long-standing executives with certain benefits.

Indeed, the Plan’s preamble amply supports this reading,

as it contains language signifying that the purpose of the Plan is

to compensate appellees for their past years of service to

DataComm. See App. at 44 (“WHEREAS, the Corporation

desires to provide to certain of its employees (the “Eligible

Executives”) with [sic] certain additional benefits based upon

their many years of service to the Corporation”) (emphasis

added). The preamble makes no mention of an intent to secure

appellees’ compliance with the restrictive provisions of

Paragraph 6, or to otherwise bind appellees in any way. The real

crux of the agreement, then, is a commitment undertaken by

DataComm to reward appellees’ for past consideration.

Finally, Third Circuit precedent further supports a finding

that the obligations set forth in Paragraph 6 are not material. In

Enterprise Energy Corp. v. United States (In re Columbia Gas

Sys.), 50 F.3d 233 (3d Cir. 1995), this court appealed to the

Restatement to evaluate materiality:

In order to determine the materiality of the class

members' obligations, we turn first to basic

contract principles. There is a distinction in the

law between failure of a condition and a breach of

a duty: ‘Non-occurrence of a condition is not a

breach by a party unless he is under a duty that the

condition occur.’ Restatement (Second) of

Contracts § 225(3) (1981). This distinction

between a condition and a duty (or promise) is

important here. The Restatement makes clear that

while ‘a contracting party's failure to fulfill a

condition excuses performance by the other party

-31-

whose performance is so conditioned, it is not,

without an independent promise to perform the

condition, a breach of contract subjecting the

nonfulfilling party to liability for damages.’

Merritt Hill Vineyards, Inc. v. Windy Heights

Vineyard, Inc., 61 N.Y.2d 106, 460 N.E.2d 1077,

1081-82, 472 N.Y.S.2d 592 (N.Y. 1984) (citing

Restatement (Second) of Contracts § 225).

50 F.3d at 241 (footnotes omitted).19 Columbia Gas greatly

clarifies the nature of appellees’ obligations under the Benefit

Plan. Paragraph 6 permits DataComm to terminate an

executive’s benefits should that executive have been found to

have violated one of the listed restrictions. In other words, a

breach by one of the appellees would excuse continued

performance by DataComm. However, such a breach would not,

by itself,20 subject the “nonfulfilling” executive to liability for

damages. Accordingly, the appellees’ obligations should be seen

as conditions, and not duties. And, “if the remaining obligations

in the contract are mere conditions, not duties, then the contract

cannot be executory for purposes of § 365 because no material

breach could occur.” Id. at 241.

For the foregoing reasons, I conclude that the Benefit

19

As the Columbia court noted, “[t]he Restatement has

dropped the term ‘condition precedent’ in favor of simply

stating it as ‘condition.’ E. Allen Farnsworth, 2 Farnsworth on

Contracts § 8.2, at 349 (1990).” 50 F.3d at 241 n. 15.

20

The confidentiality agreements cited in the Plan or the

doctrine of loyalty might have subjected an executive who

breached his duty of confidentiality or loyalty to liability, but

this consequence would have emerged from a legal relationship

that existed independent of the relationship forged by the Plan.

-32-

Plan was not executory. Since section 365 permits rejection only

of those contracts that are executory, I would affirm denial of

appellants’ 365 Motion on the ground that section 365 does not

apply to the contract at issue. Accordingly, I concur in the

judgment of the court, subject to the small reservation noted in

footnote 1, supra.

-33-