IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
In re:
FREEDOM INDUSTRIES, INC. Case No. 2:14-bk-20017 Chapter 11
Debtor.
APPLICATION OF GARY SOUTHERN PURSUANT TO 11 U.S.C. §§105(a), 327, 365 AND 503(a) FOR ORDER: (I) CONFIRMING PAYCHECKS FOR POST PETITION SERVICES CAN BE ISSUED AND NEGOTIATED; AND (II) ALLOWING CLAIM FOR INDEMNIFICATION AS ADMINISTRATIVE EXPENSE
Now comes Gary Southern (“Southern”), by counsel, and makes this Application for entry of an Order pursuant to 11 U.S.C. §§105(a), 327, 365 and 503(a): (i) confirming that paychecks for Southern’s post-petition services through the appointment of a Chief Restructuring Officer (“CRO”) can be issued and negotiated; (ii) finding that the duty to indemnify officers contained in the Bylaws of Freedom Industries, Inc. (the “Debtor”) creates a right to indemnification incident to Southern’s employment as an officer of the Debtor; and (iii) allowing as an administrative expense Southern’s claim, as an officer of the Debtor, for indemnification pursuant to Article VII of the Debtor’s Bylaws. In support of this Application, Southern states the following:
JURISDICTION AND VENUE
1. This Court has jurisdiction to consider this Application pursuant to 28 U.S.C. §1334 and the Order of Reference entered by the district court pursuant to 28 U.S.C. §157. This is a core proceeding pursuant to 28 U.S.C. §157(b)(2).
2. Venue in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
3. The statutory predicates for the relief requested herein are 11 U.S.C. §§ 105(a), 327, 365 and 503(a).
BACKGROUND
4. Effective as of the purchase by Chemstream Holdings, Inc. (“Chemstream”) of all of the outstanding shares of capital stock of the Debtor (on or about January 1, 2014), Southern became president of the Debtor, at an annual salary of $230,000.00.
5. Freedom, whose corporate office is located in Charleston, West Virginia, operates two production facilities located in Nitro, West Virginia (the "Nitro Facility") and Charleston, West Virginia (the "Charleston Facility").
6. On or about January 9, 2014, an incident occurred involving one of Freedom's storage tanks located at the Charleston Facility (the "Incident"). Facts surrounding the Incident are subject to pending investigations by Freedom and various regulatory and other governmental authorities.
7. Beginning January 10, 2014 (the day after the incident) through February 26, 2014, Southern worked 12-16 hours per day, each and every day including Saturdays and Sundays (i.e. 46 consecutive days), attending to the Debtor’s business. As of the week beginning March 3, 2014, Southern has been working 10-12 hours per day, Monday through Friday, and has been on call for the business of the Debtor at all other times. As president of the Debtor, Southern’s duties have included (i) all aspects of the Debtor’s remediation plan for its Elk River tank farm, (ii) daily meetings with representatives of the state and federal government in connection with their investigations, (iii) responding to requests arising from the WV DEP’s daily site supervision, (iv) negotiations with vendors to insure continued access to critical raw materials to protect the Debtor’s accounts receivable, (v) working with producers to formulate a plan for disposition of a broad range of raw materials, and (vi) seeing to the wind down of the Debtor’s business, including liquidation of inventory and implementation of reductions in force to minimize on going expenses. As a result, the
RELIEF REQUESTED
8. On January 17, 2014 (the “Petition Date”), Freedom Industries, Inc. (the “Debtor”) filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. in this Court. Southern executed the petition as president of the Debtor. The Debtor continues to operate its business as a debtor-in-possession pursuant to 11 U.S.C. §§1107 and 1108. 9. On February 5, 2014, the United States Trustee appointed a five member Official Committee of Unsecured Creditors (the "Committee").
10. By this Application, Southern seeks entry of an Order, pursuant to 11 U.S.C. §§ 105(a), 327, 365 and 503(b)(1)(A)(i): finding that paychecks for his post-petition services through the appointment of a CRO can be issued and negotiated; (ii) finding that Article VII of the Debtor’s Bylaws impose a mandatory duty to indemnify its officers, and that the right thereby created is an incident to Southern’s employment contract with the Debtor; and (iii) allowing Southern’s claim for indemnification under Article VII of the Debtor’s Bylaws as an administrative expense, on the basis that Southern’s continued employment by the Debtor is essential to a successful outcome in this bankruptcy case.
11. The local practice in this Court calls for approval of employment of officers of chapter 11 debtors, pursuant to 11 U.S.C. §327. Upon information and belief, this is not the majority position. See, e.g., eToys, Inc. 331 B.R. 176 (Bankr. D. Del. 2005) (officer of debtor-corporation is not “professional” who needs to be retained by Debtor under bankruptcy statute governing retention of professionals); 3 Collier on Bankruptcy ¶ 327(02[6][c] (“The general view is that officers of the debtor are not professionals whose employment must be approved by the court. However, some courts have held to the contrary.”)
12. On January 21, 2014, this Court entered its Order (Doc. 51) granting the Debtor’s Motion for Entry of an Order Authorizing the Payment of Pre-Petition Wages, Benefits and Employment Taxes (Doc. 5). Given the local practice in this Court, it is not clear whether or not this Order authorizes payment to Southern for his post-petition services. Given this uncertainty, Southern has not drawn any compensation from the Debtor after the paycheck issued for services through Sunday, January 19, 2014.
13. Southern has raised the issue of whether an application approving his employment by the Debtor is necessary and appropriate. Upon information and belief, the Debtor has not filed an application to approve Southern’s employment, based on the Order entered January 21, 2014, and the majority view that such application is unnecessary.
14. Given the local practice of this Court, Southern requests the Court to enter an order affirmatively finding that it is permissible for the Debtor to issue and for him to negotiate paychecks for post-petition services through the time that a Chief Restructuring Officer (“CRO”) is appointed by this Court, pursuant to 11 U.S.C. §503(b)(1)(A)(i)).
15. Upon information and belief, Freedom will continue to require Southern’s services to achieve a successful outcome in this bankruptcy case, notwithstanding the appointment of a CRO.
16. As the Court is aware, numerous lawsuits have been filed against the Debtor and others following the Incident on January 9, 2014. Southern has been named individually as a defendant in two of these actions: Vantap, LLC, d/b/a Vandalia Grill, et al. v. Eastman Chemical Company, et al. Civil Action No. 2:14-1374 in the United States District Court for the Southern District of West Virginia and Amanda Franklin, et al. v. Freedom Industries, Inc., et al. A.P. No. 14-2002 in the United States Bankruptcy Court for the Southern District of West Virginia (the “Civil
federal and state investigations that are ongoing, Southern has retained the law firm of Kay Casto & Chaney PLLC.
17. Pursuant to Section 7.1 of the Debtor’s Bylaws, Southern “shall be entitled as of right to be indemnified by the [Debtor] against all expenses, liability and loss (including without limitation attorneys’ fees, judgments, …) paid or incurred … in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or other, … as a party or otherwise, by reason of … being or having been a director, or officer of the [Debtor].” (Emphasis added.) Pursuant to Section 7.3 of the Debtor’s Bylaws, Southern is entitled to have his expenses in any Action (as defined in the Bylaws) paid in advance by the Debtor, prior to final disposition of the Action, “subject to any obligation which may be imposed by law … to reimburse the Corporation if it is ultimately determined that he or she is not entitled to be indemnified as authorized under these Bylaws…. Pursuant to Section 7.4 of the Bylaws, Southern has the right to bring an action to receive payment of expenses in advance. A copy of the Debtor’s Bylaws are attached hereto and made a part hereof as Exhibit A.
18. Southern has raised his claim to be indemnified with the Debtor’s insurer, AIG Specialty Insurance Company (“ASIC”). On March 10, 2014, ASIC issued a letter which provides, in pertinent part:
Based upon our review of the above-referenced policies and the complaints, SIC has concluded that there is potential coverage for the claims against Mr. Southern pursuant to Coverage D-2 of the policy EG 14196320, subject to 1) the reservation of rights stated in this letter; and 2) approval of the bankruptcy court with respect to any payments to be made from the policy limits. As you may be aware, Freedom Industries, the named insured, has filed for bankruptcy protection. Under these circumstances, the policies and the policies’ limits are being treated as property of the bankruptcy estate. As such, any disbursements from the policy proceeds, whether for defense or indemnity, cannot be made without bankruptcy court approval. Consequently, to the extent that Mr. Southern or his defense counsel intend to
seek any payments or reimbursements from the policy limits, application to and approval of the bankruptcy court will be necessary.
(Emphasis added.) A copy of the March 10, 2014 letter from ASIC is attached hereto and made a part hereof as Exhibit B.
19. Without conceding any rights that Southern has under the provisions of the ASIC policy, Southern is filing this Application as suggested by ASIC.
20. Southern’s claim against the Debtor for indemnification arising from litigation commenced against him in his capacity as an officer of the Debtor is entitled to recognition as an administrative claim in this case pursuant to 11 U.S.C. §503(b), and as an incident to performance due to him under his executory employment contract with the Debtor pursuant to 11 U.S.C. §365. See, In re Hecks Properties, Inc., 151 B.R. 739, 766-67 (S.D. W.Va. 1992); Matter of Baldwin-United Corp., 43 B.R. 443 (S.D. Ohio 1984).
21. As noted by the Baldwin-United court, the first circuit first articulated the generally accepted test for whether a claim qualifies for administrative expense status:
For a claim in its entirety to be entitled to first priority ... the debt must arise from a transaction with the debtor-in-possession. When the claim is based upon a contract between the debtor and the claimant, the case law teaches that a creditor’s right to payment will be afforded first priority only to the extent that the consideration supporting the claimant’s right to payment was both supplied to and beneficial to the debtor-in-possession in the operation of the business.
See, In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir.1976)
22. Southern’s continued employment by the Debtor is essential to achieving a successful result in this case, and thus is entitled to administrative expense priority. In recognition of the fact
attendant to this, Southern is willing to continue to provide any and all services needed by the Debtor, with no further affirmative compensation after the CRO is employed, other than allowing his claim for indemnification pursuant to 11 U.S.C. §§365 and 503(b)(1)(A).
23. Southern’s right to indemnification under the Bylaws is a component of his compensation as an officer of the Debtor under 11 U.S.C. §365, and thus constitutes an actual, necessary cost and expense of preserving the Debtor’s estate pursuant to 11 U.S.C. §503(b)(1)(A)(i). Southern has incurred legal fees from Kay Casto & Chaney for services rendered in connection with the incident. Attached hereto and made a part hereof as Exhibit C is a statement of charges from Kay Casto & Chaney through February 28, 2014, which (i) includes services rendered by Robert B. Allen, Erin J. Webb and Christian M. Capece, relating to the various state and federal investigations and civil liability defense, but (ii) excludes the services of Steven L. Thomas in connection with this bankruptcy case, and further excludes the services of Pamela C. Deem and John D. Hoblitzell, III, in connection with other matters.
WHEREFORE, Gary Southern requests this Court to enter an Order pursuant to 11 U.S.C. §§105(a), 327, 365 and 503(a):
(a) finding that the Debtor is authorized to issue and Southern is authorized to negotiate paychecks for post-petition services through the appointment of a Chief Restructuring Officer; and (b) allowing as an administrative expense Southern’s claim for indemnification in connection with the incident;
GARY SOUTHERN By Counsel
/s/Steven L. Thomas
Robert B. Allen (WVSB No. 110) Steven L. Thomas (WVSB No. 3738) Kay Casto & Chaney PLLC
Post Office Box 2031
Charleston, West Virginia 25327-2031 (304) 345-8900, Fax: (304) 345-8909
IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
In re:
FREEDOM INDUSTRIES, INC. Case No. 2:14-bk-20017 Chapter 11
Debtor.
CERTIFICATE OF SERVICE
I, STEVEN L.THOMAS, do hereby certify that on the 15th day of March, 2014, I electronically
filed the foregoing APPLICATIONOFGARYSOUTHERNPURSUANTTO11U.S.C.§§105(a) AND 503(a) FINDING: (I) PAYCHECKS FOR POST PETITION SERVICES CAN BE NEGOTIATED;AND(II)RIGHTTOINDEMNIFICATIONPURSUANTTOTHEBYLAWS OFFREEDDOM INDUSTRIES,INC. with the Clerk of the Court using the CM/ECF system, which will send notification of such filing to all parties listed on the Court’s electronic service mailing list and by US Mail, postage prepaid on the 17th day of March to:
Stephen L. Thompson, Esq. J. Nicholas Barth, Esq. Barth & Thompson P.O. Box 129
Charleston, West Virginia 25321 Counsel For Debtor
Mark E. Freedlander, Esq. Michael J. Roeschenthaler, Esq. Scott E. Schuster, Esq.
Jason P. Alter, Esq.
625 Liberty Avenue, 23rd Floor Pittsburgh, PA 15222
Counsel For Debtor William F. Dobbs, Jr., Esq.
Alvin L. Emch, Esq. Ellen S. Cappellanti, Esq. JACKSON KELLY PLLC Post Office Box 553
Charleston, West Virginia 25322 Counsel for WV American Water
John T. Miesner, Esq. P. O. Box 8396
South Charleston, West Virginia 25303
CharlesJ. Kaiser, Jr., Esq. Denise Knouse-Snyder, Esq. Jeffery D. Kaiser, Esq.
PHILLIPS, GARDILL, KAISER & ALTMEYER, PLLC 61 Fourteenth Street Wheeling, WV 26003 Janet L. Thompson 1326 Elmwood Ave Charleston, WV 25301
Eric M. Wilson
State of WV, Dept. of Tax & Revenue PO Box 766
Charleston, WV 25323-0766
Gary L. Call
Assistant United States Attorney P.O. Box 1713
Charleston, West Virginia 25326
John E. Sutter, Esq, Roger A. Decanio, Esq.
The Sutter Law Firm, P.L.L.C. 1598 Kanawha Boulevard, East Charleston, West Virginia 25311
David L. Bissett, Esq.
Trial Attorney, Office of U.S. Trustee 2025 United States Courthouse 300 Virginia Street, East Charleston, WV 25301 Debra A. Wertman, Esq.
Asst. US Attorney, Office of U.S. Trustee 2025 United States Courthouse
300 Virginia Street, East Charleston, WV 25301
Christopher S. Smith Hoyer Hoyer & Smith 22 Capitol Street Charleston, WV 25301
Michael A. Shiner, Esquire Danielle L. Dietrich, Esquire Tucker Arensberg, P.C. 1500 One PPG Place
Pittsburgh, Pennsylvania 15222
Kevin W. Thompson, Esquire David R. Barney, Jr., Esquire Thompson Barney
2030 Kanawha Boulevard, East Charleston, West Virginia 25311 Van Bunch, Esquire
Bonnett Fairbourn Friedman & Balint PC 2325 E. Camelback Road, Suite 300 Phoenix, Arizona 85016
P. Rodney Jackson, Esq. Law Offices of Rod Jackson 401 Fifth-Third Center 700 Virginia Street, East
Charleston, West Virginia 25301 Jared M. Tully, Esq
FROST BROWN TODD LLC Laidley Tower Suite 401 500 Lee Street East
Charleston, West Virginia 25301
Ronald E. Gold, Esq. Douglas L. Lutz, Esq.
FROST BROWN TODD LLC 3300 Great American Tower 301 East 4th Street
Cincinnati, Ohio 45202 Edward M. King, Esq.
FROST BROWN TODD LLC 400 West Market Street Suite 3200
Louisville, Kentucky 40202
