How can a recipient of a transfer of money do nothing in return, and by such inaction provide reasonably equivalent value in exchange for the transfer? The Tenth Circuit in its decision in Weinman v. Walker (In re Adam Aircraft Industries, Inc.), 2015 WL 5973397 (10^th Cir. 2015) held that a former employee’s compliance with a severance agreement containing a non-compete provision, provided reasonably equivalent value in exchange for the payments made to him under the agreement.

Joseph Walker served as president and a member of the board of directors of the debtor. Throughout his tenure, he never had an employment agreement, a non-compete agreement or a severance agreement, with the company. About one year before the company filed bankruptcy, its board concluded that it needed to replace Walker as president of the company and to remove him from the board. This conclusion was not known to Walker until after the board had hired his replacement. At the time, the company was in the final stages in its negotiations for a substantial debt financing with Morgan Stanley. In communicating the board’s decision to Walker, the Chairman and CEO told Walker that it was important to the company’s financing negotiations that Walker’s separation be treated as a resignation rather than a firing. Shortly after this discussion, Walker went to his office, retrieved his personal belongings and left the company’s premises never to return. The minutes of the board meeting for Feb. 7, 2007 reflected Walker had resigned effective Feb. 2, 2007. His replacement commenced his duties as president of the debtor on Feb. 2, 2007.

Over the next several days, Walker and the company negotiated a separation agreement that contained several essential elements: (1) the company retained Walker as a consultant for 18 months at a salary of $250,000 per year, contingent on his helping the debtor to maintain its sales backlog at a certain level, (2) Walker would not compete with the company during this time frame, (3) the company would refund Walker’s deposit he had placed for the purchase of an aircraft, and (4) the company would repurchase stock Walker owned in the company for the same price he paid for it several months earlier. The separation agreement, along with a subsequent modification of it, both stated that Walker’s employment with the company terminated March 1, 2007, about one month after Walker’s resignation.

The company’s bankruptcy trustee sued Walker seeking to recover, among other things, the severance payments made to him under the agreement as fraudulent under §548. The questions addressed by the Tenth Circuit included (1) whether Walker was a statutory insider for purposes of § 548, (2) whether Walker was a non-statutory insider, and (3) whether Walker gave reasonably equivalent value in exchange for the severance payments he received.

With regard to its determination whether Walker was a statutory insider, the court first looked to the definition of the term “insider” in the Bankruptcy Code. That definition states that an “insider” is an officer, director or a person in control of the debtor.   In this instance, although the two separation agreements stated that Walker’s employment terminated on March 1, the Tenth Circuit held that the bankruptcy court’s finding that his employment actually ended on February 1 was not clearly erroneous. Walker had submitted his resignation, emptied his office, had performed no duties, and his replacement took office, all on February 1 and 2. Finding these facts supported a conclusion that Walker had made a “clean break” with the company in early February, the Tenth Circuit affirmed the finding that Walker was not a statutory insider on the dates he received his severance payments. With regard to the question of whether Walker qualified as a non-statutory insider, the Tenth Circuit considered the only evidence produced by the trustee—that Walker had presented the initial terms for his separation—to be an insufficient basis for a finding of insider status.

In addressing the trustee’s arguments that Walker did not provide reasonably equivalent value in exchange for his severance payments, the Tenth Circuit noted the bankruptcy court’s findings of fact on the dispute. The bankruptcy court found that (1) Walker agreed to refrain from taking a position with a competing company, (2) Walker could have easily found a position with the competitor because of his high reputation in the industry, (3) Walker agreed to be supportive of the debtor in its efforts to obtain its financing package from Morgan Stanley, and (4) waived his potential claims for wrongful termination. In short, the company was willing to pay Walker money in exchange for his noncompetition, goodwill and waiver of claims. The members of the board were sophisticated business people, and the majority of them were outside directors who were more intent on making a profit than in reaching an agreement with Walker merely to placate him. The evidence established that several members of the board were concerned that firing Walker could imperil the company’s negotiations for financing, and reaching an agreement with Walker that paid him several hundred thousand dollars while at the same time preserving the company’s ability to receive $80,000,000 in financing, was a good deal for the company.

In reaching its conclusion, the Tenth Circuit refused to accept the trustee’s argument that non-compete agreements have no value as a matter of law. The court distinguished the holdings of two cases on which the trustee relied—In re Joy Recovery Tech. Corp., 286 B.R. 54 (Bankr. N.D. Ill. 2002) and In re Vadnais Lumber Supply, Inc.), 100 B.R. 127 (Bankr. D. Mass. 1989)—because the individuals involved in both cases already owed a fiduciary duty to their employers not to compete, a duty which Walker did not owe until after he entered into the separation agreements following his resignation as president.