FairPoint Communications, Inc.

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------------------------X 	FOR PUBLICATION
In re: 	Chapter 11
FAIRPOINT COMMUNICATIONS, INC., et al., 	Case No. 09-16335 (BRL)
(Jointly Administered)
Debtors.
--------------------------------------------------------X
APPEARANCES:
PAUL HASTINGS JANOFSKY & WALKER LLP
Park Avenue Tower
75 E. 55th Street, First Floor
New York, New York 10022
Telephone: 	(212) 318-6000
Facsimile: 	(212) 319-4090
By: 	Luc A. Despins
James T. Grogan
Attorneys for Debtors and Debtors in Possession
WIGGIN & NOURIE, P.A
670 North Commercial Street, Suite 305
P.O. Box 808
Manchester, New Hampshire 03105
Telephone: 	(603) 629-4528
Facsimile: 	(603) 623-8442
By: 	Donna-Marie Cote
WAYNE GREENWALD, PC
475 Park Avenue South, 26 th Floor
New York, New York 10016
Telephone: 	(212) 983-1922
Facsimile: 	(212) 983-1965
By: 	Wayne Greenwald
Attorneys for Creditor Isidoro M. Flores
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Before: Hon. Burton R. Lifland
United States Bankruptcy Judge
MEMORANDUM AND ORDER SUSTAINING FAIRPOINT’S OBJECTION
PURSUANT TO SECTION 502(b)(7) OF THE BANKRUPTCY CODE REGARDING
PROOF OF CLAIM NO. 306 FILED BY ISIDORO FLORES AND IMPOSING
SANCTIONS
Before this Court is the objection (the “Objection”) of FairPoint Communications, Inc., et
al. (“FairPoint” or “Debtors”) pursuant to section 502(b)(7) of the Bankruptcy Code (the
“Code”) to proof of claim number 306 (the “Claim”) filed by Isidoro M. Flores (“Flores”)
asserting 	a 	$1 	million 	unsecured 	claim 	for 	wrongful 	termination 	on 	the 	basis 	of 	age
discrimination under the Age Discrimination in Employment Act of 1967 (the “ADEA”) and
New Hampshire Revised Statutes Annotated Chapter 354-A (the “NH Statute”). On February 7,
2011, FairPoint filed an objection to the Claim arguing that section 502(b)(7) of the Code caps
the Claim at $100,000. 	On March 9, 2011, Flores filed, albeit tardily, an opposition to the
Objection. 	Upon review of the papers and after oral argument, FairPoint’s Objection to the
Claim is hereby SUSTAINED.
DISCUSSION
Section 502(b)(7) of the Code caps claims of employees against debtors for damages
resulting from the termination of an “employment contract” to the lesser of one year’s salary or
the salary that accrues from the date of the employee’s termination to the petition date.1 This
section 502 limitation applies when two conditions are met—the claim is by an employee, and
the damages sought are for the termination of an employment contract. 	See In re WorldCom,
Inc., 361 B.R. 675, 681 (Bankr. S.D.N.Y. 2007). 	A writing is considered an “employment
contract” under this section if it “establishes the terms and conditions of an employment
1 Although the accrued salary from Flores’s termination through the petition date was $58,333, Debtors nevertheless
seek to cap the Claim at $100,000.
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relationship.” 	In re The Charter Co., 82 B.R. 144, 146 (Bankr. M.D. Fla. 1998). 	In capping
claims arising from the termination of employment, section 502(b)(7) of the Code reflects
Congress’s intent to protect a debtor’s estate, and in particular, other creditors of a debtor, from
being burdened by exorbitant breach of employment claims. In re Murray Indus., Inc., 114 B.R.
749, 752 (Bankr. M.D. Fla. 1990). In this light, courts have broadly interpreted section 502(b)(7)
of the Code to cap claims arising from the termination of an employee contract whether the claim
was based on contractual damages or violation of another act, like the National Labor Relations
Act (the “NLRA”). In re Wheeling-Pittsburgh Steel Corp., 113 B.R. 187, 193 (Bankr. W.D. Pa.
1990), revs’d on other grounds.
On its face, section 502(b)(7) of the Code applies to the current Claim, which should be
capped based on the plain language of the statute. Flores was an employee of FairPoint subject
to an employment agreement and his claim for damages results from his termination—facts that
Flores does not dispute. Thus, the age discrimination Claim falls within those claims that section
502(b)(7) of the Code intends to limit. However, Flores presents several unavailing arguments to
explain why section 502(b)(7) of the Code is inapplicable to his Claim. 	Flores argues that the
ADEA is remedial legislation that should be liberally interpreted to effectuate the congressional
purpose of ending age discrimination in employment. Allowing an ADEA claim to be capped by
section 502(b)(7) of the Code undermines Congress’s intent behind the ADEA legislation.
Further, Flores proposes that section 502(b)(7) of the Code applies only to claims stemming from
the actual termination. According to Flores, his claim is not for damages for the termination but
for the discriminatory motive behind the termination—a claim that Congress never intended to
limit through section 502(b)(7) of the Code.
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This argument is incorrect, however, because, as noted above, section 502(b)(7) of the
Code applies to any claim stemming from the termination of an employment arrangement
provided the claim is by an employee and the damages stem from termination of an employment
contract. 	Indeed, section 502(b)(7) of the Code has been applied to cap an NLRA violation
despite the fact that it is a remedial statute. In re Wheeling-Pittsburgh Steel Corp., 113 B.R. at
193. 	Moreover, similar arguments that tried to incorporate motive-based exceptions into the
Code were rejected by the Supreme Court on the grounds that if Congress meant to include such
exceptions they would have explicitly done so. See FCC v. Next Wave Pers. Commc’n, Inc., 537
U.S. 293, 301-02 (2003) (rejecting argument attempting to allow a motive-based exception to
section 525 of the Code). This case provides that motivation behind the termination, a theme not
mentioned in the plain language of section 502(b)(7) of the Code, is not in the calculus of the
statute.
Next Flores argues that the NH Statute claim is more akin to a tort claim than a contract
claim, and that section 502(b)(7) of the Code does not cap such claims. However, this argument
is incorrect for many reasons. First, section 502(b)(7) of the Code may cap tort claims. The case
that Flores cites, In re Holm, does not stand for the proposition that this section is inapplicable to
torts claims. 931 F.2d 620, 623 (9th Cir. 1991). In that case, the court did not cap the asserted
claims of abuse of corporate control and tortious interference with contracts, holding that “the
relationship between the parties was that of shareholders of a corporation rather than an
employer-employee relationship.” 	Id. 	Thus, the court found section 502(b)(7) of the Code
inappropriate because the case did not stem from an “employment contract” and not because
section 502(b)(7) of the Code does not apply to tort claims. By contrast, Flores’s claims are all
based on the employer-employee relationship, and fall squarely within the ambit of section
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502(b)(7) of the Code.
Second, no court has ever held that violations of the NH Statute gives rise to a tort claim.
Courts have consistently held that the analysis of age discrimination cases under the NH Statute
is the same as the ADEA, and even Flores admits that the ADEA is a contractually-based claim.
Flores misconstrues an advisory opinion from the New Hampshire Human Rights Commission
Merrill v. Fall Mountain Sch. Dist., to support his idea that the NH Statute is dissimilar to the
ADEA and, consequently, not capped by section 502(b)(7) of the Code. EA 0313-06, 16D-2006-
01191 (New Hampshire Human Rights Commission). 	However, Merrill only discussed how
liability must be established under the NH Statute. 	The court concluded that the ADEA
requirement of showing that age was the “but for” cause of the adverse employment decision is
not the applicable causational standard in the NH Statute. 	This decision is irrelevant for
purposes of the cap under section 502(b)(7) of the Code because the cap only matters if the
claimant has already proven liability and established damages. 	The decision has nothing to do
with defining the underlying claim of the NH Statute, and only concerns evidentiary standards
and burden shifting.
Flores cannot argue that he has suffered some type of personal injury from his
termination in order to evade the cap of section 502(b)(7) of the Code. It is settled law in New
Hampshire that workers cannot assert claims against employers for emotional distress and other
tort claims for personal injuries arising out of the employment relationship. See, e.g., Censullo v.
Brenka Video, Inc., 989 F.2d 40, 43 (1st Cir. 1993) (applying New Hampshire law and citing
O'Keefe v. Associated Grocers of N.E., Inc., 424 A.2d 199, 201 (N.H. 1980)).
Flores’s final argument is that insurance will cover his claim and, therefore, section
502(b)(7) of the Code is not implicated because the Claim will not burden FairPoint. Flores may
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be correct, and in cases where a debtor is unaffected by the payment of employment claims, such
payments will not necessarily be capped. See Hall v. Goforth (In re Goforth), 179 F.3d 390, 395
(5th Cir. 1999) (holding third party jointly and severally liable for damages from breach of
employment agreement is not protected by section 502(b)(7) of the Code). However, insurance
is not such a case. Allowing Flores’s exorbitant claim to be paid from insurance will potentially
burden FairPoint with higher insurance premiums and impair its ability to maintain continuous
insurance coverage—precisely the type of matters that section 502(b)(7) of the Code intends to
limit.
SANCTIONS
Finally, notwithstanding all of the porosity of Flores’s arguments discussed above,
Flores’s response is stricken because it was filed late without excuse. 	Pursuant to Local Rule
9006-1, all answering papers in non-discovery matters must be filed “so as to ensure actual
receipt not later than seven days before the return date.” 	This deadline was also incorporated
into the Debtors’ Motion for Interim and Final Orders, Pursuant to Bankruptcy Code Section
105(a) and Bankruptcy Rules 1015(c) and 9007, Implementing Certain Notice and Case
Management Procedures, Docket #8 at ¶ 26 (“the “Case Management Order”). 	Instead of
following theses timelines, counsel for Flores, Wayne Greenwald (“Counsel”), cavalierly filed
the response on the eve of the originally scheduled hearing without requesting an extension of
the time to respond to the Objection. 	Counsel has failed to explain why the response was late-
filed and whether the lateness should be excused under the applicable standard of excusable
neglect. Accordingly, the response is hereby stricken.
In light of Counsel’s late-filed response to the Objection, the Court hereby imposes
sanctions on two counts: one for violating this Court’s Case Management Order, and the second,
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for violating the Local Rules.
Federal Rule of Civil Procedure 16(f)(1)(C) (“Rule 16(f)”), incorporated herein through
Bankruptcy Rule 7016, allows a court to impose sanctions for failure to comply with a
scheduling or other pretrial order. 	In the case of violation of Local Rules, sanctions are
appropriate if the rule itself provides for sanctions. Even where a local rule of bankruptcy courts
does not prescribe sanctions for failure to follow, sanctions can be imposed through the inherent
power of the court. 	In re Chase, 372 B.R. 142, 155 (Bankr. S.D.N.Y. 2007). 	The applicable
standard in imposing sanctions on an attorney pursuant to a court's inherent power depends on
the nature of the conduct in question. A fairly recent case clarified the applicable standard in the
Second Circuit when a court’s inherent powers are used. 	U.S. v. Seltzer, 227 F.3d 36 (2d Cir.
2000). 	Prior to the Seltzer decision, case law in this Circuit seemed to imply that a finding of
bad faith was a prerequisite to imposing sanctions pursuant to a court’s inherent authority. The
Seltzer court clarified that bad faith is necessary only when sanctions are imposed for a lawyer
exceeding “conduct of the sort that is normally part of the attorney's legitimate efforts at zealous
advocacy for the client.” Id. at 40. However, in cases where sanctions are imposed for conduct
that impacts the orderly running of the court system and is not undertaken for the client's benefit,
bad faith need not be shown. 	As the Seltzer court explained: “Under circumstances such as
these, sanctions may be justified absent a finding of bad faith given the court's inherent power to
manage [its] own affairs so as to achieve the orderly and expeditious disposition of cases.” In re
Chase, 372 B.R at 154 (quoting U.S. v. Seltzer, 227 F.3d at 41). 	Even though bad faith is not
required, subsequent cases appear to apply a negligence or recklessness standard in these
circumstances. 	See id. (citing In re Pennie Edmonds LLP, 323 F.3d 86, 93 (2d Cir. 2003);
Wilder v. GL Bus Lines, 258 F.3d 126, 130 (2d Cir. 2001)).
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In the current case, Counsel may be sanctioned for violating Rule 16(f) and Local Rule
9006-1. 	This Court’s Case Management Order is clearly a “scheduling or other pretrial order,”
subject to sanctions under Rule 16(f). 	The Case Management Order requires Counsel to give
seven days notice; instead, Counsel filed his opposition the night before the scheduled hearing.
Counsel has failed to adequately explain his tardiness, and sanctions are appropriate.
Sanctions pursuant to this Court’s inherent powers are also justified. Even assuming that
a reckless or negligent standard is necessary to impose sanctions pursuant to a court’s inherent
power, the standards are met here. 	Both the Local Rules and the Case Management Order
unmistakably require seven days notice for the filing of opposition papers. 	Had Counsel been
notified of the applicable time limits through only one rule, perhaps this Court would permit
Counsel to claim his tardy filing was an accidental oversight. 	But where a local rule and an
order of the court notify Counsel of the time limits to filing opposition papers, noncompliance
certainly rises to recklessness and warrants the imposition of sanctions. 	Because Counsel’s
conduct here falls somewhat short of outright bad faith, a token disincentive sanction of $400 is
imposed on Counsel for Flores.
IT IS SO ORDERED.
Dated: New York, New York 	/s/ Burton R. Lifland
March 17, 2011 	United States Bankruptcy Judge
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