Employment Agreement dissatisfied by promissory note requiring incentive payment by cash or equivalent

Employment Agreement dissatisfied by promissory note requiring incentive payment by cash or equivalent

In the case of Am Gen. LLC v. Armour, No. 71S03-1507-PL-407, 2015 Ind. LEXIS 1045, the employer failed to satisfy its obligation under an employment agreement when it offered the employee the subordinate “promissory note” as payment, in which “note” was not treated as cash or cash equivalent.

The parties had entered into an employment contract on November 14, 2007, according to which the employee was entitled to a compensation package including long-term incentive plan (LTIP) that was payable with respect to the 2011 fiscal year. On January 2, 2012, the employee retired as President but did not receive the 2011 fiscal year bonuses unlike other employees. Rather, he started receiving LTIP payment in installments and the final installment made to him was in the form of a “promissory note”.

The “note” provided for satisfaction of all obligations of the employer under LTIP upon acceptance, and full payment under the “note” wasn’t due until 2015. Moreover, it was unsecured; transferable only under certain conditions and subordinate to other debts owed by the employer. The employee through the counsel refused acceptance of the “note” and demanded payment of all amounts owed to him. In response to the demand, the employer filed a declaratory judgment action asserting that it hadn’t breached the LTIP portion of the employment agreement. Conversely, when the employer failed to make the full LTIP payment, the employee counter-claimed for breach of the agreement.

The case when decided by the trial court, was made in favor of the employee concluding that the plain meaning of “pay” or “payment” was “to exchange cash or cash equivalent for goods or services” and the “note” was neither cash nor cash equivalent. However, a divided Court of Appeals reversed the order of the trial court.

Thereafter, in an appeal to the Indiana Supreme Court, it was held that the employer was required to make LTIP payments in cash or its equivalent in accordance with the terms of this agreement and since the “note” didn’t satisfy any requisite, the employer breached the employment and the employee was entitled to a summary judgment.

The Court stated that under Indiana law, although the form of payment was unspecified; it mandated for payment to be made in cash or its equivalent. It further established a clear distinction between the “note” and a “cash equivalent” and based its decision on three factors: firstly, principal of the “note” wasn’t due until three years after LTIP payments were due under the employment agreement; secondly, “note” was unsecured and subordinate to other large bank debts that employer owed; and thirdly, it could only be transferred under certain conditions.

The court thus held that “note” was merely a promise to pay, and not a payment as demanded by the employment agreement. Hence, the court granted the transfer and the opinion of the court of appeals was vacated.