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In re Allegheny International Inc.

decided: January 17, 1992.

IN RE: ALLEGHENY INTERNATIONAL, INC. ET AL.
v.
J. DANIEL SNYDER, APPELLANT



Appeal from the United States District Court for the Western District of Pennsylvania. (D.C. Civil Docket No. 89-02380)

Present: Hutchinson, Cowen and Seitz, Circuit Judges

Author: Hutchinson

Opinion OF THE COURT

HUTCHINSON, Circuit Judge.

J. Daniel Snyder (Snyder) appeals an order of the United States District Court for the Western District of Pennsylvania. That order affirmed a decision of the United States Bankruptcy Court for the Western District of Pennsylvania. The bankruptcy court had disallowed Snyder's claim for compensation in accord with a written employment contract dated April 16, 1986, between Snyder and Allegheny International, Incorporated (Allegheny), the debtor in a Chapter 11 bankruptcy proceeding. We will vacate the district court's order affirming the bankruptcy court and remand the case to the district court so that it may vacate the bankruptcy court's judgment and remand the case to the bankruptcy court for further proceedings consistent with this opinion.

The bankruptcy court had concluded that Snyder's negligence in the performance of contractual duties was a material breach of the 1986 contract. It based that Conclusion on findings concerning Snyder's acts and omissions in carrying out his responsibilities under an earlier contract with Allegheny. The bankruptcy court made no findings on the parties' general state of mind or knowledge about Snyder's earlier derelictions when they entered into the 1986 contract. Such findings are necessary under applicable Pennsylvania contract law to dispose of Allegheny's contention that Snyder's pre-contract acts or omissions gave Allegheny the right to terminate Snyder's contract.*fn1 More specifically, further findings are needed on whether Snyder knowingly misrepresented sales and cost figures for the subsidiaries he had previously supervised for Allegheny, concealed accounting improprieties in those divisions that would have been material to Allegheny's decision to promote him, or knowingly failed to disclose them when he knew or should have known that Allegheny would rely on the false figures in promoting him, and whether Allegheny acted negligently in not discovering the truth before promoting Snyder or is otherwise precluded from relying on Snyder's misrepresentation, concealment or failure to disclose.

I.

On February 20, 1988, Allegheny filed a petition for relief under Chapter 11 of the bankruptcy code, 11 U.S.C.A. §§ 1101-1174 (West Supp. 1991), in the United States Bankruptcy Court for the Western District of Pennsylvania. Snyder filed a claim against Allegheny in the Chapter 11 proceeding alleging that Allegheny owed him $1,378,650.00 under his employment agreement with Allegheny. He also sought interest, costs and attorney's fees. Allegheny objected to Snyder's claim contending that he was terminated for cause.

On October 30, 1989, after an evidentiary hearing, the bankruptcy court sustained Allegheny's objection to Snyder's claim. The court held that Allegheny's evidence was sufficient to overcome the prima facie validity of the claim. It also held that Snyder failed thereafter to present enough evidence to sustain his claim. Snyder filed a timely notice of appeal to the district court from the bankruptcy court's judgment. See 28 U.S.C.A. § 158(c) (West Supp. 1991); Bankr. R. 8002. The district court affirmed the order of the bankruptcy court in an order and accompanying memorandum opinion. Snyder then filed a timely notice of appeal from the district court's judgment. That appeal is now before us for decision.

II.

Snyder's career with Allegheny began when he started working for True Temper, a subsidiary of Allegheny, on April 19, 1976. Snyder left True Temper on September 22, 1978, but returned to work for Allegheny on December 1, 1979. He received various promotions over the next five years and acquired something of a reputation as a "turn-around specialist," i.e., an executive who could turn an unprofitable operation into a money-maker. In 1984, Snyder became President of Allegheny's Engineered Products Division. In that position, he was responsible for nine of Allegheny's subsidiaries, including Bra-Con Industries (Bra-Con) and Sciaky Brothers (Sciaky), two troubled subsidiaries whose reports projected a loss for the year ending December, 1984, when Snyder took over. The initial reports after Snyder took over conformed to his reputation as a "turn-around specialist". For example, they showed a turn-around from a projected loss of $200,000.00 at Bra-Con in October to a profit after taxes of $316,000.00 by December. His reputation enhanced, Snyder became responsible for eight more of Allegheny's subsidiaries in May of 1985.

A year later, in April of 1986, Snyder's superiors at Allegheny decided to promote him to Vice President in Charge of Operations Planning. On April 16, 1986, Snyder and Allegheny executed a written employment agreement designating Snyder Vice President in Charge of Operations Planning. This agreement was signed on Allegheny's behalf by F. George Scott (Scott), Allegheny's Senior Vice President of Human Resources, and attested to by another person whose position with Allegheny does not appear and whose signature is illegible. The contract gives no indication on its face that it is not immediately effective or otherwise conditioned on later ratification by any other person or body within Allegheny. Snyder testified that this promotion changed his role with Allegheny and that he no longer was responsible for the seventeen subsidiaries that included Bra-Con and Sciaky.

Under the 1986 agreement, Snyder was obligated to "use his best efforts to promote the interest of" Allegheny and to "exert his best and most diligent efforts to perform the services and undertake the duties" assigned to him by Allegheny. Appellee's Supplemental Appendix (Supp. App.) at 3. Paragraph four of the agreement made Snyder's new employment contract effective for an indefinite term. It provided in relevant part:

The term of this Agreement shall commence on the date set forth in the opening paragraph hereof [April 16, 1986] and shall continue until the occurrence of one of the following events described in clauses (a) through (d), at which time the term hereof shall cease and the employment provided for hereunder and the obligation of the Corporation [Allegheny] to pay and provide the salary provided hereinabove shall terminate, (a) the death or permanent disability of Employee Snyder, (b) the voluntary termination of his employment with the Corporation by the Employee following the giving of the required notice by him as described in the immediately succeeding sentence, (c) the breach of this Agreement by Employee, or (d) three years after the date the Corporation shall have notified the Employee in writing that it elects to terminate his employment hereunder.

Appellant's Appendix (App.) at 19-20.

Thereafter, on July 22, 1986, the agreement dated April 16, 1986 was submitted for approval to Allegheny's Management and Human Resources Committee (Committee). It was approved that same day. By this time, however, Snyder's superior, Robert J. Buckley (Buckley), Allegheny's Chairman and Chief Operating Officer, had become aware of serious questions concerning the accuracy of the figures that indicated Bra-Con and Sciaky had become profitable under Snyder's tutelage by the end of 1984 and had continued to be profitable in 1985 and 1986.

Allegheny had adopted a Statement of Corporate Policy for its executives like Snyder. It was in effect both before and after execution and approval of Snyder's 1986 contract as Vice President in Charge of Operations Planning. The policy statement required Snyder's "compliance with accepted accounting rules and controls . . . at all times. The books of account, budget proposals, economic evaluation for projects and the like must truly reflect the transactions they record." Supp. App. at 45.

In January of 1986, in a series of letters to Buckley, Snyder submitted his annual affirmation that he knew of no transaction or event that had violated Allegheny's corporate policies at Bra-Con, Sciaky or the other Allegheny subsidiaries over which he had general supervisory responsibility. Sometime in April or May of 1986, however, Brian Roche (Roche), Allegheny's Director of Internal Audit, was directed to conduct an investigation and audit of Bra-Con and Sciaky. It is not clear whether Roche was told to conduct that investigation before Snyder's contract was signed on April 16. There is, however, no evidence in the record to show that any of Snyder's superiors knew of the improprieties before July 16, 1986 when Buckley, Scott, Roche and Snyder met to discuss the result of Roche's investigation.

Roche proceeded to look into the accounting practices of Bra-Con and Sciaky during the years 1984, 1985 and 1986. He concluded that, at Snyder's direction, sales of equipment at Bra-Con and Sciaky were recognized earlier than they should have been. Specifically, Bra-Con recognized $10,000,000.00 of sales in the fourth quarter of 1984 that it should not have recognized until 1985. Sciaky likewise recognized $6,000,000.00 of sales in the fourth quarter of 1984 that it should have recognized in 1985. The bankruptcy court found that these early recognitions "substantially inflated" the 1984 operating results for the subsidiaries and that the false enhancement allowed Bra-Con to show a profit. As previously stated, the forecast for Bra-Con prepared by a predecessor of Snyder, as of October, 1984, had predicted a loss. Similar discrepancies were noted for the years 1985 and 1986.

The bankruptcy court found that the early recognition of sales, as well as an improper deferral of costs it found was related to the premature recognition of sales, later caused Allegheny to take a $2,800,000.00 write-off. Additionally, the bankruptcy court found that an additional $1,000,000.00 Allegheny later wrote off was the result of a reversal of a sales entry at Bra-Con. Finally, it found the early recognition of sales and resulting deferral of costs conflicted with generally accepted accounting standards as well as Allegheny's corporate policy and concluded that Snyder was responsible for all of these write-offs.

The results of the audit were discussed by Buckley, Snyder, Roche and Scott on July 16, 1986, three months after Scott had signed Snyder's new contract. At that time, Buckley told Snyder he had to take some of the responsibility for the accounting improprieties. No immediate action was taken against Snyder. Roche's investigation continued. On July 23, one day after the Committee approved Snyder's contract, Roche submitted a supplemental report to Buckley. Roche testified that this supplemental report confirmed his earlier Conclusion that there was neither invoicing nor customer approval of the sales that were prematurely recognized in violation of proper accounting practices. On this evidence, the bankruptcy court found that the investigation was ongoing as of July 22 when the Committee officially approved Snyder's new employment agreement. Buckley and Scott attended the July 22 meeting of the Committee. There is no evidence in the record that the other members of the Committee were advised of the investigation concerning Snyder. There is likewise no evidence the other Committee members otherwise had any such knowledge before they approved Snyder's new contract.

In August of 1986, Oliver Travers replaced Buckley as Chairman and Chief Executive Officer of Allegheny. Travers tried to negotiate a severance agreement with Snyder. These negotiations failed and Travers fired Snyder on October 31, 1986 because of the accounting improprieties Roche had discovered. Twenty-seven Allegheny executives were removed from their positions between December, 1985 and October 31, 1986, but only two, Buckley and Snyder, were terminated for cause.

III.

The bankruptcy court had jurisdiction over Snyder's claim under 28 U.S.C.A. § 1334(a) (West Supp. 1991) and 28 U.S.C.A. § 157(a) (West Supp. 1991). The district court had jurisdiction over Snyder's appeal from the denial of his claim under 28 U.S.C.A. § 158(a) (West Supp. 1991). We have jurisdiction over Snyder's appeal from the district court's final order affirming the denial of Snyder's claim under 28 U.S.C.A. § 158(d) (West Supp. 1991).

In cases originating in the bankruptcy court, we occupy a second tier of appellate review. We have described ...


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