In December 1996, the U. S. Bankruptcy Court for the District of Maryland ruled in Maryland Paper Box Company that an unfunded death benefit clause in a written employment agreement was unreasonable compensation in light of the poor financial condition of the company. The Liquidating Agent for the company filed an objection, pursuant to Section 502(b)(4) of the Bankruptcy Code, to the $550,000 claim filed by Julie Mahr Poll, an heir of one of the former principals of the company and thus an "insider."
Maryland Paper Box Company was a family-owned business that sold folding paper boxes and specialty bags. By the 1980's, Abraham Mahr, a son of the founder, was running the company.
In 1983, the company entered into a written employment agreement with Abraham Mahr, then 77 years old, that increased his salary and the value of his death benefit clause. This agreement provided that if Mr. Mahr died while employed by Maryland Paper Box, the company would pay his designated beneficiary, Ms. Poll, his monthly salary for three months and $3,333.33 per month for 10 years ($400,000) thereafter. Neither the employee nor the employer made contributions to fund this plan. In 1985 the employment agreement was amended to increase the death benefit to be paid to Ms. Poll, but the death benefit plan was still not funded.
The evidence at trial revealed that the company sustained a moderate operating loss in 1983 and a huge loss in 1985. Also, the company's balance sheet, operating capital, and debt ratio began to deteriorate during 1982 (when the company showed a significant profit), a trend that generally continued uninterrupted during the life of the company. Maryland Paper Box filed for bankruptcy protection in May 1993. The bankruptcy court recognized the poor financial health of the company at the time it executed the written employment agreements with Mr. Mahr; that Mr. Mahr had been more than adequately compensated on a present basis; that his death benefit plan was completely unfunded; and that the present large body of unsecured creditors should not be required to "fund" the benefit. The court found in favor of the Liquidating Agent and sustained in full the objection to Ms. Poll's claim.
For more information, contact Paul D. Trinkoff at 410/752-9718 or Lynn A. Kohen at 410/752-9748.