A former CEO with an employment contract promising valuable company stock claims he was the victim of a bait-and-switch scheme when he was fired just before he would have become entitled to it. The sole reason he was fired, he claims, was to save the company from having to keep its end of the bargain. In the summer of 2021, the District Court for the Eastern District of Texas, Sherman Division, held that Scott Crane, the former CEO of Rave Restaurant Group, could pursue his breach of contract and fraud lawsuit against his former employer.

Most top executives are offered complicated compensation structures in their employment contracts as incentives to join a company and improve its profitability. Although salary and bonuses are sometimes generous, the real inducement for an executive to take a top position is the promise of equity ownership in the company. This is especially true if the company is a start-up or poised for expansion. Those promises are often protected by the terms of an employment contract. But contract interpretation when the executive leaves the company can be anything but straightforward.

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If you are in the process of creating a compensation package for an employment contract, negotiating an employment contract, anticipating a hard-earned stock benefit or if you are anticipating the need for a severance negotiation, reach out to our experienced Texas employment lawyers. Just click on this link to get the conversation started Contact Kilgore & Kilgore. As a word to the wise, it is always preferable to get legal advice at the contract negotiation, rather than waiting until earned benefits are anticipated, when problems arise. Wherever you find yourself, we offer a free review of the facts of your case. To learn more about executive compensation practice, click this link Executive Compensation.

Crane’s Employment Contract

Crane was recruited for the position of CEO for two of Rave Restaurants brands in 2016 and interviewed with several members of the board of directors. He was ultimately offered a salary with potential bonuses and shares based on his achievement of certain performance metrics. His executive compensation package was memorialized in an employment contract and spelled out in multiple restricted stock award agreements. Perhaps ominously, his right to collect on this deferred compensation depended on whether he was employed by Rave on a date after his achievement of the required performance. His arrival at the company was widely heralded in the Texas business press.

Rave’s stock price increased during Crane’s employment, from $2.22 per share two days before the announcement of his hire to $3.08 per share on the day before his termination was announced – an increase of 72 percent in 30 months.

Crane claims he was instrumental in fixing Rave’s balance sheets and that he met the benchmarks set by Rave’s board of directors, thus entitling him to approximately 328,000 shares for the 2016 fiscal year; 300,000 shares for the 2017 fiscal year; and 300,000 shares for the 2018 fiscal year.

Fired in Violation of his Employment Contract

In July 2019, one month after Crane claims he reached the benchmarks for fiscal year 2018, but before the date on which entitlement to the company shares vested, the board fired him. It gave no reason. Crane claims Rave failed to transfer the shares he earned, refused to pay his bonus, refused to compensate him for his earned but unpaid vacation, did not pay him $300,000 in severance pursuant to the employment contract, and did not pay his COBRA premium payments.

Rave argued that although Crane arguably met the benchmarks, he did not meet the requirement that he be employed on the required date. Crane countered that the only reason he failed to meet the second requirement was because Rave made it impossible. He argued that the Court should interpret the contract in a manner that would prevent an unjust forfeiture of the benefit of the bargain he arguably earned through his performance.

Crane filed his lawsuit in January 2020. Rave moved for summary judgment. The dispute raises a variety of contract issues, but the thorniest of these may about the enforceability of a condition precedent in a contract. Crane asked the Court to find there was a condition precedent and that Rave made it impossible for Crane to fulfill the condition precedent. Crane relied heavily on Sellers v. Minerals Techs., Inc. when making his argument.

The Employment Contract in the Sellers v. Minerals Techs Case

A condition precedent is an event that must happen or be performed before an individual has a right to enforce an obligation. In Sellers, the Fifth Circuit noted that “[b]ecause of their ‘harshness in operation,’ condition precedent are generally not favored under Texas law and should not be recognized if ‘another reasonable reading of the contract is possible’ or the condition ‘would impose an absurd or impossible result.’” The District Court’s decision in Crane further cites Sellers for the proposition that “[u]nder Texas jurisprudence, if one party prevents another from performing a condition precedent or renders its fulfillment impossible, then the condition may be considered fulfilled.”

What does this mean for Scott Crane? So far, all we know is that, at least on the portion of his breach of contract claim that relates to more than 900,000 shares of company stock, he will have the opportunity to go to trial. The same is true for a portion of his fraud claim. The District Court determined that these claims could not be decided simply as a matter of law, and that both sides should have the opportunity to introduce evidence at trial that supports their positions.

What does this mean for top executives whose compensation agreements include stock award agreements, commissions, bonuses, and other forms of incentive compensation? The Sellers decision, as applied in Crane, is good news for those seeking to enforce employer promises, especially when it appears that an employer is backing out of the deal after the executive has substantially performed his or her part of the employment contract.

Contact Us If You Have Questions About Your Employment Contract, Its Content, Negotiation, and Enforcement

Remember that an ounce of prevention is worth a pound of cure. Make sure that you get your employment contract reviewed by an employment lawyer before you sign it. It is essential that you understand it thoroughly. Contact an experienced employment lawyer if, and as soon as, difficulties arise. Reach out to Kilgore & Kilgore a free review of the facts of your case. Click here to get the conversation started contact Kilgore & Kilgore.