UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON DIVISION
IN RE:
RUSSELL CAVE COMPANY, INC.
f/k/a
The J. Peterman Company
DEBTOR CASE
NO. 99-50142
CHAPTER
11
MEMORANDUM OPINION
This matter is before the Court on the Objections of
the Official Committee of Unsecured Creditors to Allowance of Employee
Administrative Expense Requests and to Pre-Petition Employee Claims. The debtor has filed responses to both these
objections. This matter was heard on
April 25, 2000, and taken under submission by the Court for decision on the
applicable law in regard to severance claims.
A brief chronological review of the record herein
indicates that the debtor filed its Chapter 11 petition in this Court on
January 25, 1999. As part of its first
day filings, the debtor moved for authorization to pay pre-petition employee
wages, salaries, and related items totaling over $385,000. The Employee Wage Motion was granted by
order entered on January 26, 1999 (“the First Day Order”). On March 5, 1999 substantially all the
debtor’s assets were sold at auction to Paul Harris Stores, Inc. The Court fixed August 16, 1999 as the claims
bar date, and on November 18, 1999, a Joint Liquidating Plan of Reorganization
was confirmed. The Plan became
effective by its terms on November 29, 1999.
The Official Committee of Unsecured Creditors (“the
Committee”) in its Objection to Employee Administrative Expense Requests
represents that during the period from November 29, 1999 through January 3,
2000, 45 employees of the debtor filed requests for allowance and payment of
various administrative expenses totaling $444,882.94. The Committee specifically raises the issue of the extent to
which employees are entitled to administrative expense priority for claims
arising from pre-petition severance agreements with the debtor, assuming that
the claimants can provide sufficient factual and legal support to establish
their entitlement to the amounts requested.
The existence of an administrative expense is
determined pursuant to 11 U.S.C. §503(b)(1)(A) which provides in pertinent part
that “there shall be allowed administrative expenses, including .... the
actual, necessary costs and expenses of preserving the estate, including wages,
salaries, or commissions for services rendered after the commencement of the
case.” Such an expense is accorded
first priority under 11 U.S.C. §507. The
Committee contends that this administrative expense priority can be afforded only
to that portion of the benefit that was actually earned by services provided
(i.e., accrued) during the post-petition period. See In re Sunarhauserman, Inc., 126 F.3d 811 (6th
Cir. 1997).
The debtor, in support of the claimants, contends that
severance pay should not be prorated because any severance payment, whether
determined on the basis of salary, years worked, or type of position held, is
compensation for termination of employment without notice. It concedes that this is the minority
position and has cited several Second Circuit cases which represent this
position, including In the Matter of Straus-Duparquet, Inc., 386 F.2d
649 (2nd Cir. 1967); In re W.T. Grant Co., 620 F.2d 319 (2nd
Cir. 1980); and Trustees of the Amalgamated Insurance Fund v. McFarlin’s,
Inc., 789 F.2d 98 (2nd Cir. 1986). The majority of courts considering this question do not agree
with this line of reasoning, however, and have supported the Committee’s
position.
While the Committee cites many of the cases representing
the majority position, the basics of it, both as to administrative expense
claims and pre-petition claims, are set out in In re Yarn Liquidation, Inc.,
217 B.R. 544 (Bkrtcy.E.D.Tenn. 1997):
The majority rule is based on the purpose of
the administrative expense priority.
Generally, a claim for an administrative expense must be based on a
benefit furnished to the debtor during the bankruptcy case. .... For example, an employee who works during
the bankruptcy case furnishes the employee’s labor as a benefit to the
debtor. The employee has an
administrative expense claim for compensation owed for the work performed
during the bankruptcy case.
The majority rule does not preclude
severance pay based on length of service from ever becoming an administrative
expense, .... The cases focus on whether the severance pay was earned before or
during the bankruptcy case. Whether the
severance pay was earned before or during the bankruptcy case depends on
whether it arose from services provided by the employee before or during the
bankruptcy case. Severance pay based on
length of service is an administrative expense only to the extent it was
earned by service during the bankruptcy case.
It is not an administrative expense to the extent it was earned by service
before the bankruptcy. ....
Likewise, when severance pay is based on
length of service, it is entitled to the third priority under §507(a)(3) only
to the extent it was earned within 90 days before the date of bankruptcy. .... (Cites omitted.)
At
546. See also In re Roth
American, Inc., 975 F.2d 949, 957 (3rd Cir. 1992); In re
Mammoth Mart, Inc., 536 F.2d 959, 955 (1st Cir. 1976); In the
Matters of Health Maintenance Foundation et al., 680 F.2d 619, 621 (9th
Cir. 1982); In re Ohio Corrugating Co., 115 B.R. 572, 578-579
(Bkrtcy.N.D.Ohio 1990); In re Holabird Company, 86 B.R. 111, 114
(Bkrtcy.N.D.Ohio 1988). This Court
agrees and concludes that severance pay claims, as well as any other
administrative expense claims are entitled to administrative priority only to
the extent that they were earned after the bankruptcy petition was filed.
In order to calculate any administrative expense
allowable under the above rationale, courts have used a multiplier fraction
which has the number of days of employment after the petition date as the
numerator and 365 as the denominator.
For such a calculation to be performed there must be sufficient
information available including discharge date and weekly or hourly pay rates
at discharge.
As concerns pre-petition claims, the Committee in its
Objection to Pre-Petition Employee Claims contends that much the same rationale
applies as is set out in its treatment of administrative expense claims. The Committee represents that during the
period from January 25, 1999 to the claims bar date, 279 employees of the
debtor filed proofs of claim for alleged wages and benefits owing as of the
petition date, most if not all seeking entitlement to priority under 11 U.S.C.
§507(a)(3). That section provides a
third priority for
allowed,
unsecured claims, but only to the extent of $4,300 for each individual
...earned within 90 days before the date of the filing of the petition
...for... wages, salaries, or commissions, including vacation, severance, and
sick leave pay earned by an individual ....
The
Committee further represents that many such alleged priority claims seek
payment of severance benefits earned prior to 90 days immediately preceding the
petition date. The Committee believes
that most, if not all, of the claimants have received post-petition payments
from the debtor in respect of pre-petition wages, but has been unable to
discover the amounts paid.
The Committee
raises the issue of evidentiary and/or legal support for the various claims. Assuming such support can be provided, the
Committee objects to the allowance and payment of such claim to the extent it
is not entitled to priority under §507(a)(3).
The Committee further maintains that if a valid priority claim can be
demonstrated, that priority should be disallowed to the extent of any
post-petition payments which the claimant received in respect of pre-petition
wages or employee benefits. As with the
issue of administrative expense claims, the majority of courts support the
Committee’s position including In re Crafts Precision Indus., Inc., 244
B.R. 178, 181 (1st Cir.BAP 2000); In re Lykes Bros. Steamship
Co., Inc., 213 B.R. 401, 403 (Bkrtcy.M.D.Fla. 1997); In re Wean, 169
B.R. 126, 128 (Bkrtcy.W.D.Pa. 1994); In re Cardinal Indus., Inc., 160
B.R. 83, 85-86 (Bkrtcy.S.D.Ohio 1993).
The debtor makes arguments in regard to pre-petition
priority claims which are similar to those it advanced in regard to
administrative expense claims and relies again on the reasoning of Straus-Duparquet,
supra. It maintains that
termination within the 90-day pre-petition period causes severance pay to be
earned at the date of termination, rather than over the entire period of the
employee’s tenure with the employer. It
concludes that the Court should rule that severance pay is compensation for
termination without cause and in lieu of notice, regardless of the employer’s
formula for calculating such severance, and that all of severance is earned on
the day of termination and, if within the 90-day period, subject to the $4,300
limit of §507(a)(3). The Court finds
this argument unconvincing here as it did in regard to administrative expense
claims.
The majority of courts have ruled that §507(a)(3)
requires that only those employee benefits actually earned during the 90-day
period immediately preceding the filing of a petition are entitled to a
priority in payment. Pre-petition
priority claims for severance pay in this case are therefore limited to ninety
days prior to date of filing plus date of filing or 91/365 (0.249315068), or
approximately one-fourth of one week’s salary or wages, applying a multiplier
similar to that used to calculate administrative expense claims, supra. The Court finds this to be the persuasive
position and further agrees with the Committee’s position that any properly
documented and supported pre-petition claims determined to be entitled to
priority pursuant to §507(a)(3) must be reduced by any wages and/or benefits
received pursuant to the terms of the First Day Order, so as not to exceed the
$4,300 limit.
In summary, the Court concludes that the Committee’s
position in regard to claims for severance pay is correct, whether they are
administrative expense claims or pre-petition priority claims. Administrative expense claims are accorded
administrative priority only to the extent that they were earned after the
bankruptcy petition was filed.
Pre-petition claims are entitled to priority only to the extent that they
were earned within 90 days of the date of filing of the bankruptcy petition and
only up to a limit of $4,300. In
addition, any claim determined to be entitled to priority must be reduced by
any wages and/or benefits received pursuant to the First Day Order. An order in conformity with this opinion
shall be prepared and submitted by Counsel for the Committee and shall provide
that Committee’s Counsel shall serve the executed order on all effected
claimants within 3 business days after entry.
Dated:
By
the Court -
Judge
William S. Howard
Copies to:
W. Timothy Miller, Esq.
Gregory D. Pavey, Esq.
U.S. Trustee