JOHN BACHMAN; BRUCE PHELPS, APPELLANTS,
v.
COMMERCIAL FINANCIAL SERVICES, INC., APPELLEE.
| [1] | UNITED STATES COURT OF APPEALS TENTH CIRCUIT |
| [2] | No. 00-5108 |
| [3] | Keywords: administrative claim, priority, severance
benefits |
| [4] | April 24, 2001 |
| [5] | IN RE: COMMERCIAL FINANCIAL SERVICES, INC., DEBTOR. JOHN BACHMAN; BRUCE PHELPS, APPELLANTS, v. COMMERCIAL FINANCIAL SERVICES, INC., APPELLEE. |
| [6] | APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF OKLAHOMA (D.C. No. 99-CV-390-H) |
| [7] | Submitted on the briefs: Greggory T. Colpitts of Magee
& Colpitts, Tulsa, Oklahoma, for Appellants. Larry M. Wolfson and
Jerry L. Switzer, Jr. of Jenner & Block, Chicago, Illinois, and Neal
Tomlins and Ronald E. Goins of Tomlins & Goins, Tulsa, Oklahoma, for
Appellee. |
| [8] | Before Henry, Briscoe, and Murphy, Circuit Judges. |
| [9] | The opinion of the court was delivered by: Murphy,
Circuit Judge |
| [10] | PUBLISH |
| [11] | This case requires us to determine whether lump sum
cash payments due upon termination and promised to appellants when they
executed employment contracts with Commercial Financial Services, Inc.,
(CFS), were entitled to priority as administrative
expenses in CFS's eventual bankruptcy. After reviewing the briefs of the
parties, the relevant case law, and the opinions of the bankruptcy court
and the district court, we affirm. *fn1 |
| [12] | Appellants Bachman and Phelps entered into employment
contracts with CFS in which both employees were promised lump sum cash
payments upon termination by CFS prior to the expiration of the
contracts unless such termination was for cause. The lump sum payments
equaled appellants' annual base salaries of $120,000 and $150,000,
respectively. Before appellants' contracts expired, CFS filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code
and assumed the role of debtor in possession. Appellants continued to
work for the debtor in possession, but each was terminated, without
cause, within a month after the filing. Both appellants were paid full
salaries for the post- petition period in which they worked. |
| [13] | After the terminations and with the approval of the
bankruptcy court pursuant to 11 U.S.C. § 365(a), the debtor in
possession rejected appellants' employment contracts. Appellants then
filed a motion in the bankruptcy court seeking an order classifying
their lump sum payments as priority administrative claims under 11 U.S.C.
§ 503(b)(1)(A). |
| [14] | 11 U.S.C. § 503(b)(1)(A) provides: |
| [15] | (b) After notice and a hearing, there shall be allowed
administrative expenses . . . including-- |
| [16] | (1)(a)the actual, necessary costs and expenses of
preserving the estate including wages, salaries, or commissions for
services rendered after the commencement of the case. |
| [17] | Administrative expenses allowed under § 503(b) are
entitled to priority pursuant to 11 U.S.C. § 507(a)(1) and §
726(a)(1). The policy behind such priority is to encourage creditors to
extend credit and supply debtors with goods and services post-petition
in order to increase the likelihood that a successful reorganization
will occur. See In re Jartran, Inc., 732 F.2d 584, 587-88 (7th Cir.
1984). Creditors are unlikely to do this unless they are promised
priority. Such priority does no injustice to pre-petition creditors,
because they will presumably benefit more from a reorganized debtor than
from one forced into liquidation. Id. at 586. Such priorities are
strictly construed, however, "[b]ecause the presumption in
bankruptcy cases is that the debtor's limited resources will be equally
distributed among his creditors." Isaac v. Temex Energy, Inc. (In
re Amarex, Inc.), 853 F.2d 1526, 1530 (10th Cir. 1988) (quotation
omitted). Administrative priority must have a clear statutory purpose;
appellants can prevail only by demonstrating that their claims
"comport with the language and underlying purposes of § 503."
Jartran, Inc., 732 F.2d at 586. |
| [18] | In a thorough and well-reasoned opinion, the bankruptcy
court held that the lump sum payments were not "necessary costs and
expenses of preserving the estate" under 11 U.S.C. § 503(b)(1)(A)
nor could they be compensation for appellants' post-petition services.
Applying the First Circuit test articulated in Cramer v. Mammoth Mart,
Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950, 954 (1st Cir. 1976), and
endorsed by this circuit in Amarex, 853 F.2d at 1530, the bankruptcy
court further determined that appellants' claims neither arose from a
transaction with the debtor in possession nor benefitted the debtor in
possession. The bankruptcy court held that the claims, therefore, were
not entitled to priority as administrative expenses. The district court
affirmed, and appellants appeal. |
| [19] | This court considered a situation similar to the
present one in Amarex. There, the claimant was party to an employment
contract with Amarex providing for a one-year $10,000 bonus which could
be annualized over the first year. During the claimant's first year of
employment, Amarex was placed in involuntary bankruptcy. After working
for the debtor in possession for more than a year after the filing, the
claimant sought classification of the unpaid bonus as an administrative
expense. |
| [20] | In rejecting the district court's conclusion that the
entire bonus was entitled to priority because it was earned
post-petition, this court adopted the analysis of the First Circuit in
Mammoth Mart, 536 F.2d 950. |
| [21] | [A]n expense is administrative only if it arises out of
a transaction between the creditor and the bankrupt's trustee or debtor
in possession (citations omitted) and only to the extent that the
consideration supporting the claimant's right to payment was both
supplied to and beneficial to the debtor- in-possession in the operation
of the business. A debt is not entitled to priority simply because the
right to payment arises after the debtor in possession has begun
managing the estate. Amarex, 853 F.2d at 1530 (quotations omitted). *fn2 |
| [22] | Largely because the bonus at issue in Amarex was
"guaranteed" and "annualized" and because the
claimant could draw a monthly advance against it, we agreed with the
bankruptcy court that the bonus was part of the claimant's "agreed
salary, and was earned day by day during that first year." Id. at
1531. Priority was accorded only that portion of the bonus earned
post-petition because "[o]nly those services were `consideration
supporting the claimant's [Isaac's] right to payment . . . both supplied
to and beneficial to the debtor-in-possession in the operation of the
business.'" Id. at 1532 (quoting Mammoth Mart, 536 F.2d at 954).
Amarex is not limited to cases involving employee bonuses and sets out
this circuit's definitive procedure for determining all administrative
expense claims, including the severance-pay-type claims presented here.
General Am. Transp. Corp. v. Martin (In re Mid Region Petroleum, Inc.),
1 F.3d 1130, 1133 n.5 (10th Cir. 1993). |
| [23] | Applying the Amarex/Mammoth Mart test to the facts of
this case, we agree with the bankruptcy court and the district court
that these claims for lump sum termination payments should not be
accorded priority as administrative expenses. In order to attain such
status, the claims must have arisen from a transaction with the debtor
in possession. Amarex, 853 F.2d at 1530. Appellant's argue that they had
a transactional relationship with the debtor in possession because the
debtor in possession continued to employ them post-petition and paid
them for their work. This is insufficient to establish a transaction
with the debtor in possession for administrative priority purposes. |
| [24] | "It is only when the debtor-in-possession's
actions themselves -- that is, considered apart from any obligation of
the debtor -- give rise to a legal liability that the claimant is
entitled to the priority of a cost and expense of administration."
Mammoth Mart, 536 F.2d at 955. It is crucial that the claimant's
performance be induced by the debtor in possession. Jartran, Inc., 732
F.2d at 587. |
| [25] | Here, there is no evidence that the debtor in
possession assumed the employment contracts or entered into new
post-petition contracts with appellants. In fact, shortly after the
terminations, the debtor in possession rejected the employment
contracts. The debtor in possession did nothing to give rise to legal
liability for payment of the lump sum amounts. Nor did the debtor in
possession induce appellants' performance by promising to pay them the
lump sum amounts if they would continue to work post-petition. |
| [26] | Further, it is not determinative that payment of the
lump sum was contingent upon appellants' termination, an event which
occurred post- petition. In determining administrative priority, courts
look to "when the acts giving rise to a liability took place, not
when they accrued." Pension Benefit Guar. Corp. v. Sunarhauserman,
Inc. (In re Sunarhauserman, Inc.), 126 F.3d 811, 818 (6th Cir. 1997);
see also Pension Benefit Guar. Corp. v. Skeen (In re Bayly Corp.), 163
F.3d 1205, 1208-09 (10th Cir. 1998). Here, in order for appellants to
prevail, the liability must arise post-petition; it is not enough that
the right to payment arose after the debtor in possession assumed
control. Amarex, 853 F.2d at 1530. The liability arose at the time the
contracts were executed; only the right to payment arose upon
appellants' termination. Appellants have not shown that their claims
arose from a transaction with the debtor in possession and thus have not
met the first prong of the Amarex/Mammoth Mart test. |
| [27] | The second requirement for administrative priority is
that "the consideration supporting the claimant's right to payment
was both supplied to and beneficial to the debtor-in-possession in the
operation of the business." Id. (quotation omitted). Appellants'
claims also fail on this front. |
| [28] | Appellants argue that they satisfy this requirement
because, by working for the debtor in possession for some three weeks
after the filing, they provided services which benefitted the estate.
This showing, however, is insufficient to establish that the
consideration supporting the right to payment of the lump sum "was
both supplied to and beneficial to the debtor-in-possession in the
operation of the business." Id. (quotation omitted). |
| [29] | With regard to the requirement that the consideration
must be supplied to the debtor in possession, there is nothing in the
record to suggest that appellants' work for the debtor in possession for
three weeks post-petition was consideration for the large lump sum
payments at issue here. Indeed, the consideration for the lump sums was
the agreement by appellants, supplied pre-petition, that they would
forego other employment opportunities and sign on with CFS as employees.
That consideration included obligating themselves to work for CFS for
two years and to move their residences from other states to Tulsa,
Oklahoma. The three weeks of post-petition work was not consideration
for the lump sum payments; that work was consideration for the payment
of salaries which appellants received in full. As we stated in Amarex: |
| [30] | [T]he right to priority does not necessarily depend on
the fact that the obligation to pay the bonus did not arise until after
the commencement of bankruptcy proceedings. As the cases indicate, what
is crucial is what consideration supports the bonus, and whether such
consideration, or a portion of it, was pre-petition services. Amarex,
853 F.2d at 1531. |
| [31] | The consideration supporting appellants' right to the
lump sum cash payments was the mutual promises contained in their
respective employment contracts. That consideration was rendered
entirely pre- petition and cannot support appellants' claim for
administrative priority. No part of the consideration for the lump sum
payments was supplied to the debtor in possession. |
| [32] | Further, there is no evidence that the consideration
for the lump sum payments was beneficial to the debtor in possession in
the operation of the business. In fact, four days after appellants were
terminated, the debtor in possession moved the bankruptcy court for
permission to reject the employment contracts and eventually did so.
Thus, appellants' agreement to forego other employment opportunities to
work for CFS in return for the promise of the lump sum payments was of
no benefit to the estate. The lump sum payments were not actual,
necessary costs and expenses of preserving the estate. See 11 U.S.C. §
503(b)(1)(A). |
| [33] | Appellants cite Teamsters Local No. 310 v. Ingrum (In
re Tucson Yellow Cab Co.), 789 F.2d 701, 704 (9th Cir. 1986), in which
the Ninth Circuit held that severance pay in lieu of notice was entitled
to administrative priority. That case, driven largely by equitable
concerns, is distinguishable. In Tucson Yellow Cab, a collective
bargaining agreement between the taxi drivers and the company provided
for two weeks notice prior to termination or severance pay in lieu of
notice. The clear intent of the parties was to compensate the drivers
for at least two weeks before termination, either by providing them with
two weeks notice, after which the drivers would presumably work two more
weeks and be paid, or to pay them two weeks severance pay and terminate
them immediately. The pay in lieu of notice was clearly a component of
compensation. Here, in contrast, appellants were paid their normal wages
for the three weeks they worked post-petition. The lump sum cash
payments were not "wages, salaries, or commissions for services
rendered after the commencement of the case." See 11 U.S.C. §
503(b)(1)(A). |
| [34] | Here, as in Mammoth Mart, the salaries paid appellants
fully compensated them for their post-petition services to the debtor in
possession. "The claims for [the lump sum payments] are based
entirely upon [consideration supplied] by appellants to the debtor, and,
as such, are not entitled to priority." Mammoth Mart, 536 F.2d at
955. |
| [35] | The judgment of the United States District Court for
the Northern District of Oklahoma is AFFIRMED. |
|
|
|
| Opinion Footnotes | |
|
|
|
| [36] | *fn1
After examining the briefs and appellate record, this panel has
determined unanimously that oral argument would not materially assist
the determination of this appeal. See Fed. R. App. P. 34(a)(2); 10th
Cir. R. 34.1(G). The case is therefore ordered submitted without oral
argument. |
| [37] | *fn2
Appellants in the bankruptcy court relied on language in Amarex which
quoted Trustees of Amalgamated Insurance Fund v. McFarlin's, Inc., 789
F.2d 98 (2d Cir. 1986), to argue that, because severance pay is
compensation for the hardship employees face when they are terminated,
severance pay is earned upon dismissal. Amarex, 853 F.2d at 1530-31.
That statement in McFarlin's was meant to summarize Second Circuit case
law on the issue of severance pay. The reference to that statement, as
dicta, in Amarex was part of this court's effort to illustrate the
disagreement among the circuits regarding the treatment of severance pay
as an administrative expense. The ultimate decision in Amarex resulted
from the application of Mammoth Mart, a case rejecting the Second
Circuit approach to severance pay claims in bankruptcy. Appellants'
suggestion that this circuit finds all severance pay claims entitled to
administrative priority rests on a misreading of Amarex. |