On an issue dividing the bankruptcy courts, Delaware Bankruptcy Judge Kevin J. Carey ruled that severance is earned in full as a fourth priority claim on the day an employee is fired, under Section 507(a)(4).
The employed had worked for the company for about five years and was entitled to 15 weeks of severance, to be paid each week after he was let go. Paid nine weeks of severance before the company filed a chapter 11 petition, the employee filed a priority severance claim for the remaining six weeks, or some $8,700.
Section 507(a)(4) provides a fourth priority claim up to $12,850 for “wages” and “severance” that are “earned within 180 days before” the filing date. The debtor objected to giving the claim priority status, contending that the former employee only had a severance claim based on six months of work before bankruptcy. In his Oct. 19 opinion, Judge Carey disagreed and allowed the employee his entire fourth priority claim of $8,700.
Judge Carey listed bankruptcy courts around the country that take the contrary view, allowing a priority claim only for the portion of total severance pay attributable to the 180-day period.
Judge Carey had already decided almost the same issue in his 2006 Garden Ridge decision. For him, the contingencies for a severance claim are satisfied and the compensation is “earned” when the employee is fired.
Judge Carey’s most difficult task was distinguishing Roth American, where the Third Circuit held in 1992 that an administrative expense claim for severance under Section 503(b)(1)(A) is based on the length of time an employee works after a chapter 11 filing. Judge Carey declined to follow Roth American, saying it dealt with a “different issue.”
Judge Carey approvingly cited Matson v. Alarcon, where the Fourth Circuit held in 2011 that severance is earned in full on the day an employee becomes entitled to the compensation.
If the issue goes up on appeal and the Third Circuit reverses, Judge Carey’s decision will have given rise to an interesting split of circuits eligible for Supreme Court review, because the Fourth Circuit in Matson distinguished Roth American.