Bankruptcy Judge Tamara O. Mitchell of Birmingham, Ala., declined to follow two court of appeals decisions under the former Bankruptcy Act that awarded administrative expense status for severance claims because executives continued working after Chapter XI filings.
The facts in the case before Judge Mitchell were similar to those in the Bankruptcy Act cases, Straus-Duparquet v. Local Union No. 3, 386 F.2d 649 (2d Cir. 1967), and In re Public Ledger, 161 F.2d 762 (3d Cir. 1947).
The executive had a written, prepetition employment contract paying severance equal to about one year’s salary and bonus if he were to be fired without cause. The executive was paid about six weeks of salary after the chapter 11 filing, although he had been told not to report for work. About eight months later, the bankruptcy court granted a motion to reject the employment agreement as an executory contract.
When his contract was rejected, the executive filed a motion for allowance and payment of about $285,000 in severance, contending that being fired after filing entitled him to an administrative claim under Section 503(b)(1)(A). Although he was not working, the executive contended that he provided value for the debtor by respecting the non-competition and non-disparagement clauses.
In her January 24 opinion, Judge Mitchell disagreed. She said that the two circuit court opinions handed down before the adoption of the Bankruptcy Code “have been questioned by recent decisions,” including by two bankruptcy judges in the Southern District of New York.
Judge Mitchell said that the severance claims were prepetition claims because they were based on contracts signed before bankruptcy. The fact that payment was contingent on events after filing “is of no consequence,” she said.
Addressing the theory underlying Straus-Duparquet, Judge Mitchell said that the Bankruptcy Code does not allow “an implied finding” that the debtor could assume a contract without court approval by having the executive continue working after filing.
Alternatively, Judge Mitchell denied the administrative expense claim because the executive had shown no “actual or necessary benefit to the estate” by complying with the non-competition and non-disparagement clauses after bankruptcy. Any benefit from compliance, she said, “did not rise to the level of a concrete benefit justifying an administrative expense.”