The salary in an executive’s prepetition employment contract is not the presumptively reasonable amount of the executive’s postpetition administrative claim, according to the Ninth Circuit Bankruptcy Appellate Panel.
The debtor company’s executive chairman had an employment contract calling for annual compensation of almost $800,000. He was also the largest shareholder.
In chapter 11 only four months, the debtor rejected the executory employment contract around the time of confirmation. The company had not paid the executive during its sojourn in chapter 11.
The executive filed a timely motion for allowance and payment of an administrative claim based on a proration of his prepetition salary. After trial, the bankruptcy court allowed some $15,000, approximately the same amount paid to other board members for their services during the chapter 11 process.
The bankruptcy court found there was little evidence to support the claim for how much time the executive spent, perhaps because he lived a great distance from the company’s headquarters and operations. The bankruptcy court also found that the executive had not independently proven the reasonable value of his services other than by alluding to his prepetition salary.
Unable to challenge the bankruptcy court’s fact findings, the executive argued in the BAP that the bankruptcy court committed errors of law by misallocating the burden of proof and not affording his contract presumptive weight postpetition.
Writing for the BAP on April 24, Bankruptcy Judge Meredith A. Jury rejected both arguments and upheld the bankruptcy court. Her opinion is a primer on the initial and shifting burdens of proof and persuasion with regard to administrative claims. She was even more emphatic than the bankruptcy court in rejecting the executive’s legal theories.
Judge Jury began by explaining that administrative claims under Section 503(b)(1)(A) “are held to a stricter standard” because they are not presumptively allowed like prepetition claims. Rather, she said, an administrative claimant bears the burden of persuasion by a preponderance of the evidence that the services were actual and necessary and conferred benefit on the estate.
The executive contended that Section 503(b)(1)(A)(i) carved out salaries as automatically entitled to administrative status. Judge Jury rejected the argument, observing that no court had read the section “in that manner.”
Had Congress intended to obligate a debtor for prepetition wage rates until the contract was rejected, “it would have said so explicitly, as it did for rents due under an unexpired lease” in Section 365(d)(4), Judge Jury said.
Second, the executive cited NLRB v. Bildisco and Bildisco, 465 U.S. 513, 104 S. Ct. 1188, 79 L. Ed. 2d 482 (1984), for the proposition that the contract rate is presumptively reasonable. Judge Jury rejected his reading of Bildisco.
Instead, Judge Jury said the pivotal language in Bildisco was the sentence saying that a debtor is “obligated to pay for the reasonable value of those services . . . which, depending on the circumstances, may be what is specified in the contract.” [Emphasis added.] The emphasized language, she said, gives “the trial court unlimited discretion to determine whether such postpetition services were actual and necessary expenses of preserving the estate.”
After Bildisco, Judge Jury said that courts are “almost” uniform in holding that contract wages are probative but not binding and are not given presumptive weight. She cited the First Circuit for “explicitly” rejecting the idea that a prepetition contract controls the amount of an administrative claim for wages.
Where the bankruptcy court had “equivocally found” a presumption but ruled that the debtor had overcome the presumption, Judge Jury said, “We hold more definitively that a contract price in a rejected employment agreement is not presumptive of value in the first place.”
Because the executive had not challenged the bankruptcy court’s fact findings, Judge Jury upheld the bankruptcy court’s award at a rate comparable to what other board members were paid.