United States Court of Appeals
For the First Circuit
No. 03-2512
IN RE: SERVISENSE.COM, INC.,
Debtor,
ARS BROOK, LLC and PETER BOS,
Appellants,
v.
CRAIG R. JALBERT, LIQUIDATING
SUPERVISOR OF SERVISENSE.COM, INC.,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
Before
Boudin, Chief Judge,
and Torruella and Dyk*, Circuit Judges.
John P. Dennis with whom Norman Brown, IV and Lynch,
Brewer, Hoffman & Fink LLP were on brief for appellants.
Howard P. Blatchford, Jr. with whom Bruce F. Smith,
Michael J. Fencer, and Jager Smith P.C. were on brief for appellee.
September 8, 2004
*
Of the Federal Circuit, sitting by designation.
DYK, Circuit Judge. The question here is whether a
Liquidating Supervisor in bankruptcy has the authority pursuant to
11 U.S.C. §§ 363(b) and 704 to settle a disputed claim for the full
amount of that claim in order to avoid the expenditure of
attorneys’ fees and costs. We hold that such a settlement is
authorized, and that the bankruptcy court did not abuse its
discretion in approving the settlement in this case.
I
ServiSense.com, Inc. (“ServiSense”) was a corporation
engaged in the business of reselling telecommunications services to
residential customers. In March of 2000 ServiSense hired David A.
Dane as its Vice President - Customer Care. He was subsequently
promoted to President and Chief Operating Officer on December 21,
2000. Under his employment agreement, Dane was to be paid a yearly
salary, and “[a]fter 12 consecutive months of employment,” he was
entitled to receive “12 months salary and benefits if terminated
without cause” (the “severance agreement”). (App. at 346.) As of
October of 2000, the amount of Dane’s annual salary was $135,000,
and the value of Dane’s benefits was approximately $12,500, for a
total severance payment of $147,500.
ServiSense subsequently experienced financial difficulty,
and Dane agreed in June of 2001 to a reduction of his salary by 50%
to $67,500 annually. On August 20, 2001, ServiSense filed for
Chapter 11 bankruptcy protection. In December of 2001 ServiSense
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filed a motion to sell substantially all of its assets, converting
the bankruptcy to a Chapter 7 liquidation proceeding. Dane
apparently provided valuable assistance both before and after the
conversion to a Chapter 7 liquidation proceeding. After the
conversion, Dane assisted ServiSense in consummating the sale of
its assets, including helping to formulate the Joint Liquidating
Plan of Reorganization (“Plan”), until he was terminated as an
employee in February of 2002.1
The events in question occurred during the period between
the Chapter 11 filing and Dane’s termination as an employee. On
December 6, 2001, Dane instructed ServiSense’s bookkeeper to
restore his salary to $135,000, and Dane was paid this salary until
he was terminated. Although the parties disagree as to whether
ServiSense’s Board authorized Dane to increase his salary, the
present controversy does not directly concern Dane’s right to this
salary, but rather primarily his right to severance pay. On
January 9, 2002, a motion was filed in the name of the debtor
proposing “a retention payment agreement (‘RPA’) with Dane which
will ensure his continued employment through the end of the sale
process and which will also effectuate a resolution of claims which
will otherwise arise in connection with Dane’s severance agreement
with the Debtor.” (App. at 3.) The RPA provided for a payment to
1
After his termination as an employee, Dane served as an
Estate Representative at the hourly rate of $90.
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Dane of $35,000 “in consideration for his agreement to remain in
the employ of the Debtor through the completion of the sale of its
assets.” (App. at 3.) The RPA also provided that the $35,000
payment would qualify as an administrative expense entitled to
priority in bankruptcy, but that the $35,000 payment “shall reduce
the Debtor’s obligations under the severance agreement on a dollar-
for-dollar basis, and that the remaining claims held by Dane
arising out of the . . . severance agreement shall constitute pre-
petition general unsecured claims against the Debtor’s bankruptcy
estate,” which were not entitled to administrative priority. (App.
at 4.)
A motion to approve this arrangement was filed in the
bankruptcy court pursuant to Rule 9019(a) of the Federal Rules of
Bankruptcy Procedure2 on January 9, 2002. The motion was signed by
counsel for ServiSense and assented to by counsel for the
Creditors’ Committee. Although the motion was originally granted
by the bankruptcy court, a motion to reconsider was filed by
appellant Peter Bos -- the Chief Executive Officer, a director, and
a creditor of ServiSense -- disputing whether the debtor approved
the agreement. While the motion to reconsider was still pending,
a Liquidating Supervisor, Craig R. Jalbert, the appellee here, was
2
That rule provides, in pertinent part: “On motion by the
trustee and after notice and a hearing, the court may approve a
compromise or settlement.” Fed. R. Bankr. P. 9019(a).
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appointed. The bankruptcy court later granted the motion to
reconsider.
In the interim, Dane had been terminated in February of
2002. The parties dispute the circumstances of the termination.
The appellants argue that Bos terminated Dane for cause on February
2, 2002, but the appellee argues that Dane was terminated with all
of the other ServiSense employees on February 1, 2002. On March
21, 2002, Dane filed an administrative claim for $147,500, arguing
that he was entitled to that amount because the severance agreement
was executory and because ServiSense had never rejected the
agreement.
On April 25, 2002, the Liquidating Supervisor entered
into a settlement with Dane under which Dane would receive
everything that he would have received under the proposed January
9, 2002, agreement. A motion to approve the settlement was granted
by the bankruptcy court, In re ServiSense.com, Inc., No. 01-16539-
WCH (Bankr. D. Mass. Aug. 20, 2002) (“ServiSense I”),3 and the
bankruptcy court’s action was affirmed on appeal to the district
court, In re ServiSense.com, Inc., No. 02-11987-PBS (D. Mass. Sept.
26, 2003) (“ServiSense II”).
3
The bankruptcy court also held that its order granting
the settlement motion rendered moot the previous motions with
respect to the RPA. ServiSense I, slip op. at 21.
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II
A
“On an appeal from the district court, we independently
review the bankruptcy court’s decision . . . . The approval of a
compromise is within the sound discretion of the bankruptcy judge,
however, and this court will not overturn a decision to approve a
compromise absent a clear showing that the bankruptcy judge abused
[his] discretion.” Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir.
1995) (citations omitted). We apply this abuse of discretion
standard “against the background understanding that ‘[c]ompromises
are favored in bankruptcy.’” LeBlanc v. Salem (In re Mailman Steam
Carpet Cleaning Corp.), 212 F.3d 632, 635 (1st Cir. 2000) (quoting
Hicks, Muse & Co. v. Brandt (In re Healthco Int’l, Inc.), 136 F.3d
45, 50 n.5 (1st Cir. 1998)) (alteration in original). “[T]he
responsibility of the bankruptcy judge, and ours on review, is not
to decide the numerous questions of law and fact raised by
appellants but rather to canvass the issues and see whether the
settlement falls below the lowest point in the range of
reasonableness.” Healthco Int’l, 136 F.3d at 51 (quoting Cosoff v.
Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir. 1983))
(internal quotation marks and alterations omitted).
The propriety of bankruptcy settlements is judged under
a four-part standard:
In deciding whether to approve a compromise
of a lawsuit, the specific factors a
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bankruptcy court should consider include: “(i)
the probability of success in the litigation
being compromised; (ii) the difficulties, if
any, to be encountered in the matter of
collection; (iii) the complexity of the
litigation involved, and the expense,
inconvenience and delay attending it; and,
(iv) the paramount interest of the creditors
and a proper deference to their reasonable
views in the premise.” The court’s
consideration of these factors should
demonstrate whether the compromise is fair and
equitable, and whether the claim the debtor is
giving up is outweighed by the advantage to
the debtor’s estate.
Jeremiah v. Richardson, 148 F.3d 17, 23 (1st Cir. 1998) (quoting
Jeffrey, 70 F.3d at 185) (citation omitted).
The bankruptcy court held with respect to the first two
factors that (1) Dane had a colorable claim to administrative
priority for his $147,500 claim under the severance agreement and
(2) there would be no difficulties in the matter of collection.
ServiSense I, slip op. at 20. With respect to the third factor --
the complexity, expense, inconvenience, and delay of litigation --
the bankruptcy court found: “Given the acrimony which was evident
during the hearings on these matters and which permeated the
affidavits presented, obtaining [the required] evidence will be
arduous. The expense of such litigation is certain to exceed the
settlement amount of $35,000.” Id. at 20-21. Finally, with
respect to the fourth factor, the bankruptcy court concluded that,
because the cost of litigation would “in all likelihood” exceed the
settlement amount, the creditors’ “interests would better be served
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by settling the matter, avoiding the litigation and having the case
closed as expeditiously as possible.” Id. at 21.
The district court agreed that Dane had a colorable claim
and that, “based on the parties’ prior animosity (which [it]
observed as well), [litigation of the issues covered by the
settlement] would likely be rife with disputes.” ServiSense II,
slip op. at 14. In addition, the district court noted that the
parties did not dispute the bankruptcy court’s finding that “the
expense of such litigation would be certain to exceed the
settlement amount,” and it held that the bankruptcy court acted
within its discretion with respect to the other Jeremiah factors.
Id. The district court also noted that no party had objected to
the appointment of the Liquidating Supervisor, indicating that he
was not seen as partial or untrustworthy, and that the Creditors’
Committee had assented to the original RPA and had not objected to
the Liquidating Supervisor’s settlement. Id. at 14-15.
B
The focus of this appeal is on whether Dane had a
colorable claim to a $147,500 priority claim for severance. For a
claim to be entitled to administrative priority in bankruptcy, it
must arise after the bankruptcy petition has been filed. Cramer v.
Mammoth Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950, 954
(1st Cir. 1976). “When the claim is based upon a contract between
the debtor and the claimant, the case law teaches that a creditor’s
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right to payment will be afforded first priority 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” after the bankruptcy petition was
filed. Id. In approving the settlement in this case, the
bankruptcy court focused on Mammoth Mart in determining whether
Dane’s claim under the severance agreement could be entitled to
administrative priority. ServiSense I, slip op. at 19. Mammoth
Mart states:
[W]hether a claim for severance pay based upon
an unrejected contract with the debtor and
arising from a chapter XI discharge will be
entitled to § 64(a)(1) priority will depend
upon the extent to which the consideration
supporting the claim was supplied during the
reorganization. If an employment contract
provides that all discharged employees will
receive severance pay equal to their salaries
for a specified period, the consideration
supporting the claim--being an employee in
good standing at the time of the
discharge--will have been supplied during the
arrangement, and the former employee will be
entitled to priority.
536 F.2d at 955. The bankruptcy court held that, under Mammoth
Mart, because Dane arguably remained an employee in good standing
at the time of his discharge, “it is reasonable to conclude that
Dane has a colorable claim that he is entitled to have his
severance claim treated as a priority claim.” ServiSense I, slip
op. at 20.
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After the bankruptcy court’s decision, this court decided
Mason v. Official Committee of Unsecured Creditors (In re FBI
Distribution Corp.), 330 F.3d 36 (1st Cir. 2003). In FBI
Distribution, an employee sought to recover severance benefits
under her employment agreement, which provided that she would
receive three years’ salary and other fringe benefits if she was
terminated without cause. Id. at 39. The court reaffirmed that,
under Mammoth Mart, an employee is “entitled to administrative
priority only to the extent that the consideration supporting the
claim was supplied to the debtor in possession during the
reorganization and was beneficial to the estate.” Id. at 42-43.
The court held that, in the agreement at issue in FBI
Distribution, “the consideration supporting [the employee’s] claim
for severance benefits was not ‘being an employee in good standing
at the time of discharge,’ but rather her agreement to forego other
employment opportunities . . . , which she provided prepetition to
the debtor the moment she signed the Employment Agreement,” and it
rejected the employee’s argument that her claim was entitled to
administrative priority under Mammoth Mart. Id. at 46-47 (quoting
Mammoth Mart, 536 F.2d at 955). The court noted that “it is not
entirely clear what type of severance provision the Mammoth Mart
court was contemplating when it discussed this hypothetical
situation,” but “f[ou]nd it unlikely that it was referring to
severance provisions in executive contracts, like the one here.”
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Id. at 47. Instead, the court “presume[d] that [the Mammoth Mart
court] was referring to the severance plan at issue in [In re
Public Ledger, Inc., 161 F.2d 762 (3d Cir. 1947)], which was a plan
that provided for severance pay in lieu of notice of termination.”
Id. Accordingly, the court held that the employment agreement in
FBI Distribution was not entitled to administrative priority
because there was never a court-approved assumption of the
agreement by the debtor and because the consideration was not
supplied post-petition. Id. at 48.
The district court determined that the later FBI
Distribution decision would have precluded the settlement in this
case, stating that “[i]n light of the First Circuit’s clarification
of the law, the bankruptcy court turned out to be overly
pessimistic in its conclusion that under Mammoth Mart, the
Liquidating Supervisor would not be likely to succeed against Dane
on his claim for full severance and salary as a priority claim.”
ServiSense II, slip op. at 12. Rather, the district court held:
The Liquidating Supervisor would have had a
strong argument that Dane had given the
complete consideration required for receipt of
the severance payment as soon as he had been
employed twelve months with Debtor, that is in
March 2001, which is before the filing of the
petition. Therefore, under the rationale of
FBI Distribution, Dane arguably held only a
contingent claim against Debtor at the
Petition Date, which should have been
classified as pre-petition debt.
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Id. Thus, the district court determined that the Liquidating
Supervisor would have had a strong argument under FBI Distribution
that Dane was not entitled to administrative priority for his claim
under his severance agreement. Nevertheless, the district court
held that the settlement was reasonable given the state of the law
-- as represented by Mammoth Mart -- at the time of the settlement
and the bankruptcy court’s approval of the settlement, stating that
“it was not unreasonable to have settled this claim for short
money.” Id. at 13.
C
We disagree with the bankruptcy court and the district
court that Dane had a colorable claim to administrative priority
for his $147,500 claim under the severance agreement. Rather, this
case is unusual in that the Liquidating Supervisor agreed to pay
Dane everything that Dane had a colorable right to claim.
Dane’s argument that he was entitled to administrative
priority for his $147,500 claim under the severance agreement had
little support, even under Mammoth Mart. There is now no claim
here that ServiSense assumed the agreement pursuant to 11 U.S.C.
§ 365(a). Under these circumstances, Dane would have been entitled
to administrative priority for his claim under the severance
agreement only if he provided consideration after ServiSense filed
its bankruptcy petition. See Mammoth Mart, 536 F.2d at 954.
Pursuant to Mammoth Mart, Dane could have made two arguments with
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respect to his entitlement to administrative priority, neither of
which would have given Dane a colorable claim for administrative
priority for his claim. First, Dane could have argued that he was
entitled to priority because he was “an employee in good standing
at the time of [his] discharge.” Id. at 955. However, as FBI
Distribution made clear, Mammoth Mart cannot be read to encompass
Dane’s severance agreement. See FBI Distribution, 330 F.3d at 46-
47. Dane was an executive seeking to enforce an agreement he had
negotiated with ServiSense, not an hourly employee seeking
severance pay pursuant to a company policy, like the appellants in
Mammoth Mart. In any event, Dane’s severance agreement was not
based on a requirement that he remain “an employee in good standing
at the time of the discharge,” unlike the agreement discussed in
Mammoth Mart. 536 F.2d at 955. Rather, the severance agreement by
its own terms provided for severance only “[a]fter 12 consecutive
months of employment.” (App. at 346.) Dane earned the right to
severance once he had performed twelve months of service, which
occurred pre-petition.
Nor is there a colorable claim pursuant to footnote 4 of
Mammoth Mart4 that, to induce Dane to remain on the job, ServiSense
4
Footnote 4 of Mammoth Mart provides: “The result [in
this case] would be different if the debtor-in-possession had, to
induce the employees to remain on the job, promised them that, if
discharged, they would receive severance pay based on the prior
practice. Then the consideration supporting appellants’ claims
would be the services performed subsequent to the debtor-in-
possession’s promise.” 536 F.2d at 955 n.4.
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promised him after the bankruptcy petition was filed that he would
receive severance pay based on his severance agreement. As the
Liquidating Supervisor candidly conceded at oral argument, there is
no colorable claim here that the debtor induced Dane to remain with
the company by promising that he would receive $147,500 in
severance pay pursuant to the pre-filing agreement. Even assuming
that the debtor approved the increase of Dane’s salary to the
$135,000 level, there was no post-petition promise to pay him
severance to retain his services. The only possible inducement by
ServiSense was its promise (1) to pay the $35,000 retention payment
as an administrative expense and (2) to treat the remainder of the
$147,500 sought by Dane as an unsecured claim. Thus, Dane did not
have a colorable claim to administrative priority for his claim for
$147,500 under the severance agreement.
Dane’s only colorable claim was for exactly what he
received under the January 9, 2002, settlement -- a $35,000
priority claim for the retention payment and a $112,500 unsecured
claim for the balance of his severance payment under the pre-
petition severance agreement. Even this claim was legitimately in
dispute. First, the parties dispute whether ServiSense ever
authorized the $35,000 retention payment and whether the
Liquidating Supervisor had the authority to ratify such an
agreement. In addition, there is a dispute even as to the
unsecured claim for $112,500, as the parties dispute whether Dane’s
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“salary” for purposes of the agreement was $67,500 or $135,000.
Even though the bankruptcy court decided that Dane was not
terminated for cause and that the severance agreement was
triggered, ServiSense I, slip op. at 19, the parties also dispute
whether Dane was terminated for cause, which would have eliminated
all of Dane’s rights under the settlement agreement. While the
claim to priority for the $35,000 and $112,500 amounts was
disputed, the claim was nonetheless a substantial, non-frivolous
claim.
The key fact here is that the bankruptcy court found that
the expense of any litigation of Dane’s claim “is certain to exceed
the settlement amount.” ServiSense I, slip op. at 21.5 Based on
this finding, we agree with the district court that the bankruptcy
court had the authority to approve the settlement and did not abuse
its discretion in doing so.6 See ServiSense II, slip op. at 14.
A decision by a Liquidating Supervisor to spare the creditors the
5
The bankruptcy court characterized the amount of the
settlement as $35,000. However, it appears that Dane also
recovered approximately 12.5% of his non-priority claim for
$112,500, or slightly more than $14,000. We do not think that this
difference is significant.
6
In this connection, we reject the appellants’ contention
that the Liquidating Supervisor lacked the authority to enter into
the settlement agreement because the Plan provides that all pre-
petition agreements like Dane’s settlement agreement were deemed
rejected and thus must be treated as non-priority unsecured claims.
The Liquidating Supervisor plainly had the authority under section
6.8(c) of the Plan to enter into settlements with the approval of
the bankruptcy court.
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expense of litigation over a non-frivolous claim where the expense
of litigation is “certain” to exceed the amount of a settlement is
eminently reasonable, and we will not disturb it. We need not
decide in this case what other circumstances might make it
reasonable to enter into a settlement for the full amount of the
claim.
III
Because the bankruptcy court did not exceed its authority
or abuse its discretion in approving the Liquidating Supervisor’s
settlement, its decision must be affirmed.
It is so ordered.
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Ars Brook, LLC v. Jalbert (In Re Servisense.com, Inc.)
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