United States Court of Appeals
For the First Circuit
No. 02-2054
IN RE: FBI DISTRIBUTION CORP., F/K/A FILENE’S BASEMENT, INC.;
FBC DISTRIBUTION CORP., F/K/A FILENE’S BASEMENT CORP.,
Debtors.
____________________
KATHLEEN MASON,
Appellant,
v.
OFFICIAL COMMITTEE OF UNSECURED CREDITORS,
FOR FBI DISTRIBUTION CORP. AND FBC DISTRIBUTION CORP.,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Reginald C. Lindsay, U.S. District Judge]
Before
Torruella, Circuit Judge,
Campbell and Stahl, Senior Circuit Judges.
Robert M. Trien, with whom Victor G. Milione, P.C., and Nixon
Peabody LLP, were on brief, for appellant.
Ronald R. Sussman, with whom Christopher A. Jarvinen, Kronish
Lieb Weiner & Hellman LLP, Joseph S.U. Bodoff, and Bodoff &
Associates, were on brief, for appellees.
May 27, 2003
STAHL, Senior Circuit Judge. This case requires us to
decide whether the Chapter 11 debtor in possession must pay in
excess of $1.2 million in severance pay, pursuant to the terms of
two prepetition contracts, as an administrative expense to an
executive who was terminated after rendering postpetition services.
We affirm the bankruptcy court's grant of summary judgment, denying
administrative priority status to the executive's claim.
I
On May 17, 1999, Filene's Basement, Inc. (n/d/b/a FBI
Distribution Corp.), then a wholly owned subsidiary of Filene's
Basement Corp. (n/d/b/a FBC Distribution Corp.) (collectively,
"debtors" or "debtor in possession"),1 hired Kathleen Mason as
President of Filene's Basement Division and Chief Merchandising
Officer. Mason left a high-paying position as President of Home
Goods, Inc., a subsidiary of TJX Companies, to join Filene's at a
time when it was already experiencing financial difficulty.2 As a
prelude to her employment, the parties signed two written
1
"Debtors" will be used to refer to prepetition activity
whereas "debtor in possession" will be used to refer to
postpetition activity.
2
As of May 2, 1999, reported year-to-date losses were
$7,528,069 and by October 30, 1999 had grown to $40,975,868.
According to Mason's affidavit, prior to entering the Employment
Agreement, she knew that Filene's had lost $9.8 million in the
fiscal year ending January 31, 1999 and that it had lost money the
preceding five years. And within two weeks of her first day of
work, the Chairman and Chief Executive Officer of Filene's
expressed to her the idea of filing for Chapter 11 relief.
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agreements: the Employment Agreement and the Retention Agreement.
The Employment Agreement set the initial term of employment at
three years and entitled Mason to an annual base salary of
$400,000, in addition to fringe benefits, stock options, and
bonuses, including a signing bonus of $100,000. It also provided
that in the event Mason was terminated without cause, she was
entitled to receive three years' salary and other fringe benefits.
The Retention Agreement was essentially a golden parachute, which,
in general terms, provided that should Mason's employment terminate
following a qualifying "Change in Control," she would receive three
years' salary plus other benefits, including legal fees and
expenses.3
On August 23, 1999, Filene's Basement, Inc. and Filene's
Basement Corp. filed for relief under Chapter 11 and continued to
operate pursuant to sections 1107 and 1108 of the Bankruptcy Code,
11 U.S.C. §§ 1107, 1108, as debtor in possession.4 Following the
filing, Mason continued to render services pursuant to the
prepetition Employment Agreement, for which she received her full
salary and benefits owed thereunder. According to Mason, she was
3
The Retention Agreement provided that any payments owing
under it would be offset by the amount of payment paid under other
agreements that entitled Mason to benefits upon termination. At
oral argument, Mason stated that any amounts owed under the
Retention Agreement would be reduced by any amounts received under
the Employment Agreement's termination provisions.
4
The following day, the bankruptcy court ordered the cases to
be jointly administered.
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induced to remain with the company by the debtor in possession's
postpetition promise that her two agreements "were in effect and
would be honored." Mason also queried her counsel about the status
of the two agreements; her counsel recommended that the debtor in
possession seek formal bankruptcy court approval of the agreements.
When Mason relayed her counsel's recommendation to the debtor in
possession, she was allegedly told that both agreements had already
been approved by them and that only the paperwork needed to be done
before seeking court sanction.
In the meantime, the operations were quickly downsized:
35 of the 55 stores were closed shortly after the petition date,
and in the wake of these closures, on November 9, 1999, Mason was
notified that she was being put on "administrative leave," with
pay, pending a motion to reject both agreements under 11 U.S.C. §
365. While the motion was under advisement, on February 2, 2000,
the debtor in possession sold substantially all of its remaining
assets to another corporation.
On February 25, 2000, the bankruptcy court granted the
motion to reject the Employment Agreement but ruled that the
Retention Agreement could not be rejected because that agreement
was nonexecutory.5 The court agreed with Mason that the "Retention
5
"The Bankruptcy Code furnishes no express definition of an
executory contract, see 11 U.S.C. § 365(a), but the legislative
history to section 365(a) indicates that Congress intended the term
to mean a contract 'on which performance is due to some extent on
both sides.'" NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522
-4-
Agreement [could not] be considered executory because she ha[d] no
performance obligations thereunder." Neither party appealed these
rulings. Four days later, on March 1, 2000, Mason was terminated.
Mason then filed a "Request for Payment of Chapter 11
Expense," in which she claimed that her termination benefits
specified in both agreements, including legal fees and expenses,
were entitled to first priority as administrative expenses under 11
U.S.C. §§ 507 and 503(b)(1) because she was terminated after
rendering postpetition services and after a qualifying change in
control had taken place during the reorganization. In addition,
she maintained that because the debtor in possession induced her to
continue working by promising to honor the two agreements, they
were bound by the terms of those agreements. The appellees, the
Official Committee of Unsecured Creditors (the "Committee") for the
estate, opposed the request, and both parties filed motions for
summary judgment.
In a thorough, well-written opinion, the bankruptcy court
granted summary judgment in favor of the Committee on the ground
that the consideration supporting the termination clauses--Mason's
agreement to forgo her employment opportunities at Home Goods,
Inc.--was supplied to the debtors when Mason signed the two
agreements; consequently, she had only a general unsecured claim
for damages not entitled to administrative priority. The court
(1984) (quoting H.R. Rep. No. 95-595, p. 347 (1977)).
-5-
also rejected her inducement argument as "implausible" given
Mason's distrust of the debtor in possession and her consultations
with counsel about the status of the two agreements. Finally, the
court held that the general unsecured claim under the Employment
Agreement was subject to the one-year cap pursuant to 11 U.S.C. §
502(b)(7).6 As for the Retention Agreement, the court held that
Mason was entitled to benefits under the agreement since she was
terminated subsequent to a qualifying change in control, but
because the contract was nonexecutory, the rights springing from
the agreement were prepetition general unsecured claims not
entitled to administrative priority. Unlike the claim under the
Employment Agreement, however, the claim was not subject to the
one-year cap.7 On appeal, the United States District Court for the
District of Massachusetts affirmed on a different ground, holding
that Mason had failed to show that her postpetition services were
"necessary to preserve the estate" under 11 U.S.C. 503(b)(1).
6
We agree with the Committee that Mason forfeited any right to
appeal the court's ruling that the claim is subject to the one-year
cap. The first place she mentions any challenge to the ruling is
in the conclusion of her opening brief, where she makes a one-
sentence statement that the statutory cap should not apply. It is
axiomatic that a party forfeits a claim on appeal where she failed
to raise it with some effort at developed argumentation in her
opening brief, and instead raised it for the first time in her
reply brief. R.I. Dep't of Env't Mgmt. v. United States, 304 F.3d
31, 47 n.6 (1st Cir. 2002); Anderson v. Beatrice Foods Co., 900
F.2d 388, 397 (1st Cir. 1990); see also Fed. R. App. P. 28(a)(6).
7
The Committee did not appeal these rulings.
-6-
II
Our review of the district court's decision amounts to
review of the bankruptcy court's decision in the first instance.
Printy v. Dean Witter Reynolds, Inc., 110 F.3d 853, (1st Cir.
1997); Hope Furnace Assocs., Inc. v. FDIC, 71 F.3d 39, 42-43 (1st
Cir. 1995). Because this case comes to us on a grant of summary
judgment, we review the rulings de novo. Magarian v. Hawkins, 321
F.3d 235, 236 (1st Cir. 2003).
A
The paramount objective of a Chapter 11 reorganization is
to rehabilitate and preserve the value of the financially
distressed business. Bildisco, 465 U.S. at 528; Otte v. United
States, 419 U.S. 43, 53 (1974). To accomplish this objective,
subsection 507(a)(1) of the Bankruptcy Code, 11 U.S.C. § 507(a)(1),
grants first priority in the distribution of the limited assets of
the estate to administrative expenses allowed under section 503, 11
U.S.C. § 503, which include "the actual, necessary costs and
expenses of preserving the estate, including wages, salaries, or
commissions for services rendered after the commencement of the
case," 11 U.S.C. § 503(b)(1)(A). Congress recognized that granting
first priority to administrative expenses would encourage
creditors, otherwise wary of dealing with Chapter 11 businesses, to
provide the goods and services required for successful
rehabilitation. H.R. Rep. No. 595, 95th Cong., 1st Sess. 186, 186-
-7-
87 (1977); Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.),
536 F.2d 950, 954 (1st Cir. 1976). And since the estate's
creditors who have pre-bankruptcy claims will presumably benefit
more from rehabilitation than from liquidation, it is not
surprising that those creditors bear the costs of the
rehabilitation. Granting priority status, however, is contrary to
the fundamental principle of bankruptcy law that the debtor's
limited resources are to be distributed equally among similarly
situated creditors, see H.R. Rep. No. 595, 95th Cong., 1st Sess.
186 (1977); thus, statutory priorities are narrowly construed, and
the burden of proving entitlement rests with the party seeking it.
In re Hemingway Transp., Inc., 954 F.2d 1, 5 (1st Cir. 1992).
B
In general, for a claim to qualify as an administrative
expense under subsection 503(b)(1), (1) it must have arisen from a
transaction with the trustee or debtor in possession, rather than
from a prepetition transaction with the debtor, and (2) the
consideration supporting the claim must have benefitted the estate
in some demonstrable way. Id. at 5; Mammoth Mart, 536 F.2d at 954.
Here, there was no postpetition agreement between Mason and the
debtor in possession. As Mason stated, "it is undisputed that her
postpetition services were rendered pursuant to her pre-petition
employment agreement." In such circumstances, we need to explore
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the interplay between subsection 503(b)(1) and the Code's treatment
of executory contracts under 11 U.S.C. § 365.
C
Subsection 365(a) allows a debtor in possession8, subject
to the court's approval, to assume or to reject a prepetition
executory contract. 11 U.S.C. § 365(a). The debtor in possession
may make this decision at any time prior to the confirmation of the
plan, unless the court orders otherwise upon request of the
nondebtor contracting party. Id. § 365(d)(2). This latitude
allows the debtor in possession an opportunity to determine which
of the prepetition executory contracts are beneficial to the estate
and which should be assumed or rejected. See Pub. Serv. Co. of
N.H. v. N.H. Elec. Cooperative, Inc. (In re Pub. Serv. Co. of
N.H.), 884 F.2d 11, 15-16 (1st Cir. 1989) (The Code "afford[s]
breathing space to decide which contracts they wish to assume [or
reject]"). If a debtor in possession assumes an executory contract
under subsection 365(a), "it assumes the contract cum onere," and
the liabilities incurred in performing the contract will be treated
as administrative expenses. Bildisco, 465 U.S. at 531-32; see also
In re Frontier Props., Inc. 979 F.2d 1358 (9th Cir. 1992). If the
contract is rejected, on the other hand, the contract is deemed
8
Pursuant to 11 U.S.C. § 1107(a), the Chapter 11 "debtor in
possession shall have all the rights . . . and powers, and shall
perform all the functions and duties, . . . of a trustee serving in
a case under this chapter."
-9-
breached on the date "immediately before the date of the filing of
the petition," 11 U.S.C. § 365(g)(1), and the nondebtor party has
a prepetition general unsecured claim for breach of contract
damages, one not entitled to administrative priority, 11 U.S.C. §
502(g). See Bildisco, 465 U.S. at 531; In re Stewart Foods, Inc.
v. Stewart Foods, Inc. (In re Stewart Foods, Inc.), 64 F.3d 141,
144 (4th Cir. 1995). It should be evident that the decision to
assume or reject has significant consequences and that "the
authority to reject an executory contract is vital to the basic
purpose to [sic] a Chapter 11 reorganization, because [it] can
release the debtor's estate from burdensome obligations that can
impede a successful reorganization." Bildisco, 465 U.S. at 528.
Where the debtor in possession, however, induces a
nondebtor to render performance pursuant to an unassumed
prepetition executory contract, pending its decision to reject or
assume, the nondebtor party will be 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. 11 U.S.C. §
503(b)(1); Mammoth Mart, 536 F.2d at 954; see also Bildisco, 465
U.S. at 531. The facts and holding of Mammoth Mart provide an apt
illustration. The employees in that case sought administrative
priority for their severance pay, which was based on length of
service. The employees had been terminated by the debtor in
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possession during the reorganization and had been paid their wages
plus severance pay attributable to the services rendered after the
filing date. Not happy with this outcome, the employees requested
that the court order the debtor in possession to pay as an
administrative expense all of their accrued severance, including
severance that had been "earned" from rendering prepetition
services. The court denied the employees' claim on the ground that
the consideration supporting the claim for severance consisted of
the prepetition services rendered for the debtor: "no part of their
present claims [arose] from services performed for the debtor-in-
possession . . . ." Mammoth Mart, 536 F.2d at 955. The rationale
underlying the holding was that because severance pay was a
component of compensation for services rendered--that is, the
employees' wages included severance pay--it could be entitled to
administrative priority, but only to the extent that it was earned
postpetition. Furthermore, it made no difference that the right to
payment for the severance earned prepetition arose during the
reorganization. What did matter was when the consideration
supporting the claim was supplied. Id. at 954; see also 11 U.S.C.
§ 503(b)(1) ("for services rendered after the commencement of the
case") (emphasis added).
Contrary to Mason's assertion, the terms of the
prepetition contract do not determine the amount of the priority--a
question we left open in Mammoth Mart, 536 F.2d at 954 n.3--nor
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does the contract become enforceable against the debtor in
possession simply because it elects to receive benefits under the
contract after the filing date.9 Although during the Chapter 11
proceeding a prepetition executory contract remains in effect and
enforceable against the nondebtor party to the contract, the
contract is unenforceable against the debtor in possession unless
and until the contract is assumed. Bildisco, 465 U.S. at 532
("[F]rom the filing of a petition in bankruptcy until formal
acceptance, the [executory contract] is not an enforceable contract
[against the debtor in possession] . . . . and may never be
enforceable again."); United States ex rel. United States Postal
Serv. v. Dewey Freight Sys., Inc., 31 F.3d 620, 624 (8th Cir. 1994)
(citing Bildisco, 465 U.S. at 532 and other cases); In re Univ.
Med. Ctr., 973 F.2d 1065, 1075 (3d Cir. 1992); In re Pub. Serv. Co.
of N.H., 884 F.2d at 14-15; see also In re Alongi, 272 B.R. 148,
152 (Bankr. D. Md. 2001); In re El Paso Refinery, L.P., 220 B.R.
37, 48 (Bankr. W.D. Tex. 1998). As instructed by the Supreme Court
in Bildisco,
9
According to Mason, the debtor in possession here had two
choices, either terminate her prior to filing for bankruptcy to
avoid the specter of extraordinary postpetition liability or
attempt to renegotiate the terms of her employment. If
negotiations ultimately failed, however, the debtor in possession
would be stuck with the terms of Mason's agreement in toto once
they elected to receive the benefits under that agreement. If
Mason's reasoning were to prevail, a debtor in possession would
not, as a practical matter, be able to avail itself of the benefits
of section 365. Not surprising, this is not the law.
-12-
If the debtor-in-possession elects to continue
to receive benefits from the other party to an
executory contract pending a decision to
reject or assume the contract, the debtor-in-
possession is obligated to pay for the
reasonable value of those services, which,
depending on the circumstances of a particular
contract, may be what is specified in the
contract.
465 U.S. at 531 (emphasis added) (citations omitted). Thus, under
Bildisco, absent a court-approved assumption, from the date of the
filing of the Chapter 11 proceeding, Mason's Employment Agreement
was unenforceable against the debtor in possession despite their
election to continue her employment; she is entitled to only the
reasonable value of her postpetition services that benefitted the
estate. Although the Employment Agreement may be probative of the
reasonable value, it is not the dispositive measure.
We recognize that Bildisco addressed a particular type of
executory contract, a collective bargaining agreement. Yet the
Court did not limit its discussion to collective bargaining
agreements, but instead discussed general principles of executory
contract law. Further, in 1984, in response to Bildisco, Congress
amended the Code by adding 11 U.S.C. § 1113, which provides special
treatment for collective bargaining agreements. Bankruptcy
Amendments and Federal Judgeship Act of 1984, sec. 541, § 1113,
Pub. L. No. 98-353, 98 Stat. 333. Among other things, 11 U.S.C.
1113 overturned that part of Bildisco that allowed the trustee to
make unilateral changes in the terms or conditions of a collective
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bargaining agreement during reorganization. See United Food &
Commercial Workers Union, Local 328, AFL-CIO v. Almac's Inc., 90
F.3d 1, 4 (1st Cir. 1996). However, Congress left intact
Bildisco's discussion of the enforceability of garden variety
executory contracts during Chapter 11 proceedings.
In the same Act, Congress also added subsection
365(d)(3), 11 U.S.C. § 365(d)(3), which requires a debtor in
possession to "timely perform all the obligations of the debtor .
. . arising . . . under any unexpired lease of nonresidential real
property [during Chapter 11 proceedings], until such lease is
assumed or rejected," and subsection 365(d)(4), 11 U.S.C. §
365(d)(4), which provides that if the debtor in possession fails to
assume such a lease within 60 days, the "lease is deemed rejected."
Bankruptcy Amendments and Federal Judgeship Act of 1984, sec. 362,
§§ 365(d)(3), (d)(4), Pub. L. No. 98-353, 98 Stat. 333 (emphasis
added). Thus, Congress eliminated the rule that landlords were
entitled only to the reasonable value of the benefits bestowed upon
the debtor in possession and forced the debtor in possession to
decide whether to assume the lease within 60 days. Obviously then,
when Congress thought that certain executory contracts were more
deserving of special treatment, it said so. But no such
specificity is provided for prepetition employment contracts.
Congress’s familiarity with Bildisco and its failure to provide
special treatment to garden variety employment contracts indicates
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that Congress intended that employment contracts be subject to the
general principles governing executory contracts outlined in
Bildisco.
D
To avoid the realities of the foregoing principles, Mason
relies principally upon footnote 4 in Mammoth Mart to argue that
there is, or should be, an exception where a debtor in possession
induces the nondebtor party to continue to perform the prepetition
contract by a promise to honor the terms of that contract. In such
a case, the theory goes, both parties are bound by all of the terms
of the contract, including, in this case, the contractual
termination provisions. Although Mason's argument seems consistent
with footnote 4 of Mammoth Mart10 and may carry some equitable
appeal, it runs directly contrary to not only the general
principles governing executory contracts, see supra Part II.C, but
also to the language of and policies served by section 365, and,
10
We note that Mammoth Mart was a pre-Code case and relied, in
part, upon a 1947 case, In re Public Ledger, Inc., 161 F.2d 762 (3d
Cir. 1947), which may explain the reason for the footnote. In
Public Ledger, the Third Circuit held that where the trustee and
employee continue "the employment upon the same terms as were
provided in the collective contract, and therefore, while the
employees were under the duty of delivering their services in
accordance therewith, the employer was under the correlative duty
of paying them in accordance therewith." Similarly, the Public
Ledger court used other language to suggest that a debtor in
possession could assume a contract by implication, without court
approval, and thus be bound by all the terms of the prepetition
contract. See, e.g., id. at 767. For reasons that will soon
become apparent, this is not the law under the Bankruptcy Code.
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for that matter, to the goals of Chapter 11, which is the
successful rehabilitation of the business for the benefit of both
the debtor and all its creditors.
Mason's argument amounts to a claim that the debtor in
possession assumed the Employment Agreement by implication. It is
well settled, however, that an executory contract cannot be assumed
by the unilateral acts of the debtor in possession during the
reorganization of the business. Thinking Machs. Corp. v. Mellon
Fin. Servs. Corp. (In re Thinking Machs. Corp.), 67 F.3d 1021, 1025
(1st Cir. 1995) (holding that court approval is a condition
precedent); Dewey Freight Sys., Inc., 31 F.3d at 624; Matter of
Whitcomb & Keller Mortgage Co., 715 F.2d 375 (7th Cir. 1983); In re
Uly-Pak, Inc., 128 B.R. 763, 765 (Bankr. S.D. Ill. 1991). Rather,
the plain text of section 365 requires express approval by the
court. 11 U.S.C. § 365 ("[T]he trustee, subject to the court's
approval, may assume or reject any executory contract . . . .");
see In re Thinking Machs. Corp., 67 F.3d at 1025. The policy
served by court approval is not difficult to discern. As mentioned
above, assumption of a prepetition contract has serious
consequences: it not only elevates a prepetition liability to a
postpetition liability, but also entitles the nondebtor party to
first priority status. Court approval thus provides protection to
the unsecured creditors whose claims could be prejudiced by
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potentially burdensome contracts--ones that may have driven the
business into bankruptcy in the first place.
It also insures that the Committee has an opportunity to
object and that it is fully able to oversee the debtor in
possession's operation of the business and the negotiation of the
plan of reorganization. See 11 U.S.C. § 1103 (setting forth the
functions of the appointed committee of unsecured creditors). This
case illustrates the policy well. During the hearing on the motion
to reject, the Committee explained that it supported the motion to
reject on the ground that it was opposed to the assumption of any
of the debtors' prepetition employment agreements, including
Mason's, as they allegedly contained "extraordinary" severance
packages that were "far in excess of anything that [it] normally
s[aw] as customary." Regardless of the truth of the Committee's
statement, the point is that the other unsecured creditors were
given an opportunity to voice their objection before their rights
to the limited assets of the estate could be prejudiced. In short,
before a debtor in possession and a prepetition creditor can saddle
the bankrupt estate with obligations contained in a prepetition
executory contract, they must first receive court approval.11 Here,
of course, there was no court-sanctioned assumption; the debtor in
possession rejected the contract with court approval.
11
This should come as no surprise to Mason: her own counsel
informed her soon after the petition date that she should seek
court approval of both agreements.
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In many instances, Chapter 11 proves to be a harsh
reality for nondebtors like Mason, but achieving better policy is
a task for Congress, not the courts. In any event, Mason did have
a remedy: she could have petitioned the bankruptcy court, pursuant
to 11 U.S.C. § 365(d)(2), to order the debtor in possession to
assume or reject her Employment Agreement within a specified time.
This she decided not to do.
III
With these general principles in mind, we turn to Mason's
claims, addressing the Employment Agreement first.
A
Mason's principal argument is that her claim for
severance is entitled to administrative priority because the
consideration supporting her claim constituted "being an employee
in good standing at the time of the discharge," which she supplied
postpetition. In other words, the "reasonable value" of her being
"in good standing" was an amount equal to in excess of $1.2 million
plus other benefits including legal costs and expenses. If one
takes Mason's argument to its logical terminus, an executive would
be entitled to administrative priority for lump-sum severance pay,
no matter how astronomical, simply by working one day for the
debtor in possession so long as she was in "good standing at the
time of discharge." For the reasons that follow, we cannot accept
this conclusion.
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We hold that the consideration supporting Mason's claim
for severance benefits was not "being an employee in good standing
at the time of the discharge," but rather her agreement to forgo
other employment opportunities (in this case, her agreement to
forgo her high-paying position at Home Goods, Inc.), which she
provided prepetition to the debtor the moment she signed the
Employment Agreement in May 1999. See In re Commercial Fin. Serv.,
Inc., 246 F.3d 1291, 1294 (10th Cir. 2001) (denying administrative
priority to claim for lump-sum severance pay nearly identical to
Mason's, on the ground that the consideration supporting the claim
was the agreement to forgo other employment opportunities, which
was supplied entirely at the time of the execution of the
employment agreement); In re Phones for All, Inc., 249 B.R. 426,
430 (Bankr. N.D. Tex. 2000) (same), aff'd 288 F.3d 730 (5th Cir.
2002); see also In re Nomus-American, Inc., No. 01-50255 11, 2002
WL 230701, at *2 (Bankr. M.D. N.C. 2002) (same); In re M Group,
Inc., 268 B.R. 896, 901 (Bankr. D. Del. 2001) (same); In re
Cincinnati Cordage & Paper Co., 271 B.R. 264, 267-69 (Bankr. S.D.
Ohio 2001) (same); In re Uly-Pack, 128 B.R. 763, 768 (Bankr. S.D.
Ill. 1991) (same). Indeed, Mason stated that the severance
provisions in her Employment Agreement and Retention Agreement were
part of the inducement to leave her high-paying position at Home
Goods. Unlike severance or vacation benefits geared to length of
service--benefits that clearly constitute a part of an employee's
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wages for services rendered, see, e.g., Mammoth Mart, 536 F.2d at
954-5512--the severance benefits here do not constitute any part of
her compensation for services rendered. Whether she worked two
minutes or thirty-five and one-half months after executing the
Employment Agreement, she was entitled to in excess of $1.2 million
if she were terminated without cause. In fact, by the literal
terms of the agreement, it appears that she was entitled to over
$1.2 million regardless of whether she rendered any services
whatsoever. Her compensation for services rendered simply did not
include severance pay. Cf. 11 U.S.C. § 503(b)(1) (granting
priority to "wages, salaries, or commissions for services rendered
after the commencement of the case.").
Mason relies primarily upon the following dictum in
Mammoth Mart:
If an [unrejected] 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
12
Where severance or vacation pay is geared to length of
service, the pay is essentially additional wages. For example,
suppose the employee earns two weeks (i.e. 10 days) severance or
vacation for rendering services for a full calendar year; that
would mean that she earned one day of severance or vacation for
every twenty-six days worked. Clearly the severance or vacation is
a component of her daily compensation for services rendered.
Mammoth Mart, 536 F.2d at 954-55. Accordingly, the court in
Mammoth Mart held that an employee under such a program was
entitled to administrative priority for the severance "earned" for
services rendered postpetition, but not for severance earned
prepetition.
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have been supplied during the arrangement, and
the former employee will be entitled to
priority.
536 F.2d at 955. Although not binding on this court, we briefly
address this passage.13 To begin, it is not entirely clear what
type of severance provision the Mammoth Mart court was
contemplating when it discussed this hypothetical situation. We
find it unlikely that it was referring to severance provisions in
executive employment contracts, like the one here. See, e.g., Soma
Biswas, Wachner Settles Warnaco Severance Fight, The Daily Deal,
Nov. 19, 2002 (discussing Linda Wachner's $25 million severance
payment she sought during Chapter 11 proceeding); Calvin Trillin,
Deep Pocket, Short Reach, Time Mag., Jan. 13, 1997, at 24
(discussing Michael Ovitz's $90 million severance package).
Because the court cited to In re Public Ledger, 161 F.2d at 769-71,
we presume that it was referring to the severance plan at issue in
that case, which was a plan that provided for severance pay in lieu
of notice of termination. Under such a plan, the employer could
either provide two days' notice, after which the employee would
work two more days and be paid, or terminate the employee
13
Both the bankruptcy and district courts rejected Mason's
argument on the ground that when the court in Mammoth Mart made
that comment, it was discussing the hypothetical situation in which
severance pay was predicated on an "unrejected contract." Because
Mason was terminated shortly after the rejection of the contract,
the theory goes, she had only a prepetition general unsecured claim
for damages. Because we hold that the consideration supporting her
claim was supplied prepetition, we offer no opinion whether the
timing of her termination is dispositive.
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immediately and pay the employee two days' pay. Courts that have
granted administrative priority to such severance pay arrangements
have done so on the theory that severance in lieu of notice, like
severance based on length of service, is a component of
compensation. See, e.g., In re Pub. Ledger, Inc., 161 F.2d at 769-
71; Teamsters Local No. 310 v. Ingrum (In re Tucson Yellow Cab
Co.), 789 F.2d 701, 704 (9th Cir. 1986); see also In re Commercial
Fin. Serv., 246 F.3d at 1296 (distinguishing severance pay in lieu
of notice plans from one similar to Mason's on the ground that the
former "was clearly a component of compensation"). As should now
be clear, however, we hold that Mason's severance pay was not a
component of compensation for services she rendered and thus is not
entitled to administrative priority.14
Of course, Mason is entitled to receive the reasonable
value of the beneficial services rendered during the
reorganization. For these services, she was fully compensated by
the debtor in possession: she received her full salary plus fringe
benefits pursuant to the terms of her Employment Agreement for all
the services she rendered postpetition.15 Absent a court approved
14
We offer no opinion on whether we would grant administrative
priority to in lieu of notice plans.
15
In fact, Mason might have received more than the reasonable
value of the services she rendered as administrative expenses. At
the hearing on the motion to reject, on December 22, 1999, the
bankruptcy court instructed the debtor in possession to cease
paying Mason her salary and benefits and to route those payments to
an escrow account while the court took the motion under advisement.
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assumption of her Employment Agreement, this was all she is
entitled to receive.
B
Having determined that Mason's claim arising out of the
Employment Agreement is not entitled to administrative priority, we
turn to the Retention Agreement. The parties agree that the
Retention Agreement is a nonexecutory contract because Mason owed
no performance thereunder. The consideration supporting the
Retention Agreement--to forgo other employment opportunities--was
supplied the moment she signed the agreement. Only the right to
payment arose after the petition date. Notwithstanding the
foregoing principles, Mason asks us to grant administrative
priority on the theory that nonexecutory contracts should be
treated differently because they can be neither assumed nor
rejected, and thus should be enforceable against the debtor's
estate as an administrative expense.
Mason misses the point. While the claim under the
Retention Agreement is enforceable against the estate in the
bankruptcy proceeding, it is a prepetition claim. In re Stewart
Foods, Inc., 64 F.3d at 144; In re Hemingway Transp., Inc., 954
F.2d at 8; 11 U.S.C. § 101(5)(A) (defining claim as "right to
Apparently due to a "ministerial error," Mason continued to receive
her full salary and benefits until February 15, 2000, even though
she did not render any services to the estate during that period.
The dispute over those payments is beyond the scope of this appeal.
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payment, whether or not such right is . . . contingent, matured,
[or] unmatured"). The contingent claim, however, is not entitled
to priority simply because the right to payment arises during the
reorganization when the contingency occurs. In re Commercial Fin.
Serv., Inc., 246 F.3d at 1295; In re Stewart Foods, Inc., 64 F.3d
at 144, 146 In re Hemingway Transp., Inc., 954 F.2d at 8; Mammoth
Mart, 536 F.2d at 954; Jartran, 732 F.2d at 587; 11 U.S.C. §
503(b)(1) ("for services rendered after the commencement of the
case") (emphasis added). Under a nonexecutory contract, in which
the nondebtor owes no future performance, the nondebtor provides no
consideration "after the commencement of the case," and thus is not
entitled to priority. 11 U.S.C. § 503(b)(1)(A) (emphasis added);
In re Stewart Foods, Inc., 64 F.3d at 145 ("[R]egardless of the
nature of the contract, if at the time of the bankruptcy filing the
debtor has an obligation under the contract to pay money to the
non-debtor party, that obligation is handled as a pre-petition
claim in the bankruptcy proceedings."). We hold, therefore, that
Mason's claim under the Retention Agreement is not entitled to
administrative priority.
IV
Having determined that the consideration supporting
Mason's claims under the Employment Agreement and the Retention
Agreement was provided to the debtors prior "to the commencement of
the [Chapter 11 proceedings]," 11 U.S.C. § 503(b)(1)(A), we hold
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that her claims are not entitled to administrative priority.16
Accordingly, the grant of summary judgment must be affirmed.
16
Again, we recognize that Congress's balancing of the equities
in Chapter 11 in favor of reorganization and equality of
distribution of the limited assets to all unsecured creditors, see
supra Part II, may be a harsh reality for the individual nondebtor
like Mason, who is a party to a prepetition executory contract with
the debtor. But Congress provided a remedy: Mason could have
petitioned the bankruptcy court under subsection 365(d)(2), 11
U.S.C. § 365(d)(2), to order the debtor in possession either to
assume or reject her Employment Agreement within a specified time,
a remedy of which she chose not to pursue.
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