In re Capital Service

• Decision Date: 22 December 1955
• Docket Number: No. 58071.,58071.
• Citation: 136 F. Supp. 430
• Parties: Matter of CAPITAL SERVICE, Inc., etc., Debtor.
• Court: U.S. District Court — Southern District of California

136 F. Supp. 430

Matter of CAPITAL SERVICE, Inc., etc., Debtor.

No. 58071.

United States District Court S. D. California, Central Division.

December 22, 1955.

Craig, Weller & Laugharn, Los Angeles, Cal., C. E. H. McDonnell, Los Angeles, Cal., for trustee.

Pauline Nightingale, Leon H. Berger, Edward M. Belasco, Los Angeles, Cal., for Division of Labor Law Enforcement.

JAMES M. CARTER, District Judge.

This is a review of an order of a Referee in Bankruptcy, and concerns the question as to whether vacation pay is part of an employee's wage, and whether employees may have a claim allowed as an administration expense for such pay, earned during the period in which a debtor in possession operated a business under an order of the bankruptcy court.

The Facts

A Petition for Arrangement by Capital Service, Inc., was filed September 14, 1953, under Chap. XI, Sec. 322, 11 U.S. C.A. § 722. A plan of Arrangement, also filed September 14, 1953, alleged the character of the business a "bakery business." On the same day the Referee made a written order that "Debtor shall continue in possession of its property. * * * Debtor shall have power subject to control of the court to operate the business * * * including * * * the power and right to use cash and bank accounts of the debtor for the purpose of operation of the business of the debtor * * *".

The President of the corporation was appointed General Manager of the debtor in possession on September 16, 1953, and from September 14, 1953, to February 1, 1954, the business was operated by the debtor in possession. On February 1, 1954, the corporation was adjudicated a bankrupt and a trustee appointed.

Forty six individuals hereafter called the "claimants" worked during the period from September 14, 1953, to February 1, 1954, in the business conducted by the debtor in possession. All were former employees of the bankrupt corporation. They were paid their wages (without vacation pay) through the bankruptcy court, for this period and thus such wages paid were treated as administrative expense. No question is involved as to employment or events after February 1, 1954. Claim was made for wages and pro rata vacation pay as a prior claim for the three months prior to the fiing of the Chap. XI proceedings (June 14, 1953, to September 14, 1953), as will be seen by the claim hereafter referred to, but this portion of the controversy has been disposed of and is not here for consideration.

The case thus differs from those adjudicated cases where claim is made for priority for vacation pay earned in periods before the commencement of a bankruptcy proceeding, and where the question was whether it became due during the three month period before the commencement of bankruptcy proceedings; In re Kinney Aluminum Co., D.C. Calif.1948, 78 F.Supp. 565, 569, allowing the claims on the basis that they accrued or became due during the three month period; In re Men's Clothing Code Authority, D.C.N.Y.1937, 71 F. Supp. 469, and Division of Labor Law Enforcement, State of California v. Sampsell, 9 Cir., 1949, 172 F.2d 400, 401-402, holding vacation wages to be entitled to priority, must be earned within the three month period; Kavanas v. Mead, 4 Cir., 1948, 171 F.2d 195, 6 A.L.R.2d 645, holding claims, terminating before the beginning of the three month period but deferred as to payment were not entitled to priority; and this case differs from cases involving priority of severance pay accruing before the commencement of the bankruptcy proceedings, McCloskey v. Division of Labor Law, etc., 9 Cir., 1952, 200 F.2d 402, affirming In re Elliott Wholesale Grocery Co., D.C. S.D.Cal.1951, 98 F.Supp. 1017.

Proof of unsecured debt claiming priority as administrative costs was filed June 5, 1954, in behalf of the 46 claimants by the Division of Labor Law Enforcement, of the Department of Industrial Relations of the State of California, as assignee. The claim sought wages for vacation pay earned from May 1, 1953, to February 1, 1954, the date of adjudication, totaling $5,324.20. Objection by the Trustee was filed November 13, 1954. It points out September 14, 1953, as the commencement of the Chap. XI proceeding and adjudication and appointment of a Trustee on February 1, 1954. The objection was "That only that portion of the vacation pay earned after June 14, 1953" (which was three months before the Chap. XI petition was filed) "should be accorded a prior position in the within proceeding and that any earned prior to June 14, 1953, should be allowed as a general unsecured claim only, and placing his objection on that ground, objects to each, every and all the claimants (sic) individually, unless and until an appropriate itemization is made, allocating the vacation pay claimed to the periods before and after June 14, 1953, respectively."

An amended claim was filed for the same 46 claimants on December 21, 1954, fixing the period for vacation pay earned as September 14, 1953, to February 1, 1954 and reducing the claims to $2,508.36. This amended claim was thus for the period beginning with the order authorizing the debtor to operate the business and ending with adjudication and the appointment of the Trustee on February 1, 1954. The claims for vacation pay earned in the three months prior to September 14, 1953, were ordered paid by the Trustee and are not here for consideration. (Partial order on Labor claims Jan. 1955).

On January 21, 1955, a stipulation of facts was filed providing:

"1. That the individuals listed in Exhibit A, attached to the Objections * * * worked at the rates set forth in said exhibit and for the length of time shown in said exhibit." Exhibit A listed the claimants and their claims from May 1955, and is identical to the Exhibit attached to the original claim.

"2. That the amounts of wages due for vacation pay in * * * Ex. A are correctly calculated.¹

"3. That between the bankrupt corporation and its employees as listed in Exhibit A, and its other employees generally, neither prior to nor after the commencement of these proceedings was there any written union contract covering wages, vacations or conditions of employment."

"4. That each individual listed in the Exhibit `A', described hereinbefore, was employed under an individual oral contract of employment in which he was promised wages and vacations with pay on the following scale:

"A. A vacation of one week with pay after one year's continuous service.

"B. A vacation of two weeks with pay after two or more years of continuous service.

"C. A prorata vacation at the rate of one day per month if an employee were laid off or discharged without cause."

"5. That there was no interruption of the employment of the said individuals due to the filing of the petition under Chapter XI of the Bankruptcy Act by the bankrupt corporation, and no notice was given to any of the bankrupt corporation's employees that a change was made or contemplated in their employment contracts."

"6. That the stipulated facts herein, and the evidence offered at a hearing on December 16, 1954, on the objections of the Trustee to the claim of the Division of Labor Law Enforcement, No. 129, are deemed to be evidence offered and facts stipulated to, and the said objections may be applied to the amended claim of the Division of Labor Law Enforcement insofar as it asserts a claim for administrative vacation pay." No other objections were ever filed.

We note in passing that the objection, if applied to the amended claim, was by its language no objection at all but instead a concession that the amended claim was good.²

On March 15, 1955, the Referee filed a 15 page opinion and on April 6, 1955, signed and filed findings of fact, conclusions of law and an order disallowing the amended claim in full.

The Referee stated in his opinion that "The amended claim is based on alleged wages as vacation pay earned since the commencement of the bankruptcy on September 14, 1953. It is based on wages accumulated prior to bankruptcy and paid, and wages accumulated during the administration of the debtor in possession and paid, so as to complete one or two years, or more, of service with an alleged attendant vacation pay."

We did not think this correct and so had counsel file herein an additional stipulation clarifying the ambiguities in the earlier stipulation and specifying that only the vacation pay allegedly earned between September 14, 1953 and February 1, 1954, was in issue. The new stipulation follows:

"The stipulation of facts heretofore filed on January 21, 1955 in the above entitled matter is supplemented as follows:

"(1) In Exhibit A, attached to the `Amended Administration Cost Claim' filed December 21, 1954, the figures under the column entitled `Monthly Vacation Rate Scale,' represent the amount of vacation pay accrued monthly, i. e. one day's pay and the figures under the column `Wages Due' is a projection on a four and one-half month basis for the period from September 14, 1953 to February 1, 1954.

"(2) Paragraphs 1 to 4 inclusive of the stipulation filed January 21, 1955, refer to exhibit A, `attached to the objections to claim of the Division of Labor Law Enforcement No. 129, filed herein by the trustee * * *'. The said paragraphs 1 to 4 of the stipulation shall apply and refer with equal force and effect to the Exhibit A, attached to the amended claim."

"(3) None of the vacation pay claimed in the amended claim accrued prior to September 14, 1953 and the question presented to the Referee heretofore and to the District court on petition for review involves Sec. 4C of the stipulation filed January 21, 1955. No claim is made based on Sec. 4A or 4B of the said stipulation."

Under Sec. 4(c) of the first stipulation referring to lay-off or discharge without cause, we hold that the filing of the arrangement proceedings constituted a discharge of employees and of the claimants herein. Sec. 2921, Labor Code of California, infra; McCloskey v. Division of Labor Law, etc., ...