In re Comtec Industries, Inc.

• Decision Date: 03 October 1988
• Docket Number: Bankruptcy No. 84-03081S.
• Citation: 91 BR 344
• Parties: In re COMTEC INDUSTRIES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

91 B.R. 344 (1988)

In re COMTEC INDUSTRIES, INC., Debtor.

Bankruptcy No. 84-03081S.

United States Bankruptcy Court, E.D. Pennsylvania.

October 3, 1988.

Lawrence J. Tabas, Phila., Pa., for trustee.

Robert J. Wilson, Philadelphia, Pa., for claimant.

Jonathan Ganz, Philadelphia, Pa., for debtor.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

The instant case presents our second major encounter with wage claims, following our decision in In re Konidaris, 87 B.R. 846 (Bankr.E.D.Pa.1988). In Konidaris, the claimant was, however, a sympathetic figure: a waitress who had foregone her salary for two years to attempt to help her restaurant employer to survive. Here, the claimant is much less of a sympathetic figure: he is the former President and sole investor, stockholder, officer, and director of the Debtor who, after the demise of his business, retroactively and unilaterally decided that his services, over the three years of the Debtor's existence, deserved to be compensated at $1,000.00 weekly. We have little difficulty in concluding that such a claimant as is presented here is precluded from making a priority claim and that all of his claims must be subordinated to those of other creditors, if not denied.

This Chapter 7 case was filed on September 17, 1984, shortly after the Debtor ceased doing business. The principal business of the Debtor, since its founding by the Claimant, Stephen Comroe (hereinafter referred to as "the Claimant"), in October, 1981, had been marketing a patented invention of the Claimant which was picturesquely called the "fishgrabber." The "fishgrabber" is utilized to "fish" wires from walls in performing electrical contracting work.

On November 12, 1984, the Claimant filed the two Proofs of Claim in contest: one a priority claim in the amount of $2,000.00 for wages allegedly due for the weeks of September 7, 1984, and September 14, 1984, and the other an unsecured claim in the amount of $145,000.00 for wages allegedly due from October 2, 1981, through August 31, 1984. On May 13, 1988, inexplicably subsequent to the approval of the Trustee's Final Account on December 14, 1987, following the Final Audit Hearing in the case, the Trustee filed a "Motion" objecting to the claims because they failed to even remotely contain the detail called for in Official Bankruptcy Form No. 29 for wage claims and requesting that the claims be denied or subordinated. Indeed, the claim forms submitted, far from adhering to the above Official Form, included no information other than the amounts and dates covered by the claims.

After two continuances, the matter came before us for a hearing on August 23, 1988. After a hearing, at which the sole witnesses were the Claimant and the Debtor's former secretary and "record keeper," Cecelia Wood, we accorded the Claimant and the Trustee the opportunity to simultaneously file Opening Briefs and Reply Briefs on or before September 6, 1988, and September 13, 1988, respectively. The Claimant filed his Brief on September 6, 1988. The Trustee was granted an extension until September 16, 1988, to file a reply.

Ms. Wood testified that the Debtor had, throughout its existence, three employees in addition to salesman working strictly on a commission basis: Fred Evers, who was paid $1,500.00 weekly; Ms. Wood herself, who was paid $180.00 weekly; and the Claimant, who was not paid at all except for receipt of reimbursement for expenses, but who was its sole shareholder as the result of his making a $16,200.00 "loan" to the business for start-up capital.

Although she had written out the Proofs of Claim forms, when asked how she determined to claim compensation at $1,000.00 weekly for the Claimant, Ms. Wood stated that she was "not sure where he (the Claimant) got this figure," as no checks had ever been written to the Claimant, nor had any sum for his salary ever been carried on the Debtor's books. Obviously, this figure was dictated to her by the Claimant.

The Claimant contended that his long work hours and "loans" justified a salary of at least two-thirds that received by Mr. Evers. He did, however, concede that he was paid "in excess of $10,000.00" annually during the period that the Debtor was in business as an officer of an incorporated electrical contracting business which shared space with the Debtor. The Trustee questioned the judgment of the Debtor in paying $78,000.00 annually to Mr. Evers, let alone an additional $52,000.00 annually to the Claimant, when the Debtor's gross profits were marginal and it regularly suffered losses.

Neither party addresses the issue of the Claimant's right, as an officer of the Debtor, to a priority claim pursuant to 11 U.S.C. § 507(a)(3), which reads as follows:

§ 507. Priorities

(a) The following expenses and claims have priority in the following order:

. . . . .

(3) Third, allowed unsecured claims for wages, salaries, or commissions, including vacation, severance, and sick leave pay —

(A) earned by an individual within 90 days before the date of the filing of the petition or the date of the cessation of the debtor\'s business, whichever occurs first; but only

(B) to the extent of $2,000 for each such individual.

Collier states that, as in its predecessor, § 64(a)(2) of the Bankruptcy Act, former 11 U.S.C. § 104(a)(2), the policy behind the priority set forth in § 507(a)(3) is to favor those who are need of protection because of the loss of wages caused by a bankruptcy and who could not have been expected to investigate their employer's creditworthiness before accepting employment. 3 COLLIER ON BANKRUPTCY, ¶ 507.043b, at 507-27 to 507-28 (15th ed. 1988), quoting Blessing v. Blanchard, 223 F. 35, 37 (9th Cir.1915); and In re Lawsam Electric Co., 300 F. 736, 736 (S.D.N.Y. 1924). Cf. Konidaris, supra, 87 B.R. at 857 (post-petition wages are a Congressionally-favored category of administrative claims).

Numerous cases decided under the Bankruptcy Act were consistent with the principles set forth in the controlling opinion of the Third Circuit Court of Appeals that wage-claim priorities are allowable to only "those who work, labor, or serve in more or less subordinate capacities" and not to "the active officers or managers of a corporation or business...." In re Ko-Ed Tavern, Inc., 129 F.2d 806, 809 (3d Cir.1942). Accord, e.g., In re Progressive Luggage Corp., 34 F.2d 138, 138-39 (2d Cir.1929); In re Bush Terminal Printing Corp., 32 F.2d 264, 265 (2d Cir.1929); Blessing, supra, 223 F.2d at 37; In re Marshall E. Smith & Bros., Inc., 35 F.Supp. 56, 57 (E.D.Pa.1940); Lawsam Electric, supra, 300 F. at 736; and In re Industrial Car Manufacturing Co., 1 B.R. 339, 345-46 (Bankr.E.D.Pa. 1979).

We have, rather remarkably, found no cases decided under the Bankruptcy Code which address this issue. However, we find nothing in the legislative history of the Code to cause us to conclude that Congress meant to change the clearly-defined dichotomy between subordinate wage-earners entitled to priority and managerial officers who are not. See United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., ___ U.S. ___, 108 S.Ct. 626, 634, 98 L.Ed.2d 740 (1988); Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 358-60, 93 L.Ed.2d 216 (1986); and Midlantic National Bank v. New Jersey Dep't of Environmental Resources, 474 U.S. 494, 500-01, 106 S.Ct. 755, 759-60, 88 L.Ed.2d 859 (1986) (It is assumed that principles established under interpretation of the Bankruptcy Act carry over to comparable Code provisions in the absence of any indications to the contrary).

The most pertinent passage in the legislative history of the Code which we could locate is the following:

Paragraph (3) § 507(a)(3) expands and increases the wage priority found in current section 64a(2). The amount entitled to priority is raised from $600 to $2400. The former figure was last adjusted in 1926. Inflation has made it nearly meaningless, and the bill brings it more than up to date. The three-month limit is retained, but is modified to run from the earlier of the date of the filing of the petition or the date of the cessation of the debtor\'s business. The priority is expanded to cover vacation, severance, and sick leave pay.

H.R.REP. No. 595, 95th Cong., 1st Sess. 357 (1977); S.REP. No. 989, 95th Cong., 2nd Sess. 69 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5855, 6313. The only "expansion" effected in the Code was in the measure of the 90-day period and the express reference to vacation, severance, and sick pay. The only "increase" was in the amount which could be claimed, due to inflation. Therefore, we conclude that the restriction of the scope of the Act's priority wage claims to parties that perform labor in a subordinate capacity as opposed to managers and directors of a corporate debtor remains viable. Compare Konidaris, supra (wage claimant was obviously a subordinate laborer).

Recognition of this distinction eliminates any potential that the Claimant here is entitled to a priority wage claim on the basis of § 507(a)(3). He was the sole entrepreneur of the entire commercial venture of the Debtor. As such, he is barred from receiving any priority in his wage claims.

The second issue is whether the Claimant is entitled to any claim at all or whether his claim should be subordinated to that of other creditors. We conclude that, at the very least, his claims must be subordinated, on several different grounds.

The principles underlying subordination of an insider's claims against a debtor are well-articulated in Pepper v. Litton, 308 U.S. 295, 306-10, 60 S.Ct. 238, 245-47, 84 L.Ed. 281 (1939). There, the court did not hesitate to disregard even a state-court judgment which supported an insider's salary claim. Compare Heiser v. Woodruff, 327 U.S. 726, 732-33, 66 S.Ct. 853, 855-56, 90 L.Ed. 970 (1946) (bankruptcy court bound by res judicata effect of state-court judgment in absence of contrary equitable principles). Instead, the Court found controlling...