In re First Magnus Financial Corp.

• Decision Date: 20 June 2008
• Docket Number: No. 4:07-bk-01578-JMM.,4:07-bk-01578-JMM.
• Citation: 390 B.R. 667
• Parties: In re FIRST MAGNUS FINANCIAL CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — District of Arizona

390 B.R. 667

In re FIRST MAGNUS FINANCIAL CORPORATION, Debtor.

No. 4:07-bk-01578-JMM.

United States Bankruptcy Court, D. Arizona.

June 20, 2008.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Brenda K. Martin, James E. Cross, Osborn Maledon, PA, Craig Solomon Ganz, Garland Allen Brown, James P.S. Leshaw, John R. Clemency, Todd A. Burgess, Greenberg Traurig, LLP, Phoenix, AZ, for debtor.

MEMORANDUM DECISION

JAMES M. MARLAR, Bankruptcy Judge.

On March 31, 2008, a group of eight former employees of Debtor, on behalf of themselves and 256 others, filed a motion to allow immediate payment of a portion of their proofs of claim (Dkt. # 1995).¹ Specifically, they seek to recover, as a priority administrative expense and immediate payment under the confirmed chapter 11 plan, approximately 40 days' wages and benefits, as well as attorneys' fees, as damages pursuant to the Worker Adjustment and Retraining Notification ("WARN") Act, 29 U.S.C. § 2101, et seq. This chapter 11 bankruptcy case is affected because they seek the allowance of not less than $1,939,875.84, plus attorneys' fees, as an administrative expense. They style themselves, in shorthand fashion, the "WARN Act" employees. We will do likewise.

This issue was argued on May 19, 2008, after which the court took the matter under advisement. Having now reviewed applicable law, the court issues its decision.

PREFACE

The issue presented is one of first impression. It involves dueling federal statutes, and to the extent possible, the court must harmonize them.

From a bankruptcy perspective, the clash of ideas pits long-established bankruptcy principles against the newly enacted Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), which went into effect on October 17, 2005.

The particular new section in question here is 11 U.S.C. § 503(b)(1)(A)(ii), and the issue is whether that statute grants an administrative expense claim to former employees who were laid off pre-petition. To answer this question, the court must consider:

1. What was Congress' intent?

2. Is the statute so clear on its face that it needs no interpretation?

3. If the statute is unclear, can the court unravel the intent of Congress?

With this backdrop, the court now addresses the problem.

JURISDICTION

Jurisdiction over this core matter is unquestioned. 28 U.S.C. § 157(b)(2)(A), (B) and (O); 28 U.S.C. § 1334.

FACTS

The essential facts are not in dispute.

With the exception of one employee, whom Debtor alleged was not employed on the day of the mass layoff, these WARN Act employees were terminated by Debtor on August 16, 2007, without receiving 60 days' advance written notice. Debtor then filed a voluntary liquidating chapter 11 petition on August 21, 2007. The employees maintain that Debtor violated the WARN Act, and that the 60-day liability period for this violation runs from August 16, 2007, and into the post-petition period. They further argue that the post-petition portion of their claims is entitled to administrative expense status, pursuant to § 503(b)(1)(A), which they maintain gives them priority in a bankruptcy distribution and immediate payment pursuant to the confirmed plan provisions. 11 U.S.C. § 507(a)(2).

The parties do not dispute that any allowed pre-petition back-pay claims are entitled to fourth and/or fifth priority distribution as unsecured claims, subject to a cap of $10,950 each, pursuant to § 507(a)(4) and (a)(5).²

OPPOSITION TO THE ADMINISTRATIVE CLAIM STATUS

Debtor arid the Official Committee of Unsecured Creditors (together "Debtor") jointly oppose the relief sought in the motion. As a threshold matter, Debtor contends that the plain language of § 503(b)(1)(A) requires a prior back-pay award determination, and that these claimants cannot obtain an award from the bankruptcy court in the first instance. Debtor further maintains that administrative expense status is reserved for claims that arise post-petition and that constitute actual and necessary costs and expenses in the preservation of the estate; that the WARN Act claims are merely "constructive" wage claims and are otherwise punitive in nature, rather than compensatory. Alternatively, Debtor contends that its situation falls under the "unforeseen business circumstances" exception to the WARN Act notice requirement. Finally, it maintains that any attorneys' fees, which are available under the WARN Act, are not entitled to administrative expense allowance.

DISCUSSION

A. The WARN Act.

The WARN Act was passed in 1988 in the wake of numerous plant closings and mergers in the 1970s and 1980s. This act mandates that defined employers give affected workers 60 days' written notice of a plant closing or a mass layoff. 29 U.S.C. § 2102(a). The purpose of the WARN Act is to ensure that workers receive advance notice of plant closures and mass layoffs that affect their jobs. Marques v. Telles Ranch, Inc., 131 F.3d 1331, 1333-34 (9th Cir.1997). The Act was intended to allow "workers and their families some transition time to adjust to the prospective loss of employment, to seek and obtain alternative jobs and, if necessary, to enter skill training or retraining that will allow these workers to successfully compete in the job market." 20 C.F.R. § 639.1(a).

The WARN Act is primarily remedial, i.e., ensuring an income stream or protection to workers, their families and communities by providing the most rapid possible readjustment and retraining of displaced workers and to ease the personal and financial difficulties of the terminated workers. See Local Joint Exec. Bd. of Culinary/Bartender Trust Fund v. Las Vegas Sands, Inc., 244 F.3d 1152, 1159 (9th Cir.2001); see also In re Hanlin Group, Inc., 176 B.R. 329, 333-34 (Bankr. D.N.J.1995) ("[T]he purpose of WARN is to provide a statutory form of severance pay.").

The WARN Act contains no statutory section which outlines how such claims are to be treated under a companion federal statute, the Bankruptcy Code.

B. Pre-BAPCPA treatment of WARN Act claims.

Prior to BAPCPA, most bankruptcy courts treated pre-petition WARN Act back-pay claims as "wages" rather than as a "penalty," and afforded them priority treatment under § 507(a), up to the amount of the statutory cap. Any excess, over the cap, was treated as an unsecured claim. See In re Kitty Hawk, Inc., 255 B.R. 428, 439 (Bankr.N.D.Tex.2000); In re Riker Indus., Inc., 151 B.R. 823, 825-26 (Bankr.N.D.Ohio 1993); In re Cargo, Inc., 138 B.R. 923, 927-28 (Bankr.N.D.Iowa 1992).³ The Cargo court found that WARN Act claims were similar to severance pay at termination. See id. (citing Matter of Health Maintenance Foundation, 680 F.2d 619, 621 (9th Cir.1982)) (severance pay at termination in lieu of notice is entitled to priority payment as cost of administration). Cf. In re Patau Corp., 18 F.3d 746, 751 (9th Cir.1994) (NLRB back pay award).

C. The Bankruptcy Code.

1. Super-Priority of Administrative Claims.

It is long-accepted that bankruptcy proceedings embody the ideal of "equitable distribution" of a debtor's assets among competing creditors. Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 667, 126 S.Ct. 2105, 2116, 165 L.Ed.2d 110 (2006); Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990); Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1203 (9th Cir.2005). The Code is designed to achieve an "equality of treatment among similarly situated creditors." In re Lockard, 884 F.2d 1171, 1178 (9th Cir.1989).

Since it is rarely possible for a debtor to pay all creditors in full, Congress has prioritized distributions to creditors. Under the Bankruptcy Code, certain types of claims are entitled to administrative claim status. These expenses include "the actual, necessary costs and expenses of preserving the estate ....," and are accorded top-tier priority for payment, even ahead of most other "priority" claims. 11 U.S.C. § 507(a)(1)(C) and (2). The theory behind this "super-priority" treatment for administrative expenses is that the services rendered to a debtor, which help preserve the value of the estate, whether for continuation of the business or immediate liquidation, benefit all of the pre-petition creditor body. 4 Collier on Bankruptcy ¶ 503.06[1], at 503-24.1 to 24.2 (15th ed. rev.2008).

Because priority for administrative claims departs from the Code's policy of equality of distribution, the party seeking administrative priority bears the burden of proof. Proving entitlement as an "actual and necessary" expense is narrowly construed. Howard Delivery Serv., 547 U.S. at 667, 126 S.Ct. at 2116; Patau Corp., 18 F.3d at 750; In re Metro Fulfillment, Inc., 294 B.R. 306, 309 (9th Cir. BAP 2003); In re Hanna, 168 B.R. 386, 388 (9th Cir. BAP 1994). As the Supreme Court recently held:

"[I]f one claimant is to be preferred over others, the purpose should be clear from the statute ..."

Every claim granted priority status reduces the funds available to general unsecured creditors and may diminish the recovery of other claimants qualifying for equal or lesser priorities.... "To give priority to a claimant not clearly entitled thereto is not only inconsistent with the policy of equality of distribution; it dilutes the value of the priority for those creditors Congress intended to prefer." In re Mammoth Mart, Inc., 536 F.2d 950, 953 (C.A.1 1976).

Howard Delivery Serv., 547 U.S. at 667, 126 S.Ct. at 2116 (internal citations omitted).

As a general rule, an administrative expense claimant must show that the claim was incurred post-petition, that it directly and substantially benefitted the estate, and that it is an "actual and necessary" expense, a test which includes necessary costs of administering or operating the estate's business. Hanna, 168 B.R. at 388; Metro Fulfillment, 294 B.R. at 309.

2. Section 503—Administrative Expense.

Section 503 of the Bankruptcy Code establishes what types of claims are accorded administrative status. In general, these types of...