In re Golden Distributors, Ltd.

• Decision Date: 15 November 1991
• Docket Number: Bankruptcy No. 90 B 21146 to 90 B 21149.
• Citation: 134 BR 760
• Parties: In re GOLDEN DISTRIBUTORS, LTD., and Capital Cigar and Tobacco Company, Incorporated, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

134 B.R. 760 (1991)

In re GOLDEN DISTRIBUTORS, LTD., and Capital Cigar and Tobacco Company, Incorporated, Debtors.

Bankruptcy Nos. 90 B 21146 to 90 B 21149.

United States Bankruptcy Court, S.D. New York.

November 15, 1991.

Summit Rovins & Feldesman, New York City, for debtors.

Schneider, Cohen, Solomon, Leder & Montalbano, Cranford, N.J., for Local 153 O.P.E.I.U. and Teamsters Local No. 560.

Ball Livingston & Tykulsker, Newark, N.J. (David Tykulsker, of counsel), for IUE Local 332.

DECISION ON MOTION AND CROSS MOTION FOR ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSES

HOWARD SCHWARTZBERG, Bankruptcy Judge.

In this voluntary Chapter 11 case, the debtor, Golden Distributors, Ltd. ("Golden"), has moved pursuant to 11 U.S.C. §§ 502 and 1122 and Bankruptcy Rules 3007 and 3013 for an order fixing the amount and priority of various benefit claims of former employees of Metropolitan Distribution Services, Inc. ("Metropolitan"), a division of the debtor. Such claims are alleged to be due and owing to former employees under several collective bargaining agreements between Metropolitan and various unions. The debtor proposes that sick leave and personal holidays as well as vacation and severance pay accruing after the filing of the bankruptcy petition be treated as administrative expenses under 11 U.S.C. § 503(b). The debtor contends that all other claims including vacation and severance pay accruing prepetition should be classified as general unsecured claims because they represent compensation for pre-petition services. The debtor acknowledges that a portion of these claims may be entitled to priority status under 11 U.S.C. § 507(a)(3).

Local 332 of the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers AFL-CIO ("Local 332"), Local 560 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, AFL-CIO ("Local 560") and Local 153 of the Office and Professional Employees International Union, AFL-CIO ("Local 153"), on behalf of various former employees of Metropolitan, oppose, in part, the debtor's classification of claims and Locals 560 and 153 have cross-moved accordingly. First, the Unions contend that each employee's severance pay claim, in its entirety, should be treated as an administrative expense for the reason that severance pay, under prevailing case law, is compensation for termination and is not earned on a per diem basis. Thus, the Unions argue, full severance pay is due when termination of employment occurs. The Unions also assert that vacation, personal, and sick leave days earned pre-petition should be treated as administrative expenses under 11 U.S.C. § 1113(f), which creates an administrative priority for all benefits due under a collective bargaining agreement.

FACTUAL BACKGROUND

The debtor filed with this court on November 13, 1990 ("Filing Date") petitions for reorganizational relief under Chapter 11 of the Bankruptcy Code and continued in possession and management of their businesses and properties pursuant to 11 U.S.C. §§ 1107 and 1108. The separate cases were consolidated for purposes of administration by an order of this court. The debtor's principal offices are located in Hauppage, New York. On May 31, 1991, this court authorized Debtor in Possession ("DIP") financing by First National Bank of Boston, Chase Manhattan Bank and National Westminster Bank ("Banks") pursuant to 11 U.S.C. § 364 for approximately $100 million which is secured by a superpriority secured lien in all assets of the debtor. With the court's approval, an additional $10.5 million was borrowed from Principal Mutual Life Insurance Company ("Principal") which holds a subordinated super-priority secured lien on the assets.

On May 14, 1990, Golden purchased the stock of Metropolitan which was in the business of distributing cigars, cigarettes and candy products. Metropolitan maintained a distribution facility in East Hanover, New Jersey which shut down permanently on or about August 1, 1991. The East Hanover facility employed members of Locals 153, 332 and 560 as well as nonunion workers. Non-union employees were entitled to benefits under Metropolitan's general corporate policy. The rights of Union members arose from various collective bargaining agreements. Metropolitan, the debtor in possession, did not assume or reject any of the collective bargaining agreements pursuant to 11 U.S.C. § 1113.

At issue in this proceeding are personal and sick leave days and severance and vacation pay which are claimed to be due to former employees of Metropolitan's East Hanover facility. The debtor's general corporate policy and the collective bargaining agreements are substantially similar with respect to these benefits. Under both plans, the benefits in question vest in the same way. Severance and vacation pay increase according to length of service while personal and sick leave days are based upon employment in the current year only.

Prior to, and following, the decision to close the East Hanover facility, representatives from Metropolitan met with union leaders to discuss how employees' benefits should be categorized under the Bankruptcy Code. Shortly before closing, Metropolitan prepared a chart which set forth benefits earned by each employee. The chart separates benefits into categories for pre-petition and post-petition claims based upon when they were earned. Metropolitan asserts that benefits earned pre-petition must be treated as general unsecured claims and benefits earned post-petition must be treated as administrative expenses. Accordingly, the debtor proposes that employee's accrued benefits be classified as follows:

a. any severance pay and vacation pay which accrued or was earned as a result of employment after the Filing Date, as well as any personal holiday pay and sick leave pay to which an employee is entitled, would be treated as an administrative expense pursuant to 11 U.S.C. § 503(b);

b. any severance pay and vacation pay which accrued or was earned as a result of employment within 90 days before the Filing Date would be treated as a priority claim pursuant to 11 U.S.C. § 507(a)(3) and would be subject to a $2,000 cap per employee; and

c. any severance pay and vacation pay which accrued or was earned as a result of employment within 90 days before the Filing Date and which exceeded the $2,000 cap, as well as any severance pay and vacation pay which accrued or was earned more than 90 days prior to the Filing Date, would be treated as an unsecured claim.

Trial Memorandum In Support of Debtors' Motion, at 7-8. The debtor asserts that any claim for benefits should be subject to the DIP lenders. That is, the benefits claims would be subordinate to the super-priority secured position of the Banks and the subordinated super-priority position of Principal.

The Unions oppose, in part, Metropolitan's classification of claims. The Debtor and the Unions agree that sick leave and personal days as well as the portion of vacation pay that accrued after the Filing Date are administrative expenses under 11 U.S.C. § 503(b) because they are based upon post-petition employment and are necessary for the preservation of the estate. These claims are subordinate to the unsecured claims of the DIP lenders pursuant to 11 U.S.C. § 364(c)(1) which elevates those post-petition creditors above claims allowed under 11 U.S.C. § 503(b).

The Unions only dispute the debtor's classifications of severance pay and that part of vacation pay which represents services rendered pre-petition. The Unions assert that severance pay claims, in their entirety, should be treated as administrative expenses because severance pay, under prevailing case law, is triggered by termination of employment and does not represent compensation based on length of service. Thus, the Unions contend, former employees are entitled to full severance pay upon termination. The Unions also argue that vacation pay due to Union members, in its entirety, should be treated as administrative expense under 11 U.S.C. § 1113(f), which creates an administrative priority for all benefits authorized under a collective bargaining agreement.

DISCUSSION

Under 11 U.S.C. § 507(a)(1) administrative expense claims, including claims allowed under 11 U.S.C. § 503(b), are given first priority status subordinate only to secured creditors. 11 U.S.C. § 503(b) provides in relevant part as follows:

After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—

(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after commencement of the case. . . .

11 U.S.C. § 503(b) (emphasis added).

Although 11 U.S.C. § 503(b) does not specifically include related benefits, vacation and severance pay, as forms of wages, are allowable as expenses necessary for the preservation of the estate and thus, are entitled to priority status under 11 U.S.C. § 507(a)(1). In re Schatz Federal Bearings Co., Inc., 5 B.R. 549, 552 (Bankr.S.D.N.Y.1980). The issues in the present case are whether severance and vacation pay, which are calculated according to length of service, should be treated as administrative expenses in their entirety pursuant to 11 U.S.C. §§ 503(b) and 507(a)(1). The court must also determine whether the benefit claims are subject to the claims of the DIP lenders.

SEVERANCE PAY

Severance pay for terminated employees is a cost of carrying on business and constitutes an administrative expense. Amalgamated Insurance Fund v. William B. Kessler, Inc., 55 B.R. 735, 739 (S.D.N.Y.1985); In re Chicago Lutheran Hospital Assoc., 75 B.R. 854, 856 (Bankr. N.D.Ill.1987). In the instant case, the employer, Golden, as is typically the case, calculated severance pay according to an employee's length of employment. A portion may be based upon services rendered prior to the...