In re Robotek Contracting & Consulting, LLC

• Decision Date: 28 February 2012
• Docket Number: Case No. 08-33312-dof
• Parties: In re: ROBOTEK CONTRACTING & CONSULTING, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

IN RE: ROBOTEK CONTRACTING & CONSULTING, LLC, Debtor.

Case No. 08-33312-dof

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION - FLINT

Signed: February 28, 2012

Chapter 7 Proceeding

Hon. Daniel S. Opperman

Opinion Regarding Objections to Severance and Vacation Pay Claims

Factual Background

From October 2001 until July 11, 2008, Robotek Contracting & Consulting, LLC ("Robotek") was in the business of programming industrial robots. On June 17, 2008, a judgment was entered against Robotek and in favor of Margni, Inc. ("Margni") in the amount of $900,000.00. On July 8, 2008, Margni served a writ of garnishment on Comerica Bank, and Comerica Bank froze Robotek's account. Margni also served writs of garnishment on certain customers of Robotek, resulting in accounts receivable being withheld by those customers. Robotek decided to terminate its operations effective upon the close of business on July 11, 2008.

On July 11, 2008, Robotek issued to its employees a "Notice of Permanent Layoff and Separation Agreement and Full and Final Release" ("Separation Agreement"). The Separation Agreement provided that the employees would be terminated as of July 11, 2008, and it stated:

Due to the nature of this termination, to reward you for your efforts to make us successful, and to also assist you as you transition to new employment, we are willing to offer you a severance package. Under this package, we are offering each employee being laid-off today with a four weeks' [sic] of their base pay (based on a 40 hour workweek) for each year of service, with partial years to be prorated and with no employee being laid-off on this date to receive less thaneight weeks of severance pay. The amount of your severance pay eligibility is provided below.

In exchange for this severance pay, though, we ask that you agree to release us from all claims and the other terms as specified in this letter. If you wish to accept this offer, then please indicate your acceptance by signing in the space provided below on or before July 16, 2008. In addition for you agreeing to this separation package and its terms, as indicated below we will also release you from the restrictions limiting your ability to work for a competitor or client. Due to the fact that we are closing our operations, we no longer believe that there is a legitimate interest at stake which should limit your ability to work for others.

With regard to other termination benefits, the Separation Agreement provided as follows:

Under this arrangement, and except as specifically stated in this letter, you acknowledge and agree that you are not entitled to receive any other benefits or compensation as a terminating employee of the Company under any Company practice, policy, or otherwise, other than: a) your normal compensation for work performed for the period May 31, 2008 through today; b) any earned but unused vacation days as normally payable upon termination, if any; c) any expense payments due to you in accordance with our normal expense payment policies, for the period June 1, 2008 through today; and any retirement contribution required to be made by Robotek on your behalf since its last contribution so made, through today. You further acknowledge that, except as specified in this paragraph, you have been fully and properly compensated for all work through today. Since your termination is a layoff, you may be entitled to receive unemployment compensation. That entitlement, though, may be subject to setoffs required by the State of Michigan and is solely controlled by the rules of the State of Michigan.

On August 17, 2008, Robotek filed its chapter 7 bankruptcy petition. On that same date, Michael Mason was appointed as the chapter 7 trustee. Various former Robotek employees ("Wage Claimants") filed proofs of claims for the amounts owed to them under the terms of the Separation Agreement and sought allowance of their claims as priority claims pursuant to 11 U.S.C. § 507(a)(4). On February 4, 2009, Margni filed objections to the Wage Claimants' claims, but it failed to serve notices of its objections at that time. In December 2010, Margni served the notices of its objections to those claims. A preliminary hearing was held on January 26, 2011, and additional hearings were held on March 30, 2011, May 25, 2011, and October 4, 2011. The only remaining issue with regard to Margni's objections is whether the WageClaimants are entitled to payments for earned but unused vacation time under the Separation Agreement.

On November 17, 2011, the Trustee filed objections to the Wage Claimants' claims.¹ The Trustee argues that (1) the claims should be disallowed as priority claims, or, in the alternative, (2) the claims should be prorated and the amount should be reduced to reflect the amount of severance pay that would be attributable to the 180 days prior to the petition date. The Wage Claimants filed a Response to the Trustee's Objections on November 30, 2011. The Court held a status conference on December 6, 2011, and it entered an Order Setting Briefing Deadlines on December 9, 2011. A hearing was held on January 11, 2012, at which the Court heard oral arguments with regard to both the Trustee's and Margni's objections to the Wage Claimants' claims. At the conclusion of that hearing, the Court took those matters under advisement.

Jurisdiction

This Court has subject matter jurisdiction over this proceeding under 28 U.S.C. §§ 157(a), 157 (b)(1), 1334(a), and E.D. Mich. LR 83.50(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (B).

Analysis

A. Trustee's Objections to the Wage Claimants' Claims

11 U.S.C. § 507 sets forth the categories of expenses and claims that are entitled to priority treatment in the distribution of a debtor's estate. Section 507(a)(4) provides that a fourth priority is given to "allowed unsecured claims, but only to the extent of $10,950 for each individual . . . earned within 180 days before the date of filing the petition or the date of the cessation of the debtor's business, whichever occurs first, for - (A) wages, salaries, or commissions, includingvacation, severance, and sick leave pay earned by an individual."² 11 U.S.C. § 507(a)(4) (emphasis added).

The Wage Claimants argue that they are entitled to priority treatment for the full amount of their severance pay up to the $10,950 capped amount. Focusing on the term "earned" in § 507(a)(4), the Trustee argues that (1) the Wage Claimants' claims should be disallowed because the severance pay agreed to in the Separation Agreement was merely labeled "severance pay," but was actually paid by Robotek in exchange for the expansive release contained in the Separation Agreement, (2) the Wage Claimants' claims should be disallowed as priority claims because the severance pay was not "earned," or (3) if priority treatment is allowed, the Wage Claimants' claims should be prorated and the amount should be reduced to reflect the amount of severance pay that would be attributable to the 180 days prior to the petition date.

(1) Whether the Severance Pay Was Merely Payment for the Release

The Court first considers the Trustee's argument that the severance pay was not in fact severance pay, but it was rather paid by Robotek in exchange for the expansive release included in the Separation Agreement. In support of his position, the Trustee relies on the fact that Robotek's Employee Handbook did not provide for any severance pay other than unemployment compensation; the fact that the Separation Agreements were given to the employees on July 11, 2008, at the time of termination, and the employees were given time to review, sign, and return the Separation Agreements; and the fact that the Separation Agreement included an expansive release.

The Trustee has not cited, and the Court has not found, any provision in the Employee Handbook regarding severance pay. Paragraph 5.3 of the Employee Handbook, entitledUnemployment Compensation, states: "If you are laid off or your employment terminates, you may be eligible for unemployment compensation benefits. The Company pays the cost of the benefits by taxes paid to fund the unemployment compensation system." The Trustee urges the Court to read that paragraph to mean that Robotek did not intend to provide any severance pay to its employees. The Court is not persuaded by this argument. There are several paragraphs of the Employee Handbook that provide some instruction regarding the intended scope and application of the provisions in the Employee Handbook. For instance, the Introduction to the Employee Handbook states:

(1) The Handbook contains only general information and guidelines. It is not intended to be a comprehensive guide, nor does it address all of the possible applications of, or exceptions to, the general policies and procedures described herein. For that reason, if you have any questions about the applicability of a policy or practice to you and/or your eligibility for a particular benefit, you should address your specific questions to the management team.

(2) This Handbook is not intended to be an employment contract, nor is the Handbook intended to imply any type of contractual relationship. Further, the Handbook does not guarantee any fixed terms and conditions of employment. To the contrary, although we will certainly try to keep you informed of changes as they occur, the procedures, practices, policies and benefits described herein may be modified or discontinued at any time with or without prior notice.

(3) Your employment with Robotek is at-will. This means that your employment is subject to termination by your or the Company at any time, with or without case and with or without notice. Nothing in these policies shall be interpreted to be in conflict with or to eliminate or modify in any way your employment-at-will status. Only the President of the Company has the authority to enter into an agreement for employment for any specified period of time, or

...