In re US Metalsource Corp.

• Decision Date: 21 December 1993
• Docket Number: Bankruptcy No. 91-22919 JLC. Motion No. PMS-1.
• Parties: In re U.S. METALSOURCE CORP., Debtor. OFFICIAL COMMITTEE OF UNSECURED CREDITORS METALSOURCE CORP., Movant, v. U.S. METALSOURCE CORP., Respondent.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Pennsylvania

163 B.R. 260 (1993)

In re U.S. METALSOURCE CORP., Debtor.

OFFICIAL COMMITTEE OF UNSECURED CREDITORS METALSOURCE CORP., Movant, v. U.S. METALSOURCE CORP., Respondent.

Bankruptcy No. 91-22919 JLC. Motion No. PMS-1.

United States Bankruptcy Court, W.D. Pennsylvania.

December 21, 1993.

COPYRIGHT MATERIAL OMITTED

Paul M. Singer, Diane M. Lancaster, Reed, Smith, Shaw & McClay, Pittsburgh, PA, for Committee of Unsecured Creditors.

Steven T. Shreve, Stone, Glosser, & Stone, Pittsburgh, PA, for Salaried Employees.

Office of U.S. Trustee, Pittsburgh, PA, for U.S. trustee.

David B. Salzman, Campbell and Levine, Pittsburgh, PA, for debtor.

MEMORANDUM OPINION

JOSEPH L. COSETTI, Chief Judge.

The matter before the Court is a motion filed by the Committee of Unsecured Creditors of U.S. Metalsource, Corp. seeking: 1) a modification of the Wage Order insofar as it relates to severance and vacation pay and 2) authorization for the Committee to bring suit, in the name of the Debtor, to recover any "excess" severance payments that the Debtor may have made to terminated employees under the Wage Order. After careful consideration of the record and the representations made by the parties, the Court determines that: 1) this Court's first day Wage Order was a final order; 2) the employment relationship between the Debtor and its Salaried Employees was not an "executory contract" as the term is used within the Bankruptcy Code; 3) the Court should not modify its first day Wage Order; and 4) the payment of severance and vacation benefits to salaried employees are not transactions in the ordinary course of business and are subject to prioritization pursuant to 11 U.S.C. § 507(a)(3).

Finally, the Committee's request for authorization to bring suit in the name of the Debtor to recover any "excess" severance payments that the Debtor may have made to terminated employees under the Wage Order is denied. The Wage Order itself was not wisely considered by the Debtor as vital to a successful reorganization. In addition, it was not monitored by the Committee of Unsecured Creditors. Employees who have received payments in excess of $2,000 in reliance upon this Court's Wage Order are not required to return such money to the Debtor, and the Wage Order is vacated as of March 10, 1993, the date this matter was filed by the Committee.

I. FACTS

On August 12, 1991, U.S. Metalsource Corp. (hereinafter "the Debtor") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Contemporaneously with its petition, the Debtor filed several first day emergency motions including, inter alia, an Emergency Application for an Order Authorizing Payment of Pre-Petition Wages, Salaries, Commissions, Reimbursement of Employee Business Expenses and Payment of Other Pre-Petition Employee Benefits (hereinafter the "Wage Motion").

The Debtor's request for relief, as set forth in the Wage Motion, asserted that the payment of severance pay is permitted because such claims "are entitled to priority in payment under Section 507(a)(3) or Section 507(a)(4) of the Bankruptcy Code." The Wage Motion also stated that "the total amount of payments requested is insignificant when compared to the size of the Debtor's estate and the importance of the continued services of employees." These are not adequate grounds for such an order.

On August 13, 1991, a hearing was held on the Wage Motion whereby the attorney for the Debtor, David Salzman, described the Debtor's business operations as being "a chain of 12 steel service centers with the emphasis on the word `service.'" Mr. Salzman emphasized further in his testimony at the hearing that:

The Debtor\'s business is very "people" oriented. Its employees are essential to its continued operations . . . To a large degree the Debtor\'s business is made up of the relationships of the people that work for it . . . That is the core and essence of the business . . .

The Debtor believes that the severance policy is very important to its operations. In light of the fact that it has announced that it is reducing service centers, the Debtor needs, for the benefit and morale of its employees, to be able to tell its employees that there will be a severance package for them in the event that their service center is one that would be ultimately closed . . .

The Debtor believes that this will provide the morale for the employees that remain, to enable them to continue to work, . . . and to hopefully enable us to reorganize around the profitable service centers.

(Audio record: Hearing, August 13, 1991). Based upon the foregoing representations made by Debtor's counsel, the Court granted the relief requested by the Debtor in the Wage Motion. The Debtor was unable to produce a profit. When this became apparent, the Committee should have requested a change in the policy.

The only party to receive notice of the hearing and pendency of the Wage Motion was the United States Trustee.¹ The Debtor served a copy of the Court's order (hereinafter the "Wage Order") to all parties whose names appeared on the service list for this case. Included on this service list was the Debtor's twenty largest unsecured creditors. The Committee did not monitor this Order.

Subsequent to the entry of the Wage Order, no appeal was taken and no party requested the Court reconsider its decision². The text of the Wage Order states in pertinent part:

. . . it is further ORDERED, that the Debtor . . . is, authorized and empowered to pay, in the ordinary course of business and in accordance with existing policies and practices, vacation and sick pay on account of services rendered by employees to the Debtors, whether before or after the Filing Date; and it is further . . .

ORDERED, that the Debtor be and hereby is, authorized and empowered to pay severance pay (excluding severance pay under executive employment contracts but including severance pay as to employees who become entitled before the Filing Date), on account of services rendered by its employees, whether before or after the Filing Date, in the ordinary course of business and in accordance with existing policies and practices; except that no severance pay for a period in excess of four (4) month\'s pay may be paid to one employee without further Order of Court.

It is undisputed that the Debtor made severance payments to its terminated employees in accordance with the Wage Order.

The Debtor's severance policy has been in effect since May 1, 1990 and is outlined in detail in an employee booklet. Touted as "an important part of your employee benefits," the employee booklet encourages each employee to "fully understand" his or her "rights and duties" under the severance policy. In the employee booklet, the Debtor specifically reserved the right "to modify or terminate any or all of the provisions of the Plan at any time."

The Debtor's severance policy can be described as a graduated benefit scale whereby the amount of severance pay awarded to a terminated employee is contingent upon the duration of the former employee's service.³ Since obtaining the Wage Order, the Debtor has issued a number of releases to its employees. Upon termination, the practice of the Debtor has been to generally advise each terminated employee of both the Wage Order and of the continuance of the Debtor's pre-Chapter 11 severance policy.

Since the petition date, the Debtor's operations have been far from smooth. The Debtor has continued to operate at a loss and a plan of reorganization was not confirmed until May 1993, almost three years after it filed bankruptcy. The Unsecured Creditor's Committee of U.S. Metalsource Corp. (hereinafter the "Committee"), beginning with its appointment on August 13, 1991, has been an active participant in this case. In addition to filing two plans of reorganization, the Committee petitioned this Court to replace the management of the Debtor with personnel "appropriate" to conduct the disposition contemplated by the Committee's second proposed plan.

On January 4, 1993, after notice and hearing, the Court approved the appointment of Warren Beiger as the "Responsible Officer" to oversee and manage the Debtor's asset disposition process. Subsequent to this appointment, the Committee learned that the Debtor had paid 369 terminated employees a total of $1,103,604.00 in severance benefits between the petition date (August 12, 1991) and January 15, 1993. The overall average severance payment was $2,990.79. However, of the $1.1 million in total severance benefits paid, $309,888.00 were made to 21 salaried employees. The average payment for these 21 salaried employees was $14,756. This sum does not seem wisely spent. The severance payments made to these salaried employees are the subject of the dispute presently before the Court.

On March 10, 1993, 19 months after the entry of the Wage Order, the Committee filed a motion seeking: i) a modification of the Wage Order insofar as it relates to severance and vacation pay and ii) authorization for the Committee to bring suit, in the name of the Debtor, to recover any "excess" severance payments that the Debtor may have made to terminated employees under the Wage Order. Specifically, the Committee is seeking to retroactively limit the severance pay received by each of the Debtor's current and previously terminated employees to the lesser of 1) the actual amount of severance pay that an employee is eligible to receive pursuant to the Debtor's prepetition severance policy, or 2) the $2,000 wage priority cap under 11 U.S.C. § 507(a)(3)(B). Any balance remaining in excess of this amount would then be treated as a prepetition unsecured claim.⁴ The Committee concedes that any severance pay earned postpetition is a claim entitled to administrative priority pursuant to 11 U.S.C. § 507(a)(1).

A group of salaried employees (hereinafter the "Salaried Employees") objected to the Committee's motion and contended that: 1) the Wage Order is a final order and any...