Palau Corp., In re

• Decision Date: 08 March 1994
• Docket Number: No. 92-55720,92-55720
• Citation: 18 F.3d 746
• Parties: 145 L.R.R.M. (BNA) 2795, 62 USLW 2567, 127 Lab.Cas. P 11,056, 25 Bankr.Ct.Dec. 547, Bankr. L. Rep. P 75,805 In re PALAU CORPORATION, Debtor. NATIONAL LABOR RELATIONS BOARD, Appellant, v. Edward M. WALSH, Trustee for Palau Corporation, Debtor, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 746

18 F.3d 746

145 L.R.R.M. (BNA) 2795, 62 USLW 2567,

127 Lab.Cas. P 11,056,

25 Bankr.Ct.Dec. 547, Bankr. L. Rep. P 75,805

In re PALAU CORPORATION, Debtor NATIONAL LABOR RELATIONS BOARD, Appellant, v. Edward M. WALSH, Trustee for Palau Corporation, Debtor, Appellee.

No. 92-55720.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 4, 1993.

Decided March 8, 1994.

Eric G. Moskowitz, Deputy Assistant General Counsel for Special Litigation, Washington, D.C., for the appellant.

Linda Sorensen, Howard, Rice, Nemerovski, Canady, Robertson & Falk, San Francisco, California, for the appellee.

Appeal from the Ninth Circuit Bankruptcy Appellant Panel.

Before: ALARCON, LEAVY, and KLEINFELD, Circuit Judges.

LEAVY, Circuit Judge:

In this case we must decide whether an unlawfully discharged employee's claim for backpay is entitled to administrative priority when his claim accrued after the former employer filed a petition in bankruptcy. For the reasons which follow we conclude that the claim is not entitled to priority as an

administrative expense of the bankruptcy estate.

FACTS AND PRIOR PROCEEDINGS

On November 3, 1980, the Palau Corporation ("Palau") laid off two of its employees, Ralph Montoya ("Montoya") and Michael Cook ("Cook"). Ten days later Montoya filed charges with the National Labor Relations Board ("NLRB"), alleging that Palau had engaged in unfair labor practices. Palau filed a petition in bankruptcy the following month (December 10, 1980), seeking reorganization and protection from creditors under Chapter 11 of the Bankruptcy Code.

On January 30, 1981, the Regional Director for the NLRB issued a complaint against Palau based on Montoya's charges. Palau responded to the complaint and, on August 6, 1981, a hearing with oral argument was held before an administrative law judge ("ALJ"). The ALJ issued his decision on January 28, 1982, finding that Palau's act of laying off Montoya and Cook constituted a violation of the National Labor Relations Act ("Act"), 29 U.S.C. Secs. 151-169, and directing Palau to offer Montoya and Cook reemployment. Although it is not clear to what extent Palau attempted to comply with this directive, it is undisputed that Palau did not challenge the ALJ's findings on appeal, which were affirmed by the NLRB on March 3, 1982.

Meanwhile, the bankruptcy court converted the proceedings from Chapter 11 to a Chapter 7 liquidation on February 7, 1982. Palau ceased operations and Edward M. Walsh was appointed to serve as the estate's trustee in bankruptcy ("Trustee"). On May 28, 1982, the NLRB filed its initial proof of claim with the bankruptcy court, demanding a total of $66,839.04 in back wages and contributions to employee benefit plans for the two former employees. The NLRB further argued that the entire claim was entitled to first priority as an administrative expense of the bankruptcy estate rather than third priority as a wage claim. ¹

The Trustee eventually allowed the claim but denied it any administrative priority. The NLRB filed its opposition to the Trustee's determination on July 31, 1991, and moved for a hearing on the question of whether the claim was entitled to treatment as an administrative expense of the estate. Along with its opposition and motion for hearing the NLRB also filed an amended proof of claim for $13,069.40, representing Cook's ² total claimed net backpay ($8,428.00) and net fringe benefit contributions ($4,641.40). The NLRB argued that $2,482.00 of this total consisted of pre-petition net backpay ($2,091.00) and pre-petition net fringe benefit contributions ($391.00), while the remaining $10,587.40 consisted of post-petition net backpay ($6,337.00) and post-petition net fringe benefit contributions ($4,250.40).

On October 10, 1991, the bankruptcy court issued an amended order allowing the NLRB's claim for pre-petition backpay (i.e., that which accrued between November 3, 1980, and December 10, 1980), but treating the remaining claim for post-petition backpay (i.e., that which accrued between December 10, 1980, and February 7, 1982) as a general unsecured claim rather than as an administrative expense of the estate. The NLRB challenged the second half of this ruling on appeal to the Bankruptcy Appellate Panel

("BAP"). The BAP unanimously affirmed the bankruptcy court's determination in a published opinion, National Labor Relations Bd. v. Walsh (In re Palau Corp.), 139 B.R. 942 (9th Cir. BAP 1992), and the NLRB has timely appealed.

ANALYSIS

Standard of Review

We independently review the bankruptcy court's decision because we are in as good a position as the BAP to examine the lower court's findings of fact and conclusions of law. See Mitsui Mfrs. Bank v. Unicom Computer Corp. (In re Unicom), 13 F.3d 321, 323 (9th Cir.1994). We review the bankruptcy court's findings of fact for clear error and examine its legal conclusions de novo. See id.

Discussion

This appeal stands or falls on the answer to one question: Is the backpay that accrues to an unlawfully discharged employee after his former employer files a petition in bankruptcy entitled to administrative priority as an expense of the bankruptcy estate? For the reasons which follow we conclude that it is not.

I

The Bankruptcy Code provides that the administrative expenses of a bankruptcy estate are to be accorded a first priority of payment. 11 U.S.C. Sec. 507(a)(1). ³ Administrative expenses are defined as "the actual, necessary costs and expenses of preserving the [bankruptcy] estate, including wages ... for services rendered after the commencement of the case[.]" 11 U.S.C. Sec. 503(b)(1)(A). Wage claims not entitled to administrative priority are treated as general unsecured claims entitled to the lowest priority, except that the first $2,000.00 of an individual's wages earned within ninety days of his employer's filing of a bankruptcy petition will be accorded a third priority. See 11 U.S.C. Sec. 507(a)(3). ⁴

Put simply, the Bankruptcy Code divides wage claims into categories of pre- and post-petition, and accords varying levels of priority to those claims. Post-petition wages deemed necessary for the preservation of the bankruptcy estate are treated as though fully secured and are accorded first priority treatment; pre-petition wages earned within 90 days of the employer's bankruptcy filing are treated as if partially secured (i.e., up to $2,000.00) and receive third priority treatment; while all other wages, i.e., those earned within the 90-day time frame but in excess of $2,000.00, those earned outside the 90-day time frame, and those for services not deemed necessary for the preservation of the bankruptcy estate, are treated as unsecured.

The NLRB argues that Cook's post-petition backpay is entitled to administrative priority as a matter of federal bankruptcy law because, had Palau not laid off Cook, Cook's post-petition services would have been necessary for the preservation of the bankruptcy estate. See 11 U.S.C. Sec. 503(b)(1)(A). Underlying this contention are two arguments, one explicit, the other implicit. With respect to the former, the NLRB insists that the National Labor Relations Act controls rather than the Bankruptcy Code, i.e., because Cook's wage claim is the result of an unfair labor practice, federal labor law governs the terms and conditions of its payment. As for the latter, the NLRB contends that Palau should not be allowed to profit--or, conversely, Cook should not be made to suffer--as the result of Cook's wrongful discharge. ⁵

As already noted, both the bankruptcy court and the BAP rejected the NLRB's position. The essence of their holdings was that, while federal labor law determines whether or not an unfair labor practices claim exists, federal bankruptcy law determines the priority of such a claim, and Cook's claim did not qualify as an administrative expense under federal bankruptcy law because he performed no services during the period in question and because the costs associated with his wage claim could not fairly be characterized as necessary to preserve the bankruptcy estate. Each of these points will be discussed in turn.

II

The question of whether we must look to federal labor law or to federal bankruptcy law to determine the priority of Cook's wage claim need not detain us. In Kapernekas v. Continental Airlines, Inc. (In re Continental Airlines, Inc.), 148 B.R. 207 (D.Del.1992), a case nearly on all fours with the instant appeal, the district court upheld the bankruptcy court's denial of administrative priority to a post-petition accrued backpay claim filed by an unlawfully discharged employee of a company in Chapter 11. In reaching this conclusion the district court held that

while laws governing unfair labor practices, such as the National Labor Relations Act ... govern the question of whether or not a claim for compensation for unfair labor practices exists and what the value of that claim is, it is the Bankruptcy Code which determines the priority and allowability of any and all claims filed in a bankruptcy proceeding. Therefore, since the issue in this case is not whether [the unlawfully discharged employee] has a claim for back pay but rather whether that claim should have administrative priority status, it is the Bankruptcy Code which governs the issue.

148 B.R. at 211. This conclusion is consistent with longstanding law. See e.g. Nathanson v. National Labor Relations Bd., 344 U.S. 25, 28-29, 73 S.Ct. 80, 82-83, 97 L.Ed. 23 (1952) ("The policy of the National Labor Relations Act is fully served by recognizing the claim for back pay as one to be paid from the [bankruptcy] estate. The question whether it should be paid in preference to other creditors is a question to be answered from the Bankruptcy Act."). Cf. Federal Deposit Ins. Corp. v. Soderling (In re Soderling), 998 F.2d 730, 733 (9th Cir.1993) (while state law governed determination of whether party had an interest in community property, federal bankruptcy...