Unishops, Inc., Matter of, 528
| Citation | 553 F.2d 305 |
| Decision Date | 31 May 1977 |
| Docket Number | No. 528,D,528 |
| Parties | In the Matter of UNISHOPS, INC., Debtor. Jerome ZELIN, Claimant-Appellant, v. UNISHOPS, INC., Debtor-Appellee. ocket 76-5028. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
George Natanson, New York City (Natanson, Reich & Barrison, New York City, on the brief), for claimant-appellant.
Daniel A. Zimmerman, New York City (Elias Mann and Levin & Weintraub, New York City, on the brief), for debtor-appellee.
Before MEDINA, ANDERSON and TIMBERS, Circuit Judges.
Jerome Zelin appeals from a judgment in the Southern District of New York by Judge Thomas P. Griesa reversing an order of Bankruptcy Judge Roy Babitt which had allowed Zelin's claim for $100,000 as an expense of administration of Unishops, Inc., a debtor in possession in a Chapter XI arrangement proceeding, thereby giving the claim first priority under Section 64(a)(1) of the Bankruptcy Act, 11 U.S.C. Section 104(a)(1), and permitting payment of the claim in full. The District Court held that Zelin's claim is not entitled to priority. 417 F.Supp. 405 (S.D.N.Y.1976).
The claim in issue arises from the following letter agreement entered into by Unishops and Zelin on March 19, 1973:
Dear Mr. Zelin:
We refer to the discussions with you concerning the payment to be made to you by Unishops, Inc. (the "Company") in the event of the termination of your employment with the Company under the circumstances referred to in the following paragraph.
the Company will pay to you, on a monthly basis commencing on the first day of the month following the month in which such termination occurs, $50,000 a year for a period of two years, aggregating $100,000. * * *
If you should voluntarily resign, either because of a diminution or material change in the character of your duties as Chief Operating Officer or a diminution of your responsibilities or salary, or because the location at which your services are to be rendered is changed to a location outside of the New York metropolitan area, such resignation shall not be deemed to be a voluntary resignation for the purpose of this agreement with the consequence that you will, under such circumstances, be entitled to the payments provided for hereunder.
Very truly yours,
Unishops, Inc.
At the time of this agreement, Zelin had been employed for some eleven years as the principal executive officer of Unishops and owned about one-half of 1% of its shares. This was the first such written agreement between the parties.
On November 30, 1973, Unishops filed a petition for an arrangement under Chapter XI of the Bankruptcy Act and became debtor in possession. Zelin was continued in its employ. On December 7, 1973, the District Court entered an order, pursuant to Southern and Eastern Districts Local Bankruptcy Rule XI-3, approving Zelin's continued employment and fixing his compensation at $100,000 per year, payable in monthly instalments. This employment was continued until July 16, 1974, eight months after the Chapter XI filing, when the debtor in possession discharged Zelin.
Zelin thereupon filed his claim for $100,000, asserting that he was entitled to payment in full as a first priority expense of administration. Bankruptcy Act Section 64(a)(1), 11 U.S.C. Section 104(a)(1). Unishops, while not disputing the amount of the claim, opposed granting the claim priority status, insisting instead that it was merely a general unsecured claim entitled to the same proportionate payment to be given other general claims in the plan of arrangement.
The Bankruptcy Judge held that the $100,000 severance pay was an expense of administration and hence entitled to payment in full, citing this court's decision in Straus-Duparquet, Inc. v. Local Union No. 3, 386 F.2d 649 (2d Cir. 1967). He also held that Local Bankruptcy Rule XI-3 was not intended to cover severance pay and, therefore, the failure of the court to approve the March 19th letter agreement had no effect on the debtor's obligation to pay.
On appeal, the District Court held that the Local Rule "refers to officers' compensation in general, and clearly covers severance pay" (emphasis in original). Because there had been no court approval of the March 19th agreement, the District Court held that it had been rejected, and Zelin was relegated to the status of a general unsecured creditor. 417 F.Supp. at 408.
The two opinions below and the briefs of counsel explore a number of contentions and lines of authority, but we feel that the matter can be much more simply determined. This was an executory contract, In re Forney, 299 F.2d 503, 507 (7th Cir. 1962), in all respects valid and supported by a proper consideration. Had a dismissal or resignation occurred prior to the filing of the petition, Zelin's claim for the payment of $100,000 would have been the claim of a general creditor. Had his employment continued until after the conclusion of the Chapter XI proceeding, Zelin would, we assume, have been entitled to be paid the $100,000 in full.
A debtor in possession under Chapter XI may disaffirm or reject an executory agreement only in accordance with the statutory procedures. As stated in the leading treatise,
The failure to assume affirmatively an executory contract does not result at any time in a rejection of the contract. Whether the debtor is in possession, or whether there is a receiver or trustee, the contract can be rejected only by affirmative action under § 313(1) and Chapter XI Rule 11-53...
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