Matson v. Alarcon

Summarized by Lynn Tavenner , Tavenner & Beran, PLC
14 years 8 months ago

Citation:

2011 U.S. App. LEXIS 13729 (4th Cir. July 6, 2011)(published)

Tag(s):

4th Circuit

Ruling:

For purposes 11 U.S.C. § 507(a) (4), severance compensation was "earned" by former employee claimants on the day they became participants in the debtor's severance plan immediately after their termination from employment. To reach such conclusion, upon certification from the Bankruptcy Court, the Fourth Circuit applied a plain meaning approach to the language of 11 U.S.C. § 507(a) (4), which provides a fourth priority to "allowed unsecured claims, up to a delineated amount (which was $10,950 for purposes of the claims at hand), for each individual . . . earned within 180 days before the date of the filing of the petition. . . for (A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual." 11 U.S.C. § 507(a)(4) (emphasis added). The Court opined that it must determine the method by which an individual "earns" severance pay, within the meaning of this statute, to decide whether the claimants "earned" their full severance pay or only a pro-rated portion of that pay during the pre-petition period. In view of the meaning and the purpose of severance compensation, the Court concluded that “to become entitled” represents the ordinary meaning of the manner in which employees "earn" severance pay and held that an employee "earns" the full amount of severance pay on the date the employee becomes entitled to receive such compensation. The Fourth Circuit then found that the claimants became entitled to the full severance when they became participants in the plan upon their termination from employment and their signing a severance agreement and release. The Fourth Circuit further opined that while the amounts of the severance compensation to which the claimants were entitled under the plan were based on their length of service to Land America, this method of calculation did not, as the trustee contended, dictate that those employees earned severance compensation over the entire course of their employment. The Court also noted that its conclusion was not altered by decisions of other circuits addressing the priority treatment of severance compensation in the context of administrative expense claims permitted under 11 U.S.C. § 503(b)(1)(A) because the two statutes are materially different and section 503(b)(1)(A) does not use the word "earned" or specifically include "severance pay" as a form of wages, salaries, and commissions. Instead, § 503(b)(1)(A) requires a calculation of the value of "services rendered" in a period of time after a debtor files its bankruptcy petition. As a result, the Fourth Circuit remained of steadfast that under 11 U.S.C. § 507(a)(4), an employee "earns" the entirety of his or her severance compensation on the date that the employee becomes entitled to receive such compensation under the applicable severance compensation plan and affirmed the Bankruptcy Court.

Procedural context:

Pursuant to 28 U.S.C. § 158(d)(2)(A)(i), certified directly to Fourth Circuit from the United States Bankruptcy Court for the Eastern District of Virginia, at Richmond, Case No. 3:08-bk-35994, Kevin R. Huennekens, Bankruptcy Judge.

Facts:

In April 2004, LandAmerica Financial Group, Inc. established a "Severance Benefits Plan" (the plan), which stated a purpose "to assist eligible Employees upon termination" of employment.” Once employees became participants in the plan, they were entitled to receive compensation equal to their weekly salary for a certain number of weeks, which was calculated based upon an employee’s length of service. Within the last 180 days before LandAmerica filed its bankruptcy petition, LandAmerica terminated the employment of the claimants. It was not contested that the claimants became participants in the plan upon their termination. However, LandAmerica did not pay the claimants any amount of the severance compensation due. After LandAmerica filed its bankruptcy petition, the claimants filed proofs of claims against the bankruptcy estate for the severance compensation they were due under the terms of the plan. The claimants asserted that their severance claims were entitled to priority treatment up to the statutory maximum amount provided in 11 U.S.C. § 507(a) (4). The Trustee of the LandAmerica Financial Group, Inc. Liquidation Trust contended that the claimants "earned" severance compensation over the entire course of their employment and that, therefore, only the portion of those claims "earned" within the 180-day period before LandAmerica filed for bankruptcy was entitled to priority treatment under 11 U.S.C. § 507(a)(4). The Bankruptcy Court found that the severance claims were entitled to priority to the full extend allowable under Section 507(a) (4) and certified the appeal directly to the Fourth Circuit.

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