Opinion
Case No. 02 B 13533 (AJG).
July 15, 2003.
DECISION AND ORDER DENYING REQUEST FOR ADMINISTRATIVE PRIORITY STATUS FOR CLAIMS BASED ON TRANSITION BONUS
On July 21, 2002 and November 8, 2002, WorldCom, Inc. and certain of its direct and indirect subsidiaries (collectively, the "Debtors") filed petitions under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The Debtors chapter 11 cases have been consolidated for procedural purposes only and are being jointly administered pursuant to orders, dated July 22, 2002 and November 8, 2002. The Debtors continue to operate their businesses as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The Debtors provide a broad range of communications services. Prior to the filing of the petitions, the Debtors determined to exit one aspect of such services — the wireless resale business. The Debtors deemed the assistance of certain employees necessary to the wind-down of the wireless business. To induce those employees to remain during the transition, the Debtors entered into individual letter agreements (the "Letter Agreements") with them pre-petition on June 7, 2002. Pursuant to the Letter Agreements, if any such employee remained an active employee in good standing until a transition date (either August 31, 2002 or December 31, 2002), and met certain performance objectives established at the outset of the term, that employee would be entitled to a transition or stay bonus (the "Transition Bonus"). The Debtors retained the right to lengthen or shorten the transition period as required by business conditions.
The Debtors provide a broad range of communications services. Prior to the filing of the petitions, the Debtors determined to exit one aspect of such services — the wireless resale business. The Debtors deemed the assistance of certain employees necessary to the wind-down of the wireless business. To induce those employees to remain during the transition, the Debtors entered into individual letter agreements (the "Letter Agreements") with them pre-petition on June 7, 2002. Pursuant to the Letter Agreements, if any such employee remained an active employee in good standing until a transition date (either August 31, 2002 or December 31, 2002), and met certain performance objectives established at the outset of the term, that employee would be entitled to a transition or stay bonus (the "Transition Bonus"). The Debtors retained the right to lengthen or shorten the transition period as required by business conditions.
As a result of the filing of the chapter 11 petitions, the Debtors accelerated the wind-down of the wireless business. The Debtors contend that by the time the Debtors filed their petitions, most of the business and stores related to the wireless business had been either closed or sold. Consequently, the Debtors determined that the wind-down of the wireless business was not critical to the reorganization efforts and the payment of Transition Bonuses would not benefit the estate. The Debtors assert that based upon this assessment, they did not seek to assume the Letter Agreements. Rather, on September 10, 2003, the Debtors sent the employees who were parties to the Letter Agreements a memorandum indicating that the Debtors were unable to proceed with the Transition Bonus program and that the Debtors had determined to reject the Letter Agreements. In the memorandum, the Debtors released the employees from any obligation to remain as employees through the originally agreed upon transition dates. The employees were, however, offered the option of remaining employees of the Debtor and qualifying for continued receipt of salary and for severance benefits, in accordance with the Debtors' severance plan, upon termination of their employment. Certain of those individuals who opted to remain employed by the Debtors and whose employment was subsequently terminated accepted severance benefits and in conjunction therewith executed a General Release Agreement. Those employees signatory to a General Release Agreement agreed that in consideration for the severance payment, the employee released the Debtors from claims of any nature related to that individual's employment or the cessation of its employment with the Debtors.
On February 4, 2003, certain of the employees (the "Transition Employees") who were party to a Letter Agreement filed a motion (the "Transition Bonus Motion") to compel payment of their Transition Bonus as an administrative expense. On February 10, 2003, the Debtors filed a motion (the "Rejection Motion") seeking to reject certain executory contracts, including the Letter Agreements with the majority of the Transition Employees. On February 19, 2003, the Transition Employees filed an objection (the "Rejection Objection") to the Rejection Motion arguing that it was untimely as all the services required of the employees under the Letter Agreements to entitle them to payment of the Transition Bonus were performed prior to December 31, 2002. In addition, several other employees, who were each a party to a Letter Agreement, filed an individual objection to the Rejection Motion. On February 27, 2003, the Debtors filed an objection (the "Transition Bonus Objection") to the Transition Bonus Motion, which included a response to the Rejection Objection and the objections of the individual employees. On February 27, 2003, the Official Committee of Unsecured Creditors filed a Joinder to the Debtors' Transition Bonus Objection. On March 4, 2003, a hearing (the "Hearing") was conducted before the Court concerning this matter.
The Transition Employees contend that they are entitled to an administrative expense priority for the payment due them for the Transition Bonus. The Transition Employees argue that although the Letter Agreements were entered into pre-petition, the employees provided services pursuant to those Letter Agreements, post-petition, thereby entitling their claims to priority status. In support of their position, the Transition Employees cite to cases in this Circuit concerning severance benefits. The Debtors argue that the Termination Bonus program does not qualify as a severance benefit under applicable case law. The Debtors further argue that the Transition Employees do not qualify for administrative priority for their claim based on an analysis under 11 U.S.C. § 503(b)(1)(A). The Debtors contend that because the wind-down of the wireless business was accelerated and almost concluded pre-petition and was not deemed critical to the reorganization effort, the debtors-in-possession did not induce any post-petition services by the Transition Employees in that regard as any such services would have provided no benefit to the estates. The Debtors further contend that because the Transition Employees continued to receive their regular wages for the term they were employed post-petition and were also afforded the opportunity to avail themselves of the Debtors' severance plan, the Transition Employees were adequately compensated for any benefit their employment provided to the estate, post-petition. The Debtors further argue that the Transition Employees are not claiming that they were inadequately compensated for their post-petition work for the Debtors. Rather, the Debtors assert that the Transition Employees' claim is that the pre-petition Letter Agreements, which were not assumed, entitle them to more compensation.
Some of the employees who filed individual objections to the Rejection Motion adopted the arguments of the Transition Employees. Therefore, where relevant, references to the Transition Employees include the individual employees who filed those objections.
DISCUSSION
Section 365(a) of the Bankruptcy Code provides, in relevant part, that "the trustee, subject to the court's approval, may assume or reject any executory contract . . . of the debtor." Pursuant to 11 U.S.C. § 365(d)(2), a debtor-in-possession in a chapter 11 case is afforded substantial latitude in deciding whether to assume or reject an executory contract as it has until a reorganization plan is confirmed to make that decision. NLRB v. Bildisco Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984). However, the breathing space afforded to the debtor for the assumption or rejection of executory contracts is not without limits. Under § 365(d)(2), any party to an executory contract may request that the court fix a time within which the debtor must assume or reject an executory contract. In re Enron Corp., 279 B.R. 695, 702 (Bankr. S.D.N.Y. 2002).
In a chapter 11 case, pursuant to 11 U.S.C. § 1107, a debtor-in-possession, subject to certain exceptions, has the rights and powers, and performs the duties and functions, of a trustee.
At issue in the Bildisco decision was a collective bargaining agreement. Although the Code was amended in response to the Bildisco decision to provide special treatment for collective bargaining agreements, Bankruptcy Amendments and Federal Judgeship Act of 1984, sec. 541, § 1113, Pub.L. No. 98-353, 98 Stat. 333, the discussion in the Bildisco decision concerning general principles of executory contract law is still applicable to garden variety executory contracts. In re FBI Distribution Corp., 330 F.3d 36, 44 (1st Cir. 2003). Moreover, because under the Code, no special treatment is accorded to pre-petition employment contracts, they are subject to the general principles delineated in the Bildisco decision. Id.
If a debtor-in-possession elects to assume an executory contract, it assumes the contract subject to its existing burdens and charges. Bildisco, 465 U.S. at 531-32, 104 S.Ct. 1199. While, ordinarily, a debtor's post-petition breach of a pre-petition contract is treated as a pre-petition claim, In re Chateaugay, 102 B.R. 335, 351 (Bankr. S.D.N.Y. 1992), assumption of a pre-petition executory contract elevates the claim to the status of an administrative expense requiring payment in full. In re Crystal, 220 B.R. at 834. As assumption of a pre-petition contract subjects the estate to the contract's burdens, court approval is required prior to its assumption. In re FBI Distribution Corp., 330 F.3d 36, 45 (1st Cir. 2003), Child World, 147 B.R. at 852. This requirement affords notice and an opportunity to object to such assumption by unsecured creditors whose claims may be adversely impacted by the assumption of the contractual obligations by the estate. FBI Distribution, 330 F.3d at 45, Child World, 147 B.R. at 852.
Pursuant to 11 U.S.C. § 365(g)(1), the rejection of an executory contract that has not been previously assumed constitutes a breach of the contract and a claim based on that breach relates back to the date immediately preceding the filing of the bankruptcy petition. Bildisco, 465 U.S. at 530, 104 S.Ct. 1198. The rejection of a contract by a debtor-in-possession actually represents its decision not to have the estate assume the contract. Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding "Rejection," 59 U.COLO. L.REV. 845, 848 (1988). Thus, the estate does not have the obligation to perform under the contract. In re The Drexel Burnham Lambert Group, 138 B.R. 687, 703 (Bkrtcy. S.D.N.Y. 1992). The rejection of a contract, however, does not mean that the contract is rescinded or that its obligations disappear. Id., Child World, 147 B.R. at 852. Rather, the damages resulting from the rejection of an executory contract are treated as pre-petition general unsecured claims that are administered through the bankruptcy case. Bildisco, 465 U.S. at 531, 104 S.Ct. at 1199, citing, 11 U.S.C. § 502(g), 507.
Subsection 365(g)(1) of Title 11 provides, in relevant part:
(g) . . . the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease —
(1) if such contract or lease has not been assumed under this section or under a plan confirmed under chapter 9, 11, or 13 of this title, immediately before the date of the filing of the petition.
During the post-petition period, pending a debtor's determination on whether to assume or reject an executory contract, "the express provisions of the Bankruptcy Code and . . . the Code's overall effort to give a debtor-in-possession some flexibility and breathing space" preclude attempts by a non-debtor counter-party to a contract to enforce its terms. Bildisco, 465 U.S. at 532, 104 S.Ct. 1199, citing, See H.R. Rep. No. 95-595, p. 340 (1977). Although the contract is not immediately enforceable, if the debtor-in-possession elects to continue to receive benefits from the other party during this period, "the debtor-in-possession is obligated to pay for the reasonable value of those services which, depending on the circumstances of a particular contract, may be what is specified in the contract." Bildisco, 465 U.S. at 531, 104 S.Ct. 1199 (citations omitted). The entitlement to a priority "is an equitable right based upon the reasonable value of the benefits conferred, rather than upon the contract price." In re Hooker Investments, Inc., 145 B.R. 138, 145 (Bankr. S.D.N.Y.2d Cir. 1960), quoting, American Anthracite Bituminous Coal Corp. v. Leonard Arrivabene, 280 F.2d 119, 124 (2d Cir. 1960) (internal quotation omitted). A debtor's decision to elect to receive benefits under a contract post-petition, however, does not translate into an obligation to assume the contract because a debtor cannot assume a contract by implication. See FBI Distribution Corp., 330 F.3d at 45 (noting that an executory contract cannot be assumed by the unilateral acts of the debtor-in-possession). The assumption of a contract cannot be implied because notice to creditors and court approval is specifically required before contractual burdens can be imposed on an estate. Child World, 147 B.R. at 852. In the absence of assumption of a contract, a claim can only be based on quantum meruit. Hooker, 145 B.R. at 149-51.
The Transition Employees argue that the Letter Agreements cannot be rejected because the Letter Agreements had terminated by their own terms prior to the Debtor's motion to reject them and, therefore, they were not executory contracts subject to rejection pursuant to 11 U.S.C. § 365(a). The Debtors argue that the time to determine whether a contract is executory is at the petition date. The Debtors further argue that even if the contracts cannot now be rejected, the Transition Employees only have pre-petition claims because the contracts were not assumed.
Section 365(a) of the Bankruptcy Code concerns the assumption or rejection of an "executory" contract. Where a contract expires post-petition by its own terms prior to a debtor filing a motion to assume or reject such contract, it is no longer executory and not amenable to assumption or rejection, pursuant to 11 U.S.C. § 365(a). Thus, courts consider whether the contract is executory on the date the motion is filed or heard. In re Riodizio, 204 B.R. 417, 421 (Bankr. S.D.N.Y. 1997). See also, Gloria Manufacturing Corp. v. International Ladies Garment Workers' Union, 734 F.2d 1020, 1022 (4th Cir. 1984) (finding that if a contract expires prior to date the trustee obtains court approval for its rejection, the issue is moot). If no contract is extant, there is nothing to assume or reject. Thus, in the instant case, the Debtors' motion to reject the Letter Agreements is moot. Nevertheless, because the Letter Agreements were not assumed and because assumption cannot be implied, the claims based on the post-petition breach of the pre-petition Letter Agreements remain general unsecured claims unless the Transition Employees can establish that performance under the Letter Agreements was induced by the debtor-in-possession and that there was some discernible benefit to the estate derived from the post-petition performance under the Letter Agreements which entitle the claims to an administrative expense priority pursuant to 11 U.S.C. § 503(b)(1)(A).
Applying a "functional" approach, certain courts have held that the overriding consideration for assumption or rejection of a contract is benefit to the estate and, therefore, have found that, despite the inclusion of the term "executory" in section 365(a), assumption or rejection of a contract is proper without regard to whether it is executory. See Drexel Burnham Lambert, 138 B.R. 617 (Bankr. S.D.N.Y. 1991). The Transition Employees have requested that the Court sanction the Debtors for having filed a motion to reject a contract that was no longer executory. However, the acceptance of the "functional" approach by certain courts in this circuit provides a basis upon which to deny the Transition Employees' sanction request.
Section 503(b)(1)(A) of the Bankruptcy Code provides a priority for "the actual, necessary costs and expenses of preserving the estate . . . for services rendered after the commencement of the case." Pursuant to section 507(a)(1) of the Bankruptcy Code, these expenses for administering the estate are afforded a first priority. Thus, expenses the debtor-in possession incurs during the reorganization effort are afforded a first priority. In re Jartran, Inc., 732 F.2d 584 (7th Cir. 1984).
This priority is based on the premise that the operation of the business by a debtor-in possession benefits pre-petition creditors; therefore, any claims that result from that operation are entitled to payment prior to payment to "creditors for whose benefit the continued operation of the business was allowed." Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950, 954 (1st Cir. 1976). While Mammoth Mart was decided under the former Bankruptcy Act, its analysis is applicable under the Bankruptcy Code. In re Drexel Burnham Lambert Group Inc., 134 B.R. 482, 489 (Bankr. S.D.N.Y. 1991).
Administrative expenses are afforded this priority to facilitate the reorganization effort by encouraging third-parties, who might be reluctant to deal with a debtor-in-possession, to transact such business. Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d Cir. 1986) citing, Mammoth Mart, 536 F.2d at 954. Otherwise, absent this incentive, the third-parties would refrain from dealing with the debtor-in-possession thereby inhibiting the reorganization effort and harming pre-petition creditors. Id.
Nevertheless, in light of the bankruptcy goal of providing equal distribution of a debtor's assets to all creditors, priorities are narrowly construed. Amalgamated Ins. Fund, 789 F.2d at 100. Strictly construing the terms "actual" and "necessary" minimizes administrative expense claims thereby preserving the estate to benefit all creditors. Drexel, 134 B.R. at 488. If claims not intended to have priority are afforded such, the value of the priority for those creditors Congress intended to prefer would be diluted. Mammoth Mart, 536 F.2d at 953. It is important to note that once a debtor is in bankruptcy, an ordinary contract action between that debtor and a counter-party to the contract becomes a contest among the debtor's creditors to share in the distribution of the debtor's assets. General American Transportation Corp. v. Martin (In re Mid Region Petroleum, Inc.), 1 F.3d 1130, 1133 (10th Cir. 1993). Any priority given to one creditor is done to the detriment of other creditors. Enron Corp., 279 B.R. at 705; In re Patient Education Media, Inc., 221 B.R. 97, 101 (Bankr. S.D.N.Y. 1998). The focus on allowance of a priority is to prevent unjust enrichment of the estate, not to compensate the creditor for its loss. In re Enron Corp., 279 B.R. 79, 85 (Bankr. S.D.N.Y. 1992); In re R.H. Macy Co., Inc., 170 B.R. 69, 78 (Bankr. S.D.N.Y. 1994). Thus, a court looks to the actual benefit to the estate not the loss sustained by a creditor. In re CIS Corp., 142 B.R. 640, 642 (S.D.N.Y. 1992). The claimant has the burden of establishing entitlement to the priority. Enron Corp., 79 B.R. at 85; Drexel, 134 B.R. at 489.
An expense will be accorded administrative status
1) if it arises out of a transaction between the creditor and the bankrupt's trustee or debtor-in-possession; and
2) only to the extent that the consideration supporting the claimant's right to payment was both supplied to and beneficial to the debtor-in-possession in the operation of the business.
Amalgamated Ins. Fund, 789 F.2d at 101; Mammoth Mart, 536 F.2d 954.
The services performed by the claimant must have been "induced" by the debtor-in-possession, not the pre-petition debtor. Jartran, Inc., 732 F.2d 587, citing, Mammoth Mart, 536 F.2d at 587. Considering inducement by the debtor-in-possession to be a crucial element comports with the policy reason for allowing the priority, which is to encourage third-parties to supply the debtor-in-possession with goods and services with the goal of achieving a reorganization to benefit all creditors. Jartran Inc., 732 F.2d at 588, 590. Thus, benefit to the debtor-in-possession alone is not sufficient to warrant entitlement to an administrative expense priority as it would be contrary to this policy reason for allowing the priority. Jartran, Inc., 732 F.2d at 590.
Where a "debtor-in-possession elects to continue to receive benefits from the other party to an executory contract pending a decision to assume or reject the contract, the debtor-in-possession is obligated to pay for the reasonable value of those services." Patient Education Media, 221 B.R. at 101, quoting, NLRB v. Bildisco Bildisco, 465 U.S. 513, 531, 104 S.Ct. 1188, 1199, 79 L.Ed.2d 482 (1984); see also In re Continental Airlines, Inc., 146 B.R. 520 (Bankr. D.Del. 1992). Thus, the claims of third-parties who are induced to supply goods or services to a debtor-in-possession pursuant to a contract that has not been rejected are afforded administrative priority to the extent that the consideration supporting the claim was supplied during the reorganization. In re Jartran, Inc., 732 F.2d 534, 588 (7th Cir. 1984).
A debtor must derive a benefit under a contract in order for a claim based on the contract to be accorded administrative expense priority. In re R.H. Macy Co., Inc., 170 B.R. 69, 77-78 (Bankr. S.D.N.Y. 1994). The benefit must run to the debtor-in-possession. Continental Airlines, 146 B.R. at 526. If the consideration was supplied pre-petition, the claim is not entitled to administrative priority even where the right to payment arises post-petition. Jartran, Inc., 732 F.2d 587.
The inclusion of the words "actual" and "necessary" in section 503(b)(1)(A) requires that the estate receive a "real benefit from the transaction." Drexel, 134 B.R. at 488. A potential benefit is not sufficient. Id. An option or potential to benefit does not equal benefit to the estate. Macy, 170 B.R. at 78. A claim based on a mere potential for benefit to the estate premised on a contingency is not entitled to priority as there must be actual value received by the estate. In re Kessler, 23 B.R. 722, 724 (Bankr. S.D.N.Y. 1982), aff'd, Amalgamated Ins. Fund v. Kessler, 55 B.R. 735. Although the Bankruptcy Code affords a debtor time to deliberate and consider whether to assume or reject a contract, that opportunity, though advantageous is not the type of benefit that warrants elevation of the claim to administrative priority. Enron Corp., 279 B.R. at 706; Mid Region Petroleum, 1 F.3d at 1133.
The Transition Employees claim entitlement to an administrative claim priority pursuant to Strauss-DuParquat Inc. v. Local Union No. 3 Int'l Brotherhood of Elec. Workers (In re Strauss-DuParquat Inc.), 386 F.2d 649 (2d Cir. 1967), because they contend that their claim is for a severance payment. In Strauss-DuParquat, the Second Circuit found that an employee's severance payment based on a pre-petition contract was entitled to administrative expense priority as it compensated the employee for termination of employment which occurred post-petition. Id. at 651. The Second Circuit defined severance pay as
a form of compensation for the termination of the employment relation, for reasons other than the displaced employees' misconduct, primarily to alleviate the consequent need for economic readjustment but also to recompense him for certain losses attributable to the dismissal.
As Straus-DuParquat was decided under the former Bankruptcy Act, the continued viability of that decision was questioned by the Hooker Investments court based on the statutory distinctions between the Bankruptcy Code which superceded the Bankruptcy Act and based on subsequent rulings by other courts. In re Hooker Investments, Inc., 145 B.R. 138, 146-47 (Bankr. S.D.N.Y. 1992). Nevertheless, even when adhering to the Straus-DuParquat principle that severance pay that becomes payable post-petition is entitled to administrative priority, the courts in this circuit have narrowly construed what constitutes a severance claim. In re Hooker Investments, Corp., 145 B.R. at 149; In re Jamesway, 199 B.R, 821, 840 (Bankr. S.D.N.Y. 1995).
Courts first consider the policy objectives of affording employees severance pay which are:
1) to protect employees for economic hardship of joblessness; and
2) to reward employees for past service to the company.
Hooker Investments, 145 B.R. at 149, citing, Bradwell v. GAF Corp., 954 F.2d 798, 801 (2d. Cir. 1992); In re Jamesway, 199 B.R, at 840. A payment is not considered severance where the consideration for the payment is the employees pre-petition commitment to stay. Hooker Investments, 145 B.R. at 149.
Severance pay is compensation for termination of employment and is usually directly related to the length of past service provided by the employee to the company. Bradwell v. GAF Corp., 954 F.2d 798, 801 S.D.N.Y. 1992); Jamesway, 199 B.R. at 840. Typically, employees with a longer period of past service receive a greater amount. In re Crystal Apparel, Inc., 220 B.R. 816, 836 (Bankr. S.D.N.Y. 1998).
In support of their position that their claims are entitled to administrative priority as a severance payment, the Transition Employees cite to In re Spectrum Information Technologies, Inc., 193 B.R. 400, 402 (Bankr. E.D.N.Y. 1996). In Spectrum, the court disagreed with the analysis of the court in Hooker Investments concerning the Second Circuit having distanced itself from the strict holding of Straus-DuParquat after the enactment of the Bankruptcy Code and other subsequent judicial decisions in this area. Similar to the In re Ralph Lauren Womenswear, Inc., 197 B.R. 771, 775-76 (Bankr. S.D.N.Y. 1996) court, this Court finds the analysis in the Hooker Investments case more persuasive, and also does not have to address this issue because even under the analysis set forth in the Spectrum case, the payments in issue before this Court would not be considered severance payments. The Spectrum court acknowledged that severance pay is compensation for the event of termination. Spectrum, 193 B.R. at 407. In the instant case, the Transition Bonus was payable whether or not the employment was terminated as evidenced by the fact that certain of the employees seeking payment under the Transition Bonus program currently remain employed by the Debtors.
This length of service connection distinguishes severance pay from the type of Transition Bonus present here which is not related to the employees past service to WorldCom. Rather, at the time of offering a stay bonus, a company looks into the future and to the value it expects the employee will bring to the company over a specific period of time. Thus, unlike a severance payment which is tied to the employees past service, a stay bonus is keyed to the value to the business of having a particular employee remain for the scheduled time frame. The stay bonus is offered as an inducement for the employee to forego other employment opportunities. The consideration given by the employee is the commitment to stay for a specific period in exchange for the bonus. The benefit to the employer is the added value for the services of the employee, who may be a key employee, for a limited period of time, often because hiring new employees would be difficult. In contrast to a severance payment which is triggered by an employer's unilateral action, a stay bonus usually is due on a date certain. At the time the Debtors entered into the Letter Agreements with the Transition Employee, the Debtors viewed a protracted wind-down of the wireless business as beneficial to their overall business strategy for the enterprise. Upon determining to file for bankruptcy protection, however, the Debtors did not consider the protracted wind-down critical to the reorganization effort and they accelerated the wind-down process which then was substantially concluded pre-petition.
Moreover, here the Transition Bonus does not have any of the characteristics of a severance payment. The Transition Bonus was not intended to compensate the employee for the economic hardship of joblessness as even those who were to remain employed by the Debtors after the transition date were entitled to receive it. Nor was the Transition Bonus meant to compensate the employee for past service. Rather, the Transition Bonus was intended as compensation to the employee for the value the particular employee would supply to the business in the wind-down of the wireless business. Thus, the payment in issue is not a severance payment under Straus-DuParquat and its progeny which treat "severance" as a term of art in their decisions in this area. See Crystal, 220 B.R. at 836.
The consideration for the agreement to pay the Transition Bonus was the employees' pre-petition commitment to stay until the transition date. Any claim arising from the breach of that pre-petition agreement is a pre-petition claim even though the right to payment came due post-petition and was contingent on the employee remaining with the Debtor. Thus, absent a showing that the claim is entitled to an administrative expense priority pursuant to 11 U.S.C. § 503(b)(1)(A), the right to receipt of the Transition Bonus only entitles a claimant to a pre-petition general unsecured claim.
The initial element for entitlement to administrative priority is that the debtor-in-possession induced the counter-party's performance. The September 10, 2002 memorandum that the debtors-in-possession sent to the Transition Employees informed them that they would not honor the Transition Bonus program and that the Transition Employees could either elect to terminate their employment or remain employed, in the latter case, continuing to receive their weekly salary and an opportunity to qualify for severance benefits upon termination. Thus, it is apparent that after September 10, 2002, any performance by the Transition Employees under the Letter Agreements was not induced by the debtors-in-possession and any such performance would not qualify for an administrative expense priority. Moreover, in the period from the July 21, 2002 filing date to September 10, 2002, there is no indication that the debtors-in-possession did anything affirmatively to induce the Transition Employees to perform under the Letter Agreements. Rather, the Debtors maintain that they did not require the Transition Employees' services for the wind-down of the wireless business as that project had been substantially concluded pre-petition. The Debtors contend that whatever benefit they initially thought the business would derive from the more protracted wind-down of the wireless business was not deemed critical to the reorganizing enterprise once it was determined they would file for bankruptcy protection. The Debtors assert that was the reason they did not move to assume the Letter Agreements. As previously discussed, pursuant to the Bankruptcy Code, the Debtors are afforded considerable latitude to determine whether to assume or reject a pre-petition contract, and assumption of contractual obligations cannot be implied. This is a large, complex bankruptcy case involving thousands of contracts. Allowing the Debtors' silence concerning a contract to result in the equivalent of its assumption would be contrary to the purpose of affording debtors breathing room to make a reasoned determination concerning the value of assuming contracts. The counter-party to any such contract may protect its interests by filing a motion, pursuant to 11 U.S.C. § 365(d)(2), to compel a debtor to make a determination on that issue. The Transition Employees have not met their burden to establish that, post-petition, the Debtors induced performance under the Letter Agreements.
Moreover, the Transition Employees have not met their burden to establish the second element for an administrative expense priority — that they conferred a benefit upon the estate with respect to performance under the Letter Agreements. The Transition Employees acknowledge that they continued to receive their salaries during the post-petition period that they were employed by the Debtors. Further, those employees that were terminated, and who qualified under the Debtors' severance plan, received severance pay. The Transition Employees do not claim that they were inadequately compensated for their post-petition services for the Debtors. Rather, they claim that the pre-petition Letter Agreements entitle them to more compensation despite the fact that the Letter Agreements were not assumed.
The Debtors maintain that because the wind-down of the wireless business was accelerated and virtually concluded pre-petition, the Transition Employees did not confer any benefit upon the estate in this regard post-petition. As previously noted, the Debtors contend that whatever value they formerly saw in taking time to wind-down the wireless business, they subsequently concluded was no longer beneficial once they made the decision to file for reorganization. Rather, the Debtors assert that they determined to accelerate the process and that it was almost concluded on the date the Debtors filed their petitions. As most of the wind-down occurred pre-petition, most of the benefit was conferred pre-petition. While this allows for the possibility that some benefit was conferred on the estates post-petition, the Transition Employees and individual objectors have not met their burden to establish that they conferred a benefit on the estates. With the exception of two individuals, none of the other Transition Employees detail any way in which they allege that they conferred a benefit on the estates. The two individuals argue that they assisted the Debtors in attaining a positive cash flow. However, this assertion relates to the entire period, including the pre-petition period and the employees have not established that their contribution related to the post-petition period or the reasonable value of that service. Whatever contribution there was to the wind-down attributable to the post-petition period, beyond the routine collection of receivables or sale of the remaining assets, would be of dubious benefit to the debtors-in-possession as the enhancement the Debtors originally sought from a smooth transition out of the wireless business, and for which they entered into the Letter Agreements, was no longer deemed necessary. As the one claiming an administrative expense priority has the burden of proof on the issue, the Transition Employees have not established benefit to the estates or entitlement to the priority for the Transition Bonus claims.
Finally, in any event, each Transition Employee and individual objector who in consideration for the receipt of a severance payment signed a General Release Agreement released the Debtors from claims of any nature related to that individual's employment or the cessation of its employment with the Debtors. The General Release Agreement provides that it is to be construed under Georgia law under which the plain and unambiguous terms of a release provision controls. Darby v. Mathis 441 S.E.2d 905 (Ga.App. 1994). Paragraph d of the General Release Agreement provides, in relevant part that:
Employee agrees to release and forever discharge [the Debtors] from any and all claims, demands, causes of action, damages or liability (hereafter collectively referred to as "claims") of any nature whatsoever, known or unknown, which Employee has or may have and which arise out of, concern or relate in any way to his/her employment or the cessation of employment with [the Debtors] prior to the date of this [General Release] Agreement. . . . (emphasis added).
The General Release Agreement further provides that the signing employee "agrees to refrain from bringing, prosecuting or arbitrating any claim, demand or cause of action, either at law or in equity, against the Company as the result of any act or omission by the Company occurring up to and including the date of employee's execution of this [General Release] Agreement." Thus, the plain and unambiguous language of the release provision bars those employees who executed a General Release Agreement from pursuing claims under the Letter Agreements. With respect to the Transition Employees and other individual objectors who did not execute General Release Agreements, not having proven the elements to establish entitlement, pursuant to 11 U.S.C. § 503(b)(1)(A), to an administrative expense priority, their claims based on the Letter Agreements are pre-petition, general unsecured claims.
CONCLUSION
Those Transition Employees and individual objectors who signed a General Release Agreement are barred from pursuing any cause of action against the Debtors related to their employment, including an action under the Letter Agreements.
With respect to the remaining employees, the right to payment under the Termination Bonus program does not constitute a severance payment. Therefore, the Transition Employees are not entitled to an administrative expense priority for these bonuses under the Sraus-DuParquat line of cases.
Further, the Transition Employees have not established the elements for an administrative expense priority under 11 U.S.C. § 503(b)(1)(A) in that they have not met their burden to show that, post-petition, either (a) the debtor-in-possession induced their performance to assist in the wind-down of the wireless business, or (b) that any performance by them under the Letter Agreements benefitted the estates.
In those instances where the Transition Employee or individual objector did not execute a General Release Agreement, any claim they have arising from their respective Letter Agreements are pre-petition, general unsecured claims.
Based upon the foregoing, it is hereby
Ordered, that the Motion is denied; and it is further
Ordered, that the Transition Employees' request to impose sanctions on the Debtors is denied; and it is further
Ordered, that the Transition Employees and individual objectors who signed a General Release Agreement are barred from pursuing any claim against the Debtors related to that employees' employment or cessation of employment with the Debtors; and it is further
Ordered, that the claims based on the Letter Agreements of the remaining Transition Employees and individual objectors are pre-petition, general unsecured claims.