In an 8 page decision dated October 19, 2016, Judge Carey of the Delaware Bankruptcy Court overruled an objection to the reclassification of the claim of a terminated employee. Judge Carey’s opinion is available here (the “Opinion”). This employee (“Mangan”) was a fifteen year veteran of the Debtor, and was entitled to 15 weeks of severance pay upon termination. That is not in dispute.
Also admitted is that Mangan was terminated on August 1, 2014, the Debtors filed for bankruptcy on September 9, 2014, and the Debtors’ employees and representative obtained continued assistance from Mangan in running the business through October 16, 2016. Finally, $8,693.70 remains unpaid to Mangan. Opinion at *3.
Judge Carey’s Opinion
Judge Carey started his discussion of applicable law by discussing section 507(a)(4) of the Bankruptcy Code, which provides that priority status would be granted for severance earned by an individual within 180 days of the bankruptcy petition. Opinion at *4.
This begins the real analysis, which has resulted in a split among bankruptcy courts: when does an employee “earn” a severance payment. Some courts have held that severance pay, like vacation pay, is earned over the course of employment. Opinion at *5. However, Judge Carey has already ruled upon this issue, and in citing his prior In re Garden Ridge Corp. opinion, shows that he has not changed his mind. In that case, as in this one, he held that an employee’s “right to receive severance payments was earned no earlier than upon termination of employment.” Opinion at *5.
Judge Carey refers to a number of cases on this issue in a variety of jurisdictions, so even for those of you who are not Delaware practitioners, it is worth a read. Footnotes 19 and 22 are the footnotes of interest for those who want a quick overview of some other courts’ holdings on this issue.
At the end of the day, I can see how both arguments are persuasive. Without both having worked a number of years and having been fired, there would be no severance payment. However, I don’t think we will ever see a decision on this issue on appeal because the amounts involved are just too small; 507(a)(4) caps the priority amount at $12,850. An appeal to district court would almost certainly cost the estate far more than this limited cap. And at the end of the day, an estate’s fiduciaries are charged with maximizing the recovery to unsecured creditors, not minimizing priority claims.