Fourth Circuit Affirms Bankruptcy Court Finding that LandAmerica Employees' Severance Benefit Plan Claims Entitled to Priority Under Bankruptcy Code Section 507(a)(4)

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In an opinion dated July 6, 2011 (a copy of the opinion is available on our blog: http://blog.ch11cases.com/2011/07/fourth-circuit-affirms-bankruptcy-court.html), the Fourth Circuit Court of Appeals affirmed a decision of Bankruptcy Judge Kevin R. Huennekens of the United States Bankruptcy Court for the Eastern District of Virginia. In the opinion (captioned Bruce H. Matson, Trustee of the LandAmerica Financial Group, Incorporated Liquidated [sic] Trust vs. Alarcon et al.), the Fourth Circuit determined that Judge Huennekens was correct in finding that the claims of 125 former employees of LandAmerica Financial Group for unpaid benefits due pursuant to a Severance Benefits Plan were earned on the date that the employees had their employment terminated and, therefore, the entire amount of the severance benefits were entitled to priority pursuant to section 507(a)(4) of the Bankruptcy Code (up to the statutory cap).

LandAmerica established the Severance Benefits Plan in 2004. Employees were eligible to participate in the plan when:

1. the employee was terminated without cause;

2. the employee signed a severance agreement and release; and

3. certain other circumstances were not present, such as the employee was rehired within 30 days of termination, the employee was offered an "equal" position with LandAmerica within a 50-mile radius, or the termination action was due to the employee’s death or resignation.

Once an employee became a participant in the plan, the employee was entitled to receive a severance benefit, the amount of which was determined based upon the employee's length of service and salary. Severance benefits were to be paid in either a lump sum or in monthly installments, and the board of directors of LandAmerica retained the "unilateral right to 'modify, alter, or amend the Plan, in whole or in part,' or to eliminate the plan entirely."

The 125 employees whose claims were at issue in the present case were all terminated by LandAmerica between August and November 2008 (i.e., within the last 180 days before LandAmerica filed its bankruptcy petition) and all other conditions for the employees to become participants in the Severance Benefits Plan were met. LandAmerica did not, however, pay any severance benefits owing under the plan to any of the employees prior to the bankruptcy filing (or after). After the chapter 11 filing, the employees filed proofs of claim asserting claims for their severance plan benefits and that those amounts were entitled to priority pursuant to section 507(a)(4) of the Bankruptcy Code.

The Trustee of the LandAmerica Financial Group, Inc. Liquidation Trust did not object to the amounts of the employees' claims, but did object to the assertion that the claims were entitled to priority for the full amount. Rather, the Trustee argued 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 (the pre-petition period) was entitled to priority treatment under 11 U.S.C. § 507(a)(4)." To determine the amount of the severance compensation "earned" during the pre-petition period, the Trustee proposed "a formula that computed an employee’s daily rate of severance compensation."

The bankruptcy court rejected the Trustee's position and held that the entire severance benefit amount was "earned" when the employee was terminated and became eligible to participate in the plan. The Fourth Circuit applied a de novo standard in reviewing the bankruptcy court's determination. In considering the meaning of the meaning of the word "earned," as it appears in 11 U.S.C. § 507(a)(4), the Fourth Circuit stated that it "presents an issue of first impression in this Court." The court also noted that the term "severance pay" is also undefined in the statute.

The court then noted that the purpose of severance compensation is "to 'alleviate the consequent need for economic readjustment' and 'to recompense [the employee] for certain losses attributable to the dismissal.'" (quoting Straus-Duparquet, Inc. v. Local Union No. 3, Int’l B’hood of Elec. Workers, 386 F.2d 649, 651 (2d Cir. 1967)). Because "the triggering events allowing employees to receive 'severance pay' lie within the employer’s control and its decision both to provide severance compensation and to terminate the employment relationship," the court determined that "employees do not 'earn' 'severance pay' in exchange for services rendered as they do when they 'earn' wages, salaries, and commissions." Instead, the court held that the appropriate definition for the word "earn" as it relates to severance compensation is "to come to be duly worthy of or entitled" (quoting Webster’s Third New International Dictionary 714 (2002)).

Read more below or on our blog.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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