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IN RE UNISHOPS

August 2, 1976

In the Matter of UNISHOPS, INC., Debtor


The opinion of the court was delivered by: GRIESA

GRIESA, District Judge.

 This is an appeal from an order of Bankruptcy Judge Babitt allowing the $100,000 claim of Jerome Zelin as an expense of administration of the debtor in possession in a Chapter XI proceeding. The effect of this order is to give this claim priority under 11 U.S.C. § 104(a)(1), and to permit payment of the claim in full. The debtor in possession concedes the amount of the claim, but contends that it should be treated as a general claim. It appears that, as a general claim, payment of less than 50% would be made.

 The order of the Bankruptcy Judge is reversed. I hold that Zelin's claim is not entitled to priority.

 I.

 The source of the claim in question is a letter agreement dated March 19, 1973, between the debtor, Unishops, Inc., and Zelin. The agreement provided for severance pay in the event that Zelin's employment as "Chief Operating Officer" of Unishops should cease. It was agreed that, in the event Zelin's employment terminated for any reason other than death or voluntary resignation, Unishops would pay Zelin $50,000 per year for a period of two years, or a total of $100,000. It should be noted that this agreement did not deal with any subject relating to Zelin's employment other than severance pay.

 On November 30, 1973 Unishops filed a Chapter XI petition in this court. After the filing, Unishops, as debtor in possession, continued Zelin in its employ. On December 5, 1973 an application was made to Judge Babitt for approval of officers' compensation pursuant to Bankruptcy Rule XI-3 of this court. This rule provides:

 
"Rule XI-3 -- Compensation to Debtor
 
"No compensation shall be paid to the debtor, if an individual, or to the members of a copartnership, if a copartnership, or to an officer, stockholder or director of a corporation, if a corporation, from the time of the filing of the petition until confirmation of the arrangement unless a prior order of the court shall have been obtained approving the employment and fixing the compensation."

 Among the materials submitted on the application was a description of Zelin as Vice Chairman of the Board and Chief Operating Officer, and the duties performed by him. Approval was requested for payment of Zelin's salary in the amount of $100,000 per year. No request was made for approval of any severance pay. On December 7, 1973 Judge Babitt entered an order approving officers' salaries, including the $100,000 per year for Zelin. It appears that this was Zelin's salary prior to the filing of the Chapter XI petition. There was no reference in the order to severance pay.

 On or about July 16, 1974 the debtor in possession discharged Zelin. This resulted in Zelin's claim for $100,000 severance pay pursuant to the letter agreement of March 19, 1973.

 II.

 Judge Babitt, in holding that the $100,000 termination benefit should be classified as an administration expense, relied upon Straus-Duparquet, Inc. v. Local Union No. 3, 386 F.2d 649 (2d Cir. 1967). In that case, certain employees were discharged by a debtor in possession shortly after the filing of the Chapter XI petition. A union collective bargaining agreement, entered into prior to the filing of the Chapter XI petition, provided for severance pay. The Court of Appeals held that the severance pay was an administration expense, stating (386 F.2d at 651):

 
"Since severance pay is compensation for termination of employment and since the employment of these claimants was terminated as an incident of the administration of the bankrupt's estate, severance pay was an expense of administration and is entitled to priority as such an expense."

 Judge Babitt also held that Local Rule XI-3 did not require court approval of Zelin's severance pay, because such pay was not ...


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