The opinion of the court was delivered by: DUFFY
This is an appeal from an order of the Honorable John J. Galgay, Bankruptcy Judge, entered June 22, 1978, concerning the treatment and disposition of certain claims filed against the bankrupt estate of the W. T. Grant Company (hereinafter referred to as "Grant"). In particular, the order addresses the claims of former Grant employees who qualified for severance benefits and who continued to work for Grant during its unsuccessful attempt at an arrangement under Chapter XI of the Bankruptcy Act (hereinafter sometimes referred to as the "Act"). Judge Galgay directed that these claims be treated as a cost and expense of the unsuccessful Chapter XI proceeding and, pursuant to Section 64(a)(1) of the Act, entitled to full payment as a first priority. The appellants, Charles G. Rodman as Trustee of Grant's estate (hereinafter referred as the "Trustee"), and Morgan Guaranty Trust Company of New York on behalf of itself and as agent for other bank claimants, object to this priority treatment and have filed the instant appeal.
On October 2, 1975, Grant filed a petition for an arrangement under Chapter XI of the Act. Thereafter, by order of the Bankruptcy Court dated April 13, 1976, Grant was adjudicated a bankrupt.
Prior to the Chapter XI proceeding Grant was the operator and manager of over 1,000 retail outlets. In order to induce individuals to accept employment with Grant, it offered potential employees a wage and compensation package which included the receipt of severance pay benefits. The severance pay benefit plans for Grant employees are set forth in the Grant Store Manual, New York Office Supervisor's Personnel Manual, District Manager's Guide to Termination Policy and Procedure and approximately 53 Collective Bargaining Agreements between Grant and various union representatives. See Trustee's Exhibits 1A, 3, 7 and 12A; Retail Clerks International Association's (hereinafter referred to as "RCIA") Exhibit A. Despite minor variations the agreements generally provide that a worker who meets a minimum "length of service" requirement (generally one year) is, upon termination, entitled to a severance payment. The precise amount of the payment is determined by the number of years the worker was employed by Grant and his weekly salary at the date of termination. For example, under the typical plan a worker employed for two years would receive one week's pay whereas an employee with five years of service would receive two weeks' pay.
Upon the filing of its petition on October 2, 1975, Grant, pursuant to Section 342 of the Act, became a debtor-in-possession and was expressly authorized to operate and manage its retail outlets. Thereafter, during the unsuccessful Chapter XI proceeding, many of Grant's retail outlets were liquidated and its employees terminated. Finally, in April 1976, Grant was adjudicated a bankrupt and its remaining retail outlets were liquidated and the balance of its work force terminated. As a result, approximately 32,000 employees who were employed during the aborted Chapter XI proceeding and were eventually terminated have filed claims for severance pay benefits. It has been estimated that these claims when finally computed will be in excess of 11 million dollars.
Section 64 of the Bankruptcy Act dictates that certain debts of a bankrupt shall have priority over other debts. It provides:
The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment, shall be (1) the costs and expenses of administration . . . (2) wages and commissions, not to exceed $ 600 to each claimant, which have been earned within three months before the date of the commencement of the proceeding . . . .
The Trustee, in his application for instructions as to the treatment and disposition of claims filed against the bankrupt estate, characterized the claims for severance pay as part of the wages earned by Grant employees.
He recommended, therefore, that each severance claim be divided into three categories and paid accordingly. First, that portion of an employee's severance claim which accrued subsequent to the filing of the Chapter XI petition would be fully paid as an expense of administration under Section 64(a)(1) of the Act. Second, that portion of an employee's severance claim which accrued during the three months prior to the filing of the Chapter XI petition, not exceeding $ 600, would be paid as a secondary priority claim under Section 64(a)(2). The balance of the claim would be treated as a pre-Chapter XI non-priority unsecured wage claim.
however, argue that severance pay benefits are not akin to wages but rather are a form of compensation for the termination of the employment relationship. They urge that a claim for severance pay does not lend itself to the type of tortured division the Trustee would subject it to. They conclude, therefore, that those employees who continued to work for Grant during the unsuccessful Chapter XI proceeding are entitled to have their entire severance claim treated as a cost and expense of administration.
Judge Galgay adopted the claimants' reasoning. He found that despite contrary authority in other Circuits, under the clear pronouncements of the Second Circuit severance pay is not earned from day to day and unlike wages does not accrue. Accordingly, he found that the severance claims for those individuals who continued to work for Grant during the Chapter XI proceeding were not divisible as suggested by the Trustee and were fully payable as a cost and expense of administration. In addition, Judge Galgay found that although Grant, as debtor-in-possession, had the power to reject the severance provisions as executory contracts, it failed to formally do so and consequently the severance provisions survived the Chapter XI proceeding.
There can be no doubt that in this Circuit severance pay benefits guaranteed under a collective bargaining agreement are not to be construed as wages. Indeed, in Straus-Duparquet, Inc. v. Local Union No. 3 International Brotherhood of Electrical Workers, 386 F.2d 649 (2d Cir. 1967) this Circuit defined severance benefits 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.
Id. at 651. The Court went on to hold that "severance pay is not earned from day to day and does not "accrue' so that a proportionate part is payable under any circumstances." Id. The Court concluded that since severance pay is a form of compensation for termination of the employer-employee relationship, where the termination is an incident of the administration of a bankrupt's estate, the payments are entitled to a priority as an expense of administration. Id. See also In re Unishops, Inc., 553 F.2d 305, 308 n.1 (2d Cir. 1977). Thus, insofar as those employees were entitled to severance pay benefits pursuant to the several collective bargaining agreements involved herein, their severance claims are not divisible as suggested by the Trustee. Consequently, absent a rejection of these executory agreements by the Trustee, these claims for severance pay are entitled to a priority.
The law, however, is somewhat less clear with respect to individual severance pay agreements. In the leading case, Unishops, supra, 553 F.2d 305, the Court was presented with a letter agreement between a corporation and one of its executive officers concerning severance pay benefits. After eleven years of service Unishops' Chief Operating Officer was promised by the corporation that upon termination he would be entitled to a $ 100,000 severance payment. Just eight months after the agreement, in November 1973, Unishops filed a petition for an arrangement under Chapter XI of the Bankruptcy Act. Thereafter, Unishops continued to run its operation as a debtor-in-possession. The individual continued to act as Chief Operating Officer at Unishops until July 1974 when he was discharged.
The Court found that since the officer had continued in Unishops' employ for some time after it entered Chapter XI, and since the debtor-in-possession never rejected the executory severance agreement, Unishops received benefits under the contract and hence he was entitled to a priority under Section 64(a)(1) of the Act. The confusion arises, however, in a footnote to the Court's decision where it is stated that while those "cases involving severance pay under collective bargaining contracts, such as Straus-Duparquet, Inc. v. Local Union No. 3, supra, 386 F.2d 649 (2d Cir. 1967), correctly define severance pay as compensation for termination of ...