Matson v. Alarcon

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRUCE H. MATSON, Trustee of the 

LandAmerica Financial Group,

Incorporated Liquidated Trust,

Trustee-Appellant,

v.

DIEGO ALARCON; EMILY E. ANDERS;

BRUCE A. AVILA; ANNELISE J.

BRADDOCK; STEVEN P. BAKER;

MICKEY J. BARKER; MICHAEL

BARLOW; DIANNE F. BIGBIE; FRANK

E. BILLINGS, JR.; RHONDA L.

BITTERMAN; JOHN C. BOMMARITO;

NANCY BOYER; KIMBERLY L.

CODAY; SHAWN D. COSMAN; NANCY  No. 10-2352

DEANGELO; BELINDA DURON;

TAMMY J. ELLEY; LAWRENCE M.

FURLONG; MICKEY GARCIA; RICHARD

GRAB; JOANNE S. GUNN; PAMALA

M. HARVEY; ELIZABETH HAYNES;

MELINDA S. HURD; JUDITH A . V.

KANE; LINDA A. KEAN; DENISE

KING; KEIKO LAM; MONIQUE

LAUFAU; LEA L. LAUTENSCHLAGER;

JOHN A. MAASS; FRANK P.

MARCARIO; KATHLEEN A.

MCADAMS; REGINA M. MORRISON;

JENNY NORTHCUTT;



2 MATSON v. ALARCON

GAIL M. O’HANLEY; VANAH G. 

RAFANELLI; KELLY S. ROBBINS;

LACEY M. ROBBINS; JULIE A.

ROBERTS; CHARI ROBINSON; LOREE

A. RUSSO; SVEN M. RUTH; SHARON

MARIE SAYRE; CHARLENE SCHUH;

JENNIFER F. SIEM; J. ALAN SMELKO;

MICHAEL S. SMITH; DAWN M.

SMITH; JANICE SPARROW; ROBERT

M. STILLWAGON; MARY TAMMINGA;

JERRI THURMAN; NOEL M. TOWNES;

JINXIE WEIDMARK; WENDY L.

WELCH; BETTY WHELAN; ROBERT

M. WILSON; ELIZABETH S.

WOODROOF; PAUL YAO; EDWARD R.

ZAVAL; STEPHEN D. BROOKS;

DEANNA B. BRUCE; NAOMI L.

CAMPANALE; MARTHA A. 

CARTLEDGE; THOMAS N. CATANESI;

STEVEN A. COLVIN; BRIAN W.

CRESS; JENNIFER L. DANSER;

MELINDA CRYSTAL DAVIS; BRIAN K.

DREW; GARY EVERITT; STEVEN L.

FAHRENKROG, II; KIM FANUCCHI;

SHARON M. FOX; KAMILA GRIGAR;

EDUARDO GUEVARA; FAITH HANE;

SYDNIE HARMAN; KEVIN W. HARRIS;

ARLENE L. HAWLEY; WADE

HERMAN; TRACEY HUNTINGTON;

SARA E. JONES; MARY KENNEDY;

DANA KLIMA; RICHARD T. KNAPICK;

REBECCA LAWSON; STEPHANIE

LAWSON; GREGORY LEE; MICHELE

E. LEFEVER;



MATSON v. ALARCON 3

MARIVEL LEON; CHRISTOPHER 

LESEURE; DAVID L. LINGERFELT;

GREGG H . C. LUM; PAMELA S.

MANNIA; PETER F. MASELLI; SARAH

A. MCBRIDE; CATHERINE JEAN

MILLS; MIKE D. MURRAY; DONNA

M. O’DELL; ALINA A. OPREA;

BEVERLEY J. PACKARD; MICHAEL

SAWCHAK; DEBORAH J. SMITH;

PAULA M. SMITH; SUZANNE M.

SMITH; NATALIE ST. CROIX;



CHRISTOPHER H. STAMEY; LINDA

TAAFFE; MARVIN CLIFTON TAYLOR;

SAMUEL E. TAYLOR; GLADYS D.

TERRIER; ROBERT L. THOMAS, JR.;

TANGALIA TIMBERLAKE; GEORGE N.

VIDACOVICH, JR.; VERNA VISCIGLIA;

SHERRI WEISS; STEPHANIE R.

WIGGINS; JOSEPH B. WYKEL; LONNIE

J. YETT; TRAVIS BARDEN; CHARLES

C. CAIN; ERIK G. IVERSON; DONALD

E. JONES, JR.; LAURA A. MUTRUX;

WENDY R. HEVENER,

Claimants-Appellees.



Appeal from the United States Bankruptcy Court

for the Eastern District of Virginia, at Richmond.

Kevin R. Huennekens, Bankruptcy Judge.

(3:08-bk-35994)

Argued: May 10, 2011

Decided: July 6, 2011

4 MATSON v. ALARCON

Before NIEMEYER, KING, and KEENAN, Circuit Judges.

Affirmed by published opinion. Judge Keenan wrote the opin-

ion, in which Judge Niemeyer and Judge King joined.

COUNSEL

ARGUED: Christopher Lawrence Perkins, LECLAIRRYAN,

PC, Richmond, Virginia, for Appellant. Joshua David McKar-

cher, COVINGTON & BURLING, LLP, Washington, D.C.,

for Appellees. ON BRIEF: Christian K. Vogel, LECLAIR-

RYAN, PC, Richmond, Virginia, for Appellant. Michael St.

Patrick Baxter, COVINGTON & BURLING, LLP, Washing-

ton, D.C., for Appellees.

OPINION

KEENAN, Circuit Judge:

In this case, a trustee of a bankruptcy estate filed objections

in the bankruptcy court to the requested priority treatment of

a portion of severance compensation claims filed by the debt-

or’s former employees (the claimants). The bankruptcy court

overruled the trustee’s objections and, under 28 U.S.C.

§ 158(d)(2)(A)(i), certified an appeal to this Court.

On appeal, the trustee contends that the claimants "earned"

their severance compensation over the entire course of their

employment. The trustee asserts that, therefore, under 11

U.S.C. § 507(a)(4), only a pro-rated portion of the claims was

"earned" within 180 days preceding the bankruptcy petition

and was entitled to priority treatment. We disagree with the

trustee’s position, and conclude that the claimants "earned"

MATSON v. ALARCON 5

their severance compensation on the date they became partici-

pants in the debtor’s severance plan immediately after their

termination from employment. Accordingly, we affirm the

bankruptcy court’s order.

I.

In April 2004, LandAmerica Financial Group, Inc. (Lan-

dAmerica) established a "Severance Benefits Plan" (the plan),

which stated a purpose "to assist eligible Employees upon ter-

mination" of employment. The plan provided "severance ben-

efits to eligible Employees who become Participants" in the

plan. An employee qualified as a participant in the plan when

the employee 1) was terminated without cause, 2) signed a

severance agreement and release, and 3) certain other exempt-

ing circumstances were not present. Those circumstances

included that the employee was not rehired within 30 days of

termination, the employee was not offered an "equal" position

with LandAmerica within a 50-mile radius, and the termina-

tion action was not due to the employee’s death or resigna-

tion.

Once employees became participants in the plan, they were

entitled to receive compensation equal to their weekly salary

for a certain number of weeks. The number of weeks of com-

pensation to which a participant was entitled was based on the

employee’s length of service to LandAmerica. For example,

under the plan established in 2004, an eligible participant who

worked for more than one year but less than two years would

receive severance compensation equal to two weeks of pay,

while an employee who worked at least eight years but less

than ten years would receive severance compensation equal to

six weeks of pay.

The plan also provided that a participant would receive this

severance compensation either in a single sum or in monthly

installments over a defined period of time. LandAmerica’s

board of directors (the board) retained the unilateral right to

6 MATSON v. ALARCON

"modify, alter, or amend the Plan, in whole or in part," or to

eliminate the plan entirely. In 2008, the board slightly

amended the plan by decreasing the number of weeks of sal-

ary that an eligible participant could receive based on the

employee’s years of service.1

Between August 2008 and November 2008, within the last

180 days before LandAmerica filed its bankruptcy petition,

LandAmerica terminated the employment of the claimants,

Diego Alarcon and 124 other employees. Based on their ter-

mination and the fact that the other conditions of the plan

were satisfied, the claimants became participants in the plan.

However, LandAmerica did not pay the claimants any amount

of the severance compensation due.

After LandAmerica filed its bankruptcy petition on Novem-

ber 26, 2008, the claimants filed proofs of claims against the

bankruptcy estate for the severance compensation they were

due under the terms of the plan, as amended in 2008. The

claimants asserted that their severance claims were entitled to

priority treatment up to the statutory maximum amount pro-

vided in 11 U.S.C. § 507(a)(4).

Bruce H. Matson, Trustee of the LandAmerica Financial

Group, Inc. Liquidation Trust (the trustee), did not object to

the amounts of the severance claims. However, he contended

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.

1

The amendments to the plan in 2008 also required that an employee

must work at least one year before being eligible to receive any severance

pay. The plan as it existed before these amendments permitted an

employee who had worked at least six months to receive severance pay.

The substance of these amendments, however, does not affect the issue

presented in this appeal.

MATSON v. ALARCON 7

§ 507(a)(4). To calculate the amount of severance compensa-

tion "earned" during the pre-petition period, the trustee pro-

posed a formula that computed an employee’s daily rate of

severance compensation. The trustee provided an example of

the application of his proposed formula to one of the claims

at issue during a hearing held by the bankruptcy court.

In that example, the employee worked for LandAmerica for

a total of 437 weeks, a period exceeding eight years, and was

entitled under the plan to receive $8,500 in severance com-

pensation. Before being terminated from employment, the

employee worked 22 weeks during the pre-petition period.

Because the period of 22 weeks represented 5.03% of the

employee’s 437 total weeks of employment, the trustee con-

tended that the employee "earned" 5.03% of $8,500 during

the pre-petition period, or $429.31. Thus, the trustee con-

tended that only this portion of the employee’s severance

claim was entitled to priority treatment under 11 U.S.C.

§ 507(a)(4), while the remaining amount, $8,070.69, should

be classified as an unsecured general claim. After the hearing,

the bankruptcy court issued a memorandum opinion overrul-

ing the trustee’s objections, and entered an order in favor of

the claimants on this issue.

II.

A.

The question raised in this appeal presents an issue of law,

requiring this Court to apply a de novo standard of review. In

re Bateman, 515 F.3d 272, 277 (4th Cir. 2008).

B.

Section 507 of the Bankruptcy Code sets forth the catego-

ries of expenses and claims that are entitled to priority treat-

ment in the distribution of a debtor’s estate. 11 U.S.C. § 507.

In the enumerated list provided in the statute, a fourth priority

8 MATSON v. ALARCON

is given to "allowed unsecured claims, but only to the extent

of $10,950 for each individual . . . earned within 180 days

before the date of the filing of the petition. . . for (A) wages,

salaries, or commissions, including vacation, severance, and

sick leave pay earned by an individual."2 11 U.S.C.

§ 507(a)(4) (emphasis added). Therefore, we must determine

the method by which an individual "earns" "severance pay,"

within the meaning of this statute, to decide whether the

claimants "earned" their full severance pay or only a pro-rated

portion of that pay during the pre-petition period.

Under established principles of statutory interpretation, we

consider the disputed statutory terms in the context in which

they are employed. United States v. Groce, 398 F.3d 679, 681

(4th Cir. 2005). When the terms at issue are not defined in the

statute, we apply their plain and ordinary meaning. Scrim-

geour v. Internal Revenue, 149 F.3d 318, 327 (4th Cir. 1998).

This plain and ordinary meaning provides the "most reliable

indicator of Congressional intent." Soliman v. Gonzales, 419

F.3d 276, 281-82 (4th Cir. 2005).

The interpretation of the word "earned," as it appears in 11

U.S.C. § 507(a)(4), presents an issue of first impression in this

Court. While the statute does not define the word "earned,"

we observe that to "earn" generally means to "receive as equi-

table return for work done or services rendered," or "to come

to be duly worthy of or entitled." Webster’s Third New Inter-

national Dictionary 714 (2002). The first of these definitions

plainly encompasses the common understanding of the man-

ner in which employees "earn" wages, salaries, and commis-

sions, the three general types of compensation listed in 11

U.S.C. § 507(a)(4)(A). Employees typically receive such

compensation in exchange for their employment performance.

See, e.g., In re Public Ledger, 161 F.2d 762, 770 n.7 (3d Cir.

2

Effective April 1, 2010, and applicable to cases commenced on or after

that date, the statutory maximum in 11 U.S.C. § 507(a)(4) was increased

to $11,725. 75 Fed. Reg. 8747-48 (Feb. 25, 2010).

MATSON v. ALARCON 9

1947) (wages are agreed-upon compensation received for ser-

vices rendered); In re Gurewitz, 121 F. 982, 983 (2d Cir.

1903) (same). The triggering events permitting employees to

receive wages, salaries, and commissions generally lie within

the employees’ control upon performance of their work, sub-

ject to the terms of the employment agreement.

The word "earned," as used in 11 U.S.C. § 507(a)(4)(A),

applies not only to wages, salaries, and commissions, but also

to several other types of compensation, including "severance

pay." The term "severance pay" is not defined in the statute.

However, that term generally is defined as "an allowance usu-

ally based on length of service that is payable to an employee"

upon termination without cause. See Webster’s Third New

International Dictionary 2081 (2002). The purpose of such

severance compensation is to "alleviate the consequent need

for economic readjustment" and "to recompense [the

employee] for certain losses attributable to the dismissal."

Straus-Duparquet, Inc. v. Local Union No. 3, Int’l B’hood of

Elec. Workers, 386 F.2d 649, 651 (2d Cir. 1967).

In contrast to wages, salaries, and commissions, the trigger-

ing 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. Thus, employees do not "earn" "severance pay"

in exchange for services rendered as they do when they "earn"

wages, salaries, and commissions. Rather, employees receive

"severance pay" as compensation for the injury and losses

resulting from the employer’s decision to terminate the

employment relationship. This ordinary understanding of the

term "severance pay" is consistent with the stated purpose of

the plan in the present case, namely, to assist employees upon

termination.

In view of the meaning and the purpose of severance com-

pensation, we conclude that the second definition of "earn"

described above, to become entitled, represents the ordinary

10 MATSON v. ALARCON

meaning of the manner in which employees "earn" "severance

pay," within the intendment of Congress in 11 U.S.C.

§ 507(a)(4)(A). We therefore hold that an employee "earns"

the full amount of "severance pay" on the date the employee

becomes entitled to receive such compensation, subject to sat-

isfaction of the contingencies provided in the applicable sev-

erance compensation plan.3 See id. at 651 (explaining that

severance pay is not earned from day to day and does not

accrue over time).

In the present case, when the claimants became participants

in the plan upon their termination from employment and their

signing a severance agreement and release, the claimants

earned severance compensation. While the amounts of the

severance compensation to which the claimants were entitled

under the plan were based on their length of service to Lan-

dAmerica, this method of calculation did not, as the trustee

contends, dictate that those employees earned severance com-

pensation over the entire course of their employment. The

trustee’s position in this regard conflicts both with the pur-

pose of severance compensation and the plain terms of the

plan at issue.

3

We find no merit in the trustee’s argument in favor of pro-ration based

on the statute’s legislative history when Congress lengthened the pre-

petition period from 90 days to 180 days. During that legislative process,

the House of Representatives’ Report explained that the effect of this

change was that a "greater portion" of unpaid vacation, severance, and

sick leave pay would be entitled to priority payment. H.R. Rep. No. 109-

31, pt. 1 at 1401 (2005). The use of the phrase "greater portion," however,

did not clearly express a legislative intent that employees "earn" "sever-

ance pay" over the entire course of their employment. See Holland v. Big

River Minerals Corp., 181 F.3d 597, 603 n.2 (4th Cir. 1999) (explaining

that courts look beyond the plain meaning of a statute only in the rare

instance in which Congress has clearly expressed a contrary legislative

intent). An alternative conclusion that could be drawn from this legislative

history is that Congress intended to provide employees with a greater win-

dow of eligibility for priority regarding such vacation, severance, and sick

leave pay "earned" during the 180-day period.

MATSON v. ALARCON 11

Our conclusion is supported by the fact that the board

implemented the plan and retained the right to amend the plan

or to eliminate it entirely. If we were to hold that employees

earned severance compensation over the entire course of their

employment, an employee who began working for Land-

America before the plan was established in 2004 necessarily

would have earned severance compensation before Land-

America had even adopted a severance benefits plan. More-

over, if the board had eliminated the plan before an employee

was terminated, then, under the trustee’s position, that

employee would have earned severance compensation for a

period of time but would never receive that compensation.

Finally, our conclusion is not altered by decisions of our

sister circuits addressing the priority treatment of severance

compensation in the context of administrative expense claims

permitted under 11 U.S.C. § 503(b)(1)(A). Many of those

courts have held that severance compensation based on length

of employment has priority as an administrative expense of

the bankruptcy estate only to the extent that the compensation

is based on services provided to the bankruptcy estate after

the debtor files for bankruptcy. See In re Roth Am., Inc., 975

F.2d 949, 957 (3d Cir. 1992); In re Mammoth Mart, Inc., 536

F.2d 950, 953 (1st Cir. 1976); In re Health Main. Found., 680

F.2d 619, 621 (9th Cir. 1982); but see Straus-Duparquet, 386

F.2d at 651.

As the bankruptcy court explained in its memorandum

opinion in this case, however, 11 U.S.C. § 503(b)(1)(A), the

current codification of the statute at issue in those other cases,

and 11 U.S.C. § 507(a)(4), the statute at issue in this case, are

materially different. Section 503(b)(1)(A) does not use the

word "earned" or specifically include "severance pay" as a

form of wages, salaries, and commissions. Instead,

§ 503(b)(1)(A) requires a calculation of the value of "services

rendered" in a period of time after a debtor files its bank-

ruptcy petition. See In re Pittston Stevedoring Corp., 40 B.R.

424, 427-28 (Bankr. S.D.N.Y. 1984) (stating that "earned

12 MATSON v. ALARCON

within" is distinct from "service rendered within" and that

"earned" "allows for some variation according to agreement

between employers and employees" while "services rendered"

does not). Therefore, we remain of the opinion that under 11

U.S.C. § 507(a)(4), an employee "earns" the entirety of his or

her severance compensation on the date that the employee

becomes entitled to receive such compensation under the

applicable severance compensation plan.

III.

Accordingly, we affirm the bankruptcy court’s holding that

the severance claims at issue are entitled to priority treatment

under 11 U.S.C. § 507(a)(4) in amounts no greater than the

maximum amount provided by statute.

AFFIRMED