Petition — RODMAN, ETC. v. RINIER, ETC., et al. (Nos. 79-1459, 79-1458)

IO 5OMS Vv '

FIs

%9-1459) —

MAR 18 1980

PAICHAEL ROLAK, JR.,

In THE

Supreme Court of the United States

October Term 1979

CHARLES G. RopMAN, as Trustee of the Estate of

W. T. Grant Company, Bankrupt,

Petitioner,

v.

Auton Rinigr, as Agent for Certain Employees of Bankrupt,

ANSWERING EMPLOYEES OF Bankrupt, Locau 807-IBT, Retain

CLERKS INTERNATIONAL ASSOCIATION, NATIONAL LABOR RELA

TIONS BOARD,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Harvey R. MILLER

Attorney for Petitioner

767 Fifth Avenue

New York, New York 10022

(212) 758-7800

/

RICHARD P. KRASNOW

DIANE K. WEEKS

Of Counsel

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CLERI

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PAGE

ME oi dA ae ucinada eae ee teed 2

I Bored yk ete ta Gee ee 2

ree ees 2

NN i so ae 3

ee eee 4

Reasons for Granting the Writ .................... 8

I. THe Decision BELow Is IN CONFLICT WITH DECISIONS

OF OTHER CourTS OF APPEALS ................ 8

II. Pre-Bankruptcy SEVERANCE Pay POLICIES AND

AGREEMENTS DO NOT RESULT IN BANKRUPTCY

ADMINISTRATION .CLAIMS UNLESS ASSUMED BY THE

BANKRUPTCY FIDUCIARY...............0cc00-. ll

III. Assumption oF Pre-Bankruptcy Executory Pou.

CIES AND AGREEMENTS REQUIRES ExXPLicir PRIoR

BaANKRupTCY CourT APPROVAL ................ 15

IV. THE TREATMENT OF ANY PorTION OF SEVERANCE Pay

BENEFITS AS ADMINISTRATIVE EXPENSES MUST BE

PREDICATED Upon BENEFITS CONFERRED UPON THF

Se SS ce ee 18

NN ee ae 7 ota a ee ae 21

APPEN DICES*

Appendix I—Opinion and Judgment of the United States

Court of Appeals for the Second Circuit.

Appendix II—Decision and Order of the United States Dis-

trict Court for the Southern District of New

York.

Appendix III—Decision and Order of the Bankruptcy Court.

Appendix IV—Local Joint Hotel Executive Board, AFL-CIO v.

TABLE OF CONTENTS

Hotel Circle, Inc., F.2d (9th Cir. 1980).

* The appendix material in respect of the petition herein and in

respect of a petition concurrently filed by Morgan Guaranty Trust

Company of New York (“Morgan”) is set forth in a separate Joint

Appendix filed on behalf of both petitioners Morgan and Charles G.

Rodman, as Trustee of the Estate of W. T. Grant Company, Bankrupt.

References to the Joint Appendix will be designated “Jt. App.”

il

TABLE OF AUTHORITIES

PaGE

CASES:

Allegaert v. Perot, 548 F.2d 432 (2d Cir. 1977)...... 12

American Anthracite & Bituminous Coal Corp. v.

Leonardo Arrivabene, S.A.. 280 F.2d 119 (2d Cir.

I ad acl. Sars Wig OSs ad Kas 4. CS 11-12,15, i6,18

In re American National Trust, 426 F.2d 1059 (7th Cir.

iri PR ee ea eh pain aie a ibe 4 9

Bank of America National Trust and Savings Ass’n v.

Smith, 336 F.2d 528 (9th Cir. 1964)............. 11

Brotherhood of Railway v. REA Express, Inc., 523 F.2d

164 (2d Cir. 1975), cert. denied, 423 U.S. 1017, 1073

TER IgE EUR techy gaa p= ee Nara ei Ne a 12

Denton & Anderson Co. v. Induction Heating Corp., 178

ee Oe A SO oe ed as ose eee bk 11

In re Diamond REO Trucks, Inc., 20 Collier Bankr.

Res Eaoe (wo. MEG. TOT) 2... ce ean. 20

In re Fredrick Meats, Inc., 483 F.2d 951 (9th Cir. 1973) 1]

In re Godwin Bevers Co., Inc., 575 F.2d 805 (10th Cir.

DR Caen Sti Wa te 11

In re Gulfco Investment Corp., 520 F.2d 741 (10th Cir

GARE SST AN» St SRC gener gras pA rg eitet Or Oy sear aa 9

In re J. Bain, Inc., 554 F.2d 255 (5th Cir. 1977)..... 11

Local Joint Executive Board, AFL-CIO v. Hotel Circle,

Inc., F.2d Ce Oe UUIOD ks kha aca hove xs 2,9, 16-17

In re Mammoth Mart, Inc., 536 F.2d 950 (lst Cir.

WG ee eee ek es aaa ane eee k Soak 2, 8,18

In re Maryvale Community Hospital, Inc., 456 F.2d 414

(9th Cir.), cert. denied, 409 U.S. 879 (1972)....... 9

Nathanson v. National Labor Relations Board, 344 U:S.

Ne ina ee gL Ree te gc vies | 10

In re Public Ledger, Inc., 161 F.2d 762 (8rd Cir.

Rae, ein ae rs Soins a Ad RS ow os 2,8, 19, 20

Shopmen’s Local Union No. 455 # Kevin Steel Products,

ene, 619 F.2a GOS (ad Cir. 1975) ... . wk i ees 12

ili

Straus-Duparquet, Inc. v. Local Union No. 3, IBEW, 386

eis ces cence es ess 7, 8

Sunflower Oil Co. v. Wilson, 142 U.S. 313 (1892)..... 11

Texas Importing Co. v. Banco Popular de Puerto Rico,

Gon Fe Gee (56m Cir. 1906) 0c enc ceese. 9

Truck Drivers Local Union No. 807 v. Bohack Corp., 541

Be ee ee es BEE K sewe kee Cee we canes 1

2

In re Unishops, Inc., 553 F.2d 305 (2d Cir. 1977) .... 8

In re Walker, 93 F.2d 281 (2d Cir. 1937)........... 5

In re Wil-Low Cafeterias, Inc., 111 F.2d 83 (2d Cir. 1940) 5

Statutes

Bankruptcy Aet:

mentee: Be, FA WI. BGS) ink cece ac iiss 2

Section 64a, 11 U.S.C. § 104(a) ............ 1, 3, 7, 8, 9, 18, 20

RIN: TOs Ad 0 Pes EO vo ie ok oo is Vibe oes ae 3, 4, 14

moctaom Simesy 82 TC. © TID) on. eet ee wane 12, 13

ah ees ea Se) . Se ar 5

Section 96702), 11 UBC. § 1672)... . <-~ ioo wees 12

Section S782), 11 UBC. § TIS)... cee s cess 3-4, 14

Bankruptcy Code:

Section 507(a)(3), 11 U.S.C. § 507(ay(3) ....... 000. 10

= ee ee ere er eee 10

Judicial Code and Judiciary:

ae ee PIS See od te ek vo ere toe oak 2

Treatise:

4A Collier, Bankruptcy 170.44{4] at 550-52 (14th ed.

BP er een ge eee Se ae a 12

6 Collier, Bankruptcy 1 3.23[5] at 578 (14th ed. 1976) 9

8 Collier, Bankruptcy 1] 6.32[2] at 931-32 (14th ed. 1978) 5

In THE

Supreme Court of the United States

October Term, 1979

CHARLES G. RopMaN, as Trustee of the Estate of

W. T. Grant Company, Bankrupt,

Petitioner,

v.

Auton Rinigr, as Agent for Certain Employees of Bankrupt,

ANSWERING EMPLOYEES OF Bankrupt, Loca 807-IBT, RetaIL

CLERKS INTERNATIONAL ASSOCIATION, NATIONAL LABOR RELA-

TIONS BOARD,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Petitioner, Charles G. Rodman, as Trustee for the Estate

of W. T. Grant Company, Bankrupt, (the “Trustee”’), requests

the issuance of a writ of certiorari to the United States Court

of Appeals for the Second Circuit (the “Second Circuit’’) to

review that court’s judgment and decree entered January 3,

1980. The Second Circuit decree affirmed an order of the

United States District Court for the Southern District of

New York (the “District Court’) that had affirmed an order

of the bankruptcy court for that District. The bankruptcy

court had determined that thousands of employee claims for

severance pay benefits earned substantially prior to the com-

mencement of a bankruptcy case constituted costs and

expenses of administration in their entirety, entitled to a

first priority of distribution under Section 64a(1) of the Bank-

ruptey Act, 11 U.S.C. § 104a(1) (the “Act”). The decisions

below were rendered (a) despite contrary decisions by other

United States Courts of Appeals that had considered the

9

a

issue,* and (b) without any consideration as to the extent of

any benefits that were received by the bankrupt estate from

any work, labor or services performed by an employee and

paid for by Grant after tne filing of the petition under the

Act. ;

Opinions Below

The judgment and decree of the Second Circuit, dated

January 3, 1980, is not officially reported and appears in Jt.

App. I annexed hereto. The decision and order of the

District Court, dated July 18, 1979, is officially reported at

474 F. Supp. 788, and a copy thereof is annexed hereto as Jt.

App. II. The order of the bankruptcy court, July 21, 1978,

based upon its decision dated June 22, 1978, is not officially

reported and both the order and the decision appear in Jt.

App. III annexed hereto.

Jurisdiction

The judgment and decree of the Second Circuit was

entered on January 3, 1980, and this petition for certiorari

was filed within 90 days of that date. The jurisdiction of the

Court is invoked pursuant to 28 U.S.C. § 1254(1) and Section

24c of the Bankruptcy Act, 11 U.S.C. § 47c.

Questions Presented

1. Are claims for severance pay benefits earned as part

of wages prior to the filing of a bankruptcy petition entitled

to 100% payment as costs and expenses of administration of

the bankrupt’s unsuccessful Chapter XI case irrespective of

(a) the period of employment of the claimant after the filing

of the petition; (b) the absence of any authorized or intended

assumption by the bankruptcy fiduciary of the bankrupt’s

*In re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir. 1976); In re

Public Ledger, Inc., 161 F.2d 762 (3d Cir. 1947). Since the order of the

Second Circuit was entered, the United States Court of Appeals for

the Ninth Circuit has rendered a decision which also is in conflict

with the Second Circuit and the subject judgment and decree. Local

Joint Executive Board, AFL-CIO v. Hotel Circle, Inc., ... F.2d ... (9th

Cir. 1980), is not yet officially reported and a copy is annexed as Jt.

App. IV.

3

pre-bankruptcy severance pay policies or agreements; (c) the

provisions of Section 64a of the Act, 11 U.S.C. § 104a, which

establish the hierarchy of priority claims including wages

against a bankrupt estate, and (d) the rejection of the pre-

bankruptcy executory policies and agreements pursuant to

Sections 378(2) and 70b of the Act, 11 U.S.C. §§ 778(2) and

110%, retroactive to the date of the filing of the bankruptcy

petition?

2. Does the failure of a bankruptcy fiduciary, i.e. a

debtor-in-possession or trustee, to reject formally executory

policies and agreements pursuant to the provisions of the Act

result in the automatic assumption of such policies and

agreements as administrative costs of the bankrupt estate?

3. In the absence of an authorized assumption of pre-

bankruptcy executory severance pay policies and agreements

by a bankruptcy fiduciary, is a claimant who performs pur-

suant to such policies or agreements entitled to receive more

than the reasonable value of the benefits conferred upon the

bankrupt estate as a result of the claimant’s performance?

Statutes Involved

Section 64a(1) and (2) of the Act, 11 U.S.C. § 104a(1) and (2):

Section 64. Debts Which Have Priority.

a. 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, includ-

ing the actual and necessary costs and expenses of

preserving the estate subsequent to filing the petition;

* * * (2) wages and commissions, not to exceed $600 to

each claimant, which have been earned within three

monthsbefore the date of the commencement of the

proceeding, * * *

Section 378(2) of the Act, 11 U.S.C. § 778(2):

4

Section 378. Upon the entry of an order directing that

bankruptcy be proceeded with

(2) in the case of a petition filed under Section 322

of this Act {an original petition under Chapter XI of the

Act], the proceeding shall be conducted, so far as pos-

sible, in the same manner and with like effect as if a

voluntary petition for adjudication in bankruptcy had

been filed and a decree of adjudication had been entered

on the day when the petition under this chapter [XI]

was filed; and the trustee nominated by creditors under

this chapter shall be appointed by the court, or, if not so

nominated or if the trustee so nominated fails to qualify

within five days after notice to him of the entry of such

order, a trustee shall be appointed by the court;

Section 70b of the Act, 11 U.S.C. § 110b:

b. The trustee shall assume or reject an executory

contract, including an unexpired lease of real property,

within sixty days after the adjudication or within thirty

days after the qualification of the trustee, whichever is

later, but the court may for cause shown extend or

reduce the time. Any such contract or lease not assumed

or rejected within that time shall be deemed to be

rejected.* **

Statement of the Case*

On October 2, 1975, W. T. Grant Company (“Grant”) filed a

petition for an arrangement under Chapter XI of the Act.

Prior thereto Grant was engaged in the business of operating

and managing a nationwide chain of approximately 1,070

retail outlets for the sale of general lines of merchandise. As

part of its pre-bankruptcy employment policies and practices,

relating to substantially all of its employees, and collective

*The facts stated are distilled from the opinions of the lower

courts and those set forth are undisputed.

5

bargaining agreements as to a small minority of its

employees, Grant offered to its employees a wage and com-

pensation package that included severance pay benefits. The

severance pay benefits were earned by each employee based

upon his or her length of employment.* Thus, the dollar

amount of severance pay benefits which were earned was a

direct function of the employee’s service period.

Subsequent to the filing of the Chapter XI petition, |

Grant, as a debtor-in-possession under Section 342 of the Act,

11 U.S.C. § 742,** informed its employees and gave notice to

all store managers of the suspension of the payment of

severance pay benefits during the pendency of the Chapter

XI case subject to further order of the bankruptcy court.

The Chapter XI case extended from October 2, 1975 to

April 13, 1976, the date that Grant was adjudged a bankrupt

under the Act. Prior to the date of adjudication and almost

immediately subsequent to the filing of the Chapter XI

petition, Grant embarked upon a contraction of the number

of its operating retail outlets. By the end of December, 1975,

over 400 retail stores had been closed. In February, 1976, it

became apparent that the rehabilitation attempt under

Chapter XI of the Act would be unsuccessful and, by order

of the bankruptcy court dated February 12, 1976, Grant was

directed to terminate and liquidate all of its retail operations.

Consequently as of April 13, 1976, essentially all of the retail!

outlets had been closed and liquidated.

*The severance pay benefits policies of Grant in effect prior to

October 2, 1975, are set forth in the Grant Store Manual, District

Manager’s Guide to Termination Policy and Procedures, New York

Office Supervisor’s Personnel Manual and approximately 53 collective

bargaining agreements.

** A debtor-in-possession is a bankruptcy fiduciary. Where no

receiver is appointed the debtor-in-possession has all the title and

exercises all of the powers of a trustee underi the Act. Section 342 of

the Act, 11 U.S.C. § 742; see also, In re Wil-Low Cafeterias, Inc., 111

F.2d 83 (2d Cir. 1940); In re Walker, 93 F.2d 281 (2d Cir. 1937) 8 Collier,

Bankruptcy {1 6.32{2] at 931-32 (14th ed. 1978).

6

Throughout the pendency of the Chapter XI case, Grant,

as a debtor-in-possession, paid no severance pay benefits to

terminated employees with the exception of a single pay-

ment made to a former executive pursuant to a specific order

of the bankruptcy court approving the same. The bank-

ruptcy court neither authorized nor approved any assump-

tion of the executory pre-bankruptcy severance pay policies

and agreements of Grant by the debtor-in-possession during

the Chapter XI case. No application was made by the

debtor-in-possession for authority to assume such executory

policies and agreements until April 8, 1976, just five (5) days

before the date that was known to all parties in interest to be

the date that Grant would be adjudged a bankrupt. The

hearing date for the application had been set for a date

fourteen (14) days subsequent to the date of adjudication.

The Trustee did not adopt the application and it lapsed.

In accordance with the Act, January 14, 1977 was the

last date for the filing of proofs of claim against the bank-

rupt estate. As of the close of business on that date, former

employees of Grant had filed a total of 49,344 proofs of claim.

Proofs of claims for severance pay benefits totalled 41,187

seeking an aggregate recovery of approximately $20,000,000.

After review of such proofs of claim, the Trustee determined,

after eliminating duplicate claims, that approximately

28,000 claims for severance pay benefits remained. The

Trustee estimated that the proofs of claim for severance pay

benefits might ultimately aggregate $11,382,000.

By application to the bankruptcy court dated May 10,

1977, the Trustee sought instructions as to the disposition of

the claims for severance pay benefits. Inasmuch as Grant’s

pre-bankruptcy wage and compensation policies had pro-

vided for the earning of severance pay benefits based upon

length of employment, the Trustee proposed that (a) the

portion of a discharged employee’s severance benefits claim

earned subsequent to the commencement of the Chapter XI

case and prior to the date of the employee’s termination be

paid in full, as a cust and expense of administration under

7

Section 64a(1) of the Act, supra; (b) the portion of such claim

earned during the three (3) months prior to the commence-

ment of the Chapter XI case be paid as a second priority

under Section 64(2) of the Act, supra; and (c) the remaining

portion of such claim, i.e., earned more than three (3) months

prior to the filing date and not a priority claim under Section

64a(2) of the Act, supra, be treated as a pre-bankruptcy

general unsecured claim. The Trustee also proposed that, for

the purpose of determining what portion of an employee’s

claim was to be accorded priority status, each employee’s

total severance pay be allocated over a twelve-month period

so as to avoid inequity and prejudice to long-term employees.

The Trustee submitted that the pre-bankruptcy executory

wage and employment policies and agreements of Grant had

not been assumed by the debtor-in-possession. Therefore, the

severance pay benefits did not constitute a Section 64a(1) cost

and expense of administration entitled to full payment as

distinguished from other components of wages earned pre-

and post-bankruptcy that are subject to the statutory limita-

tions and allocations as provided by Section 64a(2) of the Act,

supra. The Respondents objected tu the Trustee’s proposal

and claimed that all severance pay benefits constituted

administrative expenses entitled to fu'! payment.

After hearing, the bankruptcy court rendered its decision

dated June 22, 1978. Although the bankruptcy court

recognized the inequities and illogical consequences resulting

therefrom and the conflicting decisions in the First and

Third Circuits,* it concluded that as an inferior court it was

bound by the Second Circuit decision of Straus-Duparquet, Inc.

v. Local Union No. 3, IBEW, 386 F.2d 649 (2 Cir. 1967). The

bankruptcy court determined that all severance pay benefits

constituted costs and expenses of administration irrespective

of when earned and the limitation as to the amount of a

priority wage claim under Section 64a(2) of the Act, supra.

The District Court affirmed the order of the bankruptéy court

* See footnote at page 2, supra.

8

on the basis of Straus-Duparquet and further upon the ground

that, irrespective of Straus-Duparquet, the debtor-in-posses-

sion’s failure to reject formally the pre-bankruptcy executory

policies and agreements of Grant as to severance pay benefits

resulted in the automatic assumption of such executory obli-

gations by the debtor-in-possession and the bankrupt estate.

The Second Circuit affirmed the District Court. It con-

cluded that Grant as a debtor-in-possession, as a matter of

law, had assumed the pre-bankruptcy executory policies and

agreements of the bankrupt as to severance pay benefits, In re

Unishops, Inc., 553 F.2d 305 (2d Cir. 1977), and, in any event,

severance pay benefits were compensation for termination,

“* * * as opposed to a form of wages * * *,” entitled to the

Status of a cost and expense of administration, Straus-Dupar-

quet, supra.

REASONS FOR GRANTING THE WRIT

The Decision Below is in Conflict With Decisions of

Other Courts of Appeals.

Two basic issues were presented to the Second Circuit.

First, in reaching its decision that severance pay benefits

earned on the basis of years of service are not allocable in the

same manner as wages under the Act, the Second Circuit

rejected the decisions of In re Mammoth Mart, Inc., 536 F.2d

950 (1st Cir. 1976) and In re Public Ledger, Inc., 161 F. 2d 762

(3d Cir. 1947). In Mammoth Mart and Public Ledger, each

Court of Appeals decided that severance pay benefits earned

as part of wages must be allocated in the same manner as

wages under Section 64a of the Act, supra. The Trustee’s

proposal as to the disposition of claims for severance pay

benefits conforms with the principles enunciated in Mammoth

Mart and Public Ledger.

Secondly, in determining that by inaction the debtor-in-

possession had assumed the bankrupt’s executory policies

and agreements irrespective of the benefits received, the

9

Second Circuit also rejected the long established principle of

bankruptcy jurisprudence that the assumption of executory

contracts which results in the creation of first priority costs

and expenses of administration under Section 64a(1) of the

Act, supra, requires an express order of the bankruptcy court.

In re Gulfco Investment Corp., 520 F.2d 741 (10th Cir. 1975); In

re Maryvale Community Hospital, Inc., 456 F.2d 414 (9th Cir.),

cert. denied, 409 U.S. 879 (1972); In re American National Trust,

426 F.2d 1059 (7th Cir. 1970); Texas Importing Co. v. Banco

Popular de Puerto Rico, 360 F.2d 582 (5th Cir. 1966); see also, 6

Collier, Bankruptcy, {1 3.23[5] at 578 (14th ed. 1976). Since the

judgment and decree of the Second Circuit, the conflict

between the circuits as to the rejection or assumption of

executory contracts by inaction or acceptance of benefits has

been heightened by the decision of the United States Court of

Appeals for the Ninth Circuit in Local Joint Executive Board

AFL-CIO, v. Hotel Circle, Inc., F.2d (9th Cir. 1980) (Jt. App.

IV).

The Ninth Circuit held that even though a receiver had

operated the debtor’s business in accordance with the provi-

sions of a pre-bankruptcy executory collective bargaining

agreement and had participated in negotiation relating

thereto, in the absence of assumption with court approval

neither the receiver nor the estate was bound by the

executory provisions. In contrast, the Second Circuit has

held that a bankruptcy fiduciary, i.e., a debtor-in-possession

or trustee, may through inadvertence or mere inaction and

without notice to affected parties assume executory contracts

and policies, resulting in the creation of what may be sub-

stantial costs and expenses. Such costs and expenses of

administration may be of a magnitude sufficient to preclude

the payment and satisfaction of any inferior priority claims

as well as the claims of general unsecured creditors.

Thus, the instant petition pertains to matters of

importance in the administration of debtors’ estates under

federal bankruptcy laws. If the Second Circuit decision is

10

allowed to stand with its extension of the so-called Straus-

Duparquet doctrine, the basic principle of bankruptcy juris-

prudence, i.e., equality of distribution to creditors of the

same class, will be significantly impaired without legislative

authority therefor. Nathanson v. National Labor Relations

Board, 344 U.S. 25 (1952). The admini_tration and distribu-

tion of assets of debtor’s estates will be different depending

upon the judicial circuit within which the debtor’s case is

pending.* Thus, satisfaction of claims of employees based

upon similar grounds will vary substantially from one

judicial district to another depending entirely upon the

irrelevant fact of geography.

The enactment of the Bankruptcy Reform Act of 1978,

Public Law No. 95-598, 92 Stat. 2549 (1978) (the “Bankruptcy

Code’’), does not moot the instant petition. Unless the law is

clarified as to the disposition and treatment of claims for

severance pay benefits and as to the prerequisites for the

assumption or rejection of executory contracts and policies,

the application of the limitations imposed upon claims for

severance pay benefits as provided in the Bankruptcy Code,

Section 507(a)(3) of Title 11 U.S.C. (1979), will be dependent

entirely upon the vagaries of the respective judicial circuits.

Further, the construction of the provisions of Section 365 of

the Bankruptcy Code, 11 U.S.C. § 365 (Executory contracts

and unexpired leases), may be adversely affected by the

Second Circuit’s decision as to the manner in whic’:

executory contracts may be assumed by a fiduciary in a

debtor’s case.

The Bankruptcy Code carries forward the first priority

position of costs and expenses of administration. Therefore,

the Second Circuit decision will continue to have vitality and

*The 1978 Annual Report of the Director of the Administrative

Office of the United States Courts reflects that 202,122 petitions under

the Act were filed that year. Every bankruptcy petition involves

questions relating to executory contracts and policies. Chapter XI

filings increased from 1969 by 7.2%. It is anticipated that current

economic conditions may result in a significant number of filings

under the Bankruptcy Code.

1]

result in disparate treatment of claims for “tenured” sever-

ance pay benefits as well as the establishment of undefined

standards for the assumption or rejection of executory con-

tracts. Each of the subject matters dealt with by the Second

Circuit decision represent critical aspects of bankruptcy

administration, particularly in these difficult economic times.

Clarification by the Supreme Court is essential. Accordingly,

a writ of certiorari should issue.

II

Pre-Bankruptcy Severance Pay Policies and Agree-

ments do not Result in Bankruptcy Administration Claims

Unless Assumed by the Bankruptcy Fiduciary.

Pre-bankruptcy executory obligations of a debtor do not

result in first priority costs and expenses of administration

under the Act unless the bankruptcy fiduciary, e.g., debtor-

in-possession or trustee, assumes such executory obligations

and thereby obligates the debtor’s estate for the payment of

the same as administrative expenses. The mere fact that a

liability to pay matures after the commencement ‘of a bank-

ruptcy “ase does not make that liability an administrative

claim unless assumed by the bankruptcy fiduciary. Thus,

severance pay benefit claims earned during employment are

no different than a claim for goods sold and delivered prior to

the filing of a bankruptcy petition the payment for which

matures thereafter. In re Godwin Bevers Co., Inc., 575 F.2d 805

(10th Cir. 1978); Denton & Anderson Co. v. Induction Heating

Corp., 178 F.2d 841 (2d Cir. 1949). Indeed, the continued use

of leased premises by a bankrupt fiduciary with payment for

such use and occupancy does not result in all lease paymenis

and obligations becoming costs and expenses of administra-

tion. Sunflower Oil Co. v. Wilson, 142 U.S. 313 (1892); In re J.

Bain, Inc., 554 F.2d 255 (5th Cir. 1977); In re Fredrick Meats,

Inc., 483 F.2d 951 (9th Cir. 1973); Bank of America National

Trust and Savings Ass’n. v. Smith, 336 F.2d 528 (9th Cir. 1964);

American Anthracite & Bituminous Coal Corp. v. Leonardo

12

Arrivabene, S.A., 280 F.2d 119 (2d Cir. 1960); 4A Collier,

Bankruptcy 11 70.44(4] at 550-52 (14th ed. 1976).

Further, a debtor-in-possession is a separate and distinct

juridical entity. Thus, in Shopmen’s Local Union No. 455, v.

Kevin Steel Products, Inc., 519 F.2d 698 (2d Cir. 1975), the

established principle of law was stated as follows:

The argument [of the union as to the binding effect of a

collective bargaining agreement on the debtor-in-posses-

sion] fails to take into account the nature of a

bankruptcy proceeding. A debtor-in-possession under

Chapter XI or under Chapter X, a trustee under the

latter chapter, or a trustee in a straight bankruptcy

proceeding is not the same entity as the pre-bankruptcy

company. A new entity is created with its own rights

and duties, subject to the supervision of the bankruptcy

court.

519 F.2d at 704. (Emphasis by court). See also Brotherhood of

Railway v. REA Express, Inc., 523 F.2d 164 (2d Cir. 1975), cert.

denied, 423 U.S. 1017, 1073 (1976); Allegaert v. Perot, 548 F.2d

432 (2d Cir. 1977).

Accordingly, a debtor-in-possession, as a separate legal

entity, is not bound by the provisions and obligations of a

debtor’s pre-bankruptcy executory policies and contracts.

Rather, such executory contracts and policies are suspended

pending the decision as to whether the same should be

assumed or adopted in accordance with the provisions of the

Act. Truck Drivers Local Union No. 807 v. Bohack Corp., 541

F.2d 312 (2d Cir. 1976).

In a Chapter XI case, an executory contract of a debtor

may be rejected pursuant to Section 313(1) of the Act, 11

U.S.C. § 713(1), or as part of a Chapter XI plan in accordance

with Section 357(2) of the Act, 11 U.S.C. § 757(2). The latter

provision is meaningless unless a decision as to rejection,

which is antithetical to assumption, can await the promulga-

tion, acceptance and confirmation of a Chapter XI plan. The

confirmation of a Chapter XI plan providing for the rejection

13

of an executory contract or such rejection pursuant to Section

313(1), supra, results in the relation-back of the effective date

of rejection to the date of the filing of the Chapter XI

petition.

Nonetheless, the Second Circuit decided that since the

debtor-in-possession did not formally reject the bankrupt’s

pre-bankruptcy executory policies and agreements as to

severance pay benefits, it assumed the bankrupt’s obligations

thereunder. The Second Circuit’s decision is erroneous in at

least two respects. First, the debtor-in-possession did not take

any affirmative action and the record is devoid of any

evidence establishing the assumption by the debtor-in-posses-

sion of the pre-bankruptcy executory policies and agreements

concerning severance pay benefits. Indeed, the record estab-

lishes the converse as to the intent of the debtor-in-posses-

sion. As noted in the decision of the District Court, Grant, as

a debtor-in-possession, specifically alerted and apprised its

employees that severance pay benefits provided for by the

bankrupt prior to the commencement of the Chapter XI case

would not be paid unless authority were obtained from the

bankruptcy court (Jt. App. II). As discussed above, the

debtor-in-possession’s recognition of the necessity to obtain

such court approval is evidenced by its filing of an applica-

tion with bankruptcy court during the waning days of the

Chapter XI case seeking authority to pay severance pay

benefits. That application, which was made without consult-

ing with the creditors affected thereby and only after it was

determined that the Chapter XI case had failed, was never

granted. Thus, no such authority was ever obtained from the

bankruptcy court during the Chapter XI case as to the

Respondents.

Secondly, the Second Circuit failed to take into account

the rejection of the executory policies and agreements in

accordance with the specific provisions of the Act. In con-

trast to the other cases which have considered the priority

status of claims for severance pay benefits, supra, the

Chapter XI Case initiated by Grant failed. Consequently,

14

the claim status to be accorded to such claims materially

affects the potential realization of other creditors from the

bankrupt estate. Therefore, the provisions of the Act must be

examined carefully.

The Act specifically provides for the consequences result-

ing from the termination of a Chapter XI case by an adjudi-

cation in bankruptcy. Section 378(2) of the Act, supra,

provides in substance that in a case such as the Grant case, if

an order is entered directing that bankruptcy be proceeded

with then, “so far as possible,” the proceeding shall be

conducted “* * * in the same manner and with like effect as

if a voluntary petition for adjudication in bankruptcy had

been filed and a decree of adjudication had been entered on

the day when the petition under [Chapter XI] was filed;

***.” An order adjudging Grant a bankrupt and directing

that bankruptcy be proceeded with was entered in respect of

the Grant case on April 13, 1976. Pursuant to Section 378(2),

supra, the ordinary or liquidating bankruptcy case relates

back ot October 2, 1975, the date of the filing of the Chapter

XI petition.

In accordance with the foregoing, Section 70b of the Act,

supra, became operative. That section provides, in part:

The trustee shall assume or reject an executory contract,

***, within sixty days after the adjudication or within

_ thirty days after the qualification of the trustee, which-

ever is later, but the court may for cause shown extend

or reduce the time. _ Any such contract or lease not

assumed or rejected within that time shall be deemed to

be rejected.

The Trustee qualified on April 13, 1976. Grant was

adjudged a bankrupt under the Act on April 13, 1976. The

Trustee never assumed the pre-bankruptcy executory policies

and agreements of Grant as to severance pay benefits. A

fortiori, the pre-bankruptcy executory policies and agree-

ments of Grant were rejected effective as of October 2, 1975,

15

the date of the commencement of the bankruptcy proceed-

ings. Consequently the Second Circuit was wrong in con-

cluding that the pre-bankruptcy executory policies and

agreements were never rejected.

Ill

Assumption of Pre-Bankruptcy Executory Policies and

Agreements Requires Explicit Prior Bankruptcy Court

Approval.

The necessity of assumption of pre-bankruptcy executory

policies and agreements as to severance pay benefits in order

to raise claims therefor to a cost and expense of administra-

tion is aptly set forth in American Anthracite & Bituminous

Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119 (2d Cir.

1960). In that case the court affirmed the denial of claims of

certain creditors to be costs and expenses of a Chapter XI

administration. The court stated:

The right to priority in Chapter XI proceedings is

governed solely by § 64 of the Bankruptcy Act. See

§ 302, 11 U.S.C.A. § 702; 8 Collier on Bankruptcy Para.

9.33 (14th Ed. 1941). Section 64, sub. a(1) includes

among those claims entitled to first priority “the actual

and necessary costs and expenses of preserving the

estate subsequent to filing the petition” and “the costs

and expenses of administration.” The claim of a creditor

having an executory contract with the debtor at the time the

debtor's petition is filed is entitled to priority wnder these

provisions only if the trustee or debtor in possession elects to

assume the contract or if he receives benefits under it. The

right to priority in the event the contract is assumed follows

from the fact that the trustee or debtor in possession has

elected to make the contract of the debtor hvis own, just as of it

had been made by the trustee or debtor in possession in the

Jirst instance. The right to priority in the event the trustee or

debtor in possession receives benefits under the contract dir.

ing the interval between the filing of the debtor's petition and

the rejection of the contract “is an equitable right based upon

16

the reasonable value” of the benefits conferred, rather than

upon the contract price. In re United Cigar Stores Co., 2

Cir., 69 F.2d 513, 515, certiorari denied sub nom.

Reisenwebers, Ine. v. Irving Trust Co., 1934, 293 U.S.

966, 55 S.Ct. 76, 79 L.Ed. 665; see Oscar Heineman Corp.

v. Nat Levy & Co., 2 Cir., 1925, 6 F.2d 970, 43 A.L.R.

727; Gardner v. Gleason, 1 Cir., 1919, 259 F. 755. Where

no benefits are received by the bankrupt estate or its

representative under the contract, and the contract is not

assumed, the creditor’s claim is not entitled to priority, Peti-

tion of Colburn, 1 Cir., 1926, 16 F.2d 780; In re No Care

Elec. Radiator Corp., D.C.S.D.N.Y.i1933, 3 F.Supp. 331,

although of course, upon rejection, the creditor may file

a general claim against the estate. See §§ 63, sub.a(9),

353, 11 U.S.C.A. §§ 108, sub.a(9), 753.

280 F.2d at 124-25. (Emphasis added).

The necessity for court scrutiny and approval before

assumption of an executory agreement may become effective

was succinctly stated by the Ninth Circuit in the Hotel Circle

case, supra:

While neither we nor the Supreme Court has passed

on the question before us, the more persuasive cases

from other jurisdictions hold that “ ‘asswmption or adop-

tion of the contract can only be effectuated through an

express order of the [bankruptcy] judge.’” [citations omit-

ted] The basic reasoning for this view is expressed by

Collier:

The general rule that economy of administration

calls for close, strict, and active control by the court

of all administrative expenditure seems to lead to

the conclusion that it is improper for a trustee

to assume executory contracts on his own

responsibility.

4A Collier on Bankruptcy 1 70.43[5], at 531 (14 ed. 1976).

Similarly, we have expressed the view that “(i]t is well

17

settled bankruptcy law that on important decisions,

whatever their character, the trustee must get the

court’s approval * * *.” [citations omitted]

Surely, the assumption of executory pre-bankruptcy

severance pay policies and agreements of Grant must be

characterized as an “important decision.” The consequences

of such a decision involved the priority claim status of

millions of dollars of claims as costs of administration to be

satisfied ahead of the claims of other creditors and in excess

of the salaries, wages and bonuses that Grant, as debtor-in-

possession, paid to its Chapter XI employees for their ser-

vices. Clearly, an important decision in any bankruptcy

case. The standards to apply will have monumental

importance in the future administration of bankruptcy cases.

The construction of the provisions of the Bankruptcy Code in

many instances will be predicated upon pre-Code law. The

instant case is of a paramount importance in the future

treatment of executory agreements in debtor cases.

The Second Circuit decision allows the assumption of

potentially large liabilities and other obligations by silence

and without notice to the bankruptcy court or the parties

affected thereby—the creditors. Indeed, the Second Circuit

found assumption by the debtor-in-possession even though it

manifested an intent contrary to assumption. Clearly an

incongruous result. To avoid the result mandated by the

Second Circuit requires that debtors reject collective bargain-

ing agreements and policies immediately upon the filing ofa

reorganization petition under the Bankruptcy Code. This

type of precipitous action will cause dislocation and labor

unrest and potentially will preclude any opportunity for

rehabilitation and reorganization of the debtor. The Second

Circuit’s requirement is incongruous with the provisions of

the Act and the Bankruptcy Code which allow for an

extended period to consider the consequences of assumption

or rejection as well as Congressional policy favoring

reorganization.

18

IV

The Treatment of any Portion of Severance Pay

Benefits as Administrative Expenses Must be Predicated

Upon Benefits Conferred Upon the Debtor’s Estate.

Clarification of the standards to be applied in respect of

claims for severance pay benefits absent assumption of the

pre-bankrupt’s policies and agreements by a debtor-in-posses-

sion is essential to future administration of cases under the

Bankruptcy Code. The extent of uncompensated benefits

received by the bankrupt estate is the only basis upon which

claims for severance pay benefits may be entitled to priority

as costs and expenses of administration. Compensation as a

cost and expense of administration limited to benefits con-

ferred upon a debtor’s estate is consistent with the rationale

expressed in American Anthracite, supra.

The principle expressed in American Anthracite is particu-

larly applicable in cases in which severance pay benefits are

a component of wages as in the case at bar. In that context,

the principle stated in In re Mammoth Mart, Inc., 536 F.2d 950

(Ist Cir. 1976) governs. In that decision, the First Circuit

noted that the primary purpose of granting administration

status to claims arising after the commencement of a case

under the Act is to implement “the statutory objective of

facilitating the rehabilitation of insolvent businesses.” 536

F.2d at 954. Congress presumed that such an objective could

be achieved by allowing to those parties providing the neces-

sary goods and services during the course of the administra-

tion of a debtor’s estate a priority for expenses actually

incurred in order to maintain, preserve or rehabilitate the

estate. Thus, whether a claim in its entirety is to be

characterized as an expense of administration under Section

64a(1) is dependent upon whether “the debt [arose] from a

transaction with the debtor-in-possession.”’

Id.

19

[W]hether a claim for severance pay based upon an

unrejected contract with the debtor and arising from a

chapter XI discharge will be entitled to § 64(a)(1) priority will

depend upon the extent to which the consideration supporting

the claim was supplied during the reorganization. . . .

Id. at 955.

In applying this criteria to the severance pay benefits

claims of the debtor’s discharged employees, the court con-

cluded that such consideration was lacking:

Because the amount of severance pay claims depends

upon the length of employment, the consideration supporting

appellants’ claims was the services performed for Mammoth

Mart over the entire period of each appellant’s employment.

Since no part of their present claims arise [sic] from services

performed for the debtor-in-possession, no portion of appel-

lant’s claims may receive § 64(a)(1) priority.

* * *

It is established that a debt is not entitled to priority as

a cost and expense of administration simply because the

claimants’ right to payment arises after the debtor-in-

possession has taken some action.

* * *

The claims for additional severance pay are based entirely

upon services performed by appellants to the debtor and, as

such, are not entitled to priority.

Id. (emphasis added) (citations omitted).

Similarly, in In re Public Ledger, Inc., supra, the Third

Circuit held that when claims for severance pay benefits

were based upon collective bargaining agreements that condi-

tioned the amount of such benefits upon length of employ-

ment, the benefits were earned on an accrual basis and

20

constituted wages subject to the provisions of Section € 4a(2)

of the Act, supra. The Court of Appeals in that case found

significant the distinction between the concept of when sever-

ance pay is “earned” and when it is “due and payable.”

Since the extent of liability for severance pay was not predi-

cated on the actual termination of the employee, but rather

upon his prior service with the debtor as in the case of Grant,

the Court of Appeals held that the entire claim was not an

expense of administration under Section 64a(1):

We hold that the discharge provision of the [union]

contract relates to wages and any sum received by the

employee under it is a part of his wage. Upon the

conditions of the contract being met, money earned each day

of the service matures in time to the status of a due debt.

Each claim, therefore, should be allowed in its rightful

sum as a charge against the estate and that portion

which was so earned under the trustees’ management

Should be given the priority due to administrative

expense. The same principle should be applied under

§ 64, sub. a(2) of the Bankruptcy Act, the provision for

priority of wages.

161 F.2d at 773 (Emphasis supplied). See also, In re Diamond

REO Trucks, Inc., 20 Collier Bankr. Cases 1130 (W.D. Mich.

1979).

Each year thousands of reorganization cases are filed

under the federal bankruptcy law. The failure to grant the

instant petition will allow the existence of uncertainty and

inconsistent results as to the treatment of executory policies

and contracts and the material consequences flowing there-

from, particularly with respect to awesome dollar impact of

severance pay claims. The continued viability of the Second

Circuit decision will substantially reduce the possibilities of

reorganization under the Bankruptcy Code. Clarification of

the conflicting Circuit Court decisions is essential to the

proper functioning of the bankruptcy law.

21

Conclusion

A writ of certiorari should issue to review the judgment

and decree of the Second Circuit.

Dated: New York, New York

March 17, 1980

Respectfully,

Harvey R. MILuer,

Attorney for Petitioner Charles G.

Rodman, as Trustee of the Estate of

W. T. Grant Company, Bankrupt

767 Fifth Avenue

New York, New York 10022

(212) 758-7800

RIicHARD P. Krasnow,

DIANE K. WEEKs,

Of Counsel