Proofs Of Claim Of Debtor's Former Employees Terminated Within Ninety Days Before Petition Date Allowed Because Right To Severance Is Based On Termination Date, Not On Date Of Employment Contracts
In re Garden Ridge Corp., Case No. 04-10324 (KJC), 2006 WL 521914 (Bankr. D. Del. March 2, 2006) (Judge Kevin J. Carey)
Two former employees of the Debtor had employment contracts entitling them to severance pay if they were terminated without cause. Both former employees were fired within the 90 day period preceding the Petition Date. Each filed a proof of claim asserting they were entitled to an unsecured priority claim of $4,650, pursuant to 11 U.S.C. § 507(a)(3), on the basis that their severance compensation was “earned within 90 days before the date of the filing of the petition.” The Debtor objected to both claims, asserting that the right to payment accrued when the employees each entered into their respective employment contracts. The Court held that the employees held valid claims under section 507(a)(3) because the significant date was the date of termination, not the date of their employment contracts.
Two former employees of Debtor entered into employment contracts more than ninety days before debtor Garden Ridge Corporation’s petition date of February 2, 2004. The employment contracts each entitled the employees to severance pay if they were terminated for any reason other than “for cause.” Both were fired within the 90 day period preceding the Petition Date. Each filed a proof of claim asserting they were entitled to an unsecured priority claim of $4,650, pursuant to 11 U.S.C. § 507(a)(3), on the basis that their severance compensation was “earned within 90 days before the date of the filing of the petition.” The Debtor filed objections to both claims, asserting that the right to payment accrued when the employees each entered into their respective employment contracts, and thus were not claims for compensation earned within 90 days before the petition.The Court overruled the Debtor’s claim objections, and allowed the employees’ claims, holding that only a contingent obligation arose when the contracts were entered into. The contingencies actually occurred when the employees were terminated, at which time the Debtor became obligated to make the severance payments. The Court looked to the intent behind section 507(a)(3) to buttress its conclusion, holding that an employee’s right to severance pay cannot be protected, as rights to wages, salary, commissions, vacation and sick leave are protected, if severance pay rights are earned when the employment relationship begins, as that would almost always be outside the 90 day period.
