In Re Beverage Enterprises, Inc.
OPINION
A. INTRODUCTION
Thе present posture of the instant proof of claim litigation arising in the above-captioned bankruptcy case requires us to determine whether a claim under the Worker Adjustment and Retraining Notification Act (“the WARN Act”) arising due to post-petition actions of the Debtor is entitled to priority status. We hold, consistent with the Union-claimant’s position on the issue, that this claim is entitled to administrative priority as an actual, necessary cost and expense of preserving the Debtor’s estate pursuant to 11 U.S.C. §§ 507(a)(1) and 503(b)(1)(A). Therefore, we will schedule a status hearing to determine how we will proceed in liquidating this claim, as is necessitated by our decision.
B. PROCEDURAL AND FACTUAL HISTORY
BEVERAGE ENTERPRISES, INC. (“the Debtor”); its parent company, POCONO SPRINGS COMPANY (“Pocono”); and Purity Water Company, another related company whose case was ultimately dismissed, all filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on March 25, 1997. Pocono was and remains, on a reduced scale, a producer and distributor of water from natural springs under a plan confirmed in a decision of June 24, 1998, reported as
In re Pocono Springs Co.,
The Debtor was, at the commencement of this ease, a distributor of Pocono’s water and numerous other non-alcoholic beverages. According to the Debtor, its demise resulted from actions of Hornell Brewing Co. (“Hornell”) in illegally terminating a contract exclusively licensing the Debtor to distribute Arizona Iced Tea products in the Philadelphia area in March 1997, as described in a lawsuit in which decisions were reported at
In re Pocono Springs Co.,
The
Pocono I
decision also granted conditional, prospective relief from the automatic
Upon consummation of the sale of DPSU’s license, a sales agreement was executed. Thereafter, on or about June 29, 1997, the Debtor’s employees were issued notices of termination of their employment as of July 3, 1997. The emplоyees were paid only through and including July 4,1997.
On October 1, 1997, Teamsters Local Union 830 (“the Union”), the representative of most of the Debtor’s employees, filed a proof of claim, docketed as No. 137 (“the Claim”), asserting that the Debtor committed a violation of the WARN Act by failing to provide 60 days notice of its plant closing to its employees. The claim asserted that the Union, on behalf of its members who were former employees of the Debtor, was entitled to damages in an unliquidated priority claim in an amount exceeding $100,000.00. We note that the Union now estimates this claim at $800,000.
On July 20, 1998, the Debtor filed an objection (“the Objection”) to the Claim. In the Objection the Debtor alleged principally that the Union’s asserted administrativе claim was invalid on the ground that the Debtor’s notice was adequate and sufficient under the “faltering business” exception referenced in the WARN Act at 29 U.S.C. § 2102(b)(1).
A hearing on the Objection was scheduled on August 26, 1998. At that time, the Debt- or asserted two new issues: (1) the Union lacked standing to assert the Claim; and (2) the Claim was properly classified as either a general unsecured claim or an unsecured priority claim for “wages” under 11 U.S.C. § 607(a)(3) and not as an administrative claim. The Union sought discovery to support the Claim, which the Debtor resisted. The parties ultimately agreed that, since funds would be available to pay the Claim only if it were classified as an administrative claim, the parties should brief the two new issues raised by the Debtor prior to cоnducting discovery and a hearing on the merits of the Claim.
These briefs were due on September 16, 1998, but the parties both submitted their respective briefs early. In its brief, the Debtor conceded, in light of the decision in
United Food & Commercial Workers Union Local 751 v. Brown Group, Inc.,
C. DISCUSSION
The determination of the sole remaining issue as to whether the Claim constitutes a priority administrative expense requires interpretation of § 2104(a)(l)(A)(i), (ii) of the WARN Act and §§ 507(a)(1) and 503(b)(1)(A) of the Bankruptcy Code. These laws read as follows:
§ 2104. Administration and enforcement of requirements
(a) Civil actions against employers
(1) Any employer who orders a plant closing or mass layoff in violation of section 2102 of this title shall be liable to each aggrieved employee who suffers аn employment loss as a result of each closing or layoff for -
(A) back pay for each day of violation at a rate of compensation not less than the higher of the average regular rate received -
(i) by such employee during the last 3 years of the employee’s employment; or
(ii) the final regular rate received by such employee....
§ 507. Priorities
(a) The following expenses and claims have рriority in the following order:
(1) First, administrative expenses allowed under section 503(b) of this title
(b) After notice and a hearing, there shall be allowed, administrative expenses, other than claims allowed under section 502(f) of this title, including—
(1)(A) the actual, necessary costs and expenses of expenses of preserving the estate, including wages, wages, salaries, or сommissions for services rendered after the commencement of the case....
The Debtor asserts that the Claim is not entitled to administrative priority under §§ 507(a)(1) and 503(b)(1)(A) of the Code because WARN Act “back pay” liability does not constitute “wages.” In support of this argument, it relies, initially, on
United Steelworkers of America, AFL-CIO-CLC v. North Star Steel Co.,
Next, the Debtor argues that the Union’s claim does not qualify as a § 503(b)(1)(A) administrative expense because WARN Act “back pay” liability is not based on services rendered. Again, the Debtor relies on
Georgia-Pacific, supra,
Further, the Debtor maintains that the Claim at issue are not actual and necessary costs of preserving the Debtor’s estate and therefore the WARN Act benefits at issue are not otherwise appropriate for administrative expenses classification. In this argument, the Debtor relies on several court decisions stating that administrative expenses must be the actual and necessary costs of preserving the estate for the benefit of its creditors.
See Palau, supra,
Finally, the Debtor contends that
Reading Co. v. Brown,
The Union, on the other hand, supports its position principally by citation to
In re Hanlin Group, Inc.,
Not surprisingly, the Union counters the Debtor’s argument that the
Reading
decision is inapplicable, citing
Hanlin Group, supra,
We believe that there is a line of cases cited by neither party nor in Hanlin Group, the only precedent addressing the issue, of classification of postpetition WARN Act benefits, which settle the issue. These cases address the issue of when post-petition severance pay claims of workers of a DIP are properly classifiable as an administrative expense.
These eases divide severance pay claims into two categories. In the first category is severance pay that is required contractually to be paid an employee when that employee is laid off without being given a predetermined amount of notification.
See, e.g., In re Roth American, Inc.,
In the second category is severance pay based solely on the length of the employee’s service with the debtor. As the name implies, this category refers to severance pay that is obtainable by an employee solely because of the time that the employee has worked for a particular employer.
E.g., Roth American, supra,
The arguments and authorities cited by the Debtor cannot overcome this conclusion. The
North Star
and
Georgia-Pacific
holdings have little bearing on the issue. Far more pertinent is the principle, established ever since the decision in
Public Ledger, supra,
With respect to the issue of whether or not WARN Act benefits are “wages,” much can be said fоr the Union’s position that they are. In broad outline, the WARN Act provides that, when an employer which orders a plant closing without the required sixty days’ advance notice, that employer is liable to the affected employees for back pay and benefits. 29 U.S.C. §§ 2101(a)(1), 2101(a)(8), 2101(a)(5), 2102(a), and 2104(a)(1)(A). The Act’s legislative history makes it clear that Congress intended the “back рay” language in WARN to connote the traditional “back pay” remedy as discussed in
Phelps Dodge Corp. v. NLRB,
However, assuming
arguendo,
that WARN Act benefits are not properly designated as “wages,” we note, as the court stated in
In re Crouthamel Potato Chip Company,
[w]ages and commissions for service rendered after the petition has been filed are identified by § 503(b)(1) as merely “included” within the broader class of “actual, necessary costs and expenses of preserving the estate.” Thus, once the conclusion is reached that a claim does not fall within the explicitly listed category of wages for services rendered after the commencement of the case, it is still necessary to consider whether the claim would fit ivithin the broader class of actual and necessary costs of preserving the estate. To make that determination, the court must consider (1) whether the claim is for costs incurred post-petition which were necessary for thе preservation of the estate or provided some benefit to the estate and (2) whether the claim results from a transaction or relationship between the debtor in possession and the creditor as distinguished from expenses resulting solely from pre-petition relationships between the debtor and the creditor (emphasis added).
The cases cited by the Debtor,
e.g., Palau, Eagle Bus, Continental,
and
In re Wheeling-Pittsburgh Steel Corp.,
By arguing that WARN Act liability is not “wages,” the Debtor is actually lending support to the alternate argument that such a claim is an administrative expense under the
Beading Co.
paradigm regarding рostpetition damage awards. If sums due under the WARN Act are not classifiable as wages, then same must be in the nature of damages paid in compensation for post-petition injuries, which are properly classified as administrative claims.
See, e.g., In re N.P. Mining Co.,
D. CONCLUSION
For all of the foregoing reasons, we are compelled to deny the Debtor’s argument that the Claim is not proрerly classified as an administrative claim. We will therefore schedule the matter for a status hearing on October 7,1998, to determine how the discovery which the Union contends is a prerequisite to the final hearing on the Objection shall take place and when that hearing will be scheduled.
ORDER
AND NOW, this 29th day of September, 1998, upon consideration of the parties’ argumеnts and briefs relative to the proper classification of the proof of claim, No. 137, filed by Teamsters Local Union No. 830 (“the Claim”), it is hereby ORDERED as follows:
1. The Claim is deemed properly classified as a priority claim pursuant to 11 U.S.C. §§ 507(a)(1) and 503(b)(1)(A).
2. A status conference to establish a schedule for relevant discovery and a hearing date for final disposition of the Debtor’s objection to the Claim is scheduled on
WEDNESDAY, OCTOBER 7, 1998 AT 9:30 A.M. and shall be held in Bankruptcy Courtroom No. 1, Second Floor, 900 Market Street, Philadelphia, PA 19107.