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NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-13-1494-KiTaD

)

MERUELO MADDUX PROPERTIES, ) Bk. No. 1:09-13356-VK

INC., )

)

Debtor. )

 )

)

RICHARD MERUELO, )

)

Appellant, )

)

v. ) M E M O R A N D U M1

)

REORGANIZED MERUELO MADDUX )

PROPERTIES, INC., )

)

Appellee. )

______________________________)

Argued and Submitted on June 26, 2014, 

at Pasadena, California

Filed - August 20, 2014

Appeal from the United States Bankruptcy Court

for the Central District of California

Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding

 

Appearances: Aimee Dominguez, Esq. of Dominguez Alejo LLP argued

for appellant Richard Meruelo; Christopher E.

Prince, Esq. of Lesnick Prince & Pappas LLP argued

for appellee Reorganized Meruelo Maddux Properties,

Inc. 

 

Before: KIRSCHER, TAYLOR and DUNN, Bankruptcy Judges.

FILED

AUG 20 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may have

(see Fed. R. App. P. 32.1), it has no precedential value. See 9th

Cir. BAP Rule 8013-1.
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Richard Meruelo ("Meruelo") appeals an order denying his

request for severance pay in connection with his postpetition

termination from chapter 112 debtor, Meruelo Maddux Properties,

Inc. ("Debtor"). Because the bankruptcy court applied an

incorrect standard of law to Meruelo's severance claim, we VACATE

and REMAND, in part. 

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Prepetition events

Meruelo, former CEO and Chairman of the Board of Directors

for Debtor, entered into an Executive Employment Agreement with

Debtor on January 30, 2007. It provided, among other things, a

base salary of $450,000 and a mandatory annual bonus equal to

fifty percent of the base ($225,000). The Employment Agreement

had an initial three-year term, but would automatically renew for

successive one-year terms, unless either party gave the required

notice of non-renewal. 

If Meruelo's employment terminated "without cause," he would

receive a single lump-sum severance payment equal to three times

the sum of (i) his base salary and (ii) the greater of (a) the

bonus actually paid to him for the most recent completed fiscal

year and (b) the minimum bonus that would have been paid during

the fiscal year in which his employment was terminated. In short,

Meruelo would receive at least $2,025,000.3

2 Unless specified otherwise, all chapter, code and rule

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and

the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

3 An identical employment agreement for Debtor's President

and COO, John Maddux ("Maddux"), was executed on the same day. 

continue...

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B. Postpetition events

Debtor and its affiliated entities filed chapter 11 

bankruptcy cases in March 2009, before the end of the initial term

in Meruelo's Employment Agreement. The cases were consolidated

and jointly administered. Debtor continued its usual operations,

and Meruelo continued to serve as CEO. Meruelo filed a proof of

claim on September 23, 2009, and another one on March 7, 2012. 

The initial term of Meruelo's Employment Agreement expired on

January 30, 2010. The Employment Agreement was not assumed, but

Meruelo continued to work for Debtor.

1. The notice of non-renewal

After the appointment of the Official Committee of Equity

Holders ("OEC") and during the time that competing plans were

being offered by Debtor and entities known as Charlestown Capital

Advisors, LLC and Hartland Asset Management Corporation

(collectively "Charlestown"), it became apparent to Debtor that if

the Charlestown plan were approved, Meruelo would no longer be

employed with the reorganized debtor and would hold a substantial

claim as a result of his termination. In particular, Meruelo

would be entitled to a significant severance package if he were

terminated during the Employment Agreement's term. 

In a formal written demand sent to Debtor on September 21,

2010, the OEC's counsel noted that Meruelo's Employment Agreement

would automatically renew for another one-year term (from

January 31, 2011 to January 30, 2012) absent the delivery of a

3...continue

Maddux sought the same severance claim as Meruelo. He is not a

party to this appeal, but we discuss him where necessary.

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non-renewal notice by November 29, 2010. To avoid Meruelo's

severance claim, the OEC demanded that Debtor issue a notice of

non-renewal by September 29, 2010.

When Debtor, still under the control of Meruelo and Maddux,

failed to issue the notice of non-renewal, the OEC sought standing

to issue it. The OEC noted that if the Charlestown plan were

confirmed, Meruelo would be terminated and such termination would

be "without cause" per the terms of his Employment Agreement. In

that case, Meruelo would hold a claim for severance. The OEC

contended that if the non-renewal notice were timely issued,

Meruelo's severance claim would be avoided because his employment

would not be terminated during the employment term under the

Employment Agreement. Failing to issue it, however, would result

in Debtor being saddled with a substantial administrative expense

for Meruelo's severance claim.

Debtor opposed the OEC's motion, contending that issuing the

notice of non-renewal to Meruelo would qualify as a "good reason"

for him to resign, thereby triggering a severance payment equal to

"one times the sum" of his base salary plus the amount equal to

the bonus he was paid the previous year. Likewise, a termination

"without cause" would trigger a severance payment equal to "three

times the sum" of his base salary plus the greater of the amount

equal to the bonus he was paid the previous year or what he would

have received in the year of his termination. Debtor contended

the notice of non-renewal clause in the Employment Agreement

permitted Debtor to terminate Meruelo's employment or at least to

transition him to an "at will" employee, without such termination

qualifying as one "without cause." However, argued Debtor, to

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invoke this beneficial clause the executory Employment Agreement

would first have to be assumed, a decision within Debtor's

business judgment, not the OEC's, and which would require Debtor

to cure all existing defaults, currently about $1 million in

unpaid bonuses.

After two hearings on the matter, the bankruptcy court

granted the OEC standing to issue the notice of non-renewal. The

order expressly provided that the issuance of the non-renewal

notice would not expand or restrict any party's right to dispute a

claim asserted by Meruelo under the Employment Agreement including

(a) any party's right to assert that his employment may be

terminated for "cause" or (b) Meruelo's right to assert a claim

under the Employment Agreement against the estate. 

The OEC issued the notice of non-renewal to Meruelo on

November 24, 2010. Despite the notice, Meruelo continued to work

for Debtor until August 5, 2011, when he was officially

terminated.

2. The Charlestown Plan and Meruelo's termination

The bankruptcy court confirmed the Charlestown Plan. Per the

Charlestown Plan and by operation of law, on July 25, 2011,

Meruelo ceased to be employed by the reorganized debtor, EVOQ

Properties, Inc. ("EVOQ"). On August 5, 2011, EVOQ issued to 

Meruelo a notice of termination, effective July 25, 2011. 

Enclosed was a check for the amount EVOQ maintained was Meruelo's

accrued unpaid salary through August 5, as well as his unused

vacation time through July 25. The termination notice advised

Meruelo to file an administrative claim for any unpaid bonus

compensation he felt he was entitled to. 

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3. Meruelo's motion to compel payment of wages and

severance

In response to his termination, Meruelo filed a Motion for

Order Compelling Debtors to Pay Administrative Expense and

Prepetition Unsecured Wage Claims ("Motion to Compel Payment"). 

In short, Meruelo argued that EVOQ, per the Charlestown Plan,

failed to pay his administrative expense and prepetition unsecured

claim on the Effective Date, July 25, 2011. Meruelo argued he was

entitled to no less than $450,000 in bonus wages for 2009 and 2010

($225,000 for each year), a prorated bonus of $133,767 for 2011

(from January 31, 2011 to August 5, 2011, after the non-renewal

notice and up to the termination date), at least $2,025,000 in

severance pay, accrued and unused vacation wages, and other

penalties and attorney's fees.4 The Motion to Compel Payment did

not distinguish whether the severance payment was considered a

prepetition unsecured claim or an administrative expense. Nowhere

in the motion were relevant Code sections referenced or discussed. 

EVOQ opposed Meruelo's Motion to Compel Payment, arguing that

Meruelo was not entitled to an administrative claim for his 2011

base salary, bonus and severance benefits under the Employment

Agreement. The Employment Agreement no longer existed because it

expired on January 30, 2011. As for Meruelo's prepetition claims,

EVOQ argued that it had 180 days from the Effective Date of the

4 Upon objection by several creditors to Meruelo's bonus

wages for 2009, Judge Thompson issued a Memorandum Decision on

July 6, 2009, determining that the issue of bonus wages to Meruelo

and other Debtor executives was to be decided at a later date

"upon further notice to creditors." All objections to payment of

his salary were overruled. The 2009 bonus wages were later

granted by Judge Kaufman on November 23, 2011.

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Charlestown Plan to object to prepetition claims. Thus, Meruelo's

request was premature. 

In November 2011, the bankruptcy court granted the Motion to

Compel Payment, in part, as to Meruelo's 2009 bonus claim. He was

ultimately also awarded his 2010 bonus claim. In its arguments

against Meruelo's remaining employment claims, EVOQ conceded that

Meruelo was entitled to reasonable compensation for his services

after the Employment Agreement expired, but argued he was not

entitled to severance because once the Employment Agreement

expired, the Term of Employment ended and the company was no

longer liable for severance pay.

In June 2012, the bankruptcy court issued a scheduling order

for Meruelo's remaining disputed employment claims: (1) his 2011

bonus claim for $133,767; and (2) his claim for severance pay.5

The court ordered briefing and scheduled an evidentiary hearing. 

Meruelo, pro se, filed his brief, which incorporated the

arguments made in Maddux's brief on the same issue. Meruelo (as

argued by Maddux) contended he was entitled to severance if he was

terminated without cause during the "Term of Employment," which

was defined in paragraph 3 of the Employment Agreement. While the

"Term of Employment" included the three-year initial term and any

one-year extended term, the Employment Agreement did not address

when the "Term of Employment" technically ended. Meruelo argued

that issue was answered in the last sentence of paragraph 3, which

provided, "but the Term of Employment shall end upon any

5 The bankruptcy court's ruling respecting the 2011 bonus

claim is not at issue in this appeal, but we discuss it where

necessary since it was decided with the severance claim.

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termination of Executive's employment with Employer as herein

provided." Arguably, the language did not say the Term of

Employment ended when the initial term or extended term expired. 

Instead, argued Meruelo, the Term of Employment ended when the

employment terminated, which implied that the Term of Employment

was effective until he was officially terminated on August 5,

2011, not when the notice of non-renewal was sent in November

2010. Thus, the terms of the Employment Agreement were

enforceable at the time he was terminated, and he was entitled to

full severance. 

Meruelo argued that he should get the severance he bargained

for and not be in a worse position because he remained on the job,

when he could have resigned upon the non-renewal notice and

received the severance payment. Alternatively, if the court

determined that the terms of the Employment Agreement were not

contractually binding at the time of his termination, Meruelo

argued he was entitled to a "reasonable" severance on a "quantum

meruit" basis. 

EVOQ argued that expiration of the Employment Agreement

precluded any severance, and it disputed Meruelo's contention that

the notice of non-renewal served no purpose, particularly when he

and Maddux decided to not renew every other executive whose

initial term was set to expire in January 2009 in order to avoid

severance claims. EVOQ also disputed Meruelo's quantum meruit

theory; it argued that quantum meruit applied only to the 2011

bonus because the parties had disputed what was the "reasonable

value" of Meruelo's services. EVOQ distinguished the cases

Meruelo claimed supported his quantum meruit theory for severance. 

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4. The evidentiary hearing and the bankruptcy court’s

ruling on the 2011 bonus and severance claims

At the start of the evidentiary hearing on the 2011 bonus and

severance claims, the bankruptcy court confirmed with counsel for

EVOQ that both claims were administrative expense claims. The

court went on to say that such claims were "supposed to be

necessary and beneficial," and that the burden was on the claimant

to demonstrate the bonus and severance package was necessary to

"keep them there." Hr'g Tr. (April 22, 2013) 12:1-4. The court

then stated that the burden was on the claimant to "show the

reasonableness of the compensation," particularly when the

Employment Agreement was not controlling as it was not renewed. 

Id. at 12:13-13:1. It later ruled that the 2011 bonus and

severance claims were not subject to the terms of the Employment

Agreement because it had not been renewed; Meruelo was working

without a contract during the period of January 31, 2011 through

August 5, 2011. 

Counsel for EVOQ then argued that because the Employment

Agreement was not controlling, the court had to look at what was

"reasonable," and Meruelo and Maddux had not presented any

evidence as to what amount was reasonable. After further argument

by EVOQ, counsel for Maddux argued:

MR. SHEMANO: The Court mentioned that these claims are

being asserted as administrative expense claims and

really were these reasonable and necessary benefits to

the estate. Let's just remember, we can call these -- we

don't have to call these administrative expense claims;

we can call these general unsecured claims. 

Id. at 18:15-20. The bankruptcy court then noted again that the

2011 bonus and severance claims were brought as administrative

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expense claims, but opined that even if they were considered

unsecured claims, the burden was still on the claimant to show the

amount requested was "reasonable" given that no contract was in

effect. Id. at 22:11-23:5. In response, Maddux's counsel stated

that the court did not need to get "fixated" on "whether these are

administrative expense claims or not." Id. at 23:7-9. His

client's case did "not stand or fall on whether we demonstrate

benefit to the estate." Id. at 23:19-20. 

After further argument from counsel, the bankruptcy court 

expressed its view about the severance claim: 

The agreements were not renewed. They waived their right

to severance. They could have collected it and left and

said, you know what, go ahead with that other plan. But

instead, they decided, we're going to shoot for keeping

the company in our control.

. . .

I don't have any evidence that this is reasonable. I

don't think it is reasonable. I don't understand why

that would be reasonable . . . . 

. . .

They -- I don't think its reasonable. I think it's their

burden to show it's reasonable. 

. . . 

No, it is not reasonable for people who stayed on after

the agreements were not renewed to simply assume in the

absence of an approved -- court-approved employment

agreement -- they didn't ask for severance in their

insider comp forms. 

. . .

Well, I don't think there's any record it's reasonable. 

There's no record it's reasonable. None, zero. I mean,

you may say that, well, we have a record that since the

Court approved the 2009 bonuses and 2010 bonuses maybe

the Court should approve (indiscernible), but no court

ever approved the severance . . . . It was never

litigated. 

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. . .

Okay. So I just don't think it's reasonable to expect

you to collect severance pay when there was all this

litigation about the fact that you were going to get a

notice of non-renewal to cut off your right to severance

pay. 

. . .

There's no . . . evidence that the severance amount is

reasonable, none. No evidence that it's reasonable. I

mean, you're saying based on a 2007 contract provided for

three times when he knew that there was a notice of nonrenewal and that this was the main focus of it and -- you

know, he -- there's just no evidence that it's -- in this

context that it's reasonable. 

. . .

There's no evidence that somebody else would have

required three years of severance or they would have

agreed to pay three years of severance. 

Id. at 38:1-5; 39:13-16; 39:20-22; 40:6-10; 40:21-41:3; 42:5-9;

51:5-13; 51:21-23. In response, counsel for Maddux argued:

MR. SHEMANO: Your Honor, we say under § 502(b)(4) this

Court can do what it wants as a court of equity of

reasonableness. If this Court thinks three times [the

base salary] is not reasonable, we live or die with that. 

Like I said, we -- that's what our papers say. 

Id. at 51:24-52:3. Upon further discussion, the following

colloquy ensued: 

MR. SHEMANO: Your Honor, again, the point is, when they

negotiated it . . . this is a package. Okay. And if you

-- if the Court thinks the value is zero under quantum

meruit, I think the Court is making a mistake. I -- if

the Court said it's not two million dollars, I can't

argue with the Court. I think there's a number between

zero and two million that based upon the facts and

circumstances this Court should --

THE COURT: I'm not picking numbers out of the sky.

MR. SHEMANO: –- choose --

THE COURT: I mean, you know, I'm just -- it's not --

MR. SHEMANO: Well, all right, now, I will --

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THE COURT: Three times is unreasonable. There's no

evidence it's reasonable. The fact that it's in a

contract that was negotiated three years before . . . . 

Id. at 54:5-21. 

After further argument from counsel, the bankruptcy court

announced its oral ruling denying the severance claim in its

entirety:

I don't think [the severance amount is] reasonable or

appropriate on quantum meruit grounds that that severance

amount in that contract, which was not renewed. 

And I think whether it's administrative or unsecured,

it's the claimant's ultimate burden on showing it as

being reasonable and appropriate and payable and I don't

see it where an agreement wasn't renewed, and for all of

the reasons I've articulated. So I think the case is

[sic] that look at severance are distinguishable on the

specific facts of this case, and so no severance.

Id. at 75:18-76:2. 

The bankruptcy court entered an order allowing Meruelo's 2011

bonus claim but denying his claim for severance ("Compel Order"). 

The Compel Order was silent as to what authority the bankruptcy

court relied upon for its decision. On September 24, 2013, the

court entered an order for attorney's fees in connection with

Meruelo's and Maddux's employment claims. Although they were

determined to be the prevailing parties, because Meruelo had no

attorney's fees or expenses, he was awarded nothing. This timely

appeal followed.

II. JURISDICTION 

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334

and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158. 

III. ISSUE

Did the bankruptcy court abuse its discretion by applying an

incorrect standard of law to Meruelo's severance claim?

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IV. STANDARD OF REVIEW

We review the bankruptcy court's order allowing or

disallowing an administrative claim for abuse of discretion. 

Gonzales v. Gottlieb (In re Metro Fulfillment, Inc.), 294 B.R.

306, 309 (9th Cir. BAP 2003)(citing Teamsters Indus. Sec. Fund v.

World Sales, Inc. (In re World Sales, Inc.), 183 B.R. 872, 875

(9th Cir. BAP 1995)). A bankruptcy court abuses its discretion if

it applies an incorrect legal standard or its factual findings are

illogical, implausible or without support from evidence in the

record. TrafficSchool.com v. Edriver Inc., 653 F.3d 820, 832 (9th

Cir. 2011).

V. DISCUSSION

The bankruptcy court abused its discretion by applying an

incorrect standard of law to the severance claim.

We start by briefly recapping the pertinent facts of this

case. Meruelo's Employment Agreement, which no one disputes was

an executory contract, was executed in January 2007. It was still

in effect when Debtor filed its chapter 11 cases in 2009, as the

initial term of the Employment Agreement did not end until

January 30, 2010. The Employment Agreement was not assumed or

rejected prior to confirmation, but the parties apparently

believed that it renewed for one more year from January 31, 2010

to January 30, 2011. The OEC acted as though it had renewed,

which explained its belief that a notice of non-renewal was needed

by November 29, 2010, to satisfy the 60-day notice requirement. 

The bankruptcy court also noted at the evidentiary hearing that

the Employment Agreement automatically renewed for one more year

in January 2010.

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The bankruptcy court did not enter written findings and

conclusions, nor state its analysis with any particularity at the

evidentiary hearing. The court determined: that the Employment

Agreement had not been renewed after January 2011 and had expired

prior to Meruelo's termination in August 2011; and that the amount

of his severance claim was not reasonable. The court, however,

never stated any statutory or case law authority for its decision.

The bankruptcy court stated during its oral ruling that

whether the severance claim was an administrative expense or an

unsecured claim, the claimant had the burden to prove the amount

was "reasonable." The court also stated that it had distinguished

the "quantum meruit" cases cited by Maddux (and thus Meruelo), but

did not say on what basis. Adding to the confusion, Meruelo

argued in the Motion to Compel Payment that the severance claim

was an administrative expense, but later argued (through Maddux)

that such claim could be treated as either an administrative

expense or an unsecured claim under § 502(b)(4). Meruelo had

filed both a proof of claim and the Motion to Compel Payment,

which functioned as a motion to allow an administrative expense

claim. The Compel Order, drafted by counsel, does not state under

what authority the severance claim was being denied.

Section 502(b)(4) provides for the allowance of a claim over

objection "except to the extent that . . . if such claim is for

services of an insider . . . such claim exceeds the reasonable

value of such services." Thus, an insider's claim for services

under § 502(b)(4) is subject to a "reasonableness" standard. See

The Margulies Law Firm, APLC v. Placide (In re Placide), 459 B.R.

64, 72 (9th Cir. BAP 2011). However, such claims are only for the

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insider's services rendered and unpaid at the time of the filing

of the petition. 4 COLLIER ON BANKRUPTCY ¶ 502.03[5][a] (Alan N.

Resnick & Henry J. Sommer eds., 16th ed. 2012). In other words, 

§ 502(b)(4) applies to prepetition claims. Since the claims at

issue here were for Meruelo's 2011 bonus, which was for services

rendered postpetition, and the severance claim, which accrued

postpetition, they were not for prepetition claims. Therefore, if

the bankruptcy court applied § 502(b)(4), it abused its

discretion. 

Section 503(b)(1)(A)(i) provides that administrative expenses

include "the actual, necessary costs and expenses of preserving

the estate, including wages, salaries, and commissions for

services rendered after the commencement of the case[.]" The

burden of proving an administrative expense claim is on the

claimant. Einstein/Noah Bagel Corp. v. Smith (In re BCE West,

L.P.), 319 F.3d 1166, 1172 (9th Cir. 2003).

The Ninth Circuit has afforded administrative expense

priority for certain types of severance pay for employees who

provided postpetition services. The rule is that "pay at

termination in lieu of notice" is considered an administrative

expense, but "pay at termination based upon length of employment"

is not. See Teamsters Local No. 310 v. Ingrum (In re Tucson

Yellow Cab Co.), 789 F.2d 701, 703 (9th Cir. 1986); Lines v. Sys.

Bd. of Adjustment No. 94 Bhd. of Ry., Airline & S.S. Clerks

(In re Health Maint. Found.), 680 F.2d 619, 621 (9th Cir. 1982)

(applying § 64(a)(1) of the former Bankruptcy Act, now

§ 503(b)(1)(A)(i)). However, the lump-sum severance payment at

issue here does not fall into either one of these categories. It

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provided for severance on termination without cause, with no

mention of length of service or a notice period. We faced this

same issue in Dullanty v. Selectors, Inc. (In re Selectors, Inc.),

85 B.R. 843, 845-46 (9th Cir. BAP 1988):

Despite the apparent simplicity of the severance pay

rule, the result in the instant case is not obvious. 

First, the parachute clause in the case at bar is not

like the provisions in the cases cited above. In those

cases, the severance pay clauses provided compensation

based upon what the employee would have earned during a

specified period prior to termination. See Tucson Yellow

Cab, 713 F.2d at 703 (two weeks notice or two weeks pay);

Health Maintenance, 680 F.2d at 620 (specified number of

days pay based on length of employment); Mammoth Mart,

536 F.2d at 952 (one [week’s] salary per year of

employment); Straus–Duparquet, 386 F.2d at 650 (one or

two weeks pay); Public Ledger, 161 F.2d at 771 (specified

number of weeks pay depending on the length of

employment). (Footnote omitted). 

The parachute clause in the instant case is unlike any of

these provisions: It does not provide compensation based

upon salary during employment; nor does it mention or

base compensation upon any notice period or length of

employment. 

. . .

In our view, the parachute clause in the instant case is

so different from the severance pay provisions addressed

in the Ninth Circuit cases, that it should not be forced

into either category. 

We held that in cases with severance or "parachute" clauses like

the one at issue here, the Ninth Circuit severance pay rules are

inapplicable, and instead such clauses should be subjected to

analysis under § 503(b)'s standards — does the severance clause

give rise to an actual and necessary expense of preserving the

estate? Id. at 846. 

We recognize authority exists which dictates that employees

shall receive compensation on a quantum meruit basis for services

rendered postpetition for the time period before an executory

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contract has been assumed or rejected:

If the debtor-in-possession elects to continue to receive

benefits from the other party to an executory contract

pending a decision to reject or assume the contract, the

debtor-in-possession is obligated to pay for the

reasonable value of those services, which depending on

the circumstances of a particular contract, may be what

is specified in the contract. 

NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531 (1984). This

"reasonable value of services" standard appears to be what the

bankruptcy court applied to both the 2011 bonus claim and the

severance claim. While this may be the proper standard to apply

for compensation consisting of wages or something akin to wages

when a contract has not yet been assumed or is non-existent, it

does not apply to severance claims.

A claimant's right to a lump-sum severance payment should be

analyzed under the general rules governing administrative expense

priority. In re Selectors, Inc., 85 B.R. at 846; Bachman v.

Commercial Fin. Servs., Inc (In re Commercial Fin. Servs., Inc.),

246 F.3d 1291, 1293-94 (10th Cir. 2001)(applying § 503(b)'s

"actual and necessary" test to executives' lump-sum severance

claims); Klemick v. Able Labs., Inc., 2007 WL 952030, at *5

(D.N.J. Mar. 28, 2007)(same); In re Big M, Inc., 2014 WL 2442940,

at *4 (Bankr. D. N.J. May 30, 2014)(same); In re Ellipso, Inc.,

2012 WL 827103, at *3 (Bankr. D.D.C. Mar. 9, 2012)(employment

contract not assumed; court applied "reasonable value" test to

executive's wage claim, but applied § 503(b)'s "actual and

necessary" test to executive's severance claim); In re M Group,

Inc., 268 B.R. 896, 902 (Bankr. D. Del. 2001)(applying "actual and

necessary" test under § 503(b) to executive's lump-sum severance

claim); In re Uly-Pack, Inc., 128 B.R. 763, 766-69 (Bankr. S.D.

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Ill. 1991) (employment contract of chapter 11 debtor's former CEO

was terminated postpetition when case was converted to chapter 7

and assets were sold by trustee; court applied § 503(b) analysis

to severance claim but determined it was entitled only to the

status of a general unsecured claim under § 502(b)(7)). 

In determining whether the claimant's severance claim is

entitled to priority as an administrative expense, the bankruptcy

court must consider: (1) was the severance provision the result

of a transaction with the debtor in possession; and (2) was the

consideration supporting the claimant's right to severance

beneficial to the debtor's operation of its business. 

In re Selectors, Inc., 85 B.R. at 846; In re Commercial Fin.

Servs., Inc., 246 F.3d at 1294-95; Klemick, 2007 WL 952030, at *5;

In re Big M, Inc., 2014 WL 2442940, at *4-5; In re Ellipso, Inc.,

2012 WL 827103, at *3; In re M Group, Inc., 268 B.R. 896, 902

(Bankr. D. Del. 2001); In re Uly-Pack, Inc., 128 B.R. at 766. See

generally In re BCE West, L.P., 319 F.3d at 1172 (claimants

seeking payment of an administrative expense claim must show the

debt arose from a transaction with the debtor and directly and

substantially benefitted the estate). 

One could argue that In re Tucson Yellow Cab Co., Inc.,

789 F.2d at 703-05, suggests that Meruelo's severance claim could

be analyzed under a "reasonableness" or "quantum meruit" theory. 

In Tucson Yellow Cab, a collective bargaining agreement between

the taxi drivers and the company provided for two weeks notice

prior to termination or severance pay in lieu of notice. Id. at

703. The CBA was ultimately rejected by the estate; the taxi

drivers were terminated by the new owner several days thereafter. 

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The taxi drivers sought administrative priority for their

severance claims. Id. The Ninth Circuit held that severance pay

in lieu of notice was entitled to administrative priority under

§ 503(b)(1)(A), as long as such pay was owed by contract or in

quantum meruit — i.e., when the contract no longer exists at the

time of termination. Id. Because the CBA at issue was no longer

in existence on the date of termination, the court allowed the

two-week pay severance claims as administrative claims on a

quantum meruit basis. Id. at 704. 

We distinguish Tucson Yellow Cab, which was largely decided

on equitable grounds. First, Meruelo's severance payment is not

"pay in lieu of notice." Further, the clear intent of the CBA was

to compensate the taxi drivers for at least two weeks before

termination, either by giving them two weeks notice, after which

the drivers would presumably work two more weeks and be paid, or

to pay them two weeks severance pay and terminate them

immediately. Therefore, the "pay in lieu of notice" was clearly a

component of compensation — a payment akin to wages. See

In re Commercial Fin. Servs., Inc., 246 F.3d at 1296. The

severance claim at issue here is not a component of wages subject

to a "reasonable value" analysis. Meruelo was paid his normal

wages and, ultimately, his bonuses for the time he worked for

Debtor postpetition. The lump-sum severance payment is an

entirely separate claim and subject to the general rules governing

administrative expense priority under § 503(b). 

From our review of the record, we conclude the bankruptcy

court abused its discretion by applying an incorrect standard of

law when analyzing Meruelo's severance claim. It was not subject

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to a "reasonableness" standard, but rather the "actual and

necessary" standard set forth in § 503(b). Accordingly, we must

VACATE and REMAND.

VI. CONCLUSION

Because the bankruptcy court applied an incorrect standard of

law, we VACATE and REMAND the Compel Order, in part, so the court

can consider the severance claim under the proper legal standard.

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