United States Court of Appeals

For the First Circuit

No. 02-2054

IN RE: FBI DISTRIBUTION CORP., F/K/A FILENE’S BASEMENT, INC.;

FBC DISTRIBUTION CORP., F/K/A FILENE’S BASEMENT CORP.,

Debtors.

____________________

KATHLEEN MASON,

Appellant,

v.

OFFICIAL COMMITTEE OF UNSECURED CREDITORS,

FOR FBI DISTRIBUTION CORP. AND FBC DISTRIBUTION CORP.,

Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Reginald C. Lindsay, U.S. District Judge]

Before

 Torruella, Circuit Judge,

Campbell and Stahl, Senior Circuit Judges.

Robert M. Trien, with whom Victor G. Milione, P.C., and Nixon

Peabody LLP, were on brief, for appellant.

Ronald R. Sussman, with whom Christopher A. Jarvinen, Kronish

Lieb Weiner & Hellman LLP, Joseph S.U. Bodoff, and Bodoff &

Associates, were on brief, for appellees.

May 27, 2003
1"Debtors" will be used to refer to prepetition activity

whereas "debtor in possession" will be used to refer to

postpetition activity.

2As of May 2, 1999, reported year-to-date losses were

$7,528,069 and by October 30, 1999 had grown to $40,975,868.

According to Mason's affidavit, prior to entering the Employment

Agreement, she knew that Filene's had lost $9.8 million in the

fiscal year ending January 31, 1999 and that it had lost money the

preceding five years. And within two weeks of her first day of

work, the Chairman and Chief Executive Officer of Filene's

expressed to her the idea of filing for Chapter 11 relief. 

-2-

STAHL, Senior Circuit Judge. This case requires us to

decide whether the Chapter 11 debtor in possession must pay in

excess of $1.2 million in severance pay, pursuant to the terms of

two prepetition contracts, as an administrative expense to an

executive who was terminated after rendering postpetition services.

We affirm the bankruptcy court's grant of summary judgment, denying

administrative priority status to the executive's claim. 

I

On May 17, 1999, Filene's Basement, Inc. (n/d/b/a FBI

Distribution Corp.), then a wholly owned subsidiary of Filene's

Basement Corp. (n/d/b/a FBC Distribution Corp.) (collectively,

"debtors" or "debtor in possession"),1 hired Kathleen Mason as

President of Filene's Basement Division and Chief Merchandising

Officer. Mason left a high-paying position as President of Home

Goods, Inc., a subsidiary of TJX Companies, to join Filene's at a

time when it was already experiencing financial difficulty.2 As a

prelude to her employment, the parties signed two written
3The Retention Agreement provided that any payments owing

under it would be offset by the amount of payment paid under other

agreements that entitled Mason to benefits upon termination. At

oral argument, Mason stated that any amounts owed under the

Retention Agreement would be reduced by any amounts received under

the Employment Agreement's termination provisions. 

4The following day, the bankruptcy court ordered the cases to

be jointly administered.

-3-

agreements: the Employment Agreement and the Retention Agreement.

The Employment Agreement set the initial term of employment at

three years and entitled Mason to an annual base salary of

$400,000, in addition to fringe benefits, stock options, and

bonuses, including a signing bonus of $100,000. It also provided

that in the event Mason was terminated without cause, she was

entitled to receive three years' salary and other fringe benefits.

The Retention Agreement was essentially a golden parachute, which,

in general terms, provided that should Mason's employment terminate

following a qualifying "Change in Control," she would receive three

years' salary plus other benefits, including legal fees and

expenses.3

 On August 23, 1999, Filene's Basement, Inc. and Filene's

Basement Corp. filed for relief under Chapter 11 and continued to

operate pursuant to sections 1107 and 1108 of the Bankruptcy Code,

11 U.S.C. §§ 1107, 1108, as debtor in possession.4 Following the

filing, Mason continued to render services pursuant to the

prepetition Employment Agreement, for which she received her full

salary and benefits owed thereunder. According to Mason, she was
5"The Bankruptcy Code furnishes no express definition of an

executory contract, see 11 U.S.C. § 365(a), but the legislative

history to section 365(a) indicates that Congress intended the term

to mean a contract 'on which performance is due to some extent on

both sides.'" NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522

-4-

induced to remain with the company by the debtor in possession's

postpetition promise that her two agreements "were in effect and

would be honored." Mason also queried her counsel about the status

of the two agreements; her counsel recommended that the debtor in

possession seek formal bankruptcy court approval of the agreements.

When Mason relayed her counsel's recommendation to the debtor in

possession, she was allegedly told that both agreements had already

been approved by them and that only the paperwork needed to be done

before seeking court sanction.

In the meantime, the operations were quickly downsized:

35 of the 55 stores were closed shortly after the petition date,

and in the wake of these closures, on November 9, 1999, Mason was

notified that she was being put on "administrative leave," with

pay, pending a motion to reject both agreements under 11 U.S.C. §

365. While the motion was under advisement, on February 2, 2000,

the debtor in possession sold substantially all of its remaining

assets to another corporation.

On February 25, 2000, the bankruptcy court granted the

motion to reject the Employment Agreement but ruled that the

Retention Agreement could not be rejected because that agreement

was nonexecutory.5 The court agreed with Mason that the "Retention
(1984) (quoting H.R. Rep. No. 95-595, p. 347 (1977)). 

-5-

Agreement [could not] be considered executory because she ha[d] no

performance obligations thereunder." Neither party appealed these

rulings. Four days later, on March 1, 2000, Mason was terminated.

Mason then filed a "Request for Payment of Chapter 11

Expense," in which she claimed that her termination benefits

specified in both agreements, including legal fees and expenses,

were entitled to first priority as administrative expenses under 11

U.S.C. §§ 507 and 503(b)(1) because she was terminated after

rendering postpetition services and after a qualifying change in

control had taken place during the reorganization. In addition,

she maintained that because the debtor in possession induced her to

continue working by promising to honor the two agreements, they

were bound by the terms of those agreements. The appellees, the

Official Committee of Unsecured Creditors (the "Committee") for the

estate, opposed the request, and both parties filed motions for

summary judgment. 

In a thorough, well-written opinion, the bankruptcy court

granted summary judgment in favor of the Committee on the ground

that the consideration supporting the termination clauses--Mason's

agreement to forgo her employment opportunities at Home Goods,

Inc.--was supplied to the debtors when Mason signed the two

agreements; consequently, she had only a general unsecured claim

for damages not entitled to administrative priority. The court
6We agree with the Committee that Mason forfeited any right to

appeal the court's ruling that the claim is subject to the one-year

cap. The first place she mentions any challenge to the ruling is

in the conclusion of her opening brief, where she makes a onesentence statement that the statutory cap should not apply. It is

axiomatic that a party forfeits a claim on appeal where she failed

to raise it with some effort at developed argumentation in her

opening brief, and instead raised it for the first time in her

reply brief. R.I. Dep't of Env't Mgmt. v. United States, 304 F.3d

31, 47 n.6 (1st Cir. 2002); Anderson v. Beatrice Foods Co., 900

F.2d 388, 397 (1st Cir. 1990); see also Fed. R. App. P. 28(a)(6).

7The Committee did not appeal these rulings.

-6-

also rejected her inducement argument as "implausible" given

Mason's distrust of the debtor in possession and her consultations

with counsel about the status of the two agreements. Finally, the

court held that the general unsecured claim under the Employment

Agreement was subject to the one-year cap pursuant to 11 U.S.C. §

502(b)(7).6 As for the Retention Agreement, the court held that

Mason was entitled to benefits under the agreement since she was

terminated subsequent to a qualifying change in control, but

because the contract was nonexecutory, the rights springing from

the agreement were prepetition general unsecured claims not

entitled to administrative priority. Unlike the claim under the

Employment Agreement, however, the claim was not subject to the

one-year cap.7 On appeal, the United States District Court for the

District of Massachusetts affirmed on a different ground, holding

that Mason had failed to show that her postpetition services were

"necessary to preserve the estate" under 11 U.S.C. 503(b)(1). 
-7-

II

Our review of the district court's decision amounts to

review of the bankruptcy court's decision in the first instance.

Printy v. Dean Witter Reynolds, Inc., 110 F.3d 853, (1st Cir.

1997); Hope Furnace Assocs., Inc. v. FDIC, 71 F.3d 39, 42-43 (1st

Cir. 1995). Because this case comes to us on a grant of summary

judgment, we review the rulings de novo. Magarian v. Hawkins, 321

F.3d 235, 236 (1st Cir. 2003). 

A

The paramount objective of a Chapter 11 reorganization is

to rehabilitate and preserve the value of the financially

distressed business. Bildisco, 465 U.S. at 528; Otte v. United

States, 419 U.S. 43, 53 (1974). To accomplish this objective,

subsection 507(a)(1) of the Bankruptcy Code, 11 U.S.C. § 507(a)(1),

grants first priority in the distribution of the limited assets of

the estate to administrative expenses allowed under section 503, 11

U.S.C. § 503, which include "the actual, necessary costs and

expenses of preserving the estate, including wages, salaries, or

commissions for services rendered after the commencement of the

case," 11 U.S.C. § 503(b)(1)(A). Congress recognized that granting

first priority to administrative expenses would encourage

creditors, otherwise wary of dealing with Chapter 11 businesses, to

provide the goods and services required for successful

rehabilitation. H.R. Rep. No. 595, 95th Cong., 1st Sess. 186, 186-
-8-

87 (1977); Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.),

536 F.2d 950, 954 (1st Cir. 1976). And since the estate's

creditors who have pre-bankruptcy claims will presumably benefit

more from rehabilitation than from liquidation, it is not

surprising that those creditors bear the costs of the

rehabilitation. Granting priority status, however, is contrary to

the fundamental principle of bankruptcy law that the debtor's

limited resources are to be distributed equally among similarly

situated creditors, see H.R. Rep. No. 595, 95th Cong., 1st Sess.

186 (1977); thus, statutory priorities are narrowly construed, and

the burden of proving entitlement rests with the party seeking it.

In re Hemingway Transp., Inc., 954 F.2d 1, 5 (1st Cir. 1992).

B

In general, for a claim to qualify as an administrative

expense under subsection 503(b)(1), (1) it must have arisen from a

transaction with the trustee or debtor in possession, rather than

from a prepetition transaction with the debtor, and (2) the

consideration supporting the claim must have benefitted the estate

in some demonstrable way. Id. at 5; Mammoth Mart, 536 F.2d at 954.

Here, there was no postpetition agreement between Mason and the

debtor in possession. As Mason stated, "it is undisputed that her

postpetition services were rendered pursuant to her pre-petition

employment agreement." In such circumstances, we need to explore
8Pursuant to 11 U.S.C. § 1107(a), the Chapter 11 "debtor in

possession shall have all the rights . . . and powers, and shall

perform all the functions and duties, . . . of a trustee serving in

a case under this chapter."

-9-

the interplay between subsection 503(b)(1) and the Code's treatment

of executory contracts under 11 U.S.C. § 365.

C

Subsection 365(a) allows a debtor in possession8, subject

to the court's approval, to assume or to reject a prepetition

executory contract. 11 U.S.C. § 365(a). The debtor in possession

may make this decision at any time prior to the confirmation of the

plan, unless the court orders otherwise upon request of the

nondebtor contracting party. Id. § 365(d)(2). This latitude

allows the debtor in possession an opportunity to determine which

of the prepetition executory contracts are beneficial to the estate

and which should be assumed or rejected. See Pub. Serv. Co. of

N.H. v. N.H. Elec. Cooperative, Inc. (In re Pub. Serv. Co. of

N.H.), 884 F.2d 11, 15-16 (1st Cir. 1989) (The Code "afford[s]

breathing space to decide which contracts they wish to assume [or

reject]"). If a debtor in possession assumes an executory contract

under subsection 365(a), "it assumes the contract cum onere," and

the liabilities incurred in performing the contract will be treated

as administrative expenses. Bildisco, 465 U.S. at 531-32; see also

In re Frontier Props., Inc. 979 F.2d 1358 (9th Cir. 1992). If the

contract is rejected, on the other hand, the contract is deemed
-10-

breached on the date "immediately before the date of the filing of

the petition," 11 U.S.C. § 365(g)(1), and the nondebtor party has

a prepetition general unsecured claim for breach of contract

damages, one not entitled to administrative priority, 11 U.S.C. §

502(g). See Bildisco, 465 U.S. at 531; In re Stewart Foods, Inc.

v. Stewart Foods, Inc. (In re Stewart Foods, Inc.), 64 F.3d 141,

144 (4th Cir. 1995). It should be evident that the decision to

assume or reject has significant consequences and that "the

authority to reject an executory contract is vital to the basic

purpose to [sic] a Chapter 11 reorganization, because [it] can

release the debtor's estate from burdensome obligations that can

impede a successful reorganization." Bildisco, 465 U.S. at 528.

Where the debtor in possession, however, induces a

nondebtor to render performance pursuant to an unassumed

prepetition executory contract, pending its decision to reject or

assume, the nondebtor party will be entitled to administrative

priority only to the extent that the consideration supporting the

claim was supplied to the debtor in possession during the

reorganization and was beneficial to the estate. 11 U.S.C. §

503(b)(1); Mammoth Mart, 536 F.2d at 954; see also Bildisco, 465

U.S. at 531. The facts and holding of Mammoth Mart provide an apt

illustration. The employees in that case sought administrative

priority for their severance pay, which was based on length of

service. The employees had been terminated by the debtor in
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possession during the reorganization and had been paid their wages

plus severance pay attributable to the services rendered after the

filing date. Not happy with this outcome, the employees requested

that the court order the debtor in possession to pay as an

administrative expense all of their accrued severance, including

severance that had been "earned" from rendering prepetition

services. The court denied the employees' claim on the ground that

the consideration supporting the claim for severance consisted of

the prepetition services rendered for the debtor: "no part of their

present claims [arose] from services performed for the debtor-inpossession . . . ." Mammoth Mart, 536 F.2d at 955. The rationale

underlying the holding was that because severance pay was a

component of compensation for services rendered--that is, the

employees' wages included severance pay--it could be entitled to

administrative priority, but only to the extent that it was earned

postpetition. Furthermore, it made no difference that the right to

payment for the severance earned prepetition arose during the

reorganization. What did matter was when the consideration

supporting the claim was supplied. Id. at 954; see also 11 U.S.C.

§ 503(b)(1) ("for services rendered after the commencement of the

case") (emphasis added).

Contrary to Mason's assertion, the terms of the

prepetition contract do not determine the amount of the priority--a

question we left open in Mammoth Mart, 536 F.2d at 954 n.3--nor
9According to Mason, the debtor in possession here had two

choices, either terminate her prior to filing for bankruptcy to

avoid the specter of extraordinary postpetition liability or

attempt to renegotiate the terms of her employment. If

negotiations ultimately failed, however, the debtor in possession

would be stuck with the terms of Mason's agreement in toto once

they elected to receive the benefits under that agreement. If

Mason's reasoning were to prevail, a debtor in possession would

not, as a practical matter, be able to avail itself of the benefits

of section 365. Not surprising, this is not the law.

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does the contract become enforceable against the debtor in

possession simply because it elects to receive benefits under the

contract after the filing date.9 Although during the Chapter 11

proceeding a prepetition executory contract remains in effect and

enforceable against the nondebtor party to the contract, the

contract is unenforceable against the debtor in possession unless

and until the contract is assumed. Bildisco, 465 U.S. at 532

("[F]rom the filing of a petition in bankruptcy until formal

acceptance, the [executory contract] is not an enforceable contract

[against the debtor in possession] . . . . and may never be

enforceable again."); United States ex rel. United States Postal

Serv. v. Dewey Freight Sys., Inc., 31 F.3d 620, 624 (8th Cir. 1994)

(citing Bildisco, 465 U.S. at 532 and other cases); In re Univ.

Med. Ctr., 973 F.2d 1065, 1075 (3d Cir. 1992); In re Pub. Serv. Co.

of N.H., 884 F.2d at 14-15; see also In re Alongi, 272 B.R. 148,

152 (Bankr. D. Md. 2001); In re El Paso Refinery, L.P., 220 B.R.

37, 48 (Bankr. W.D. Tex. 1998). As instructed by the Supreme Court

in Bildisco,
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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-inpossession 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.

465 U.S. at 531 (emphasis added) (citations omitted). Thus, under

Bildisco, absent a court-approved assumption, from the date of the

filing of the Chapter 11 proceeding, Mason's Employment Agreement

was unenforceable against the debtor in possession despite their

election to continue her employment; she is entitled to only the

reasonable value of her postpetition services that benefitted the

estate. Although the Employment Agreement may be probative of the

reasonable value, it is not the dispositive measure. 

We recognize that Bildisco addressed a particular type of

executory contract, a collective bargaining agreement. Yet the

Court did not limit its discussion to collective bargaining

agreements, but instead discussed general principles of executory

contract law. Further, in 1984, in response to Bildisco, Congress

amended the Code by adding 11 U.S.C. § 1113, which provides special

treatment for collective bargaining agreements. Bankruptcy

Amendments and Federal Judgeship Act of 1984, sec. 541, § 1113,

Pub. L. No. 98-353, 98 Stat. 333. Among other things, 11 U.S.C.

1113 overturned that part of Bildisco that allowed the trustee to

make unilateral changes in the terms or conditions of a collective
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bargaining agreement during reorganization. See United Food &

Commercial Workers Union, Local 328, AFL-CIO v. Almac's Inc., 90

F.3d 1, 4 (1st Cir. 1996). However, Congress left intact

Bildisco's discussion of the enforceability of garden variety

executory contracts during Chapter 11 proceedings. 

In the same Act, Congress also added subsection

365(d)(3), 11 U.S.C. § 365(d)(3), which requires a debtor in

possession to "timely perform all the obligations of the debtor .

. . arising . . . under any unexpired lease of nonresidential real

property [during Chapter 11 proceedings], until such lease is

assumed or rejected," and subsection 365(d)(4), 11 U.S.C. §

365(d)(4), which provides that if the debtor in possession fails to

assume such a lease within 60 days, the "lease is deemed rejected."

Bankruptcy Amendments and Federal Judgeship Act of 1984, sec. 362,

§§ 365(d)(3), (d)(4), Pub. L. No. 98-353, 98 Stat. 333 (emphasis

added). Thus, Congress eliminated the rule that landlords were

entitled only to the reasonable value of the benefits bestowed upon

the debtor in possession and forced the debtor in possession to

decide whether to assume the lease within 60 days. Obviously then,

when Congress thought that certain executory contracts were more

deserving of special treatment, it said so. But no such

specificity is provided for prepetition employment contracts.

Congress’s familiarity with Bildisco and its failure to provide

special treatment to garden variety employment contracts indicates
10We note that Mammoth Mart was a pre-Code case and relied, in

part, upon a 1947 case, In re Public Ledger, Inc., 161 F.2d 762 (3d

Cir. 1947), which may explain the reason for the footnote. In

Public Ledger, the Third Circuit held that where the trustee and

employee continue "the employment upon the same terms as were

provided in the collective contract, and therefore, while the

employees were under the duty of delivering their services in

accordance therewith, the employer was under the correlative duty

of paying them in accordance therewith." Similarly, the Public

Ledger court used other language to suggest that a debtor in

possession could assume a contract by implication, without court

approval, and thus be bound by all the terms of the prepetition

contract. See, e.g., id. at 767. For reasons that will soon

become apparent, this is not the law under the Bankruptcy Code.

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that Congress intended that employment contracts be subject to the

general principles governing executory contracts outlined in

Bildisco. 

D

To avoid the realities of the foregoing principles, Mason

relies principally upon footnote 4 in Mammoth Mart to argue that

there is, or should be, an exception where a debtor in possession

induces the nondebtor party to continue to perform the prepetition

contract by a promise to honor the terms of that contract. In such

a case, the theory goes, both parties are bound by all of the terms

of the contract, including, in this case, the contractual

termination provisions. Although Mason's argument seems consistent

with footnote 4 of Mammoth Mart10 and may carry some equitable

appeal, it runs directly contrary to not only the general

principles governing executory contracts, see supra Part II.C, but

also to the language of and policies served by section 365, and,
-16-

for that matter, to the goals of Chapter 11, which is the

successful rehabilitation of the business for the benefit of both

the debtor and all its creditors. 

Mason's argument amounts to a claim that the debtor in

possession assumed the Employment Agreement by implication. It is

well settled, however, that an executory contract cannot be assumed

by the unilateral acts of the debtor in possession during the

reorganization of the business. Thinking Machs. Corp. v. Mellon

Fin. Servs. Corp. (In re Thinking Machs. Corp.), 67 F.3d 1021, 1025

(1st Cir. 1995) (holding that court approval is a condition

precedent); Dewey Freight Sys., Inc., 31 F.3d at 624; Matter of

Whitcomb & Keller Mortgage Co., 715 F.2d 375 (7th Cir. 1983); In re

Uly-Pak, Inc., 128 B.R. 763, 765 (Bankr. S.D. Ill. 1991). Rather,

the plain text of section 365 requires express approval by the

court. 11 U.S.C. § 365 ("[T]he trustee, subject to the court's

approval, may assume or reject any executory contract . . . .");

see In re Thinking Machs. Corp., 67 F.3d at 1025. The policy

served by court approval is not difficult to discern. As mentioned

above, assumption of a prepetition contract has serious

consequences: it not only elevates a prepetition liability to a

postpetition liability, but also entitles the nondebtor party to

first priority status. Court approval thus provides protection to

the unsecured creditors whose claims could be prejudiced by
11This should come as no surprise to Mason: her own counsel

informed her soon after the petition date that she should seek

court approval of both agreements. 

-17-

potentially burdensome contracts--ones that may have driven the

business into bankruptcy in the first place. 

It also insures that the Committee has an opportunity to

object and that it is fully able to oversee the debtor in

possession's operation of the business and the negotiation of the

plan of reorganization. See 11 U.S.C. § 1103 (setting forth the

functions of the appointed committee of unsecured creditors). This

case illustrates the policy well. During the hearing on the motion

to reject, the Committee explained that it supported the motion to

reject on the ground that it was opposed to the assumption of any

of the debtors' prepetition employment agreements, including

Mason's, as they allegedly contained "extraordinary" severance

packages that were "far in excess of anything that [it] normally

s[aw] as customary." Regardless of the truth of the Committee's

statement, the point is that the other unsecured creditors were

given an opportunity to voice their objection before their rights

to the limited assets of the estate could be prejudiced. In short,

before a debtor in possession and a prepetition creditor can saddle

the bankrupt estate with obligations contained in a prepetition

executory contract, they must first receive court approval.11 Here,

of course, there was no court-sanctioned assumption; the debtor in

possession rejected the contract with court approval.
-18-

In many instances, Chapter 11 proves to be a harsh

reality for nondebtors like Mason, but achieving better policy is

a task for Congress, not the courts. In any event, Mason did have

a remedy: she could have petitioned the bankruptcy court, pursuant

to 11 U.S.C. § 365(d)(2), to order the debtor in possession to

assume or reject her Employment Agreement within a specified time.

This she decided not to do.

III

With these general principles in mind, we turn to Mason's

claims, addressing the Employment Agreement first.

A

Mason's principal argument is that her claim for

severance is entitled to administrative priority because the

consideration supporting her claim constituted "being an employee

in good standing at the time of the discharge," which she supplied

postpetition. In other words, the "reasonable value" of her being

"in good standing" was an amount equal to in excess of $1.2 million

plus other benefits including legal costs and expenses. If one

takes Mason's argument to its logical terminus, an executive would

be entitled to administrative priority for lump-sum severance pay,

no matter how astronomical, simply by working one day for the

debtor in possession so long as she was in "good standing at the

time of discharge." For the reasons that follow, we cannot accept

this conclusion.
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We hold that the consideration supporting Mason's claim

for severance benefits was not "being an employee in good standing

at the time of the discharge," but rather her agreement to forgo

other employment opportunities (in this case, her agreement to

forgo her high-paying position at Home Goods, Inc.), which she

provided prepetition to the debtor the moment she signed the

Employment Agreement in May 1999. See In re Commercial Fin. Serv.,

Inc., 246 F.3d 1291, 1294 (10th Cir. 2001) (denying administrative

priority to claim for lump-sum severance pay nearly identical to

Mason's, on the ground that the consideration supporting the claim

was the agreement to forgo other employment opportunities, which

was supplied entirely at the time of the execution of the

employment agreement); In re Phones for All, Inc., 249 B.R. 426,

430 (Bankr. N.D. Tex. 2000) (same), aff'd 288 F.3d 730 (5th Cir.

2002); see also In re Nomus-American, Inc., No. 01-50255 11, 2002

WL 230701, at *2 (Bankr. M.D. N.C. 2002) (same); In re M Group,

Inc., 268 B.R. 896, 901 (Bankr. D. Del. 2001) (same); In re

Cincinnati Cordage & Paper Co., 271 B.R. 264, 267-69 (Bankr. S.D.

Ohio 2001) (same); In re Uly-Pack, 128 B.R. 763, 768 (Bankr. S.D.

Ill. 1991) (same). Indeed, Mason stated that the severance

provisions in her Employment Agreement and Retention Agreement were

part of the inducement to leave her high-paying position at Home

Goods. Unlike severance or vacation benefits geared to length of

service--benefits that clearly constitute a part of an employee's
12Where severance or vacation pay is geared to length of

service, the pay is essentially additional wages. For example,

suppose the employee earns two weeks (i.e. 10 days) severance or

vacation for rendering services for a full calendar year; that

would mean that she earned one day of severance or vacation for

every twenty-six days worked. Clearly the severance or vacation is

a component of her daily compensation for services rendered.

Mammoth Mart, 536 F.2d at 954-55. Accordingly, the court in

Mammoth Mart held that an employee under such a program was

entitled to administrative priority for the severance "earned" for

services rendered postpetition, but not for severance earned

prepetition. 

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wages for services rendered, see, e.g., Mammoth Mart, 536 F.2d at

954-5512--the severance benefits here do not constitute any part of

her compensation for services rendered. Whether she worked two

minutes or thirty-five and one-half months after executing the

Employment Agreement, she was entitled to in excess of $1.2 million

if she were terminated without cause. In fact, by the literal

terms of the agreement, it appears that she was entitled to over

$1.2 million regardless of whether she rendered any services

whatsoever. Her compensation for services rendered simply did not

include severance pay. Cf. 11 U.S.C. § 503(b)(1) (granting

priority to "wages, salaries, or commissions for services rendered

after the commencement of the case."). 

Mason relies primarily upon the following dictum in

Mammoth Mart: 

If an [unrejected] employment contract

provides that all discharged employees will

receive severance pay equal to their salaries

for a specified period, the consideration

supporting the claim being an employee in good

standing at the time of the discharge will
13Both the bankruptcy and district courts rejected Mason's

argument on the ground that when the court in Mammoth Mart made

that comment, it was discussing the hypothetical situation in which

severance pay was predicated on an "unrejected contract." Because

Mason was terminated shortly after the rejection of the contract,

the theory goes, she had only a prepetition general unsecured claim

for damages. Because we hold that the consideration supporting her

claim was supplied prepetition, we offer no opinion whether the

timing of her termination is dispositive. 

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have been supplied during the arrangement, and

the former employee will be entitled to

priority. 

536 F.2d at 955. Although not binding on this court, we briefly

address this passage.13 To begin, it is not entirely clear what

type of severance provision the Mammoth Mart court was

contemplating when it discussed this hypothetical situation. We

find it unlikely that it was referring to severance provisions in

executive employment contracts, like the one here. See, e.g., Soma

Biswas, Wachner Settles Warnaco Severance Fight, The Daily Deal,

Nov. 19, 2002 (discussing Linda Wachner's $25 million severance

payment she sought during Chapter 11 proceeding); Calvin Trillin,

Deep Pocket, Short Reach, Time Mag., Jan. 13, 1997, at 24

(discussing Michael Ovitz's $90 million severance package).

Because the court cited to In re Public Ledger, 161 F.2d at 769-71,

we presume that it was referring to the severance plan at issue in

that case, which was a plan that provided for severance pay in lieu

of notice of termination. Under such a plan, the employer could

either provide two days' notice, after which the employee would

work two more days and be paid, or terminate the employee
14We offer no opinion on whether we would grant administrative

priority to in lieu of notice plans.

15In fact, Mason might have received more than the reasonable

value of the services she rendered as administrative expenses. At

the hearing on the motion to reject, on December 22, 1999, the

bankruptcy court instructed the debtor in possession to cease

paying Mason her salary and benefits and to route those payments to

an escrow account while the court took the motion under advisement.

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immediately and pay the employee two days' pay. Courts that have

granted administrative priority to such severance pay arrangements

have done so on the theory that severance in lieu of notice, like

severance based on length of service, is a component of

compensation. See, e.g., In re Pub. Ledger, Inc., 161 F.2d at 769-

71; Teamsters Local No. 310 v. Ingrum (In re Tucson Yellow Cab

Co.), 789 F.2d 701, 704 (9th Cir. 1986); see also In re Commercial

Fin. Serv., 246 F.3d at 1296 (distinguishing severance pay in lieu

of notice plans from one similar to Mason's on the ground that the

former "was clearly a component of compensation"). As should now

be clear, however, we hold that Mason's severance pay was not a

component of compensation for services she rendered and thus is not

entitled to administrative priority.14 

Of course, Mason is entitled to receive the reasonable

value of the beneficial services rendered during the

reorganization. For these services, she was fully compensated by

the debtor in possession: she received her full salary plus fringe

benefits pursuant to the terms of her Employment Agreement for all

the services she rendered postpetition.15 Absent a court approved
Apparently due to a "ministerial error," Mason continued to receive

her full salary and benefits until February 15, 2000, even though

she did not render any services to the estate during that period.

The dispute over those payments is beyond the scope of this appeal.

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assumption of her Employment Agreement, this was all she is

entitled to receive.

B

Having determined that Mason's claim arising out of the

Employment Agreement is not entitled to administrative priority, we

turn to the Retention Agreement. The parties agree that the

Retention Agreement is a nonexecutory contract because Mason owed

no performance thereunder. The consideration supporting the

Retention Agreement--to forgo other employment opportunities--was

supplied the moment she signed the agreement. Only the right to

payment arose after the petition date. Notwithstanding the

foregoing principles, Mason asks us to grant administrative

priority on the theory that nonexecutory contracts should be

treated differently because they can be neither assumed nor

rejected, and thus should be enforceable against the debtor's

estate as an administrative expense. 

Mason misses the point. While the claim under the

Retention Agreement is enforceable against the estate in the

bankruptcy proceeding, it is a prepetition claim. In re Stewart

Foods, Inc., 64 F.3d at 144; In re Hemingway Transp., Inc., 954

F.2d at 8; 11 U.S.C. § 101(5)(A) (defining claim as "right to
-24-

payment, whether or not such right is . . . contingent, matured,

[or] unmatured"). The contingent claim, however, is not entitled

to priority simply because the right to payment arises during the

reorganization when the contingency occurs. In re Commercial Fin.

Serv., Inc., 246 F.3d at 1295; In re Stewart Foods, Inc., 64 F.3d

at 144, 146 In re Hemingway Transp., Inc., 954 F.2d at 8; Mammoth

Mart, 536 F.2d at 954; Jartran, 732 F.2d at 587; 11 U.S.C. §

503(b)(1) ("for services rendered after the commencement of the

case") (emphasis added). Under a nonexecutory contract, in which

the nondebtor owes no future performance, the nondebtor provides no

consideration "after the commencement of the case," and thus is not

entitled to priority. 11 U.S.C. § 503(b)(1)(A) (emphasis added);

In re Stewart Foods, Inc., 64 F.3d at 145 ("[R]egardless of the

nature of the contract, if at the time of the bankruptcy filing the

debtor has an obligation under the contract to pay money to the

non-debtor party, that obligation is handled as a pre-petition

claim in the bankruptcy proceedings."). We hold, therefore, that

Mason's claim under the Retention Agreement is not entitled to

administrative priority.

IV

Having determined that the consideration supporting

Mason's claims under the Employment Agreement and the Retention

Agreement was provided to the debtors prior "to the commencement of

the [Chapter 11 proceedings]," 11 U.S.C. § 503(b)(1)(A), we hold
16Again, we recognize that Congress's balancing of the equities

in Chapter 11 in favor of reorganization and equality of

distribution of the limited assets to all unsecured creditors, see

supra Part II, may be a harsh reality for the individual nondebtor

like Mason, who is a party to a prepetition executory contract with

the debtor. But Congress provided a remedy: Mason could have

petitioned the bankruptcy court under subsection 365(d)(2), 11

U.S.C. § 365(d)(2), to order the debtor in possession either to

assume or reject her Employment Agreement within a specified time,

a remedy of which she chose not to pursue. 

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that her claims are not entitled to administrative priority.16

Accordingly, the grant of summary judgment must be affirmed.