# United Stat es Court of Appeals For the First C ircuit

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. RonaldR. 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, 20031 "Debtors" will be used to refer to prepetition activity

whereas "debtor in poss ession " will be used to refer to postpetition activity.

2 As of May 2, 1999, reported year-to-date losses wer e $7,528,069 and by Octobe r 3 0, 1999 had grown to $40,975,868. Accordi ng t o 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 Fil ene' s expressed to her the idea of filing for Chapter 11 relief. -2- STAHL, Senior Circuit Judge . This case re quires 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, "deb tors " or "debtor in possession"), 1 hired Kathleen Mason as President of Filene's Basement Di v ision 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 written3 The Retention Agreement provided that any pa y ments owing

under it would be offset by the amount of payment paid under other agreements that entitled Mason to b enefit s upon termination. At oral argument, Mason stated that any amounts owed under the Retention Agreement wouldbe reduced byany amounts received under the Employment Agreement's termination provisions.

4 The 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 $4 00,0 00, 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 entitledto 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. andFilene'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 , Ma son 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 was5 "The Bankruptcy Code furnishes no exp ress definition of an

e xecutorycontract, see 11 U.S.C. § 365(a), but the legislat iv e historyto 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- inducedto remain with the company by the debtor in possession's postpetition promise t hat he r two agreements "were in effect and wouldbe 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 recommendatio n to t he debtor in possession, she was allegedly told that both agreements hadalready 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 clo sed s hortly after the petition date, and in the wake of these closures, on November 9, 1999, Mason was notif iedthat 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 po ssession sold substantially all of its remaining assets to another corporation.

On F ebru ary 25, 2000, the bankruptcy court granted the motion to reject the Employment Agr eement but ruled that the Retention Agreement could not be r ejec ted 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 fil ed a "Request for Payment of Chapter 11 Expense," in which she claimed that her termination benefits specifiedin 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 qual ifyi ng change in contro l 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 bou nd 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 mot ion s for summary judgment.

In a thorough, well-written opinion, the bankruptcy court grantedsummary judgment in favor of the Committee on the ground that the consideration supporting the termination clauses--Mason's agreement to f orgo her employment opportunities at Home Goods, Inc.--was supplied to the debtors when Mason signed the two agreements; co nseq uently, she had only a general unsecured claim for da mages not entitled to administrative priority. The court6 We 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 conclusio n of her opening brief, where she makes a onesentence statement that the statutory cap shouldnot apply. It is axiomatic that a partyforfeits a claim on appeal where she failed to raise it with some effort at developed argumentation in her opening br ief, and instead raised it for the first time in her replybrief. R.I. Dep't of Env't Mgmt. v. United States , 304 F.3d 31, 47 n.6 (1s t Cir. 2002) ; Anderson v. Beatrice Foods Co. , 900 F.2d 388, 397 (1st Cir. 1990); see also Fed. R. App. P. 28(a)(6).

7 The Committee did not appeal these rulings. -6- also rejected her in duceme nt 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

co urt he ld 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, t he c ourt held that Mason was entitled to benefits under the agreement since she was terminatedsubsequ ent to a qualifying change in control, but because the contract was nonexecutory, the right s sp ringing from the agreement were p rep etition general unsecured claims not entitledto administrative p riorit y. Unlike the claim under the Employment Agreement, however, the claim wa s n ot subject to the one-year cap. 7 On appeal, the UnitedStates 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 O ur review of the district court's decision amount s t o

r eview of the bankruptcy court's decision in the first ins tance . Printyv. 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 summar y 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 distressedbusiness. 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 BankruptcyCode, 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 c ost s and expenses of preser ving 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 se rvices 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 sinc e the estate's creditors who have pre-bankruptcy claims wil l pr esumably 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 limitedresources are to be distributed equally among similarly situatedcreditors, 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 froma 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.2dat 954. Here, th ere was no postpetition agreement between Mason and the debtor in possession. As Mason stated, "it is undisputed that her postpetition services were r ende red pursuant to her pre-petition employment agreement." In such circumstances, we need to explore8 Pursuant to 11 U.S.C. § 11 07(a ), the Chapter 11 "debtor in

possession shall have all the rights . . . and powers, and shall performall 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 possession 8 , subject to the court's approval, to assume or to reject a prepetition executorycontract. 11 U.S.C. § 365(a). The debtor in possession maymake this decision at any time prior to the confirmation of the plan, unless the court orders otherwise upon request of the nondebtor contrac ting p arty. 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 andwhich should be assumed or rejected. See Pub. Serv. Co. of N.H. v. N.H. Elec. Cooperati ve, 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-

breachedon 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 unsecu red 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, I nc.) , 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 authorityto reject an executory contract is vital to the basic purpose to [sic] a Chapter 11 reorganization, because [it] can release the debtor's estate fromburdensome obligations that can impede a successful reorganization." Bildisco , 465 U.S. at 528.

Where the debtor in possession, however, induces a nondebtor to render performanc e pursuant to an unassumed prepetition executory contract, pending its decision to reject or assume, the nondebtor part y wi ll be entitled to administrative priority only to the extent that the consideration supporting the claimwas suppli ed 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 priorityfor their severance pay, which was based on length of service. The employees had been terminated by the debtor in-11-

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 c ourt order the debtor in possession to pay as an administrative expense a ll o f their accrued severance, including

severance that had been "earned" from rendering p rep etition 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 theirpresent 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 compo ne nt of compensation for services rendered--that is, the employees' wages included seve ranc e 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).

Contraryto 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--nor9 According to Mason, the debtor in possession here had two

choices, either terminate her pr ior to filing for bankruptcy to avoidthe specter of extraordinary po stpeti tion liability or atte mpt to renegotiate the terms of her employment. If negotiations ultimately failed, however, the debtor in possession wouldbe stuck w ith the te rms of Mason's agreement in toto once theyelected to receive the benefits under that agreement. If Mason's reasoning were to prevail, a debt or 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. -12- 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 d urin g the Chapter 11 proceeding a prepetition executory contract remains in effect and enforceable against the nondebtor pa rty to the contract, the contract is unenforceable against the debtor in possession unless

an duntil t he contract is assumed. Bildisco , 465 U.S. at 532 ( "[F]romthe filin g o f 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." ); UnitedSta tes ex rel. United States Postal Serv. v. Dewey Freight Sys., Inc. , 31 F.3d 620, 624 (8th Cir. 1994) (citi ng Bildisc o , 465 U.S. at 532 and other cases); In re Univ. Med. Ctr. , 973 F.2d 1065, 1075 (3dCir. 1992); In re Pub. Serv. Co. of N.H. , 884 F.2d at 14-15; see also In re Alongi , 2 72 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 ,-13- If the debtor-in-possession elects to continue to receive benefits fromthe other party to an executorycontract pending a decision toreject 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 contr ac t, 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, fromthe date of the filing of the Chapter 11 proceeding, Mason's Employment Agreement

was unenforceable against the debtor in possessi on d espite 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 executorycontract, 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 amendedthe 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-14-

bargaining agreement during reorganizati on. See United Food & Commercial Workers Uni on, Lo cal 328, AFL-CIO v. Almac's Inc. , 90 F.3d1, 4 (1st Cir. 1996). However, Congress left intact Bildisco 's discussion of the en fo rceability of garden variety executory contracts during Chapter 11 proceedings.

In t he same Act, Congress also added subsection 365(d)(3), 11 U.S.C. § 365(d)(3), which requ ire s 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 assumedor 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." BankruptcyAmendments and Federal Judgeship Act of 1984, sec. 362, §§ 365(d)(3), (d)(4), Pub. L. No. 98-353, 98 Stat. 333 (emphasis added). Thus, Co ngr ess eliminated the rule that landlords were entitledonly 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 exe cutory contracts were more deserving of special treatment, it said so. But no such specificityis provided for prepetition employment contracts. Congress’s familiarity with Bildisco and its failure to provide special treatment to garden variety employment contracts indicates10 We note that Mammoth Mart was a pre-Code case andrelied, in

part, upon a 1947 case, In re Public Ledger, Inc. , 161 F.2d 762 (3d Cir. 1947), which may explain the reason fo r th e footnote. In Public Ledger , the Third Circuit held that where the trustee and employee continue "the employment u pon th e same terms as were providedin the collective contract, and therefore, while the emplo yees w ere under the duty of delivering their services in accordance therewith, the employer was under the correlative duty of paying them in accordance therew ith ." Similarly, the Public Ledger court used other language to suggest that a debtor in possession could assume a con trac t by implication, without court approval, and thus be bound by all the te rms 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. -15- that Congress intendedthat 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 byall 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 Mart 10 and may carry some equitable appeal, it runs directly cont rar y to not only the general principles governing executory contracts, see supra Part II.C, but also to the language of and p olicies served by section 365, and,-16-

for that matter, to the go als 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 cl aim th at the debtor in possession assumed the Employment Agreement by implication . It is well settled, however, that an executory contract cannot be assumed bythe unilateral acts of the debtor in possession during the reorganization of the busi ness. 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

cou rt. 11 U.S.C. § 365 ("[T]he trustee, subject to the court' s approval, may a ssume or reject any executory contract . . . .");

see In re Thinking Machs. Corp. , 67 F.3d at 1025. The policy servedbycourt approval is not difficult to discern. As mentioned above, assumption of a prepetition contract has serious consequences: it not only elevates a prepetition liabi lit y to a postpetition liability, but also entitles the nondebtor part y to first priority status. Court approval thus provides protection to the unsecured creditors whose claims could be prejudiced by11 This should co me as no surprise to Mason: her own counsel

informedher soon after the petition date that she should seek court approval of both agreements. -17- potentiallyburdenso m e 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 overs ee the debtor in possession's operation of the business and the negotiation of the plan of reorganization. See 11 U.S.C. § 1103 (sett ing 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 credit ors 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 executorycontract, 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 pro ves 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 petitionedthe bankruptcy court, pursuant to 11 U.S.C. § 365(d)(2), to ord er 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 administrat ive pr iority 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-sumseverance 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.-19- 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 he r agr eement to forgo othe r employment opportunities (in this case, her agreement to forgo her high-paying position at Home Goods, Inc.), which she providedp rep etition 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 priorityto claim for lump-sum severance pay nea rly id entical to Mason's, on the ground that the consideration supporting the claim

was the agreement to forgo o ther 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) (s ame), aff'd288 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. 200 1) (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's12 Where severance or vacation pay is geared to length of

serv ice , 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 wouldmean that she earned one day of severance or vacation for everytwenty-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 entitledto administrative priority for the severance "earned" for services rendered p ostpet ition, but not for severance earned prepetition. -20- wages for services rendered, see, e.g. , Mammoth Mart , 536 F.2d at 954-55 12 --the severance benefits here do not constitute any part of her com pen sation for services rendered. Whether she worked two minu tes 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 l iter al term s of the agreement, it appears that she was entitled to over $1.2 million regar dles s 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 priorityto "wages, salaries, or commissions for services rendered after the commencement of the case.").

Mason relies primarily up on 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 claimbeing an employee in good standing at the time of the dischar ge wi ll13 Both the bankruptcy and district courts rejected Mason's

argument o n the grou nd 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 claimwas supplied pre pet ition, we offer no opinion whether the timing of her termination is dispositive. -21- 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 ad dress thi s passage. 13 To begin, it is not entirely clear what type of severance provision th e Ma mmoth Mart court was contemplating when it discussed this hypotheti cal 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 eith er provide two days' notice, after which the employee would work two more days and be paid, or terminate the employee14 We offer no opinion on whether we would grant administrative

priority to in lieu of notice plans.

15 In 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 re ject , on December 22, 1999, the bankruptcycourt 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. -22- immediately and pay the employee two days' pay. Courts that have grantedadministrative priority to such severance pay arrangements have done so on the theory that severance in lieu of notice, like

seve rance based on length of service, is a component o f compensation. See, e.g. , In re Pub. Ledger, Inc. , 161 F.2d at 769- 71; Teamsters Local No. 310 v. Ingrum (In re Tucson Yell ow C ab 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 t hat 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, M ason is entitled to receive the reasonable value of the be neficial 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 approvedApparentlydue 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. -23- 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 consid eration supporting the Retention Agreement--to forgo other employment opportunities--was suppliedthe moment she s igned the agreement. Only the right to payment arose after the petition date. Notwithstanding the foregoing principles, Mason asks us to grant admi nis trative priorityon the theorytha t nonexecutory contracts should be treateddifferently 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 p oin t. While the claim under the Retention Ag reem ent is enforceable against the estate in the bankruptcyproceeding, it is a prepetition claim. In re Stewart Foods , Inc. , 64 F.3d at 144; In re Hemingway Transp., Inc. , 954 F.2dat 8; 11 U.S.C. § 101(5)(A) (defining claim as "right to-24-

payme nt, 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 F oods, Inc. , 64 F.3d at 145 ("[R]egardless of the nature of the contract, if at the time of the bankruptcy filing the deb tor has an obligation under the contract to pay mone y to th e non-debtor party, that obl igat ion 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 [Cha pter 1 1 proceedings]," 11 U.S.C. § 503(b)(1)(A), we hold16 Again, 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 unsecuredcreditors, 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 petitionedthe bankruptcy court unde r 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. -25- that her claims are not entitled to admi nist rative priority. 16 Accordingly, the grant of summary judgment must be affirmed.