## F I L E D United States Court of Appeals Tenth Circuit 

### APR 24 2001 

### PATRICK FISHER Clerk PUBLISH
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

In re: COMMERCIAL FINANCIAL SERVICES, INC.,

Debtor.

JOHN BACHMAN; BRUCE PHELPS,

Appellants,

v. COMMERCIAL FINANCIAL SERVICES, INC.,

Appellee. No. 00-5108

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA

(D.C. No. 99-CV-390-H)

Submitted on the briefs: Greggory T. Colpitts of Magee & Colpitts, Tulsa, Ok lahoma, for Appellants. Larry M. Wolfson and Jerry L. Switzer, Jr. of Jenne r & Block, Chicago, Illinois, and Neal Tomlins and Ronald E. Goins of Tomlins & G oins, Tulsa, Oklahoma, for Appellee.

Before HENRY , BRISCOE , and MURPHY , Circuit Judges.1 After examining the briefs and appellate record, th is panel has determined

unanimously that oral argument would not materially assist the determination of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). Th e case is therefore ordered submitted without oral argument.

-2- MURPHY , Circuit Judge.

This case requires us to determine whether lump sumcash payments due upon termination and promised to appellants when th ey executed employment contracts with Commercial Financial Services, Inc., (CFS), were entitled to priority as administrative expenses in CFS’s eventu al bankruptcy. After reviewing the briefs of the parties, the relevant c ase law, and the opinions of the bankruptcy court and the district court, we affirm. 1 Appellants Bachman and Phelps entered into employme nt contracts with CFS in which both employees were promised lump sum cash payments upon termination by CFS prior to the expiration of the c ontracts unless such termination was for cause. The lump sum payments e qualed appellants’ annual base salaries of $120,000 and $150,000, respectivel y. Before appellants’ contracts expired, CFS filed a voluntary petition f or relief under Chapter 11 of the Bankruptcy Code and assumed the role of debtor in p ossession. Appellants continued to work for the debtor in possession, buteach was terminated, without-3-

cause, within a month after the filing. Both appel lants were paid full salaries for the post-petition period in which they worked. After the terminations and with the approval of the bankruptcy court pursuant to 11 U.S.C. § 365(a), the debtor in posse ssion rejected appellants’ employment contracts. Appellants then filed a moti on in the bankruptcy court seeking an order classifying their lump sum payment s as priority administrative claims under 11 U.S.C. § 503(b)(1)(A). 11 U.S.C. § 503(b)(1)(A) provides: (b) After notice and a hearing, there shall be allo wed administrative expenses . . . including-- (1)(a)the actual, necessary costs and expenses of preserving the estate including wages, salaries, or commissions for services rendered after the commencement of the case. Administrative expenses allowed under § 503(b) are entitled to priority pursuant to 11 U.S.C. § 507(a)(1) and § 726(a)(1). The policy behind such priority is to encourage creditors to extend creditand supply debtors with goods and services post-petition in order to increase the likelihood that a successful reorganization will occur. See In re Jartran, Inc. , 732 F.2d 584, 587-88 (7th Cir. 1984). Creditors are unlikely to do this unless th ey are promised priority. Such priority does no injustice to pre-petition creditor s, because they will presumably benefit more from a reorganized debtor than from one forced into liquidation. Id.-4-

at 586. Such priorities are strictly construed, ho wever, “[b]ecause the presumption in bankruptcy cases is that the debtor’ s limited resources will be equally distributed among his creditors.” Isaac v. Temex Energy, Inc. (In re Amarex, Inc. ), 853 F.2d 1526, 1530 (10th Cir. 1988) (quotationomitted). Administrative priority must have a clear statutory purpose; appellants can prevail only by demonstrating that their claims “comport wi th the language and underlying purposes of § 503.” Jartran, Inc. , 732 F.2d at 586. In a thorough and well-reasoned opinion, the bankruptcy court held that the lump sum payments were not “necessary costs and exp enses of preserving the estate” under 11 U.S.C. § 503(b)(1)(A) nor could th ey be compensation for appellants’ post-petition services. Applying the F irst Circuit test articulated in Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.) , 536 F.2d 950, 954 (1st Cir. 1976), and endorsed by this circuit in Amarex , 853 F.2d at 1530, the bankruptcy court further determined that appellants ’ claims neither arose from a transaction with the debtor in possession nor benef itted the debtor in possession. The bankruptcy court held that the claims, therefor e, were not entitled to priority as administrative expenses. The district court aff irmed, and appellants appeal. This court considered a situation similar to the present one in Amarex. There, the claimant was party to an employment cont ract with Amarex providing for a one-year $10,000 bonus which could be annuali zed over the first year.-5-

During the claimant’s first year of employment, Ama rex was placed in involuntary bankruptcy. After working for the debt or in possession for more than a year after the filing, the claimant sought classi fication of the unpaid bonus as an administrative expense. In rejecting the district court’s conclusion that t he entire bonus was entitled to priority because it was earned post-petition, th is court adopted the analysis of the First Circuit in Mammoth Mart , 536 F.2d 950.

[A]n expense is administrative only if it arises ou t of a transaction between the creditor and the bankrupt’s trustee or debtor in possession (citations omitted) and only to the e xtent that the consideration supporting the claimant’s right to payment was both supplied to and beneficial to the debtor-in-possess ion in the operation of the business. A debt is not entitled to priority simply because the right to payment arises after the debto r in possession has begun managing the estate.2 Appellants in the bankruptcy court relied on language in Amarex which

quoted Trustees of Amalgamated Insurance Fund v. McFarlin’s, Inc. , 789 F.2d 98 (2d Cir. 1986), to argue that, because severance pay is compensation for the hardship employees face when they are terminated, s everance pay is earned upon dismissal. Amarex , 853 F.2d at 1530-31. That statement in McFarlin’s was meant to summarize Second Circuit case law on the i ssue of severance pay. The reference to that statement, as dicta, in Amarex was part of this court’s effort to illustrate the disagreement among the circuits rega rding the treatment of severance pay as an administrative expense. The ultimate decision in Amarex resulted from the application of Mammoth Mart , a case rejecting the Second Circuit approach to severance pay claims in bankrup tcy. Appellants’ suggestion that this circuit finds all severance pay claims en titled to administrative priority rests on a misreading of Amarex. -6- Amarex , 853 F.2d at 1530 (quotations omitted). 2 Largely because the bonus at issue in Amarex was “guaranteed” and “annualized” and because the claimant could draw a monthly advance against it, we agreed with the bankruptcy court that the bonus was part of the claimant’s “agreed salary , and was earned day by day during that first year.” Id. at 1531. Priority was accorded only that portion of the bonus earned post-petition because “[o]nly those se rvices were ‘consideration supporting the claimant’s [Isaac’s] right to payment . . . both supplied to and beneficial to the debtor-in-possession in the operation of the business.’” Id. at 1532 (quoting Mammoth Mart , 536 F.2d at 954). Amarex is not limited to cases involving employee bonuses and sets out this circui t’s definitive procedure for determining all administrative expense claims, incl uding the severance-pay-type claims presented here. General Am. Transp. Corp. v. Martin (In re Mid Regi on Petroleum, Inc.) , 1 F.3d 1130, 1133 n.5 (10th Cir. 1993).-7-

Applying the Amarex/Mammoth Mart test to the facts of this case, we agree with the bankruptcy court and the district court th at these claims for lump sum termination payments should not be accorded priority as administrative expenses. In order to attain such status, the claims must hav e arisen from a transaction with the debtor in possession. Amarex , 853 F.2d at 1530. Appellant’s argue that they had a transactional relationship with the debtor in possession because the debtor in possession continued to employ them post-petitio n and paid them for their work. This is insufficient to establish a transact ion with the debtor in possession for administrative priority purposes. “It is only when the debtor-in-possession’s actions themselves -- that is, considered apart from any obligation of the debtor -- give rise to a legal liability that the claimant is entitled to the priority of a cost and expense of administration.” Mammoth Mart , 536 F.2d at 955. It is crucial that the claimant’s performance be induced by the debtor in possession. Jartran, Inc. , 732 F.2d at 587. Here, there is no evidence that the debtor in posse ssion assumed the employment contracts or entered into new post-petit ion contracts with appellants. In fact, shortly after the terminations, the debtorin possession rejected the employment contracts. The debtor in possession didnothing to give rise to legal liability for payment of the lump sum amounts. Nordid the debtor in possession-8-

induce appellants’ performance by promising to pay them the lump sum amounts if they would continue to work post-petition. Further, it is not determinative that payment of th e lump sum was contingent upon appellants’ termination, an event w hich occurred post-petition. In determining administrative priority, courts lookto “when the acts giving rise to a liability took place, not when they accrued.” Pension Benefit Guar. Corp. v. Sunarhauserman, Inc. (In re Sunarhauserman, Inc.) , 126 F.3d 811, 818 (6th Cir. 1997); see also Pension Benefit Guar. Corp. v. Skeen (In re Bayly Corp.) , 163 F.3d 1205, 1208-09 (10th Cir. 1998). Here, in orde r for appellants to prevail, the liability must arise post-petition; it is not enoug h that the right to payment arose after the debtor in possession assumed control. Amarex , 853 F.2d at 1530. The liability arose at the time the contracts were exec uted; only the right to payment arose upon appellants’ termination. Appellants hav e not shown that their claims arose from a transaction with the debtor in possess ion and thus have not met the first prong of the Amarex/Mammoth Mart test. The second requirement for administrative priority is that “the consideration supporting the claimant’s right to payment was both supplied to and beneficial to the debtor-in-possession in the operation of the business.” Id. (quotation omitted). Appellants’ claims also fail on this front.-9-

Appellants argue that they satisfy this requirementbecause, by working for the debtor in possession for some three weeks afterthe filing, they provided services which benefitted the estate. This showing , however, is insufficient to establish that the consideration supporting the rig ht to payment of the lump sum “was both supplied to and beneficial to the debtor- in-possession in the operation of the business.” Id. (quotation omitted). With regard to the requirement that the considerati on must be supplied to the debtor in possession, there is nothing in the r ecord to suggest that appellants’ work for the debtor in possession for three weeks p ost-petition was consideration for the large lump sum payments at issue here. Ind eed, the consideration for the lump sums was the agreement by appellants, supplied pre-petition, that they would forego other employment opportunities and sig n on with CFS as employees. That consideration included obligating themselves to work for CFS for two years and to move their residences from oth er states to Tulsa, Oklahoma. The three weeks of post-petition work was not consi deration for the lump sum payments; that work was consideration for the p ayment of salaries which appellants received in full. As we stated in Amarex : [T]he right to priority does not necessarily depend on the fact that the obligation to pay the bonus did not arise until aft er the commencement of bankruptcy proceedings. As the cas es indicate, what is crucial is what consideration supports the bonus, and whether such consideration, or a portion of it, was pre-pet ition services.-10-

Amarex , 853 F.2d at 1531. The consideration supporting appellants’ right to t he lump sum cash payments was the mutual promises contained in theirrespective employment contracts. That consideration was rendered entirel y pre-petition and cannot support appellants’ claim for administrative priori ty. No part of the consideration for the lump sum payments was supplied to the debto r in possession. Further, there is no evidence that the consideratio n for the lump sum payments was beneficial to the debtor in possessionin the operation of the business. In fact, four days after appellants were terminated, the debtor in possession moved the bankruptcy court for permissio n to reject the employment contracts and eventually did so. Thus, appellants’ agreement to forego other employment opportunities to work for CFS in return for the promise of the lump sum payments was of no benefit to the estate. The lump sum payments were not actual, necessary costs and expenses of preserving the estate. See 11 U.S.C. § 503(b)(1)(A). Appellants cite Teamsters Local No. 310 v. Ingrum (In re Tucson Yel low Cab Co.) , 789 F.2d 701, 704 (9th Cir. 1986), in which the N inth Circuit held that severance pay in lieu of notice was entitled to adm inistrative priority. That case, driven largely by equitable concerns, is distinguishable. In Tucson Yellow Cab , a collective bargaining agreement between the taxi dr ivers and the company-11-

provided for two weeks notice prior to termination or severance pay in lieu of notice. The clear intent of the parties was to compensate the drivers for at least two weeks before termination, either by providing t hem with two weeks notice, after which the drivers would presumably work two m ore weeks and be paid, or to pay them two weeks severance pay and terminate them immediately. The pay in lieu of notice was clearly a component of compensat ion. Here, in contrast, appellants were paid their normal wages for the thr ee weeks they worked post-petition. The lump sum cash payments were not“wages, salaries, or commissions for services rendered after the commencement of the case.” See 11 U.S.C. § 503(b)(1)(A). Here, as in Mammoth Mart , the salaries paid appellants fully compensated them for their post-petition services to the debtorin possession. “The claims for [the lump sum payments] are based entirely upon [co nsideration supplied] by appellants to the debtor, and, as such, are not entitled to priority.” Mammoth
Mart , 536 F.2d at 955. The judgment of the United States District Court fo r the Northern District of Oklahoma is AFFIRMED.