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Workers win severance pay priority in bankruptcy court

Former employees’ severance-pay claims are entitled to full priority in the employer’s bankruptcy, the 4th U.S. Circuit Court of Appeals has held.

Last week’s published decision affirmed the ruling of a U.S. Bankruptcy Court judge in Richmond, Va., in favor of 125 former employees of LandAmerica Financial Group Inc.

LandAmerica let the employees go less than 180 days before filing its bankruptcy petition. Under the company’s severance plan, they were entitled to a specified number of weeks’ wages based on their years of service.

They sought priority status for their severance pay in the bankruptcy case.

LandAmerica’s trustee did not object to the amount of the claims; however, he did object to priority status for the full amount.

In the trustee’s view, severance pay was earned over the entire course of each employee’s years at the company, and only a prorated portion that was “earned” within the last 180 days was entitled to priority under 11 U.S.C. §507(a)(4).

For example, an employee who had been with the company for a little over eight years might be entitled to a severance payment of $8,500. Under the trustee’s argument, only 5.03 percent of that amount would have been “earned” in the 180 days before the bankruptcy petition was filed. Therefore, the trustee argued, only 5.03 percent of $8,500 — about $430 — should be allowed as a priority claim, while the balance of $8,070 would be classified as an unsecured general claim.

The bankruptcy judge rejected the argument, and the 4th Circuit affirmed on July 6.

“The trustee’s position in this regard conflicts both with the purpose of severance compensation and the plain terms of the plan at issue,” Judge Barbara M. Keenan wrote for the appeals court.

“While the amounts of the severance compensation to which the claimants were entitled under the plan were based on their length of service to [the debtor], this method of calculation did not, as the trustee contends, dictate that those employees earned severance compensation over the entire course of their employment,” the court explained.

Rather, for purposes of the statute, employees “earn” the full amount of severance pay “on the date the employee becomes entitled to receive such compensation.” In this case, that occurred when the employees became participants in the plan, immediately after their termination, the court held.

The case is Matson, trustee for LandAmerica, v. Alarcon et al., US4th No. 10-2352.

Pat Murphy of Lawyers USA, the Boston-based sister publication of The Daily Record, contributed to this article.