EXECUTIVE SEVERANCE PAYMENTS IN BANKRUPTCY CASES

Talk about complicated!  Recently, I did a search on Google to find some easy information on this issue - and came up completely empty!  Thus, I had to drill down myself. Now that I have, I thought I would pass it along to my brethren and sithren (is that a word? should be!).  Let me see if I can simplify.

Many times incoming executives are offered lucrative severance packages in the event they are terminated, or the company goes bankrupt.  Little do they know....

Here is how it works.  Executive severance payments for bankrupt companies are limited by 11 U.S.C. Section 502(b)(7), which in essence says the following:

Executives can receive no more than 1 year of pay from either the date they are terminated (if before the bankruptcy is started) or from the date of the bankruptcy (if they are fired on or after the bankruptcy filing).

In the bankruptcy context, such severance payments are deemed to be accelerated for purposes of filing a Proof of Claim.  In other words, assume that Executive earning $200,000 has a 3 year severance package, payable beginning 30 days after he/she is fired, over 36 equal monthly payments.  The executive in question is then fired on the day the bankruptcy filing is made. 

When the Executive goes to file a Proof of Claim, he/she is asked to set forth the amount he/she was owed on the date the bankruptcy was filed.  How to answer?

The answer should be $600,000 - i.e. the full value of the severance package, plus: 1) any compensation or any other benefits that was/were due but unpaid as of the date the bankruptcy filing; 2) any earned but unused vacation time; and, 3) the value of any benefits in addition to severance offered as part of the severance package.

In such a scenario, the severance will under Section 502(b)(7) be limited to $200,000; the cap will not apply to the value of any pre-bankruptcy obligations, nor will it limit the value of any claims relating to post-bankruptcy benefits due in accord with the severance agreement.

Perhaps the best discussion I have seen on the principles discussed herein is found in the attached case, In re Dornier Aviation, out of the Virgina Federal District Court.

Bankruptcy's are really complex, so under no circumstances should you rely on this article as the Gospel.  If you are an executive owed severance from a bankrupt former employer, by all means hire an attorney!

John A. Gallagher, Executive Severance Attorney, Paoli, PA 610-647-5027

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