Bankruptcy Court Clarifies The Applicable Requirements For Severance Payments To Debtors' Former Officers

The District Court for the Northern District of Ohio recently clarified the applicable requirements for post-petition severance payments to a debtor’s former officers. In the case of In re: Forum Health, et al., the debtor sought authorization from the Court to make a severance payment in the amount of $18,126.00 to its former Chief Executive Officer. The Trustee objected, asserting that the debtor’s motion was not based on a program that was generally applicable to all full-time employees as required by 11 U.S.C. § 503(c)(2)(A).

The Trustee first argued that the debtor’s proposed severance payment was not based on a “generally applicable” program because the proposed severance payment was made under the CEO’s individual employment agreement, rather than a company-wide severance policy. While the debtor had a Separation Policy applicable to all Eligible Employees, employees with employment contracts containing individual severance plans (including the debtor’s former CEO) were excluded from the Separation Policy. The Court, in a matter of first impression, rejected this argument. The Court explained that the Separation Policy itself need not be generally applicable to all full-time employees, as long as the Debtors have a program that is generally applicable. The debtor’s program could validly include the Separation Policy for some employees and individual agreements with other employees.

The Trustee next argued that the debtor’s proposed severance payment was not based on a “generally applicable” program because the debtor maintained no severance program for union employees. While the Separation Policy applied to all Eligible Employees, union employees were not eligible to participate. For that reason, the Court held that the debtor’s severance program was not “generally applicable to all full-time employees” and denied the debtor’s proposed severance payment to its former CEO.

Following this decision, creditors should carefully review post-petition severance payments to a debtor’s employees to ensure that such payments satisfy the Bankruptcy Code’s requirement that severance payments be made pursuant to a generally applicable program. While a debtor’s program may consist of a collection of employee-specific severance policies, every category of full time employees must be covered by the program.

¹  2010 WL 1703505 (Bankr. N.D. Ohio Apr. 7, 2010).

Posted by: Matthew J. Horwitz

Categories: Bankruptcy & Banking Law