USCA1 Opinion
January 26, 1995
NOT FOR PUBLICATION
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UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 94-1834
IN RE DOCTORS HOSPITAL, INC.,
Appellant,
v.
RAMON VILAR,
Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Juan M. Perez-Gimenez, U.S. District Judge]
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Before
Torruella, Chief Judge,
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Campbell, Senior Circuit Judge,
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and Boudin, Circuit Judge.
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Carlos Batista-Jimenez with whom Charles A. Cuprill-Hernandez was
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on brief for appellant.
Igor J. Dominguez with whom Igor J. Dominguez Law Offices was on
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brief for appellee.
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Per Curiam. In July 1989, Doctor's Hospital (the
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"Hospital") filed a chapter 11 petition in the United States
Bankruptcy Court for the District of Puerto Rico.
Thereafter, the Hospital continued to operate as debtor-in-
possession. The following year the Hospital hired Ramon
Vilar to serve as its Hospital Administrator. Vilar signed a
five-year employment contract with the Hospital on December
14, 1990. Under the contract, Vilar was given "complete
autonomy" in the day-to-day operation of the hospital.
By October 1991, the Hospital desperately needed funds
in order to continue operating. To secure financing, the
Hospital entered into a court-approved agreement with Medicos
Especializados y de Emergencias, Inc. ("Medicos") and
Medicos' President, Dr. Roberto Kutcher Olivio. Under the
agreement, Medicos and Kutcher acquired 51 percent of the
Hospital's capital stock; and Medicos and Kutcher assumed
responsibility for administering and operating the Hospital.
The agreement took effect on November 1, 1991, and on
November 4, 1991, Kutcher informed Vilar that his contract
with the Hospital was terminated.
Vilar then filed with the bankruptcy court an
application for payment of administrative expenses, including
expenses for severance pay and vacation pay, pursuant to 11
U.S.C. 503(b)(1)(A). Administrative expenses are "the
actual, necessary costs and expenses of preserving the
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estate, including wages, salaries, or commissions for
services rendered after the commencement of the case". Id.
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Severance and vacation pay, incident to post-petition
employment, are widely considered to be administrative
expenses. See, e.g., Matter of Schatz Federal Bearings Co.,
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Inc., 5 B.R. 549, 552 (S.D.N.Y. Bankr. 1980). The Bankruptcy
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Code, 11 U.S.C. 507(a)(1), assigns first-priority status to
section 503(b) expenses to encourage third parties to supply
those goods and services necessary to rehabilitate the
debtor's business. See, e.g., In re Mammoth Mart, Inc., 536
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F.2d 950 (1st Cir. 1976).
Clause 4(a) of the contract allowed Vilar four weeks of
compensated vacation time for each year that the contract was
in effect. Vilar based his claim for severance pay on clause
13 of his employment contract with the Hospital, which
states:
The Board may, in its discretion, terminate Vilar's
duties as Administrator of the Hospital. Such
action will require a majority vote of the Board
and will become effective when such vote is taken.
After such termination, all rights, duties and
obligations of both parties shall cease except that
Hospital will continue to pay Vilar his then
monthly salary of (sic) for the month in which his
duties were terminated and for six (6) consecutive
months thereafter, as agreed upon termination
payment.
In June 1992 the bankruptcy court heard testimony
concerning Vilar's application for payment of administrative
expenses. The Hospital objected to the application, arguing
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that it did not have to pay Vilar anything because he had
been terminated for cause. According to the Hospital, Vilar
had breached the contract because he had failed to perform
his duties as Administrator and because he was insubordinate
and negligent. Vilar maintained that he satisfactorily
performed all of his obligations under the contract.
At the conclusion of the hearing, the bankruptcy court
stated that "[t]he evidence . . . shows that the [Hospital's]
board of directors may have had cause to terminate the
employment contract but opted not to do so." The court found
that Medicos and Kutcher had terminated Vilar with the
approval of the Hospital's board of directors and that the
termination had triggered Clause 13, thereby giving Vilar a
valid claim for severance pay. However, the court concluded
that the claim for severance pay, although allowed as an
unsecured claim, was not entitled to priority status because
clause 13 did not benefit the estate. The bankruptcy court
did find that Vilar was due vacation pay as an administrative
priority.
On review, the district court affirmed the bankruptcy
court's allowance of both claims. The district court
specifically endorsed the finding of the bankruptcy court
that the dismissal had not been made for cause. The district
court also upheld the bankruptcy court's holding that the
claim for vacation pay was an administrative expense, but the
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district court reversed with respect to severance pay,
concluding that it too was an administrative expense entitled
to priority.
On appeal, the Hospital disputes that Vilar has a valid
claim to severance and vacation pay. The Hospital's argument
is simple: it treats the bankruptcy court's reference to
cause--that the Hospital "may have had cause" to terminate
Vilar--as a determination that Vilar did breach his contract.
But "may have" and "did" are two different things. Even if a
material breach by Vilar would excuse the Hospital from
paying severance or vacation pay, there is no such finding of
cause here.
The bankruptcy judge seems to have treated the Hospital
as having waived any such claim of breach by failing to
assert, when it fired Vilar, that it was doing so because of
Vilar's misconduct. Whether the bankruptcy judge was right
or wrong on this issue of waiver is not before us because the
Hospital offers no argument to show that he was wrong. Why
the Hospital has chosen to argue the case on a ground refuted
by the bankruptcy court's own order is a complete mystery.
The Hospital also attacks the priority status afforded
to the vacation and severance claims, but again its principal
ground is the mistaken assumption that the Hospital was found
to have cause to terminate the contract. Indeed, the
Hospital admits that most courts that have considered
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severance pay claims in bankruptcy have held that they
comprise an administrative expense entitled to priority. The
reason, as the Hospital states, is that the severance pay
commitment is a cost of carrying on the business. E.g., In
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re Golden Distributors, Ltd., 134 B.R. 760 (S.D.N.Y. Bankr.
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1991). The only disagreement, not presented here, arises
where the contract was made prior to bankruptcy. E.g., id.
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The closest that the Hospital comes to raising a
colorable issue on appeal is to defend, in a couple of
sentences, the bankruptcy court's initial determination that
the severance pay should not be given a priority. The
reason, says the Hospital, is that the severance pay is not
linked to the services provided post petition or to the
length of employment but was provided in compensation for the
termination of the contract.
The short answer is that the severance provision was a
contracted for employment benefit, just like salary or
vacation pay, promised in exchange for Vilar's services.
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Vilar earned it by providing post-petition services (or at
least there is no finding to the contrary), and the
commitment to pay severance, together with other commitments,
benefited the estate by inducing Vilar to act as the
Hospital's administrator. In these circumstances, severance
pay falls squarely within the rationale for allowing a
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priority. See generally In re Mammoth Mart, Inc., 536 F.2d
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at 954.
Affirmed.
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