Friday, November 28, 2008

Employee Wage Motions Still Viable

The author of the Mirant and CoServ opinions limiting critical vendor motions has written to emphasize that his prior rulings do not preclude employee wage motions in chapter 11 cases. In re Tusa-Expo Holdings, Inc., No. 08-45057 (Bankr. N.D. Tex. 11/7/08).

In Tusa-Expo, the Debtor filed a routine motion to pay employee wages to which no one objected. However, as the Court explained, the motion was a good vehicle for clarification of the court's views.

Though the Motion is unopposed, the court considers this an appropriate occasion to clarify its rulings in In re CoServ,LLC,273 B.R. 487 (Bankr. N.D. Tex. 2002) and In re Mirant Corp., 296 B.R. 427 (Bankr. N.D. Tex. 2003). In each of those cases the court set a high bar for payment of so-called "critical vendors," i.e., creditors holding prepetition unsecured claims against the debtor. Although the court carefully distinguished in CoServ between priority wage claims and general unsecured claims, as well as recognizing the particular generically critical character of claims for wages or benefits for employees, the court is concerned lest it be perceived by some that payment of prepetition claims of employees might be subject to undue scrutiny. It is important, in the court's view, that a prospective chapter 11 debtor be confident that, absent a question as to whether continuation of its operations is appropriate, prepetition wage and benefit obligations will continue during chapter 11 to be honored on a timely basis.

Memorandum Opinion, pp. 3-4.

The Court pointed out that the priority nature of wage claims set them apart from the typical critical vendor analysis. Then it went on to state that even apart from priority status, that employee claims would meet the test for payment of critical vendors under CoServ.

The Court concluded:

A central purpose of chapter 11 is to realize on a debtor's going concern value. That going-concern value is dependent in part upon the continuity and performance of the debtor's work force--something particularly true in the case at bar. The continuity and performance of a debtor's work force is, in turn, typically dependent on timely payment of wages and benefits. As claims based on prepetition wages and benefit programs almost always--as is the true of the Prepetition Employee Obligations--are entitled to priority payment under section 507(a) of the Code, unsecured creditors are not disadvantaged by early--timely--satisfaction of those claims.

Memorandum Opinion, p. 8.

There is nothing earth-shattering in this opinion. However, it is reassuring to see a court go out of its way to acknowledge the pragmatic nature of chapter 11, where the first order of business is to see that the patient survives long enough to have a chance at reorganizing. The problem with critical vendor motions was that just about every vendor could claim to be critical. In the absence of Congressional authority, there was no reason to create a de facto priority category for vendors. Since CoServ and Mirant, Congress has amended the Code to create an administrative priority category for vendors in the period immediately preceeding the petition. 11 U.S.C. Sec. 503(b)(9). These claims share some of the characteristics of employee wages claims in that they are given a high priority. However, there is a distinction in that most employees live paycheck to paycheck. If there is an interruption in pay, they are highly motivated to look for another job. Vendors, on the other hand, frequently extend credit and realize that credit risk is a cost of doing business. It will be interesting to see whether courts re-examine the critical vendor concept in light of this legislative change.


Patchws said...

Love the explination. Keep it up. You always have gems on your blog that I can hold on to.

meiyi said...

Hello. I'm trying to understand chapter 11 and came upon your blog.

I still don't understand.
One question, will employees be paid if the company is filed Chapter 11?

Anonymous said...