Early Retirement Benefits Not Entitled to Severance Priority

By: Joe Scolavino

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Although the Second Circuit generally treats severance payments as priority administrative expenses when employment is terminated during the employer’s bankruptcy,

[1]

early retirement benefits triggered by severance are not entitled to administrative expense treatment.

[2]

  In Supplee v. Bethlehem Steel Corp. (In re Bethlehem Steel Corp.) the early retirement withdrawal penalty was waived due to the employee’s termination.

[3]

  The employee argued that the extra money derived from the waived penalty constituted a severance payment that was entitled to an administrative priority in the Bethlehem bankruptcy.

[4]

  The court disagreed, reasoning that that the lump-sum retirement benefits for which the employee became eligible at termination did not constitute a new benefit earned at termination, and was thus not entitled to administrative priority.

[5]

 

The administrative expenses in the case of a corporate debtor receive the highest priority in bankruptcy proceedings.

[6]

  These include wages, salaries, and “commissions for services rendered after the commencement of a case.”

[7]

  Although there is a split in the circuits,

[8]

the Second Circuit adopts the view that severance payments, a benefit created by termination, for terminated employees qualify as administrative expenses.

[9]

  However, where the benefits are payment for past services, they are not considered as severance payments.

[10]

  The court in Bethlehem reasoned that the employee’s termination did not create an entitlement to benefits under a pension plan, but instead merely accelerated the payment of benefits to which the employee already was entitled.

[11]

  Since pension benefits are payment for past services, they are not severance payments, and thus, are not entitled to administrative priority.

[12]

 

Given the current economic crisis, ensuing bankruptcies, and increasing unemployment, a terminated employee’s ability to seek early retirement benefits in addition to any possible severance packages will be limited in light of Bethlehem.