ABI Journal Article Details How Terminated Employees Scored a Key Ruling on Priority Treatment of Severance Claims

ABI Journal Article Details How Terminated Employees Scored a Key Ruling on Priority Treatment of Severance Claims

Contact: John Hartgen
             [email protected]


September 6, 2011, Alexandria, Va. — An article in the September edition of the ABI Journal looks at a recent district court ruling that provided laid-off employees with a key victory on the priority treatment of severance claims. Author Gregory Fox of Friedman Kaplan Seller & Adelman LLP (New York) explains how the U.S. Court of Appeals for the Fourth Circuit addressed the issue in the chapter 11 case of Land America Financial Group, Inc. The Fourth Circuit upheld a bankruptcy court ruling to grant full priority treatment to severance claims of laid-off employees of LandAmerica. “This case represents a bittersweet victory for the workers who are often the casualties of bankruptcy, and should be considered carefully by corporations seeking to address severance obligations through a chapter 11 plan,” Fox writes.
Employee layoffs are frequently part of a failing company’s cost-cutting strategy. During the 180-day period prior to filing for chapter 11 in 2008, LandAmerica terminated 125 employees who, as of the bankruptcy filing, had not received their severance payments owed to them under the company’s severance plan. The former employees then filed proofs of claim against the company’s bankruptcy estate, seeking priority treatment for their claims up to the statutory cap set by § 507(a)(4) of the Bankruptcy Code. The liquidating trustee appointed under LandAmerica’s confirmed reorganization plan objected to these proofs of claim in 2010. The bankruptcy court overruled the trustee’s objections and held that the severance pay was earned on the date of the worker’s termination and the severance claims brought by the former employees were entitled to priority treatment. On July 6, 2011, the Fourth Circuit affirmed the bankruptcy court’s ruling that LandAmerica’s former employees should receive priority treatment to recoup their severance claims.

“The Fourth Circuit bolstered a significant employee-protection statute and went against the grain of case law that had been upholding debtors’ and trustees’ efforts to limit the amount of severance obligations that actually reaches the pockets of terminated employees,” Fox wrote. “In the future, debtors seeking to take advantage of the chapter 11 process will need to consider the result in LandAmerica if they have significant unpaid severance obligations incurred six months in advance of the bankruptcy filing.”

To obtain a copy of “Laid-Off Employees Score Key Victory on Priority Treatment of Severance Claims,” published in the September edition of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at [email protected].


ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes nearly 13,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abiworld.org/conferences.html.