UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LITTLE FORK RESOURCE AND
DEVELOPMENT CORPORATION CASE NO. 87-00020
MEMORANDUM OPINION AND ORDER
This matter is before the Court on the Amended Request for Payment of Administrative Expenses filed by the Office of the West Virginia Attorney General as counsel to the West Virginia Department of Labor on behalf of former employees of the debtor. The expenses claimed are in the nature of medical benefits and vacation pay. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(A).
FINDINGS OF FACT
The debtor herein filed a Chapter 11 petition in this Court on January 27, 1987. The case was converted to Chapter 7 on May 11, 1989. A Request for Payment of Administrative Expenses pursuant to 11 U.S.C.'503(b)(1)(A) and Bankruptcy Rule 2016 was filed by the Office of the West Virginia Attorney General as counsel to the West Virginia Department of Labor on behalf of former employees of the debtor on August 30, 1990. The request was for vacation and medical fringe benefits and for work performed but unpaid after the filing of the Chapter 11 but before the conversion to Chapter 7. Priority was alleged pursuant to 11 U.S.C. '507(a)(1). The Amended Request for Payment of Administrative Expenses was filed on October 18, 1990. The Trustee's Response to Motion for Administrative Expenses was filed on November 13, 1990. Affidavits have been filed by the employees in question concerning the time of their employment and the amounts they claim are owed to them.
CONCLUSIONS OF LAW
The allowance of administrative expenses is provided for in 11 U.S.C.'503. The specific subsection at issue herein is '503(b)(1)(A), which states, "After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case;" Administrative expenses allowed pursuant to '503(b) have first priority pursuant to 11 U.S.C. '507(a)(1). The possibility of payment of such claims as administrative expenses is affected by 11 U.S.C. '726(b) which provides in pertinent part:
Payment on claims of a kind specified in paragraph (1)...of section 507(a) of this title...shall be made pro rata among claims of the kind specified in...such paragraph, except that in a case that has been converted to this chapter under section 1112[,] [sic] 1208, or 1307 of this title, a claim allowed under section 503(b) of this title incurred under this chapter after such conversion has priority over a claim allowed under section 503(b) of this title incurred under any other chapter of this title...
Therefore claims for administrative expenses incurred since this case was converted to Chapter 7 have "superpriority".
For purposes of determining allowance of the Chapter 11 administrative expenses, however, the first question to be considered is whether or not vacation pay and medical benefits fall within the confines of'503(b)(1)(A). Vacation pay claims are generally entitled to administrative expense status. In re Valley Concrete Corporation, 118 B.R. 174 (Bkrtcy.D.R.I. 1990). In re St. Louis Globe-Democrat, Inc., 86 B.R. 606 (Bkrtcy.E.D.Mo. 1988). Matter of Schatz Federal Bearings Co., Inc., 5 B.R. 549 (Bkrtcy.S.D.N.Y. 1980). Determining the extent to which these claims may be paid, however, requires further analysis by the Court. As pointed out by the court in St. Louis Globe-Democrat, "[i]n most cases, vacation pay is earned from day to day over a long period of time and the employee would be entitled to receive an administrative priority payment pursuant to '503(b)(1)(A) for the vacation pay accrued only during the administrative period". In the case at bar, the administrative period lasted from the date of the filing of the Chapter 11 petition, January 27, 1987, to the date of conversion to Chapter 7, May 11, 1989. The affidavits filed by the former employees/claimants herein state that the affiants are owed one week's worth of vacation pay. The administrative period lasted long enough for an employee to accumulate at least one week's worth of vacation pay, and in the absence of any objection or demonstration to the contrary, it is the opinion of this Court that the claims for one week's worth of vacation pay are allowable as administrative expenses.
The designation of claims for medical benefits as administrative expenses is not quite so clear cut, but a recent case, In re Pacesetter Designs, Inc., 114 B.R. 731 (Bkrtcy C.D. Col. 1990), has held that a debtor-in-possession's employee who was injured post-petition in the normal course and scope of her employment for the debtor had an administrative expense claim for the direct, necessary medical expenses she incurred as a result of her injury. The court found the rationale for its decision in the language of 11 U.S.C.'364(a), which provides in part:
If the trustee is authorized to operate the business of the debtor under section...1108..., unless the court orders otherwise, the trustee may obtain unsecured credit and incur unsecured debt in the ordinary course of business allowable under section 503(b)(1) of this title as an administrative expense.
The court reasoned that the debtor failed to carry proper workers' compensation insurance and thus incurred post-petition, unsecured debt in the ordinary course of business. At 733-34.
The court went on to observe that, statutory interpretation aside, equity demanded that the employee, an "innocent bystander", not be forced to bear her own medical expenses in this instance and that "[i]t is reasonable to conclude that this employee--and any employee of a responsible Chapter 11 debtor-in-possession--could assume and should be able to assume that necessary and adequate insurance, particularly workers' compensation insurance, was being properly maintained as she worked as an employee of the Debtor-in-Possession." At 735.
The situation in the case at bar differs in that it does not involve workers' compensation coverage, which is mandated by statute, but medical insurance. In addition, none of the four former employees claiming medical expenses has alleged that he received a work-related injury, as did the employee in Pacesetter. However, the medical expenses incurred by the affected employees herein meet the test set out in the leading case of In re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir. 1976) and employed by the Pacesetter court: 1) the debt must arise from a transaction with the debtor-in-possession; and 2) the debt must be beneficial to the debtor-in-possession in the operation of the business. In re Mammoth Mart, Inc., at 954.
In addition, the affected employees were justified in assuming that adequate medical insurance was being maintained for them by the debtor-in-possession, as it is uncontroverted that this was part of the compensation package offered as an inducement for their employment, and that weekly sums were deducted from their wages for this purpose. The fact, also uncontroverted, that the debtor-in-possession did not pay these sums to the insurer and allowed the insurance to lapse should not shift the burden for these medical expenses from the debtor-in-possession to the employees.
In consideration of all of the foregoing it is the opinion of this Court that vacation pay and medical benefits are allowable as administrative expenses entitled to first priority pursuant to 11 U.S.C.''503(b)(1) and 507(a)(1). They are, however, subordinated to claims for administrative expenses incurred after the conversion of this case to Chapter 7 pursuant to 11 U.S.C. '726(b). It is therefore hereby ORDERED that the vacation pay and medical benefits claimed by the West Virginia Department of Labor on behalf of former employees of the debtor are allowable as administrative expenses entitled to first priority although subordinate to claims for administrative expenses in the Chapter 7 case, and objection to such claims is overruled.
This is a final order dated this _____ day of February, 1991.
By the Court -
Chris Quasebarth, Esq.
Ann Samani, Esq.
Susan Mullins Johnson, Esq.