New Bankruptcy Opinion: IN RE 3S INTERNATIONAL, LLC – Bankr. Court, ED Michigan, 2016

In Re: 3S INTERNATIONAL, LLC, Chapter 11 Proceeding Debtor.

Case No. 15-21594-dob.

United States Bankruptcy Court, E.D. Michigan, Northern Division, Bay City.

April 5, 2016.


DANIEL OPPERMAN, Bankruptcy Judge.

The issue in this case is whether Creditor Gina S. Yob should be allowed an administrative claim in the amount of $42,000.00. This matter was heard on January 21, 2016, after which the Court issued an Order Establishing Deadlines to Supplement Pleadings. Ms. Yob and the Debtor filed supplemental briefs. Creditor Mercantile Bank of Michigan filed a concurrence in support of Debtor’s position and Ms. Yob filed a response to that concurrence. After waiting to see if other parties believed additional pleadings should be filed, the Court has considered the record and the supplemental pleadings before it, and now issues its decision on this matter.


The facts are undisputed regarding the issue before the Court. Debtor filed this Chapter 11 bankruptcy case on August 6, 2015. Ms. Yob is a past employee of the Debtor. After Ms. Yob left the employment of Debtor, she signed a Confidential Severance Agreement, General Release & Covenant Not To Sue on June 2, 2015 (“Post-Employment Agreement”). Ms. Yob asserts that she has complied with her obligations under this agreement namely by not competing and obtaining employment in her chosen field of work, but that Debtor has not made the required payments under such, and owes Ms. Yob $48,000.00. Shortly after the bankruptcy was filed, Ms. Yob filed a Motion to Compel the Debtor to Assume or Reject the Post-Employment Agreement as an Executory Contract, which the Court granted in part and denied in part, in an Order dated October 9, 2015, which allowed Debtor until December 1, 2015, to file a notice indicating its intent to assume or reject the Post-Employment Agreement. This Order further provided that “if Debtor does not file such a Notice on or before December 1, 2015, then Debtor will immediately commence on December 1, 2015, and continuing on the first and fifteenth day of each month until such a Notice is filed, to pay $6,000 to Gina S. Yob under the Contract.”

Debtor ultimately rejected the Post-Employment Agreement via Motion filed on December 4, 2015, and an Order approving such Motion was entered on December 23, 2015. The instant Motion for Allowance of the $42,000.00 as administrative claim was filed the same day, on December 23, 2015. At the time of rejection, Ms. Yob claims the total due and owing her post-petition was $48,000.00. This amount is reduced by one payment that was made by Debtor’s counsel in the amount of $6,000.00 [1] , bringing the total amount claimed owing post-petition to Ms. Yob to be $42,000.00. In this Motion, Ms. Yob argues that pursuant to the Post-Employment Agreement, Debtor was required to make certain payments to Ms. Yob in exchange and in consideration for her promise not to compete with the Debtor among other promises. Ms. Yob asserts that her reliance upon these promises by not competing constitutes a benefit to the bankruptcy estate pursuant to 11 U.S.C. § 503(b) because Debtor received the benefit of her not competing while not paying consideration for such benefit.

Debtor denies the claim of Ms. Yob is entitled to administrative claim priority status. First, Debtor argues that Ms. Yob should be considered an “insider” as that term is used in 11 U.S.C. § 503(c)(2), because Ms. Yob holds a 15% non-voting interest in the Debtor, and the payments at issue constitute “severance payments” pursuant to this subsection, which disallows such payments to an insider of a debtor with certain limited exceptions not applicable here. Debtor further asserts that Ms. Yob violated the terms of the Post-Employment Agreement making enforcement of such prior to rejection as an administrative expense claim inappropriate. Finally, Debtor argues that Ms. Yob’s covenant not to compete did not benefit the estate to any degree, and the $6,000.00 already paid to Ms. Yob more than adequately compensates her for any benefit conferred.


This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334, 157(a) and E.D. Mich. LR 83.50. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B) (allowance or disallowance of claims against the estate).


Section 507(a)(2)

Section 507(a)(2) states:

(a) The following expenses and claims have priority in the following order:

* * **

(2) Second, administrative expenses allowed under Section 503(b) of this title, . . . .

11 U.S.C. § 507(a)(2) (emphasis added).

Section 503(b)(1)(A)

“The Bankruptcy Code grants priority to certain administrative expenses, such as the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case.” In re Sunarhauserman, Inc., 126 F.3d 811, 816 (6th Cir. 1997) . “Claims for administrative expenses under § 503(b) are strictly construed because priority claims reduce the funds available for creditors and other claimants.” In re Federated Dept. Stores, Inc., 270 F.3d 994, 1000 (6th Cir. 2001) (citations omitted).

The “well-accepted `benefit to the estate’ test . . . states that a debt qualifies as an `actual, necessary’ administrative expense only if (1) it arose from a transaction with the bankruptcy estate and (2) directly and substantially benefitted the estate.” In re Sunarhauserman, Inc., 126 F.3d 811, 816 (6th Cir. 1997) (citing Employee Transfer Corp. v. Grigsby (In re White Motor Corp.), 831 F.2d 106, 110 (6th Cir.1987) ). “The benefit to the estate test limits administrative claims to those where the consideration for the claim was received during the post-petition period.” Id. “[R]egardless of the substantive law on which the claim is based, the proper standard for determining that claim’s administrative priority looks to when the acts giving rise to a liability took place, not when they accrued. Id. at 818.

Section 503(c)(2)

Section 503(c) provides exceptions to otherwise Section 503(b) administrative expense claims. Subsection (c)(2) states:

(c) Notwithstanding subsection (b), there shall neither be allowed, nor paid —

* * * * *

(2) a severance payment to an insider of the debtor, unless —

(A) the payment is part of a program that is generally applicable to all full-time employees; and

(B) the amount of the payment is not greater than 10 times the amount of the mean severance pay given to nonmanagement employees during the calendar year in which the payment is made;

For a corporate debtor, an “insider” is a “director of the debtor,” “officer of the debtor,” “person in control of the debtor,” “partnership in which the debtor is a general partner,” “general partner of the debtor,” or “relative of a general partner, director, officer, or person in control of the debtor.” 11 U.S.C. § 101(31)(B).


The Court begins its analysis with ruling out the exception argued by Debtor under Section 503(c)(2). Ms. Yob is a past employee of Debtor and clearly does not qualify as an “insider.” Also, Ms. Yob agreed to not compete or seek employment in certain areas, all of which distinguish the Post-Employment Agreement from a severance agreement. Thus, this exception is inapplicable.

The Court next turns to whether Ms. Yob’s claim for $42,000.00, which consists of the payments she would have received post-petition under the Post-Employment Agreement, qualifies as an administrative expense claim under 11 U.S.C. § 503(b)(1)(A). Ms. Yob argues that by her not being allowed to seek employment elsewhere she benefitted Debtor, and the wages she gave up by not competing with Debtor conferred an actual and necessary expense to her that directly and substantially benefitted the Debtor’s bankruptcy estate. The Debtor does not question the time period claimed by Ms. Yob or the amount claimed of $48,000.00.

The Debtor questions and contests the benefit it received by Ms. Yob’s forbearance from competing, even though it voluntarily entered into the Post-Employment Agreement only a few months before it filed its petition with this Court. The Debtor also argues Ms. Yob’s forbearance did not benefit the bankruptcy estate.

Despite what the Debtor now argues is a clear lack of benefit to either it or the estate, the Debtor, in response to Ms. Yob’s Motion to Compel Debtor to Assume or Reject the Post-Employment Agreement, requested additional time to make a determination to assume or reject the Post-Employment Agreement. The Court granted that request via the October 9, 2015, Order giving the Debtor until December 1, 2015, to decide whether to assume or reject the Post-Employment Agreement. Meanwhile, Ms. Yob honored her portion of the agreement. The Debtor has not demonstrated any change in the circumstances involving the Debtor and Ms. Yob, as to the Post-Employment Agreement, other than the passage of time, all of which benefitted the Debtor and the bankruptcy estate and was to the detriment of Ms. Yob. If the Debtor believed the benefits it received from the Post-Employment Agreement did not exist or were not worth $6,000.00 twice a month, that conclusion could have been made much earlier than December, 2015.

The Debtor also argues that Ms. Yob has violated the Post-Employment Agreement by filing a proof of claim with this Court stating that the basis of the claim is a cause of action for wrongful termination, unlawful discrimination, defamation, and other tort or contract claims. The Debtor’s argument is well taken. As filed, it could be that Ms. Yob intends to breach her agreement. To remove this possibility, the Court allows Ms. Yob 21 days to amend her proof of claim to delete references to the cause of action claims. If the proof of claim is amended properly, the Court will grant Ms. Yob’s request for relief. If not, the Court will continue the hearing on her motion.

Accordingly, the Court concludes the date of commencement for administrative expense status should be the date of Debtor’s petition to the date of rejection. As requested by Ms. Yob, the amount would be $48,000.00, less the $6,000.00 already paid, for a total administrative claim award of $42,000.00, subject to amendment of her proof of claim. [2]


For the above-stated reasons and subject to amendment of her proof of claim, the Court determines that Ms. Yob is entitled to priority status pursuant to 11 U.S.C. § 503(b) as an administrative expense claimant in the amount of $42,000.00 and, therefore, conditionally grants Ms. Yob’s Motion. The Court directs Ms. Yob, through counsel, to submit an order consistent with this Opinion.

Not for Publication

[1] Footnote 1 of Paragraph 5 of Debtor’s Response (Docket #88) to Ms. Yob’s Motion for Allowance of Administrative Claim states: “Pursuant to this Court’s Order, the Debtor was to make a payment on December 1, 2015 if it wished extended time to make a determination of whether to assume or reject the Post-Employment Agreement. The Debtor determine [sic] that it would reject the Post-Employment Agreement. However, Debtor’s counsel failed to give timely notice. Debtor’s counsel has personally paid the $6,000.00 to Ms. Yob. The Estate will not be charged for the $6,000.00 nor will Debtor’s counsel seek to recover the $6,000.00 from any other source.”

[2] As indicated in a previous footnote, Debtor’s counsel stated that he personally paid Ms. Yob the $6,000.00. The record is not all clear to the Court why Debtor’s counsel took this action, so the Court expresses no opinion as to the propriety of this action, other than to note it is an extraordinary and gracious act by counsel that may have been unnecessary. The Court leaves this as a private matter between the attorney and client, but in light of this decision allows both sides the right to reconsider their actions.

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