Yes, it depends on the assets of the company and the priority of the severance claim when compared to competiting creditor claims. Normally the severeance claim is treated as an unsecured claim and may only get paid pennies on the dollar. However, if a portion of it is treated as an administrative claim, that portion may get paid 100 cents on the dollar as per the severance agreement.
In a Chapter 11 proceeding, a pre-petition severance agreement can be deemed to be executory or non-executory. The consequence of which definition applies is the claim priority to which the former employee may be entitled. This may mean a former employee receives either 100 cent dollars or less than 100 cents on the dollar on
account of payments due under the severance agreement.
Obviously, a debtor company will usually seek a way to minimize payments to former employees, whereas, former employees would rather be paid in full. Section 365 of the
Bankruptcy Code provides that a trustee may assume or reject any executory contract.
The rejection of an executory contract enables the employee to file an unsecured claim which is deemed to arise as of the date the bankruptcy petition was filed.
However, until the court enters an order rejecting the contract, the employee to the severance contract may be entitled to an administrative claim based upon the actual and necessary benefit provided to the bankruptcy estate. Thus, an employee whose executory severance contract is rejected, but who can demonstrate actual and necessary benefit to the estate, will have a bifurcated claim consisting of an administrative portion for post-petition services through the rejection date (likely to be
paid in full) and an unsecured portion for the rejection damages (unlikely to be paid in full).
Please click "ACCEPT" so I can get credit for my work. We can continue our conversation after this at no additional charge.