GALGAY, Bankruptcy Judge
Former Bankruptcy Act — Executory Contract — Rejection of — Arrangements — Priority Status
A bankruptcy court will not allow priority status for claims for unpaid wages, vacation pay and damages since the employment agreements had been rejected with court approval. Under Section 313 of the Bankruptcy Act, a rejection constitutes a breach of contrat retroactive to the time of filing the petition, thus rendering the agreement a pre-Chapter 11 claim. Accordingly, only unpaid wages and vacation pay earned during the Chapter XI proceeding will be entitled to priority. See Sec. 63(b) at ¶ 2621, Sec. 313(1) at ¶ 3318.
[Digest of Opinion]
Two related corporate Chapter XI debtors in possession entered into an employment agreement with the creditor-employees, which did not contain any severance pay provisions. After the filing of the Chapter XI petition, their employment was continued for some time but was eventually terminated and the debtor sought to reject the executory employment agreements with the creditors. Thereafter, with the creditor's consent, the court authorized the rejection of the creditor's employment agreements.
The creditors filed claims asserting Chapter XI priority status. Their claims included unpaid wages, vacation pay, pension and other benefits under the agreements, as well as items for damages.
Under Section 313 of the Bankruptcy Act, a court approved rejection of an executory agreement constitutes a breach of the agreement retroactive to the filing of the petition. Thus, the claims for damages in this case are pre-Chapter XI. Accordingly, these claims may not be given the status of priority claims as necessary business expense of the Chapter XI debtor. The creditors were only entitled to the reasonable value of the tangible benefits which they provided to the debtors. If they were not paid for the work they did during the Chapter XI proceeding, then that amount only would be a priority claim.