
USCA1 Opinion

	




          January 26, 1995                                 NOT FOR PUBLICATION                                 ___________________                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________        No. 94-1834                            IN RE DOCTORS HOSPITAL, INC.,                                      Appellant,                                          v.                                     RAMON VILAR,                                      Appellee.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                           FOR THE DISTRICT OF PUERTO RICO                  [Hon. Juan M. Perez-Gimenez, U.S. District Judge]                                               ___________________                                 ____________________                                        Before                                Torruella, Chief Judge,                                           ___________                           Campbell, Senior Circuit Judge,                                     ____________________                              and Boudin, Circuit Judge.                                          _____________                                 ____________________            Carlos  Batista-Jimenez with whom Charles A. Cuprill-Hernandez was            _______________________           ____________________________        on brief for appellant.            Igor J. Dominguez with  whom Igor J. Dominguez Law Offices was  on            _________________            _____________________________        brief for appellee.                                 ____________________                                 ____________________                 Per  Curiam.    In  July 1989,  Doctor's  Hospital  (the                 ___________            "Hospital")  filed a chapter 11 petition in the United States            Bankruptcy   Court  for   the   District  of   Puerto   Rico.            Thereafter, the Hospital  continued to operate  as debtor-in-            possession.   The  following  year the  Hospital hired  Ramon            Vilar to serve as its Hospital Administrator.  Vilar signed a            five-year employment  contract with the Hospital  on December            14, 1990.    Under the  contract, Vilar  was given  "complete            autonomy" in the day-to-day operation of the hospital.                 By October  1991, the Hospital  desperately needed funds            in order  to continue  operating.  To  secure financing,  the            Hospital entered into a court-approved agreement with Medicos            Especializados  y  de   Emergencias,  Inc.  ("Medicos")   and            Medicos' President,  Dr. Roberto  Kutcher Olivio.   Under the            agreement,  Medicos and  Kutcher acquired  51 percent  of the            Hospital's capital  stock;  and Medicos  and Kutcher  assumed            responsibility for administering and operating  the Hospital.            The  agreement took  effect  on  November  1,  1991,  and  on            November 4,  1991, Kutcher  informed Vilar that  his contract            with the Hospital was terminated.                 Vilar   then  filed   with  the   bankruptcy  court   an            application for payment of administrative expenses, including            expenses for severance  pay and vacation pay,  pursuant to 11            U.S.C.    503(b)(1)(A).    Administrative expenses  are  "the            actual,  necessary  costs  and  expenses  of  preserving  the                                         -2-                                         -2-            estate,  including  wages,   salaries,  or  commissions   for            services rendered after  the commencement of the case".   Id.                                                                      ___            Severance  and   vacation  pay,  incident   to  post-petition            employment,   are  widely  considered  to  be  administrative            expenses.  See, e.g., Matter  of Schatz Federal Bearings Co.,                       ___  ____  _______________________________________            Inc., 5 B.R. 549, 552 (S.D.N.Y. Bankr. 1980).  The Bankruptcy            ____            Code, 11 U.S.C.   507(a)(1), assigns first-priority status to            section 503(b) expenses to  encourage third parties to supply            those  goods  and  services  necessary  to  rehabilitate  the            debtor's business. See, e.g.,  In re Mammoth Mart,  Inc., 536                               ___  ____   _________________________            F.2d 950 (1st Cir. 1976).                 Clause 4(a) of the contract  allowed Vilar four weeks of            compensated vacation time for each year that the contract was            in effect.  Vilar based his claim for severance pay on clause            13  of  his  employment  contract with  the  Hospital,  which            states:                 The Board may, in its discretion, terminate Vilar's                 duties  as Administrator  of  the  Hospital.   Such                 action will  require a  majority vote of  the Board                 and will become effective  when such vote is taken.                 After  such termination,  all  rights,  duties  and                 obligations of both parties shall cease except that                 Hospital  will  continue  to  pay  Vilar  his  then                 monthly salary of  (sic) for the month in which his                 duties were terminated and  for six (6) consecutive                 months  thereafter,  as  agreed   upon  termination                 payment.                 In  June  1992  the  bankruptcy  court  heard  testimony            concerning Vilar's application  for payment of administrative            expenses.  The Hospital  objected to the application, arguing                                         -3-                                         -3-            that it  did not have  to pay Vilar  anything because  he had            been  terminated for cause.  According to the Hospital, Vilar            had breached  the contract because  he had failed  to perform            his duties as Administrator  and because he was insubordinate            and  negligent.   Vilar  maintained  that  he  satisfactorily            performed all of his obligations under the contract.                 At the  conclusion of the hearing,  the bankruptcy court            stated that "[t]he evidence . . . shows that the [Hospital's]            board  of  directors  may have  had  cause  to  terminate the            employment contract but opted not to do so."  The court found            that  Medicos  and  Kutcher  had terminated  Vilar  with  the            approval of  the Hospital's board  of directors and  that the            termination had  triggered Clause 13, thereby  giving Vilar a            valid claim for severance pay.   However, the court concluded            that  the claim  for  severance pay,  although allowed  as an            unsecured claim, was not  entitled to priority status because            clause 13 did not  benefit the estate.  The  bankruptcy court            did find that Vilar was due vacation pay as an administrative            priority.                 On review,  the district  court affirmed  the bankruptcy            court's  allowance  of  both  claims.    The  district  court            specifically  endorsed  the finding  of the  bankruptcy court            that the dismissal had not been made for cause.  The district            court  also upheld  the bankruptcy  court's holding  that the            claim for vacation pay was an administrative expense, but the                                         -4-                                         -4-            district  court  reversed  with  respect  to  severance  pay,            concluding that it too was an administrative expense entitled            to priority.                   On appeal, the Hospital disputes that Vilar has a  valid            claim to severance and vacation pay.  The Hospital's argument            is simple:   it treats  the bankruptcy  court's reference  to            cause--that the  Hospital "may  have had cause"  to terminate            Vilar--as a determination that Vilar did breach his contract.            But "may have" and "did" are two different things.  Even if a            material  breach  by Vilar  would  excuse  the Hospital  from            paying severance or vacation pay, there is no such finding of            cause here.                 The bankruptcy judge seems  to have treated the Hospital            as  having  waived any  such claim  of  breach by  failing to            assert, when it fired Vilar, that it was doing so  because of            Vilar's misconduct.   Whether the bankruptcy  judge was right            or wrong on this issue of waiver is not before us because the            Hospital offers no  argument to show that he  was wrong.  Why            the Hospital has chosen to argue the case on a ground refuted            by the bankruptcy court's own order is a complete mystery.                 The Hospital  also attacks the priority  status afforded            to the vacation and severance claims, but again its principal            ground is the mistaken assumption that the Hospital was found            to  have  cause  to  terminate  the  contract.   Indeed,  the            Hospital   admits  that  most  courts  that  have  considered                                         -5-                                         -5-            severance  pay  claims  in  bankruptcy have  held  that  they            comprise an administrative expense entitled to priority.  The            reason, as  the Hospital  states, is  that the  severance pay            commitment is  a cost of carrying on  the business.  E.g., In                                                                 ____  __            re Golden  Distributors, Ltd., 134 B.R.  760 (S.D.N.Y. Bankr.            _____________________________            1991).   The  only disagreement,  not presented  here, arises            where the contract was made prior to bankruptcy.  E.g., id.                                                              ____  ___                 The  closest  that  the  Hospital  comes  to  raising  a            colorable  issue on  appeal  is to  defend,  in a  couple  of            sentences,  the bankruptcy court's initial determination that            the  severance pay  should  not be  given  a priority.    The            reason, says the Hospital,  is that the severance pay  is not            linked  to  the services  provided  post petition  or  to the            length of employment but was provided in compensation for the            termination of the contract.                 The  short answer is that  the severance provision was a            contracted  for  employment  benefit,  just  like  salary  or            vacation  pay,  promised in  exchange  for Vilar's  services.                                     _________________            Vilar earned  it by  providing post-petition services  (or at            least   there  is  no  finding  to  the  contrary),  and  the            commitment to pay severance, together with other commitments,            benefited  the  estate  by  inducing  Vilar  to  act  as  the            Hospital's administrator.  In these  circumstances, severance            pay  falls  squarely  within  the rationale  for  allowing  a                                         -6-                                         -6-            priority.  See generally  In re Mammoth Mart, Inc.,  536 F.2d                       _____________  ________________________            at 954.                 Affirmed.                 ________                                         -7-                                         -7-
