Postpetition Employment at Prepetition Rates? One Court Says, “Not Necessarily.”

Contributed by David G. Litvack
In In re Ellipso, Inc., the United States Bankruptcy Court for the District of Columbia recently held that, although an employee’s postpetition services may give rise to an administrative expense claim, the amount of such claim must be limited to the reasonable value of the services provided – not necessarily the amount specified by any applicable contract.  According to the bankruptcy court, an employment contract may be probative of the value provided, but it is not dispositive.
In Ellipso, after the debtor filed its chapter 11 petition in 2009, an employee continued to work for four months following the petition date (March through June).  Although the employee was paid, consistent with his employment contract, $6,000.00 a month for his work in March, April and May, he received no compensation for June.  As a result of such non-payment, the employee filed a motion for allowance of an administrative expense against the debtor’s estate, pursuant to section 503(b)(1)(A)(i) of the Bankruptcy Code, for payment of, among other things, his June services.  Section 503(b)(1)(A)(i) grants a creditor an allowed administrative expense for “the actual, necessary costs and expenses of preserving the estate, including—(i) wages, salaries, and commissions for services rendered after the commencement of the case.”  The party requesting allowance of an administrative expense, however, bears the burden of proof as to the reasonable value of the services rendered.
At the outset, the bankruptcy court rejected the employee’s argument that an executory contract (here, the employment contract) can be assumed by implication.  Under bankruptcy law, if an employment contract is assumed, a debtor is required to pay any amounts due under such contract.  The bankruptcy court noted that court approval for the assumption of an executory contract is required, and because no such approval was ever sought or granted, the employment contract was not assumed.  Accordingly, because the contract was not assumed, the employee was left with an administrative claim, but only to the extent of the reasonable value of the services he provided (i.e. on a quantum meruit basis).
Although acknowledging that the employee worked for the debtor in June 2009, the debtor objected to the allowance of payment for the employee’s June 2009 services and argued that the reasonable value of the services provided by the employee was “zero” dollars and, as a result, the employee should not be allowed an administrative expense for his June 2009 services because such services did not benefit the debtor.  In support, the debtor submitted all the postpetition e-mails sent by the employee to the debtor’s CEO, which evidence showed that, prior to June 2009, the e-mails dealt primarily with business matters, but by June 2009, the e-mails mainly discussed matters not germane to the employee’s employment.  The debtor asserted that it should not be required to compensate the employee for his own personal pursuits.  The bankruptcy court, however, rejected this argument and found that although the employee did pursue his own interests on company time, he also provided beneficial services to the debtor, including, among other services, meeting with potential investors.  Moreover, the bankruptcy court found that the debtor permitted the employee to engage in the allegedly personal activities because the CEO of the debtor was the recipient of the e-mails at issue.  Lastly, the bankruptcy court determined that the debtor treated the employee as an employee through June 2009 because the debtor paid for the employee’s health insurance through June 16, 2009 and only ceased paying at that point because the debtor had run out of funds.
Having found that the employee provided beneficial services to the debtor, the bankruptcy court was tasked with determining the reasonable value of such services.  Although the bankruptcy court noted that the amount specified in the employment contract was “probative of the reasonable value of his services, but [ ] not dispositive,” it, nevertheless, held that the most probative evidence of the reasonable value of the employee’s services was the rate set forth in the employment contract – $6,000.00 per month.  The bankruptcy court also observed that the employee received the same monthly payments for his services – $6,000.00 per month – prepetition and postpetition.  Based on these facts, the bankruptcy court granted the employee’s motion for allowance of an administrative expense for the June 2009 work at the rate specified in the employment contract.
Interestingly, the bankruptcy court dismissed the fact that the employee actually performed less work in June 2009 than he did in prior months, reasoning that because he made his services available for the entire month, he was entitled to full payment.  This reasoning begs the question as to whether the bankruptcy court’s analysis would have changed if, rather than performing “less” work in June 2009, the employee performed no work during the month of June 2009, but nevertheless made himself available.  Or, in the alternative, if the bankruptcy court would have increased the employee’s compensation if the employee could have proven that he worked more hours than had been customary during the previous months.  In any event, this case makes clear that those seeking allowance of administrative expenses against a debtor’s estate typically must establish the beneficial nature of their services to a debtor, as well as the value of such services, even when the administrative expense claim is for wages set forth in a contract.