Doctor's Hospital v. Vilar

Opinion

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                                 NOT FOR PUBLICATION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

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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

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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

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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

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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

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priority.  See generally  In re Mammoth Mart, Inc.,  536 F.2d
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            at 954.

                 Affirmed.
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