4th Circuit: Matson v. Alarcon- Date on which Severance Package was Earned for Purposes of Priority under 11 U.S.C. § 507(a)(4)‏

11 U.S.C. § 507(a)(4) places as the 4th priority "allowed unsecured claims, but only to the extent of $10,950 for each individual . . . earned within 180 days before the date of the filing of the petition. . . for (A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual." 11 U.S.C. § 507(a)(4) (emphasis added). As the Bankruptcy Code does not define the word "earned," the Court of Appeals turned to the dictionary which defines "earn" generally to means to "receive as equitable return for work done or services rendered," or "to come to be duly worthy of or entitled." Webster’s Third New International Dictionary 714 (2002). Accordingly, the word "earned," as used in 11 U.S.C. § 507(a)(4)(A), applies not only to wages, salaries, and commissions, but also to several other types of compensation, including "severance pay." As the purpose of severance pay is to "alleviate the consequent need for economic readjustment" and "to recompense [the employee] for certain losses attributable to the dismissal" Straus-Duparquet, Inc. v. Local Union No. 3, Int’l B’hood of Elec. Workers, 386 F.2d 649, 651 (2d Cir. 1967), this fits within the second definition of "earn", viz. "to come to be duly worthy of or entitled." Therefore an employee "earns" the full amount of "severance pay" on the date the employee becomes entitled to receive such compensation, subject to satisfaction of the contingencies provided in the applicable severance compensation plan, here upon termination. The 4th Circuit also distinguished this from allowance of severance pay as an administrative expense under 11 U.S.C. § 503(b)(1)(A), which instead of discussing amounts "earned" requires a calculation of the value of "services rendered" in a period of time after a debtor files its bankruptcy petition. 4th Circuit: Matson v. Alarcon.PDF