Memorandum of Decision Re: Severance Pay as Preference

DO NOT PUBLISH This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
Judge's Decisions
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re MTC TELEMANAGEMENT CORP., et al.,                                       No. 97-12893        Debtor(s). ______________________________________/ JOHN H. BROWNELL, Trustee,        Plaintiff(s),    v.                                                                                              A.P. No. 98-1110 GARY R. ANDERSON,        Defendant(s). _______________________________________/
Memorandum of Decision
     The debtors in these cases were affiliated entities in the telecommunications business. They purchased transmission line capacity from telephone service providers and resold that capacity to business and consumer customers.      The debtors experienced financial difficulties during 1997 and unsuccessfully attempted a workout with major creditors. When this failed, the debtors' principals bailed out. They transferred the business assets to the major secured creditor and abandoned the debtors after paying themselves large amounts in severance benefits.      The remaining creditors filed involuntary petitions against the debtors. Since the principals had bailed and there was no one left to look after the debtors' estates, the court consolidated the cases and appointed John H. Brownell as trustee. In this adversary proceeding, Brownell mainly seeks to recover as a preference $149,000.00 paid to defendant Gary Anderson, who was the debtor's Chief Financial Officer.      Anderson has moved the court for summary judgment, relying on Matter of Southmark Corp., 62 F.3d 104 (5th Cir.1995). The court has reviewed this case carefully, and finds itself in the position of having to follow a case it believes is wrong. The court in Southmark found that if severance pay is tendered when employment is terminated, it is "simultaneous" and therefore not on account of an antecedent debt. Therefore, the element of a preference specified in § 547(b)(2) of the Bankruptcy Code is not present.      Whether one says that the debtor's obligation to pay severance pay arose when the employment contract was signed or when the employee was actually terminated, the payment was clearly made on account of an antecedent debt. Congress intended § 547(c)(1) to cover payments which are substantially contemporaneous; such payments are not avoidable if the creditor gave "new value." This term requires a dollar-for-dollar exchange, so that the estate is not diminished. In re Jet Florida Systems, Inc., 861 F.2d 1555, 1559 (11th Cir. 1988). By calling the severance pay "simultaneous" and therefore not on account of an antecedent debt, the court in Southmark allowed a creditor to have the benefit of the substantially contemporaneous defense without requiring the creditor to show new value.      Application of Southmark achieves a highly inequitable result in cases like this one, where the transferees are insiders. When insiders decide that the debtor's financial ship is sinking, they should be taking steps to insure that whatever assets are available are distributed fairly and equitably among all creditors. Equity should not permit them to appropriate whatever assets are available and abandon ship, leaving the other creditors to their fate like the hapless pilgrims in Joseph Conrad's Lord Jim.      Nonetheless, the court understands that as an inferior court it is not free to disregard Southmark; if a split among the circuits is to be created, it should be at a higher level. Accordingly, the court will in further proceedings follow that case, but will grant appropriate stays so that its rulings can be reviewed by courts with the power to dissent from the Fifth Circuit's ruling.      The trustee has raised an issue of fact as to whether there was a binding obligation to pay severance pay, which precludes summary judgment at this time. However, the remainder of the case shall be conducted in conformity with this memorandum and it shall be deemed without controversy that the payment to Anderson is not recoverable as a preference. Counsel for Anderson may submit an appropriate form of order.
Dated: December 30, 1998                                                                         ____________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      United States Bankruptcy