First Impressions: Prepetition Severance Pay Entitled To Priority Under Section 507(A)(4)

In the first circuit-level opinion on the issue, the Fourth Circuit Court of Appeals in Matson v. Alarcon, 651 F.3d 404 (4th Cir. 2011), held that, for purposes of establishing priority under section 507(a)(4) of the Bankruptcy Code, an employee's severance pay was "earned" entirely upon termination of employment, even though the severance amount was determined by the employee's length of service with the employer.

SECTION 507(a)(4)

Section 507 sets forth the categories of claims that are entitled to priority treatment under the Bankruptcy Code. Under section 507(a)(4), a fourth priority is given (with emphasis added) to "allowed unsecured claims, but only to the extent of [$11,725] for each individual . . . earned within 180 days before the date of the filing of the petition . . . for . . . wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual."