Opinion
Case Nos. 01-12264-SSM, 01-12265-SSM, (Jointly Administered).
June 17, 2002
Alexander M. Laughlin, Esquire, Gold, Morrison Laughlin, P.C., McLean, VA, Local counsel for the debtors in possession.
Mr. Darrell Merschak, LaSalle, IL, Creditor pro se.
Malcolm Mitchell, Esquire, Vorys, Sater, Seymour Pease, L.L.P. Alexandria, VA, Local counsel for the Official Committee of Unsecured Creditors.
MEMORANDUM OPINION
A hearing was held in open court on April 26, 2002, on the omnibus objection to claims (Doc. # 731) filed by the debtors on March 27, 2002. Among the claims objected to were priority Claims No. 351, 352, and 353, each in the amount of $20,000.00, filed by Darrell Merschak in the case of Pathnet Telecommunications, Inc. Mr. Merschak filed a written response to the objection and was present at the hearing, representing himself. After receiving evidence and hearing the contentions of the parties, the court took the issues under advisement. For the reasons stated, the objection will be sustained.
The claims are identical in amount and differ only in the stated basis for claiming priority:
Claim # Dated Filed Amount Basis for priority
351 May 18, 2001 May 25, 2001 $20,000 § 506(a)(3)
352 Aug. 15, 2001 Sep. 4, 2001 $20,000 § 506(a)(3), (4), (6)
353 Jul. 17, 2001[*] Sep. 4, 2001 $20,000 § 506(a)(3), (4), (7), (8)
[*] Claim 353 expressly states that it amends the May 18, 2001, claim.
Background
On April 2, 2001, Pathnet Telecommunications, Inc. ("PTI") and five of its affiliates, Pathnet, Inc. ("PNI"), Pathnet Operating, Inc. ("POI"), Pathnet Fiber Equipment, LLC, Pathnet Real Estate, LLC, and Pathnet Real Estate of Virginia, Inc., filed voluntary chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware. PTI is a holding company and is the direct parent of PNI and POI. The remaining three companies are subsidiaries of POI. An order was entered for the joint administration of all six cases, which were thereafter transferred to this district. The companies continued to operate for a short period of time while efforts were made to sell the business as a going concern. When those efforts failed to bear fruit, POI's case and those of its three subsidiaries were converted to chapter 7.
PTI and PNI remained chapter 11 cases, however, and on March 11, 2002, an order was entered confirming their joint plan of liquidation. Notwithstanding the "joint" designation, the plan expressly preserved the separate corporate identities of PTI and PNI, with PTI's creditors being paid only from PTI assets, and PNI's creditors only from PNI assets. Under the confirmed plans, the assets of each company would be liquidated and the proceeds, after payment of administrative expenses and priority claims, distributed pro rata to the general unsecured creditors. Because of the large amount of debt and relatively small amount of assets, general unsecured creditors are expected to receive dividends of somewhere between one and three cents on the dollar. Equity interests in the companies will receive no distribution, effectively making the stock worthless except as a historical curiosity.
Mr. Merschak was hired by Pathnet beginning May 15, 2000, for a position which he describes as Director of Revenue Management for a base salary of $85,000.00 per year plus eligibility for an "annual target bonus of 25%" based on "performance criteria" to be "defined" by Mr. Merschak's immediate supervisor and by "Pathnet." Additionally he would be given "an option to purchase 8,000 shares of common stock at . . . an exercise price per share of the fair market value as determined by the Company at the time of the grant," with the option vesting "over a period of four years in equal installments . . . based on your original date of hire." Finally, he would receive a signing bonus of $10,000 "to assist you with your temporary housing and relocation to Virginia." The written employment offer is set forth in a May 9, 2000, letter on "Pathnet" letterhead and does not specify which of the Pathnet companies was to be the employer.
The employment offer describes the position as Director, Billing Operations. The court does not regard the difference in terminology as significant.
At the time Mr. Merschak was hired, he lived in LaSalle, Illinois, and traveled weekly from Illinois to Pathnet's offices in Reston, Virginia. A corporate American Express card was issued to him through Pathnet for use in charging travel expenses. These expenses would be reimbursed to him by PNI after the travel was performed. Mr. Merschak would submit expense reports to PNI on a weekly basis and would be paid two to three weeks later by direct deposit into his bank account. In order to get the lowest possible fares, Mr. Merschak would book his flights a month or two in advance.
On March 28, 2001 (five days prior to the chapter 11 filings), Mr. Merschak was terminated without notice along with a number of other employees. He was paid his salary through March 28th, plus two weeks severance pay and four days accrued vacation pay. Approximately five weeks earlier, he had been paid a bonus in the net amount, after withholding, of $3,998.41. The amount of the bonus was determined by the company's board of directors. Because of the company's difficult cash position, the board decided that employee bonuses would be awarded at half the targeted amount. The amount paid to Mr. Merschak accordingly represented 12.5% of the prorated amount (May 15th through December 31st) of his annual salary.
On the day he was terminated, Mr. Merschak had a number of non-refundable airline tickets charged to the American Express card for the future trips he expected to make between Illinois and Virginia. The unpaid balance on the card is $5,473.15, and American Express has made a demand on him for payment of that amount. Approximately $1,000.00 to $1,200.00 of that amount represents travel expenses for which he did receive reimbursement by PNI prior to being discharged. He testified that approximately $2,700.00 to $2,800.00 represents the nonrefundable airline tickets he had booked for future travel. It would appear that the difference (approximately $1,850.00) represents pre-termination expenses for which an expense report was never submitted.
Mr. Merschak apparently believed that once his employment ended, he could not submit an expense report for pre-termination expenses. PNI's comptroller, however, testified that a number of employee expense claims were submitted after the chapter 11 filing for prepetition travel and were paid with court approval.
Mr. Merschak testified that, as a condition of his employment, he was required to move to Virginia. As temporary lodging while looking for a house to purchase, he rented an apartment at a rent of $650.00 per month, with the lease running through June 2001. His family had not yet moved from Illinois to Virginia at the time his employment was terminated, and he therefore simply broke the lease. He did pay the April 2001 rent but has not paid the May or June 2001 rent.
Discussion A.
A timely proof of claim filed in a bankruptcy case is allowed unless an objection is made, in which event the court is required to "determine the amount of such claim . . . as of the date of the filing of the petition" and to allow the claim in such amount, subject to certain exceptions and limitations. § 502, Bankruptcy Code. The debtors object to the claim on the following grounds: (1) all pre-petition wages and expense reimbursements to employees were paid prior to the chapter 11 filing, with the result that there are no wages or expenses owed to Mr. Merschak; (2) the amount asserted as a priority claim exceeds the amounts entitled to priority under § 507(a), Bankruptcy Code; (3) Mr. Merschak was employed by PNI, not PTI, and therefore has no claim against PTI; and (4) the second and third proofs of claim were filed after the claims bar date.
B.
It is unfortunately the case that full payment of claims is the exception rather than the rule in bankruptcy, since most debtors have significantly more assets than liabilities by the time they file for bankruptcy relief. In general, the goal of bankruptcy is to provide an equal distribution to unsecured creditors. This goal is subject, however, to a number of Congressionally-created exceptions which favor the payment of certain kinds of debts, known as "priority" debts. § 507(a), Bankruptcy Code. Such debts are paid (to the extent of available funds) prior to any distribution on account of general unsecured claims.
As noted, Mr. Merschak has asserted a claim in the amount of $20,000.00. The proof of claim represents that he is due unpaid wages, salary, and compensation for the period May 15, 2000 to March 28, 2001. The original proof of claim asserted priority only under § 507(a)(3), Bankruptcy Code. The second proof of claim (in terms of date filed) states that it is an amendment of the prior claim and asserts priority under §§ 507(a)(3), (a)(4), (a)(7), and (a)(8). The third proof of claim (in terms of date filed) does not reference either of the prior proofs of claim, but asserts priority under § 507(a)(3), (a)(4), and (a)(6). Although both the second and third proof of claim were filed after the claims bar date (July 31, 2001), the general rule is that a timely-filed proof of claim can be amended after the claim bar date to cure a defect in the claim as filed or to describe the claim with greater particularity, so long as the amendment will not cause undue prejudice to the debtor or to other creditors. See In re Marohn, 1997 WL 866612 at *9 (Bankr.E.D.Va. 1997), citing Sambo's Restaurants, Inc. v. Wheeler (In re Sambo's Restaurants, Inc.), 754 F.2d 811 (9th Cir. 1985); Unioil v. Elledge (In re Unioil, Inc.), 962 F.2d 988 (10th Cir. 1992) (amendment allowed of defective claim filed by individual to show trust as true creditor); Newcomb v. United States (In re Newcomb), 60 B.R. 520 (Bankr.W.D.Va. 1986) (amendment of IRS claim allowed to add omitted quarter where chapter 13 plan had sufficient funds to pay amended claim); United States v. Vlavianos (In re Vlavianos), 71 B.R. 789, 793-94 (Bankr.W.D.Va. 1986) (disallowing amendment of IRS proof of claim after debtor completed payments under chapter 13 plan in reliance on filed claim). However, a new and different claim may not, in the guise of an "amendment" to an existing claim, be asserted after the bar date has passed. See United States v. Int'l Horizons, Inc. (In re Int'l Horizons, Inc.), 751 F.2d 1213 (11th Cir. 1985); Matter of Stavriotis, 977 F.2d 1202 (7th Cir. 1992). In the present case, the dollar amount and underlying basis of the claim have not been changed as a result of the amendments, only the statutory subsections upon which Mr. Merschak is relying to establish the priority of his claim. The refinement of his position in that respect does not prejudice creditors and does not constitute the submission of a "different" claim. For that reason, the court treats the third proof of claim as an allowable amendment of a timely-filed proof of claim, as well as the final statement of the claim.
No documentation is attached to any of the proofs of claim except for the statement, "Employer was negligent in paying wages and re-imbursing employee for authorized business travel." In response to the objection, however, the debtor itemized the claim as follows and provided some supporting documents:
Description Amount
American Express charges $5,473.15 Remaining portion of targeted bonus $16,464.00 Telephone bill for Pathnet, Inc., phone line $779.01 Three months rent on Ashburn, Va., house $1,950.00 Value of 8,000 Pathnet shares $8,000.00 __________ Total $20,502.16
Relevant to the present controversy, the Bankruptcy Code provides for priority in payment of the following type of claims:
(3) Third, allowed unsecured claims, but only to the extent of $4,650.00 for each individual or corporation, as the case may be, earned within 90 days before the date of the filing of the petition or the date of the cessation of the debtor's business, whichever occurs first, for —
(A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual; or
(B) sales commissions earned by an individual or by a corporation with only 1 employee, acting as an independent contractor in the sale of goods or services for the debtor in the ordinary course of the debtor's business if, and only if, during the 12 months preceding that date, at least 75 percent of the amount that the individual or corporation earned by acting as an independent contractor in the sale of goods or services was earned from the debtor;
(4) Fourth, allowed unsecured claims for contributions to an employee benefit plan —
(A) arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessation of the debtor's business, whichever occurs first; but only
(B) for each such plan, to the extent of —
(i) the number of employees covered by each such plan multiplied by $4,650.00; less
(ii) the aggregate amount paid to such employees under paragraph (3) of this subsection, plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan.
* * *
(6) Sixth, allowed unsecured claims of individuals, to the extent of $1,950 for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.
§ 507(a)(3), (4) and (6), Bankruptcy Code (emphasis added).
C.
As a threshold issue, however, the court is required to consider whether a claim has been asserted against the proper debtor. The issue arises because Mr. Merschak filed his proof of claim in the case of PTI rather than PNI. PTI is a holding company and is the direct parent of PNI and POI. It does not appear, however, that PTI had employees of its own. Although the employment letter simply referred to "Pathnet" and not to a particular company within the Pathnet family, it appears that all employees, including Mr. Merschak, were paid by PNI. See Exh. 2-B to Merschak Response (showing salary payments and expense reimbursement by direct deposit from "Pathnet, Inc."). Indeed, Mr. Merschak does not assert that PTI was his direct employer; rather, he argues that "PTI could not have conducted or advanced business affairs under corporate charter if it were not for the work efforts of the people under the employ of PNI." He also argues that the legal distinction between PTI and PNI "is irrelevant for this legal matter" based on the joint administration of the cases.
For that matter, neither did POI. Instead, PNI's employees performed services for POI under the terms of a written intercompany services agreement, with PNI being reimbursed on a quarterly basis.
With respect to the latter argument, the court notes that joint administration simply treats two or more related entities as a conglomerate for administrative convenience. It does not merge the assets and liabilities of the jointly-administered debtors. Such merger occurs only in the relatively rare instances in which the court, upon proper motion, orders substantive consolidation of two or more bankruptcy estates. See In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515 (2d Cir. 1988). In the case of PTI and PNI, there has never been an order directing substantive consolidation. The plan of liquidation, although denominated a "joint" plan, maintains the separate identities of the two bankruptcy estates, with PTI's creditors being paid only from PTI assets, and PNI's creditors being paid only from PNI assets.
The relationship of PTI to PNI is that of shareholder. It is a fundamental principle of corporate law that a corporation is an entity separate and distinct from its shareholders, and that the shareholders of a corporation are not liable for its debts in the absence of wrongdoing. 4B, Michie's Jurisprudence, Corporations, §§ 5 and 137 (1999 repl. vol.); DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir. 1976). It is true that is some instances courts will "pierce the corporate veil" — that is, disregard the separate existence of the corporation — and impose liability for the corporation's debts on a shareholder. DeWitt, 540 F.2d at 683. However, the power to pierce the corporate veil is exercised reluctantly and cautiously, and the burden of establishing a basis for disregard of the corporate fiction rests on the party asserting the claim. Id. The factors that will typically support the piercing of the corporate veil include fraud, undercapitalization, domination of the corporation by a single shareholder, and disregard of corporate formalities. Id. at 684-87. However, "a single factor will rarely, if ever, be sufficient to justify the drastic remedy of piercing the corporate veil," and the trier of fact "should look at all the circumstances in each case." In re County Green Ltd. Partnership, 604 F.2d 289, 292 (4th Cir. 1979) (reversing district court and reinstating order of bankruptcy court which had declined to pierce the corporate veil).
On the present record, the court has little difficulty in concluding that Mr. Merschak has not carried his burden of showing sufficient grounds for disregarding the separate corporate existence of PTI so as to impose liability on PTI for PNI's debts. All that has been shown is that PTI is PNI's sole shareholder. Standing alone, that is simply not a sufficient basis for piercing the corporate veil. As has been cogently observed,
There must be something more than identity of officers and stock ownership in corporate setups in order to disregard the corporate fiction. It must appear that it was organized for a fraudulent purpose or that some injury has resulted to someone from the transaction, something of fraud, something of illegality or wrongdoing, or something where the moving party has cause for complaint in connection with the transaction. . . . The instrumentality rule should only be invoked after mature consideration and caution. Indiscriminate application would destroy the purpose of the corporate law. . . . The mere fact the stock in one company is owned by another company does not justify invoking the rule. . . . Something more is needed, such as fraud, illegality, or wrongdoing which produced the injury or complaint, otherwise the corporate entity will stand.
Brown v. Margrande Compania Naviera, S.A., 281 F. Supp. 1004, 1005-06 (E.D.Va. 1968) (emphasis added). The Brown decision quoted with approval from the decision in Overstreet v. Southern Railway Co., 371 F.2d 411 (5th Cir. 1967), cert. denied, 387 U.S. 912, 87 S.Ct. 1700, 18 L.Ed.2d 634 (1967). That case involved a plaintiff who was injured at a railroad crossing by a locomotive with the legend "Southern" written on its side and operated by a wholly-owned subsidiary of Southern Railway Company. Although the court acknowledged that "the constituent members of the Southern Railway system constitute a `family,'" it declined to find the parent corporation liable on that basis and held that "the corporate fiction should not be disregarded because of identity of corporate names, stockholders and officers and the fact of ownership of capital stock in one corporation by another." Id., 371 F.2d at 412. Accordingly, the court concludes that the objection to Mr. Merschak's claim must be sustained on the ground that PTI has no liability to Mr. Merschak for any unpaid bonuses, unreimbursed expenses, or unissued stock options that might be owed to him by PNI.
D.
Given the court's determination that the claim must be disallowed because any liability is that of PNI rather than PTI, it is not necessary to discuss the remaining issues in detail. Nevertheless, some brief comment is appropriate for the benefit of the parties.
First, Mr. Merschak has asserted priority status with respect to the entirety of his claim. However, it seems clear that the only applicable basis upon which the claim might be accorded priority is under the statutory priority for wages, salaries, or commissions earned within 90 days before the filing of the bankruptcy petition § 507(a)(3). Priority under this provision is limited to $4,650.00. The priority for consumer deposits, § 507(a)(6), Bankruptcy Code, applies only to deposits paid to the debtor for services that the debtor never provided. Since the security deposit for the apartment was not paid to the debtor but to the landlord, the statutory priority simply does not apply. Finally, the statutory priority for unpaid contributions to "an employee benefit plan," § 507(a)(4), Bankruptcy Code, does not apply to the asserted failure to issue the stock options set forth in the employment letter. Neither the employment letter nor the testimony at the hearing suggest the existence of an "employee benefit plan" to which the stock would be contributed upon exercise of the option. Rather, the stock, had the option been exercised, would have been owned by Mr. Merschak, not by a "plan" maintained for the benefit of employees.
With respect to the 25% "target bonus," the court must agree with the debtors that the employment letter made payment of the bonus subject to "performance criteria" to be determined by the corporation. Although "performance criteria" could be read as referring solely to Mr. Merschak's performance, it can just as easily be read as referring to the corporation's performance. In this case, the evidence shows that the board of directors, based on the company's tight cash position, decided to pay employees only a half bonus. That bonus, in Mr. Merschak's case, was calculated as 12.5% of his annual salary, prorated for the 7-month period he had worked for the company in calendar year 2000, and has been fully paid. Thus, the court would conclude that no further amount is owed based on the "target bonus" provision of the employment letter.
With respect to the $5,473.15 in American Express charges, Mr. Merschak testified that he had already been reimbursed by PNI for approximately $1,000 to $1,200 of this amount and that $2,700 to $2,800 represented nonrefundable airline tickets he had purchased in advance (in order to obtain the lowest possible fare) for anticipated travel that never occurred. The remaining (approximately) $1,850.00 represents travel expenses for which he had not submitted reimbursement requests prior to his termination. It is not clear from the record when those expenses were incurred, since Mr. Merschak did not place in evidence an itemization of the expenses or the underlying charge slips. It is an interesting question whether unpaid expense reimbursements properly fall within the statutory category of "wages, salaries, or commissions, including vacation, severance, and sick leave pay," and second, whether the advance purchase of nonrefundable airline tickets for the employer's benefit would fall within that category, or, indeed, be a liability of the employer at all in the absence of evidence that the employer directed or authorized the purchase. Although the issue is not free from doubt, the court would be inclined (but for the fact that the claim has been asserted against the wrong company) to rule that the $1,850.00 in unreimbursed travel actually performed, as well as the $2,750 in advance tickets purchased with what seems to have been tacit authorization, are valid priority claims.
With respect to the telephone bill, there is no evidence that Mr. Merschak is liable for that bill or that the telephone company (Verizon) has ever sought to collect it from him. The phone number is question is the telephone he used at the company's offices. The phone bill itself is in the name of "Pathnet, Inc.," and merely gives Mr. Merschak's name as the "Attn" addressee. In the absence of a threatened or actual claim against Mr. Merschak, there is no basis for him to assert an indemnity claim.
With respect to the rent and security deposit on the apartment that Mr. Merschak leased pending his relocation to Virginia, no evidence was presented that either PNI or PTI agreed to reimburse him for the cost of temporary housing until he located permanent housing and moved his family to Virginia. Rather, the agreement provided that he would be paid a "signing bonus of $10,000 . . . to assist you with your temporary housing and relocation to Virginia." Mr. Merschak was an at-will employee and could be terminated at any time. Accordingly, the only liability that either PNI or PTI would have had with respect to temporary housing was to pay the $10,000 signing bonus. There is no assertion that the $10,000.00 was not paid. Accordingly, there is no legal basis for a claim against the company for any liability incurred by Mr. Merschak when he "broke" the lease.
Finally, no valid claim has been established for loss or damage related to the failure to issue the stock options. The options, which were to vest over a period of four years in equal (presumably annual) installments, would have allowed Mr. Merschak to purchase an aggregate of 8,000 shares "at an exercise price per share of the fair market value as determined by the Company at the time of the grant." Given that Mr. Merschak was an at-will employee and had worked only 10 months before he was terminated, his vested interest would have extended, at most, to 10/48ths of 8,000 shares, or 1,667 shares. There was no evidence presented of the price at which PTI's stock was trading immediately prior to the bankruptcy filing. Nor was there evidence that the company had ever "determined" a fair market value for the stock. But in any event, no compensable damage could have resulted from the breach unless Mr. Merschak could have sold the stock for an amount in excess of what he would have to have paid for it. Given that both PTI and PNI are in the process of being liquidated under confirmed plans that will result in no distribution to shareholders, the stock of both companies is worthless. Thus, Mr. Merschak has suffered no loss from the failure to issue him options to purchase the stock.
E.
In summary, the court reluctantly concludes that the claim must be disallowed in its entirety because it is asserted against the wrong entity. However, even if the claim had been properly asserted against the correct entity, the court would allow the claim only in the amount of $4,600.00, and would disallow the balance of the claim.
A separate order will be entered consistent with this opinion.