## Facts

- Roth American, Inc., a Wilkes-Barre, Pennsylvania manufacturer employing over 200 workers, operated under a collective-bargaining agreement (CBA) with Teamsters Local 401.
- Roth filed a voluntary Chapter 11 petition on February 2, 1988, while the CBA term was ongoing.
- Post-petition, Roth and the Union negotiated a February 1988 memorandum of agreement (MOA) effective February 4, 1988, that (1) extended the CBA, (2) reduced wages by $0.70 per hour, and (3) promised to maintain covered operations in the Wilkes-Barre area for two years and not move essential equipment.
- The parties did not seek bankruptcy-court approval of the MOA, and no hearing occurred at which creditors could object.
- Roth implemented the wage reduction briefly but ceased operations in June 1988, before the promised two-year period.
- The Union filed claims for (1) “unearned wages” based on the alleged breach of the two-year operations promise and (2) severance pay and vacation pay, asserted as administrative expenses.
- The bankruptcy court rejected the unearned-wage claim as an administrative obligation and allowed severance and vacation pay as administrative expenses only to the extent earned after the petition date; the district court affirmed.

## Issues

1. Whether the February 1988 MOA created an enforceable post-petition obligation binding the bankruptcy estate despite the absence of bankruptcy-court approval.
2. Whether “unearned wages” for breach of the two-year operations promise qualify as an administrative expense under 11 U.S.C. § 503(b).
3. Whether severance pay and vacation pay are entitled to administrative-expense priority in full, or only to the extent earned post-petition.

## Decision

- The Third Circuit affirmed the district court’s judgment (and the bankruptcy court’s order).
- The MOA, as a post-petition agreement outside the ordinary course with material creditor implications, was not binding on the estate absent bankruptcy-court approval; the Union could not recover unearned wages as an administrative claim.
- Severance pay and vacation pay were entitled to administrative-expense priority only to the extent earned after the petition date; amounts attributable to pre-petition service were not entitled to administrative priority.

## Legal Principles

- Administrative expenses under 11 U.S.C. § 503(b) are construed narrowly because they are paid ahead of general unsecured claims.
- To qualify as an administrative expense, a claim generally must arise from a post-petition transaction with the debtor-in-possession and be actual and necessary to preserve the estate (i.e., provide a post-petition benefit to the estate).
- A debtor-in-possession’s post-petition contract that is outside the ordinary course of business and materially affects creditor interests requires bankruptcy-court authorization; without approval, it does not bind the estate as an administrative-priority obligation.
- Wage-related benefits that accrue over time, including severance pay tied to length of service and vacation pay, are apportioned between pre- and post-petition periods; only the post-petition earned portion receives administrative priority.

## Conclusion

The court held that an unapproved, post-petition labor agreement outside the ordinary course could not support administrative-priority damages for a broken operations promise, and it limited administrative-expense treatment of severance and vacation pay to the portions earned after the Chapter 11 filing.


In re Roth Am., Inc., 975 F.2d 949 (3d Cir. 1992)