Priority for Unpaid the Bankruptcy Act in 1978. This new required to carry in each of the provision was intended to extend pri- dozen or so states in which it operat- Workers’ Comp ority treatment to other forms of ed. In an amended proof of claim, Zurich asserted that these unpaid employee compensation not covered Premiums premiums qualified as contributions by § 507(a)(4), while establishing a to an employee benefit plan entitled combined monetary cap on the High Court Says No to priority under § 507(a)(5). If enti- claims that could receive such priori- tled to priority, Zurich would share ty (pursuant to BAPCPA, what were By Lawrence A. Katz pro rata with other priority creditors, previously §§ 507(a)(3) and (a)(4) of including various health, welfare and the Bankruptcy Code were numbered Priorities are the alchemist’s stone pension plans, in the net proceeds 507(a)(4) and (a)(5) and the com- of the Bankruptcy Code — they have from the sale of Howard’s assets pur- bined cap on the priorities was the power to turn worthless claims suant to a Chapter 11 plan of liqui- increased to $10,000 per employee). into pots of gold. Without priority sta- dation. If Zurich was not entitled to The new provision covered “contri- tus, unsecured claims typically receive priority, the parties stipulated that butions to an employee benefit little or no distributions from the Zurich would receive nothing. plan…arising from services rendered bankruptcy estate. When these claims The Bankruptcy Court denied prior- within 180 days before the date of the fall within one of the statutory priori- ity status to Zurich’s claim, as did the filing of the petition or the date of the ties of § 507(a) of the Bankruptcy District Court. Each court concluded cessation of the debtor’s business, Code, however, they often lead to sig- that the unpaid insurance premiums whichever occurs first … ” nificant distributions — sometimes did not constitute bargained-for bene- T HE C ASE even payment in full. What often sep- fits paid in lieu of wages, and thus The issue in Howard Delivery Serv., arates the “haves” from the “have- were not contributions to an “employ- nots” in the bankruptcy arena is the Inc. v. Zurich American Ins. Co. , 126 ee benefit plan” as that undefined S. Ct. 2105 (2006), decided on June ability to fit one’s claim into the finite term was used in the Bankruptcy 15, 2006, was whether unpaid premi- list of priorities set forth in § 507(a). Code. Each court relied on decisions ums due under a workers’ compensa- Section 507(a)(4) of the Bankruptcy of the Sixth ( In re Birmingham- tion insurance policy constitute “con- Code affords priority treatment to Nashville Express, Inc. , 224 F.3d 511, claims for “wages, salaries, or com- tributions to an employee benefit 517), Eighth ( In re HLM Corp. , 62 F.3d missions, including vacation, sever- plan” so as to entitle the claimholder 224, 226-227) and Tenth ( In re ance, and sick leave earned by an to priority treatment under § 507 Southern Star Foods, Inc. , 144 F.3d (a)(5). Resolving a split among the individual” earned within 90 days of 712, 717) Circuits that had reached the circuit courts, the Supreme Court the earlier of the petition date or the same conclusion, and rejected the cessation of the debtor’s business. In ruled that such premiums do not fall contrary ruling of the Ninth Circuit two earlier decisions of the U.S. within the scope of § 507(a)(5). The ( Employers Ins. of Wausau v. Plaid Supreme Court, United States v. Supreme Court’s ruling in Howard Pantries, Inc. , 10 F.3d 605, 607) that Embassy Restaurant, Inc. , 359 U.S. 29 Delivery provides insight into not had ruled consistent with the position only the Court’s view of the priority (1959), and Joint Industry Bd. of Elec. taken by Zurich. Industry v. United States , 391 U.S. 224 provisions at issue, but also its The Fourth Circuit reversed 2 to 1 (1968), health and welfare plans were approach to the interpretation of all in a per curium opinion, with no held not to be “wages” and thus not provisions of the Bankruptcy Code. agreement among the judges as to entitled to priority treatment under § B ACKGROUND the rationale for the decision. 403 507(a)(4). In response to these deci- On Jan. 30, 2002, Howard Delivery F.3d 228 (4th Cir. 2005). Judge Robert sions, Congress added § 507(a)(5) to King concluded that § 507(a)(5) was Service, Inc. (Howard) filed its the list of priorities when it amended unambiguous on its face and that Chapter 11 bankruptcy petition in the workers’ compensation insurance U.S. Bankruptcy Court for the Lawrence A. Katz is a partner in the premiums fell within the plain mean- Northern District of West Virginia. Virginia and Washington, DC, offices ing of “contributions” to an “employ- Howard operated as an over-the- of Venable LLP. He focuses on bank- ee benefit plan,” as each of those road-freight carrier to the Midwest ruptcy, financial restructurings and terms was defined in the dictionary. and mid-Atlantic regions. The com- commercial litigation and has exten- While agreeing with the ultimate out- pany employed hundreds of truck sive experience in debtor and credi- come, Judge Dennis Shedd found drivers, mechanics, freight handlers, tors’ rights issues. Katz was counsel that the statute was ambiguous, thus management and general administra- of record for the co-petitioner inviting a review of the legislative tive personnel. At the time it filed for Creditors Committee before the U.S. history leading to the addition of bankruptcy, Howard owed Zurich Supreme Court in the Howard § 507(a)(5) to the hierarchy of priori- American Insurance Company Delivery case and was the author of ties. Based upon his review of the (Zurich) $410,215 in insurance pre- the petition for certiorari and the legislative history, he concluded that miums for the workers’ compensa- briefs submitted by Howard Delivery continued on page 4 tion coverage that Howard was and the Committee. September 2006 The Bankruptcy Strategist ❖ www.ljnonline.com/alm?bank 3
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