Originally published November 7, 2005

Recently, the Supreme Court granted certiorari in one case of interest to the business community. Amicus briefs in support of the petitioner will be due on December 22, 2005, and amicus briefs in support of the respondent will be due on January 26, 2006.

Bankruptcy—Priorities—Claim for unpaid workers’ compensation insurance premiums. In a bankruptcy proceeding against a debtor’s estate, the Bankruptcy Code gives priority to unsecured claims "for contributions to an employee benefit plan * * * arising from services rendered." 11 U.S.C. § 507(a)(4). The Code defines "employee benefit plan" as "an employee welfare benefit plan or an employee pension benefit plan or a plan which is both * * *." 11 U.S.C. § 1002(3). "Employee benefit plan" in turn is defined as "any plan, fund, or program which was * * * established or maintained by an employer * * * for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits in the event of sickness, accident, disability, death or unemployment * * *." 11 U.S.C. § 1002(1). The Supreme Court today granted certiorari in Howard Delivery Service, Inc. v. Zurich American Insurance Co., No. 05-128, to determine whether an unsecured claim for unpaid premiums owed for a debtor’s statutory workers’ compensation liability insurance policy is entitled to priority under Section 507(a)(4) of the Code.

This issue has split the federal courts of appeals, and in fact divided the Fourth Circuit panel in this case. In a one paragraph per curiam opinion, the Fourth Circuit held that Zurich’s insurance claim was entitled to priority under Section 507(a)(4). 403 F.3d 228. Two concurring opinions, resting on different rationales, supported the result. One panel member dissented.

Judge King, concurring, agreed with the Ninth Circuit that the statute’s meaning was plain, and relied on dictionary definitions to conclude that Section 507(a)(4)’s language—particularly the phrases "contributions to," "employee benefit plan" and "arising from services"—include statutorily required employer contributions to workers’ compensation program plans. In so concluding, Judge King rejected the reasoning of the Sixth, Eighth, and Tenth Circuits, which had previously held, based on the legislative history of the Bankruptcy Code, that employer contributions to workers’ compensation program plans were not properly considered "employee benefit plans" entitled to priority under Section 507(a)(4).

Although agreeing with that conclusion, Judge Shedd reached that result in an entirely different manner. According to Judge Shedd, the phrase "employee benefit plan," as used in the Bankruptcy Code, is susceptible to more than one interpretation. As a result, Judge Shedd looked to the legislative history of the statute, including the fact that Congress used the same phrase—"employee benefit plan"—in both Section 507(a)(4) and ERISA, to conclude that the plan was properly considered an "employee benefit plan" under Section 507(a)(4) and therefore warranted priority.

Finally, Judge Neimeyer, dissenting, found that the decisions of the Sixth, Eighth, and Tenth Circuits "better capture the plain meaning of Section 507(a)(4)" (403 F.3d at 242) and therefore concluded that claims for unpaid workers’ compensation insurance premiums do not enjoy the same priority as claims for unpaid employee benefit plans.

The Supreme Court’s decision in this case will obviously be of great interest to all insurance companies that provide workers’ compensation policies to employers, as the decision will establish whether priority under Section 507(a)(4) will be given to claims for unpaid workers’ compensation premiums. More generally this case is important to the business community at large, as it will affect the priority given to all unsecured debts of employers. Any questions about this case should be directed to David Gossett (202-263-3384) in our Washington, D.C. office.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a combination of two limited liability partnerships: one named Mayer Brown LLP, established in Illinois, USA; and one named Mayer Brown International LLP, incorporated in England.