Employee Payroll Deductions For Health Benefits Do Not Constitute Preferential Transfers When Paid Into A Health Plan
Golden v. The Guardian (In re Lenox Healthcare, Inc.), 343 B.R. 96 (Bankr. D. Del. 2006) (Judge Mary F. Walrath)
When Guardian Life Insurance Company of America was sued by the Chapter 11 Trustee for Lenox Healthcare, Inc. for alleged preferential, fraudulent and unauthorized post-petition transfers it received, Guardian moved for summary judgment in part on the basis that the transfers it received were actually deductions taken by Lenox from its employees’ paychecks for the purpose of procuring health benefits. As a result, Guardian argued, the funds received by it were not transfers of the debtor’s interest in property, and therefore were not recoverable as preferences. The Bankruptcy Court (Judge Mary F. Walrath) agreed.
The Chapter 11 Trustee, Charles Golden, filed a complaint against the Debtor’s pre-petition insurer, Guardian Life Insurance Company of America, alleging claims under 11 U.S.C. §§ 547, 548, 549 and 550. After the completion of discovery, Guardian moved for summary judgment.
Through an Administrative Services Agreement (ASA) with Guardian, the Debtor maintained ERISA qualified self-funded health and dental benefit plans for its employees. Under these plans, Guardian provided various administrative services and paid employees’ claims on the Debtor’s behalf. Guardian invoiced the Debtor each month for claims paid in the prior month, which the Debtor then paid.
Plaintiff’s original complaint alleged three preferential, fraudulent or unauthorized payments. After the statute of limitations ran, Plaintiff amended the complaint to include two more transfers. The Debtor made all of the payments under the Administrative Services Agreement (the “ASA”) between the parties.
In moving for summary judgment, Guardian asserted four defenses: (1) that the transfers were not transfers of an interest of the Debtor in property; (2) that Guardian was a mere conduit, and not the initial transferee; (3) that Plaintiff could not meet his burden under 11 U.S.C. § 547(b)(5); and (4) that the additional payments alleged under the Amended Complaint were time-barred.
Guardian asserted that the transfers were not property of the debtor’s estate because they consisted of employee payroll deductions and employer contributions that were held wholly in trust for the employees. Plaintiff conceded that such payments were probably not preferential, but asserted that a portion went to pay administrative fees, and that to that extent, they are avoidable. Guardian produced evidence rebutting this assertion.
The Court held that the portion of the transfers consisting of employee contributions were not property of the estate. Those funds were held in trust by the debtor at the time they were withheld from the employees’ paychecks. The court disagreed with Guardian with respect to the employer contributions, holding that employer contributions to an employee benefit plan are not held in trust until they are actually transferred to the plan. Until that time, the contributions are the employer’s property and are potentially avoidable. Because the ratio of employee contributions to employer contributions was unknown, the Court denied summary judgment.
Guardian also claimed that it was a mere conduit of the transfers and not an initial transferee. Guardian asserted that it did not have a beneficial interest in the transfers, but was required to receive them in trust for the employees and for the healthcare providers providing medical services. The Court quickly rejected this defense because the payments reimbursed Guardian for its advance payments of employee claims. The Court noted that if the Debtor had established a funding account from which Guardian could have drawn checks and forwarded them directly to the employees or Debtor for distribution, the conduit defense might have worked because it would have required the Debtor to transfer funds to its benefit funding account before Guardian paid employee claims. In this case, where Guardian, was simply seeking reimbursement of funds it had already paid, Guardian had full use of the funds to use as it pleased and was not a mere conduit.
As to the statute of limitations defense, the Court found for Guardian. While Plaintiff asserted that the additional transfers related back to the original complain because they arose out of the same transaction – the ASA – the Court held that because the complaint merely listed the original transfers, never mentioning the ASA, and because the additional payments varied in amount and frequency, there is no evidence of the presence of a scheme or course of conduct that would support relation back of the additional transfers to the original complaint.
Finally, the Court granted partial summary judgment in favor of Guardian as to the preference claims on the basis that the Chapter 11 Trustee had produced no evidence in support of its burden under section 547(b)(5) of the Bankruptcy Code. The Court noted that he had responded to Guardian’s request for admissions by admitting that he did not perform a 547(b)(5) analysis. Also, the Chapter 11 Trustee did not address this issue in its response to Guardian’s summary judgment motion. Because discovery had been conducted, and Plaintiff never presented any evidence to support this element of his claim, partial summary judgment on the preference claims was appropriate.
UPDATE: In an April 2, 2007 Memorandum Opinion, Judge Walrath denied the Trustee's Motion for Reconsideration, holding that the Trustee's motion "is an attempt to have the court consider arguments that should have been included in the Trustee's reply to Guardian's Motion for summary judgment." The Court rejected the Trustee's attempt to argue that the Court should have taken judicial notice of pleadings in the main case that supported the Trustee's burden on 547(b)(5), and that the Court's failure to do so was plain error: "The Trustee cannot thrust his own burden on the Court or expect the Court to search the record to support an argument that the Trustee failed to make when presented with the opportunity to do so."
