U.S. Supreme Court Holds That Insurance Company's Claim To Recover Unpaid Workers' Compensation Premiums In Debtor-Employer's Chapter 11 Case Was Not Entitled To Priority Treatment Under 11 U.S.C. § 507(a)(5) As "Contributions To An Employee Benefit
Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 126 S.Ct. 2105 (2006) (Justice Ruth Bader Ginsburg)
Resolving a split among the circuits, the Supreme Court held that an insurer’s claim to recover unpaid workers’ compensation premiums in a Chapter 11 case was not entitled to priority treatment under 11 U.S.C. § 507(a)(5) as “contributions to an employee benefit plan.” Insurer Zurich American Insurance Company provided workers’ compensation insurance for debtor Howard Delivery Service, Inc. The Court held that, because the benefits of such coverage inure mainly to the employer, workers’ compensation insurance is not an “employee benefit plan.” Although the Court acknowledged that employees do benefit from such coverage, the greater benefit is to the employer.
Howard Delivery Service, Inc. contracted with Zurich American Insurance Company to provide workers’ compensation insurance. Howard failed top pay premiums associated with the coverage, and filed for bankruptcy. Zurich filed a proof of claim asserting a right to priority payment, under 11 U.S.C. § 507(a)(5), of $400,000 in unpaid premiums. The United States Bankruptcy Court for the Northern District of West Virginia denied priority status for the Claim, and the District Court affirmed. The Fourth Circuit, however, reversed. The Supreme Court granted certiorari to resolve a Circuit split; the Sixth, Eighth and Tenth Circuits denied priority status to workers’ compensation premium claims, while the Fourth and Ninth awarded priority status to such claims.11 U.S.C. § 507(a)(5) grants priority status to providers of an employee benefit plan who seek to recover unpaid premiums. The term “employee benefit plan” is undefined in the Bankruptcy Code.
Zurich urged the Court to adopt the definition of “employee benefit plan” used in ERISA, which, the Court stated, perhaps includes workers’ compensation insurance. However, the Court was not persuaded that it should adopt a definition from a statute written without bankruptcy in mind.
Instead, the Court found it significant that, although employees received a benefit from workers’ compensation, employers gain the most from workers’ compensation by receiving immunity from tort actions. This is unlike the fringe benefit plans that are accounted for in 11 U.S.C. § 507(a)(5), and that provide benefits exclusively to employees.
The Court also distinguished workers’ compensation plans from other fringe benefits by noting that workers’ compensation is almost always statutorily required, whereas other fringe benefits that are afforded priority status are bargained-for.
The Court also stated that this result is consistent with the policy of promoting equality of distribution among creditors. Were such claims to be afforded priority status, they would diminish the pool of funds available for distribution to other claimants with equal or lesser priorities.
Accordingly, the Court declined to afford priority status to Zurich’s claim for unpaid premiums.
Justice Kennedy, dissenting (joined by Justices Souter and Alito), disagreed with the majority’s assertion that workers compensation does not fall within “contributions to an employee benefit plan.” Kennedy argued that workers’ compensation provides an important benefit to employees, providing for employees to be paid, even if they are unable to work because of an accident; therefore, the dissenting justices stated, workers compensation programs fall squarely within the meaning of an “employee benefit plan,” and should be accorded priority status under 11 U.S.C. § 507(a)(5).
