TEXT :: State law required Petitioner to maintain workers’ compensation coverage for his freight trucking business. Petitioner contracted with Respondent to provide this insurance. After Petitioner canceled the policy and filed a Chapter 11 bankruptcy, Respondent, in an amended claim, asserted that the unpaid premiums had priority status as contributions to an employee benefit plan under 11 U.S.C § 507(a)(5) of the Bankruptcy Code. The bankruptcy court held that the claim was not entitled to priority status because, although the premiums were a benefit for employees, they were statutorily required and not “tied to bargained-for, wage-substitution-type benefits,” and thus not intended by Congress to be included in the priority. The district court affirmed, holding that workers’ compensation is not a wage substitute and that holding otherwise would excessively broaden the scope of the Bankruptcy Code. On appeal, the Fourth Circuit Court of Appeals reversed and held that claims for unpaid workers’ compensation insurance premiums are entitled to priority under 11 U.S.C. § 507(a)(5). The judges, however, disagreed in their reasoning. Judge King determined that the plain meaning of “contributions to an employee benefit plan” included the claim. Judge Shedd reasoned that although the phrase was ambiguous, the legislative history allowed borrowing the definition from the Employee Retirement Income Security Act of 1974 (ERISA), which includes workers’ compensation as an employee benefit plan. The U.S. Supreme Court granted certiorari and HELD that, due to the equal distribution aim of the Bankruptcy Code and the doubt as to whether workers’ compensation claims clearly fit within the category of “contributions to an employee benefit plan . . . arising from services rendered,” such claims are not entitled to priority status.
Historically, in interpreting the Bankruptcy Code, the Court has considered the equal distribution purpose of the statute to mandate strict construction of the language to avoid preferring one claimant over another. In Nathanson v. NLRB, the Board issued a complaint against a company for unfair labor practices and ordered it to pay back wages to employees who lost pay on account of the company’s practices. The company was then forced into involuntary bankruptcy, and the Board filed a claim for the back wages. The issue before the Court was whether that claim was entitled to priority status under § 64(a)(5) of the Bankruptcy Act.
The Court first affirmed the lower court’s ruling that the Board was a creditor of the company. However, the Court determined that although the Board was an agency of the United States, it did not follow that any debt owed to the Board was a debt owed to the United States. Looking beyond the language to the purpose of the priority, the Court found that the purpose of assuring public revenue was not met since the back pay would go to private individuals. Thus, the Court held that the equality-of-distribution theme of the Bankruptcy Code controlled, and absent a clear purpose to the contrary, the back pay awards should not be treated any differently from other wage claims.
This narrow reading of priorities continued in United States v. Embassy Restaurant, Inc., where the Court held that contributions to a union welfare fund, required by a collective bargaining agreement, were not entitled to priority status as “‘wages . . . due to workmen’” under the Bankruptcy Act. At the time of United States v. Embassy Restaurant, Inc. , there was no priority for benefit plans. The defendant, a restaurant with union employees, entered into a collective bargaining agreement that set hours, wages, and conditions of employment. The agreement also required that the employer contribute a set amount to the trustees of the welfare fund. When the employer filed for bankruptcy, the trustee filed a claim for unpaid contributions and asserted priority status.
To determine if the claim qualified as priority, the Court first noted the equal distribution policy of the Bankruptcy Act. Since the contributions did not clearly fit within the language of the provision, they could not be entitled to priority unless they satisfied the specific purpose of the provision. The Court found that the purpose of providing employees displaced by bankruptcy prompt access to back wages did not extend to fringe benefits. Thus, the Court read the priority narrowly, and determined that if the wages priority was to include claims for fringe benefits, it would have to be expanded by Congress.
In response to Embassy, Congress in 1978 amended the Bankruptcy Code to add a new priority for contributions to employee benefit plans. This priority was intended to encompass those fringe benefits received by employees as substitutes for wages, such as pension plans and health or life insurance plans. The purpose of the priority, like the purpose of the wage priority it is connected with, is in part to ensure that employees will not leave a failing business out of fear of losing compensation. Thus, the new priority was to provide more protection to employees.
Although the Embassy Court began its analysis with the equal distribution purpose of the Bankruptcy Act, where the statutory language is clear, principles of statutory construction require the Court to look at the plain meaning of the statute, even if it conflicts with the equal distribution purpose. In United States v. Ron Pair Enterprises, Inc., after respondent filed a Chapter 11 bankruptcy, the government obtained a nonconsensual security interest in his property through a tax lien. The government then sought recovery of postpetition interest under 11 U.S.C. § 506(b) because the claim was oversecured. The Court looked solely to the statutory language in holding that postpetition interest was plainly available to holders of secured interests, regardless of whether they are consensual or nonconsensual. Even though this holding was “somewhat in tension with the desirability of paying all creditors as uniformly as practicable,” the Court determined that the plain language of the statute required this result.
November 2014, Vol. 66, No. 6
Lily Kahng, The Taxation of Intellectual Capital