US Supreme Court Asked to Interpret Scope of 1978 Bankruptcy Code Amendment that Was Designed to Overrule Two Prior Supreme Court's Holdings on Wage Priorities in Bankruptcy

The latest revelation regarding Judge Alito's past is that he wrote a memo in 1986, while a lawyer for the Reagan administration, in which he advised the president to expressly declare the president's understanding of a bill at the time it was signed because "[t]he president's understanding of the bill should be just as important as that of Congress."

In a similar vein, Judge Alito may soon be asked as a member of the Supreme Court in Howard Delivery Service, Inc., v. Zurich Am. Ins. Co., No. 05-128, to provide his understanding of statutory provisions that themselves were designed to overrule two long-standing Supreme Court cases (here and here). Those cases, decided under the Bankruptcy Act of 1898 (as amended), held that wage priorities in bankruptcy would not be extended to cover various fringe benefits that technically were not "wages." The obvious difference between the Court's and the president's interpretive views, of course, is that (President Andrew Jackson and the Archidiocese of Portland aside) the Court's interpretation of the meaning of such legislation is dispositive, whereas the president's interpretation is not.

In Howard Delivery Service, the debtor/petitioner recently submitted its opening brief, which presents the following straight-forward question for the Court to answer:

In a bankruptcy case, is an unsecured claim for unpaid premiums owing for a debtor's statutory workers' compensation liability insurance policy entitled to priority under Section 507(a)(4) of the Bankruptcy Code as a "contribution to an employee benefit plan arising from services rendered," as held by the Fourth and Ninth Circuits, or is such a claim not entitled to Section 507(a)(4) priority, as held by the Sixth, Eighth and Tenth Circuits? [NB: BAPCPA had the effect of renumbering Section 507(a)(4) so that now it is numbered Section 507(a)(5).]

The Fourth Circuit, unable to deliver a majority or pluraity opinion, looked here more like the "gang that couldn't shoot straight" in answering this question. The petitioner summarized the Fourth Circuit's "fractured per curiam" ruling as follows:

Judge King wrote an opinion concurring in the judgment in which he found that the language of § 507(a)(4) is plain and unambiguous and that the unpaid premiums constituted "contributions to an employee benefits plan arising from services rendered." 403 F.3d at 232. By contrast, Judge Shedd, in his concurring opinion, found the language of § 507(a)(4) to be ambiguous. 403 F.3d at 239. Nevertheless, Judge Shedd ultimately agreed with Judge King that Zurich's claim was entitled to priority, but relied instead upon a provision of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C.S. § 1001-1461, that referred to the term "employee benefit plan." Id. Judge Niemeyer issued a dissenting opinion in which he found that:
[t]he plain language of § 507(a)(4), which gives priority to claims for unpaid contributions to an employee benefit plan arising from services rendered, does not cover claims for unpaid insurance premiums charged to cover the statutory liability of the employer to its employees. The unpaid insurance premium is not an unpaid contribution; it is not an unpaid contribution to an employee benefit plan; and it does not arise out of an employee's services rendered in that it is not a wage surrogate.

403 F.3d at 244 (emphasis in original). Judge Niemeyer further found that the opinions of Judge King and Judge Shedd violated the underlying rule that priorities under the Bankruptcy Code are to be narrowly construed. 403 F.3d at 244 (Niemeyer, J., dissenting).

Though the Petitioner will likely win given the fractured ruling of the Fourth Circuit compared to the strong, consistent rulings of the Sixth, Eighth, and Tenth Circuits, it will be interesting to see how the Court will handle statutory interpretation questions such as:

  • It is an oft-stated principle of statutory construction that a court must consider the specific language itself, the context of that language, and the broader context of the statute as a whole. To what extent will the decision be shaped by an "overriding objective of providing to creditors equal distribution of a debtor's limited resources"? (Pet. Brief at *10.)
  • Will the Court agree that the plain meaning of the 1978 Bankruptcy Code amendment that extended wage priorities to "contributions to an employee benefit plan" should be limited to the situations addressed in the prior Supreme Court holdings that the legislation is said to have been designed to overturn?
  • To what extent should the Court rely upon legislative history to determine whether the priorities of Section 507(a)(4) should be extended beyond fringe benefits and comparable "wage substitutes"?
  • To what extent should courts look to contemporaneous editions of Merriam Webster's or Random House dictionaries in defining simple words like "contribution," "benefit," and "plan", and to what extent must there be consistency between their plain meaning and their "usage within the broader context of the Bankruptcy Code"? (Pet. Brief at *15.)
  • Is it appropriate for the Court to "incorporate characterizations of a term in another statute absent some congressional indication that this was intended"? (Pet. Brief at *15-*16.)

The debtor/petitioner's "Summary of Argument" follows:

A fundamental principle underlying the Bankruptcy Code is that creditors should generally be treated equally. Kothe v. R.C. Taylor Trust, 280 U.S. 224, 227 (1930). If the claims of certain creditors are to be given priority over the claims of other creditors, that priority must be authorized by Congress in clear and precise terms. Nathanson v. NLRB, 344 U.S. 25, 29 (1952) (Jackson & Black, J.J., dissenting).

The language of § 507(a)(4) of the Bankruptcy Code specifically limits priority treatment to "contributions to an employee benefit plan arising from services rendered." Applying the plain meaning of these words, premiums due under a workers' compensation liability insurance policy are not entitled to priority treatment.

First, the premiums are not "contributions" under the plain definition of this term. The premiums do not constitute voluntary or negotiated "contributions" by an employer, but instead are required payments made to discharge a statutorily mandated liability.

Second, workers' compensation insurance coverage is not an "employee benefit plan." The term "employee benefit plan" is not defined in the Bankruptcy Code, and it is not appropriate to look to ERISA for such a definition. The various definitions contained in ERISA were specifically designed to effectuate the purposes of ERISA, not the Bankruptcy Code. There is no reason to believe that when Congress used the words "employee benefit plan" in the Bankruptcy Code, it intended to incorporate the ERISA definition of these words into the Bankruptcy Code. Unlike pension plans or life, health or disability insurance plans, workers' compensation insurance is a legally mandated, non-negotiated form of risk allocation. Rather than serving as a wage substitute, it is a statutory obligation that employers must meet, regardless of the wages or other fringe benefits that they provide their employees. The coverage is not something that can be bargained for in lieu of higher wages or other benefits; it is provided by statute, and employees are subject to workers' compensation coverage whether or not the insurance premiums are paid. It is the employer, rather than the employee, that is the principal beneficiary of a workers' compensation insurance policy.

Third, the claim for unpaid premiums does not "arise from services rendered." It arises instead from the employer's default in payment to the insurance company, not from services rendered by the employees.
Even if § 507(a)(4) is deemed ambiguous, making it necessary to look to the Congressional intent behind the provision, the legislative history makes clear that premiums paid for a workers' compensation insurance policy are not contributions to an employee benefit plan, since workers' compensation insurance is a statutorily mandated system of risk allocation and not a wage substitute.

Congress enacted § 507(a)(4) specifically to overrule the holdings of two Supreme Court cases that had limited the existing wage priority and did not recognize various wage substitutes or fringe benefits that are often bargained for in lieu of wages. See United States v. Embassy Rest., Inc., 359 U.S 29 (1959); Joint Indus. Bd. v. United States, 391 U.S. 224 (1968). Section 507(a)(4) was intended to give priority *9 status to claims for such fringe benefits, and there is nothing in the legislative history to suggest that § 507(a)(4) was intended to extend priority treatment beyond such fringe benefits. See, e.g., State Ins. Fund v. Southern Star Foods, Inc. (In re Southern Star Foods, Inc.), 144 F.3d 712, 716 (10th Cir. 1998), cert. denied, 525 U.S. 978 (1998).

The Sixth, Eighth and Tenth Circuits have all held, consistent with the dissenting opinion of Judge Niemeyer in the decision below, that premiums due under a workers' compensation insurance policy are not contributions to an employee benefit plan. The concurring opinions of Judges King and Shedd and the decision of the Ninth Circuit in Employers Ins. of Wausau v. Plaid Pantries, Inc., 10 F.3d 605 (9th Cir. 1993), do not withstand scrutiny in light of the reasoning relied upon by these other Circuit Courts. Accordingly, the Court should reverse the Court of Appeals and hold that the claims of Zurich are not entitled to priority treatment under § 507(a)(4) of the Bankruptcy Code.

Finally, the National Coordinating Committee for Multiemployer Plans ("NCCMP") filed this amicus curiae brief in support of the debtor/petitioner. The chief contribution provided by this group rests in its review of the legislative history, which it claims is "devoid of any suggestion that 'contributions to an employee benefit plan[] arising from services rendered' would encompass any claims other than those claims for fringe benefits that serve as wage substitutes." (Amicus brief at *18.) In this regard, the NCCMP stated not only that the Fourth Circuit misread legislative history, but that the NCCMP is uniquely qualified to comment upon legislative intent at the time because of its extensive involvement in the drafting of the Code amendments. The NCCMP wrote:

The NCCMP is the appropriate party to question his conclusion since Judge Shedd relies on the testimony of the NCCMP's former Chairman to establish this "direct indication" of legislative intent. To the contrary, the testimony of the Chairman of the NCCMP and that of four other witnesses representing the interests of organized workers indicate that the multiemployer plan community and organized labor sought to ensure claims for contributions owed any fringe benefit fund established in accordance with section 302(c) of the Taft-Hartley Act would be included in the priority and the priority itself would provide significant relief to low-wage employees who typically are exposed to the greatest hardship in the event their employer files for bankruptcy. It would be very strange indeed for the pre-eminent spokesman for multiemployer plans to stand before Congress and urge the enactment of legislation that would significantly dilute the value of the priority accorded multi-employer plans. (Amicus brief at *9-*10.)

Special thanks to Howard Bashman of the How Appealing! blog for the link to the LA Times story on Judge Alito's 1986 memo on presidential power.

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