Howard Delivery Service v. Zurich American Insurance Co. (06/15/2006)

Question presented: In a bankruptcy case, is an unsecured claim for unpaid premiums owing for a debtor's staturoty 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 4th and 9th circuits, or is such a claim not entitled to statutory priority, as held by the 6th, 8th and 10th circuits?

BY BRIAN BENNETT, MEDILL NEWS SERVICE

On Jan. 22, 2002, Howard Delivery Service, an over-the-road freight carrier based in West Virginia, cancelled its policy of workers' compensation insurance coverage with Zurich American Insurance Company.

Under West Virginia law, employers are required to subscribe to and pay premium taxes into the state's workers' compensation fund for the protection of their employees. However, an employer can also self-insure by demonstrating its financial ability to cover any potential workers' compensation claims. Howard had purchased workers' compensation insurance coverage from Zurich in 1997 to fulfill state obligations to self-insure.

Eight days after cancelling the Zurich policy, Howard filed for bankruptcy, seeking the protection of the court as it reorganized its business operations.

In May 2002, Zurich filed a creditor's claim seeking priority status from the bankruptcy court for its claim for the unpaid premiums owed on the policy. Upon the policy's cancellation, Howard owed Zurich thousands of dollars in unpaid premiums.

Zurich's claim specified that the insurance company should be entitled to priority status under "507(a)(4) of the Bankruptcy Code. That provision says that a creditor of a Chapter 11 debtor is authorized to recover on a fourth-level priority basis "for contributions to an employee benefit plan arising from services rendered."

On July 15, 2003, the bankruptcy court denied the Zurich claim priority status, ruling that the unpaid premiums are not bargained-for, wage-substitute-type benefits. Five months later, on appeal to the district court, Zurich's claim was similarly denied.

A divided 4th Circuit Court of Appeals panel reversed.

A contribution to an employee benefit plan need not be voluntarily made for it to qualify under the bankruptcy statute for priority status, concluded Judge Robert King for the majority. The language of the bankruptcy statute is plain, the majority found, and "does not require that compensation received by an employee be a wage substitute."

While King found the term "employee benefit plan" to be clear, Judge Dennis Shedd was unsure of the terms clarity. In Judge Shedd's concurring opinion, he said he believes that the term was likely intended to be an imported definition from the Employee Retirement Income Security Act (ERISA) which includes workers' compensation benefit plans.

Judge Paul Niemeyer dissented, stating the unpaid insurance premium is not an unpaid contribution to an employee benefit plan and does not arise out of an employee's services rendered because it is not a wage surrogate.

Niemeyer criticized King's opinion, stating that the majority had "cobbled together selected dictionary definitions and portions of definitions…to stretch them beyond their plain meanings."

Niemeyer similarly disputed Shedd's opinion because it construed "employee benefit ban" too broadly.

In his dissent, Niemeyer expressed concern over the 4th Circuit's decision as it widened a split among other circuits. The 4th Circuit was joining the 9th Circuit in holding that claims for unpaid workers' compensation insurance premiums have the same priority as claims for unpaid employee fringe benefits.

Conversely, the 6th, 8th and 10th circuits have held that claims for unpaid workers' compensation insurance premiums do not fall within the statutory language of "507(a)(4) of the Bankruptcy Code.

On Nov. 7, 2005, the U.S. Supreme Court accepted review in the case, and on June 15, 2006, the Court sided 6-3 with Howard Delivery Service.

Writing the majority opinion, Justice Ruth Bader Ginsburg concluded that insurance carriers' claims for unpaid workers' compensation premiums owed by an employer fall outside the priority allowed by "507(a)(5).

Justice Anthony Kennedy wrote the dissent for himself and Justice David Souter and Samuel Alito.