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Supreme Court Decision Update - Howard Delivery Service v. Zurich American Insurance

supreme2.jpgAmong other things, the Supreme Court decided a bankruptcy case today. In Howard Delivery Service v. Zurich American Insurance (PDF of the Opinion), the Supremes interpreted § 507(a)(5) of the Bankruptcy Code to deny priority status to workers’ comp premiums when a company goes belly-up.

Quizlaw Analysis: Unless you are an insurance company that provides workers compensation insurance to other companies, this case will probably never affect you. Nevertheless, the Supremes dazzled the world by ruling that a bankrupt company with a long list of unsecured creditors does not have to give priority to their workers comp provider because workers compensation does not fit within “contributions to an employee benefit plan,” which are owed priority status under § 507(a)(5) of the Bankruptcy Code. I know! Exciting.

This is what happened: Zurich American Insurance provided workers compensation coverage in ten states to Howard Delivery Service, which was required to take out workers comp policies under state laws. After Howard filed for Chapter 11 bankruptcy, Zurich filed an unsecured creditor’s claim for $400,000 in premiums, asserting that they qualified as “contributions to an employee benefit plan” entitled to priority under § 507(a)(5) of the Code.

The Supremes, however, disagreed. In a 6-3 opinion written by Justice Ginsberg, the Court asserted that, under the Bankruptcy Code, wages, salaries, and commissions get first priority. After that, fringe benefit contributions get second priority, with a total cap on both wages and benefit contributions at $10,000 per employee. Zurich argued that workers comp premiums fall under these fringe benefit contributions. The Supremes rejected that argument, however, noting that workers comp premiums do not count as fringe benefits, which are provided as a trade-off for employment and count as a substitution or modification of wages. Workers compensation, conversely, is mandated by the state and is a modification or substitution not of an employee’s wages, but of the “common law tort liability to which employers were exposed for work-related accidents.” As such, an insurance carriers’ claims for unpaid workers compensation premiums owed by an employer fall outside the priority allowed by § 507(a)(5).

In the dissent, written by Justice Kennedy and joined by Justices Souter and Alito, the minority court disagreed with the majority’s assertion that workers compensation does not fall within “contributions to an employee benefit plan.” Kennedy wrote that, because it is clear that workers compensation does provide benefits to employees (“enable[ing] the insurer to give out substantial payments to employees” in the even of an accident), it’s clear that workers comp falls squarely within the meaning of an “employee benefit plan,” and thus should be accorded priority status.