Howard Delivery Service Inc. v. Zurich American Insurance (05-128)


Appealed from: United States Court of Appeals, Fourth Circuit

Oral argument: Mar. 21, 2006

BANKRUPTCY, WORKER’S COMPENSATION INSURANCE, STATUTORY INTERPRETATION

Section 507(a)(4) of the Bankruptcy Code states that “The following expenses and claims have priority in the following order: . . . Fourth, allowed unsecured claims for contributions to an employee benefit plan arising from services rendered within 180 days of the [filing of the petition].” Howard Delivery Service argues that it should not have to pay unpaid insurance premiums to Zurich American Insurance because workers compensation does not qualify as a “contribution to an employee benefit plan.” The Fourth and Ninth Circuits have held that workers compensation does fall within this language, while the Sixth, Eighth and Tenth Circuits have argued that it does not. The Supreme Court must now decide whether or not to interpret the language of § 507(a)(4) to include workers compensation policies as “contributions to an employee benefit plan,” which benefit from priority under the Bankruptcy Code.

[Question(s) presented] | [Issue(s)] | [Facts] | [Discussion] | [Analysis]

Questions Presented

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?

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Issues

Should the language of Section 507(a)(4) of the Bankruptcy Code be interpreted to include workers' compensation liability insurance for purposes of repayment priority?

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Facts

In the late 19th century, rapid industrialization led to an alarming increase in the number of employees injured at work. Brief for Respondent at 6. Despite these injuries, common-law tort defenses often prevented injured employees from recovering damages from their employers. Id. at 6 (quoting Arthur Larson & Lex K. Larson, Larson’s Workers' Compensation Law § 2.03, at 2-3 to 2-6 (1999)). Many workers that were disabled on the job were thus left unable to support themselves or their families. Id. at 6. In response, “states began to replace the common-law system, which often saddled employees with the difficulty and expense of establishing negligence or proving damages, with a compulsory insurance system requiting employers to compensate employees for work-related injuries without regard to fault.” Id. at 6 (quoting Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 44 (1999)). Workers’ compensation is thus a no-fault state law system providing benefits to employees who suffer a disabling injury or disease in connection with their employment. Id. at 6.

Petitioner Howard Delivery Service, Inc. (“HDS”) owned and operated a freight carrier business that serviced the Midatlantic and Midwest regions. Brief for Petitioner at 3. HDS was subject to the workers’ compensation statutes in the states in which it did business. Id. at 3. These statutes establish a comprehensive system of mandatory workers’ compensation whereby HDS was required to fund payment of workers’ compensation benefits either by subscribing to the State’s Workers’ Compensation Fund or by becoming a self-insurer. Id. at 3-4. To comply with these statutory requirements, HDS entered into an agreement with Respondent Zurich American Insurance Co. (“Zurich") in 1997 to provide Howard’s workers’ compensation insurance coverage. Id. at 4. These policies took effect on July 1, 1997, and remained in effect until January 22, 2002, when they were canceled by HDS. Id. at 4. On January 30, 2002, after having lost its main client, HDS filed for bankruptcy and sought the protection of the court as it reorganized its business. See generally Id.

On May 9, 2002, Zurich filed two proofs of claim in HDS’s bankruptcy case. Brief for Petitioner at 3. Zurich claimed that it should receive priority under § 507(a)(4) of the bankruptcy code, which provides a list for prioritizing the claims of creditors Brief for Petitioner at 3. The fourth level of priority is assigned to “contributions to an employee benefit plan arising from services rendered.” 11 U.S.C. § 507(a)(4).

On June 12, 2003, HDS filed a written objection claiming that Zurich was not entitled to priority under § 507(a)(4) because the unpaid insurance premiums upon which the claim was based did not constitute “contributions to an employee benefit plan.”  Brief for Petitioner at 5. On July 15, 2003, the bankruptcy court entered a memorandum opinion siding with HDS and ordering that Zurich’s proof of claim be modified from an unsecured priority claim to an unsecured non-priority claim. Brief for Petitioner at 5.

On March 24, 2005, the Fourth Circuit reversed the District Court’s decision by a fractured per curiam ruling. Brief for Petitioner at 6. The central issue was whether the language of § 507(a)(4) was ambiguous. Howard Delivery Service v. Zurich, 403 F.3d 228, 228 (4th Cir. 2005). In his concurring opinion, Judge King stated that he found the language to be plain and unambiguous and that the unpaid premiums constituted “contributions to an employee benefits plan arising from services rendered.” Id. at 232. Although Judge Shedd also concurred in the opinion, he found the language of § 507(a)(4) to be ambiguous. Id. at 239. Judge Shedd reconciled his agreement with the holding by relying upon a provision of the Employee Retirement Income Security Act of 1974 ("ERISA") that referred to the term “employee benefit plan.” Id. at 240; see also 29 U.S.C. § 1001-1461. In his dissent, Justice Niemeyer criticized Justice King’s reasoning by stating that the majority had “cobbled together selected dictionary definitions and portions of definitions . . . to stretch them beyond their plain meanings.” Howard Delivery Service, 403 F.3d at 245. Justice Niemeyer also stated that “to read § 507(a)(4) as expansively as do the opinions of Justice King and Justice Shedd not only disregards the explicit language of the statute, but . . . violates the underlying ground rules for construing priorities under the Bankruptcy Code.” Id. at 244-245.

The Sixth, Eighth, and Tenth circuits, on the other hand, have all held that claims for unpaid workers’ compensation insurance premiums do not fall within the statutory language of the § 507(a)(4) of the Bankruptcy Code. Brief for Petitioner at 9. On Nov. 7, 2005, the U.S. Supreme Court accepted review of the case.

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Discussion

The issue that will be decided by this case will be whether an employer providing workers’ compensation liability insurance owes a higher level of duty to its insurance companies in the event that the company goes bankrupt.

The repercussions of this case will have an effect on three groups of people: insurance companies, employers, and employees. If insurance companies are unable gain priority status in collecting unpaid insurance premiums then businesses will be able to avoid paying hefty premiums once they have declared bankruptcy. The ability of insurers to collect premiums—which obviously is enhanced or diminished by an insurer’s ability to claim priority treatment under § 507(a)(4)—has a direct impact on the availability and cost of workers’ compensation coverage. See generally Brief for Respondent. If insurers are unable to recover premiums from debtors that file for bankruptcy, they will be more likely to cancel insurance coverage when a debtor suffers financial distress, or require greater assurance of payment through payment devices such as guaranties, bonds, or letters of credit. See generally id. These precautions carry significant additional costs that some debtors will be unable to afford, and the added cost will make it less likely that debtors suffering financial distress will be able to recover. See generally id.

Businesses may be adversely affected by a ruling interpreting § 507(a)(4) as including workers’ compensation policies because these policies are statutorily mandated in most states. Because these policies are required, it seems unfair to compel a business to make large premium payments to an insurance company when the business is trying to restructure itself financially. It seems particularly unfair because the employer was not able to engage in any form of negotiation with the employee or the insurance company before obtaining a workers’ compensation policy.

Employees will be adversely affected by a ruling that does not interpret § 507(a)(4) to include workers compensation policies. If insurance companies feel like a business will be able to avoid paying high premiums because it may hide under the guise of bankruptcy, insurance companies may become less willing to insure, or will increase their insurance rates for employers. This might cause the employer to take out a lower amount of worker compensation insurance, or might reduce the amount of money an employer is able to pay an employee. This is unfair to the employee because a worker who agrees to be covered by workers’ compensation insurance gives up the right to make claims against his employer for many bodily injuries that might occur while on the job. Because the employee has given up his right to recover in tort, he should be protected to the full extent possible.

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Analysis

Statutory Construction and the Bankruptcy Code

This case requires the Court to construe the statutory meaning of a particular section of the Bankruptcy Code (“the Code”). When faced with a question of statutory construction, a federal court must undergo a two-step process. See Howard Delivery Service v. Zurich, 403 F.3d 228, 231 (4th Cir. 2005). First, the court must decide whether the language of the statute is plain and unambiguous. See id. If the language of the provision is indeed plain and unambiguous, the court must simply apply this plain meaning. See id.  However, if the court finds that there is ambiguity in the language of the provision, it must proceed to the second step, whereby the court must “ascertain the meaning intended by Congress when the provision was enacted.” Id. at 232. Significantly, in the bankruptcy context, courts are to construe statutory priorities narrowly in order to maintain the presumption that debtors’ resources are to be equally distributed. Id.

Section 507(a)(4)

In this case, the statutory provision at issue is § 507(a)(4) of the Code. Section 507(a) sets up a four-tier priority system for debtors who are “in-line” to recover from a bankrupt entity. See Howard Delivery Service v. Zurich, 403 F.3d at 230 n.5. It is the Petitioners’ qualification to assert priority to collect under the fourth level which is at issue in this case. See id. at 230. This level provides priority for “allowed unsecured claims for contributions to an employee benefit plan arising from services rendered” under the Code. 11 U.S.C. §507(a)(4). Thus, the question at issue here is whether the Petitioner’s claim for unpaid insurance premium constitutes a “contribution to an employee benefit plan” such that Petition is entitled to protection under § 507(a)(4).

Step One: Statutory Ambiguity

Several circuits have held that the statutory language of § 507(a)(4) is unambiguous. The Ninth Circuit held that the Code is unambiguous in affording priority to unpaid premiums for worker’s compensation insurance. See Employers Insurance of Wasau v. Plaid Pantries, Inc., 10 F. 3d 605 (9th Cir. 1993). That court found such claims to be indistinguishable from claims by other type of employer-insurance benefits, such as health and disability, which are afforded fourth-level priority. Id.

Notwithstanding the Ninth Circuit’s holding, the specific terms which arguably invite ambiguity are “contributions,” “employee benefit plan,” and “services rendered.” See Brief for Petitioners at 10. Neither Congress nor the Supreme Court has expressly defined the statute. See Howard Delivery Service v. Zurich, 403 F.3d at 234. Where an express definition is absent, a court should construe the terms according to their ordinary or natural meaning. See FDIC v. Meyer, 510 U.S. 471, 476 (1994). HDS emphasizes that this standard must be understood in light of the presumption against granting priority to lenders absent a “clear authorization from Congress.” Brief for Petitioners at 10-11 (citing United States v. Embassy Rest., Inc., 359 U.S. 29, 31 (1959)).

Contributions

Are the statutorily mandated insurance premiums at issue in this case “contributions” per § 507(a)(4)? The Fourth Circuit looked at the definition in Webster’s New International Dictionary and concluded that they are indeed contributions, stressing that contributions need not be payments that are made voluntarily. Howard Delivery Service v. Zurich, 403 F.3d at 235. HDS points out that in relying on an earlier edition of the same dictionary—the edition which existed when the Code was enacted—a Bankruptcy court in Minnesota reached the opposite conclusion. Brief for Petitioners at 11-12. HDS also argues that the term does no include the sort of unilateral purchase of a product, such as the premiums at issue this case, but rather one that is shared. Brief for Petitioners at 12-13. The Forth Circuit rejected this view as well. Howard Delivery Service v. Zurich, 403 F.3d at 235 n.8.

Employee Benefit Plan

Is the insurance coverage provided by Respondent an “employee section benefit plan” per § 507(a)(4)? Once again, the Fourth Circuit used the same dictionary in arriving at its conclusion that the plan at issue is an employee benefit plan. Howard Delivery Service v. Zurich, 403 F.3d at 236. The court legitimized its reliance on the dictionary over legislative history by insisting that it would only be authorized to analyze the latter if it concluded that the terms were ambiguous. See id. HDS argues that when these terms are interpreted in light of the Code’s context, their meaning is plain in excluding the plan at issue here. Brief for Petitioners at 17-18.

Services Rendered

Do the claims for unpaid workers’ compensation insurance arise from “services rendered” per § 507(a)(4)? The Fourth Circuit held that they did arise from such services, since the only reason that HDS’s duty to pay the necessary premiums and provide insurance for its workers arose from its employment of those workers. Howard Delivery Service v. Zurich, 403 F.3d at 238. That court again refused to look at legislative history in coming to its finding, insisting that such practice “would require a radical abandonment of our long-standing precedents that permit resort to legislative history only when necessary to interpret ambiguous statutory text.” Id. (citing BedRoc Ltd., LLC v. United States, 541 U.S. 176 (2004)). HDS argues that the cases upon which the Forth Circuit relies are not analogous to this case since they do not involve workers’ compensation plans, but rather other types of insurance plans such as life and health insurance. Brief for Petitioners at 30-31.

Thus, HDS also argues that these terms are unambiguous, but only insofar as their plain meaning supports the view that § 507(a)(4) does not grant priority to the unsecured claims at issue. Brief for Petitioners at 7-8. If the Supreme Court finds that the Code is unambiguous, it will end its analysis with the first step. Of course, in declaring a lack of ambiguity, the Court will then unveil the plain meaning of the provision, and in doing so, provide its own interpretation of the Code. In doing so, the Court may agree with the Ninth and Fourth Circuit’s interpretation, or provide for a counter viewpoint consistent with the HDS and three other circuits. Regardless, an analysis that ends with this step allows the Court to use traditional tools of statutory construction to exercise its inherent power as the official interpreter of Federal statutes.

Congressional History

The Fourth and Ninth Circuits did not reach the issue of congressional intent, since their inquiry ended with the first step of the analysis. Other circuits, however, have found the statutory language sufficiently ambiguous to warrant an analysis of congressional intent. These circuits have looked to records of congressional enactment of the Code from 1978. See Howard Delivery Service v. Zurich, 403 F.3d at 234. In so doing, the Tenth Circuit, for example, found that Congress enacted the Code in order to ensure that employees of bankrupt employers received priority on claims for wages and claims for wage substitutes provided through employee benefit plans. See State Insurance Fund v. S. Star Foods, Inc., 144 F.3d 712 (10th Cir. 1998). The Tenth Circuit’s conclusion is consistent with the conclusion of most of the other courts that have undergone the second step of the statutory analysis of section 507(a)(4). See Howard Delivery Service v. Zurich, 403 F.3d at 234.

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Conclusion

It is unclear, of course, whether the Supreme Court will even reach the second step of the statutory analysis. However, Justices on the Supreme Court tend to have varying ideas as to which tools of statutory interpretation should be used in answering the question of ambiguity. While some Justices defer to simple dictionary definitions, as did the Fourth Circuit, others may look outside the words of the provision in defining the terms at issue. Thus, as if often the case in issues of statutory construction, if the first step is simple, the Court will dwell on the second; but if the first step is complex, and requires a look in to congressional history, the second step may not even be discussed.

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Authors

Prepared by: Theresa Concepcion and Galit Avitan

Additional Sources

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