In In re Howard Delivery Service Inc. (Howard Delivery Service Inc. v. Zurich American Insurance Co.), 2005 WL 674869 (4th Cir. 2005), a sharply divided U.S. Court of Appeals for the Fourth Circuit recently held that amounts due pursuant to workers' compensation insurance provided in the 180 days prior to the filing of a bankruptcy petition are entitled to priority under §507(a)(4) of the U.S. Bankruptcy Code, 11 U.S.C. §101 et seq.

The Fourth Circuit now joins the Ninth Circuit in granting priority to insurers under §507(a)(4). The decision, while specifically addressing only claims relating to workers' compensation insurance, strengthens insurers' claims to priority for amounts due for health, life and disability insurance.

Circuits in Conflict

Section 507(a)(4) provides fourth-level priority for unsecured claims for contributions to employee benefit plans "arising from services rendered within 180 days before the date of the filing of the petition...." Courts have struggled with multiple questions in considering whether workers' compensation insurers are entitled to priority status under §507(a)(4) for unpaid policy premiums owed in the 180 days prior to a bankruptcy petition.

The first appeals court to address this issue, the Ninth Circuit, relied on the plain meaning of §507(a)(4) in ruling that the statute unambiguously entitled insurers to priority. See Employers Ins. of Wausau v. Plaid Pantries Inc., 10 F.3d 605 (9th Cir. 1993). The next three circuits that addressed this issue, however, denied priority to the insurers. See Employers Ins. of Wausau Inc. v. HLM Corp., 62 F.3d 224 (8th Cir. 1995) (legislative history of §507(a)(4) indicates that a workers' compensation plan does not constitute a wage substitute and is not an "employee benefit plan" because workers' compensation is statutorily mandated); State Ins. Fund v. S. Star Foods Inc., 144 F.3d 712 (10th Cir. 1998); and Travelers Prop. Cas. Corp. v. Birmingham-Nashville Express Inc., 224 F.3d 511 (6th Cir. 2000).

The opinion of the Fourth Circuit in Howard Delivery reflects the difficulty that the circuit courts have had in deciding this issue. In Howard Delivery, Zurich American Insurance Co. provided workers' compensation insurance to Howard Delivery Service Inc. prior to Howard's filing of its chapter 11 bankruptcy petition in the bankruptcy court for the Northern District of West Virginia. Zurich sought priority status for its claim for unpaid policy premiums owed to it during the 180-day period prior to Howard Delivery's bankruptcy petition. Howard objected to Zurich's claim for priority treatment, and the bankruptcy court upheld the objection, concluding that workers' compensation premiums are not bargained-for, wage-substitute-type benefits and, therefore, not entitled to priority. Zurich appealed the bankruptcy court's decision, and the district court affirmed the bankruptcy court's ruling on similar grounds.

The three-judge panel of the Fourth Circuit deciding Howard Delivery issued a short per curiam opinion announcing the disposition followed by three separate opinions. Judge King, writing the lead opinion, first noted that the court must follow a two-step process in addressing statutory construction. The first step is to decide whether the statutory provision is plain and unambiguous. Howard Delivery, 2005 WL 674869 at *2. If so, the court needs to simply "apply the statute's plain meaning." If, however, the statutory provision is ambiguous, the second step in the process would be "to seek to ascertain the meaning intended by Congress when the provision was enacted." Id.

Majority: Plain Meaning Determined by Dictionary

Judge King found the pertinent statutory terms—"contribution," "employee benefit plan" and "services rendered"—to be plain and unambiguous. First, the court noted that "contributions" included sums "paid by an employer to [a] group-insurance fund...for employees." Id. at *6 (citing Webster's Third New International Dictionary 496 (reprint 1993) (1981)). The court stated that Howard's unpaid policy premiums were sums to be paid by an employer to a group insurance fund for workers' compensation insurance, and thus constituted "contributions." In addition, the court stated that a contribution could include statutorily mandated payments and that contributions need not be payments that are made voluntarily. Id.

Second, the court considered the dictionary definitions of "benefit" and "plan" in construing the term "employee benefit plan." Again citing to Webster's Third New International Dictionary, the court stated that a benefit includes a "cash payment provided for under an...insurance plan." Id. Since workers receive benefits from an insurance plan under state law, the court held that a workers' compensation program is a "benefit" to employees. In addition, a "plan" constitutes "a detailed and systematic formulation of a large-scale campaign or program of action." Id. (citing Webster's Third New International Dictionary 1729). Although Howard Delivery argued that the insurance program only benefited Howard by shielding it from having to pay workers' compensation benefits, the court held that the insurance coverage inured to the benefit of Howard's employees since Howard's employees received the payments from the insurers. In addition, contrary to the Sixth, Eighth and Tenth Circuits, the Fourth Circuit held that "[t]he language of the statute is plain and unambiguous: It does not require that compensation received by an employee be a "wage substitute," nor does it exclude an employee benefit plan that is statutorily mandated." Id. at *7.

Finally, Howard argued that since Zurich's claim arose from the provision of insurance coverage by Zurich, rather than from services rendered by Howard's employees, the insurance coverage did not fall within the meaning of "services rendered" under §507(a)(4). The court held, however, that Zurich's claim arose from services rendered by Howard's employees, and insurers were thus entitled to priority. The court noted that it is only because workers were providing services to Howard that Howard's obligation to provide insurance arose. Id. at *8. Therefore, Judge King concluded that Zurich was entitled to priority under the statute.

In his concurring opinion, however, Judge Shedd found the phrase "employee benefit plan" to be ambiguous. He said that the court should look at the definition of "employee benefit plan" under the Employee Retirement Income Security Act of 1974 (ERISA), which included workers' compensation benefits within its definition of employee benefit plan. Judge Shedd reviewed the legislative history of §507(a)(4) of the Bankruptcy Code and noted that Congress had been urged to make the section consistent with ERISA and that Congress changed the originally proposed provision to employ the very same term as used in ERISA. He said the legislative history showed Congress's intent that the term "employee benefit plan" should have the same meaning in both statutes.

In his dissent, Judge Niemeyer stated that the statute was unambiguous and did not provide for priority. Rather than looking first at the plain meaning of the statute, however, Judge Niemeyer (as did the courts in the Sixth, Eighth and Tenth Circuit decisions) looked first at the legislative history of the section. In construing the legislative history, Judge Niemeyer concluded that the statute only applied to "voluntary" contributions to a plan that provided "wage surrogates." He also noted that priority should be given only with respect to services rendered by employees, not by insurance companies. Judge Niemeyer relied heavily on what he saw as the narrow congressional intent in enacting the priority statute, only to overrule two earlier Supreme Court decisions that had refused to give priority to certain claims owed to unions. Although the dissent reasons that it is based on the plain meaning of the statute, it can more fairly be read as a finding by Judge Niemeyer that the statutory language is ambiguous and that his review of the legislative history indicates that the statute was not intended to cover amounts due to workers' compensation insurers.

Impact of Howard Delivery on Other Insurance Claims

Although Howard Delivery relates directly to workers' compensation insurance coverage, the decision is likely to provide additional ammunition to other types of insurance providers seeking to assert priority claims in bankruptcy proceedings, including health, life and disability insurance providers. For example, in In re Ivey, 308 B.R. 752 (M.D.N.C. 2004), an insurer claimed priority for contributions made to the debtor's group health plan in the 180 days prior to the petition date. The trustee argued, among other things, that since the insurance claims at issue involved medical coverage for former employees, such claims were not within §507(a)(4). However, the district court upheld the bankruptcy court's award of priority to the insurer, ruling that the plain language of §507(a)(4) did not limit priority to claims relating to services provided by individual employees. The trustee in Ivey has appealed the district court's decision to the Fourth Circuit. That appeal has been argued and a decision should be issued shortly.

Conclusion

The Howard Delivery decision widens the split between the circuits on this issue of insurers' priority under §507(a)(4) and sets the stage for a possible final adjudication on the issue by the U.S. Supreme Court.