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Priority for Unpaid Workers' Comp Premiums

By Lawrence A. Katz
August 30, 2006

Priorities are the alchemist's stone of the Bankruptcy Code ' they have the power to turn worthless claims into pots of gold. Without priority status, unsecured claims typically receive little or no distributions from the bankruptcy estate. When these claims fall within one of the statutory priorities of ' 507(a)of the Bankruptcy Code, however, they often lead to significant distributions ' sometimes even payment in full. What often separates the 'haves' from the 'have-nots' in the bankruptcy arena is the ability to fit one's claim into the finite list of priorities set forth in ' 507(a).

Section 507(a)(4) of the Bankruptcy Code affords priority treatment to claims for 'wages, salaries, or commissions, including vacation, severance, and sick leave earned by an individual' earned within 90 days of the earlier of the petition date or the cessation of the debtor's business. In two earlier decisions of the U.S. Supreme Court, United States v. Embassy Restaurant, Inc., 359 U.S. 29 (1959), and Joint Industry Bd. of Elec. Industry v. United States, 391 U.S. 224 (1968), health and welfare plans were held not to be 'wages' and thus not entitled to priority treatment under ' 507(a)(4). In response to these decisions, Congress added ' 507(a)(5) to the list of priorities when it amended the Bankruptcy Act in 1978. This new provision was intended to extend priority treatment to other forms of employee compensation not covered by ' 507(a)(4), while establishing a combined monetary cap on the claims that could receive such priority (pursuant to BAPCPA, what were previously ” 507(a)(3) and (a)(4) of the Bankruptcy Code were numbered 507(a)(4) and (a)(5) and the combined cap on the priorities was increased to $10,000 per employee). The new provision covered 'contributions to an employee benefit plan'arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessation of the debtor's business, whichever occurs first ' '

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