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Supreme Court Denies Priority Status for Unpaid Workers' Compensation Premiums
In a recent decision, the U.S. Supreme Court clarified an issue important to workers' compensation insurers and held that pre-petition unpaid workers' compensation premiums are not entitled to priority status under the Bankruptcy Code. Howard Delivery Service, Inc., et. al. v. Zurich American Insurance Co., 126 S. Ct. 2105 (2006). This decision forecloses any disagreement among the Circuit Courts that unpaid workers' compensation premiums are entitled to priority status in a bankruptcy proceeding. In light of Howard, such claims are now considered merely general unsecured claims. Had the Supreme Court afforded priority status to such claims, they would have been paid prior to the claims of general unsecured creditors. Generally, priority expense claims receive a significant, if not 100% distribution, as opposed to general unsecured claims, which, in many circumstances, receive only pennies on the dollar. In a decision delivered by Justice Ruth Bader Ginsberg, joined by five other justices (Chief Justice John Roberts, Jr. and Justices John Paul Stevens, Antonin Scalia, Clarence Thomas, and Stephen Breyer), the Supreme Court's ruling not only brings consistency to this issue, but also provides opportunities for workers' compensation insurers to avoid forfeiture of payment of their premiums by financially troubled insureds.
In Howard, Zurich issued various workers' compensation policies to Howard Delivery Services, Inc., a freight trucking business. In 2002, Howard filed for Chapter 11 bankruptcy protection, while still owing Zurich approximately $400,000 in unpaid workers' compensation premiums. Zurich sought priority status for its claim, asserting that the unpaid premiums qualified as 'contributions to an employee benefit plan,' which would be entitled to priority status under '507(a)(5) of the Bankruptcy Code. The Bankruptcy Code provides a schedule of how claims will be paid in a bankruptcy proceeding. Generally, with certain exceptions, holders of secured claims will be paid first and in full to the extent of the value of their underlying collateral. A claim may be secured by either real or personal property, or both. Following secured claims, a debtor's estate will pay administrative claims. Administrative claims are claims incurred by a debtor subsequent to the filing of the petition in which the debtor received some benefit from the post-petition rendering of either goods or services. Usually, administrative claims are paid in full as well.
The majority of claims in a typical bankruptcy case are classified as general unsecured claims. Such claims are not secured by any form of collateral, and typically only a percentage of their full value will be paid. Congress, in enacting the Bankruptcy Code, recognized that certain types of unsecured claims should be paid in full prior to other types of claims. Thus, the Bankruptcy Code establishes a list of so-called 'priority claims,' which are paid in full or nearly in full and ahead of other general unsecured claims. Examples of priority claims include claims for unpaid wages and salaries, contributions to an employee benefit plan, and claims for taxes. For certain types of priority claims, the Bankruptcy Code establishes a monetary limit with any remaining portion of the claim above the limit being treated as a general unsecured claim. For example, ”507(a)(4) and (a)(5) address wage and fringe benefit claims against a debtor employer. Section 507(a)(4) provides that individuals or corporations will be granted priority status for wage-related claims that are earned within 180 days of the filing of the bankruptcy or the cessation of the debtor's business, whichever occurs earlier, up to a maximum amount of $10,000. Section 507(a)(5) complements '507(a)(4) by elevating to priority status claims for contributions to an 'employee benefit plan' arising from services rendered within the 180-day period up to the $10,000 maximum amount noted above, less any amounts provided for under '507(a)(4).
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