HOWARD DELIVERY SERVICE v. ZURICH AMERICAN INSURANCE COMPANY
Under West Virginia law, employers are required to either participate in a state-run workers' compensation fund or demonstrate that they are financially capable of covering any workers' compensation claims that may arise. Howard Delivery service, a West Virginia freight carrier, chose to fulfill its obligation by purchasing insurance from Zurich American Insurance Company. In January of 2002, however, the company cancelled its policy (still owing thousands of dollars in unpaid premiums) and filed for bankruptcy.
Zurich filed for special status as a creditor, arguing that the money owed to them consisted of "contributions to an employee benefit plan arising from services rendered," and that under Chapter 11 of the Bankruptcy Code they should therefore be given priority in recovering the premiums. The bankruptcy court rejected Zurich's claims, however, finding that the provision did not apply to the workers compensation insurance premiums because they were not wage-substitute-type benefits for which the company could bargain (because Howard was required by law to have some form of insurance). A federal district court affirmed the decision, but a divided panel of the Fourth Circuit Court of Appeals reversed, holding that contributions to an employee benefit plan did not need to be voluntary to meet the Chapter 11 definition.
May a creditor seek priority status in a bankruptcy case to recover unpaid premiums owed for legally-required workers' compensation insurance?
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
No. In a 6-to-3 decision authored by Justice Ruth Bader Ginsburg, the Supreme Court held that the workers' compensation insurance was different from the sort of employee benefit programs for which creditors could be given priority under Chapter 11. The programs for which preferred status was authorized were those whose main beneficiaries were the employees, and which could be offered as an alternative to wage increases. The workers' compensation insurance mandated in this case, however, benefited the employer as much as the employees (because it protected them from liability) and were legally required, not given as part of employment negotiations. Justice Ginsburg wrote that, though the question was a close one, "we are guided in reaching our decision by the equal distribution objective underlying the Bankruptcy Code, and the corollary principle that provisions allowing preferences must be tightly construed."
Argument of Paul Farrell Strain
Chief Justice Roberts: We'll hear argument first today in 05-128, Howard Delivery Service v. Zurich American Insurance Company.
Mr. Strain: Mr. Chief Justice, and may it please the Court--
We are hear about a bankruptcy priority, and bankruptcy priorities must be clearly granted by statute or they are not granted at all.
That's the first principle of bankruptcy law that this Court has laid down, that equal priority, that equal distribution is the first principle, and every priority is a deviation from that first principle, and therefore, they must be clearly set out in the statute.
This Court has been very clear over and over on those bedrock principles.
Applying them here, Zurich must demonstrate that its workers' comp insurance policy receivables are clearly included within the statutory phrase of 507(a)(4), contributions to an employee benefit plan arising from services rendered within 180 days.
Judge Niemeyer... Judge Niemeyer followed those principles, those bedrock principles of this Court.
The two concurring opinions below did not follow nor even mention those principles, and that led them to err, we... we submit.
Chief Justice Roberts: Can I get you to step back just... the presumption that you began with.
What... what's your strongest authority for that?
The first thing you cite in your brief is a dissenting opinion of two justices.
Mr. Strain: The strongest authority for that, Your Honor, is the opinion in Kothe, K, o, t, h, e, a 1930 opinion, followed by Nathanson, followed by Embassy Restaurant, and it is the--
Chief Justice Roberts: Nathanson is the... you cite the dissenting opinion for this proposition?
Mr. Strain: --No.
It is... Nathanson... the... the citation, the page citation, is to the majority... is to the majority opinion.
The principle is laid out in the majority opinion, Mr. Chief Justice.
And Nathanson majority opinion relied on Kothe, and Nathanson majority opinion was followed in 1959 by this Court in Embassy Restaurants, and followed in 1968 by this Court in Joint Industries Board also dealing with bankruptcy priorities.
That is the bedrock principles in the... of the majority decisions of... of this case... of this Court.
And what we have here, Your Honor and members of the Court, is that a... an insurance policy... what we're talking about here is an insurance policy, and the statutory language refers to an employee benefit plan.
We don't even have a plan here.
We have a policy.
There's a citation in the Zurich brief at page 20 to this Court's opinion in Pegram v. Herdrich, which I think drives that point home.
It is an incomplete citation.
The omitted language from the Zurich is as follows.
Justice Scalia: Where... where is the unomitted language?
What... what page of the brief are you quoting from?
Mr. Strain: --It's on page 20, Your Honor, of Zurich.
Citing to page 223 from this Court's opinion in Pegram, the omitted language, which comes in the middle of the quotation given at page 20, is as follows.
Thus, when employers contract with an HMO to provide benefits to employees subject to ERISA, the provisions of documents that set up the HMO are not, as such, an ERISA claim.
Now, that is what our case is, an insurance policy that incorporates a duty to pay benefits subject to workers' comp laws of the different States.
So even under the citation in... the full citation in Pegram, it is seriously questionable whether this insurance policy is a plan at all.
The statute requires an employee benefit plan.
The... this Court requires that it be clear from the statute that this insurance policy is itself a plan.
Justice Scalia: Now, ERISA... ERISA makes it very clear that... that a plan to pay insurance for employee benefits, whether it's disability or retirement or whatever else, is an employee benefit plan and... and explicitly excludes workmen's comp because otherwise it would fall within that definition of an employee benefit plan.
Mr. Strain: I believe that is... is correct, Justice Scalia.
Justice Scalia: I know that's a different statute.
I'm not saying that the... that the definitions of that statute have to apply here, but the definitions of that statute at least demonstrate that it is a permissible use of the... of... of the term employee benefit plan.
Mr. Strain: I disagree with you, Justice Scalia--
Justice Scalia: All right.
Tell me why.
Mr. Strain: --to this... to this extent.
The definition of employee benefit plan under ERISA is in two parts, a section (a), which is a... which is a listing; and a section (b), which is incorporation of provisions of the Taft Hartley law.
And it's under the section (b), the incorporation of provisions of the Taft Hartley law, that workers' compensation comes in.
And, of course it is then excluded by... by ERISA.
But a... the ERISA definition does not demonstrate that a... an insurance policy is a plan.
This Court has dealt with the issue under ERISA of whether everything scheduled in ERISA is a plan or not.
In the Massachusetts v. Morash decision, this Court determined whether a vacation... unpaid vacation policy was a plan under the definition of ERISA, and this Court held that it was not.
So it is clear from this Court's precedent that whether or not something is listed in ERISA, even if it applied... in that case, ERISA applied; in this case it does not... even if it applied, would not qualify as a plan.
Justice Ginsburg: Would it... would it if the employer were self insured?
Can you be self insured for workers' comp?
Mr. Strain: The employer can be self insured for workers'--
Justice Ginsburg: Would that be a plan then?
Mr. Strain: --I think it would not, Your Honor, because the self insurance for workers' comp, as I understand them, what they normally do is, just as the Court referred to in that omitted section of the Pegram opinion, is it simply is... is an agreement that it will provide the necessary wherewithal and bonding to pay the benefits as specified, as they may change from time to time in a State statute.
There is none of the other things, as I understand it, that the Court dealt with in Pegram which would make it a plan that are present in either a workers' compensation insurance policy or a self insurance program, as is permitted and--
Justice Ginsburg: So it would be an employee benefit program, but not a plan.
Mr. Strain: --It would be, Your Honor, or in the case of our case, an employee benefit policy.
And I would like to pick up on that, if I may, because it is not--
Justice Scalia: Before you... before you go on, could you satisfy a curiosity of mine?
Maybe Mr. Verrilli should be the one I should ask this, but you must have your... your version of it.
How do you decide whether an insurance premium is for work that was done within the last 180 days?
How... how do you calculate it, whether that characteristic of the... of the statute is complied with?
Mr. Strain: --Your Honor, I don't know that there is any good way to do that, and I think that's one of the anomalies in trying to superimpose an insurance policy under the rubric of an employee benefit plan.
Now, premiums... premiums, of course, there is a... there is a mechanism--
Justice Scalia: Oh, if it said premiums due within the last 180 days, I could understand it--
Mr. Strain: --And there is a mechanism in the policy to determine the payment of premiums.
Justice Souter: But isn't... doesn't the mechanism take into account the number of employees who are on the rolls at any given time?
Mr. Strain: I believe it does, Your Honor.
Justice Souter: Well, if that's the case, then... then doesn't the premium that you're supposed to pay depend in... in... on the number of employees within the last 180 days, which in turn depends on their working in the last 180 days?
Mr. Strain: It is not understanding... and I may be mistaken because this policy was not placed in the record by Zurich.
It is not my understanding that that is how the policy premium calculations are made, Your Honor.
Justice Souter: Well, how... maybe you just don't know the answer.
Mr. Strain: --certainly, Justice Souter, you may be right, but we've checked the proof of claim filed by Zurich which started this off, and they did not attach the workers' compensation insurance policy to it.
So it is not in the record, and I simply don't know--
Justice Souter: So that's... that's really not an issue for us.
Mr. Strain: --Well, I... I will not say that it's not an issue, Your Honor.
It is... it is an issue--
Justice Souter: Well, if you want to make it an issue, you'd have to get the... the predicate in the record to do it, and... and we just don't have that.
Mr. Strain: --Well--
Justice Souter: We... we couldn't resolve that.
Justice Scalia: --Or else establish that there's no conceivable way that 180 days makes any sense.
Mr. Strain: --And... and I... I think that, as... as I hope may blend the answers to both questions.
I think that--
Justice Souter: Consider us together, yes.
Justice Scalia: We're together on this.
Mr. Strain: --I... I think that is... I think that is where we... where we are.
We have a policy that was not placed in the record by the applicant for this priority.
We have our general knowledge of what workers' comp insurance policies are.
We have a statutory requirement which reads, a calculation with 180 days, which I suggest is an anomaly when we compare it to the statutory language.
Justice Kennedy: Is there anything in the statute which says how promptly the premiums have to be paid as it... to... to make it analogous, say, to withholding where you might have to pay every quarter on... by a certain day?
Does... does the statute regulate when and how promptly the premiums must be paid, or is that just all comprehended in the terms of the policy agreement?
Mr. Strain: Well... well, certainly the priority statute does not because the priority statute doesn't--
Justice Kennedy: No. I meant the State workmen's comp law.
Mr. Strain: --The State workers'... workers' comp law.
Your Honor, I... I don't know the answer.
I know that the State laws... I know that the State laws vary, and we have 10 different workers' comp laws that allude to or mention workers' comp insurance policies present just in this case.
So it may be that those statutes might provide some of the basis for an explanation, but I simply don't know the answer to that.
I did want to--
Justice Breyer: If you have an employer who says, I promise to give $200 a month per worker to a fund, which money will go to pay their health costs when they're sick, that's plainly covered.
Mr. Strain: --Yes, it is, Your Honor.
Justice Breyer: And now suppose it's exactly the same, but instead of his paying $200 a month, he pays $200 to an insurance company in return for a promise that they'll pay precisely the same amount to the employee if he gets sick.
In your view, that's not covered.
Mr. Strain: In our view... in our view, Your Honor... I... if... if I may, I think that the hypothetical you pose is not quite our case.
Justice Breyer: Of course.
It's not meant to be.
Mr. Strain: It... it--
Justice Breyer: I want to know how you are going to answer my hypothetical.
Mr. Strain: --Your Honor, I... I think the... the focus of the answer should be on whether it is an employee benefit or not.
Justice Breyer: I'm not... I'm asking you--
Mr. Strain: Yes.
Justice Breyer: --to answer my hypothetical please.
If in fact... you didn't want me to repeat it?
Mr. Strain: No, no.
Justice Breyer: Then what is the answer?
Mr. Strain: --I understand it, Your Honor.
Justice Breyer: In your view, is my hypothetical covered or not?
Mr. Strain: I... I think it is not, Your Honor.
Justice Breyer: It is not.
Mr. Strain: I think--
Justice Breyer: And therefore, if we accept your interpretation, then all those employers who, instead of contributing directly to health funds, instead buy insurance policies to do the same thing, will discover they do not have the advantage of the fifth priority.
Mr. Strain: --All right.
And now I see... now I see, Justice Breyer, I did misunderstand... misunderstand the facts.
Those facts clearly are covered.
They're... they're covered under--
Justice Breyer: Now, if they are covered... if they are covered, as I thought, then what is the difference whether the employer buys a policy whereby the insurance companies pays for their health benefit when they're sick or pays for their accident benefit when they have an accident at work?
Mr. Strain: --Your Honor, I think the difference are... are several.
Number one is what the employer is doing here is insuring itself against a claim that would otherwise be against the insurer.
That was not in your hypothetical, Your Honor.
That makes what we have here a policy for an employer benefit.
It is not an employee benefit.
Now, the... the employer is the insured.
Justice Scalia: The... the correlative hypothetical would be a plan such as Justice Breyer describes in which the employer has contracted to pay his employees $200 a month for when they're sick, and that's a contractual obligation of his, and then he buys insurance to cover that contractual obligation.
Mr. Strain: And--
Justice Scalia: You say that would be this case.
Mr. Strain: --That would be this case, Your Honor.
Justice Scalia: And you say that wouldn't be covered.
Mr. Strain: And that would not be covered, and that would not be covered in great part because it is an employer benefit, employer choice, employer benefit.
And what we have in this case--
Justice Breyer: Well, that's... that's a better way to put it.
If... if that's right, then what you're saying, as I understand it, is in those cases where an employer goes to an insurance company, they give a contractual promise to pay the employee when he gets sick in return for a premium by the employer... and it's a health benefit or a vacation benefit, the most typical thing... you're saying all those... all those... there's no fifth priority.
They don't... can't take advantage of that.
Mr. Strain: --No.
Your Honor, what... what I'm saying is and what we have here, if what you're describing, if I understand it correctly, is a normal fringe benefit.
That is, an employer agrees to take out a... to contribute to a pension fund for the benefit of the employees.
That is clearly covered.
That was the kind of thing dealt with in Embassy Restaurant and the Joint Industries Board that (a)(4) was intended to supplant or overrule.
Justice Ginsburg: And why did--
Chief Justice Roberts: And that's clearly covered.
Justice Ginsburg: --why did you answer Justice Scalia's question as you did?
That is also an employee benefit, that is, vacation, sickness.
Mr. Strain: Your Honor, I answered that because, as Justice Scalia changed the hypothetical, it was not an employee benefit.
It was the employer insuring itself, buying an annuity or, like we have here, insuring itself, so it... so it could make the payments.
What we have here, Your Honor, is a situation where, as is admitted in the record, the employees don't benefit at all.
As Zurich has admitted in this record at page 17, the employees are in the same position whether there is insurance or no insurance.
In fact, the irony here is that if Zurich prevails, not only do the employees not benefit, they are harmed because there are in the (a)(4)... the (a)(4) priority claimants are a total of 1.6 million, including the 400,000 of Zurich.
All the others are health and welfare funds such as Justice Breyer was... was posing.
Zurich is not.
But what happens... and there's not enough money to pay everyone.
What happens is if the Zurich Insurance Company receivable gets an equal priority with the health and welfare funds, then there is a dilution of the money going for the employees' health and welfare and pension, a 25 percent, in this case, dilution of that money because the employer chose to insure itself for its liability, potential liability, to the employees.
The employer benefitted from that insurance.
In some States, it would be required to have the insurance.
In most States, it has the option of having insurance or not.
Justice Alito: Would the same thing happen under multi employer plans?
Would not the employees typically receive the benefits even if their employer did not make the contributions that it was required to make?
Mr. Strain: It would... they would typically... in a multi employer plan, as many of our priority claimants are here, because the money is spread, the employees still get some money.
But if we consider the greater whole, the money, the available res, the available pot, to play those... pay those employees is diminished.
Justice Ginsburg: I thought there's also, isn't there, the Pension Benefit... even if there's no money in the till for the plan, isn't there a Government fund so that the worker would receive the benefit in any event if... I don't see the distinction that you're making based on whether the worker would get a benefit whether or not the employer made the contribution.
Mr. Strain: --Well, Your Honor, there certainly is... there certainly are... in most States at least, there certainly are funds that step in if a workers' comp insurer or an employer does not make... is not available to pay an award to a workers' comp injured... a worker who was injured on the job.
On the other... on the other hand, Your Honor, whether such funds exist to step in and supplant the payments not made to... in the ordinary health and welfare and pension context, I think not, Your Honor.
Justice Kennedy: Well, I recognize there are different schemes.
The only one I'm familiar with is my former State.
But did I understand from your answer that in some or many of these States, the employer is free not to have insurance?
He can be self funded?
Mr. Strain: Yes.
Yes, that's correct, Your Honor, in... in--
Justice Kennedy: And is there any requirement that there be an actual fund in place or is it just a general liability?
Mr. Strain: --Well, there is... there is... it is a... a traditional self insurance with the overlay.
That is, there... there must... there must be a showing of the wherewithal, but with the additional overlay, in all or virtually every State which permits this, of the requirement of a bond.
Justice Kennedy: A bond.
Mr. Strain: --which is an interesting point because if Zurich prevails, we have the... the camel's nose is under the tent because in all the self insurance contexts, the bond issuer will have an equivalent claim to Zurich.
Under their broad reasoning or broad interpretation of the statute that should be considered narrowly... under the broad interpretation they want, that camel's nose would be under the tent, and the bond issuer would have an equivalent claim to Zurich on its policy.
To extend that a little further, what Zurich did here... was an insurance company... it required letters of credit of Howard Delivery, the debtor, to issue its policies.
It drew down those letters of credit $1.1 million.
F&M Bank, the letter of credit issuer, of course sought security from the debtor, but not enough.
As is commonly the situation once the liquidation is finished, there wasn't enough security.
So F&M, which had facilitated Zurich's workers' compensation insurance by its letters... letters of credit, would have an equivalent claim to Zurich as well.
So more and more of the camel is going under the tent.
This is a very broad interpretation with major implications that they seek and it is completely inappropriate under the bedrock principles of approaches to priorities under bankruptcy law.
Justice Kennedy: Well, if there were letters of credit, why is Zurich injured?
Because the letters of credit were not large enough to cover the premium liability?
Mr. Strain: They... they were not, Your Honor.
They were not.
Justice Ginsburg: Mr. Strain--
--Mr. Strain, you... you mentioned--
--in... in your brief, you seem to put considerable stress on something that I haven't heard you say one word about so far, and that is that these... workers' compensation is State mandated.
They're not negotiated or even employer determined benefits.
They are whatever the law prescribes.
And you haven't... haven't mentioned that, so I'm wondering where that fits into your picture.
Mr. Strain: It... I haven't mentioned it.
I'll take this opportunity to mention it, Justice Ginsburg, because it is a very important point.
We know that in the statute... (a)(4) we're talking about... section (a)(3)... these are numberings before 2005 amendment to the act.
The language stayed the same.
The numbers were... are different.
But there are two that work together.
The (a)(3) priority for wages for the employees and the--
Justice Scalia: Where does (a)(3) appear?
There... there was that discussion in your brief, and I'm darned if I could find (a)(3).
Mr. Strain: --Section (a)(3), Your Honor.
I'll refer you, if I may, to the brief of amicus at page 11, and that's why I mentioned, Your Honor, that there is a new numbering because the numbering in the amicus brief is using the 2005 numbering in the revised statute.
And what is listed there as (a)(4) is the wages priority, and at the next page, (a)(5) is the priority that we're talking about as... as (a)(4).
Justice Scalia: Well, it would have been nice to have it in your brief--
Mr. Strain: I agree.
Justice Scalia: --and numbered... numbered 3 instead of 4.
That would have helped a lot.
Mr. Strain: I... I certainly recognize that, Your Honor.
The... the provision of (a)(3) and (a)(4)... they work in tandem to protect the workers.
They share a cap.
The more a worker benefits from a wage priority, the less the worker benefits from the... from the employee benefit plan priority.
And so they work together; they work in tandem, which gives meaning to (a)(4) under many of the canons of construction that... that we're familiar with.
It would not work... it's an anomaly that an insurance company receivable would share the cap with the wages priority.
That is simply an anomaly.
And when we look to the legislative history, it is absolutely clear, Your Honor, that the fact of the judicial... the statutory mandate for workers' compensation insurance is very important because what is spoken about, as Judge Niemeyer pointed out in his dissent below... what is spoken about in the legislative history over and over again is a wage substitute or a wage surrogate that employers do not give... will lower the wages but provide fringe benefits.
So the package remains the same.
Now, that's not a workers' compensation insurance policy, but that is the wage surrogates that the Congress was looking at.
Justice Souter: Let... let me, if I may, ask you about other possible wage surrogates because what you're saying now seems to me to mesh with the argument, another legislative history argument, to the effect that the... the current provision was meant to overrule two prior cases of this Court.
And the... the question I have turns on the fact that the... the language is broader than what would merely have been necessary to overrule those cases.
So my question is if the broader language does not cover the premiums that we're concerned with here, what other items dealing with... with wage substitutes would it pick up, would it include?
Mr. Strain: Well, Your Honor, I... I would answer from... in part from the legislative history.
Some of the things discussed were joint apprentices and training programs, by way of example, as new forms of fringe benefits that some of the witnesses wished to see to ensure would be covered.
I think that sort of thing could be covered under... under this language as well.
We know from the legislative history... we know from the legislative history that there was absolutely no intention to incorporate the definition of ERISA, and we know from this Court's teaching in the decision in United States v. C&F Fabrication just 10 years ago that it is absolutely inappropriate to incorporate into the bankruptcy statute an ERISA definition where Congress does not provide.
That's an absolute square holding of this Court that exactly should lead to rejection of the effort by Zurich to incorporate... to ask the Court to engraft onto this statute a... a definition from another statute.
If there are no questions at... additional questions at this time, I would like to reserve my remaining time.
Argument of Donald B. Verrilli, Jr.
Chief Justice Roberts: Thank you, Mr. Strain.
Mr. Verrilli Jr.: Thank you, Mr. Chief Justice, and may it please the Court--
I think it's important to focus at the outset on exactly what a workers' compensation plan provides.
A workers' compensation plan provides health insurance that pays for the medical costs of a workplace accident, disability insurance--
Justice Scalia: You're begging the question by calling it a plan.
I mean, that... that's... that's one of the issues here.
Why don't you tell us what workmen's compensation laws require?
Mr. Verrilli Jr.: --Well, I'd be happy to go right to the question of whether it's a plan, Justice Scalia, because I think it's indisputably a plan under this... under the dictionary definition, ordinary meaning of plan, this Court's interpretation of it in Pegram, under ERISA, under the Department of Labor's interpretation of it, and under plain common sense.
A plan is an arrangement or program or scheme, as Pegram said, to... established by an employer or an employee organization to secure the provision of benefits to an employee through insurance or otherwise.
Justice Ginsburg: Mr. Verrilli, there's no employer or employee, for that matter, who's doing the planning.
The planning is all done by the Government--
Mr. Verrilli Jr.: See, I... I--
Justice Ginsburg: --because what's covered is prescribed by law.
Mr. Verrilli Jr.: --I think there is a plan for this reason, Justice Ginsburg.
The... what the law prescribes is that which the employer must provide to the employees.
But it's not a self executing law.
The... the employer has got to make arrangements to ensure that the benefits are provided, and under the laws of the vast majority of the States, the employer has options for doing that.
The employer can contract with an insurance company to do it.
The employer can self insure to do it.
And by the way, Justice Kennedy, there are quite stringent requirements for fiscal solvency and there is a surety bond that needs to be posted in order to... in order to self insure.
Justice Ginsburg: But the it is not negotiable.
We think of a health plan, a retirement plan.
That doesn't have to be any set coverage.
It's negotiated or the employer, if it's not a collective bargaining situation, determines what the benefits will be.
Here, the law determines what the benefits will be.
Mr. Verrilli Jr.: I agree that that aspect of the arrangement is not negotiated, but there is nonetheless an arrangement that secures and guarantees the provisions of the benefits, and that's the plan.
There are steps that the employer has to take to secure the provision of the benefits, here through the purchase of insurance, and that is the plan.
The plan is the arrangement to secure the provision of benefits.
Certainly they are--
Chief Justice Roberts: So that if an employer decides to... because his employees have had a good year, he's going to put in a new parking lot for them... he... his plan is to have a contact with a paving company to pave the parking lot.
Are the payments under that contract contributions to an employee benefit plan?
Mr. Verrilli Jr.: --I don't think the answer to that question is yes, Mr. Chief Justice.
I think the answer is no.
I mean, I suppose you could say that those are... that's a benefit provided to employees, but--
Chief Justice Roberts: It seems like the consequence of your theory though--
Mr. Verrilli Jr.: --I don't think so.
I think there's a limiting principle here and I think the limiting principle is to look to ERISA.
ERISA has a set of... it defines what employee benefits are for ERISA purposes, and it's not... and it's not these benefits and similar things.
It's an exhaustive list of benefits.
The parking lot isn't on the list.
Similarly, a break room wouldn't be on the list.
None of those things are on the list, and therefore, I think by reference to ERISA, one can relatively easily exclude those--
Chief Justice Roberts: --But... but providing for workers' compensation through insurance, rather than through self insurance, is also not on the list.
Mr. Verrilli Jr.: --Well, I think both of them are on the list actually, Mr. Chief Justice, because both of those are programs or arrangements to secure the provision of benefits, and one is through insurance and the other through self... insurance.
So I think they're plans in both instances.
Justice Scalia: What's your answer to the 180 days' question I answered... I asked?
You know, the provision provides contributions.
It doesn't say just contributions to an employee benefit plan.
It says contributions to an employee benefit plan arising from services rendered, and then it goes on to say, but... but the services have to be within the last 180 days.
Mr. Verrilli Jr.: Right.
Justice Scalia: How do you square that with... with the purchase of block insurance like this?
Mr. Verrilli Jr.: Well, because the amounts that Zurich is seeking in premiums are the amounts that were due for providing coverage during the 180 days before Howard ceased operations, and the reason that arises from... it seems to me there are two ways in which that could arise from services rendered.
It can arise from services rendered to the employees in the following sense.
Howard has the obligation to provide those benefits by virtue of the fact that the employees are working for it during that period of time.
That's what Judge King said in his opinion in the Fourth Circuit, and that seems to me exactly right.
Alternatively... alternatively, as other courts have suggested, the... the services rendered--
Justice Scalia: But each of those insurance premiums that's paid by the employer doesn't just cover workers who worked for the last 180 days.
Each premium is divided among all the workers who've been working there for years.
Some of the premiums are going to go to... to allow the insurance company to pay in the future people who have been there for 20 years.
Mr. Verrilli Jr.: --Well--
Justice Scalia: I mean, it just seems to me it's a square peg in a round hole.
I... I don't see how you make sense out of that 180--
Mr. Verrilli Jr.: --I appreciate that, Justice Scalia, but I do think the... the obligation on the part of the employer to keep paying that premiums during that period arises from the fact that the employees are continuing to work during that period.
And what the... and what the insurance company is seeking to recover is merely the cost of providing the insurance during that period of 180 days which arises--
Justice Souter: If... if they don't pay the premium with respect to the 180 days, if there's an accident during the 180 days, the insurance doesn't cover the accident.
Mr. Verrilli Jr.: --That's an important point, Justice Souter, and I would like to focus on that and I... I hope correct something that the petitioners said.
With respect... it all depends on when the insurance policy cancels.
If there's nonpayment of premiums, then the insurance company has the right to cancel the policy, and there has... there's a notice provision, 10 days in some jurisdictions, up to 30 days in others.
But they have a right to cancel the policy.
If an injury occurs before cancellation, that injury is covered and it's covered for all time, even if the policy subsequently cancels.
But the key thing here, I think, the critical point is that without the priority, the... the insurance company is going to look at the situation and say, we have very little prospect of recovering if this company actually goes down the tubes and into bankruptcy as a general unsecured creditor.
Therefore, we need to get out of this situation fast.
And they... at that point, they're going to cancel the policy.
There's going to be much more of a hair trigger sense of the need to cancel policies.
When they cancel policies, the immediate consequence, of course, is that the... that the employees are no longer covered.
And then, the... it seems to me, the secondary consequence, which is also quite important--
Justice Scalia: --You really think that... that they cut it that fine?
They say, oh, yes, this guy is going to go into bankruptcy.
We're pretty sure about that, but don't worry.
We'll have priority.
Mr. Verrilli Jr.: --It's absolutely--
Justice Scalia: I think as soon as they smell bankruptcy, they're going to pull the plug anyway.
Mr. Verrilli Jr.: --That... I... I disagree with that, Justice Scalia.
I think in... in the real common practice here, the amount that they can recover and the amount that they think they have a prospect of recovering is a very important determinant in their decision on whether to hang in and how long to hang in until they get to the Chapter 11 process where the debtor can then husband its assets and can pay the workers' compensation premiums as an administrative claim.
So I think it's a... it's a significant determinant.
Without the priority, there's going to be a hair trigger, which means coverage is terminated sooner, and it's going to mean for many employers that they're going to have to go out of business because you can't operate without--
Justice Breyer: There... there are two parts in my mind to this.
The question is what is the difference between a workmen's... worker compensation and health benefits.
I agree with you, so far tentatively, that that difference can't lie in the nature of the contract providing the benefit.
Now, I know they'll want to argue the contrary, but put that to the side.
If it doesn't depend on that, it depends on the difference between workers' compensation and health benefits.
And you want to say there isn't enough of a difference there, though they argued the mandate makes a difference.
Of course, you could mandate health benefits too, and I don't think that would matter.
But if you're right, what about a... a long term contract for bottled water for the workers?
Mr. Verrilli Jr.: --I think my answer would be the same as to the Chief Justice that in some sense, I suppose you could say it's an employee benefit; in some sense, I suppose you could say that there's a contract to provide it.
But I think you can set the outer bounds here by reference to the employee benefits that ERISA defined as employee benefits.
But in any event--
Justice Breyer: Well, actually... this is... to me anyway, this is an important point because at some point you have to draw the line between the things of a kind that workers might bargain for and things not.
Now, if that's where we're getting there, the history of workers' compensation may cut the other way.
Mr. Verrilli Jr.: --Well, I don't... I don't think so, Justice Breyer--
Justice Breyer: Because?
What's... what's the principle I'm going to use?
Mr. Verrilli Jr.: --Well, first, if I can make a prefatory point, that the bottled water example doesn't distinguish the petitioners' position from our position.
The petitioners' position is that if it's a... if it's a negotiated for, bargained for benefit, it's in.
So I don't think that's a... it provides a limiting principle.
And it seems to me, wherever the line is--
Chief Justice Roberts: Well, sure, if they have a contract, as part of their... part of their contract, they get the bottled water, that's... that's easy to see why that's covered.
But the... the question is when it's not.
It's just something that the employer does in the course of his business that has... that benefits both his business and his workers.
Mr. Verrilli Jr.: --Right, but--
Justice Scalia: It has to be arising from services rendered.
I mean, it... it really has to be part of the contract with the employer--
Mr. Verrilli Jr.: --Well, I... I don't think that's right.
For example, in the... in the case of most voluntarily provided health insurance, the vast majority of employees in this country... it's not bargained for.
It's something an employer provides unilaterally--
Justice Ginsburg: But there's one feature of this that is... does make it different, at least one, and that is this is a benefit to the employer in the way that the others are not.
The employer... there's a tradeoff in workers' compensation.
It's not just I'm going to pay benefits when the person is injured, but I'm going to get off the hook for the tort liability that I might otherwise have.
And in the other cases of the other benefits, there is no... no such tradeoff.
Mr. Verrilli Jr.: --Well, the fact that there may be a benefit to the employer doesn't make it any less of an employee benefit.
The question is whether there is a plan that provides employee benefits, and the insurance coverage provided by workers' compensation are clearly employee benefits.
I also... and... and, of course, the with... with respect to that tradeoff, that's... that tradeoff is an employee benefit too, Justice Ginsburg, because the... the employee has no fault liability, gets paid promptly rather than have to sue and wait years, doesn't lose his or her job as a result of the injury or as a result of bringing the lawsuit.
So I don't think you can make the judgment that it's not an employee benefit plan on the basis of that fact.
And of course, voluntarily provided benefits also benefit the employer by making it a more attractive place to work and... and--
Justice Stevens: May I ask this question, Mr. Verrilli?
Mr. Verrilli Jr.: --better morale.
Justice Stevens: Can I... can I ask you... it goes back to the first point your opponent made.
What is the purpose of granting the priority?
It seems to me the purpose of the priority is to increase the likelihood that the wage claims will be paid.
And if you... if you win, it won't affect it one way or another, as you acknowledge in your brief.
But it seems to me the priority should serve the purpose of increasing the likelihood that the benefits would actually flow to the employee benefit plan.
Mr. Verrilli Jr.: I think there are four things I'd like to say in response to that, Justice Stevens.
First, there isn't a textual hook for... for that being a determinant, and it... and it--
Justice Stevens: Well, it talks about contributions to an employee benefit plan which one would not normally think of as paying insurance premiums.
Mr. Verrilli Jr.: --And the second think... well, I think to the contrary, Justice Stevens.
I think in the overwhelming majority of instances, the contributions employers make to employee benefit plans is the payment of insurance premiums to secure the benefits.
Collectively bargained benefits provided by union trusts are a small minority of the benefits that are provided to workers in this country.
But... but going back to the specific question, of course, as Justice Alito's question earlier suggested, in a multi employer pension plan situation, the plan is obligated by law to provide all vested pension benefits whether or not the employee's employer has defaulted on its payments into the fund.
So it's in exactly the same position as the insurance company is with respect to that set of benefits, and therefore, the argument doesn't draw a distinction between the two.
Justice Scalia: --Mr. Verrilli, what... what is your response to Mr. Strain's assertion that if you get a priority, so should the secondary insurer, that is, the... the bank that gave letters of credit?
They're just insuring... that... that's part of the plan too.
They couldn't have gotten the insurance from you unless they got the letters of... of credit from the bank, which is a kind of secondary insurance.
And also in the case of self insurance, which is something of a plan... I... I guess you'd call it a plan... what about the... the person who puts up the bond?
That person is a kind of insurer, just as you are.
Do all of these people now... now get bumped up to the head of the line?
Mr. Verrilli Jr.: The answer is no.
The statute expressly covers this.
The last provision of section 507 says no subrogation, and those would be subrogation situations.
So the statute just expressly covers it.
They aren't... they don't get bumped in the line, period.
I don't think there's any dispute about that.
If I could, though, return to a... a point that--
Justice Scalia: Where... where does that appear?
Mr. Verrilli Jr.: --I'm sorry.
I can't direct you to where it is--
Justice Scalia: Yes, because it's not in the briefs--
Mr. Verrilli Jr.: --I'm sorry, Justice Scalia.
Justice Scalia: --just... just as the contract isn't before us.
Mr. Verrilli Jr.: It should be in the briefs.
It's not, but that is what the last section of 507 says, that those who are subrogated to the rights of someone with a priority don't get the priority.
So that's just taken care of by the statute.
Justice Stevens: But if the payment of the premiums doesn't increase the likelihood that the employees will get the benefits, why should you get priority?
Mr. Verrilli Jr.: It does increase the likelihood, and it goes back to the example I was... I was discussing with Justice Souter earlier.
And... and what... it will not affect employees who are injured before cancellation, but it will accelerate cancellation.
And as a result of accelerating cancellation, employers who are injured after cancellation will not get the benefits.
And so it will--
Justice Kennedy: What... what about the... the example we discussed, payment of a bond premium if you're self insured?
Mr. Verrilli Jr.: --No.
I think that... I think, again, that last section of 507 takes care of that.
Justice Scalia: How do we know what you've just told us?
Is that in the record?
You're just assuring us what the content of the insurance contract is.
But we don't have the insurance contract.
Mr. Verrilli Jr.: The insurance contract is not in the record.
That's right, but the--
Justice Scalia: So we... we have your assurance that that's what happens here.
Mr. Verrilli Jr.: --As a systematic matter... it seems to me as a systematic matter, this is what insurance companies will do.
I don't think that's dependent actually, Justice Scalia, on... on the particular terms of this contract.
I'm saying as a systematic matter insurance companies--
Justice Scalia: Well, it has to be that way?
I could write a contract differently.
Mr. Verrilli Jr.: --Well... well, sure, but the contracts comply with State law.
State law sets notice period for cancellation, 10 days minimum, up to 30 days.
We've cited those in our briefs.
And so in most States and in many States here, within as few as 10 days after nonpayment, you can cancel.
Justice Scalia: That's a--
Justice Ginsburg: Mr. Verrilli, before--
Justice Kennedy: But I was... can... can I... I still don't quite understand the answer to the bond premium question.
Mr. Verrilli Jr.: Well, that... there would be no priority there because that would be... that would be a subrogated claim, and the last section of section of... the last provision of section 507 says if you're subrogated to a--
Justice Kennedy: No.
No, it wouldn't be subrogated.
The bond premium... the bonding company says we're entitled to priority.
Mr. Verrilli Jr.: --Well, I don't think--
Justice Kennedy: And it files the claim directly with the bankruptcy.
Mr. Verrilli Jr.: --I don't think that would be a claim for contribution to the plan, Your Honor, in the same sense that we're talking about here.
The... if I... if I could--
Chief Justice Roberts: You couldn't have the plan without the bond, just as here you wouldn't have a plan without the insurance policy.
It's just a different way of paying for the same thing.
Mr. Verrilli Jr.: --Well, I'm... I think there's an order of... there's another order of degree of removal, and it would make it a harder question, I suppose, as to whether there would be a... whether there would be a claim for priority in that context.
But I think, if I could, Mr. Chief Justice, I'd like to return to the question of narrow construction where we started the argument.
Justice Ginsburg: --May I detract you just for a moment?
On... on a question of the statutory history, correct me if I'm wrong, but originally, 1934, the kind of claim that you have would be a seventh priority claim.
And then in '38, Congress said no priority at all covering workers' compensation.
And then when Congress restored a priority, it ratcheted it up to four or five, depending upon which version of the statute we use.
Is there any explanation why, when Congress originally assigned first a very low priority and then no priority, suddenly it gets up to be on a par with the fringe benefits?
Mr. Verrilli Jr.: Yes.
I think there are two significant points there, Justice Ginsburg, in terms of the history.
First, in 1934 what Congress said was that workers' compensation could be a provable claim.
It then said it's... it gets the... the seventh priority, but the seventh priority was not a priority specific to workers' compensation.
It was a priority that's... it was a provision that said you get a priority if State law provides the priority.
In 1938, what Congress did was wipe out that provision for all State law granted priorities, not for workers' comp in specific.
So it doesn't seem to me it was a specific judgment about workers' comp and its place in the priority system.
And, of course, you didn't have the well developed system of employee benefit plans in the 1930's that you have now.
And what Congress did, when it enacted this provision in 1978, following closely after ERISA, was to use language which is identical to ERISA in providing a priority for employee benefit plans which, as ERISA on its face, I think, makes clear, would encompass workers' compensation plans.
Chief Justice Roberts: Mr. Verrilli, your... your friend's argument about the interrelation between (a)(3) and (a)(4) seems like a compelling one.
What is your answer to that?
Mr. Verrilli Jr.: I think the complete explanation for the relationship between (a)(3) and (a)(4) was that Congress was trying to expand the scope of the priority here without doing damage either to the wage priority above it, which... and... and there would have been damage to the wage priority above it if wages were simply redefined to include the broader set of employee benefits... or to the priorities below.
Congress just took the aggregate amount.
It seems to me just an elegant solution that protects the wage priority above, creates a new priority, and doesn't disadvantage any of the... any of the priority holders below.
And I really do think that's the complete explanation for the relationship between the two.
You really can't infer anything more than that.
But if I could just address the so called rule of narrow construction.
Certainly there is a sentence or two in Nathanson and Embassy Restaurant, but those were such clear cases of statutory construction that... that the rule of narrow construction, I submit, played no role there.
In many, many more cases in which this Court has interpreted the priority provisions of the act and the code, the Court has not mentioned this idea that there's a rule of narrow construction or that the principle of equality of distribution to creditors should trump everything else.
We've cited four in our brief, Lewis, Shropshire, Ricketts, and SBA v. McClellan, which by the way, expressly cut back on Nathanson.
But there are many more cases.
There's a whole line of tax priority cases culminating in the Reorganized CF&I Fabricators decision in which the courts adjudicated the question of... of the scope of the tax priority.
Most of the time, they find priority.
Occasionally they find no priority.
But in none of those cases is this so called rule of construction ever mentioned or the supposed primacy of the rule of equality of... of the principle of equality of distribution ever mentioned.
Chief Justice Roberts: Counsel, much of your case hinges on the assumption that Congress incorporated the ERISA definition into the bankruptcy code.
What... what is your strongest evidence for that?
Mr. Verrilli Jr.: Well, I think the fact that the phrase is identical to the phrase that appears in ERISA, employee benefit plan, is significant.
ERISA was one of the most substantial legislative accomplishments of that decade of the 1970's.
And so I think the mere fact that the exact same language appears in both places, importantly, however, with... without the limiting qualification in section 507(a)(4) that exists in ERISA itself with respect to workers' compensation plans.
I also think that if the Court does look at the legislative history, what... what one learns from the legislative history is that when the bill was originally introduced to... to create this priority, it created a priority for... proposed to create a priority for pensions, insurance, and similar employee benefit plans.
The union representatives came in to Congress and said that's too narrow.
We need something significantly broader to ensure that the full range of employee benefits is protected and granted this priority.
What the union representatives all urged Congress to do was to adopt the ERISA definition wholesale.
Now, we don't have anything in the... in the House or Senate report saying that's what we did.
In other words, we intended to adopted ERISA wholesale, but we do know that is what, in fact, they did.
They used exactly the language from ERISA and they moved it into the priority in section 507.
Justice Stevens: To follow up on the earlier question of the Chief Justice, by whom do you understand the services have to be rendered within the meaning of the act?
Mr. Verrilli Jr.: Well, I think that the... I think that the statute could be read--
Justice Stevens: Does it refer to the... the bankrupt's employees or your employees?
Mr. Verrilli Jr.: --It could be the... it could be either, it seems to me, Justice Stevens.
Justice Stevens: You think it could be either.
Mr. Verrilli Jr.: And I... but I don't think it matters in this case because you get to the same answer either way.
If it's the services rendered of the employees, the... the claim is for contributions to... for the cost of providing insurance to those employees during the 180 days.
If it's the services rendered... the provision of services during the 180 days--
Justice Scalia: --But it's not just to those.
It's to a lot of other people.
I mean, that's--
Mr. Verrilli Jr.: --But it... but it arises from.
The... had... I think it arises from in this sense, Justice Scalia.
Had Howard shut down on a certain day and didn't have employees anymore, it wouldn't have any continuing obligation to or need to pay workers' compensation premiums because there would be no workers to cover.
And so it arises from--
Justice Scalia: --Well, except the workers who had already been injured in the past--
Mr. Verrilli Jr.: --Right, but you don't need--
Justice Scalia: --and... and whom you continue to pay.
Mr. Verrilli Jr.: --But... yes.
But not... but... but we... let's see.
I think that maybe this will clear up the confusion.
We continue to pay for them even after the policy is over--
Justice Scalia: Right.
Mr. Verrilli Jr.: --and... but... and so--
Justice Scalia: And I assume that each of your premiums takes into account the fact that you're not only going to be paying for people, you know, who were injured between the last premium and now, but that you're also going to be paying for people who were injured a long time ago.
Mr. Verrilli Jr.: --Well, depending on the kind of policy, that may be true to some extent.
Sometimes policies are loss sensitive policies in which the amounts owed are calculated very carefully with respect to the amounts actually of loss incurred during the period.
That is, in fact, the case here.
If you have an understanding of insurance, you can infer that from the charts that are included in the joint appendix, although I acknowledge it's very difficult to do so.
So I do think... I do think on any common sense understanding of the... of the phrase, arising from, which is a capacious phrase, it really does arise from.
But in terms of... I think, Justice Stevens, with respect to your question, to get to the same answer, in terms of calculating the amount of the claim, whichever one you pick here, there's actually a division of authority in the lower courts.
There's a Fourth Circuit opinion by Judge Luttig, saying it's services rendered by the insurance company.
Other courts say services rendered the employees.
Since it doesn't make a difference in this case, I would respectfully suggest probably it ought not to be decided in this case because you get to the same place either way.
I do... I do think that it's important also... I'm sorry.
If I may just go back to the narrow construction rule.
The... the point of this idea of primacy of equality of distribution.
Equality of distribution is an important policy under the bankruptcy code, but it's only one important policy under the bankruptcy code.
Rehabilitation of the debtor is an important policy under the code.
The maximizing the value of the estate is an important policy under the code, and specific code provisions advance other specific policies as well.
So in any given case, as here, all of those copolicies aren't going to align and point in the same direction.
Sometimes they're going to be at cross purposes.
And what... what the Court said in Union Bank, in I think a closely analogous context interpreting the ordinary course exemption from... from the preference rule, was that we don't put a thumb on the scale either way here.
We don't assume that one of these policies is more important than the other.
What we assume is that Congress struck the balance between the potentially competing policies, that the balance is reflected in the text of the statute that Congress enacted, and that we should interpret the text as it's written without... without a presumption in either direction.
I really think Union Bank is highly instructive on that, and it's just... it's just right and plain common sense.
And that's why I think in the vast majority of cases, there is no rule of narrow construction.
Justice Ginsburg: What is... what is unemployment compensation?
Those two I think of as those are law mandated coverage that every employer must have, workers' comp and unemployment.
If there was unemployment, is that a plan too?
Mr. Verrilli Jr.: No, because the employer doesn't have the obligation to provide unemployment compensation.
That's a State run system in which the State has the obligation to provide the benefit, and the State does in fact provide the benefit.
It's usually funded through a tax.
The key difference is this is an employer obligation to provide these benefits, and I think that's why this is an employee benefit plan.
The employer is obligated to provide it to employees by virtue of the fact that the employees are working for the employer.
Not true about unemployment compensation.
In conclusion, if I could just focus on the... the point that it really is the case that enforcing this priority, as it is written, will advance the purposes for which Congress included it in the code.
It will protect the interests of workers, millions of whom have no employee benefit plan other than workers' compensation, because it will increase the prospects that that money is there to pay workers' compensation claims.
It will also advance the code's purpose of better rehabilitation because it will give insurance companies a reason not to pull the hair trigger, to hang in there with these companies, and to allow them to have a chance rehabilitate rather than forcing them into liquidation by canceling coverage which the law allows.
Rebuttal of Paul Farrell Strain
Chief Justice Roberts: Thank you, Mr. Verrilli.
Mr. Strain, you have 4 minutes remaining.
Mr. Strain: Thank you, Mr. Chief Justice.
This Court 10 years ago in United States v. Reorganized CF&I provided that... I suggest, that the engrafting of the ERISA definition into this bankruptcy statute was improper.
Almost word for word what we're asking the Court to find about this engrafting of the ERISA definition into the statute is dealt with in plain language in this Supreme Court decision.
It is simply improper to do that, and yet, that is the answer given by Zurich to the many probing hypotheticals about parking lots and bottled water and the rest.
Justice Breyer: Well, they're doing that to get a standard.
Mr. Strain: I'm sorry, Your Honor?
Justice Breyer: And I'd like to know what your... they're trying to use that as a basis for separating the bottled water from the workmen's comp from the health benefit.
And they're saying here's an example of where Congress put the workers' comp on the same side as the health benefit.
Now, that's their approach.
What's your approach to the standard?
What rule or system would you use from deciding which insured for or paid for benefits count as the plan and which ones don't?
Mr. Strain: What we look to, Justice Breyer, first of all, is whether it is a true wage substitute rather than a policy to take care of a nonnegotiable statutory requirement that's--
Justice Breyer: So if, in fact... if, in fact, the State legislature mandates certain health benefits, then the plan that provides those benefits would no longer qualify.
Mr. Strain: --That would be one significant factor to consider, Your Honor.
There are certainly others, but that would be one significant factor to consider.
That is true.
And I... I suggest to the Court that when we look to the legislative history, as the questions were asked about the legislative history, it is the void of any reference to the commission that recommended the law, the House report or the Senate report, or even one stray Congressperson suggesting that workers' comp insurance policies should get a priority.
The industry didn't even put up a representative to make that suggestion at a hearing.
It is devoid of any support for putting this nose under the tent in the way they suggest, and it truly is a broadening.
It is not subrogation.
The bondholder would not have a subrogated claim.
F&M Bank would not have a subrogated claim.
They would have a claim, a direct claim, just as Zurich does here.
And I think that the issue we come back to... and I'm glad my brother ended with that as well because that's where we began.
The issue is what is the Court's proper approach to this attempt to enlarge the priority under subsection (a)(4).
It is not correct that this Court departs from the idea that priorities are a deviation from the bedrock principle of equality of... equality of distribution.
That remains good law, cited by this Court a number of times.
The cases they purportedly cite to the contrary were plain language cases, were Embassy Restaurant and Joint Industries Board.
This Court didn't even feel necessary to cite that principle because of the... because of the plain language.
Where is the plain language establishing clearly, as this Court requires, that this is a plan?
Where is the plain language establishing clearly that this is an employee benefit?
The insurance policy.
That's what we're talking about.
Not the workers' compensation statute.
The insurance policy may benefit the employer.
The statute may benefit the employee.
But we are talking about contributions to an employee benefit plan.
Zurich's insurance policy is neither.
Unless there are further questions, Mr. Chief Justice, that concludes my argument.
Chief Justice Roberts: Thank you, Mr. Strain.
Mr. Strain: Thank you.
Chief Justice Roberts: The case is submitted.
Argument of Justice Ginsburg
Mr. Verrilli Jr.: The first case is Howard Delivery Service against Zurich American Insurance Company, No. 06-128.
The Bankruptcy Code, Section 507(a)(5), affords priority status to providers of Employee Benefit Plans, allowing them to recover ahead of other creditors amounts owed to them by bankrupt employers.
Pension plans and group health and life-insurance plans unquestionably qualify as employee benefit plans for bankruptcy priority purposes.
Providers of other insurance an employer might purchase -- for example, fire, theft and motor-vehicle liability insurance -- gain no priority in bankruptcy.
The question presented in this case: Is Worker’s Compensation Insurance more appropriately classified with group pension and health benefit plans, which receive priority status, or with other types of liability insurance, which do not?
The petitioner, Howard Delivery Service, contracted with respondent Zurich American Insurance Company for Workers’ Compensation coverage.
This insurance guaranteed that Howard’s employees would receive health, disability and death benefits in the event of on-the-job accidents.
When Howard went bankrupt in 2002, it owed Zurich some $400,000.00 for unpaid insurance premiums.
Zurich filed a claim with the bankruptcy court, asserting that these unpaid premiums qualified for the priority status accorded contributions to an employee benefit plan.
The Bankruptcy Court and the District Court rejected Zurich’s claim to be bracketed with group pension and health plans, but the Court of Appeals for the 4th Circuit, 2 to 1, held that Worker’s Compensation carriers shared the priority accorded those plans.
We now reverse the Courts of Appeals’ judgment.
The case turns, the Court’s opinion explains, on the essential character of Workers’ Compensation regimes.
Under those systems, workers generally cannot sue their employers, even when the employer is clearly at fault for a workplace accident; instead, the employee collects a preset amount for the specific type of injury incurred.
The employer is thus shielded from personal-injury suits that might yield damages many times higher than the amount payable under Workers’ Compensation schedules.
At the same time, Workers’ Compensation laws benefit workers by assuring that they will receive some compensation for all work-related injuries, whether or not negligence of the employer contributed to the injury and without hazarding the uncertainties of litigation.
In short, Workers’ Compensation arrangements benefit both employee and employer and insure the employer.
In contrast, typical fringe benefits, in particular, pension and health plans, directly benefit and insure employees only.
Further desisting Workers’ Compensation arrangements from bargained-for or employer- volunteered fringe benefits nearly all states have loss requiring employers to maintain Workers’ Compensation coverage.
Recognizing that the question is close, we assign weight to the dominant aim of the Bankruptcy Code to secure an equal distribution of the debtors’ assets among creditors.
This aim is best served by tightly construing provisions that give priority status to certain classes of creditors.
Priority for the unpaid premiums owed to a compensation carrier would mean that other creditors would receive less or even nothing at all.
Training on this case, priority status for Workers’ Compensation carriers could shrink the amount available for payments owed to plans that clearly qualify for preferential treatment, here group pension and health benefit plans.
Accordingly, we hold that unless and until Congress otherwise directs, claims for unpaid Workers’ Compensation premiums do not qualify for priority status under Section 507(a)(5) of the Bankruptcy Code.
The judgment reversing the Court of Appeals’ decision is joined by the Chief Justice and Justices Stevens, Scalia, Thomas and Breyer; Justice Kennedy has filed a dissenting opinion, joined by Justices Souter and Alito.