Bankruptcy Code sections 507(a)(4)(A) and (a)(5) grant unsecured creditors with a claim for unpaid “wages, salaries, or commissions” and unpaid contributions to “an employee benefit plan” a priority payment in the debtor’s bankruptcy. The United States Supreme Court recently ruled that these sections do not encompass payments for workers’ compensation insurance. As a result, the Court refused to grant priority to an insurance carrier’s claims for unpaid premiums.

The Court declined to use the broad definition of “employee benefit plan” contained in ERISA, which includes workers’ compensation, and found the definition has a more limited scope in the bankruptcy context. (The Bankruptcy Code contains no independent definition of this term.) Instead, the Court was persuaded by the Bankruptcy Code’s objective of securing equal distribution among creditors in deciding to curb the priority.

It is undisputed that fringe benefits that generally complement, or substitute for, hourly pay (such as pension plans and group health, life, and disability insurance) are given priority under Section 507(a)(4). In refusing to extend this priority to workers’ compensation insurance, the Court reasoned that workers’ compensation is more akin to liability insurance, which provides some protection for employers, than the kind of fringe benefits that complete a pay package and benefit the employee. The Court did acknowledge that this was a narrow line and the question was close, but ultimately the Court ruled that premiums owed by an employer to a workers’ compensation carrier do not fit within the priorities accorded by the Bankruptcy Code.

Link to the case: http://www.supremecourtus.gov/opinions/05pdf/05-128.pdf

Leslie