Does “Employee Benefit Plan” in the Bankruptcy Code Include Compensation Liability Plans?

Howard Delivery Service, Inc. v. Zurich American Ins. Co.

The Bankruptcy code prioritizes claims for unpaid “wages, salaries, or commissions” and unpaid contributions to “an employee benefit plan.” The question here is whether this extends to a compensation liability plan. The law was expanded to include employee benefit plans (one tier below wages) in response to two previous cases holding that neither unpaid contributions to a union welfare plan, nor an employee’s bargained-for contributions to an annuity plan qualified under the previous law which was limited to “wages.”

Noting that because preferential treatment diverges from the general purpose of bankruptcy laws of evenly dispersing funds that preferential treatment should only exist when clearly authorized by Congress, the Court believes that, given a choice between employee benefit plans and liability insurances (such as vehicle, fire, theft insurance), a compensation liability plan should fall within the latter. The Court of Appeals split, one judge finding the statute to clearly authorize the priority, another finding it ambiguous and searching the legislative history to find it covering the compensation liability plan, and another relying on the plain meaning to find the plan not covered.

The majority refuses to look to another statute (the ERISA) for a definition, in part because the definition used there “specifically exempts the ERISA from the genre of plan here at issue,” (any plan “maintained solely for the purpose of complying with applicable workers’ compensation laws”) but mainly because the ERISA was not written with bankruptcy in mind as the Bankruptcy code was, and instead looks to “the essential character of workers’ compensation regimes.” Compensation liability plans benefit both workers and employers, distinguishing those benefits from others covered by the law. The plans are also distinguished by being a response to a State statutory requirement, and the existence of state funds to fall back upon if the employer fails to do so.

The dissent agrees with the observed broader purpose of the law and the rule that priorities should be construed narrowly, but reminds that “this is different, though, from establishing an interpretive principle of strict construction,” since a strict construction can be “in tension” with that broader goal. The dissent sees compensation plans as net benefits to employees and argues that neither the benefit to employers, nor the mandatory nature of the plans, nor even the state fallback funds, should not be used to deny that the plans are employee benefit plans.

The EIRSA defines “employee benefit plan” to include employee welfare benefit plan” which in turn includes “any plan, fund, or program which… was established or is maintained for the purpose of providing … benefits in the event of sickness, accident, disability, death, or unemployment.” The dissent argues this is a term of art, and the exception for legally required plans was deliberately placed in the statute rather than the definintion.