359 U.S. 29 (1959), 174, United States v. Embassy Restaurant, Inc.

Docket Nº:No. 174
Citation:359 U.S. 29, 79 S.Ct. 554, 3 L.Ed.2d 601
Party Name:United States v. Embassy Restaurant, Inc.
Case Date:March 09, 1959
Court:United States Supreme Court

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359 U.S. 29 (1959)

79 S.Ct. 554, 3 L.Ed.2d 601

United States


Embassy Restaurant, Inc.

No. 174

United States Supreme Court

March 9, 1959

Argued January 22, 1959




Contributions due to be paid by a bankrupt employer to the trustee of a union welfare fund under a collective bargaining agreement held not entitled to priority in payment under § 4(a)(2) of the Bankruptcy Act a "wages . . . due to workmen." Pp. 29-35.

254 F.2d 475 reversed.

CLARK, J., lead opinion

MR. JUSTICE CLARK, delivered the opinion of the Court.

The sole issue involved here is whether contributions by an employer [79 S.Ct. 555] to a union welfare fund which are required by a collective bargaining agreement are entitled, in bankruptcy, to priority as being "wages . . . due to workmen" under § 64(a)(2) of the Bankruptcy Act, as

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amended.1 Both the trial court, 154 F.Supp. 141, and the Court of Appeals, 254 F.2d 475, held that such contributions enjoyed priority. This resulted in a conflict with the Court of Appeals for the Second Circuit, Local 140 Security Fund v. Hack, 242 F.2d 375, in view of which we granted certiorari, 358 U.S. 811.

The facts are undisputed. Embassy Restaurant, Inc., was bound in collective bargaining agreements with Local Unions 111 and 301. The agreements related to hours, wages and other conditions of employment. Under these agreements, Embassy was obligated to contribute to the trustees of the welfare funds of Locals 111 and 301 $8 per month per full-time employee. The welfare plans were organized to maintain "life insurance, weekly sick benefits, hospital and surgical benefits," and other advantages for members of the locals. Trustees administered each plan under a formal trust agreement, and were authorized to formulate and establish the conditions of eligibility for benefits, control all the funds received, collect all contributions, and, in their "sole discretion," to handle all legal proceedings incident thereto. Title to all of the funds, property, and income was placed in the trustees exclusively, and no employee or anyone claiming under him had any right whatsoever in the plan or any part thereof. In the

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bankruptcy proceeding, the trustees filed proofs of a claim for unpaid contributions due by Embassy, and asserted a second priority for all amounts that had accrued during the three months immediately preceding the bankruptcy. This priority was disallowed by the Referee but, on review, it was granted by both the trial court and the Court of Appeals. We have concluded that such contributions are not entitled to such priority in payment.

At the outset, we point out that "[t]he broad purpose of the Bankruptcy Act is to bring about an equitable distribution of the bankrupt's estate. . . ." Kothe v. R. C. Taylor Trust, 280 U.S. 224, 227, and that, "if one claimant is to be preferred over others, the purpose should be clear from the statute." Nathanson v. Labor Board, 344 U.S. 25, 29.2 Moreover, if the contributions are placed in the wage priority class, they will likewise be rendered nondischargeable under § 17 of the Act,3 resulting in their remaining outstanding debts of the bankrupt if the assets of the estate are insufficient to discharge them for three months prior to the bankruptcy.

The trustees attempt to bring contributions within this preferred class by claiming them to be "wages [79 S.Ct. 556] . . . due to workmen." This class of claim has been given a preferred position in the Bankruptcy Act for over 100 years,4 long before welfare funds played any part in labor negotiations. True, the Congress has amended the Act, but such amendments have been few and guarded ones, such as raising the ceiling on the amount permitted,5 shifting

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the relative priorities6 and enlarging the class to salesmen, clerks, etc.7 If it had wished to include contributions, Congress could easily have included them at any of these times. On the contrary, however, the purpose of Congress has constantly been to enable employees displaced by bankruptcy to secure, with some promptness, the money directly due to them in back wages, and thus to alleviate in some degree the hardship that unemployment usually brings to workers and their families. Evidence of this purpose is found in a 1934 amendment to the Bankruptcy Act.8 In that year, Congress amended § 63 to allow workmen's compensation claims as provable debts. In awarding them priority, however, Congress relegated these claims to a seventh priority, in contrast to the then fourth priority of wages.9 Only four years later, Congress abolished the priority status of these compensation claims, though it continued them as provable debts under § 63, 11 U.S.C. § 103(a)(6). It is therefore evident that not all types of obligations due employees from their employers are regarded by Congress as being within the concept of wages, even though having some relation to employment. Moreover, such action indicated the care Congress has exercised in regard to the protection it has granted "wages . . . due to workmen."

Let us examine the nature of these contributions. They are flat sums of $8 per month for each workman. The amount is without relation to his hours, wages or productivity. It is due the trustees, not the workman, and the latter has no legal interest in its whatsoever. A workman cannot even compel payment by a defaulting employer. Moreover, it does not appear that the parties to the collective

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agreement considered these welfare payments as wages. The contract here refers to them as "contributions." Finally, Embassy's obligation is to contribute sums to the trustees, not to its workmen; it is enforceable only by the trustees, who enjoy not only the sole title, but the exclusive management of the funds.

It is contended, however, that since "unions bargain for these contributions as though they were wages" and industry likewise considers them "as an integral part of the wage package," they must in law be considered "wages." This approach overlooks the fact that we deal with a statute, not business practice. Nor do we believe that holdings that various fringe benefits are wages under the National Labor Relations Act10 or the Social Security Act11 are apposite. We construe the priority section of [79 S.Ct. 557] the Bankruptcy Act, not those statutes. It specifically fixes the relative priority of claims of classes of creditors. Here, that class is "wages . . . due to workmen."

The contributions here are not "due to workmen," nor have they the customary attributes of wages. Thus, they cannot be treated as being within the clear, unequivocal language of "wages . . . due to workmen" unless it is clear that they satisfy the purpose for which Congress established the priority. That purpose was to provide the workman a "protective cushion" against the economic displacement caused by his employer's bankruptcy.12 These payments, owed as they are to the trustee, rather than to the workman, offer no support to the workman in periods of financial distress. Furthermore, if the claims of the trustees are to be treated on a par with wages, in a case where the employer's assets are insufficient to pay

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all in the second priority, the workman will have to share with the welfare plan, thus reducing his own recovery.

Respondents argue that precedent allows the priority to be asserted by one other than the workman himself. We are cited to Shropshire, Woodliff & Co. v. Bush, 204 U.S. 186, and United States v. Carter, 353 U.S. 210. In Shropshire, wages due a workman had been assigned by him, and the assignee was seeking the wage priority enjoyed by his assignor. In allowing the claim to have priority, the Court said:

When one has incurred a debt for wages due to workmen, . . . that debt . . . is entitled to priority. . . .

* * * *

. . . The character of the debts was fixed when they were incurred, and could not be changed by an assignment,

204 U.S. at 189 and also that "The priority is attached to the debt, and not to the person of the creditor. . . ." Ibid. Application of these principles to the facts here helps respondents not at all; the obligation to make contributions, when incurred, was to the trustees, not to the workmen. The debt was never owed the workmen. Furthermore, assignability of wage claims, as in Shropshire, may benefit the bankrupt's employees, who are thus enabled to obtain their money sooner than they might by waiting out the bankruptcy procedure.

Nor does the Carter case, supra, support the granting of a priority to these contributions. There, we dealt with the Miller Act,13 which granted to every person furnishing labor or material the right to sue on the contractor's payment bond "for the sum or sums justly due him." The contractor defaulted, and the trustees of a welfare fund similar to that involved here sued on the bond for recovery

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of contributions "justly due." Our opinion did not hold that contributions were part of "wages . . . due to workmen." In fact, we pointed out that the trust agreement provided that the contributions "shall not constitute or be deemed to be wages." The basis of the opinion was that the Miller Act "does not limit recovery on the statutory bond to 'wages,'" id. at 217. The Act having the broad protective purposes of securing all claims that are "justly due," we held that the trustees might recover. In short, though the contributions were not wages, they were "justly due" as a claim within "the purposes of the Miller Act." Under the Bankruptcy Act, however, not all claims "justly due" have priority. They must be within a class, such as "wages . . . due to workmen." The claims here are not. If this class is to be so enlarged, [79 S.Ct. 558] it must be done by the Congress.

The judgment is


BLACK, J., dissenting

MR. JUSTICE BLACK, with whom THE...

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