In re Gerald T. Fenton, Inc.

• Citation: 178 BR 582
• Decision Date: 01 March 1995
• Docket Number: Bankruptcy No. 90-00181.
• Parties: In re GERALD T. FENTON, INC., Debtor.
• Court: United States Bankruptcy Courts. District of Columbia Circuit

178 B.R. 582 (1995)

In re GERALD T. FENTON, INC., Debtor.

Bankruptcy No. 90-00181.

United States Bankruptcy Court, District of Columbia.

March 1, 1995.

Bruce Robertson, for debtor.

DECISION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

S. MARTIN TEEL, Jr., Bankruptcy Judge.

Under the court's consideration are cross motions for summary judgment on the priority claim of the Travelers Insurance Company ("Travelers"). The question faced by the court is whether a claim for unpaid premiums for statutorily mandated workers' compensation insurance is entitled to fourth priority status under 11 U.S.C. § 507(a)(4) as "contributions to an employee benefit plan." For reasons set out below the court concludes that this claim is so entitled.

DISCUSSION

Travelers filed a $24,721.24 unsecured priority claim in the debtor's bankruptcy case for unpaid workers' compensation premiums for the 180 days leading up to the filing of the debtor's petition in this court on March 9, 1990. The Travelers seeks priority status for this claim under § 507(a)(4), which provides:

(a) The following expenses and claims have priority in the following order . . .

(4) Fourth, allowed unsecured claims for contributions to an employee benefit plan—

(A) arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessation of the debtor\'s business, whichever occurs first; but only

(B) for each such plan, to the extent of—

(i) the number of employees covered by each such plan multiplied by $2,000; less

(ii) the aggregate amount paid to such employees under paragraph (3) of this subsection, plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan.

In 1978, § 507(a)(4) was added to the Bankruptcy Code to address Congressional concerns regarding two prior Supreme Court decisions under the Bankruptcy Act of 1898. Under the § 104(a) of the Act, only actual "wages and commissions" were entitled to priority in bankruptcy. In United States v. Embassy Restaurant, Inc.¹ and Joint Industry Board v. United States,² the Supreme Court held that payments owed by an employer to a union workers' welfare trust fund and to an employee annuity plan were not entitled to priority as "wages" or "commissions" under § 104(a) of the Act. Congress intended § 507(a)(4) to overrule those Supreme Court cases and provide priority for "fringe benefits."³ The legislative history provides:

Paragraph (4) overrules United States v. Embassy Restaurant, 359 US 29 79 S.Ct. 554, 3 L.Ed.2d 601 (1958 1959), which held that fringe benefits were not entitled to wage priority status. The bill recognizes the realities of labor contract negotiations, under which wage demands are often reduced if adequate fringe benefits are substituted. The priority granted is limited to claims for contributions to employee benefit plans such as pension plans, health or life insurance plans, and others, arising from services rendered after the earlier of one year before the bankruptcy case and the date of cessation of the debtor\'s business.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 357 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6313; S.Rep. No. 989, 95th Cong., 2d Sess. 69 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5855.

This court has joined other courts in holding that claims for unpaid insurance premiums, including workers' compensation, are entitled to fourth priority under § 507(a)(4). See In re AOV Industries, Inc., 85 B.R. 183 (Bankr.D.D.C.1988); Employers Insurance of Wausau v. Plaid Pantries, Inc., 10 F.3d 605 (9th Cir.1993); In re Saco Local Development Corp., 711 F.2d 441 (1st Cir.1983), aff'g, 23 B.R. 644 (Bankr.D.Me.1982); In re Allegheny International, Inc., 138 B.R. 171 (Bankr.W.D.Pa.1992), aff'd, 145 B.R. 820 (W.D.Pa.1992); In re Jet Florida Systems, Inc., 80 B.R. 544 (S.D.Fla.1987); but see In re HLM Corp., 165 B.R. 38 (Bankr.D.Minn. 1994); In re Arrow Carrier Corp., 154 B.R. 642 (Bankr.D.N.J.1993).

In so holding, the courts conclude that § 507(a)(4) should be read broadly in order to fulfill its purpose of ensuring that employees continue to receive the benefits to which they are entitled despite employer bankruptcy. See Plaid Pantries, 10 F.3d at 607; In re Saco, 711 F.2d at 448-49. Accordingly, the courts have rejected several arguments against priority for unpaid insurance premiums. First, courts have rejected the argument that the plans need to be the product of collective bargaining agreements. See In re Saco, 711 F.2d at 448-49. The courts reason that "insurance is no less a fringe benefit because it is granted `unilaterally' rather than being provided under the terms of a collective bargaining agreement." Id. Second, courts have refused to limit priority to claims made by employees, allowing priority for claims by insurance companies for premiums paid directly to them. See Plaid Pantries, 10 F.3d at 607; In re Saco, 711 F.2d at 449; In re Allegheny, 138 B.R. at 174-75. The courts reason that "allowing `the insurer to obtain its premiums through the priority would seem the surest way to provide the employees with the policy benefits to which they are entitled.'" Plaid Pantries, 10 F.3d at 607 (quoting In re Saco, 711 F.2d at 449). Third, courts have held that claims for unpaid premiums do "arise from services rendered," as required by § 507(a)(4)(A). See In re AOV, 85 B.R. at 186; In re Saco, 23 B.R. at 648, aff'd, 711 F.2d 441.

The trustee attempts to distinguish the present case from those prior decisions based on the fact that workers' compensation in the District of Columbia is statutorily mandated. The trustee argues that because of this statutory mandate, claims for unpaid workers' compensation premiums should not be entitled to priority under § 507(a)(4). The trustee bases this objection to priority on the recent decision in In re HLM Corp., 165 B.R. 38 (Bankr.D.Minn.1994), wherein the court held that unpaid premiums for statutorily mandated workers' compensation were not entitled to priority as contributions to an employee benefit plan under § 507(a)(4). The decision in In re HLM is in apparent conflict with the prior decisions of this court in In re AOV and the Ninth Circuit in Plaid Pantries, holding that claims for unpaid premiums for mandatory workers' compensation coverage were entitled to priority under § 507(a)(4). The trustee in this case urges the court to reject its opinion in In re AOV and the Ninth Circuit decision in Plaid Pantries in favor of the reasoning employed in In re HLM.

In the District of Columbia, workers' compensation coverage for employees is mandatory. See D.C.Code Ann. § 36-301 et seq. (1981). Section 36-303(b) dictates that "every employer subject to this chapter shall be liable for compensation for injury or death without regard to fault as a cause of the injury or death." In order to guarantee compensation coverage, under § 36-334(a), the employer must either procure insurance coverage or provide satisfactory proof to the mayor that the employer is capable of self-insurance. If the employer does not either procure insurance or submit proof of self-insurance, the employer is liable for a civil fine of $1,000 to $10,000 under § 36-339(a).

Furthermore, if an employee can not collect compensation awarded to him due to the employer's insolvency or otherwise, § 36-319 provides that the employee may seek compensation directly from the District government out of a special fund created under § 36-340. Compensation from the D.C. government is discretionary, however. Section 36-319 specifically provides:

(b) In cases where judgment cannot be satisfied by reason of the employer\'s insolvency or other circumstances precluding payment, the Mayor may, in his discretion, and to the extent he shall determine advisable after consideration of current commitments payable from the special fund established in § 36-340, make payment from such fund upon any award made under this chapter, and, in addition, provide any necessary medical, surgical, and other treatment required by § 36-307 in any case of disability where there has been a default in furnishing medical treatment by reason of the insolvency of the employer. Such employer shall be liable for payment into such fund of the amounts paid therefrom by the Mayor under this subsection; and for the purposes of enforcing this liability, the Mayor for the benefit of the fund shall be subrogated to all the rights of the person receiving such payment or benefits, including the right of lien and priority provided for by § 36-318 as against the employer and may by a proceeding in the name of the Mayor under § 36-320 or under § 36-322(c), or both, seek to recover the amount of the default or so much thereof as in the judgment of the Mayor is possible, or the Mayor may settle and compromise any such claim.

Echoing the decision in In re HLM, the trustee argues that because workers' compensation is statutorily mandated in the District and employees may be compensated directly from the District government in the event of employer insolvency, the unpaid premiums in this case should not be entitled to priority. Specifically, the trustee argues that due to the statutory mandate, (1) the workers' compensation insurance premiums are not "contributions;" (2) the workers' compensation is not a "plan;" (3) the payment of unpaid premiums does not "benefit" the employees; and (4) the claims for unpaid premiums do not arise from "services rendered." The court will consider each of these arguments in turn.

1. Are Insurance Premiums for Mandatory Workers' Compensation "Contributions?"

The trustee argues that because the workers' compensation premiums are statutorily mandated, the premiums are not "contributions" to an employee benefit plan for purposes of § 507(a)(4). In re HLM, 165 B.R. at 40. Supported by In re HLM, the trustee contends that in order to be "contributions," as that term is used in the dictionary, the...