In re HLM Corp.

• Decision Date: 14 November 1994
• Docket Number: Civ. No. 3-94-1312. Bankruptcy No. 4-92-3790 NCD.
• Citation: 183 BR 852
• Parties: In re HLM CORPORATION, Debtor. EMPLOYERS INSURANCE OF WAUSAU, Appellant, v. James RAMETTE, Trustee of the Bankruptcy Estate of HLM Corporation, Appellee.
• Court: U.S. District Court — District of Minnesota

183 B.R. 852 (1994)

In re HLM CORPORATION, Debtor EMPLOYERS INSURANCE OF WAUSAU, Appellant, v. James RAMETTE, Trustee of the Bankruptcy Estate of HLM Corporation, Appellee.

Civ. No. 3-94-1312. Bankruptcy No. 4-92-3790 NCD.

United States District Court, D. Minnesota, Third Division.

November 14, 1994.

Robert A. Judd, Wagner, Falconer & Judd, Ltd., Minneapolis, MN, for appellant.

Randall L. Seaver, Morris, Fuller & Seaver, P.A., Minneapolis, MN, for appellee.

MEMORANDUM OPINION AND ORDER

KYLE, District Judge.

Introduction

Before the Court is Appellant's appeal from an Order of the United States Bankruptcy Court.¹ The Order sustained the Appellee's objection to Appellant's priority claim and determined that unpaid workers' compensation premiums are not entitled to priority status under 11 U.S.C. § 507(a)(4).

Background

Appellant Employers Insurance of Wausau ("Wausau") is a participating insurance carrier under the Minnesota Assigned Risk Plan ("ARP"). The ARP provides workers' compensation insurance for Minnesota employers who are unable to obtain coverage through traditional market channels.

On October 18, 1986, Wausau began providing workers' compensation insurance to HLM Corporation ("Debtor") pursuant to the Minnesota ARP. The Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code ("the Code") on May 21, 1992. On June 25, 1992, the proceedings were converted to a Chapter 7 proceeding and the Appellee was appointed trustee.

On August 20, 1993, Wausau filed a proof of claim (Claim No. 20) against the Debtor in the amount of $490,479.00. This claim represents the pre-petition workers' compensation premiums due for three relevant policy periods. Wausau maintains that $149,704.00 of the claim amount was the premium incurred within 180 days from the date the Debtor filed its bankruptcy petition. Wausau contends that this portion of the unpaid premiums is an unsecured priority claim under § 507(a)(4) of the Code because it constitutes "contributions to an employee benefit plan." On January 20, 1994, the Trustee filed an objection to Wausau's claim on the grounds that the amount claimed was inaccurate, and that the claim, regardless of amount, was not entitled to priority status under § 507(a)(4). The Trustee contends that the claim is a general unsecured claim for unpaid insurance premiums.

A hearing on the Trustee's objection was held before the bankruptcy court on February 23, 1994. On March 18, 1994, the bankruptcy court issued its Order sustaining the Trustee's objection, In re HLM Corp., 165 B.R. 38 (Bankr.D.Minn.1994), holding that unpaid workers' compensation premiums are not entitled to priority under § 507(a)(4) of the Code; accordingly the bankruptcy court did not address whether the claimed amount was calculated properly. This appeal followed.

This Court has jurisdiction to hear Wausau's appeal pursuant to 28 U.S.C. § 158(a) and 28 U.S.C. § 1334(a).

Discussion

The facts in this case are not disputed. The narrow legal issue before the Court is whether § 507(a)(4) entitles Wausau to a priority claim for unpaid pre-petition workers' compensation insurance premiums earned within 180 days prior to the Debtor's bankruptcy petition. This is a question of law, and the Court accordingly reviews the bankruptcy court's decision de novo. In re Mathiason, 16 F.3d 234 (8th Cir.1994). This issue is a question of first impression in this District and the Eighth Circuit.

Unless the Code specifically creates an exception, secured claims are given priority and satisfied before any payments for unsecured claims. Section 507(a)(4) creates a fourth-level priority status for certain unsecured pre-petition claims. Specifically, § 507(a)(4) provides that:

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. . . .

11 U.S.C. § 507(a)(4). The question on this appeal, then, is whether unpaid workers' compensation premiums are "contributions to an employee benefit plan." In resolving this question, the Court initially recognizes that a presumption exists favoring an equal distribution of a bankrupt debtor's limited resources; as a result, statutory priorities within the Code should be narrowly construed. See Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 100 (2d Cir.1986) (holding that priorities under § 507(a)(4) must be narrowly construed) (citing, inter alia, Joint Indus. Bd. of Elec. Indus. v. United States, 391 U.S. 224, 228, 88 S.Ct. 1491, 1493-94, 20 L.Ed.2d 546 (1968)); In re Lull Corp., 162 B.R. 234, 239 (Bankr. D.Minn.1993) (same). With this canon of construction in mind, the Court will determine the scope of § 507(a)(4) by looking at its plain language, legislative history, and purpose.

As the bankruptcy court properly recognized, the starting point for resolving this issue is the language of the Code itself. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). The plain meaning of the Code is conclusive, except in the "rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafter." Id. at 242, 109 S.Ct. at 1031 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973 (1982)). Although the Code provides definitions for over 50 different terms, it does not specifically define the phrase "employee benefit plan." Because the Code does not provide a definition, Appellant urges the Court to look to the construction of "employee benefit plan" as the phrase is used in the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. ch. 18 (1985 & Supp. 1994). Unlike the Code, ERISA does define the term "employee benefit plan."² This definition does not specifically refer to workers' compensation insurance policies. Nonetheless, a workers' compensation insurance policy may fit within the scope of the ERISA definition. Courts have developed guidelines for determining whether an "employee benefit plan" exists for ERISA purposes when the proffered plan is not literally within the terms of the ERISA definition. See Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982).

A workers' compensation insurance policy may or may not fit within these court-developed guidelines. Contrary to Appellant's assertions, however, whether workers' compensation insurance fits within a court's construction of "employee welfare plan" is irrelevant. The ERISA definition and associated court guidelines were designed to effectuate the purposes of ERISA, not the Bankruptcy Code. Congress specifically limited its ERISA § 1002 definitions, stating that they were "for the purposes of this § 1002 subchapter." 29 U.S.C. § 1002. Wausau has not cited any conclusive legislative history or related material to show Congress intended the ERISA definition to be incorporated into the Bankruptcy Code. Indeed, the fact that Congress specifically defined over 50 terms in the Code shows that if Congress intended anything other than the ordinary meaning of the phrase "employee benefit plan," it knew how to do so with unmistakable clarity. In spite of this, Wausau asks the Court to interchange a definition from an unrelated statute promulgated four years earlier. It is not the Court's role to read the ERISA definition into § 507(a)(4) of the Bankruptcy Code. That is a task for Congress.³

Although Congress did not define the phrase "employee benefit plan," Congress did provide specific guidance on how to interpret that phrase. Congress explained with unusual particularity why § 507(a)(4) was promulgated, stating:

Paragraph (4) of § 507(a) overrules United States v. Embassy Restaurant, 359 U.S. 29 79 S.Ct. 554, 3 L.Ed.2d 601 (1958) (1959) and Joint Industries Industry Board v. United States, 391 U.S. 224 88 S.Ct. 1491, 20 L.Ed.2d 546 (1968), 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, and others arising from services performed after the earlier of one year. . . .

H.R.Rep. No. 595, 95th Cong., 2d Sess. 357 (1977) reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6313; S.Rep. No. 989, 95th Cong.2d Sess. 69 (1978) reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5855. Against this backdrop, the issue before the Court becomes whether, under the plain meaning of its terms, employer workers' compensation insurance premium payments should be equated with bargained-for fringe benefits such as contributions to pension plans, health insurance, or life insurance. The plain meaning of these words shows they should not.

Payments for a workers' compensation policy are not bargained-for substitutes for wages. In Minnesota, they are mandated by statute. Minnesota Statutes section 176.181, subd. 2 requires that, unless specifically exempted, Minnesota employers must either 1) carry workers' compensation insurance or 2) demonstrate the ability, and receive written authorization, to be self-insured. Thus, in "the realities of contract negotiations," unlike medical, health and life insurance, payment of workers' compensation premiums is irrelevant to the bargaining process. Employers may not choose to forego purchasing workers' compensation insurance, and employees may not choose to accept a higher wage in lieu of the insurance. As a result, payments to a workers' compensation insurance carrier are not bargained-for wage substitutes.

Moreover, an...