In re Southern Star Foods, Inc., BAP No. EO-96-034

• Decision Date: 28 July 1997
• Docket Number: BAP No. EO-96-034,Bankruptcy No. 94-71621.
• Citation: 210 BR 838
• Parties: In re SOUTHERN STAR FOODS, INC., Debtor. The STATE INSURANCE FUND, Appellant, v. Kenneth G.M. MATHER, Trustee; and Southern Star Foods, Inc., Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

210 B.R. 838 (1997)

In re SOUTHERN STAR FOODS, INC., Debtor The STATE INSURANCE FUND, Appellant, v. Kenneth G.M. MATHER, Trustee; and Southern Star Foods, Inc., Appellees.

BAP No. EO-96-034, Bankruptcy No. 94-71621.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

July 28, 1997.

Mary C. Coulson, Gardere & Wynne, L.L.P., Tulsa, OK (Steven J. Adams, Gardere & Wynne, L.L.P., Tulsa, OK, and Rodney Hayes, Oklahoma City, OK, with her on the brief) for Appellant.

Pamela H. Goldberg, Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., Tulsa, OK (Kenneth G.M. Mather with her on the brief) for Appellee Kenneth G.M. Mather.

Before McFEELEY, Chief Judge, PEARSON, and BOULDEN, Bankruptcy Judges.

OPINION

McFEELEY, Chief Judge.

The State Insurance Fund (the "Fund") appeals from a final order of the United States Bankruptcy Court for the Eastern District of Oklahoma denying the Fund priority status under 11 U.S.C. § 507(a)(4).¹ In re Southern Star Foods, Inc., 201 B.R. 291 (Bankr.E.D.Okla.1996). This Court has jurisdiction under 28 U.S.C. § 158(c), and reviews the statutory interpretation of the Bankruptcy Court de novo. Tulsa Energy, Inc. v. KPL Prod. Co. (In re Tulsa Energy, Inc.), 111 F.3d 88, 89 (10th Cir.1997). Because this Court agrees with the Bankruptcy Court that unpaid workers' compensation premiums are not entitled to priority status pursuant to § 507(a)(4), we affirm.

BACKGROUND

In the Bankruptcy Court the parties stipulated to the following facts: Southern Star Foods, Inc. ("Southern Star") contracted with the Fund for workers' compensation insurance coverage from February 1, 1994, to November 17, 1994, when the Fund canceled coverage for nonpayment of premiums. Southern Star did not pay the premiums due to the Fund from May 1, 1994, to November 17, 1994, in the amount of $230,849.00.

On December 23, 1994, several creditors filed an involuntary Chapter 7 petition against Southern Star. On January 11, 1995, the Court entered an order for relief and on January 23, 1995, appointed Kenneth G.M. Mather as trustee (the "Trustee") of Southern Star's bankruptcy estate.

On March 17, 1995, the Fund filed its proof of claim asserting priority status under §§ 507(a)(3) and (a)(4).² In response to the Trustee's objection, the Fund conceded the inapplicability of § 507(a)(3) but pursued its claim for priority under § 507(a)(4). Southern Star did not cease operations before the involuntary bankruptcy filing. Under § 507(a)(4) any priority claim of the Fund had to be incurred within 180 days before the involuntary petition was filed. The Fund amended its priority claim to $186,898.27, consisting of unpaid premiums incurred during this period. The Fund conceded that the remaining amount of their claim, $43,950.73 incurred before the 180-day period, should be allowed only as a general unsecured claim.

DISCUSSION

Section 507(a)(4) gives fourth priority status to "allowed unsecured claims for contributions to an employee benefit plan . . . 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."

The Fund argues that unpaid workers' compensation insurance premiums should be granted priority status under the plain meaning of the statutory phrase, "contributions to an employee benefit plan" as held by Employers Ins. v. Plaid Pantries, Inc., 10 F.3d 605 (9th Cir.1993). The Trustee argues that these unpaid premiums should not be granted priority status relying on the statute's legislative history and citing Employers Ins. v. Ramette (In re HLM Corp.), 62 F.3d 224 (8th Cir.1995).

Priority status is not favored because the overriding policy in bankruptcy is equal treatment of creditors. Jarboe v. SBA (In re Hancock), 137 B.R. 835, 837-38 (Bankr.N.D.Okla.1992), cited in Southern Star, 201 B.R. at 293; see also SBA v. Preferred Door Co., Inc. (In re Preferred Door Co., Inc.), 990 F.2d 547, 550-51 (10th Cir. 1993) (Bankruptcy Court's equitable power does not extend to altering Bankruptcy Code's "comprehensive scheme of priorities."). Therefore, statutory priorities should be construed narrowly. Isaac v. Temex Energy, Inc. (In re Amarex, Inc.), 853 F.2d 1526, 1530 (10th Cir.1988). We agree with the Bankruptcy Court that in cases such as this one in which the debtor's assets are inadequate to satisfy all creditor's claims, priority status should be awarded only where "it is so strongly deserved as to override the claims of all other creditors to equal treatment." Southern Star, 201 B.R. at 293; see Employers Ins. v. Ramette (In re HLM Corp.), 183 B.R. 852, 856 (D.Minn.1994), aff'd, 62 F.3d 224 (8th Cir.1995); cf. United States v. Dumler (In re Cassidy), 983 F.2d 161, 164 (10th Cir.1992) (discussing priorities under § 507(a)(7) and recognizing need to balance granting of priorities with "punishing innocent creditors of a bankrupt"). We are especially mindful of this policy in examining this issue of first impression in the Tenth Circuit.

We begin with the statutory language itself. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). However, the Bankruptcy Code does not define "contributions to an employee benefit plan." In analyzing the language of the statute, we look to the plain meaning of each term.

First, § 507(a)(4) covers "contributions" to an employee benefit plan. Here the Fund contracted with Southern Star to provide it insurance upon the payment of premiums. This insurance contract was not a "contribution" to an employee benefit plan. In re AER-Aerotron Inc., 182 B.R. 725, 727 (Bankr.E.D.N.C.1995). Similarly, premiums arising from the issuance of a policy of insurance are not generally referred to as "contributions." In re The Montaldo Corp., 207 B.R. 112, 114 (Bankr.M.D.N.C.1997). A "contribution" implies some sort of voluntary act. Typically, fringe benefits such as health, life and disability insurance are voluntarily given to employees. The payment of workers' compensation insurance premiums is not "voluntary;" it is mandated by statute. In re HLM Corp., 165 B.R. 38, 40 (Bankr. D.Minn.1994), aff'd, 183 B.R. 852, 856 (D.Minn.1994), aff'd, 62 F.3d 224 (8th Cir. 1995). See also In re Allentown Moving & Storage, Inc., 208 B.R. 835, 837 (Bankr. E.D.Pa.1997) ("Since workers' compensation benefits are a statutory requirement and not obtained through collective bargaining, they cannot be considered a `contribution' to an employee's `benefit plan.' Workers' compensation renders a benefit to both employer and employee.").

Second, in the context of § 507(a)(4), a "plan" is the manner in which an employer seeks to compensate an employee in ways other than wages. Workers' compensation insurance is not a "plan," but is a statutorily mandated system to spread risks of work-related injuries. Id.; Okla. Stat. Ann. tit. 85, §§ 1 et seq. (West 1997).

Third, insurance premiums do not arise from "services rendered" by employees as required under § 507(a)(4). The rendering of services by employees results in obligations to them, not to the insurer. Montaldo, 207 B.R. at 114. The claim for unpaid premiums does not arise from "services rendered" but from Southern Star's failure to pay its insurer. This makes it indistinguishable from a typical unsecured claim. AER-Aerotron, Inc., 182 B.R. at 727; HLM, 165 B.R. at 41.

As for whether workers' compensation insurance is a "benefit" plan, it is not. Instead, it provides workers an alternative to recovery for work related injuries through the courts. Carroll v. District Court, 579 P.2d 828, 830 (Okla.1978). Allowing priority status for workers' compensation insurance premiums would shift the recipient of priority status from the debtor's employees to the insurance carrier, which is not what Congress intended in § 507(a)(4).

The § 507(a)(4) priority would apply to contributions to an employee benefit plan that are made by both employees and by employers. The statute does not, however, provide a priority to third parties. Furthermore, even if a third party were to be subrogated to an employee\'s claim under § 507(a)(4), that claim would be denied priority pursuant to § 507(d).

AER-Aerotron, 182 B.R. at 727. The reference in § 507(a)(4) to "services rendered" makes clear that Congress intended a debtor's employees, not third party workers' compensation funds or insurance carriers, to be the recipients of fourth priority status. Montaldo, 207 B.R. at 114 ("The rendering of services by employees results in obligations to the employees and not to an insurer."). Southern Star's employees do not have a claim against Southern Star for the unpaid premiums. Allowing the Fund to have priority under § 507(a)(4), a priority intended to benefit employees, is tantamount to subrogating the Fund to the priority of the employees, which is impermissible under § 507(d).³ Montaldo, 207 B.R. at 117.

Significantly, the statutory cap on the priority described in § 507(a)(4)(B) refers to the wage priority in (a)(3) as a part of the cap's calculation. If insurance premium amounts were intended to be similarly capped, it would not be tied to the amount that employees may collect under the wage priority. AER-Aerotron, 182 B.R. at 727.

The Fund urges this Court to apply to the Bankruptcy Code the definition of employee benefit plan from the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq.⁴ Some of the cases granting priority status to insurance premiums have done so by incorporating the ERISA definition. Allegheny Int'l, Inc. v. Metropolitan Life Ins. Co. (In re Allegheny Int'l, Inc.), 138 B.R. 171 (Bankr. W.D.Pa.1992), aff'd, 145 B.R. 820 (W.D.Pa. 1992); In re Plaid Pantries, Inc., 137 B.R. 405, 407 (D.Or.1991), aff'd on other grounds, Employers Ins. v. Plaid Pantries, Inc., 10 F.3d 605 (9th Cir.1993); Perlstein v. Rockwood Ins. Co. (In re AOV Indus., Inc.), 85 B.R. 183 (Bankr.D.D.C.1988);...