MATTER OF UNIMET CORP.
| Decision Date | 26 May 1989 |
| Docket Number | Bankruptcy No. 685-00240. |
| Parties | In the Matter of UNIMET CORPORATION, Debtor. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio |
Jeffrey T. Heintz of Brouse & McDowell, Akron, Ohio, for trust.
Gregg P. Hirsch, New York City, for Metropolitan Life Ins. Co.
Presently before the court is an objection filed by the Official Committee of Unsecured Creditors1 to the proof of claim of Metropolitan Life Insurance Co. (Metropolitan). Metropolitan and the Trustee met informally and exchanged documentation in an attempt to resolve the objection. Unfortunately, no resolution was forthcoming and a pre-trial conference was held before the court at which the parties agreed that the threshold issue, the number of employees to be included in Metropolitan's claim, would be submitted to the court upon stipulations of fact and briefs.
From November 15, 1979 through February 28, 1985, Metropolitan, through a contract with Unimet Corporation (Unimet), provided employee benefits to employees of Unimet, Esmet, Inc., Intech Systems, Inc. (Intech), both subsidiaries of Unimet, and Cordex, a division of Unimet. (Collectively, the Unimet plan).
The nature of the benefits offered to the employees under the Unimet plan varied during the period of coverage, but as of the date the insurance policies were canceled, such benefits included basic life insurance, accidental death, dental, prescription drugs, and major medical insurance.
On August 14, 1984, the Cordex division was sold to Burcliff Industries. As part of the sale, a provision in the sales contract between Unimet and Burcliff Industries called for the employees of Cordex to continue on the Unimet plan for an additional thirty (30) day period.
On March 8, 1985, Unimet, Esmet and Intech filed for relief under Chapter 11 of Title 11 of United States Code. On June 27, 1985, Metropolitan filed a proof of claim against Unimet in the amount $1,552,603.33 for liabilities arising under the group policies issued by Metropolitan to Unimet. This claim was asserted as a general unsecured claim in the amount of $787,609.55 and a priority claim under 11 U.S.C. § 507(a)(4) for $764,993.78.
Intech's Chapter 11 bankruptcy was dismissed on June 13, 1986. On November 24, 1986, a Joint Plan of Reorganization was confirmed for Unimet and Esmet with the Unimet Assets Disposition Trust being created. Subsequently, on March 18, 1987, Metropolitan filed an amended proof of claim in the amount of $1,940,368.69 which included a priority claim under Section 507(a)(4) in the amount of $957,583.14.
As of 180 days before the filing of bankruptcy, 316 active employees were covered under the Unimet plan. Employment by company was as follows:
1. Unimet employees 15
2. Esmet employees 36
3. Intech employees 129
4. Cordex employees 136
___
Total 316
DISCUSSION
11 U.S.C. Section 507(a)(4) provides for the priority treatment of a claim for contributions to an employee benefit plan. It states:
The issue before the court, which appears to be one of first impression, is the determination of the number of eligible employees to be included in the priority pool created by Section 507(a)(4)(B)(i), supra. The Trustee does not dispute that the Unimet and Esmet employees, a total of 51, are includable. The Trustee, however, does dispute the inclusion of the Cordex and Intech employees, asserting that they were not, within 180 days prior to the filing of the bankruptcy petition, employees of the debtor, did not render services to the debtor, and thus do not qualify for inclusion.
Metropolitan, citing the Code provisions and equitable considerations, argues that all the employees covered by the benefit plan should be included in determining the amount of the priority claim.
In determining which employees are to be included, the court is guided by the provisions of Section 507(a)(3). Under the former Bankruptcy Act, unpaid wages were entitled to a second priority. See, Bankruptcy Act § 64(a)(2); 11 U.S.C. § 104(a)(2), (1970). When the Bankruptcy Reform Act of 1978 was enacted, former Section 64(a)(2) was changed. One of the changes was the creation of a new priority section for contributions to employee benefit plans. As the legislative history states:
The bill establishes a new category, a fourth priority immediately following the wage priority, for contributions and payments to employee benefit plans. This will include health insurance programs, life insurance plans, pension funds, and all other forms of employee compensation that is not in the form of wages. The priority is limited to the unused amount of the wage priority, but contributions during the full year preceding bankruptcy are given priority. The bill makes a third change by having measurement of the priority date from the date of bankruptcy or from the cessation of the debtor\'s business, whichever occurs first. This will provide additional protection to the employees of a bankrupt enterprise.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 187-188 (1977), U.S.Code Cong. & Admin. News 1978, pp. 5787, 6148.
As can be seen from the legislative history, the priority treatment given to contributions to employee benefit plans is directly tied to the wage priority of Section 507(a)(3).
For a party to be entitled to priority treatment for wages, there must be an employer-employee relationship between the debtor and the party claiming the priority. In re Dahlman Truck Lines, Inc., 59 B.R. 218 (Bankr.W.D.Wis.1986). A similar relationship seems an appropriate prerequisite for Section 507(a)(4) priority.
Additional support for this analysis can be found in the legislative purpose for the inclusion of Section 507(a)(4) in the Bankruptcy Reform Act of 1978. It was included, we are told, to specifically overrule the body of cases which had previously narrowly construed wage priority to exclude health benefit contributions. See, Sen.Rep. No. 989, 95th Congress, 2nd Sess. 69 (1978). In that priority statutes are to be given strict construction, See, In re Pittston Stevedoring Corp. 40 B.R. 424 (Bankr.S.D.N. Y.1984), Section 507(a)(4) should not be broadened beyond the limitations imposed in Section 507(a)(3) when the legislative intent is clear that Section 507(a)(4) was only enacted to cure certain defects in the predecessor to Section 507(a)(3).
Support for this interpretation can also be found in the language of Section 507(a)(4) itself. As previously noted, Section 507(a)(4)(A) provides that the claim is based upon "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. . . ." (Emphasis added).
In the instant proceeding, the only debtors are Unimet and Esmet. Intech's bankruptcy was voluntarily dismissed on June 13, 1986, and Cordex was sold prior to the 180 day period.
Also, Section 507(a)(4)(B)(i) and (ii) limit the amount of the claim to $2,000.00 per employee minus what the employee received under Section 507(a)(3), which requires, as previously noted, an employer-employee relationship. This language again points out the relationship between Sections 507(a)(3) and 507(a)(4) and reinforces the court's finding that a claim for contributions to an employee benefit plan depends upon the existence of an employer-employee relationship between the debtor and the party asserting the priority.
Finally, as the last sentence of the House Report, supra, pg. 883, states: "this Section 507(a)(4) will provide additional protection to the employees of a bankrupt enterprise." (Emphasis added).
Accordingly, the court finds that only the employees of Unimet and Esmet, which total 51, are to be included in determining the amount of Metropolitan's priority claim.
An order in accordance herewith shall issue.
Metropolitan Life Insurance Company (Metropolitan) seeks the reconsideration of this court's Memorandum of Decision and Order of June 14, 1988, wherein the court determined the number of employees to be included in the calculation of Metropolitan's Section 507(a)(4) priority claim against the debtor to be 51. Metropolitan has set forth four grounds as to why the court should reconsider its prior decision. Metropolitan also requests that an evidentiary hearing be scheduled to consider any factual matters which may be in dispute.
A brief in opposition to Metropolitan's motion has been filed on behalf of Lee J. Dicola, trustee of the Unimet Assets Disposition Trust. Thereafter, Metropolitan filed a reply brief.
The court's prior Memorandum of Decision contained a full statement of the facts as agreed upon by the parties. A summary follows, with such omissions and additions as are deemed necessary.1
From November 15, 1979 through February 28, 1985, Metropolitan, through a contract with Unimet Corporation (Unimet), provided employee benefits to employees of Unimet, Esmet, Inc., (Esmet), Intech Systems, Inc. (Intech), both subsidiaries of Unimet, and Cordex, a division of Unimet. (Collectively, the Unimet plan).
On August 14, 1984, the Cordex division was sold, and as part of...
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