Southern Star Foods, Inc., In re

Decision Date21 May 1998
Docket NumberNo. 97-7102,97-7102
Parties40 Collier Bankr.Cas.2d 93, 32 Bankr.Ct.Dec. 783, Bankr. L. Rep. P 77,693, 22 Employee Benefits Cas. 1363, 98 CJ C.A.R. 2571, 15 Colo. Bankr. Ct. Rep. 260 In re SOUTHERN STAR FOODS, INC., Debtor, STATE INSURANCE FUND, Appellant, v. SOUTHERN STAR FOODS, INC.; Kenneth G.M. Mather, Trustee, Appellee.
CourtU.S. Court of Appeals — Tenth Circuit

Steven J. Adams and Mary C. Coulson, Gardere & Wynne, L.L.P., Tulsa, OK (Rodney Hayes, Oklahoma City, OK, of counsel), for Appellant.

Kenneth G.M. Mather and Pamela H. Goldberg, Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., Tulsa, OK, for Appellee.

Before BRORBY, BARRETT and BRISCOE, Circuit Judges.

BRISCOE, Circuit Judge.

Appellant, the State Insurance Fund (Fund), appeals from the Bankruptcy Appellate Panel (BAP) decision that its claim for unpaid workers' compensation insurance premiums is not entitled to priority status under 11 U.S.C. § 507(a)(4) in the Chapter 7 bankruptcy of the debtor, Southern Star Foods. 1 See State Ins. Fund v. Mather (In re Southern Star Foods, Inc.), 210 B.R. 838 (10th Cir.BAP 1997). This appeal presents a purely legal question, which we review de novo. See Broitman v. Kirkland (In re Kirkland), 86 F.3d 172, 174 (10th Cir.1996). We affirm.

Southern Star contracted with the Fund to provide workers' compensation insurance coverage. On November 17, 1994, the insurance was canceled. At the time the coverage was canceled, Southern Star owed the Fund hundreds of thousands of dollars in unpaid premiums. When an involuntary petition in bankruptcy was filed against Southern Star on December 23, 1994, the Fund claimed priority status for their unsecured creditors' claim under § 507(a)(4), in the amount of $186,898.27. 2 The trustee objected to the Fund's claim of priority status, and the Bankruptcy Court sustained the objection, finding that § 507(a)(4) did not give priority status to a claim for unpaid workers' compensation premiums. The Fund appealed the decision to the BAP, which affirmed the denial of priority status under § 507(a)(4) in a very thorough and well-reasoned opinion.

The relevant portion of § 507(a)(4) 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 $4,000; 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. 3

The position of the parties in this appeal is simple and straightforward. The Fund argues that the unpaid workers' compensation insurance premiums owed to it by Southern Star are contributions to an employee benefit plan within the meaning of § 507(a)(4), and are, therefore, entitled to priority status. The trustee argues that they are not.

We begin our analysis with the premise that the overriding objective in bankruptcy cases is equal distribution of the debtor's limited resources among its creditors. See Isaac v. Temex Energy, Inc. (In re Amarex, Inc.), 853 F.2d 1526, 1530 (10th Cir.1988). To that end, statutory priorities must be narrowly construed. See id.

The Bankruptcy Code does not define "contributions to an employee benefit plan." The Fund urges us to look to the Employee Retirement Income Security Act of 1974 (ERISA) and apply the definition of "employee benefit plan" set forth in that statute to § 507(a)(4). We decline to read the ERISA definition of "employee benefit plan" into the Bankruptcy Code. We agree with the Eighth Circuit that " '[t]he ERISA definition and associated court guidelines were designed to effectuate the purpose of ERISA, not the Bankruptcy Code.' " Employers Ins. of Wausau, Inc. v. Ramette (In re HLM Corp.), 62 F.3d 224, 226 (8th Cir.1995) (quoting Employers Ins. of Wausau, Inc. v. Ramette (In re HLM Corp.), 183 B.R. 852, 855 (D.Minn.1994)); accord In re The Montaldo Corp., 207 B.R. 112, 115 (Bankr.M.D.N.C.1997); Official Labor Creditors Comm. v. Jet Florida Sys., Inc. (In re Jet Florida Sys., Inc.), 80 B.R. 544, 547 (S.D.Fla.1987); see also United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 219-25, 116 S.Ct. 2106, 2111-13, 135 L.Ed.2d 506 (1996) (declining to apply usage of term in Internal Revenue Code to term in Bankruptcy Code, absent some Congressional indication). Further, broadening the Bankruptcy Code by incorporating the ERISA definition into the § 507(a)(4) priority determination would be contrary to the tenet that priorities are to be narrowly construed. See In re Amarex, Inc., 853 F.2d at 1530.

Two other circuit courts have addressed the issue of whether workers' compensation premiums are contributions to an employee benefit plan within the meaning of § 507(a)(4) so as to be entitled to priority status, and they reached opposite conclusions. Compare Employers Ins. of Wausau, Inc. v. Ramette (In re HLM Corp.), 62 F.3d 224, 227 (8th Cir.1995) (holding that unpaid workers' compensation premiums were not contributions to an employee benefit plan entitled to priority status), aff'g 183 B.R. 852 (D.Minn.1994), aff'g 165 B.R. 38 (Bankr.D.Minn.1994), with Employers Ins. of Wausau v. Plaid Pantries, Inc., 10 F.3d 605, 607 (9th Cir.1993) (holding that unpaid workers' compensation premiums were entitled to priority status under § 507(a)(4)). Other courts finding that claims for workers' compensation premiums were not entitled to priority under § 507(a)(4) include In re Southern Star Foods, Inc., 210 B.R. at 844, aff'g 201 B.R. 291 (Bankr.E.D.Okla.1996); and In re Allentown Moving & Storage, Inc., 208 B.R. 835, 837 (Bankr.E.D.Pa.1997), aff'd 214 B.R. 761 (E.D.Pa.1997). Other cases finding that claims for workers' compensation premiums were entitled to priority include In re Braniff, Inc., 218 B.R. 628, 635 (Bankr.M.D.Fla.1998) (deciding issue without examining legislative history, and adopting the position in In re Gerald T. Fenton, Inc. with no discussion of ERISA); In re Gerald T. Fenton, Inc., 178 B.R. 582, 587-88, 590 (Bankr.D.D.C.1995) (applying ERISA definition of "employee benefit plan"); and Perlstein v. Rockwood Ins. Co. (In re AOV Indus., Inc.), 85 B.R. 183, 186, 189 (Bankr.D.D.C.1988) (same). 4

Before we can answer this question of first impression in this Circuit, we must first determine whether the meaning of the statute is evident from its plain language, or if the phrase is ambiguous. The split in the circuits is, in itself, evidence of the ambiguity of the phrase "contributions to an employee benefit plan;" its meaning is not evident based on the plain language of the statute. Because the phrase is ambiguous, we turn to the legislative history of the statute to aid our analysis. See United States v. Simmonds, 111 F.3d 737, 742 (10th Cir.1997).

Like the BAP, we agree with the Eighth Circuit that the legislative history clarifies that § 507(a)(4) grants priority for "fringe benefits" accepted in lieu of wages. In re HLM, Corp., 62 F.3d at 225-26. 5 In enacting § 507(a)(4), Congress stated:

The Supreme Court has held that the wage priority does not extend to fringe benefits, such as pension fund or health insurance contributions. When the wage priority was last amended in 1926, perhaps the intent of Congress was not to extend it in that fashion, because fringe benefits were little heard of at the time. Now, however, to ignore the reality of collective bargaining that often trades wage dollars for fringe benefits does a severe disservice to those working for a failing enterprise.

In recognition of changes since 1926, 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.

H.R.Rep. No. 95-595, at 187 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6148 (footnotes omitted). Specifically addressing § 507(a)(4), the legislative history provides:

Paragraph (4) overrules United States v. Embassy Restaurant, 359 U.S. 29, 79 S.Ct. 554, 3 L.Ed.2d 601 (195 ), 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.

Id. at 357, reprinted in 1978 U.S.C.C.A.N. 5963, 6313 (footnotes omitted); see also S.Rep. No. 95-989, at 69 (1978) reprinted in 1978 U.S.C.C.A.N. 5787, 5855.

The legislative history makes it clear that Congress enacted § 507(a)(4) to benefit employees. It recognized the reality that employees often bargain for fringe benefits in lieu of higher wages. The two Supreme Court cases that gave rise to the enactment of § 507(a)(4) both involved plans organized to provide benefits for employees pursuant to collective bargaining agreements. See Embassy Restaurant, 359 U.S. at 29-30, 79 S.Ct. at 554-55 (contributions owed by employer to welfare fund); Joint Indus. Bd. of Elec. Indus. v. United States, 391 U.S. 224, 225, 88 S.Ct. 1491, 1492, 20 L.Ed.2d 546 (1968) (contributions owed by employer to employees' annuity plan). In those cases, the Court denied priority status under the statutory priority for wages...

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