Friday, May 8, 2009

Are Retirees "Employees" in Determining Priority Claims Under § 507(a)(5)?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Consolidated Freightways v. Aetna (In re Consolidated Freightways)
Ninth Circuit Court of Appeals, Case Nos. 07-56720
May 6, 2009

On Wednesday, May 6, the Ninth Court filed its second opinion of the week on a § 507(a) claim priorities issue. On Monday one panel of the Court had addressed whether a debt of an employer for a workers' compensation reimbursement was an "excise tax" and thus a priority claim under § 507(a) a)(8)(E) of the Bankruptcy Code. (Here is my Bulletin on that opinion.) And now two days later the question is whether certain a debtor-employer's debts constitute "claims for contributions to an employee benefit plan" under § 507(a)(5).
Preliminary Note: This is not a well-written opinion. It does not state clearly either the specific issues the panel was addressing or its holdings on those issues. One has to try to read between the lines. Although the judge liked using million dollar words like "pellucid" and "hyaline," referring to how clear he believed the law to be, this opinion was one of the least clear ones that I have read in months. I have done my best to try to get at the intended meaning, but feel free to comment if you think I was led astray and you come away with a different understanding. This opinion makes more sense by reading the underlying bankruptcy court opinion at In re Consol. Freightways, Corp. of Del., 363 B.R. 110 (Bankr. C.D. Cal. 2007), but that should not be necessary.
The Court addressed:
1) whether the portion of the claim related to benefits paid to retirees falls within "claims for contributions to an employee benefit plan" under § 507(a) a)(5);
2) whether claims related to such retirees who did not render services within the statutory 180-day look-back period are nevertheless entitled to a priority claim;
3) whether such retiree-related claims are to be counted in determining the number of employees for purposes of calculating the priority claim; and
4) whether the priority recovery cap under this subsection is to be treated as an aggregate cap or one limited per individual employee.

1) and 2): The portion of the claim based on retirees' benefits count as priority but only so long as the retirees at the time of the filing of the case had rendered some services to the employer-debtor in the statutory 180-day look-back period.
3): The opinion, as far as I could tell, never stated this issue nor discussed it; it merely stated in the first sentence of the "Conclusion": "We disagree with the bankruptcy court’s determination that individuals who did not render services within the 180-day period are to be counted in determining the number of employees . . . under § 507(a)(5)."
4): The $4,650 (at that time) statutory recovery cap for the priority debt is an aggregate amount: the calculation of the total priority claim is not based on an individualized recovery limit of $4,650 per any single employee, but rather that $4,650 is multiplied by the total number of employees in that pool, thus allowing for some individual employees in the pool to be paid substantally more than that, assuming that there were others paid much less and the amount paid being capped at $4,650 times the number of employees.

The Court remanded to the bankruptcy court to apply these holdings.

The Essential Facts
Aetna administered Consolidated Freightways Corporation's (CFC) self-funded medical health plans. It paid medical claims for CFC's employees and retirees, which were reimbursed by CFC. When CFC filed its liquidating Chapter 11 case, it owed Aetna for medical claims as well as for costs of administering the plans. The liquidating trustee objected to priority treatment of claims related to retirees.

The Courts Below

The bankruptcy court determined that Aetna's claim related to the medical claims of retirees qualified as a priority debt The district court affirmed.

The Statutes
Since § 507(a) a)(5) addressing "contributions to an employee benefit plan" interrelates with § 507(a) a)(4) addressing "wages, salaries, or commissions," here are the pertinent portions of both:
(a) The following expenses and claims have priority in the following order: . . .

(4) Fourth, allowed unsecured claims, but only to the extent of $4,650 for each individual or corporation, as the case may be, earned within 90 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first, for —
(A) wages, salaries, or commissions, including vacation, severance, and sick
leave pay earned by an individual; or
(B) sales commissions . . . .

(5) Fifth, allowed unsecured claims for contributions to an employee benefit plan
(A) arising from services rendered within 180 days before the date 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 $ 4,650;
less (ii) the aggregate amount paid to such employees under paragraph (4) of this
subsection, plus the aggregate amount paid by the estate on behalf of such
employees to any other employee benefit plan.
(Note that these subsections were not substantively changed by BAPCPA except that the dollar amounts were greatly increased and the look-back period in § 507(a) a)(4) was doubled from 90 to 180 days, and the subsections were renumbered because of a new subsection § 507(a) a)(1)).

The Ninth Circuit's Rationale
Retirees are "Employees":
On the issues whether retirees are "employees" under § 507(a)(5) and what is meant by "arising from services rendered," the Court reasoned that "[w]hile at first blush there may be some ambiguity . . . , we think that a consideration of [that subsection] in the context of the statute renders the answer quite clear."

The Court recalled that § 507(a)(5) did not exist at first, when a priority was granted to employees only for wages and such under the predecessor to § 507(a)(4). After the Supreme Court "had determined that unpaid contributions to welfare plans that “provided life insurance, weekly sick benefits, hospital and surgical benefits” or annuities were not accorded priority. . . Congress then remedied that by adopting § 507(a)(5)."

This Ninth Circuit Panel quoted a 2006 Supreme Court opinion asserting that "[t}he current Code’s juxtaposition of the wages and employee benefit plan priorities manifests Congress’ comprehension that fringe benefits generally complement, or 'substitute' for, hourly pay."
Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 659 (2006). From this "tight connection" between the two subsections, the Ninth Circuit concluded: "The operative principle is that the priority is for those who rendered services during the 180-day period, whether they were retired or not at the moment of the filing of the bankruptcy petition."

Calculation of the Claim:
On the issue of the total amount of the claim and the meaning of the term "aggragate amount," the Ninth Circuit again quoted the Supreme Court in Howard Delivery:
Congress tightened the linkage of (a)(4) and (a)(5) by imposing a combined cap on the two priorities, currently set at $10,000 per employee [$4,650 in our case here]. Because (a)(4) has a higher priority status, all claims for wages are paid first, up to the $10,000 limit; claims under (a)(5) for contributions to employee benefit plans can be recovered next up to the remainder of the $10,000 ceiling. No other subsections of § 507 are joined together by a common cap in this way.
The panel concluded:
A plain reading of § 507(a)(5) demonstrates that it provides an aggregate limit on recovery under that provision; not an individualized recovery per employee. . . . . The result is, therefore, that an individual employee’s claim under § 507(a)(5) will not be limited by the amount that the employee may have recovered under § 507(a)(4). No doubt the overall fund will be limited by the (a)(4) recovery, but individual claims to benefits will not be.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

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