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Prepetition Claim of Third Party Service Provider for Fringe Benefits Provided to Debtors’ Employees Entitled to Priority Treatment Under Section 507(a)(5) of the Bankruptcy Code

In re Tropicana Entm’t, LLC, No. 08-10856 (KJC), 2015 WL 6112064 (Bankr. D. Del. Oct. 14, 2015)

In a recent post-confirmation dispute arising in the chapter 11 bankruptcy cases of Tropicana Entertainment, LLC and its related entities (collectively, the “Debtors”), the Honorable Kevin J. Carey was faced with a question over which courts are split—whether a prepetition claim asserted by a third party service provider of employee benefits is entitled to priority under section 507(a)(5) of the Bankruptcy Code.  The answer of the Delaware Bankruptcy Court was yes, such a claim may receive priority treatment pursuant to such section so long as it does not exceed the limitations specifically set forth therein.

Claimant Columbia Sussex Corporation (“Columbia”) contractually agreed to establish various insurance programs for the Debtors and provide certain fringe benefits for their employees, such as medical, dental, and short-term disability benefits.  It also sponsored a flexible spending plan (“FSP”) and a qualified 401(k) retirement savings plan (“401(k) Plan”) for eligible debtor employees.  As of the petition date, the Debtors owed Columbia over $3.6 million for unreimbursed health and dental premiums and FSP and 401(k) Plan payments made by Columbia on behalf of the Debtors’ employees.  For those premiums and payments made within 180 days preceding the Debtors’ bankruptcy, Columbia sought a priority claim under section 507(a)(5), which provides for priority treatment of allowed unsecured claims for contributions to employee benefit plans “(A) arising from services rendered within 180 days before the [petition date] 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 $12,475; less (ii) the aggregate amount paid to such employees under [section 507(a)(4)], plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan.”  11 U.S.C § 507(a)(5).

While the Debtors argued that the scope of section 507(a)(5) was limited to claims paid to employees as opposed to third parties and asserted that the phrase “services rendered” in section 507(a)(5) refers to employee services as opposed to those of third parties, the Bankruptcy Court disagreed.  Relying on the 2006 United States Supreme Court decision of Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 658 (2006), Judge Carey noted that Congress added section 507(a)(5) to the Bankruptcy Code in 1978 to allow employee benefit providers to recover unpaid premiums based upon services rendered by debtor employees, subject to the limitations set forth in section 507(a)(5).  As highlighted by the Supreme Court in Howard Delivery Service, Congress could have enlarged section 507(a)(4), which provides for the priority treatment of certain employee claims for wages, salaries, and commissions, to include claims for fringe benefits, but it chose instead to create a new priority provision for such benefits that would not be limited to employee claims.  Doing so allowed for the protection of employees not only by allowing employee claims asserted under section 507(a)(4) to take priority over third party claims asserted under section 507(a)(5), but also by encouraging third parties to continuously provide employees with benefits to which they are entitled as a result of continued performance of services to their debtor-employer.