Yesterday’s Supreme Court head-scratcher is Howard Delivery Serv., Inc. v. Zurich American Ins. Co., 2006 WL 1639224 (pdf), a delightful opinion in which Justice Ruth Bader Ginsburg (for a majority that surprisingly included Justices Scalia and Thomas) took on every issue we hoped here the Court would tackle, and then some.  In the end, we’re left  with another pathbreaking bankruptcy decision that will surely set the contours of the "plain meaning" doctrine in bankruptcy cases for years to come.  With the bankruptcy bench and bar struggling mightily to determine when "plain meaning" should be followed under BAPCPA’s ill-conceived and poorly drafted provisions, Justice Ginsburg’s opinion helps show the way.

The issues presented, and the winning petitioner’s arguments, are discussed at length here, and so won’t be repeated.  The basic question addressed by the Court was whether payments or premiums owing on account of workers’ compensation "plans" are entitled to a priority in bankruptcy as "claims for contributions to an employee benefit plan arising from services rendered within 90 days before the [petition] date."  Given Judge Markell’s recent opinion that when it comes to interpreting BAPCPA’s convoluted provisions, one should consider what a strict textualist like Justice Scalia might say, one would have expected Justice Scalia to join Justice Kennedy’s dissent, for Justice Kennedy (joined by Justices Souter and Alito) wrote in no uncertain terms that the statute’s "plain meaning" should govern (and hence there is no obvious reason to exclude workers’ compensation "plans" from other "plans" that benefit employees).  Instead, however, Justice Scalia (and, surprisingly, Justice Thomas too given his opinion in Ron Pair  that "as long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute") sided with Justice Ginsburg in declaring that when it comes to bankruptcy law, "plain meaning" must be viewed through bankruptcy lenses (or bifocals, depending on your eyesight).  Justice Ginsburg wrote (pp.2-3, 14, 15-16):

In holding that claims for workers’ compensation insurance premiums do not qualify for § 507(a)(5) priority, we are mindful that the Bankruptcy Code aims, in the main, to secure equal distribution among creditors. We take into account, as well, the complementary principle that preferential treatment of a class of creditors is in order only when clearly authorized by Congress….

[W]e are guided in reaching our decision by the equal distribution objective underlying the Bankruptcy Code, and the corollary principle that provisions allowing preferences must be tightly construed….  Any doubt concerning the appropriate characterization [of a bankruptcy statutory provision] is best resolved in accord with the Bankruptcy Code’s equal distribution aim.  We therefore reject the expanded [i.e., "plain meaning"] interpretation Zurich invites. (Citations omitted.)

Given the 6-3 vote, the surprise joinder by Justices Scalia and Thomas in the majority opinion clearly changed the outcome in the case.  Who really could have expected that Justices Scalia and Thomas would reject the stricter textualist-based reasoning offered by Justice Kennedy’s dissent in favor of Justice Ginsburg’s bankruptcy-based prism through which "any doubt concerning the appropriate characterization" should be filtered?  Here’s how Justice Kennedy framed the issue (dissent at pp. 1-2):

Before commencing a more detailed discussion of the central issue, certain preliminary matters must be addressed. To begin with, the Court states a background rule of construction that, when we interpret the Bankruptcy Code, “provisions allowing preferences must be tightly construed.”  The Court links this rule with a general objective in the Code for equal distribution. That objective, it is true, is acknowledged by our precedents, and we have said that a Code provision must indicate a clear purpose to prefer one claim over another before a priority will be found. This is different, though, from establishing an interpretive principle of strict construction when the Code addresses priorities, for strict construction can be in tension with the objective of “equality of distribution for similar creditors.” The bankruptcy priorities, then, should not be read simply to give priorities to as few creditors as possible. They should be interpreted in accord with the principle of equal treatment of like claims. In any event the priority provisions should not be read so narrowly as to conflict with their plain meaning.  (Citations omitted.)

I suppose, in retrospect, Justice Scalia’s apparent acceptance of the principle that the "plain meaning" doctrine has its own bankruptcy ocular was apparent from the start given the following opening exchange between Zurich American’s attorney and Justice Scalia at oral argument (at p.25):

Mr. Verrilli (for the respondent):  Thank you, Mr. Chief Justice, and may it please the Court:  I think it’s important to focus on exactly what a workers’ compensation plan provides.  A workers’ compensation plan provides health insurance that pays for the medical costs of a workplace accident, disability insurance —

Justice Scalia:  You’re begging the question by calling it a plan.  I mean, … that’s one of the issues here.  Why don’t you tell us what workmen’s compensation laws require?

So, in the end, here’s how Justice Ginsburg and the majority addressed the five questions regarding statutory interpretation teed up for its consideration:

  • To what extent will the decision be shaped by an "overriding objective of providing to creditors equal distribution of a debtor’s limited resources"?

Answer:  Very much so, as the above quotations from Justice Ginsburg’s opinion illustrate.

  • Will the Court agree that the plain meaning of the 1978 Bankruptcy Code amendment that extended wage priorities to "contributions to an employee benefit plan" should be limited to the situations addressed in the prior Supreme Court holdings that the legislation is said to have been designed to overturn?

Answer:  Pretty much, yes.  Justice Ginsburg wrote (pp. 5-6): 

Two decisions of this Court, United States v. Embassy Restaurant, Inc., 359 U.S. 29, (1959), and Joint Industry Bd. of Elec. Industry v. United States, 391 U.S. 224 (1968), prompted the enactment of § 507(a)(5). Embassy Restaurant concerned a provision of the 1898 Bankruptcy Act that granted priority status to “wages” but said nothing of “employee benefits plans” or anything similar. We held that a debtor’s unpaid contributions to a union welfare plan-which provided life insurance, weekly sick benefits, hospital and surgical benefits, and other advantages-did not qualify within the priority for unpaid “wages.” 359 U.S., at 29-35. In Joint Industry Bd., we followed Embassy Restaurant and held that an employer’s bargained-for contributions to an employees’ annuity plan did not qualify as “wages” entitled to priority status. 391 U.S., at 228-229.

  • To what extent should the Court rely upon legislative history to determine whether the priorities of Section 507(a)(4) should be extended beyond fringe benefits and comparable "wage substitutes"?

Answer: "Notably" so. Justice Ginsburg writes (p.6):

To provide a priority for fringe benefits of the kind at issue in Embassy Restaurant and Joint Industry Bd., Congress added what is now § 507(a)(5) when it amended the Bankruptcy Act in 1978. See H.R.Rep. No. 95-595, p. 187 (1977) (hereinafter H.R. Rep.) (explaining that the amendment covers “health insurance programs, life insurance plans, pension funds, and all other forms of employee compensation that [are] not in the form of wages”); S.Rep. No. 95-989, p. 69 (1978). Notably, Congress did not enlarge the “wages, salaries, [and] commissions” priority, § 507(a)(4), to include fringe benefits. Instead, Congress created a new priority for such benefits, one step lower than the wage priority. The new provision, currently contained in § 507(a)(5), allows the provider of an employee benefit plan to recover unpaid premiums-albeit only after the employees’ claims for “wages, salaries, or commissions” have been paid. (Emphasis added.)

  • To what extent should courts look to contemporaneous editions of Merriam Webster’s or Random House dictionaries in defining simple words like "contribution," "benefit," and "plan", and to what extent must there be consistency between their plain meaning and their "usage within the broader context of the Bankruptcy Code"?

Answer: If you’re in the dissent, that’s where you start, but there’s no reference to dictionary definitions in the majority opinion, or — as the above exchange at oral argument illustrates — in Justice Scalia’s opinion either.

  • Is it appropriate for the Court to "incorporate characterizations of a term in another statute absent some congressional indication that this was intended"?

Answer: No, at least not in the bankruptcy context, as Justice Ginsburg writes (pp. 8-9, 15-16):

Federal courts have questioned whether ERISA is appropriately used to fill in blanks in a Bankruptcy Code provision, and the panel below parted ways on this issue…. We follow the lead of an earlier decision, United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 219 (1996), in noting that “[h]ere and there in the Bankruptcy Code Congress has included specific directions that establish the significance for bankruptcy law of a term used elsewhere in the federal statutes.” Id., at 219-220. No such directions are contained in § 507(a)(5), and we have no warrant to write them into the text. This case turns, we hold, not on a definition borrowed from a statute designed without bankruptcy in mind, but on the essential character of workers’ compensation regimes…. We therefore reject the expanded interpretation Zurich invites. Unless and until Congress otherwise directs, we hold that carriers’ claims for unpaid workers’ compensation premiums remain outside the priority allowed by § 507(a)(5).

So that’s it for another Supreme Court term, at least from a bankruptcy perspective.  

What’s on tap for next term?  Well, the Court has already taken this one (Marrama).  My gut tells me the Court accepts this one (hey, if Judge Edith Hollan Jones can’t get nominated to the Court, the least the Court could do is consider whether to affirm her dissenting opinion!).  Finally, this one (Sasson) went to conference yesterday, and I sure hope the Court accepts it too (with special thanks to WilmerHale’s Craig Goldblatt for sending me the following additional all-star briefs filed in connection with Sasson’s cert. petition (and supporting appendix):  (i) the opposition to the cert. petition, written by Prof. Erwin Chemerinsky, (ii) the petitioner’s cert. reply brief, and (iii) the two amici briefs of Eric Brunstad and the National Association of Consumer Bankruptcy Attorneys in support of the cert. petition).

To complete the online record, you’ll find respondent-Zurich’s response brief here and the petitioner-Trustee’s reply brief here.

Thanks for reading.  And, as always, please don’t hesitate to comment and/or boo me off the field.     

Update:  Just learned today that cert. was denied in the Sasson v. Sokoloff case, which is too bad given its outstanding pedigree.

© Steve Jakubowski 2006