Legal Updates

In the Matter of Consolidated Freightways. The Ninth Circuit recently clarified some long questioned language regarding the priority of employee benefit claims in Sections 507(a)(4) and (5) of the Bankruptcy Code.

The bankrupt debtor (CFC) had retained an independent company (Aetna) to facilitate its self-funded medical health plans. Aetna reviewed claims and paid benefits to CFC employees. CFC then reimbursed Aetna for all amounts Aetna paid to CFC employees. When CFC initiated its bankruptcy proceeding, CFC owed Aetna approximately $1.5MM for amounts Aetna had paid CFC employees and former employees.

The bankruptcy Trustee conceded that Aetna's claim was entitled to priority to the extent that it related to non-retiree benefits, but argued that retiree benefits were not entitled to priority. The Court ruled that the distinction between "retired" and "non-retired" status at the time of bankruptcy filing was irrelevant, and held that the claims were entitled to priority to the extent that the employee seeking benefits had provided services to CFC within 180 days preceding the bankruptcy filing.

The Court further disregarded the Trustee's argument that the priority claims were limited to $4,650 per employee, and the Court ruled that priority claims for employee benefits are subject to an aggregate limit, rather than an individual employee limit.