The opinion of the court was delivered by: ROBERT W. GETTLEMAN
This diversity action is before the Court on cross-motions for partial summary judgment which, when considered together, dispose of most of the issues raised in the pleadings. The facts are simple and uncontroverted.
For the reasons set forth below, plaintiff's motion for partial summary judgment is granted, and defendants' is denied.
Plaintiff is the Illinois-based trustee under a Trust Agreement and Assignment for the Benefit of Creditors ("Assignment") executed by Case International Company ("Case") dated January 19, 1994. Case (now known as CIL, Inc.) is an Illinois corporation that, prior to the Assignment, had its principal place of business within this district. Defendants are two apparently related insurance companies that provided worker's compensation and general liability insurance coverage to Case and several of its affiliates. After the Assignment, which took place in Illinois, defendants filed a joint proof of loss with plaintiff claiming "approximately $ 6,832,264.00" of unpaid premiums, reduced by the proceeds of a letter of credit used to secure payment of the premiums, in an "amount not to exceed $ 2,584,000.00." It is unclear from the pleadings precisely how much was paid to defendants pursuant to the letter of credit, but it appears that the amount owed by Case to the defendants was reduced by more than $ 2,000,000.00. (Complaint and Answer, Count III, P 26.)
The dispute arose because defendants claimed that the premiums due were entitled to "priority status . . . under applicable state law to the extent [defendants'] claim relates to worker's compensation premiums." (Proof of Claim, Plaintiff's Exhibit D.) Neither party to this dispute has quantified the portion of the claim that defendants contend is entitled to priority status, although they both agree that it exceeds the jurisdictional amount of $ 50,000.00.
Defendants base their claim for priority status on three independent grounds: (a) the laws of the states of Pennsylvania, New York and Massachusetts with respect to premiums arising from worker's compensation insurance (again, the amount of such premiums is not specified); (b) the Illinois Wage Preference Act, 770 ILCS 85/1; and (c) the United States Bankruptcy Code, 11 U.S.C. § 507 (a)(4).
Because the claims filed with plaintiff were some ten times the amount of the liquidated assets ($ 55,000,000.00 compared to $ 5,500,000.00), plaintiff has been unable to make distributions to creditors so long as defendants' claim to priority went unresolved. Thus, plaintiff filed a declaratory judgment action seeking, in Count I, a declaration that defendants' claims have no priority and should thus be treated as general unsecured claims under the Trust Agreement,
which provides that all such claims will be paid pro rata. Discontent to narrow the issue, plaintiff went on to allege that a portion of defendants' claim is contingent and thus not payable (Count II), that the amount of the claim should be reduced by any sums received pursuant to the letter of credit (Count III, which is uncontested by defendants both in their pleadings and in their proof of claim), that plaintiff is entitled to an accounting from defendants (Count IV, also uncontested), and that defendants' assertion of priority has tortiously interfered with plaintiff's administration of the trust created by the Assignment and thus with the "creditor's [sic] legitimate expectancy . . . ." (Count V.)
Defendants counterclaim for a declaratory judgment on the issue of priority (Count I), and tack on a claim that plaintiff breached his fiduciary duty by retaining the same law firm that represents one of Case's major creditors (Count II). Plaintiff filed a motion for summary judgment on Count I of the complaint, and defendants filed a cross-motion for summary judgment on both Count I and Count II of the counterclaim. As noted above (at n.1), defendants have accepted plaintiff's Statement of Facts as true, and the Court finds that the issues presented are ripe for summary disposition.
1. Priority of Defendants' Claim
Defendants' principal argument for priority rests on their contention that the laws of Pennsylvania, Massachusetts and New York
grant such status to that portion of the workmen's compensation insurance premiums that relate to the risks insured by defendants in those states. Plaintiff does not contest defendants' description of the state statutes in question, but counters that these statutes cannot be applied extra-territorially. Specifically, plaintiff argues that because the assigned assets are located and are being administered by plaintiff in Illinois, the priority statutes of other states do not apply. Defendants reply that the McCarran-Ferguson Act, 15 U.S.C. § 1012, requires plaintiff to give effect to the statutes of Pennsylvania, Massachusetts and New York that grant priority status to workman's compensation insurance premium claims. The McCarran-Ferguson Act provides that the "business of insurance shall be subject to the laws of the several states," to the exclusion of federal regulation except as set forth in the Act.
Thus, even if the statutes in question constitute regulation of the "business of insurance,"
defendants would have to demonstrate that these laws may be enforced with respect to the assets in question. This defendants cannot do, for the simple reason that the three priority statutes apply only to the distributions of assets in "insolvency or bankruptcy proceedings, trustee proceedings for the administration of the states [such as in the instant case], or receiverships."
It is the proceedings themselves and the assets being distributed thereby to which the statutes are directed. In the instant case, those proceedings and those assets are in none of the three states on whose statutes defendants rely for priority; they are in Illinois, a state that does not grant such status to workmen's compensation premiums in such proceedings.
The statutes of Pennsylvania, Massachusetts and New York do not, therefore, even purport to apply to defendants' claim.
The McCarran-Ferguson Act does not change this result. That statute generally leaves the regulation of the "business of insurance" to the several states, free from federal regulation except in the areas specified in Section 2(b) of that Act (15 U.S.C. § 1012(b)). As noted by the Supreme Court in Federal Trade Commission v. Travelers Health Association, 362 U.S. 293, 300, 80 S. Ct. 717, 722, 4 L. Ed. 2d 724 (1960), the McCarran-Ferguson Act was not intended to allow a state to "regulate activities carried on beyond its own borders." Defendants' argument to the contrary is without merit.
Defendants offer two additional, equally flawed arguments for priority. First, defendants claim that its workman's compensation premiums are granted priority status by the Illinois Wage Preference Act, 770 ILCS 85/1, which provides that in insolvency proceedings, "debts owing to laborers or servants which have occurred by reason of their labor or employment and all funds due and unpaid to the trustee for the beneficiaries of any pension or retirement plan" are to be treated as preferred claims to "be first paid in full . . ." Unfortunately for defendants, its premiums are not the equivalent of wages, nor are defendants the trustees of a pension or retirement plan established for Case's employees.
Finally, defendants claim priority under the Bankruptcy Code, 11 U.S.C. § 507(a)(4), which recognizes in the fourth rank of priority, "unsecured claims for contributions to an employee benefit plan." Defendants' lengthy and rather strained argument that this language was intended to include worker's compensation premiums
misses the point. The point is that Section 507(a)(4), like all parts of the Bankruptcy Code, applies only to proceedings under Chapter 7, 11, 12 or 13 of the Code. 11 U.S.C. § ...