Greg Rayburn was the
chief executive officer (CEO) of Silas Creek Retail, Inc. In October 1997,
Carolina Sales, Inc. (apparently, part of A.B.C. Fabrics of Tampa, Inc.)
purchased substantially all of Silas Creek´s assets.
The asset purchase
agreement noted that Carolina Sales would not assume certain obligations,
including any liabilities or obligations for COBRA coverage and various
benefits such as medical, health and disability coverage. However, an
assumption agreement provided that Carolina Sales would assume certain
obligations, including certain medical/health claims that occurred before the
agreement date.
The sale of Silas
Creek´s assets became effective Nov. 1, 1997. Rayburn remained as CEO during
the sale´s transition period. He alleged that during November 1997, he and his
wife received health benefits through a group health plan offered by Carolina
Sales, and that he ´´was being treated as an employee of ABC Fabrics for the
purpose of these benefits.´´
Rayburn´s employment
terminated on Nov. 30, 1997. He allegedly was offered, and elected, COBRA
coverage, and paid the applicable COBRA premiums. Rayburn and his family
incurred more than $37,240 in medical expenses from September 1997 through
November 1998. However, none of their medical claims were paid.
In June 1999, A.B.C.
Fabrics filed for Chapter 11 bankruptcy, and continued to operate its business
at least until that date. Generally under the bankruptcy code, creditors can
assert claims against the bankrupt entity. However, certain unsecured creditors
have a higher priority than others in bankruptcy cases. Fourth on the list of
priority claims are certain unsecured claims for contributions to an employee
benefit plan.
The Rayburns argued
that they had priority status as unsecured creditors because of the $37,240 in
medical claims that A.B.C. Fabrics failed to pay. However, the company
countered that no priority claim existed because, among other things:
(1) Rayburn was the
CEO of Silas Creek until he resigned on Nov. 30, 1997, and never was an A.B.C.
Fabrics´ employee, officer or director; and
(2) any benefits
Rayburn had were not provided under the Carolina Sales plan, rather, they were
contracted for under the asset purchase and assumption agreements.
The court noted that
the priority status for employee benefit plan contributions benefits employees
of a bankrupt employer by giving priority status to promised fringe benefits
that they did not receive before the bankruptcy filing.
In determining the
Rayburns´ priority status, the court found that future proceedings were
necessary because:
(1) enough questions
were raised by both parties regarding a determination of whether the Rayburns
were actually covered by the plan; and
(2) based upon COBRA
provisions, the Rayburns might be entitled to priority status if coverage was
extended to Rayburn in November 1997, Rayburn was notified of his COBRA rights
upon his employment termination and Rayburn elected COBRA coverage.
Therefore, if A.B.C.
Fabrics determined that Rayburn satisfied the plan´s eligibility requirements
as an employee, it could not now find that he was not an employee under the
bankruptcy code. If Rayburn was deemed an employee eligible for plan benefits,
then the contributions that A.B.C. Fabrics may owe to the plan should have
whatever status the bankruptcy code provides for such contributions.
This
case represents one of probably many other COBRA cases likely to arise in this
uncertain economic environment. In many cases, employers may go bankrupt or out
of business. If they are otherwise subject to COBRA requirements, qualified
beneficiaries will be in the middle of COBRA coverage periods and paying their
premiums on a regular basis without any knowledge of the employer´s economic
condition. In those cases, qualified beneficiaries are likely to bring claims
for recoupment of their medical expenses or COBRA premiums. Employers and plan
administrators should keep an eye out for these cases. Particularly at risk are
third-party administrators, which typically collect and remit premiums.
Mandated Health Benefits: The Cobra Guide, ©Thompson Publishing Group, Inc.