The Missing Piece of the Puzzle: Perspectives on the Wage Priority in Bankruptcy

Abstract

Debate about priorities among creditors has extended for over twenty years and, while slowing, hasn't ended in a consensus. Most of the focus of this debate has been on secured credit. Notwithstanding various academic objections, the recent revisions of Article 9 of the UCC strengthened the political commitment to the place of secured credit. The battleground over priority thus shifts to the world of unsecured credit in bankruptcy. Are some of the remaining unsecured creditors more equal than others? The answer is of course yes. Beginning with Section 5 of the Bankruptcy Act of 1841 Congress determined that one sort of unsecured creditors, employees, have statutory priority over other unsecured creditors. Is the wage priority efficient? Or is this priority justified or at least explained by principles outside the sphere of the market? Part I of this working paper summarizes the legal history of the wage priority in bankruptcy beginning with the Bankruptcy Act of 1841. Even though bankruptcy was a Whig political gambit in the election of 1840, I contend that by 1841 the rise of politically active evangelicals also played a role in America's first modern bankruptcy law. I next turn to the Supreme Court's most recent foray into statutory priories, Howard Delivery Service, Inc. v. Zurich Am. Ins. Co. The Court in Howard Delivery concluded that the statutory priority afforded employee benefits did not extend to unpaid premiums for workers compensation insurance. During the course of its analysis the majority passed over without mention the one normative vision that stretched back to 1841: protection of wage earners and their families. Thus in Part III I consider three perspectives on the justification of the wage priority. Market failure contrasting with rational autonomy (the situational and the existential perspectives) are the first two. The third perspective, the normative, considers the justice of a wage priority. This Part examines the religious, cultural, and political matrix of the 1841 Act, focusing on ante-bellum American evangelicals and the Whigs. I argue that religious and political confluences on public morality played a significant role in the creation of the wage priority.