McKee v. Paradise

Background\n\nThe case involves Grigsby-Grunow, Inc., an employer that collected small welfare dues and a one-dollar entry fee from employees through automatic payroll deductions for the Majestic Employees Welfare Association, an unincorporated employee insurance group with its own officers and bank account. The employer recorded deductions on its payroll books and credited an internal association account, but never segregated or separately deposited the money. The employer stopped paying amounts due in early 1933, leaving $14,607.51 owed when equity receivers were appointed and later the employer went into bankruptcy. The association’s successor named a trustee to press a claim for a preferred payment.\n\nReasoning\n\nThe Court asked whether those unpaid deductions created a trust giving the association priority in bankruptcy. The Justices concluded they did not. The relationship was employer and employee, and when wages became due the employer simply owed a debt to the association. There was no separate fund or special deposit and no equitable title or lien created by the arrangement. The Court explained that mere failure to pay a debt does not convert general assets into a trust fund, so the claimed constructive trust could not support a preference.\n\nReal world impact\n\nThe decision keeps unpaid payroll deductions treated as ordinary debts in bankruptcy, not as segregated trust property with priority over other creditors. Employee benefit groups and trustees cannot obtain preference merely by showing payroll deductions were recorded but not separately held. The ruling resolves the dispute finally in favor of general creditors and affirms the lower court’s refusal to allow a preferred claim.\n\n