Debtor Corporation's Obligation to State Worker's Compensation Fund is Not "Excise Tax" and So Not a Priority Claim

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


California Self-Insurers' Security Fund v. Lorber Industries (In re Lorber Industries)
Ninth Circuit Court of Appeals, Case Nos. 07-56227 & 07-56309
May 4, 2009

Issue
Does a business debtor's statutory obligation to reimburse a state workers' compensation fund for benefits the fund paid out on the debtor's behalf constitute an "excise tax," and is therefore a priority debt?

Holding
This obligation to reimburse the worker's compensation fund, under the state statute at issue here, is not a priority debt under § 507(a)(8)(E)(ii) of the Bankruptcy Code primarily because "if a private creditor similarly situated to the government can be hypothesized under the relevant statute, the claim cannot be considered an excise tax."

Facts
Debtor corporation self-insured its workers' compensation obligations, as permitted under California state law and, as required under those circumstances, provided the Self-Insurers' Security Fund a security deposit in the form of a letter of credit in case it defaulted on those obligations. After filing a Chapter 11 case, debtor did default, and the Fund took over payments to injured workers, exhausting the letter of credit and then some. The Fund is statutorily entitled to reimbursement for the amount paid beyond the letter of credit. This claim was treated as a general unsecured instead of priority claim in the debtor's reorganization plan, to which the fund objected

The Statute
Section 507 of the Code states as pertinent here:

(a) The following expenses and claims have priority in the following order:
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for —
(E) an excise tax on —
(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition.

The Courts Below
The bankruptcy court held that the claim for reimbursement qualified as an excise tax but was not entitled to priority because the "transaction" being taxed was debtor's application for self-insurance 14 years before the bankruptcy case was filed, well beyond the 3-year priority period. The BAP also held that the claim qualified as an excise tax but decided that the "transaction" at issue was the debtor's post-petition default on its workers' compensation obligations; since that did not occur "during the three years immediately preceding the date of the filing of the petition," the claim was not entitled to priority.

The Ninth Circuit's Rationale
The court disagreed with both lower courts by holding that the debt was not an excise tax, and did so by focusing on one relatively new element in making this determination.

Since 1982 the Ninth Circuit had used the following 4-prong test to determine whether a debt was an excise tax:

(a) an involuntary pecuniary burden, regardless of name, laid upon individual or property; (b) imposed by or under the authority of the legislature; (c) for public purposes, including the purposes of defraying expenses of government or undertakings authorized by it; and (d) under the police or taxing power of the state.

(Interestingly, the court adopted this test in a case decades earlier but apparently involving the same employer-debtor: County Sanitation District Number 2 v. Lorber Industries (In re Lorber Industries of California) 675 F.2d 1062 (9th Cir. 1982)).

But in 2004, because of concerns that the "public purposes" prong was too broad and was thereby overly expanding the definition of "excise taxes" to the detriment of general unsecured creditors, the Ninth Circuit added a fifth prong: the debt is not an excise tax if a non-governmental creditor "can be hypothesized under the relevant statute." George v. Uninsured Employers Fund (In re George), 361 F.3d 1157(9th Cir. 2004). This means that if under the statute "a private creditor . . . can assert a claim against the debtor similar to that of the [governmental entity, the] claim did not qualify as an excise tax." The rationale is that granting priority treatment for the government on a claim that was functionally the same as that of other creditors would unfairly favor the government.

Under the California workers' compensation self-insurance statute, beyond the Self-Insurers' Security Fund's reimbursement right:

private creditors . . . may also have similar reimbursement claims against [the debtor corporation.] For example, the entity that extended the letter of credit . . . has a claim against [the debtor] related to its default on its self-insurance obligations. Additionally, [the statute] recognizes that claimants retain a cause of action against the defaulting self-insurer, and provides that the Fund can recover as a subrogee in any action to collect.

So, the Fund’s claim is one that is similar to claims that certain private creditor could raise, and is thus not an excise tax.

Distinguished Its Own Opinions Based on Another State's Statute
The Ninth Circuit panel emphasized that whether a workers' compensation reimbursement is an excise tax and thus a priority debt turns on the details of the statute at issue. It contrasted the California statutory scheme with that of Arizona's, which has "several unique, non-universal characteristics" leading earlier Ninth Circuit opinions to conclude that claims by the Arizona workers' compensation fund are priority excise taxes. Particularly, the Arizona statutes give its fund the exclusive right to pursue uninsured reimbursement claims, and such claims "have the same priority . . . as claims for taxes." See Indus. Comm’n of Ariz. v. Camilli (In re Camilli), 94 F.3d 1330 (9th Cir.1996); DeRoche v. Arizona Industrial Commission (In re DeRoche), 287 F.3d 751 (9th Cir. 2002).

The Bottom Line, and in Oregon . . .
Whether a claim for workers' compensation reimbursement is an excise tax and thus a priority debt under § 507(a)(8)(E)(ii) turns on the state statute upon which the claim is based. Assuming the traditional four prongs of the excise tax test have been met, the matter is determined by whether under the pertinent statute "a private creditor . . . can assert a claim against the debtor similar to that of the [governmental entity]."

Oregon's workers' compensation statutes seem to assert that all employer obligations to its fund are "preferred to all general claims in all bankruptcy proceedings," and that all amounts due to the umbrella agency that overseas the workers compensation functions "shall be considered taxes." ORS 656.562

Query: do these assertions serve to turn such obligations by debtors into "excise taxes" and thus priority claims in bankruptcy court, in light of this Ninth Circuit Lorber Industries opinion, which turns so much on the content of the respective state statutes? Or does the question turn on the application of the five prongs discussed in the opinion regardless of the Oregon statute's assertion? Is Oregon's statute more like California's or instead Arizona's, governed by this new Lorber Industries opinion or rather by the Arizona-based opinions distinguished and approved by the Ninth Circuit panel here?

Please feel free to respond to this question by making a comment below. For your convenience, here is ORS 656.562, quoted from above, in full:

(1) All premiums, fees, assessments, interest charges, penalties or amounts due the Industrial Accident Fund from any employer under this chapter and all judgments recovered by the State Accident Insurance Fund Corporation against any employer under this chapter shall be deemed preferred to all general claims in all bankruptcy proceedings, trustee proceedings, proceedings for the administration of estates and receiverships involving the employer liable therefor or the property of such employer.
(2) All assessments, interest charges, penalties or amounts due the Department of Consumer and Business Services shall be considered taxes due the State of Oregon.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO RECEIVE AN EMAIL WITH A LINK TO SUCH FUTURE REPORTS WHEN THEY BECOME AVAILABLE.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

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