Opinion
NO. CIV. S-00-2754 WBS
May 22, 2001
MEMORANDUM OPINION
Respondents filed an adversary proceeding in the United States Bankruptcy Court for Eastern District of California to enjoin appellants (collectively, "UEF") from enforcing their claim for reimbursement. On cross-motions for summary judgment, the bankruptcy court ruled in favor of respondents, finding that UEF's claim was discharged under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 727. The UEF appeals the bankruptcy court's order pursuant to 28 U.S.C. § 158(a). This court reviews the order de novo.
Rule 56 of the Federal Rules of Civil Procedure applies in adversary proceedings in bankruptcy. Fed.R.Bankr.P. 7056.
I. Background
Under California law, the UEF provides workers' compensation to the employees of "illegally uninsured" employers. Cal. Ins. Code § 3716. An uninsured, injured employee obtains compensation by filing an application with California Workers' Compensation Appeals Board ("WCAB"). Cal. Ins. Code § 3715. The UEF pays an award issued by the WCAB if the employer fails to pay within ten days after notification of the award. The payment of an award by the UEF constitutes a "liquidated claim for damages" against the uninsured employer. Cal. Ins. Code § 3717(a).
On February 7, 2000, the WCAB awarded $116,007.03 to one of respondent's employees for a work-related injury. When respondents failed to pay the award, the UEF began providing compensation pursuant to section 3716. As a result of the award, the UEF recorded a lien against respondents' real property. See Cal. Ins. Code § 3720.
Prior to the WCAB's decision, respondents filed a petition for bankruptcy under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701, et seq. The bankruptcy court entered an order of general discharge on January 4, 1999. Respondents filed this suit to enjoin the UEF from enforcing its claim for reimbursement, which they contend is discharged under Chapter 7. The UEF argues that its claim is an "excise tax" and thus, exempt from discharge under Chapter 7.
II. Discussion
Section 523 of the Bankruptcy Code excludes from discharge under Chapter 7 "any debt . . . for a tax . . . of the kind and for the periods specified in section . . . 507(a)(8)." 11 U.S.C. § 523(a)(1)(A). Section 507(a)(8) provides priority for "an excise tax on . . . a transaction occurring during the three years immediately preceding the date of the filing of the [bankruptcy] petition." 11 U.S.C. § 507 (a)(8)(E)(ii). Thus, a claim qualifying as an "excise tax" under section 507 is not dischargeable under Chapter 7.
The Ninth Circuit has held that "to qualify as a tax, a debt must be (1) an involuntary pecuniary burden; (2) imposed by the state legislature; (3) for a public purpose; (4) under the police or taxing power." In re Camilli, 94 F.3d 1330, 1331 (9th Cir. 1996) (citing In re Lorber Industries of California, 675 F.2d 1062 (9th Cir. 1982)); see also New York v. Feiring, 313 U.S. 283, 285 (1941) (defining "taxes" as "pecuniary burdens laid upon individuals or their property, regardless of their consent, for the purpose of defraying the expenses of government or of undertakings authorized by it"). These four factors are known as the "Lorber elements" or "requirements."
In Camilli, the Ninth Circuit considered whether an uninsured employer's obligation to reimburse the Industrial Commission of Arizona (the "Commission") for workers' compensation payments was a "tax" within the meaning of the Bankruptcy Code. Like California, Arizona law provides for a statutorily-established Special Fund, administered by the Commission, "to ensure compensation for injured workers whose employers have failed to insure them." Camilli, 94 F.3d at 1332; Ariz. Rev. Stat. § 23-1065. Payments from the fund "act as a judgment against the employer." Id. at 1332 (quoting Ariz. Rev. Stat. § 23-907).
According to the Ninth Circuit, there was "little or no question" that the employer's obligation in Camilli met three of the four Lorber requirements: "the obligation was first, imposed by or under the authority of the legislature; second, for a public purpose; and third, imposed under the police power of the state in order to protect injured employees." Camilli, 94 F.3d at 1333. Thus, the court's analysis focused on whether the debt was an "involuntary" burden. See id.
The court reasoned that although the employer chose not to purchase insurance, "[t]he source of Camilli's obligation to repay the workers' compensation benefits . . . was not her failure to obtain insurance, but the statutorily-created obligation to reimburse [the fund] once [the fund] paid benefits to an uninsured employee." Id. ("The obligation to repay the Fund in this case is thus the product of legislative fiat; at the time it arose . . . it was wholly beyond the control of the debtor."). Therefore, the court held that the obligation qualified as a "tax" under the Bankruptcy Code. Id.; see id. at 1331 (stating "an obligation imposed by statute as a result of a violation of state law cannot . . . constitute a contractual debt," as opposed to a nondischargeable tax).
Here, the parties appear to agree that respondents' obligation to reimburse the UEF meets the four Lorber requirements. Like in Camilli, there is no question that respondents' obligation is imposed by the legislature under the police power of the state for the purpose of protecting injured employees whose employers are not insured. See Cal. Labor Code § 3716(b) ("[T]he Uninsured Employers Fund is created to ensure that workers who happen to be employed by illegally uninsured employers are not deprived of workers' compensation benefits . . . ."). Further, under Camilli, "an obligation imposed by statute as a result of a violation of state law" cannot constitute a "voluntary act." Camilli, 94 F.3d at 1331, 1333. Thus, the obligation qualifies as an involuntary pecuniary burden under Lorber.
Respondents argue that the UEF's reimbursement claim fails to satisfy two additional requirements articulated by the Sixth Circuit. See In re Suburban Motor Freight, Inc., 36 F.3d 484 (6th Cir. 1994) ("Suburban II") and In re Suburban Motor Freight, Inc., 998 F.2d 338 (6th Cir. 1993) ("Suburban I"). According to the Sixth Circuit, satisfaction of the Lorber test is not sufficient because that test is too broad. See Suburban I, 998 F.2d at 341 ("The threat of the Lorber reasoning . . . is that the Government automatically wins priority for all money any debtor owes it, regardless of the nature of the payments."). Two additional concerns must be considered: (1) whether the pecuniary obligation is universally applicable to similarly situated entities; and (2) whether priority treatment for the government claim disadvantages private creditors with "like claims." Suburban II, 36 F.3d at 488; see id. at 487 (emphasizing the admonition that "equality of distribution among creditors is a central policy of the Bankruptcy Code"); see also Suburban I, 998 F.2d at 342 (government should not stand "ahead in line while leaving unpaid private insurers to languish along with the rest of the unsecured creditors").
In Camilli, the Ninth Circuit acknowledged the Sixth Circuit's reasoning in the Suburban cases, and considered the decisions "instructive." Camilli, 94 F.3d at 1333. The court went on to examine the facts of Camilli in accordance with the Suburban cases, and found that the debtor's obligation under Arizona law to reimburse the state fund for workers' compensation payments met the Suburban requirements. Id. at 1334. However, the Ninth Circuit concluded "there is no need to decide whether the Suburban I requirements must be met in all cases." Id.
Even if the Ninth Circuit did require satisfaction of the Suburban requirements in all cases, respondents' obligation to reimburse the UEF would qualify as a "tax" under the Bankruptcy Code. First, the obligation is universally applicable to similarly situated entities because California law requires that "every employer . . . shall secure the payment of [workers'] compensation." Cal. Labor Code § 3700. If an employer does not provide compensation, and the UEF is compelled to make payments to an injured employee, then the employer must reimburse the UEF. See Cal. Labor Code § 3717(a) (authorizing a civil action by the UEF against an employer for the collection of a workers' compensation award paid by the UEF). Thus, all uninsured employers in California are liable for workers' compensation payments made by the UEF.
Second, treating the obligation as a nondischargeable tax does not disadvantage private creditors with "like" claims. In Camilli, the Ninth Circuit distinguished the Commission's claims for reimbursement from the claims in Suburban II. The court noted that in Suburban II, private entities, along with the state's surplus fund, contributed to the compensation of the same injuries. See Camilli, 94 F.3d at 1334; Suburban II, 36 F.3d at 489. In contrast, the state fund in Camilli "carr[ied] its statutorily-imposed burden alone," without competition or contribution from private entities. See Camilli, 94 F.3d at 1334 ("No private entity competes with [the Commission] to pay `insurance' claims for which no insurance has been bought.").
Similarly here, only the UEF provides compensation for "specific" injuries of uninsured employees. See Cal. Labor Code § 3716 (the UEF is not created as a source of contribution "to insurance carriers, or self-insured, or legally insured employers"). No private entity is competing with the UEF for reimbursement of the claim in this case because the UEF carries its burden alone under California law. See id.
A set of facts can always be hypothesized in which a private entity might conceivably be in a like position as a government entity and thus compete with the government for reimbursement against a debtor in bankruptcy. No such circumstances are suggested here, however; and the hypothetical possibility of such a scenario is not sufficient to justify departure from established Ninth Circuit law on a similar statutory scheme designed to compensate uninsured employees.
Furthermore, in determining whether a claim is a "tax" under the Bankruptcy Code, the potential for competing "like" claims is merely a consideration, not a requirement. See Camilli, 94 F.3d at 1334. The court has given due consideration to such a potential — which likely existed under the Arizona statutory scheme considered in Camilli as well. Because the UEF's claim meets the four requirements set forth by the Ninth Circuit in Lorber, the court reverses the bankruptcy court's order.
IT IS THEREFORE ORDERED that the bankruptcy court's order granting respondents' cross-motion for summary judgment, filed December 7, 2000, be, and the same hereby is, REVERSED. The bankruptcy court's entry of judgment, filed December 7, 2000, is hereby VACATED, and the case is REMANDED for proceedings consistent with this order.
DATED: May 22, 2001
WILLIAM B. SHUBB UNITED STATES DISTRICT JUDGE