291 F.3d 111 (1st Cir. 2002), 01-9016, In re Boston Regional Medical Center, Inc.

Docket Nº:01-9016.
Citation:291 F.3d 111
Party Name:In Re: BOSTON REGIONAL MEDICAL CENTER, INC., Debtor. Commonwealth of Massachusetts Division of Employment and Training, Appellant, Cross-Appellee, v. Boston Regional Medical Center, Inc., Official Committee of Unsecured Creditors, Appellees, Cross-Appellants.
Case Date:May 31, 2002
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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291 F.3d 111 (1st Cir. 2002)

In Re: BOSTON REGIONAL MEDICAL CENTER, INC., Debtor.

Commonwealth of Massachusetts Division of Employment and Training, Appellant, Cross-Appellee,

v.

Boston Regional Medical Center, Inc., Official Committee of Unsecured Creditors, Appellees, Cross-Appellants.

No. 01-9016.

United States Court of Appeals, First Circuit

May 31, 2002

Heard March 6, 2002.

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Robert Ganong, Special Assistant Attorney General, with whom Thomas F. Reilly, Attorney General, and Daniel J. Hammond, Assistant Attorney General, were on brief for appellant.

Harold B. Murphy with whom D. Ethan Jeffery and Hanify & King were on brief for appellee.

Before LYNCH, Circuit Judge, and CAMPBELL and BOWNES, Senior Circuit Judges.

LYNCH, Circuit Judge.

This case involves a question of priorities for about three million dollars in unsecured debt owed by a bankrupt medical center. The Commonwealth of Massachusetts asserts it has priority to this sum as reimbursement for unemployment benefits it paid out to employees laid off after the bankruptcy. The estate of the medical center asserts that the Commonwealth has no priority but is in line with other unsecured creditors. The bankruptcy court and Bankruptcy Appellate Panel ("BAP") largely ruled against the Commonwealth. This issue is one of first impression at the circuit level. On different reasoning, we affirm the BAP's judgment.

The dispute between the parties concerns a three-million-dollar claim held by the Massachusetts Division of Employment and Training against the Boston Regional Medical Center. That claim arose because the Center had chosen to fulfill its obligations under Massachusetts's Employment and Training Law by reimbursing the Division for any unemployment compensation benefits paid to the Center's employees. Here, though, the payments were made to employees whom the Center laid off in large numbers shortly after filing a Chapter 11 petition, and were based on the employees' prepetition employment. The Division argues that this obligation is a tax under 11 U.S.C. § 507(a)(8) and, in substantial part, an administrative expense of the bankruptcy estate under 11 U.S.C. § 503(b). Either of these contentions, if accepted, would require the Center's bankruptcy estate to pay the Division before paying the Center's general unsecured creditors. The Center responds that the claim is not at all entitled to priority as being based on a tax, and only to a very small extent as an administrative expense. The bankruptcy court and the BAP both decided that the claim was based on a tax, but not a tax entitled to priority; they also gave priority to the claim as an administrative expense only to the small extent suggested by the Center. We hold that the claim is not based on a tax, and that the bankruptcy court and the BAP correctly determined the amount of the claim that is an administrative expense.

I.

The parties submitted this case to the bankruptcy court on stipulated facts, which we summarize briefly and place in their

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legal context. The nonprofit1 Boston Regional Medical Center, which was formerly known as the New England Sanitarium and Benevolent Association and did business as New England Memorial Hospital, filed a voluntary petition under Chapter 11 of the Bankruptcy Code on February 4, 1999. At that time, the Center had the capacity to admit up to 195 patients and employed 1262 people. Prior to filing, it had laid off a few employees and had ceased to admit patients. Within two weeks after filing, the Center (acting as debtor-in-possession) terminated 1124 employees, and by the end of the first quarter of 1999, an additional 68. In the second quarter, it terminated another 29; in the third, 4; in the fourth, 1; and in the first quarter of 2000, 33.

Some of those who lost their jobs collected unemployment insurance from the Commonwealth, as provided by federal and Massachusetts law. See generally Federal Unemployment Tax Act, 26 U.S.C. §§ 3301-3311 (2000); Employment and Training Law, Mass. Gen. Laws ch. 151A (2000). Under the Commonwealth's Employment and Training Law, applicants' benefits typically depend upon their salaries for each of the last four complete quarters they work. Mass. Gen. Laws ch. 151A, §§ 1(a), 29. Thus, the employees laid off in the first quarter of 1999 or earlier received benefits based solely on prepetition work; those laid off in the second quarter of 1999 or later received benefits based in part on prepetition work and in part on postpetition work. Because the Center laid off the vast majority of its employees in the first quarter of 1999, most relevant benefit payments were based solely on prepetition work, and most of the others were based at least in part on prepetition work.

For-profit employers within the Commonwealth must make regular contributions to the Commonwealth's Unemployment Compensation Fund based on a percentage of the wages they pay. Mass. Gen. Laws ch. 151A, § 14. Nonprofit employers have the option instead to make "payments in lieu of contributions," reimbursing the fund after the fact for benefits paid to their former employees. Id. § 14A. The Center's predecessor, the New England Sanitarium and Benevolent Association, in 1972 chose the option to pay after-the-fact reimbursement, and the Center adhered to that choice. As a result, following its massive layoffs in the first quarter of 1999, it became liable to the Division for the unemployment insurance benefits paid to the employees laid off.

Those payments were substantial. The parties agree that as of January 2001 the Division's valid claims for reimbursement of benefits paid to former Center employees amounted to $ 3,050,857. The Division timely filed its claims and amended its postpetition claim several times as it continued to pay out unemployment benefits and the Center's liability mounted. The only question now is at what priority, if any, and so to what extent, the Division will receive payment on its claims.

Before the bankruptcy court, the Division took the position that its claims fell into two categories: first, a priority claim for a tax on wages under 11 U.S.C. § 507(a)(8)(D) for the relatively small liability arising from the unemployment insurance benefits that the Division paid before the date of filing; second, an administrative expense claim for taxes incurred

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by the bankruptcy estate under §§ 507(a)(1) and 503(b) for the larger sum that the Division paid after the date of filing. The Center objected, arguing that: first, payments in lieu were not taxes under the Bankruptcy Code, and thus were within the scope of neither § 507(a)(8)(D) nor § 503(b)(1)(B); second, the Division's claims were not properly classified as administrative expenses because the classification turned not on when the Division paid the benefits, but on when the Center's employees had done the work that entitled them to those benefits.

On December 4, 2000, the bankruptcy court ruled largely for the Center. In re Boston Reg'l Med. Ctr., 256 B.R. 212 (Bankr.D.Mass.2000). It concluded that payments in lieu met the general criteria established for taxes by courts interpreting the Bankruptcy Code, relying on the decisions of the Ninth Circuit in County Sanitation District No. 2 v. Lorber Industries of California, Inc. (In re Lorber Industries of California, Inc.), 675 F.2d 1062 (9th Cir. 1982), and of the Sixth Circuit in Ohio Bureau of Workers' Compensation v. Yoder (In re Suburban Motor Freight, Inc.), 36 F.3d 484 (6th Cir. 1994) [hereinafter Suburban II ]. Boston Reg'l, 256 B.R. at 220, 225. It further concluded, however, that those payments did not qualify as taxes "on . . . wage[s], salar[ies], or commission[s]" within the meaning of § 507(a)(8)(D), because they were insufficiently closely linked to wages in amount and time and because they were contingent on occurrences other than the payment of wages. Id. at 225-27. As to the Division's argument that the wages were administrative expenses, the court agreed with the Center's reasoning that the key question of timing was whether the employment used to calculate the unemployment insurance benefits that gave rise to the obligation to make payments occurred before or after the Center's filing date. Id. at 227-29. The parties then stipulated that under the court's ruling, as of January 2001, the Division had a general unsecured claim of $2,961,374 and an administrative claim of $89,483.

The Division appealed to the BAP, and the Center cross-appealed. On August 27, 2001, the BAP affirmed. Mass. Div. of Employment & Training v. Boston Reg'l Med. Ctr. (In re Boston Reg'l Med. Ctr.), 265 B.R. 838 (BAP 1st Cir. 2001). Its reasoning was generally similar to that of the bankruptcy court. It agreed that payments in lieu were taxes, although it considered the controlling precedent to be United States v. Reorganized, CF & I Fabricators of Utah, Inc., 518 U.S. 213, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996), rather than Lorber or Suburban II; it also agreed that those payments were not taxes on wages under § 507(a)(8)(D), and it agreed with the bankruptcy court's allocation of the payments as pre-and postpetition depending on the date of the work that gave rise to the payments. Id. at 848-53. It rejected the Division's alternative argument that the payments were excise taxes under § 507(a)(8)(E) because the Division had not presented that argument to the bankruptcy court. Id. at 847-48. This appeal followed. The parties substantially renew the arguments we have described,2 with the addition of the

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new dispute about whether the Division waived its argument based on § 507(a)(8)(E).

II.

This case involves the intersection of two federal statutes and of the policies they further. The first statute is the Federal Unemployment Tax Act, 26 U.S.C. §§ 3301-3311....

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