930 F.2d 1132 (6th Cir. 1991), 89-2020, In re Wolverine Radio Co.

Docket Nº:89-2020, 89-2040.
Citation:930 F.2d 1132
Party Name:Unempl.Ins.Rep. CCH 21,952 In re WOLVERINE RADIO COMPANY, Debtor. MICHIGAN EMPLOYMENT SECURITY COMMISSION, Plaintiff-Appellee/Cross-Appellant, v. WOLVERINE RADIO COMPANY, INC., Defendant-Appellant/Cross-Appellee.
Case Date:April 08, 1991
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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930 F.2d 1132 (6th Cir. 1991)

Unempl.Ins.Rep. CCH 21,952

In re WOLVERINE RADIO COMPANY, Debtor.

MICHIGAN EMPLOYMENT SECURITY COMMISSION,

Plaintiff-Appellee/Cross-Appellant,

v.

WOLVERINE RADIO COMPANY, INC., Defendant-Appellant/Cross-Appellee.

Nos. 89-2020, 89-2040.

United States Court of Appeals, Sixth Circuit

April 8, 1991

Argued Jan. 22, 1991.

Rehearing Denied June 25, 1991.

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[Copyrighted Material Omitted]

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David A. Voges, Asst. Atty. Gen., Lansing, Mich., Donna K. Welch (argued), Detroit, Mich., for plaintiff-appellee/cross-appellant.

Rozanne M. Giunta (argued), Miller, Canfield, Paddock & Stone, Lansing, Mich., for defendant-appellant/cross-appellee.

Before GUY and BOGGS, Circuit Judges, and EDWARDS, Senior Circuit Judge.

RALPH B. GUY, Jr., Circuit Judge.

This appeal concerns the effect of a bankruptcy proceeding on the Michigan Employment Security Commission's (MESC) power to assign, to a purchaser of a debtor's assets, the debtor's rate of contribution to Michigan's unemployment trust fund. Debtor Wolverine Radio Company, Inc. (Wolverine) appeals and MESC cross-appeals from an order of the district court reversing the bankruptcy court order prohibiting MESC from assigning the experience rating of Wolverine to Wolverine's statutory successor, JOSI Broadcasting Company (JOSI), or charging JOSI's experience account for unemployment compensation paid to former employees of Wolverine who are not employees of JOSI. 1

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Wolverine argues on appeal that (1) the district court erred in its ruling that MESC may assign the debtor's experience rating and resulting contribution rate to the purchaser of assets when the sale was made in the bankruptcy court free and clear of all liens, claims, and interests, pursuant to 11 U.S.C. Sec. 363; (2) the district court erred in ruling that MESC may include unemployment compensation payments made subsequent to the sale to Wolverine's former employees when computing the purchaser's experience rating; and (3) the district court ruled in error that Wolverine's negative reserve balance, which resulted when the benefits paid to employees of Wolverine exceeded Wolverine's payment of unemployment taxes, would transfer to the purchaser of assets and should be reduced only by the amount of MESC's allowed claim for unpaid taxes against the debtor. 2 Wolverine maintains that the negative reserve balance is a debt or right to payment discharged in bankruptcy and must be eliminated in its entirety when calculating the contribution rate of JOSI.

On cross-appeal, MESC argues that the bankruptcy and district courts have no jurisdiction to determine the tax liability of JOSI, a nondebtor, and requests reversal of the district court holding that MESC must treat the debtor's past-due contribution obligations as paid on the date of discharge, thereby limiting the amount of the negative reserve balance that could be utilized in calculating the experience rating and subsequent contribution rate for JOSI.

For the reasons set forth below, we affirm.

I.

The parties have stipulated to substantially all of the pertinent facts. Wolverine, whose assets included radio broadcast equipment and a radio tower, operated a radio station in Midland, Michigan, under the call letters WRCI. In April 1984, Wolverine filed for protection under Chapter 11 of the Bankruptcy Code, and, in September 1985, the bankruptcy court confirmed the debtor's plan of reorganization (plan). Included in the confirmed plan was MESC's claim for unpaid taxes, interest, and penalties, which were allowed in the amount of $7,606.91. The plan also incorporated by reference a letter of intent executed by Wolverine and Patten Corporation providing for "free and clear" sale of Wolverine's assets. In January 1986, JOSI, as the assignee of Patten Corporation, acquired the broadcasting equipment and tower of the debtor, and was assigned the radio license of Wolverine by the Federal Communications Commission. The purchaser paid $340,000 for these assets but did not acquire the debtor's accounts receivable, valued at $19,000, or any cash or pre-paid assets.

The purchase agreement between Wolverine and Patten, pursuant to which the sale was consummated, states in paragraph 11(g):

WOLVERINE will hold at Closing good and marketable title to all property and assets listed or described in attached Exhibits A free and clear of any mortgages, liens, pledges, charges, security agreements, claims or encumbrances.

The purchase agreement also states at paragraphs 12(c), 17, and 23, respectively:

It is specifically understood that PATTEN by implication, by operation of law or any equitable proceedings, or otherwise, does not assume any local, state or federal tax liabilities or any other liabilities and obligations of WOLVERINE, as may result from the sale of its assets and property to PATTEN.

WOLVERINE agrees to and does hereby indemnify PATTEN against and save it harmless from any and all liabilities, loss, cost, expense, damage, set-off or recoupment, including reasonable amounts for attorneys' fees which may be asserted against PATTEN arising out of the operation of WRCI-FM on or prior

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to the Closing Date by reason of the purchase and sale hereunder....

This Agreement shall be construed and enforced in accordance with the laws of the State of Michigan.

The plan of reorganization addresses tax claims in pertinent parts of articles II and III, which read as follows:

Classification of Claims and Interests

All claims against and interests in the Debtor will be dealt with by the Plan. Only such claims and interests as are allowed by the Court, pursuant to Section 502(a), shall receive a distribution in accordance with the terms of the Plan. Claims against and interests in the Debtor are classified as follows:

...

C. Class 3. Tax Claims. Class 3 shall be comprised of all allowed tax claims of any governmental agency, whether unsecured or secured by property of the Debtor.

...

Provisions for Satisfying Classes of Claims or Interests

Claims and interests which are not allowed by this Court shall not receive any distribution of any nature whatsoever under the Plan. Allowed claims and interests, including both those classes which are not impaired under the Plan and those classes which are impaired under the Plan, shall be treated as follows:

...

C. Class 3. The allowed claims included in Class 3 shall be paid in full, in installment payments to be made from the Creditors Fund, over a period of five (5) years from the effective date of the Plan, in twenty (20) equal payments, together with interest at the statutory rates, in accordance with the provisions of Section 1129(a)(9)(C) of the Bankruptcy Code. These claimants shall be secured by an irrevocable letter of credit.

In April 1986, MESC wrote to JOSI to inform the company that its MESC contribution rate (the required rate of payment to the employment security fund) was 2.7 percent based on its status as a new employer. Later that year, however, MESC wrote to JOSI and altered its earlier statement; MESC expressed its intent to treat JOSI as the successor to WRCI, and MESC accordingly pegged JOSI's contribution rate for 1986 at 10 percent based on WRCI's poor contribution history when under Wolverine's ownership. 3 The MESC contribution rate for JOSI was calculated utilizing the prior 60-month debtor's history of payroll and benefit charges (the chargeable benefits component) and the debtor's negative reserve balance of $18,293 (the account building component). 4 In

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1987, JOSI was notified by MESC that the contribution rate for the calendar year 1987 would continue at 10 percent, but the negative reserve balance had been reduced to $11,130.71 based on payments made by JOSI during the year 1986. JOSI's reserve account continues to be charged for unemployment benefits being paid to Wolverine's former employees who were never employed by JOSI.

As a result of the action taken by MESC, Wolverine returned to the bankruptcy court. In response to a motion by Wolverine, the bankruptcy court entered its "ORDER ENFORCING THIS COURT'S ORDER CONFIRMING DEBTOR'S PLAN OF REORGANIZATION AND PROHIBITING THE M.E.S.C. FROM ASSIGNING DEBTOR'S EXPERIENCE RATING TO PURCHASERS." It is this order that MESC appealed to the district court. After briefing and oral argument, the district court ordered that (1) MESC must treat Wolverine's past-due contribution obligations, which were recognized in the plan as a claim of $7,601.91 to be paid over a period of five years, as paid on the date of discharge; (2) MESC has the authority to assign Wolverine's experience rating, used to gauge an employer's rate of contribution, to JOSI; and (3) MESC has the power to include unemployment compensation payments made to former Wolverine employees in the computation of JOSI's experience rating and resulting contribution rate. Wolverine appeals from this order and MESC cross-appeals.

II.

We first examine MESC's argument that the bankruptcy court has no subject matter jurisdiction to determine the tax liability of JOSI. 5 Wolverine's response to this argument is that MESC consented to jurisdiction when it stipulated to a set of facts admitting to jurisdiction in the bankruptcy court, and that MESC is precluded from raising on appeal for the first time the issue of subject matter jurisdiction. Notwithstanding what transpired in this action prior to the pending appeal, the federal courts are courts of limited jurisdiction and have a continuing obligation to examine their subject matter jurisdiction throughout the pendency of every matter before them. 6 Parties can neither

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waive nor consent to subject...

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