Cal. Emp't Dev. Dep't v. Hansen (In re Hansen), BAP No. EC–11–1320–MkPaD.

• Decision Date: 18 April 2012
• Docket Number: Adversary No. 10–02180–C.,BAP No. EC–11–1320–MkPaD.,Bankruptcy No. 10–20248–C–7.
• Citation: 2012 Daily Journal D.A.R. 5087,56 Bankr.Ct.Dec. 93,470 B.R. 535,67 Collier Bankr.Cas.2d 1543,12 Cal. Daily Op. Serv. 5855
• Parties: In re Michael Shane HANSEN and Amy Hansen, Debtors. State of California Employment Development Department, Appellant, v. Michael Shane Hansen and Amy Hansen, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

470 B.R. 535

67 Collier Bankr.Cas.2d 1543

56 Bankr.Ct.Dec. 93

12 Cal. Daily Op. Serv. 5855

2012 Daily Journal D.A.R. 5087

In re Michael Shane HANSEN and Amy Hansen, Debtors.State of California Employment Development Department, Appellant,

v.Michael Shane Hansen and Amy Hansen, Appellees.

BAP No. EC–11–1320–MkPaD.

Bankruptcy No. 10–20248–C–7.

Adversary No. 10–02180–C.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on March 22, 2012.

Decided April 18, 2012.

Amy Julia Winn, Sacramento, CA, for the Appellant.

Julia Patricia Gibbs, for the Appellees.

Before MARKELL, PAPPAS, and DUNN, Bankruptcy Judges.

OPINION

MARKELL, Bankruptcy Judge.

INTRODUCTION

The California Employment Development Department (the “EDD”) appeals the bankruptcy court's judgment that certain unpaid unemployment insurance taxes were not the kind of taxes specified in § 507(a)(8)(C).¹ As a consequence, the bankruptcy court held that the unpaid unemployment insurance taxes in this case did not give rise to a nondischargeable debt within the meaning of § 523(a)(1)(A). We AFFIRM.

FACTS

One of the debtors in this case, Michael Shane Hansen (“Hansen”), was president of Onvoi Business Solutions, Inc. Onvoi Business Solutions, Inc., in turn, was part of a group of related companies which included OBS Personnel, Inc., Onvoi Holdings, Inc., and Birdcage Travel, Inc. (collectively, the “Onvoi Entities” or “Onvoi”). The Onvoi Entities provided human resources and staffing solutions to private clients.

In December 2002, Onvoi purchased Birdcage Travel, a company which held an unemployment insurance tax rate of 0.9%. That rate, established by the EDD, was considerably lower than the 4.7% rate at which the EDD had assessed Onvoi's unemployment insurance tax liability.² Once the sale closed, Onvoi transferred its employees from its existing EDD employer account—with the 4.7% rate—to the EDD employer account formerly maintained by Birdcage Travel—which had the 0.9% rate. Based on the EDD's calculation, this saved Onvoi approximately $2.8 million in unemployment insurance taxes.

On March 29, 2004, the EDD issued a notice of assessment, pursuant to California Unemployment Insurance Code § 1735,³ to Hansen, individually, and/or as a responsible person of the Onvoi Entities. The total amount assessed was $4,820,523.86. This amount included $2,872,050.34 in unpaid unemployment insurance taxes from January 1, 2003 through September 30, 2003; $1,753,521.28 in penalties; ⁴ and $194,952.24 in unpaid interest. According to the EDD, the assessment represented the difference between the amount of unemployment insurances taxes Onvoi paid based on Birdcage Travel's 0.9% unemployment insurance tax rate and the amount Onvoi should have paid had it applied the correct 4.7% rate.

The Settlement Agreement

Hansen, Michael Alexander DiManno, Steven Dennis Whitney, and Steven Bradley Serafin (collectively, the “Onvoi Principals”) signed a settlement agreement (the “Settlement Agreement”) with the EDD. The Settlement Agreement resolved not only the notice of assessment the EDD had issued to Hansen; it also resolved the notices of assessment the EDD had issued to each of the remaining Onvoi Principals.

The Settlement Agreement provided as follows:

A. The [Onvoi Principals] shall pay the sum of $1,600,000 in eleven monthly payments within 12 months after an Administrative Law Judge (ALJ) of the CUIAB approves this Settlement Agreement (“Approval Date”). The [Onvoi Principals] shall also pay all accrued interest and additional penalties and interest thereon, which shall accrue during the eleven months following the due date for the first payment shall accrue pursuant to the Unemployment Insurance Code section 1135. The total sum of the payments due during the eleven months following the Approval Date shall be principal in the amount $1,600,000, penalty in the amount of $133,333.33, plus interest in the amount of $1,027.04, for a total sum of $1,734,360.38. (“Total Amount Owed”). If the [Onvoi Principals] pay the principal sum of $1,600,000 plus accrued interest and penalty prior to 12 months after the Approval Date, then the mandatory penalty shall cease to accrue.

...

C. If the [Onvoi Principals] fail to make any of said eleven payments on a timely basis, then the EDD will deem such failure to constitute a default in the payment schedule and a material breach of the Settlement Agreement. Hansen will then have thirty additional days to make said defaulted payment and the balance owed for the Total Amount Owed under the Settlement Agreement, with credit given for all previously made payments (“Balance Due”).

D. If Hansen fails to pay the Balance Due within the 30 days following default as set forth in the Paragraph 8(c) above, then the EDD shall deem Hansen to have defaulted and to be in material breach of the Settlement Agreement. The EDD shall then have the right to collect the Balance Due from Hansen using all means allowed by law.

E. If Hansen does not pay the Balance Due and the EDD is unable to collect the balance within 60 days following the default, then the EDD shall deem Hansen to have made a second default (“Second Default”). Hansen shall then owe to the EDD the original amount of the Challenged Assessment issued against Hansen in the amount of $4,820,523.86, with EDD giving credit for all payments made by the [Onvoi Principals] (“Challenged Assessment Balance[”] ). Interest and penalties shall accrue on the amount [of the] Challenged Assessment Balance until it is paid in full. The EDD shall then have the right to collect the Challenged Assessment Balance from Hansen using all means allowed by law. If Hansen makes a second default, the EDD agrees not to pursue any collection efforts against DiManno, Whitney or Serafin.

Settlement Agreement at 2–3.

An administrative law judge approved the Settlement Agreement on March 17, 2009. From April 2009 to September 2009, Hansen made six payments under the Settlement Agreement, totaling $1,000,513.46. Hansen did not, however, make the remaining payments.

In a November 6, 2009 letter to Hansen, the EDD notified Hansen that he had defaulted on the payment schedule and was in breach of the Settlement Agreement. The EDD further advised Hansen as follows:

Pursuant to the Settlement Agreement, you have until November 16, 2009, to pay the balance due of $733,846.92. If you do not pay the balance due of $733,846.92, by November 16, 2009, the Employment Development Department will exercise its right to collect that sum by using means allowed by law.

Furthermore, if you do not pay the balance due by January 16, 2010, you will owe the EDD the original amount of the assessment, less any settlement payments received. As of today, that amount is $3,819,990.61. In addition, interest and penalt[ies] will accrue until that amount is paid in full. The Employment Development Department will have the right to collect that amount using all means allowed by law.

Letter from EDD dated Nov. 6, 2009.

This letter notwithstanding, Hansen made no additional payments to the EDD.

The Debtors' Bankruptcy and The Adversary Proceeding

Hansen and his wife, Amy Hansen (the “Debtors”), filed a chapter 7 bankruptcy petition on January 6, 2010. On March 30, 2010, the EDD commenced the adversary proceeding giving rise to this appeal. In its complaint (the “Complaint”), the EDD sought a determination that the $3,788,969 allegedly due and owing under the Settlement Agreement (the “UI Tax”) was a “tax” of the kind specified in § 507(a)(8)(C) and thus gave rise to a nondischargeable debt within the meaning of § 523(a)(1)(A). On April 29, 2010, the Debtors moved to dismiss the Complaint as to Amy Hansen.

After the Debtors moved to dismiss the Complaint but before the bankruptcy court denied the motion, the EDD filed a first amended complaint on May 24, 2010 (the “First Amended Complaint”). In the First Amended Complaint, the EDD sought the same determination of nondischargeability, but added the allegation that the debt resulting from the UI Tax was a community debt for which both Debtors were liable.

The Debtors answered the First Amended Complaint on June 13, 2010, admitting that the amount of the EDD's claim was $3,788,969, denying that the debt was a community debt for which both Debtors were liable, and asserting waiver and estoppel as affirmative defenses to the EDD's contention that the amount allegedly due and owing was a tax.

At trial, the EDD argued that Hansen's liability for the UI Tax was two-fold. First, it contended that Hansen was liable as a responsible person as defined by California Unemployment Insurance Code § 1735. Second, it contended that Hansen was contractually liable under the Settlement Agreement which he breached. The EDD also maintained that Amy Hansen was liable as Hansen's spouse. The Debtors, on the other hand, asserted that any liability Hansen faced under the Settlement Agreement was entirely contractual, and as such, did not give rise to a nondischargeable debt within the meaning of § 523(a)(1)(A).

After hearing the parties' opening arguments, the bankruptcy court invited testimony on the issue of how the UI Tax was calculated. Brenda Farber, chief of the EDD's special procedures section, testified on that point. The bankruptcy court, however, found Farber's testimony incomplete, as she could not identify the interest rate used to generate the amounts at issue. To provide the EDD with the opportunity to supplement the evidence concerning the calculation of the UI Tax, the bankruptcy court continued the trial.⁵

Before adjourning, however, the bankruptcy court announced its preliminary rulings. First, the bankruptcy court determined that no judgment would be entered against Amy Hansen. The bankruptcy court concluded that she would be liable for the UI Tax only to the extent that the EDD could collect on its judgment from any of the Debtors' community property, and that the state court would have to...