In re Adams, Civ. A. No. 83-6192.
| Decision Date | 23 May 1984 |
| Docket Number | Civ. A. No. 83-6192. |
| Citation | 40 BR 545 |
| Parties | In re Harry C. ADAMS and Catherine Anna Adams. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Andrew N. Schwartz, Philadelphia, Pa., for debtors.
Eric L. Frank and Alan M. White, Community Legal Services, Inc., Philadelphia, Pa., for Consumers Educ. and Protective Ass'n as amicus curiae.
Edward Sparkman, Asst. City Sol., Philadelphia City Solicitor's Office, Philadelphia, Pa., for the City of Philadelphia.
This bankruptcy appeal presents the question of whether debts owed to the City of Philadelphia for water and sewer rents are "property taxes" entitled to priority status under 11 U.S.C. § 507(a)(6)(B) (1982). The Bankruptcy Court answered in the affirmative. See In re Adams, 17 B.R. 742 (Bkrtcy.E.D.Pa.1982), reaff'd on reconsideration, 34 B.R. 352 (Bkrtcy.E.D.Pa.1983). Because I conclude that water and sewer rents are not "property taxes," the decision below shall be reversed.
The facts underlying this appeal are not in dispute. The debtors, Harry and Catherine Adams, filed a Chapter 13 petition on March 25, 1981. In July, the City of Philadelphia filed a proof of priority claim in the amount of $1,215.32. The debtors objected to that portion of the claim representing unpaid water and sewer rents, some $220.82.
In its initial opinion, the bankruptcy court relied upon both state and federal law in determining that water and sewer rents were in the nature of property taxes. The federal analysis was limited to citation of one rather ancient case from this district, In re Industrial Cold Storage & Ice Co., 163 F. 390 (E.D.Pa.1908). Looking at state law, that court was persuaded by the Pennsylvania statutory provisions allowing a municipality to obtain a lien against the property in the amount of the outstanding rents. See In re Adams, 17 B.R. at 743. Although a motion for reconsideration was formally denied, a second opinion issued, which was slightly different in focus. Faced with Pennsylvania caselaw which ostensibly contradicted the earlier ruling, the court determined that federal law was controlling and relied only upon that prong of the earlier analysis. See In re Adams, 34 B.R. at 353-54. This appeal followed. The Consumer Education and Protective Association ("CEPA"), an organization of low income consumers, has moved for leave to file a brief as amicus curiae on behalf of the debtors. This motion shall be granted.
Section 507(a)(6)(B) of the Bankruptcy Code accords priority status to claims for "property taxes" held by governmental units.1 A threshold question, which apparently created some confusion below, is whether federal or state law governs. As the United States Supreme Court has noted; "the bankruptcy act is a federal statute, the ultimate interpretation of which is in the federal courts." New Jersey v. Anderson, 203 U.S. 483, 491, 27 S.Ct. 137, 140, 51 L.Ed. 284 (1906). Accord New York v. Feiring, 313 U.S. 283, 285, 61 S.Ct. 1028, 1029, 85 L.Ed. 1333 (1941); In re Lorber Ind. of Cal., Inc., 675 F.2d 1062, 1066 (9th Cir.1982). The Anderson court noted that although a state's determination of whether something is a tax is persuasive and entitled to great weight, it is not binding. Anderson, 203 U.S. at 491, 27 S.Ct. at 140. The confusion sets in because it may become crucial to determine how a state treats a debt and why that debt is incurred. The Feiring Court endeavored to explain this interface between federal and state law:
The particular demand for which the City now claims priority of payment as a tax is created and defined by state enactment. We turn to its provisions and to the decisions of the state courts in interpreting them, not to learn whether they have denominated the obligation a "tax" but to ascertain whether its incidents are such as to constitute a tax within the meaning of the Bankruptcy Act.
Feiring, 313 U.S. at 285, 61 S.Ct. at 1029 (emphasis added). Put another way, federal law defines a "tax," but state law must be referenced in order to apply that definition. The court in Feiring went on to look to the New York City sales tax ordinance to determine whether it was a "tax" within the meaning of the federal bankruptcy act. Indeed, most federal courts, at some point in their analysis, refer to the state law creating the charge or debt. See e.g., Anderson, 203 U.S. at 492-94, 27 S.Ct. at 140-41 (New Jersey corporate tax); Lorber, 675 F.2d at 1066-68 (); McDowell v. City of Barberton, Ohio, 38 F.2d 786, 787-88 (6th Cir.1930) (Ohio water charges); In re New England Carpet Co., Inc., 26 B.R. 934, 936-37 (Bkrtcy.D.Vt.1983) (). As a practical matter, it would be incongruous to treat as a tax that which state law dictates is merely a charge, particularly when state law created the charge in the first instance. Thus, although federal law governs what constitutes a "tax," how the state treats that charge may dictate the ultimate result.
Under federal law, a tax has certain characteristics which distinguish it from a mere debt or charge. The major distinction lies in whether it is an involuntary charge assessed on all or a charge for services rendered in the nature of a contractual or quasi-contractual obligation. As the Anderson court explained:
Anderson, 203 U.S. at 492, 27 S.Ct. at 140 (emphasis added). Accord Feiring, 313 U.S. at 287, 61 S.Ct. at 1030; Lorber, 675 F.2d at 1066. See also National Cable Television Ass'n v. United States, 415 U.S. 336, 340-41, 94 S.Ct. 1146, 1148-49, 39 L.Ed.2d 370 (1974). In Lorber, the Ninth Circuit held that industrial sewer user fees were not taxes. The court was persuaded by the fact that the charges were triggered by Lorber's decision to use the sewage system and that the amount of the charge was proportionate to their use.2 675 F.2d at 1067. With respect to the issue of voluntariness, the court stated:
In determining if Lorber\'s use of the system was voluntary, and if it therefore consented to imposition of the fees, we are not free to consider the practical and economic factors which constrained Lorber to make the choices it did. The focus is not upon Lorber\'s motivation, but on the inherent characteristics of the charges.
Id. at 1066. Put another way, the fact that Lorber probably had nowhere else to turn for sewerage services did not transform the charges into involuntary pecuniary burdens, and hence taxes.
Like the industrial sewer fees in Lorber, I conclude that the water and sewer rents are charges for services rendered, rather than involuntary pecuniary burdens. By state enactment, municipalities are granted the power to impose and collect "an annual rate or charge for the use of ... the sewerage system ... from the owners of, or the users of water in or on the property served ..." Sewer Rental Act of 1935, Pa.Stat.Ann. tit. 53 § 2231 (Purdon's 1974) (emphasis added). Under the Act, this annual rate must be "apportioned equitably among the properties served ...." Id. at § 2232. Municipalities are also obligated to "fix rates to be charged for the water furnished within the limits of such city, borough or town ...." Pa.Stat.Ann. tit. 53 § 2934 (Purdon's 1974) (emphasis added). These statutory provisions base the charges upon the use of the water and sewage systems.3 The charges are consensual rather than involuntary; they are triggered when the property owner elects to use the system. I agree with the reasoning in Lorber that it is not relevant that a property owner may have no other choice in obtaining water and sewer services. The "inherent character" of the charges are premised upon an implied agreement to pay for the water and sewer services furnished.
It is very telling that the Pennsylvania Supreme Court has twice struck down municipal ordinances which endeavored to base sewer rents upon the assessed value of the property served rather than the amount of actual use of sewage facilities. See Philadelphia's Petition, 343 Pa. 47, 21 A.2d 876 (1941); Hamilton's Appeal, 340 Pa. 17, 16 A.2d 32 (1940). In Hamilton's Appeal, the charge imposed for sewage was forty (40) cents for each one hundred dollars of the assessed value of the property.4 The court first noted that sewer and water systems are operated by municipalities in their proprietary rather than governmental capacity. As such, a municipality is no different from private industry and deserves to be paid for its services. 340 Pa. at 20-21, 16 A.2d at 34. The court explained that sewer rents:
are not taxes, nor a substitute for taxes, but charges made, without discrimination, for an industrial service rendered in value equal to the respective sums charged; by using the facilities with knowledge of the rates charged, the consumer, by implication, contracts and agrees to pay the rates, and his obligation to make payment rests upon contract rather than upon any exercise of the taxing power.... They are "simply charges for a commodity sold as any others sell commodities."
Id. at 21, 16 A.2d at 34 (citations omitted). The court held that this ordinance, which based rents upon property value rather than use, exceeded the scope of the Sewer Rental Act, quoted above, which allows municipalities to charge "for the use" of sewage facilities. Pa.Stat.Ann. tit. 53 § 2231. The court noted that ...
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