In re Albert Lindley Lee Mem'l Hosp., No. 09-30845-5-mcr

• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Northern District of New York
• Writing for the Court: MARGARET CANGILOS-RUIZ
• Citation: 428 B.R. 283
• Docket Number: No. 09-30845-5-mcr
• Decision Date: 07 May 2010
• Parties: In re The ALBERT LINDLEY LEE MEMORIAL HOSPITAL a/k/a A.L. Lee Memorial Hospital, Debtor.

428 B.R. 283

In re The ALBERT LINDLEY LEE MEMORIAL HOSPITAL a/k/a A.L. Lee Memorial Hospital, Debtor.

No. 09-30845-5-mcr.

United States Bankruptcy Court,
N.D. New York.

May 7, 2010.

428 B.R. 285

Camille Wolnik Hill, Esq., Bond, Schoeneck & King, PLLC, Syracuse, NY, for Debtor.

Andrew M. Cuomo, New York State Attorney General, Steven Koton, Assistant Attorney General, New York, NY, for New York State Department of Labor.

MEMORANDUM-DECISION AND ORDER

MARGARET CANGILOS-RUIZ, Bankruptcy Judge.

The pending objection before the court presents a question of apparent first impression in this Circuit as to whether a reimbursement claim for unemployment insurance compensation benefits paid to former employees of the Debtor filed as claim number 179 by the New York State Department of Labor, Unemployment Insurance Division ("New York" or "State"), is entitled to priority status under section 507(a)(8) of title 11 of the United States Code.¹ This court has core jurisdiction to determine the issue pursuant to 28 U.S.C. § 157(b)(2)(B), 28 U.S.C. § 1334 and the standing reference by the district court of bankruptcy cases to this court as authorized by 28 U.S.C. § 157(a) and implemented by Rule 76.1 of the Local Rules of Practice for the United States District Court for the Northern District of New York. The following constitutes the court's findings and conclusions pursuant to Federal Rule of Bankruptcy Procedure ("Fed. R. Bankr.P.") 7052 as made applicable by Fed. R. Bankr.P. 9014(c).

BACKGROUND FACTS

The underlying facts are not in dispute. On April 3, 2009, The Albert Lindley Lee Memorial Hospital, a/k/a A.L. Lee Memorial Hospital ("Hospital" or "Debtor"), an acute care, nonprofit general hospital operating in Fulton, New York, filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The Debtor, which had operated at the same location since 1910, became subject to mandatory closure based upon recommendations regarding

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the status of hospitals and other health care providers in New York State that were contained in a report issued on November 28, 2006, by the Commission on Health Care Facilities in the 21st Century, commonly referred to as the "Berger Commission Report." The purpose of the Hospital's chapter 11 filing was to effect an orderly wind-down of operations and close an asset purchase agreement pursuant to which Oswego Hospital would take over certain services to ensure that Fulton-area residents have ready access to medical care. At the time of filing, the Debtor had approximately 319 active employees. Soon after filing, the Debtor began to terminate many of these employees.

The claims bar date for governmental units to file proofs of claim was set for September 30, 2009. In August 2009, New York timely filed two claims: claim number 144 and claim number 145.² Debtor objected to claim number 144, which was asserted as a priority claim in the amount of $12,126.51 for "unemployment insurance taxes" due for the period from April 1, 2009, through April 3, 2009. On March 11, 2010, New York amended this claim by filing claim number 179 in the amount of $1,131,303.27 (the "Claim"). The Claim covers the last three quarters of 2009 and the first quarter of 2010 through March 8, 2010, and represents the amount the State paid in unemployment compensation benefits to Debtor's former employees. The Debtor's liability for the benefits paid is based upon an election it made some years ago to make reimbursement payments in lieu of contributions. As more fully discussed below, this is an option afforded a nonprofit organization under New York law. The State asserts the Claim is for unpaid, unemployment insurance taxes entitled to priority under Bankruptcy Code section 507(a)(8)(D) or, alternatively, (E).

The Debtor does not take issue with the amount of the Claim. Rather, the Debtor contends that the payments in lieu of contributions owed to the State's unemployment insurance fund are not taxes entitled to priority and should be treated as a general unsecured claim.

FEDERAL UNEMPLOYMENT TAX ACT, NEW YORK'S UNEMPLOYMENT INSURANCE FUND AND NONPROFIT ENTITIES

The Federal Unemployment Tax Act, 26 U.S.C. §§ 3301 et seq. ("FUTA") imposes an excise tax on employers, calculated on total wages paid by them during the year, to support the federal unemployment compensation system. Employers are given credit for contributions made to a state unemployment fund, provided that the state unemployment compensation law is certified as meeting the requirements of federal law. Id. §§ 3302 and 3304. As such, FUTA is the overall framework pursuant to which individual state unemployment compensation systems are organized and governed.

The unemployment insurance law is set forth in Article 18 of the New York Labor Law ("Unemployment Insurance Law"). Section 530 of the Unemployment Insurance Law designates the commissioner of labor ("Commissioner") as the agent of the State responsible for administration of the unemployment insurance law.³ The

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Commissioner's responsibilities include administration of unemployment insurance benefits, which are paid from New York's Unemployment Insurance Fund ("Fund"). § 550.

The Unemployment Insurance Law requires New York employers to contribute to the Fund by remitting quarterly payments. § 570. However, there is an exception to this general requirement. FUTA requires states to permit nonprofit employers to make payments in lieu of contributions. 26 U.S.C. § 3309(a)(2). Accordingly, New York allows nonprofit organizations to "elect to become liable for payments in lieu of contributions." § 563(4). If the election is made, instead of contributing to the Fund every quarter, the nonprofit organization reimburses the Fund in an amount equal to what the Fund has actually paid out in benefits to its former employees in the prior quarter. A New York nonprofit organization that has elected to make payments in lieu of contributions must continue to file returns on a quarterly basis reflecting the total number of its employees and the remuneration paid in each calendar quarter.⁴ As noted above, the Debtor made this election, as an operating, nonprofit hospital, years before it filed for bankruptcy.

The Fund consists of moneys, including but not limited to all contributions, interest, penalties, payments in lieu of contributions from nonprofit entities, and moneys credited to the State under the Federal Social Security Act. §§ 550(1) and 563(5). The Fund is "administered in trust and is used solely to pay benefits, except that moneys credited to the fund pursuant to the Federal Social Security Act may be used for the administration of the Unemployment Insurance Law." 3 New York Employment Law § 39.02 (Jonathan L. Sulds, ed., 2009). See § 550. The Commissioner is required to maintain employer accounts ⁵ within the Fund for every employer ⁶ liable to the Fund. Contribution payments as well as payments in lieu of contributions are deposited into the Fund and are collectively pooled so as to be available for disbursement of unemployment insurance benefits. § 581(1)(d).

New York Labor Law classifies its unemployment insurance system as an "experience rating" system; it outlines how employer tax rates are annually determined based upon prior employment and unemployment experience, how contributions are calculated and how employer payments, whether by contributions or reimbursement, are applied. § 581. Under New York law, payments in lieu of contributions are assessed and collected in the same manner and are subject to the same conditions as contributions due from employers. § 563(7).

PRIORITY TAX STATUS UNDER BANKRUPTCY CODE § 507

It is established law within the Second Circuit and in other jurisdictions that have addressed the issue that liabilities for state unemployment insurance contributions are "taxes" entitled to priority under both the

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former Bankruptcy Act of 1898 and the Bankruptcy Code. See, e.g., State of New York v. United States (In re Independent Automobile Forwarding Corporation ), 118 F.2d 537 (2d Cir.1941), aff'd in part, rev'd in part, on other grounds; In re Cal-Test Enter., Inc., No. 82-10178 M, slip op. at 8 (Bankr.W.D.N.Y. Aug. 8, 1985); In re Ball, No. 81-01683, slip op. at 5 (Bankr.N.D.N.Y. Nov. 10, 1983); 4 Collier on Bankruptcy § 507.11[5] (15th ed.). The Debtor argues, however, that these cases are inapposite because liabilities for contributions by for-profit entities are fundamentally distinct from liabilities for reimbursement of paid benefits by nonprofit entities. Since there is no Second Circuit precedent that addresses the priority in bankruptcy of claims for reimbursement, this court shall examine the statute and the respective policies underlying the priority scheme of the Bankruptcy Code and those underlying the unemployment insurance compensation benefits system.

Section 507 of the Bankruptcy Code lists the order of priority to be accorded certain expenses and claims. These priorities are interpreted mindful of the Bankruptcy Code's objectives to afford equal treatment to similarly situated creditors and are deemed to apply to a class of claims only as "clearly authorized by Congress." Howard Delivery Serv., Inc., v. Zurich Am. Ins. Co., 547 U.S. 651, 655, 126 S.Ct. 2105, 165 L.Ed.2d 110. See also Trustees of the Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 100 (2d Cir.1986) ("If one claimant is to be preferred over others, the purpose should be clear from the statute," citing Nathanson v. N.L.R.B., 344 U.S. 25, 29, 73 S.Ct. 80, 97 L.Ed. 23 (1952)). Bearing this in mind, Code section 507(a)(8) grants an eighth priority to governmental units' unsecured claims and provides, in pertinent part, as follows:

(a) The following expenses and claims have priority in the following order: ...

(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for—...

(D) an employment tax on a wage, salary, or

...