In re Albion Health Services

• Decision Date: 02 February 2007
• Docket Number: BAP No. 06-8017.
• Citation: 360 B.R. 599
• Parties: In re ALBION HEALTH SERVICES, Debtor. Michigan Unemployment Insurance Agency, Appellant, v. James W. Boyd, Trustee, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

360 B.R. 599

In re ALBION HEALTH SERVICES, Debtor Michigan Unemployment Insurance Agency, Appellant, v. James W. Boyd, Trustee, Appellee.

BAP No. 06-8017.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: November 8, 2006.

Decided and Filed: February 2, 2007.

Appeal from the United States Bankruptcy Court for the Western District of Michigan, Jeffrey R. Hughes, J., 339 B.R. 171.

COPYRIGHT MATERIAL OMITTED

ARGUED AND ON BRIEF:

Thomas C. Johnson, Office of the Attorney General of Michigan, Grand Rapids, Michigan, for Appellant. John T. Piggins, Miller Johnson, Grand Rapids, Michigan, for Appellee.

Before: PARSONS, SCOTT, and WHIPPLE, Bankruptcy Appellate Panel Judges.

OPINION

WHIPPLE, Bankruptcy Judge.

The Michigan Unemployment Insurance Agency ("the Agency") appeals the bankruptcy court's order finding that its claim against Debtor Albion Health Services, a nonprofit employer, for reimbursements to Michigan's Unemployment Trust Fund is not entitled to priority status as an excise tax under 11 U.S.C. § 507(a)(8)(E). For the reasons that follow, the bankruptcy court's decision will be affirmed.

I. ISSUE ON APPEAL

Whether the bankruptcy court erred in finding that reimbursement payments owed to Michigan's Unemployment Trust Fund by a nonprofit employer are not excise taxes within the meaning of § 507(a)(8)(E).

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel ("BAP") of the Sixth Circuit has jurisdiction to hear this appeal. The United States District Court for the Western District of Michigan has authorized appeals to the BAP, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). An order determining that a claim is not entitled to priority status is a final order. See In re Kids Creek Partners, 200 F.3d 1070 (7th Cir.2000)(finding that a priority-fixing order is treated as a final order); Volvo Commercial Fin. LLC v. Gasel Transp. Lines, Inc. (In re Gasel Transp. Lines, Inc.), 326 B.R. 683, 685 (6th Cir. BAP 2005) (finding an order determining that a claim is not entitled to administrative expense priority constitutes a final order).

The facts are not in dispute. The only issue before the Panel is the priority status of the Agency's claim. An order determining that a claim is not entitled to priority status is a question of law requiring de novo review on appeal. Jones v. United States (In re Garcia), 955 F.2d 16, 17 (5th Cir.1992). Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination. Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (6th Cir. BAP 2001).

III. FACTS

There are no relevant facts in dispute with respect to this appeal. Under the Michigan Employment Security Act ("MESA"), the State of Michigan maintains an unemployment compensation fund ("the Fund") that is administered by the Agency. Laid off employees from both for-profit and nonprofit employers are eligible to collect benefits from the Fund. All for-profit employers are required to make quarterly payroll-based contributions to the Fund. See Mich. Comp. Laws Serv. § 421.13. However, nonprofit employers may elect to reimburse the Fund retrospectively for whatever claims are paid from the fund on account of their laid-off employees. Mich. Comp. Laws Serv. §§ 421.13a and 421.13c. Under Michigan law, a nonprofit employer who elects to become a reimbursing employer and also pays more than $100,000 remuneration per calendar year for employment must execute a surety bond, irrevocable letter of credit, or other security in an amount approved by the Michigan Employment Security Commission to secure payment of its reimbursement obligations. See Mich. Comp. Laws Serv. § 421.13a(4).

Debtor is a nonprofit corporation that owned a hospital in Albion, Michigan, and paid its employees over $100,000 per calendar year. At all relevant times, Debtor had elected to be a reimbursing employer under § 421.13a. It ceased operations and laid off all of its employees in early 2002, prompting a large number of claims by Debtor's former employees against the Fund. The Agency made payments from the Fund to Debtor's former employees, and Debtor has failed to reimburse the Fund the amounts paid. On February 5, 2002, Debtor filed for relief under Chapter 7 of the Bankruptcy Code, and the Agency filed its proof of claim for reimbursement of unemployment benefits that it has paid to Debtor's former employees. The Agency seeks priority status for its claim as an excise tax under 11 U.S.C. § 507(a)(8)(E). The Chapter 7 Trustee, the appellee herein, objected and filed a motion for summary judgment, arguing that the Agency's claim is a general unsecured claim that is not entitled to a tax priority.¹ On March 16, 2006, the bankruptcy court granted the Trustee's motion, denying the Agency priority status for its claim, and the Agency timely appealed that decision.

IV. DISCUSSION

A. Overview of the Statutory Basis for the Agency's Claim

The Federal Unemployment Tax Act, 26 U.S.C. §§ 3301 et seq. ("FUTA"), imposes an excise tax on employers based on total wages paid by them during the year with respect to employment in order to fund the federal unemployment compensation system. See 26 U.S.C. § 3301. "Employment" is defined, however, to exclude services performed for an income tax exempt nonprofit organization. 26 U.S.C. § 3306(c)(8). In Massachusetts Division of Employment and Training v. Boston Regional Medical Center (In re Boston Regional Medical Center), 291 F.3d 111, 117 (1st Cir.2002) ("Boston Regional"), the First Circuit explained the interplay between FUTA and a state's unemployment compensation system. While FUTA imposes a tax on most American employers according to formulae contained in §§ 3301 and 3306, under § 3302,

any contribution made to a state's unemployment compensation fund serves as a credit against the federal tax. The federal government receives a portion of the total percentage to pay for the administration of the federal unemployment compensation system, but the majority goes to the state funds. The state funds, which must comply with requirements set forth in §§ 3302, 3303, 3304, and 3309, make payments to individuals who become unemployed through no fault of their own.

Id. at 117. Under § 3309,

"a state unemployment compensation system must permit, but not require, a government or nonprofit employer to make payments in lieu [of contributions] .... If an employer chooses to make payments in lieu [of contributions], it is also exempt from the requirement to make contributions to the state unemployment compensation fund. Instead, it agrees to reimburse the fund for any unemployment compensation payments made to recipients based on the recipients' work for the employer. Section 3309(a)(2) authorizes the states to take measures to ensure that employers making payments in lieu [of contributions] will meet their obligations."

Id.

Under Michigan law, each employer subject to MESA is required to make regular contributions to the Fund calculated as a percentage of wages paid by the employer. See Mich. Comp. Laws Serv. §§ 421.13 and 421.19. However, in compliance with FUTA, nonprofit employers may elect to reimburse the Fund by making payments in lieu of contributions in an amount equal to the full amount of benefits paid during any calendar quarter that is attributable to service in the employ of such organization and which is not reimbursable by the federal government. Mich. Comp. Laws Serv. § 421.13c(1). In addition to separate accounts for each employer, a "nonchargeable benefits account" or "solvency account" is maintained in the Fund to pay for such things as training benefits, benefits that are not chargeable to an individual employer, and deficiencies in an employer's separate account. Mich. Comp. Laws Serv. § 421.17. While a nonprofit employer never contributes towards the costs of administering the federal unemployment compensation system, if it chooses to make contributions to the state system, its contributions include a component used to pay for the costs of administering that system, including contributions to, the solvency account. See Mich. Comp. Laws Serv. § 421.19. Michigan law provides the Michigan. Employment Security Commission with discretion to require a nonprofit employer to execute and file with it a surety bond, irrevocable letter of credit, or other security as a condition of making payments in lieu of contribution. See Mich. Comp. Laws Serv. § 421.13d. And provision of such security is required where the nonprofit employer pays more than $100,000 remuneration per calendar year for employment. Mich. Comp. Laws Serv. § 421.13a(4).

As explained in Boston Regional:

The disadvantage to the nonprofit employer of [electing to become a reimbursing employer] is that if the nonprofit then lays off large numbers of workers within a given year, it is subject to the full actual costs of the unemployment insurance benefits of those workers. Those costs can far exceed in a given year what its required contribution based on its experience rating would have been. Even so, it is not responsible for the cost of ensuring the fund's solvency. The nonprofit employer choosing payments in lieu is choosing to self-insure and bear its own risk. Indeed, the relevant federal legislative history refers to this option as the option to self-insure. See S.Rep. No. 91-752 (1970), reprinted in 1970 U.S.C.C.A.N. 3606, 3618 ("In effect, the nonprofit organizations would be allowed to adopt a form of self-insurance.").

Boston Reg'l, 291 F.3d at 118.

B. Is the Agency's Claim Entitled to Priority Status?

In determining the priority issue before it, the Panel must be mindful of the Bankruptcy Code objective of securing equal distribution among creditors and "the complementary principle that preferential treatment of a class of...