In re Albion Health Services

• Decision Date: 16 March 2006
• Docket Number: No. HK 02-01745.,HK 02-01745.
• Citation: 339 B.R. 171
• Parties: In re ALBION HEALTH SERVICES, d/b/a Trillium Health Alliance, d/b/a Trillium Hospital, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

339 B.R. 171

In re ALBION HEALTH SERVICES, d/b/a Trillium Health Alliance, d/b/a Trillium Hospital, Debtor.

No. HK 02-01745.

United States Bankruptcy Court, W.D. Michigan.

March 16, 2006.

John T. Piggins, Esq., Grand Rapids, MI, for the Chapter 7 Trustee.

Thomas C. Johnson, Asst. Attorney General, Grand Rapids, MI, for MUIA.

OPINION RE; TRUSTEE'S OCTOBER 13, 2005 MOTION FOR SUMMARY JUDGMENT

JEFFREY R. HUGHES, Bankruptcy Judge.

The State of Michigan has filed a claim for reimbursement of unemployment benefits paid to Albion Health Services' former employees. The Chapter 7 Trustee has objected to the allowance of that claim as a tax priority. The Trustee's objection is SUSTAINED.

PROCEDURAL BACKGROUND

The State of Michigan filed what it styled as a "Proof of Chapter 7 Administrative Expense Claim" on May 10, 2004 The state contends that a portion of its claim is entitled to administrative priority pursuant to 11 U.S.C. § 507(a)(2) and that the balance of its claim is entitled to tax priority pursuant to 11 U.S.C. § 507(a)(8).¹ The Chapter 7 Trustee has responded 12,, objecting to both the priority and the amount claimed.

I first heard the Chapter 7 Trustee's objection on August 11, 2005. The parties agreed at the hearing that the priority issues should be resolved first and that the priority issues could be decided by motions for summary judgment. They also agreed that the Chapter 7 Trustee would file the motion for summary judgment on the Section 507(a)(8) tax priority issue and that the State of Michigan would file the motion for summary judgment on the Section 507(a)(2) administrative priority issue.

The Chapter 7 Trustee filed a timely motion.² Both parties filed briefs on the Section 507(a)(8) issue and the motion was heard on December 1, 2005. I took the matter under advisement at the conclusion of that hearing.

FACTUAL BACKGROUND

There are no disputed facts with respect to whether the State of Michigan's claim should be given Section 507(a)(8) priority status.

The State of Michigan maintains a fund for unemployed Michigan workers. Laid off employees from both for-profit and not for-profit employers are eligible for benefits from the fund.

The State of Michigan finances its unemployment compensation fund by collecting quarterly "contributions" from businesses that employ Michigan workers. MICH. COMP. LAWS § 421.13. All for-profit businesses are required to make these contributions. However, a not-for-profit organization may elect not to contribute to the fund. A not-for-profit organization may choose instead to simply reimburse the State of Michigan for whatever unemployment claims are paid from the fund on account of its workers as the claims are paid. MICH. COMP. LAWS § 421.13a.

Albion Health Services ("Albion Health") is a not-for-profit corporation that owned a hospital in Albion, Michigan. Albion Health ceased operations early in 2002. It filed for relief under Chapter 7 of the Bankruptcy Code shortly thereafter.

Albion Health's cessation of business prompted a spate of claims against Michigan's unemployment compensation fund. The State of Michigan asserts that it has paid $456,765.93 in benefits to Albion Health's former employees for which it has not been reimbursed. The bulk of these allegedly unreimbursed benefits coincide with Albion Health's decision to terminate operations in 2002.

DISCUSSION

"Equality of distribution among creditors is a central policy of the Bankruptcy Code." Begier v. Internal Revenue Service, 496 U.S. 53, 58, 110 S.Ct. 2258, 2262, 110 L.Ed.2d 46 (1990). However, equality of distribution is not the only policy, for the Bankruptcy Code also reflects the Orwellian notion that some creditors are "more equal than others." Consequently, the Bankruptcy Code provides that certain claims are to be paid in full before general unsecured claims are to be paid anything. See, e.g., 11 U.S.C. § 726(a).

Section 507(a) lists the claimants who are entitled to priority treatment. Tax creditors have always been included among those who have enjoyed Congress' favor. 11 U.S.C. § 507(a)(8). See, also, 11 U.S.C. § 104 (repealed).

Granting priority to tax claims has raised the question of what exactly is a tax. There is general agreement that governmental assessments against income or against the sale of cigarettes are taxes within the meaning of Section 507(a)(8). However, governments also raise revenue through other means. Governments impose fines for unlawful behavior. Governments charge fees to engage in activities subject to public regulation. Governments even engage in commerce. The sale of logging rights and the collection of park fees are but two examples. Which of these other charges is also a tax for purposes of the Bankruptcy Code? More to the point, is the State of Michigan's right in the instant case to seek reimbursement from the bankruptcy estate for unemployment claims paid to Albion Health's former employees a tax entitled to priority under Section 507(a)(8) or is it just another general unsecured claim relegated to the back of the creditor line?

The First Circuit and the Third Circuit have addressed this specific issue. Commonwealth of Massachusetts v. Boston Regional Medical Center, Inc. (In re Boston Regional Medical Center, Inc.), 291 F.3d 111 (1st Cir.2002) and The Reconstituted Committee of Unsecured Creditors v. State of New Jersey (In re United Healthcare System, Inc.), 396 F.3d 247 (3rd Cir.2005). Both Boston Regional and United Healthcare involved bankrupt nonfor-profit debtors who had "opted out" of making contributions to their respective state unemployment compensation funds. Consequently, the state in each of these cases had a substantial reimbursement claim against the debtor for unemployment benefits paid by the state on the debtor's behalf. The court in each case concluded that the state's reimbursement claim was not a "tax" within the meaning of Section 507(a)(8). Both courts employed what the court in United Healthcare characterized as a "functional examination" of the state's reimbursement claim to determine, on balance, whether the claim obligation resembled a tax or not. That is, each court looked behind whatever label the state had placed upon the claim to examine its "actual effects." Boston Regional, 291 F.3d at 122-124 and United Healthcare, 396 F.3d at 254-261.

The Sixth Circuit also has had the opportunity to consider the scope of Section 507(a)(8) in the context of contributions and reimbursements sought by the state with respect to a workers compensation fund. Yoder v. Ohio Bureau of Workers' Compensation (In re Suburban Freight, Inc.), 998 F.2d 338 (6th Cir.1993) ("Suburban I") and Ohio Bureau of Workers' Compensation v. Yoder (In re Suburban Freight, Inc.), 36 F.3d 484 (6th Cir. 1994) ("Suburban II"). The court determined in both Suburban I and Suburban II that a governmental claim is entitled to Section 507(a)(8) tax priority only if it is:

(1) an involuntary pecuniary burden; (2) imposed by the state legislature; (3) for a public purpose; (4) under the police or taxing power of the state.

Suburban II, 36 F.3d at 488.

The court also identified two other factors in Suburban II: (a) whether the obligation owed by the debtor was universally applicable to similarly situated entities; and (b) whether according priority treatment to the governmental claim would disadvantage private creditors with like claims. Id.

The courts in Boston Regional and United Healthcare recognized the six factors set forth in Suburban I and Suburban II as relevant to their functional examination of the state unemployment reimbursement claims before them. However, neither court limited its consideration to these factors.

While the Lorber-Suburban analysis is helpful in executing this examination, we do not believe that its six factors should constrain our inquiry. We believe a functional examination that balances the characteristics of the obligation at issue will signal whether an obligation is a tax for bankruptcy purposes, and that an examination should be flexible enough to allow for consideration of any relevant factor. The problem with applying only the Lorber-Suburban six-factor test is that it may prove too rigid to provide an effective analysis of every potential obligation and thus could preclude consideration of important characteristics. Also, by employing a functional examination we preempt the concern that the Court of Appeals for the Sixth Circuit expressed that the Lorber test produces overly broad classification of claims as taxes. Moreover, our more flexible approach allows us to consider the characteristics of the obligation in light of the evolving treatment of priority claims under the Bankruptcy Code. We emphasize, however, that the Lorber and Suburban factors are helpful in undertaking this functional examination, and at times application of those factors alone sufficiently may answer the question whether a governmental obligation is a tax.

United Healthcare, 396 F.3d at 255-256.

The State of Michigan argues that Boston Regional and United Healthcare misinterpreted Suburban I and Suburban II and that Suburban I and Suburban II require me to consider only the six factors identified therein for purposes of evaluating its Section 507(a)(8) claim. However, the unanimous panel in Suburban II observed at the end of its opinion that:

[T]he non-tax characteristics of Suburban's liability for reimbursement for claims payments predominate over its tax characteristics, and the Bureau's [state's] claim more closely resembles a subrogation claim than a universally applicable tax.

36 F.3d at 489.

This observation strongly suggests that the Sixth Circuit in Suburban II had in fact conducted a "functional examination" just as the First and Third Circuits had done later and that the court's reference to the six factors in Suburban II was intended to be only an illustration of what should be considered. Indeed, the Sixth Circuit has since...