In re Creative Hairdressers, Inc.
| Decision Date | 03 March 2022 |
| Docket Number | Case No. 20-14583-TJC,Case No. 20-14584-TJC |
| Citation | 639 B.R. 320 |
| Parties | IN RE: CREATIVE HAIRDRESSERS, INC., et al., Debtors. |
| Court | U.S. Bankruptcy Court — District of Maryland |
Keith N. Costa, Faegre Drinker Biddle & Reath LLP, New York, NY, Patrick A. Jackson, Faegre Drinker Biddle & Reath LLP, Wilmington, DE, Jonathan Harold Todt, Faegre Drinker Biddle & Reath LLP, Washington, DC, for Creditor Committee.
Richard Marc Goldberg, Daniel Joseph Zeller, Joel I. Sher, Shapiro Sher Guinot & Sandler, Baltimore, MD, for Debtors.
Lynn A. Kohen, L. Jeanette Rice, U.S. Trustee Office, Greenbelt, MD, for U.S. Trustee.
The Internal Revenue Service ("IRS") asserts a priority claim against debtors Creative Hairdressers, Inc. and Ratner Companies, L.C. (the "Debtors") for the employer shared responsibility payment under § 4980H of the Internal Revenue Code, part of the Patient Protection and Affordable Care Act. The IRS seeks priority status as an excise tax under 11 U.S.C. § 507(a)(8)(E). The Debtors object, contending the employer shared responsibility payment is not an excise tax entitled to priority treatment, but is a nonpriority penalty. The parties also dispute when the "transaction occur[red]" that gave rise to the employer shared responsibility payment, as that phrase is used in 11 U.S.C. § 507(a)(8)(E)(ii).
For the reasons that follow, the Court concludes the employer shared responsibility payment is an excise tax entitled to priority and the "transaction occur[red]" at the time an employee enrolls in a qualified health insurance plan under the Patient Protection and Affordable Care Act. The Court also concludes that the claim against debtor Ratner Companies, L.C. should be disallowed
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a), and Local Rule 402 of the United States District Court for the District of Maryland. This matter is a "core proceeding" under 28 U.S.C. § 157(b)(2)(K) and the Court has statutory and Constitutional authority to enter a final order.
On April 23, 2020, Creative Hairdressers, Inc. ("CHI") and Ratner Companies, L.C. ("RC") filed for Chapter 11 relief and have proceeded as debtors in possession pursuant to 11 U.S.C. §§ 1107(a) and 1108.1 The Court entered an order jointly administering these related cases under the CHI case, No. 20-14583-TJC. ECF 86.
Prior to filing bankruptcy, CHI was one of the nation's largest independent family-owned chain of hair salons, operating approximately 800 hair salons under the Hair Cuttery, Bubbles and Cielo brands. CHI employed over 10,000 full- and part-time employees. RC provided management services to CHI and certain other affiliated entities.
As is well publicized, at the onset of the COVID-19 pandemic in March 2020, state and local governments ordered non-essential businesses like the Debtors’ hair salons to close. As a result of the sudden closure of CHI's stores, the Debtors were almost immediately depleted of liquidity, and filed bankruptcy soon thereafter.
On June 2, 2020, the Court approved the sale of substantially all the Debtors’ business to HC Salon Holdings, Inc. pursuant to the Order (A) Approving and Authorizing the Sale of Substantially All of Debtors’ Assets Pursuant to the Amended and Restated Asset Purchase Agreement, Free and Clear of All Liens, Claims, Encumbrances and Other Interests, (B) Approving the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases Related Thereto, and (C) Granting Related Relief. ECF 465. The sale closed effective as of June 4, 2020. ECF 478.
CHI was partially self-insured as defined by the Patient Protection and Affordable Care Act (the "ACA"). The Debtors qualified as an Applicable Large Employer under the ACA.2 The Debtors offered minimum essential health insurance coverage to at least 95% of their employees, but some employees were allowed a tax credit or cost-sharing reduction for any of the following reasons: (a) the coverage did not provide minimum value; (b) the coverage was not affordable; or (c) the employee was not offered coverage. Under the ACA, if an employee receives a tax credit or cost-sharing reduction, then the IRS may charge the employer a shared responsibility payment ("ESRP").
For the tax period ending December 31, 2016, the IRS charged CHI an ESRP for the employees that were allowed a tax credit or cost-sharing reduction under the ACA. For each month from January 2016 through November 2016, over 450 of the Debtors’ full-time employees were enrolled in a qualified health plan for which they were allowed a tax credit or cost-sharing reduction. On December 19, 2018, the IRS sent the Debtors a Letter 226-J with a proposed ESRP of $818,640.00 for tax year 2016, noting liability was applicable under 26 U.S.C. § 4980H(b). IRS's Ex. A; ECF 881-1. The letter stated:
This letter certifies, under section 1411 of the Affordable Care Act, that for at least one month in the year, one or more of your fulltime employees was enrolled in a qualified health plan for which a PTC was allowed. Based on this certification and information contained in our records, we are proposing that you owe an ESRP of $818,640.00.
ECF 881-1 at p. 2 of 7.
CHI responded on February 14, 2019, identifying errors, which included the mistaken identification of some employees as full-time and eligible under the ACA for tax credits or cost-sharing reductions. IRS's Ex. B; ECF 881-2. The IRS responded by Letter 227-L dated April 29, 2019, reducing the proposed ESRP to $778,050.00 again noting liability was applicable under 26 U.S.C. § 4980H(b). IRS's Ex. C; ECF 881-3.
Beginning in 2017, CHI did not offer a health plan offering minimum essential coverage to salon employees. As a result, CHI accrued ESRP charges for 2017 and 2018. For each month of tax year 2017, over 350 of CHI's full-time employees were allowed a tax credit or cost-sharing reduction by the IRS.
On October 3, 2019, the IRS sent the Debtors a Letter 226-J certifying that one or more employees were allowed a tax credit and proposing an ESRP of approximately $13,901,259.96 under 26 U.S.C. § 4980H(a). IRS's Ex. D; ECF 881-4. The letter stated:
This letter certifies, under Section 1411 of the Affordable Care Act, that for at least one month in the year, one or more of your fulltime employees was enrolled in a qualified health plan for which a PTC was allowed. Based on this certification and information contained in our records, we are proposing that you owe an ESRP of $13,901,259.96.
ECF 881-4 at p. 2 of 7.
CHI responded on December 4, 2019, and provided support that CHI had offered minimum essential coverage to at least 95% of their full-time employees and their dependents. IRS's Ex. E; ECF 881-5. The IRS responded by Letter 227-L dated August 31, 2020, reducing the proposed ESRP for tax year 2017 to $1,311,930.00 and noting liability was applicable under 26 U.S.C. § 4980H(b). IRS's Ex. F; ECF 881-6. The ESRP for 2017 is an estimate and has not been assessed.
In CHI's Schedules of Assets and Liabilities, ECF 281, it listed the IRS on Schedule E/F with a contingent, unliquidated, disputed claim of $778,050.00 for "ACA – ESRP PAYMENT – 2016" and a contingent, unliquidated, disputed claim in the amount of $1.00 for "ACA – ESRP PAYMENT – 2017-2019."
The IRS filed Proof of Claim No. 175-1 ("Claim No. 175-1") against only CHI for $2,094,029.28, asserting priority status under § 507(a)(8). In the Form 410 summary, the IRS listed an "Excise" for tax period ending December 31, 2016, assessed March 16, 2020, for $778,050.00, plus $4,049.28 in matured interest and an "Excise" tax for the period ending December 31, 2017, assessed October 8, 2019, for $1,311,930.00.
The IRS later filed an amended Proof of Claim No. 175-2 ("Claim No. 175-2"). It asserts the same amounts due, but as to both the Debtors, CHI and RC.
The IRS filed Proof of Claim No. 424-1 ("Claim No. 424-1"). In its papers, the IRS concedes that Claim No. 424-1 is a duplicate of Claim No. 175-2.
The dispute before the Court raises two questions: (1) whether the ESRP is an excise tax entitled to priority under § 507(a)(8)(E) of the Bankruptcy Code and (2) if the ESRP is an excise tax, are the amounts claimed by the IRS for 2016 and 2017 taxes "on a transaction occurring within three years of the petition" as required by § 507(a)(8)(E).
The Bankruptcy Code grants priority status to certain allowed claims. Section 507(a)(8) grants priority to "excise" taxes:
§ 507(a)(8)(E).3 "Statutory priorities ... are intended ‘to assure payment, if possible, to certain classes of claims by requiring that they be paid before others are satisfied.’ " New Neighborhoods, Inc. v. W. Virginia Workers' Comp. Fund , 886 F.2d 714, 718 (4th Cir. 1989) (quoting L. King, Collier Bankruptcy Manual § 507.01 (1988)). Claims entitled to priority are paid before other unsecured claims. After the payment of priority claims, there is a presumption that the bankruptcy estate's remaining assets will be distributed equally among unsecured creditors. Ford Motor Credit Co. v. Dobbins , 35 F.3d 860, 865 (4th Cir. 1994). "Thus, statutory priorities must be narrowly construed." Id. "[I]f one claimant is to be preferred over others, the purpose should be clear from the statute." Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co. , 547 U.S. 651, 667, 126 S.Ct. 2105, 165 L.Ed.2d...
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