In re Sacred Heart Hosp. of Norristown, Bankruptcy No. 94-13275DAS.

Citation190 BR 38
Decision Date20 December 1995
Docket NumberBankruptcy No. 94-13275DAS.
PartiesIn re SACRED HEART HOSPITAL OF NORRISTOWN d/b/a Sacred Heart Hospital and Rehabilitation Center, Debtor.
CourtUnited States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

William A. Slaughter, Philadelphia, PA, for Debtor.

Jayne C. Shinko, Assistant Counsel, Office of Chief Counsel, Commonwealth of Pennsylvania Dept. of Labor and Industry, Harrisburg, PA, for Pa. Dept. of Licenses & Inspections.

Leslie B. Gaynus, Pennsylvania Department of Revenue, Bureau of Employee Tax Operations, Philadelphia, PA, for Pa. Dept. of Licenses & Inspections.

Robert Szwajkos, Lavin Coleman Finarelli & Gray, Philadelphia, PA, Former Mediator.

Neal D. Colton, Cozen & O'Connor, Philadelphia, PA, for Creditors' Committee.

Robert Lapowsky, Stevens & Lee, Wayne, PA, for AllMed Financial Corp.

John J. Koresko, V, Koresko & Noonan, Norristown, PA, for certain former employees of Debtor.

Claudia Z. Springer, Duane, Morris & Heckscher, Philadelphia, PA, for Municipal Bonds Investors Insurance Company.

J. Gregg Miller, Pepper, Hamilton & Scheetz, Philadelphia, PA, for Midlantic Bank.

Frederic Baker, Ass't. U.S. Trustee, Philadelphia, PA.

OPINION

DAVID A. SCHOLL, Chief Judge.

A. INTRODUCTION

Before the court is an objection ("the Objection") to a claim filed by the Pennsylvania Department of Labor and Industry ("L & I") which asserts a priority tax claim under 11 U.S.C. § 507(a)(7)(E) (now § 507(a)(8)(E)), against SACRED HEART HOSPITAL OF NORRISTOWN d/b/a SACRED HEART HOSPITAL AND REHABILITATION CENTER ("the Debtor") for reimbursement of a now-undisputed sum paid by L & I on account of the Debtor's unemployment compensation ("UC") liability. The sole issue is whether this sum is properly characterized by L & I as an "excise tax."

Although we previously held, in this case, In re Sacred Heart Hospital of Norristown, 1995 WL 496005 (Bankr.E.D.Pa. August 15, 1995) ("the WC Decision"), that the Debtor's obligations to L & I for similar reimbursements on account of workmen's compensation ("WC") payments were not a tax, we find, inter alia, that UC liabilities in issue have consistently been designated as an "excise tax" and that the absence of a private insurer option distinguishes the UC system at issue in the instant matter from that addressed in the WC Decision. Therefore, we will overrule the Objection.

B. FACTUAL AND PROCEDURAL BACKGROUND

On May 25, 1994, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. The facts surrounding the Debtor's filing have been previously set forth in five Opinions of this court published in West's Bankruptcy Reporter at, dated, and holding, respectively: 186 B.R. 891 (Bankr.E.D.Pa.1995) (September 28, 1995) (the Borough of Norristown was permitted to belatedly file a proof of claim); 182 B.R. 413 (Bankr.E.D.Pa.1995) (the Debtor's liquidating plan was confirmed); 181 B.R. 195 (Bankr.E.D.Pa.1995) (the Debtor's lawsuit seeking certain reimbursements from Blue Cross was referred, at least initially, to arbitration); 177 B.R. 16 (Bankr.E.D.Pa. 1995) (a motion of certain former employees to file a class proof of claim and to extend the bar date as to them was denied) ("Sacred Heart II"); and 175 B.R. 543 (Bankr.E.D.Pa. 1994) (a home health care service provider was not allowed to assert a trust against certain of the Debtor's accounts receivable). The above-referenced Opinions, particularly Sacred Heart II, 177 B.R. at 18-19, chronicle the Debtor's closure on May 18, 1994, and the subsequent termination of approximately 410 full-time and 371 part-time employees of the Debtor. As might be expected, this action resulted in a substantial number of claims for UC benefits. Since the Debtor's plan was confirmed over seven months ago, the only matters that remain to be completed in administration of this case are the resolution of certain outstanding objections to claims.

On July 21, 1994, L & I filed a proof of claim in the Debtor's case ("the First Proof of Claim") asserting a priority tax claim in the amount of $7,584,610.34. Subsequently, on October 26, 1994, L & I replaced the First Proof of Claim with a second proof of claim, docketed as No. 286 ("the Claim"). The Claim sets forth its basis as reimbursement of UC payments made to former employees of the Debtor, beginning in December 1993 and projected through June 1996. The amount allegedly due to L & I under the Claim was modified slightly downward to $7,261,136.60.

The instant dispute arose as a result of the Debtor's filing of the Objection on April 11, 1995, to the Claim, asserting that (1) the amount of L & I's claim should be reduced to $2,379,519.79; and (2) except for $5,480.31, which represents unremitted pre-petition employee withholdings for the second quarter of 1994, the Claim is not a tax claim entitled to priority under 11 U.S.C. § 507(a)(8)(E).1

The hearing on the Objection was ultimately continued until July 12, 1995. At that time, the parties requested the appointment of a mediator to attempt to resolve this matter under this court's established mediation program. On July 13, 1995, Robert Szwajkos, Esquire ("the Mediator"), was appointed by this court per the agreement of the parties. On September 26, 1995, the Mediator indicated that he had successfully narrowed the issues and that, in the event that the matter was not completely settled by October 9, 1995, the parties would present a Stipulation of Facts to serve as the record. While this anticipated state of affairs did not result in a Stipulation of Facts, and a hearing, scheduled on November 1, 1995, was necessary, the mediation was a success. Due to the efforts of the Mediator, which we deeply appreciate, the parties were able to agree to fix the Claim at $2.5 million and the hearing itself was quite brief.

At the outset of the hearing, the parties stipulated that the Debtor was a Pennsylvania employer and that, as such, it was subject to the Pennsylvania Unemployment Compensation Law, as codified at 43 P.S. §§ 751, et seq. ("the UC Law"). They also agreed that the Debtor was a non-profit organization pursuant to 43 P.S. §§ 904, et seq., which gave it the option to submit its payments for mandatory UC benefits on the basis of benefits paid, as opposed to paying on the basis of the amount of its employees' wages.

The sole witness at the hearing, called by L & I, was Frank Jackson, Assistant Director for the Tax Accounting Division of the Bureau of Employer Tax Operation of L & I. Jackson testified that payments to the fund encompass employer contributions, which are calculated and assessed as a result of a tax rate multiplied by taxable employee wages, employee withholding or contributions, and also payments in lieu of contributions. Jackson stated that an employer receiving a federal income tax exemption as a nonprofit entity, such as the Debtor, was eligible to make payments to the UC fund based on benefits paid in its behalf in lieu of contributions based on wages. Regarding the determination of the amounts of payments due, Jackson stated that L & I issues monthly bills to nonprofits which have elected to make payments in lieu of contributions, indicating the amount of UC benefits that were paid in a previous month. He opined that the benefit of this dispensation to non-profits that anticipated few layoffs, such as a hospital, which could generally transfer employees if certain operations were reduced, was that they could usually reduce the contributions otherwise payable. Such payments in lieu of contributions were required to be made within 30 days from when the UC benefits were paid to avoid the accruing of interest. In the event of a delinquency by a nonprofit making contributions in lieu of contributions based on wages, Jackson stated that L & I had the same sanctions available to it as with a contributing employer, presumably collection procedures.

Jackson also testified as to other relevant characteristics of the UC fund, including the fact that payments made cannot be withdrawn, that employers receive no return on payments made, and that they have no entitlement to funds not paid in benefits. Moreover, Jackson stated that UC coverage to employers is mandated, i.e., the fund cannot refuse coverage to any employer. He also stated that, unlike the Pennsylvania WC system, no private insurers are authorized to collect contributions or to distribute benefits. Additionally, Jackson's testimony encompassed the filing requirements of employers making payments in lieu of contributions and contribution employers. In that vein, he stated that both types of employers are required to follow the same filing requirements, which include the filing of quarterly tax returns showing the wages that were paid to each individual in the quarter and the remittance to L & I of employee withholdings.

At the close of the hearing, the court accorded both the Debtor and L & I the opportunity to simultaneously file opening briefs on December 4, 1995, and reply briefs on December 11, 1995, arguing their respective positions. The parties were granted a one-day extension on the filing of reply briefs, and filing mishaps caused us to not receive the Debtor's final submission until December 13, 1995.

C. DISCUSSION

Due to the efforts of the Mediator and the cooperation of the parties, the sole issue remaining is whether L & I is entitled to priority status under 11 U.S.C. § 507(a)(8)(E) for its agreed Claim of $2.5 million in UC benefits paid and to be paid to former employees of the Debtor. That Code section allows a priority to

an excise tax on —
(i) a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of the filing of the petition; or
(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the
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