In re Saint Joseph's Hosp.

• Decision Date: 10 April 1991
• Docket Number: Bankruptcy No. 88-14005S.
• Citation: 126 BR 37
• Parties: In re SAINT JOSEPH'S HOSPITAL, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

126 B.R. 37 (1991)

In re SAINT JOSEPH'S HOSPITAL, Debtor.

Bankruptcy No. 88-14005S.

United States Bankruptcy Court, E.D. Pennsylvania.

April 10, 1991.

Ellen M. McDowell, Drinker Biddle & Reath, Philadelphia, Pa., for debtor.

James J. O'Connell, Asst. U.S. Trustee, Philadelphia, Pa.

Kevin Brislin, Philadelphia, Pa., for Dr. Carl Ellis.

Pace Reich, Clark, Ladner, Fortenbaugh & Young, Philadelphia, Pa., for Unsecured Creditors' Committee.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION

The instant contested matter presents the issue of whether an arrangement by which a dentist operated an oral surgery clinic for the Debtor-hospital rendered the unpaid pre-petition sums due to the dentist under the parties' "employment agreement" to be "wages, salaries, or commissions" entitled to a priority under 11 U.S.C. § 507(a)(3). We conclude that the Debtor's lack of control over, inter alia, the equipment utilized, personnel hired, charges made, or hours worked by the Dentist at the clinic contravene the written characterization of the parties' relationship as that of employer and employee, and render the Dentist ineligible for a priority claim.

B. PROCEDURAL AND FACTUAL HISTORY

ST. JOSEPH'S HOSPITAL ("the Debtor") filed a voluntary Chapter 11 bankruptcy case on November 15, 1988. Its Plan of Reorganization was confirmed on July 26, 1990.

On February 9, 1989, Dr. Carl Ellis ("the Dentist") filed two proofs of claim. The first, No. 100, involved a $900 claim arising out of a Youth Study Center contract and has been voluntarily withdrawn. The second, No. 101, was in the amount of $3,400 and arose out of the Dentist's operation of an oral surgery clinic at 2000 Spring Garden Street, Philadelphia, Pennsylvania, a site about five blocks from the Debtor's main hospital location at 16th Street and Girard Avenue in Philadelphia. The claim concerned alleged wages, salary, or commissions of $1,000 weekly running from October 20, 1988, to December 1, 1988, and claimed a right to a priority pursuant to 11 U.S.C. § 507(a)(3), to the $2,000 maximum extent permitted by that law.

On January 22, 1991, the Debtor filed Objections to both of the Dentist's claims. After one continuance, until April 3, 1991, the parties' counsel appeared and presented the matter to us on a Stipulation of Facts which recites in pertinent part as follows:

5. All expenses of the dentistry practice relating to the Building, including heat and electric, were paid by the Debtor during the relevant time period.

6. All equipment and machinery used . . . in the dentistry practice during the relevant time period were supplied by and paid for by the Dentist.

7. Any personnel engaged to assist the Dentist during the relevant time period were hired by the Dentist at his own expense.

8. The Debtor provided malpractice and health insurance for the Dentist during the relevant time period.

9. The sums paid by the Debtor to the Dentist during the relevant time period were reported to the federal government on a form 1099.

10. Sums paid by the Debtor to the Dentist were at no time reported to the federal government as wages on a form W-2.

11. At no time did the Debtor withhold sums from payments made to the Dentist for federal, state, or city income or wage taxes, or for Social Security.

12. The Dentist had no direct supervisor in his practice during the relevant time period.

13. At no time did the Debtor dictate the hours of the Dentist\'s practice or the manner in which he conducted his work.

14. The Dentist\'s claim against the Debtor and/or its estate is limited to the amount of $2,000.00.

One exhibit to the Stipulation is a letter of January 15, 1985, from the Debtor's administrator to the Dentist which recites "the general guide line" of the parties' relationship. It provides, inter alia, that the "salary" of the Dentist is established as "60% of collections with an initial draw of $52,000;" that the Dentist is to be supplied with "the same benefit package offered to other hospital employees;" and that the Dentist is obliged to refer all of his patients needing hospitalization to the Debtor's facility. An attachment to the letter contains a hypothetical calculation of the Dentist's compensation which is designated as an "example of Item # 3 of employment agreement." Other exhibits to the Stipulation include letters of January 9, 1989, and January 20, 1989, from the Debtor to the Dentist in which the Debtor regretfully expresses its desire to terminate the Dentist's "employment."

C. LEGAL DISCUSSION

The Dentist's right to priority treatment is determined by 11 U.S.C. § 507(a)(3), which provides as follows:

§ 507. Priorities

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

. . . . .

(3) Third, allowed unsecured claims for wages, salaries, or commissions including vacation, severance, and sick leave pay —

(A) earned by an individual within 90 days before the date of the filing of the petition or the date of the cessation of the debtor\'s business, whichever occurs first; but only

(B) to the extent of $2,000 for each such individual.

The parties agreed that the sole issue is whether the Dentist's claim fits within the category of "wages, salaries, or commissions" set forth in § 507(a)(3). Counsel each cited one case allegedly in support of their respective positions: the Debtor, In re Kasson, Inc., U.S.A., 109 B.R. 352 (Bankr.E.D.Wis.1989); and the Dentist, In re Moriarty, 27 B.R. 73 (Bankr.M.D.Fla. 1983).

Moriarty does not support the Dentist's position. In that case, the court determined that the debtor, a real estate agent, was not entitled to exempt certain commissions as "wages" under Florida state law because he was "an independent contractor." Not only is the result regarding the party-in-interest's employment status contrary to that sought by the Dentist in the instant dispute, but the issue of entitlement to the Florida exemption is distinct from the issue of whether the Dentist's claim is entitled to priority under the Bankruptcy Code.

Kasson, holding that payments due to milk suppliers from the debtor-cheese producer were not within § 507(a)(3), is more to the point. However, Kasson is a much simpler case than the instant case. The Kasson court rather easily found that "no employer-employee relationship existed" between the debtor and the suppliers. 109 B.R. at 353. The debtor never supplied 1099 nor W-2 forms to the milk suppliers, nor did it provide any fringe benefits like insurance or a benefit package to them. Id. Although the suppliers were paid from a "`producer payroll' account," id., the court found that "under the undisputed facts, the degree of control necessary for an employer-employee relationship between the debtor and the milk suppliers was lacking." Id. at 354.

We located only a few other relevant cases decided under the Bankruptcy Code. In In re American Shelter Systems, Inc., 40 B.R. 793, 794, 795 (Bankr.W.D.La.1984), the court ultimately adopted the Trustee's contention, contrary to the position of the claimant, that "the statute 11 U.S.C. § 507(a)(3) was intended to cover employees within a master-servant relationship." Id. at 794. Thus, it concluded that the claimant, an "outside salesman" of mobile homes, was not entitled to a § 507(a)(3) priority for unpaid commissions. In In re Seventh Avenue South, Inc., 10 B.R. 289 (Bankr.W.D.Va.1981), the court held that a "chief representative of the Debtor in a subsidiary venture," id., at 289, was entitled to a priority claim under § 507(a)(3) despite the fact that his commissions were not determined until a subsequent, post-petition adjustment was made. The court, id. at 292, quoted, however, from 3A COLLIER ON BANKRUPTCY, § 64.202 at 2120 (14th ed. 1975), which states as follows:

"There is nothing ambiguous about the use of the word `wages\' in this connection. It means the agreed compensation for services rendered by the workmen, clerks, or servants of the bankrupt— those who have served him in a subordinate or menial capacity and who are supposed to be dependent upon their earnings for their present support. . . . "

This court previously held, in In re Comtec Industries, Inc., 91 B.R. 344, 346 (Bankr.E. D.Pa.1988), that

the restriction of the scope of the Bankruptcy Act\'s priority wage claims to parties that perform labor in a subordinate capacity as opposed to managers and directors of a corporate debtor remains viable. Compare In re Konidaris, 87 B.R. 846 (Bankr.E.D.Pa.1988) (wage claimant was obviously a subordinate laborer).

The issue in the present controversy is, however, not, as it was in Comtec, whether the Dentist's position with the Debtor was elevated to the status of an officer or manager, causing him not to be entitled to a priority because of an inability to satisfy the policy of being unable to investigate the Debtor's creditworthiness prior to bankruptcy. See id. at 345-46. Rather, is it whether the Debtor exercised sufficient control over his operations to render him an "employee" who was a recipient of "wages, salary, or commissions." Although the question is rather close, we are constrained to conclude that the Debtor does not meet this qualification.

Because of lack of guidance from cases under the Bankruptcy Code, we searched for analogous fact patterns in cases interpreting other laws.

The most closely analogous Bankruptcy Act cases which we located were In re Estey, 6 F.Supp. 570 (S.D.N.Y.1934), and In re All Star Feature Corp., 231 F. 251 (S.D.N.Y.1916), in which a business school teacher and an actress, respectively, were found not entitled to priorities for unpaid salaries because they were not "workmen" or "servants" of the respective debtors. See also In re Footville Condensed Milk Co., 237 F. 136 (W.D.Wis.1916) (milk handlers who were found to be "independent contractors" were held not entitled to priority). But see In re Caldwell, 164 F. 515, 517 (E.D.Ark.1908) (musicians hired to play in an orchestra...