In re Waldo

• Decision Date: 05 September 1995
• Docket Number: Bankruptcy No. 95-10117-7. Adv. No. 95/00044.
• Citation: 186 BR 118
• Parties: In re James E. WALDO, Debtor. James E. WALDO, Plaintiff, v. STATE of Montana DEPARTMENT OF LABOR AND INDUSTRY UNINSURED EMPLOYERS FUND, Defendant.
• Court: U.S. Bankruptcy Court — District of Montana

186 B.R. 118 (1995)

In re James E. WALDO, Debtor James E. WALDO, Plaintiff, v. STATE of Montana DEPARTMENT OF LABOR AND INDUSTRY UNINSURED EMPLOYERS FUND, Defendant.

Bankruptcy No. 95-10117-7. Adv. No. 95/00044.

United States Bankruptcy Court, D. Montana.

September 5, 1995.

Phillip R. Oliver, Oliver, Graves, Toennis & Gustafson, P.C., Billings, MT, for plaintiff.

John H. Grant, Jackson Murdo Grant & McFarland, P.C., Helena, MT, for defendant.

ORDER

JOHN L. PETERSON, Chief Judge.

In this adversary proceeding Plaintiff/Debtor, James E. Waldo ("Debtor"), seeks discharge of a claim by the Defendant/Creditor Montana Department of Labor and Industry Uninsured Employers' Fund ("the UEF"). Debtor avers that the claim does not fall under § 507(a)(8)(E)¹, that the claim is not for an excise tax or a tax for the purposes of the Bankruptcy Code, and that the claim is therefore dischargeable under § 523(a)(1)(A).² Debtor argues in the alternative that, if § 507(a)(8)(E) does apply to the debt, it arose from a transaction occurring more than three years prior to the date of the filing of Debtors' Petition in Bankruptcy, and is therefore dischargeable in bankruptcy under 11 U.S.C. § 507(a)(8)(E)(ii). The UEF disputes this characterization, contending that the transaction giving rise to the debt occurred within three years of the bankruptcy petition when the state court system finally determined Debtor's liability; that workers' compensation premiums are taxes; and that as a penalty related to such taxes, the debt in question falls under the priority and nondischargeability provisions of 11 U.S.C. §§ 507(a)(8)(E) and 523(a)(1)(A). However, both parties err. The Bankruptcy Court finds that the UEF's claim against Debtor is not a premium for workers' compensation insurance, is in the nature of an excise tax, and that the transaction giving rise to the tax occurred within three years of the filing of Debtor's bankruptcy petition. Therefore, judgment on the merits shall be entered in favor of the UEF dismissing the Complaint in its entirety.

Debtor filed a voluntary Chapter 7 petition on January 20, 1995, together with completed Schedules and Statement of Financial Affairs. Debtor's Schedule F (unsecured nonpriority debts totaling $72,575.80) includes the UEF's $50,000 claim listed as "disputed." Plaintiff filed the instant adversary Complaint May 11, 1995. The Trustee filed a no-asset report on May 17, 1995. After due notice, trial of this cause was held on July 11, 1995. Both Plaintiff and Debtor were represented by counsel. Plaintiff filed a trial brief and several exhibits were admitted into evidence. At the close of the hearing, the Court granted the UEF 10 days in which to respond to Plaintiff's trial brief and Plaintiff an additional five days in which to reply. The matter was then taken under advisement. The briefs have since been filed and reviewed by the Court, and the matter is ready for decision.

The questions presenting themselves in the case at bar involve the Montana Workers' Compensation statute. The first issue is whether, for the purposes of the Bankruptcy Code, an uninsured employer's obligation to pay the Montana Uninsured Employer's Fund after the employer's injured employee makes a claim against the fund is in the nature of a tax. If the uninsured employer's obligation is in fact a tax, the second issue under § 507(a)(8)(E)(ii) is when did the "transaction" giving rise to the assessment occur.

I.

The Montana Workers' Compensation Court determined that on September 28, 1988, Gary Loos died from injuries sustained while employed by Debtor. However, on the date of the injury Debtor had no workers' compensation insurance. Debtor's lack of coverage resulted in a claim by Loos' widow against the UEF pursuant to the uninsured employer provisions of the Montana workers' compensation law. Mont.Code Ann. § 39-71-501, et seq. The Montana Supreme Court affirmed this outcome on March 17, 1993. Loos v. Waldo and Uninsured Employers Fund, 257 Mont. 266, 849 P.2d 166 (1993). On September 24, 1993, the workers' compensation court entered an order awarding Mrs. Loos $275.08 per week in payments to be made by the UEF. As of June 12, 1995, the payments had totaled $76,954.65.

Under Montana law, an uninsured employer is liable to the UEF, not to exceed $50,000, when the fund disburses benefits claimed by the employer's injured employees. Mont.Code Ann. § 39-71-504(2).³ The UEF's payment's to Mrs. Loos exceeded $50,000, and therefore the UEF has a claim against Debtor for $50,000.⁴ This Court must now determine whether the UEF's claim has priority as a tax and is nondischargeable in bankruptcy.

II.

The Bankruptcy Code excepts from discharge any tax debt entitled to priority under 11 U.S.C. § 507(a)(8)(E). 11 U.S.C. § 523(a)(1)(A). Further, the Ninth Circuit Court of Appeals adopted for the purposes of bankruptcy the following "elements which characterize the exaction of a `tax'":

(a) An involuntary pecuniary burden, regardless of name, laid upon individuals or property;

(b) imposed by, or under authority of the legislature;

(c) for public purposes, including the purposes of defraying expenses of government or undertaking authorized by it;

(d) under the police or taxing power of the state.

In re Lorber Indust. of Calif., Inc., 675 F.2d 1062, 1066 (1982). An "involuntary pecuniary burden" is "a non-contractual obligation imposed by state statute upon taxpayers who have not consented to its imposition." Id. (citing with approval In re Farmers Frozen Food Co., 221 F.Supp. 385 (N.D.Cal.1963)). Since UEF's claim against Debtor satisfies the Lorber test, the debt is a tax.

In Lorber, the court found that a use fee charged by a County Sanitation District for pollutants voluntarily released into local water courses did not satisfy the first element of the court's test, and thus was not a tax. Lorber, 675 F.2d at 1067. Since the District assessed charges against the debtor in that case only for debtor's actual use of the waterways, and only in proportion to that use, the court determined that the debtor's decision to release the waste "triggered" its obligation to the district. As an obligation undertaken upon the debtor's own decisions and acts, the debt fell "within the non-tax fee classification defined by the Supreme Court." Id. (citing National Cable Television Ass'n v. United States, 415 U.S. 336, 340-41, 94 S.Ct. 1146, 1149, 39 L.Ed.2d 370 (1974)).

Asserting support for Debtor's cause in Lorber, Debtor also claims validation from a recent Ninth Circuit Bankruptcy Appellate Panel ("BAP") decision. In re Camilli, 182 B.R. 247 (9th Cir. BAP 1995).⁵ In Camilli, the BAP applied the Lorber test to an Arizona workers' compensation claim seemingly analogous to the one at bar. The debtor owed the Industrial Commission of Arizona's "special fund" ("ICA") reimbursement of benefits paid to the uninsured debtor's injured employee. Id. at 248-49. A divided BAP found that under the first element of the Lorber test, reimbursement of the fund should be properly characterized as in the nature of a "voluntary" fee. The BAP made this finding notwithstanding the fact that the Arizona statute specifically requires reimbursement by the uninsured employer once an injured employee makes a valid claim against ICA. A.R.S. § 23-907 C. Relying on In re Payne, 27 B.R. 809 (D.Kansas 1983), the BAP reasoned:

Under Lorber, assessments stemming from a debtor\'s decision to use specific services provided by the State are dischargeable as fees. Because in Arizona an employer may elect not to use insurance provided by the State, charges assessed by the State are in the nature of fees rather than taxes.

Camilli, 182 B.R. at 251. The BAP further explained that by failing to comply with provisions of the Arizona statute requiring employers to secure workers' compensation for their employees, the debtor had entered into an "implied voluntary contract with ICA . . . for subrogation of monies paid to the debtor's employees." Id.

However, the dissent in Camilli acutely criticized the BAP's conclusions in a persuasive and tightly reasoned analysis. Noting that the ICA provides benefits under statutory authority for the general public welfare, that no private workers' compensation carriers provided similar benefits, and that the ICA has direct statutory authority to collect payments made to injured employees from their uninsured employers, the dissenter concluded that the debt fit with the Supreme Court's definition of an excise tax as a "`pecuniary obligation laid upon individuals or their property, regardless of their consent, for purposes of defraying the expenses of government or undertakings authorized by it.'" Id. at 252 (citing New York v. Feiring, 313 U.S. 283, 285, 61 S.Ct. 1028, 1029, 85 L.Ed. 1333 (1941)).

The dissent emphasized that bankruptcy courts in the Ninth Circuit have interpreted Lorber as requiring tax treatment of workers' compensation reimbursement claims, Id. at 254, pointing to both In re Beaman, 9 B.R. 539, 542 (Bkrtcy.D.Oregon 1980) (where the Oregon Bankruptcy Court found a scheme requiring reimbursements made to the State Workers' Compensation Department rather than to Oregon's regular workers' compensation fund in the nature of a tax) and to In re Hutchinson, 135 B.R. 890, 891 (Bkrtcy. D.Ariz.1992) (another Arizona case holding to the same effect). These decisions serve to illustrate Ninth Circuit courts' proper recognition that in cases where uninsured employer funds have claims against employers for payments made to their injured employees, (1) no private insurance carriers compete with the state to provide such benefits, and (2) claims against uninsured employers accrue "universally against all delinquent employers whose employees make claims on the uninsured employer fund." Id. at 254-55. Thus, contrary to the majority's conclusion, once the debtor's employee suffered injuries, the debtor did not have the option of ...