Ky. Emps. Ret. Sys. v. Seven Cnties. Servs., Inc.
| Decision Date | 20 July 2020 |
| Docket Number | No. 16-5569,No. 16-5644,16-5569,16-5644 |
| Parties | KENTUCKY EMPLOYEES RETIREMENT SYSTEM; BOARD OF TRUSTEES OF KENTUCKY RETIREMENT SYSTEMS, Appellants-Cross-Appellees, v. SEVEN COUNTIES SERVICES, INC., Appellee-Cross-Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
NOT RECOMMENDED FOR PUBLICATION
File Name: 20a0419n.06
JANE B. STRANCH, Circuit Judge. This case returns to us after the Kentucky Supreme Court responded to our certified question. For decades, Seven Counties Services, Inc., a nonprofit provider of mental health services, participated in Kentucky's public pension plan, the Kentucky Employees Retirement System (KERS or the System). Because the rate set for employer contributions drastically increased, Seven Counties tried to rehabilitate its finances by rejecting its relationship with KERS through filing for reorganization under Chapter 11 of the Bankruptcy Code. The bankruptcy court and the district court both held that Seven Counties is eligible to file under Chapter 11, that the relationship between Seven Counties and KERS is based on an executory contract, and that Seven Counties is not required to make post-petition contributions based on 28 U.S.C. § 959(b).
Because the Commonwealth of Kentucky does not exercise the necessary forms of control over Seven Counties, we affirmed the conclusion that Seven Counties is a non-governmental unit, eligible to file. But lacking guidance from the Kentucky state courts, we certified the question of the nature of the relationship—whether contractual or statutory—to the Kentucky Supreme Court. Kentucky Employees Ret. Sys. v. Seven Ctys. Servs., Inc., 901 F.3d 718, 722 (6th Cir. 2018), certified question answered, 580 S.W.3d 530 (Ky. 2019). The Kentucky Supreme Court concluded that the relationship between Seven Counties and KERS is "based on a statutory obligation." Kentucky Employees Ret. Sys., 580 S.W.3d at 532. We must now decide whether the statutory obligation to contribute to KERS had to be maintained during the pendency of the bankruptcy proceedings. For the following reasons, we conclude that Seven Counties was required to fulfill that statutory obligation. We therefore REVERSE the bankruptcy court's contrary conclusion and REMAND for further proceedings consistent with both this opinion and our earlier decision to AFFIRM Seven Counties' eligibility to file under Chapter 11.
The lengthy background of this litigation is in our prior decision, Kentucky Employees Ret. Sys., 901 F.3d at 722-25, and the facts are also detailed in the Kentucky Supreme Court's opinion, 580 S.W.3d 532-37. The background relevant to this portion of the appeal is as follows.
Seven Counties is a Kentucky nonprofit that has provided mental health services in the area surrounding Louisville, Kentucky since 1978. In its role as a community mental health center (CMHC), Seven Counties provides services to approximately 33,000 people, serving as a safety net for adults and children with mental illnesses, emotional or behavioral disorders, developmental or intellectual disabilities, and alcohol or drug addictions.
Seven Counties has participated in KERS since 1979 when the Governor issued an executive order "designat[ing] Seven Counties Services, Inc. as a participating department in theKentucky Employe[e]s Retirement System." Ky. Exec. Order No. 79-78 (Jan. 24, 1979). In the past decade, participation in KERS became an increasingly heavy financial burden for Seven Counties. When Seven Counties filed its bankruptcy petition in April 2013, the KERS employer contribution rate was 24% of each employee's "creditable compensation," as defined in K.R.S. § 61.510(13); the contribution rate increased to 27% on July 1, 2013 and rose again to 39% beginning July 1, 2014.
As of June 30, 2013, Seven Counties had 1,219 active employees, including the 926 employees Seven Counties has reported to KERS as inactive despite their continued employment. There were 361 Seven Counties retirees and their surviving beneficiaries receiving an annual KERS benefit. Of Seven Counties' former employees, 283 had earned vested benefits but were not yet receiving them, and there were 1,342 terminated, nonvested employees. Seven Counties represented 3,205 of the 126,466 members in the KERS Non-Hazardous plans, or 2.53% from a straight capitation basis.
At the 24% employer contribution rate, Seven Counties could "perform its charitable mission or pay System contributions that [would] force it to terminate operations," it could not "do both." In re Seven Ctys. Servs., Inc. ( ), 511 B.R. 431, 453 (Bankr. W.D. Ky. 2014), aff'd in part, rev'd in part, 550 B.R. 741 (W.D. Ky. 2016).
In the core bankruptcy proceedings, Seven Counties moved to reject its relationship with KERS, arguing that the relationship was based on an executory contract. Seven Counties also commenced an adversary proceeding against KERS, arguing that it should be relieved of its contribution obligations to KERS even if those obligations are statutory in nature. It sought a declaration that it was ineligible to participate in KERS under Kentucky Law or the Employment Retirement Income Security Act (ERISA).
KERS moved to dismiss Seven Counties' adversary proceeding, raising sovereign immunity as a defense. The bankruptcy court denied the motion to dismiss; KERS filed an interlocutory appeal and moved to stay Seven Counties' adversary proceeding pending the appeal of the denial of sovereign immunity. The bankruptcy court agreed not to take any action on Seven Counties' adversary proceeding during the pendency of KERS's interlocutory appeal regarding sovereign immunity.
KERS filed its own adversary proceeding, arguing that Seven Counties is a governmental unit ineligible to file under Chapter 11, that the relationship between Seven Counties and KERS is based on a statutory obligation, and that Seven Counties must fulfill that obligation during the pendency of the proceeding. After a trial on KERS's adversary complaint, the bankruptcy court held that Seven Counties is eligible to file under Chapter 11, that the relationship between Seven Counties and KERS is based on an executory contract, and that Seven Counties is not required to make any post-petition contributions under 28 U.S.C. § 959(b). The court found it unnecessary to consider the claims and defenses raised by Seven Counties in its adversary proceeding.
KERS appealed to the district court. Seven Counties filed what it called a "protective cross appeal," raising the alternative reasons—specified in its adversary proceeding—for upholding the bankruptcy decision in the event the district court found the relationship between KERS and Seven Counties to be statutory rather than contractual. The district court affirmed the bankruptcy court's conclusions regarding Seven Counties' eligibility to file, the contractual nature of the relationship between Seven Counties and KERS, and Seven Counties' entitlement to relief from making contributions during the pendency of the proceeding. It dismissed Seven Counties' cross appeal as moot.
Meanwhile, the bankruptcy court confirmed Seven Counties' First Amended Plan of Reorganization on January 6, 2015, and the plan became effective February 6, 2015. During the pendency of the bankruptcy—April 6, 2013 to February 6, 2015—Seven Counties did not submit monthly reports of employee "creditable compensation" or withhold and pay employee and employer contributions to KERS that would have been due had such monthly reports been filed. K.R.S. §§ 61.560(1), .560(2), .560(4), 61.565(1), 61.675(3); 105 K.A.R. 1:140. Based on Seven Counties' annual payroll and the applicable employer contribution rates, KERS claims that Seven Counties was statutorily obligated to pay KERS $30,323,775.31 during that period.
KERS appealed the district court's ruling to this court. Seven Counties cross appealed to preserve its alternative arguments for affirming the decisions of the bankruptcy and district courts. We affirmed the conclusion that Seven Counties is eligible to file under Chapter 11 because the Commonwealth of Kentucky does not exercise the requisite degree of control over Seven Counties to render it a governmental unit or state instrumentality under the Bankruptcy Code. But lacking state court precedent characterizing the nature of the relationship between Seven Counties and KERS, we certified that question to the Kentucky Supreme Court. We explained that if the Kentucky Supreme Court found the relationship to be statutory in nature, "Seven Counties would be unable to reject its obligations to participate as an executory contract, which would resolve the core claim raise in KERS's adversary proceeding." Kentucky Employees Ret. Sys., 901 F.3d at 731. The "issue of whether that obligation must be faithfully maintained during the pendency of proceedings under 28 U.S.C. § 959(b) would remain." Id.
Before the Kentucky Supreme Court answered the certified question or this court entered a final judgment in this case, KERS filed a petition for rehearing en banc, which we held in abeyance pending a response from the Kentucky Supreme Court and entry of final judgment.
The Kentucky Supreme Court then held that Seven Counties' participation in and contributions to KERS are based on a statutory obligation. Kentucky Employees Ret. Sys., 580 S.W.3d at 532. The Court determined that Seven Counties payments to KERS qualified as "statutorily mandated assessments" under Kentucky law. Id. at 544.
We must now determine whether 28 U.S.C. § 959(b) required Seven Counties to continue, throughout the pendency of the proceedings, to fulfill its statutory obligation to contribute to KERS. The text of § 959(b) resolves much of this issue. That section provides, in relevant part:
(b) . . . [A]...
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