Lorber Industries of California, Inc., In re

• Decision Date: 28 April 1982
• Docket Number: No. 79-3610,79-3610
• Citation: 675 F.2d 1062
• Parties: In re LORBER INDUSTRIES OF CALIFORNIA, INC., a California corporation, Debtor. COUNTY SANITATION DISTRICT NO. 2 OF LOS ANGELES COUNTY, Claimant-Appellee, v. LORBER INDUSTRIES OF CALIFORNIA, INC., Debtor-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1062

675 F.2d 1062

In re LORBER INDUSTRIES OF CALIFORNIA, INC., a California corporation, Debtor COUNTY SANITATION DISTRICT NO. 2 OF LOS ANGELES COUNTY Claimant-Appellee, v. LORBER INDUSTRIES OF CALIFORNIA, INC., Debtor-Appellant.

No. 79-3610.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 7, 1981.

Decided April 28, 1982.

Irving Sulmeyer, Sulmeyer, Kupetz, Baumann & Rothman, Los Angeles, Cal., for debtor-appellant; Bennett L. Silverman, Los Angeles, Cal., on brief.

Daniel V. Hyde, Knapp, Stevens, Grossman & Marsh, Los Angeles, Cal., for claimant-appellee.

Appeal from the United States District Court for the Central District of California.

Before GOODWIN, HUG and FARRIS, Circuit Judges.

HUG, Circuit Judge:

This action was filed under Chapter XI of the Bankruptcy Act ¹ by Lorber Industries, Inc. In the arrangement proceedings before the bankruptcy court, the local sewer district filed a claim for sewer use fees it had assessed to the debtor. It was claimed the user fees constituted taxes and were therefore entitled to priority status. We hold that such fees do not constitute taxes, and that the bankruptcy court correctly classified the sewer district as a general unsecured creditor.

I FACTS

A. The District

County Sanitation District No. 2 of Los Angeles County (the "District") was formed under the authority of California Health and Safety Code §§ 4700-4858 (West 1970 & Supp. 1981). Its primary functions are to construct, operate, and maintain trunk sewer lines and treatment facilities that collect, treat, and dispose of domestic and industrial wastewater. The District is empowered to condemn or purchase property, and it may finance acquisition and construction by issuing bonds. Section 4746. Current expenses of maintenance and operation may be financed by issuance of negotiable promissory notes. Section 4746.1. It is also granted the power to levy and collect real property taxes to meet bond obligations, pay promissory notes, and defray operating expenses. Section 4747. The District is empowered to adopt specified ordinances and to enforce them through imposition of fines or imprisonment. Section 4766. These ordinances may provide for the collection of rentals, fees, and service charges. In addition to the misdemeanor penalties, charges assessed can be enforced through levy of a lien against the property for which the charge is imposed. Section 5473.5.

Prior to 1972 the District was financed through ad valorem property taxes. Each user of the system thus contributed to the District's expenses on the basis of the assessed valuation of the user's property. In addition, the District received federal grants available under section 201(g) of the Water Pollution Prevention and Control Act (the "Clean Water Act"), 33 U.S.C. § 1281(g).

In 1972 the Clean Water Act was amended to condition the award of grants upon conformance with specified revenue collection procedures. See 33 U.S.C. § 1284(b)(1), as amended by Clean Water Act Amendments of 1980, Pub.L.No.96-483, 94 Stat. 2360. The amendments required that grant applicants adopt an assessment scheme in which each nonresidential user of the system was required to pay charges proportionate to its use of the system. This requirement was imposed to reduce the inequity of requiring low volume dischargers to subsidize those industries which produce high volumes of wastewater. It was also assumed that a system of charges based on use would encourage more efficient management of waste and more conservative use of the system. S.Rep.No.95-370, 95th Cong., 1st Sess., reprinted in (1977) U.S.Code Cong. & Ad.News, 4326, 4352.

In response to these amendments, the District adopted Sections 409 and 410 of its Wastewater Ordinance, An Ordinance Regulating Sewer Construction, Sewer Use and Industrial Wastewater Discharges (April 1, 1972; as amended July 1, 1975) (the "Ordinance"). Under these sections nonresidential users of the system are assessed a surcharge. The charge is determined by an engineer's estimate, and takes into account the contribution to flow, chemical oxygen demand, and suspended solids. The user is given a credit against these charges in the amount of the user's ad valorem taxes; the balance is due to the District as a user fee.

B. The Debtor

Lorber Industries of California, Inc. ("Lorber") is a producer of polyester fabric. Its plant is located in Carson, California, within the area served by the District. In the process of knitting, printing and dyeing the fabric it produces, Lorber discharges unusually high quantities of wastewater into the sewer system operated by the District. This waste contains high levels of chemicals and suspended solids. Based on the volume discharged and on the chemical and solid content of the wastewater, charges were assessed against Lorber by the District totaling $52,653.25. This assessment covered fiscal years 1974-75, 1975-76, and 1976-77.

C. Proceedings Below

On October 19, 1976, Lorber filed a petition for relief from bankruptcy under Chapter XI of the Bankruptcy Act (the "Act"), 11 U.S.C. § 722. On June 7, 1977, the District filed a Proof of Priority Claim for the outstanding charges. The basis of the claim was that the fees due the District constituted taxes legally due and owing to the subdivision of a state, and that they were therefore entitled to priority under § 64(a)(4) of the Act, 11 U.S.C. § 104(a) (4). ² Lorber filed objections to the claim of priority, contending that the charges constituted a general unsecured claim.

The bankruptcy judge issued a written opinion sustaining Lorber's objections to the priority claim. The opinion relied upon numerous state court cases holding that water rents, sewer charges, and related fees are not taxes. It contrasted involuntary assessments imposed to lessen the burden of general taxation with contractual obligations resulting from use of a public utility system. It held that this debt was of the second type, for Lorber was legally free not to use the system, and its voluntary use thus constituted an implied contractual debt. The bankruptcy judge allowed the District's claim as a general unsecured claim.

The District appealed to the district court. That court remanded the case to the bankruptcy court, with instructions to hold hearings and prepare detailed findings of fact identifying the alternate methods of wastewater treatment and disposal available to Lorber. After holding evidentiary hearings, the bankruptcy judge determined that four alternative disposal methods existed, but that Lorber was precluded from using all of these, based on practical and economic considerations. He concluded that "Lorber chose the only practical alternative available to it when it applied for and obtained permits from the District to discharge wastewater into the District's facilities." ³

The district court reversed the decision of the bankruptcy court, and held that the surcharge was a tax. The decision reasoned that the charge was not contractual because the Ordinance enables the District to assess anyone who uses the District's services, whether or not the user acquires necessary permits. It determined that Lorber's use of the system was involuntary, because no practical alternatives were available. The district court also recognized that, as a public agency, the District was dependent upon its ability to collect funds such as these to continue provision of essential services. Lorber appeals the district court judgment.

II DISCUSSION

This court has jurisdiction to review arrangement proceedings under section 316 of the Act, 11 U.S.C. § 716. The facts in this case are not in dispute. As with other types of bankruptcy proceedings, we are free to examine the legal conclusions of the lower courts. 11 U.S.C. § 47; In re Amex-Protein Development Corporation, 504 F.2d 1056, 1058 (9th Cir. 1974).

The broad purpose of the Act is to bring about an equitable distribution of the debtor's estate. Kothe v. R. C. Taylor Trust, 280 U.S. 224, 227, 50 S.Ct. 142, 143, 74 L.Ed. 382 (1930). The priority provisions of section 64(a) run counter to that purpose, creating a special status for specified claims. If one claimant is to be granted a priority under section 64(a), that status must be justified by clear statutory authorization. United States v. Embassy Restaurant, Inc., 359 U.S. 29, 31, 79 S.Ct. 554, 555, 3 L.Ed.2d 601 (1959); Nathanson v. NLRB, 344 U.S. 25, 29, 73 S.Ct. 80, 83, 97 L.Ed. 23 (1952). In order to be classified as taxes entitled to priority under the Act, the charges in question must therefore satisfy two requirements. First, they must be "taxes," as defined by federal law. New York v. Feiring, 313 U.S. 283, 285, 61 S.Ct. 1028, 1029, 85 L.Ed. 1333 (1941); New Jersey v. Anderson, 203 U.S. 483, 491, 27 S.Ct. 137, 140, 51 L.Ed. 284 (1906). Second, their classification as priority claims must be consistent with the terms and purposes of section 64(a) and the other provisions of the Act. New York v. Feiring, 313 U.S. at 285, 61 S.Ct. at 1029.

A. Characteristics of User Fees Imposed

In general, these charges can be classified as a tax only if they constitute "a pecuniary burden laid upon individuals or property for the purpose of supporting the Government" or to support "some special purpose authorized by it." New Jersey v. Anderson, 203 U.S. at 492. Taxes are not equivalent to debts, which are voluntary obligations based on express or implied contracts. Taxes are levied without the consent or voluntary action of the taxpayer. Id. See also National Cable Television Association v. United States, 415 U.S. 336, 340-41, 94 S.Ct. 1146, 1148-49, 39 L.Ed.2d 370 (1974).

This court considered the distinction between taxes and non-tax charges in Dungan v. Department of Agriculture, State of California, 332 F.2d 793 (9th Cir. 1964), aff'g In re Farmers Frozen Food Company, 221 F.Supp. 385 (N.D.Cal.1963). We approved the analysis developed by the district...