New Neighborhoods, Inc. v. West Virginia Workers' Compensation Fund

Decision Date02 October 1989
Docket NumberNo. 88-1360,88-1360
Parties, 19 Bankr.Ct.Dec. 1470, Bankr. L. Rep. P 73,157 NEW NEIGHBORHOODS, INC., Plaintiff-Appellant, v. WEST VIRGINIA WORKERS' COMPENSATION FUND, Defendant-Appellee.
CourtU.S. Court of Appeals — Fourth Circuit

Ray A. Byrd, Daniel A. Tomassetti, Schrader, Stamp, Byrd, Byrum & Companion, Wheeling, W.Va., on brief, for plaintiff-appellant.

Donald L. Hall, Sr. Asst. Atty. Gen., on brief, for defendant-appellee.

Before PHILLIPS and MURNAGHAN, Circuit Judges, and KAUFMAN, Senior United States District Judge for the District of Maryland, sitting by designation.

FRANK A. KAUFMAN, Senior District Judge.

New Neighborhoods, Inc. appeals an order of the United States District Court for the Northern District of West Virginia, filed September 21, 1988, holding that premiums due to be paid to the Workers' Compensation Fund of the State of West Virginia (Fund) are excise taxes for purposes of 11 U.S.C. Sec. 507(a)(7)(E), and are therefore entitled to priority status in bankruptcy. In so concluding, the District Court set aside the Order of the Bankruptcy Court, filed April 25, 1988, holding that such premiums were not excise taxes within the meaning of the Bankruptcy Code. We affirm the judgment of the District Court.


11 U.S.C. Sec. 507(a)(7)(D) and (E), which are parts of the Bankruptcy Code, provide in relevant part:

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

* * *

(7) Seventh, allowed unsecured claims of governmental units, only to the extent that such claims are for--

* * *

(D) an employment tax on a wage, salary, or commission of a kind specified in paragraph (3) of this subsection earned from the debtor before the date of the filing of the petition, whether or not actually paid before such date, for which a return is last due, under applicable law or under any extension, after three years before the date of the filing of the petition;

(E) 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 filing of the petition;

* * *

In this case, the sole question presented is whether the premiums due the Fund constitute excise taxes within the meaning of section 507(a)(7)(E).


The answer to that question initially requires analysis of the West Virginia Workers' Compensation statute. That law establishes a comprehensive system of mandatory workers' compensation. While some states require employers to carry insurance (if they can obtain the same) through private insurance carriers in order to fund compensation claims, West Virginia requires an employer to fund payment of benefits either by subscribing to the Fund or by electing to obtain from the West Virginia State Compensation Commissioner (Commissioner) authority to opt-out of the Fund and to become a self-insurer as an employer sufficiently financially responsible to ensure payment of compensation to injured employees or their dependents. W.Va.Code Sec. 23-2-9 (1988). While employers permitted to self-insure need not make premium payments to the Fund, each self-insurer must post a bond with the Fund in an amount approved by the Commissioner as sufficient to secure payment of compensation to employees, must file with the Commissioner a sworn statement of the total earnings of all employees subject to the statute, and must pay to the Fund a total sum sufficient to cover his proper portion of (a) the expenses of administration of the Fund, (b) the amounts needed to cover the premiums of employers who are delinquent in payment, and (c) the costs of the disabled workers' relief fund. W.Va.Code Sec. 23-2-9 (1988). If an employer fails to meet his obligations, the Commissioner can deprive him of his status as a self-insurer and require him to make premium payments to the Fund. See UMWA v. Lewis, 309 S.E.2d 58, 65 (W.Va.1983). All claims by employees are filed with and processed by the Fund, including claims by employees of self-insurers. In the case of a self-insurer, the Fund issues a pay order to the employer directing payment of benefits rather than making compensation payments itself to the employee.

As is true under most workers' compensation laws, a West Virginia employer covered by the law is relieved of liability for damages in tort suits by employees if the said employer complies with the statute. W.Va.Code Sec. 23-2-6 (1988). Instead of their common law right to seek damages in a tort action against their employer, West Virginia employees recover compensation for injuries according to schedules established by the statute.

The Commissioner is authorized to set premium rates for employers within a given group so as to reflect the nature of the business, degree of hazard and the individual employer's record. W.Va.Code Sec. 23-2-4 (1988). Adjustments may also be made by the Commissioner for seasonal employers, during periods in which employment is "significantly reduced." W.Va.Code Sec. 23-2-5 (1988).

The Commissioner is empowered in the name of the State of West Virginia to commence a civil action against an employer who has failed to make any required payment. W.Va.Code Sec. 23-2-5a (1988). Any unpaid payment and interest thereon is a personal obligation of the employer and constitutes a lien against all of his property. W.Va.Code Sec. 23-2-5a (1988). If an employer is in default for two calendar quarters, the Commissioner may bring a civil action to enjoin the employer from carrying on business in West Virginia. Further, any employer who knowingly fails to subscribe to the Fund or to perform any required act or duty shall be guilty of a misdemeanor and shall be subject to a maximum $5,000 fine. W.Va.Code Sec. 23-1-16 (1988). The statute permits the Commissioner to obtain from the State Tax Commissioner and/or the Commissioner of the Department of Employment Security names, addresses and other information regarding employers' tax returns and wages paid by employers to employees. W.Va.Code Sec. 23-2-2 (1988). Finally, all defaulting employers are subject to common law tort suits by employees and, in addition, such employers lose the common law defenses of the fellow-servant rule, assumption of risk and contributory negligence. W.Va.Code Sec. 23-2-8 (1988). No employer or employee may become exempt from the West Virginia workers' compensation law by any contract, agreement, rule or regulation. W.Va.Code Sec. 23-2-7 (1988).


The question of whether a payment of premiums under a state's workers' compensation insurance statute constitutes an "excise tax" as that term is used in 11 U.S.C. Sec. 507(a)(7)(E) has been approached in different ways by those courts in which the issue has been presented. One approach has featured a broad coverage definition of "excise tax." See, e.g., In re Pan American Paper Mills, 618 F.2d 159 (1st Cir.1980) (involving the Puerto Rico Workmen's Accident Compensation Act and dealing with the Bankruptcy Act of 1898); State Industrial Accident Commission v. Aebi, 177 Or. 361, 162 P.2d 513 (1945) (involving Oregon's Workmen's Compensation Act and the Bankruptcy Act of 1898); In re Tri-Manufacturing and Sales Co., 82 B.R. 58 (Bkrtcy.S.D.Ohio 1988) (dealing with Ohio's workers' compensation law and Bankruptcy Code Sec. 507, and pointing out differences between section 507 and section 64 of the 1898 Act); 1 In re E.A. Nord Co., Inc., 75 B.R. 634 (Bkrtcy.W.D.Wash.1987) (dealing with the Washington State Industrial Insurance Fund and section 507(a)(7) of the Bankruptcy Code); In re Beaman, 9 B.R. 539 (Bkrtcy.D.Or.1980) (dealing with Oregon's workmen's compensation law and section 507(a)(7)). See also In re Mansfield Tire and Rubber Co., 660 F.2d 1108 (6th Cir.1981) (dealing with section 64(a)(4) of the Bankruptcy Act of 1898).

A second approach has analyzed the workers' compensation statute of the state in question in order to determine whether the statute possesses more tax attributes or more insurance attributes, and has caused several bankruptcy courts to hold that the predominance of insurance characteristics requires the conclusion that statutory workers' compensation law premiums are not excise taxes under the Bankruptcy Code. In re Smith Jones, Inc., 36 B.R. 408 (Bkrtcy.D.Minn.1984) (with relation to Ohio's workers' compensation statute); In re Payne, 27 B.R. 809 (Bkrtcy.D.Kan.1983) (with regard to Kansas Worker's Compensation Act and the Bankruptcy Code).

A third approach stresses whether, regardless of the insurance attributes of a particular state statute, there are sufficient tax attributes present in the statute to call for coverage within the term "excise taxes." See In re Pan American Mills Paper Corp., 618 F.2d at 162 (citing State Industrial Accident Commission v. Aebi, 162 P.2d at 516); In re Intern. Automated Machines, Inc., 9 B.R. 575 (Bkrtcy.N.D.Ohio 1981).

Appellant New Neighborhoods, Inc. contends that the West Virginia workers' compensation system establishes a state system of insurance, and asks this Court to adopt the approach of those courts which have considered determinative the predominance of the insurance attributes of their state statutes--a predominance which appellant claims for the West Virginia statute involved in this case.

Whether workers' compensation premiums are taxes entitled to priority as excise taxes pursuant to 11 U.S.C. Sec. 507(a)(7)(E) is to be determined as a matter of federal law so that the priority provision in the Bankruptcy Code can be "nationwide in its application," City of New York v. Feiring, 313 U.S. 283, 285, 61 S.Ct. 1028, 1029, 85 L.Ed. 1333 (1941) (involving a New York City sales tax); In re Pan American Paper Mills, Inc., ...

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