Pierce, Matter of, 90-1923

• Decision Date: 16 July 1991
• Docket Number: No. 90-1923,90-1923
• Parties: , 25 Collier Bankr.Cas.2d 69, 21 Bankr.Ct.Dec. 1465, Bankr. L. Rep. P 74,134 In the Matter of Richard A. PIERCE, Debtor. STATE OF TEXAS and the Texas State Employment Commission, Appellants, v. Richard A. PIERCE, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 709

935 F.2d 709

60 USLW 2138, 25 Collier Bankr.Cas.2d 69,

21 Bankr.Ct.Dec. 1465,

Bankr. L. Rep. P 74,134

In the Matter of Richard A. PIERCE, Debtor.

STATE OF TEXAS and the Texas State Employment Commission, Appellants, v. Richard A. PIERCE, Appellee.

No. 90-1923.

United States Court of Appeals, Fifth Circuit.

July 16, 1991.

John Mark Stern, Mark Browning, Asst. Attys. Gen., Jim Mattox, Atty. Gen., Austin, Tex., for appellants.

Sean F. Creegan, Deputy Chief Counsel for Employment Sec., Dept. of Labor & Indus., Harrisburg, Pa., for amici curiae Com. of Pa., et al.

Joe Scott, Sr. Asst. Atty. Gen., Casper, Wyo., for amicus curiae Wyoming Dept. of Employment.

Gary Allen, Chief, Gary D. Gray, Kenneth W. Rosenberg, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for amicus curiae U.S.

W. Hollis Webb, Jr., Kevin L. Williams, Baker, Clifford, Krier & Webb, Lubbock, Tex., for appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before THORNBERRY, JONES, and WIENER, Circuit Judges.

THORNBERRY, Circuit Judge:

The bankruptcy court concluded that unemployment taxes which the debtor owed to the Texas Employment Commission (TEC) were not entitled to priority under section 507(a)(7)(D) of the Bankruptcy Code because the debtor paid the wages on which the taxes were based more than ninety days before filing for bankruptcy. The TEC appealed that decision to the district court, arguing that unemployment taxes are not dischargeable if the return was due within three years of the date when the employer filed for bankruptcy. The district court affirmed the bankruptcy court's decision, 115 B.R. 523, however, and the TEC now appeals to this court.

We conclude that the bankruptcy court's interpretation of the Code is palpably incorrect. Therefore, the order discharging the debtor's liability for unemployment taxes is REVERSED and judgment is RENDERED in favor of the TEC for $5,319.48, the amount of unemployment taxes owed.

FACTS AND PROCEDURAL HISTORY

The facts are not disputed. See Stipulations of Fact, reprinted in Record on Appeal (R.), vol. 2. The debtor, Richard A. Pierce, operated a business known as Regal Building Systems. On September 13, 1988, he filed for relief under Chapter 7 of the Bankruptcy Code. When Pierce filed his petition for bankruptcy, he owed unemployment taxes of $5,319.48. See Tex.Rev.Civ.Stat.Ann. art. 5221b-5 (Vernon 1987 & Supp.1991). The taxes were assessed on wages that he had paid to his employees more than ninety days before he filed for bankruptcy and more than ninety days before he closed his business. The returns for these taxes were all due within three years of the date on which he filed for bankruptcy. Neither the state of Texas nor the TEC filed a proof of claim for the amount that Pierce owed, see 11 U.S.C.A. Secs. 501, 502(a), 727(c)(1) (West 1979 & Supp.1991).

Pierce was granted his Chapter 7 discharge on February 13, 1989. On February 16, he filed a complaint in the bankruptcy court against the state of Texas and the TEC seeking a determination that his liability for the unemployment taxes had been discharged. The TEC answered, claiming that the taxes which Pierce owed were exempt from discharge under sections 507(a)(7)(D) and 523(a)(1)(A) of the Bankruptcy Code because the returns for the taxes were due within three years of the date that Pierce petitioned for bankruptcy. See 11 U.S.C.A. Sec. 726(a)(1) (West 1979). In April 1990, Pierce moved for summary judgment. The bankruptcy court conceded that the legislative history of the Bankruptcy Reform Act of 1978 indicated that the unemployment taxes were not dischargeable but concluded that "the plain reading of the statute [did] not yield this result." See Pierce v. Texas, 115 B.R. 523, 526 (Bankr.N.D.Tex.1990). Consequently, the bankruptcy court granted Pierce's discharge. The district court summarily affirmed. See Order, reprinted in R., vol. 1, at 93.

The bankruptcy court's interpretation of the Bankruptcy Code significantly curtails the power of states and the federal government to collect employment taxes from bankrupt employers. The decision also affects the ability of the federal government to collect the employer's share of social security taxes. For this reason, Wyoming, Pennsylvania, and the federal government have filed briefs in support of the TEC.

DISCUSSION

Both the bankruptcy court and the district court concluded that unemployment taxes which become due more than ninety days prior to the filing of a bankruptcy petition or cessation of a debtor's business are not entitled to priority under section 507(a)(7)(D) of the Bankruptcy Code and, therefore, are not exempt from discharge under section 523(a)(1)(A). We review their interpretation of the Code de novo. See In re Kolstad, 928 F.2d 171, 173 (5th Cir.1991).

A debt that has "priority" is paid from the bankruptcy estate before the debts to general unsecured creditors are paid. See 3 L. King, Collier on Bankruptcy p 507.02, at 507-9 (15th ed. 1991). In section 507 of the Code, Congress listed all priorities in bankruptcy in the order in which they are to be paid. See id. p 507.02, at 507-11. Unemployment taxes, the focus of this case, have seventh priority, along with other "unsecured claims of governmental units." See 11 U.S.C.A. Sec. 507(a)(7) (West Supp.1991). But the claims of governmental units listed in section 507(a)(7) have an advantage over most other priorities: they are non-dischargeable even if the governmental entity did not file a proof of claim. See 11 U.S.C.A. Sec. 523(a)(1)(A) (West Supp.1991). ¹

Pierce's argument is based on the relationship between two priorities: that given to claims for unpaid wages in section 507(a)(3)(A) and that given to employment taxes in section 507(a)(7)(D). Under section 507(a),

[t]he 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.

....

(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.

(emphasis added).

Pierce asserts his right to a discharge using the following deductive reasoning. Under section 507(a)(7)(D), an employment tax has priority if it is "on a wage, salary or commission of the kind specified in [507(a)(3) ]." The "kind" of wages specified in section 507(a)(3)(A) are those "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." The wages on which he owes taxes were earned more than ninety days before he filed for bankruptcy and more than ninety days before he closed his business. Consequently, the TEC's claim is not entitled to priority, which means that its claim for unemployment taxes is not exempt from discharge under section 523(a)(1)(A). Thus, Pierce's conclusion hinges on the premise that section 507(a)(7)(D)'s reference to section 507(a)(3) imposes a temporal restraint on the priority of employment taxes.

The TEC proffers another explanation for the reference to 507(a)(3) in section 507(a)(7)(D). Section 507(a)(7)(D) refers to "an employment tax on a wage, salary or commission of the kind specified in [507(a)(3) ]"; section 507(a)(3) refers to "claims for wages, salaries, or commission, including vacation, severance, and sick leave pay." According to the TEC, the reference back to section 507(a)(3) was intended to incorporate the kinds of wages included in that section, not the periods for which those wages were classified as a priority.

Although the TEC offers no authority to support its conclusion, the language of section 507(a)(7)(D) itself rebuts Pierce's interpretation. That section speaks of wages "of the kind specified in [507(a)(3) ] earned from the debtor before the date of the filing of the petition." If we insert the language of 507(a)(3), as Pierce would have us do, 507(a)(7)(D) provides that taxes have priority only if they are on wages

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, earned from the debtor before the date of the filing of the petition.

This combination of the two sections produces either redundancy or opposition. Moreover, section 507(a)(7)(D) already limits the period for priority to "three years before the date of the filing of the petition." If we accept Pierce's analysis, this restriction would apply only if a debtor closed his business more than three years ago and still owed unemployment taxes on wages paid within ninety days before he closed.

The wording of section 523 of the Code also refutes Pierce's exegesis. In section 523(a)(1)(A), Congress excepted from discharge taxes "of the kind and for the periods specified in section 507(a)(2) or 507(a)(7) of [title 11]" (emphasis added). Congress would have used similar language in 507(a)(7)(D) had it intended for the allusion to 507(a)(3) to include a temporal restriction.

Ironically, Pierce contends that his interpretation of the statute is so clear that this court should not look to the legislative history of this provision for enlightenment. See Toibb v. Radloff, --- U.S. ----, ----, 111 S.Ct. 2197, 2200, 115 L.Ed.2d 145 (1991) (holding that...