Opinion
Case No. 98-43156 NG Chapter 13
November 3, 1999
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON DEBTORS' OBJECTION TO CLAIM
This Chapter 13 case is before the court pursuant to the debtors' objection to the claim of the Director of the Department of Industrial Relations as Administrator of the Uninsured Employer Fund's (UEF). The court has jurisdiction over the subject matter of, and parties to, this matter pursuant to 28 U.S.C. § 1334(b). This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(I). Having reviewed the papers submitted by the parties, the Court hereby submits its findings of fact, opinion and conclusions of law.
FINDINGS OF FACT
The debtors operated the C-Daco Binding Manufacturing Company, Inc., (C-Daco), and do not deny that they did so at all relevant times without workers' compensation insurance in violation of California law. An employee, Martina Corsbie, claims to have suffered industrial injuries between November 1993 and January 1994, in the course of her employment with C-Daco. On December 12, 1994, Corsbie filed a claim with the Workers' Compensation Appeals Board for these injuries. As developed below, the UEF pays any award which remains unpaid for 10 days. To date, the UEF has expended $1,144.83 and the UEF Claims Unit estimates the maximum probable value of the case to be $83,779.86. The debtors filed their Chapter 13 petition on April 8, 1998. Their Chapter 13 plan provides a 25% payout to unsecured creditors. On October 2, 1998 the UEF Collection Unit filed it's proof of claim and on December 10, 1998 the debtors filed their objection. The UEF asserts that its claim qualifies as an excise tax entitled to priority under 11 U.S.C. § 507(a)(8)(E)(ii). As such, the UEF's claim would be dischargeable, but § 1322(a)(2) would require it be paid in full through the Chapter 13 plan. The debtors assert that the claim is unsecured, or alternatively, if the claim is an excise tax, that it is time barred under § 507(a)(8)(E)(ii).
OPINION
California law requires that all employers maintain workers' compensation insurance. Cal. Const. art. XIV, § 4. The California Legislature created the Uninsured Employers Fund to provide benefits to employees injured while working for an uninsured employer. Cal. Labor Code § 3716(b). In order to receive compensation from the UEF, the employee must first obtain an award from the Workers' Compensation Appeals Board (WCAB). The WCAB requires that the employee establish liability in compliance with Cal. Labor Code § 3715 before the Board fixes the amount of the award. Once issued, the employer has ten days within which to pay or post a bond for the award's payment. Cal. Labor Code § 3715. The UEF becomes obligated to pay after the award remains unpaid for ten days. Cal. Labor Code § 3716(a), (d). Once the UEF has paid the compensation, it has a liquidated claim for damages against the employer. Cal. Labor Code § 3717(a). The dispute in this case is how the UEF's claim is characterized for purposes of bankruptcy law.
The UEF asserts that its claim for damages against the uninsured employer qualifies as an excise tax under Bankruptcy Code § 507(a)(8)(E). Federal bankruptcy statutes do not define "tax," but the Supreme Court has stated that taxes are "pecuniary burdens laid upon individuals or their property, regardless of their consent, for the purpose of defraying the expenses of government or of undertakings authorized by it."New York v. Feiring, 313 U.S. 283, 285 (1941). This issue is one of first impression as applied to California's system of workers' compensation. The Court of Appeals for the Ninth Circuit, however, has provided guidance in two main decisions. The first is In re Lorber Industries of California, Inc., 675 F.2d 1062 (9th Cir. 1982), where the court found that fees owed to a sewer district were not taxes. Lorber sets forth a four-part test which defines the characteristics of an excise tax. To qualify a debt must be (1) an involuntary pecuniary burden; (2) imposed by the state legislature; (3) for a public purpose; (4) under the police or taxing power. Id. at 1066. The second decision isIn re Camilli, 94 F.3d 1330 (9th Cir. 1996), where the Ninth Circuit found that the claim of the Arizona Special Fund, for workers' compensation benefits it paid on behalf of an uninsured employer, qualified as an excise tax. In Camilli the Ninth Circuit applied two additional criteria enunciated in In re Suburban Motor Freight, Inc., 998 F.2d 338 (6th Cir. 1993) (Suburban I): first, that the pecuniary obligation be universally applicable to similarly situated entities; and second, that according priority treatment to the government claim would not disadvantage private creditors with like claims. 94 F.3d at 1334. The Ninth Circuit specifically distinguished between Ohio's monopolistic system at issue in Suburban I and II, which discriminated against private sureties, and Arizona's system in which there was no discrimination, as a basis for their opinion.
There is no question that the four Lorber elements and the first of the Suburban I additions are satisfied. In re Camilli held that the obligation an uninsured employer owes to the state fund for compensation paid to an injured employer is involuntary. The last three requirements of Lorber are satisfied by Cal. Labor Code § 3716(b), and the obligations under Cal. Labor Code §§ 3710.2-3732 universally apply to all uninsured employers. Whether the claim of the UEF qualifies as an excise tax rests on the determination of the second of the two Suburban I considerations, namely whether there are private creditors with like claims and whether they are disadvantaged. For the following reasons this court is constrained to answer both questions affirmatively.
On the issue of whether there are private creditors with like claims, debtor cites Cal. Labor Code § 5500.5. Section 5500.5 governs situations where there is a cumulative work-related injury for which more than one employer is responsible. If one of two employers responsible for an employee's injury carries insurance, Section 5500.5(a) imposes joint and several liability on the insured employer. The insured employer is held responsible for the entire award if the uninsured employer fails to pay.Id. Upon payment of the injured employee's claim, the insured employer is subrogated to the employee's rights and is left to seek reimbursement from the uninsured employer for benefits paid on its behalf. Id.
The debtor asserts that the § 5500.5(a) claim for reimbursement held by a properly insured employer and the UEF's claim are "like" under the Suburban I standard. In re Camilli held that the Arizona Special Fund
. . .
differs from Ohio's in that the [Special Fund] carries its statutorily-imposed burden alone. No private entity competes with the [Special Fund] to pay `insurance' claims for which no insurance has been bought. Thus, there are no private creditors with claims similar to the [Special Fund]'s in bankruptcy proceedings.
94 F.3d at 1334. Arizona law has no equivalent to California's Labor Code § 5500.5. Instead, Arizona law states: "[w]here compensation is payable for an occupational disease the only employer liable shall be the employer in whose employment the employee was last injuriously exposed to the hazards of such disease . . ." A.R.S. Section 23-901.02. Because only one employer is held liable, Arizona eliminates the situation where a private party (an insured employer) ends up with a reimbursement claim against an uninsured employer. In Arizona no previous employer responsible for injuries to one of the claimants would be liable, insured or not, because only the last employer would be liable under A.R.S. Section 23-901.02. However, in California the previous employer would be liable and would pay `insurance' claims for which no insurance was bought. It is for that reason that the UEF and the insured employer hold "like" claims for bankruptcy purposes. Both are imposed by California law, both are required to pay worker's compensation claims on behalf of an unlawfully uninsured employer, and both seek reimbursement from that employer. Therefore, under Suburban I there is a private creditor with a like claim.
The final inquiry is whether according priority treatment to the UEF's claim would disadvantage those insured employers with like claims. For the following reasons this court finds that it would. The UEF pays a compensation award only if all responsible employers were unlawfully uninsured. Cal. Labor Code § 3716(b). If one of two responsible employers carries insurance, the UEF is not liable and the insured employer pays the entire claim. Id. Pursuant to Cal. Labor Code § 5500.5(a), upon payment of the claim the insured employer is subrogated to the rights of the employee as against the uninsured employer. Given that structure, a direct and foreseeable disadvantage will result when an uninsured employer files bankruptcy after having multiple employees file worker's compensation claims for injuries sustained at the workplace. If one claimant has a cumulative injury for which the previous responsible employer carries insurance, he would be required to pay the entire claim, and then be subrogated to the employee's rights, outlined in Cal. Labor Code § 3706, as against the insured employer. Standing in the shoes of the employee, the insured employer would be entitled to obtain a state court judgment, become a judgment creditor and be treated as a general unsecured creditor in the uninsured employer's bankruptcy. Assume arguendo, that the UEF pays the remaining claims on behalf of the uninsured employer and is granted an excise priority pursuant to 11 U.S.C. § 507(a)(8). In a chapter 7 case, as was the case inCamilli, their priority claim would receive full payment prior to any distribution to the unsecured creditors. 11 U.S.C. § 726. If the priority claims consume the entire estate the unsecured creditors receive nothing. Id. The same result would occur if the uninsured employer files a Chapter 13 petition. Under Chapter 13 the plan must provide for the full payment of all priority claims, while unsecured creditors might receive nothing. 11 U.S.C. § 1322(a)(2). This court finds such a scenario to be precisely the disadvantage contemplated by the Camilli and Suburban I II courts. Therefore, the claim of the UEF is hereby denied priority status under 11 U.S.C. § 507(a)(8)(E).
Despite finding that the UEF's claim is not a priority claim, this court will consider the merits of debtor's argument that the UEF's claim would be time-barred if it were a priority. Under § 507(a)(8)(E) allowed unsecured claims of governmental units are granted priority status to the extent they are for an excise tax. In the event that a return is not required, the tax must be on "a transaction occurring during the three years immediately preceding the date of the filing of the petition." 11 U.S.C. § 507(a)(8)(E)(ii). The parties disagree as to what "transaction" triggers the running of the three year period prescribed by § 507(a)(8)(E)(ii). The UEF asserts that the transaction occurs when the UEF is obligated to pay the injured employee, and debtors contend that the transaction takes place on the date of the injury to the employee. For the following reasons this court agrees with the UEF's position.
In this case, "`[t]he particular demand for which the [state] now claims priority of payment [and nondischargeability] as a tax is created and defined by state enactment.'" In re Waldo, 186 B.R. 118 (D. Mont. 1995), aff'd mem., 108 F.3d 340 (9th Cir. 1997) quoting Feiring, 313 U.S. at 285. As in Waldo, we must look to the California state law which imposes the liability on the debtor for guidance as to when the UEF's "particular demand" became due. When such demand became due is synonymous, for our purposes, with when the "transaction" occurred under § 507.
Pursuant to the California Labor Code, an injured employee must proceed against the uninsured employer, obtain a valid award, then make demand upon the UEF after the employer fails to pay the award within ten days of its issuance. Cal. Labor Code §§ 3715, 3716, 3717. It cannot be disputed that the UEF has no claim against the employer until the expiration of the ten days following an award against the employer. The UEF may have knowledge of the uninsured employer's WCAB case pending, but it is not yet liable to expend any funds on the employer's behalf.In re Waldo dealt with an analogous situation. Under the Montana statute, the UEF did not have to pay an award until the UEF either paid or determined the amount to be paid to the employee. Mont. Code Ann. § 39-71-504. This court also notes that the Ninth Circuit agreed with Waldo's reasoning on the timeliness issue when it was presented with Waldo's appeal. Had it chosen to use the date of the injury as triggering the three year period, it would have overturned its holding inCamilli, as the injury in Camilli had occurred over three years prior to the petition date.
Therefore, this court finds that the date of the injury to the debtors' employee is not the "transaction" referred to in § 507(a)(8)(E)(ii). Instead, as was precisely the case inWaldo, the debtor's liability to the UEF arose after several statutorily prescribed steps, all of which occurred within three years of the debtors' petition date and would therefore be timely as a priority claim.
CONCLUSION
For the reasons stated above the claim of the Director of the Department of Industrial Relations as Administrator of the Uninsured Employer Fund is hereby found to be non-priority and unsecured in the amount of $83,762.49.