Camilli v. Industrial Commission (In Re Camilli) , 182 B.R. 247 ( 1995 )

OPINION

MEYERS, Bankruptcy Judge:

I

The bankruptcy court held that a state agency’s claim for reimbursement of workers’ compensation benefits paid to the debt- or’s employee was nondischargeable as an excise tax.

We REVERSE.

II

FACTS

Karen Camilli (“Camilli”) owned a janitorial business in Arizona called Final Touch. Arizona law required Camilli to provide workers’ compensation benefits for her employees, using either State provided insurance, private insurance or appropriate self-insurance. Ariz.Rev.Stat.Ann. (“A.R.S.”) § 23-961. On November 26, 1989, Barbara Kennedy (“Kennedy”), an employee of Final Touch, was injured at work. At that time, Final Touch did not have workers’ compensation insurance.

Under Arizona law, an employer who fails to procure workers’ compensation insurance can be held hable to an injured worker in a legal action. A.R.S. § 23-907.A. The injured worker may either file a civil action against the employer or apply for compensation benefits with the Industrial Commission of Arizona (“ICA”). A.R.S. § 23-907.B. Payments of these benefits “act as a judgment against the employer.” A.R.S. § 23-907.C.

Kennedy filed a claim for compensation with the ICA. The ICA awarded Kennedy $14,543.55 in compensation, plus $1,454.36 as a statutory penalty. The total award of $15,-997.91 was then filed in superior court as a judgment against Camilli.

On February 6,1991, Camilli filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. The ICA filed a proof of claim in the bankruptcy case, asserting that its claim was entitled to priority status as an excise tax pursuant to 11 U.S.C. § 507(a)(7)(E)(ii). The ICA also objected to confirmation of Camilli’s Chapter 13 plan. After briefing and oral argument by both parties, the bankruptcy court took the matters under advisement. The Chapter 13 case was dismissed before the court issued a decision.

Seven months later, on December 10,1992, Camilli filed a Chapter 7 petition. She subsequently filed a complaint alleging that the debt owed to the ICA was dischargeable because it was not an excise tax. After the ICA filed a response to the complaint, the parties stipulated to submit the issue to the trial court based upon the oral argument and pleadings filed in Camilli’s prior Chapter 13 case.

The bankruptcy court issued an order on November 12,1993, finding that the principal amount paid by the ICA was a nondischargeable tax, but that the penalties, attorney’s fees and costs assessed by the ICA were dischargeable. A judgment was entered on December 15,1993, providing that the sum of $43,237.81, was excepted from the discharge. This amount represents the principal amount of medical and compensation benefits which the ICA had paid to Kennedy through January 4, 1993. Camilli filed an appeal.

III

STANDARD OF REVIEW

Because the facts in this appeal are undisputed, the appeal involves only legal issues which are subject to de novo review. In re Conco Bldg. Supplies, Inc., 102 B.R. 190, 191 (9th Cir. BAP 1989).

IV

DISCUSSION

Section 523(a)(1)(A) of the Bankruptcy Code excepts from discharge debts for taxes entitled to priority under Section 507(a)(2) and (a)(7). The ICA contends that its claim is nondischargeable because it is entitled to priority under Section 507(a)(7)(E)(ii) as an excise tax. Camilli disputes the ICA’s characterization of its claim as an excise tax.

Everyone generally has preconceived notions of what a tax is. Under the proverbial “duck test,” anything that looks like a tax, walks like a tax and quacks like a tax is a tax. See City of Jackson v. Pittman, 484 So.2d 998, 1000 (Miss.1986). A claim for reimbursement of funds paid to injured workers does not “quack like a tax” and traditionally would not be thought of as a tax. Yet we are not free to use this simple test. Courts must view the term “tax” as embedded in legal contexts from which the word gains concrete and specific meaning. Brock v. Washington Metropolitan Area Transit Auth., 796 F.2d 481, 489 (D.C.Cir.1986). Characterization of a payment as a “tax” in certain contexts has no talismanic significance, especially when the term is applied to an elaborate statutory scheme such as that created by the Bankruptcy Code. See Union Pacific R. Co. v. Public Utility Com’n, 899 F.2d 854, 861 (9th Cir.1990). We look to federal law to determine whether a debt is a tax entitled to priority in bankruptcy. New York v. Feiring, 313 U.S. 283, 285, 61 S.Ct. 1028, 1029, 85 L.Ed. 1333 (1941).

The issue of whether charges incurred under a state’s workers’ compensation scheme should be viewed as taxes is a difficult one, generating a diversity of decisions which, on the whole, may do more to confuse the issue than to clarify it.¹ Even the court in the leading case of In re Lorber Industries of California, Inc., 675 F.2d 1062, 1067 (9th Cir.1982), admitted that determining whether assessments are fees or taxes can be “a close question.” The distinction between a fee and a tax in this case also is a close question. The Ninth Circuit’s analysis in the Lorber case, as additionally developed by the Sixth Circuit, leads us to conclude that the claim for reimbursement is dischargeable.

Lorber adopted the list of four factors describing a tax in the context of bankruptcy law, which was first set forth in In re Farmers Frozen Food Company, 221 F.Supp. 385, 387 (N.D.Cal.1963), aff'd without opinion, 332 F.2d 793 (9th Cir.1964). An exaction of a tax is characterized as:

(a) An involuntary pecuniary burden, regardless of name, laid upon individuals or property;

(b) Imposed by, or under authority of the legislature;

(c) For public purposes, including the purposes of defraying expenses of government or undertakings authorized by it;

(d) Under the police or taxing power of the state.

Lorber, supra, 675 F.2d at 1066. On its face, this list is broad and has the potential to include any and all sovereign undertakings. Suburban I, supra, 998 F.2d at 341-42; Payne, supra, 27 B.R. at 814. However, after listing the factors, the court in Lorber expounded on them and found that the sovereign undertaking at issue was not a tax. Lorber, supra, 675 F.2d at 1066-1068. Although the Lorber case concerned the Bankruptcy Act, the analysis in Lorber has continuing viability for cases brought under the Bankruptcy Code. Hutchinson, supra, 135 B.R. at 891. See In re George, 95 B.R. 718, 720 (9th Cir. BAP 1989) (applying Lorber to a case under the Bankruptcy Code), aff'd without opinion, 905 F.2d 1540 (9th Cir.1990).

The first element of a tax set forth in Lorber is “[a]n involuntary pecuniary burden, regardless of name, laid upon individuals or property.” The court explained that while debts are voluntary obligations based on express or implied contracts, taxes are noncon-tractual obligations levied without the consent or voluntary action of the taxpayer. 675 F.2d at 1066.

The court in Lorber examined an ordinance which allowed a water district to assess surcharges only when district services were used by industrial customers and only in an amount proportionate to their use. The court noted that imposition of these charges was triggered by the debtor’s decision to discharge industrial wastewater. Because the assessment resulted from the debt- or’s acts, the court found that it was not a tax. 675 F.2d at 1067. Rather, the amounts specifically charged for those services were by nature a debt obligation, based on a contractual agreement, the application for and issuance of a permit. Id.

In this case, Camilli had the choice of using self-insurance or private insurance instead of the state system of workers’ corn-pensation. The Bankruptcy Code generally does not give priority to claims resulting from injuries suffered by a debtor’s employee. See Chateaugay Corp., supra, 153 B.R. at 635 (“The states agree that workers’ compensation claims arising out of pre-petition injuries are ordinarily entitled to general unsecured status.”). If a private insurer had paid Kennedy’s claim, the debtor would have had no obligation to reimburse the insurer for the claim and the insurer’s claim for any insurance premiums owed would not be given priority in bankruptcy. The payments to Kennedy by the ICA resulted from Camilli’s voluntary decision not to provide insurance, and therefore the ICA’s assessment should be regarded as a fee.

In sum, under Lorber, assessments stemming from a debtor’s decision to use specific services provided by the State are discharge-able as fees. Because in Arizona an employer may elect not to use insurance provided by the State, charges assessed by the State are in the nature of fees rather than taxes.

The ICA points out that once Camilli decided not to provide either private insurance or proper self-insurance, Arizona law required her to reimburse the ICA for benefits paid to Kennedy. The ICA maintains that the levy was therefore in the nature of an involuntary tax. This reasoning conflicts with that in Lorber. The Lorber court rejected the water district’s argument that because it had statutory authority to impose charges on entities who had not acquired a permit prior to use, the source of the charge was statutory rather than contractual. Lorber, supra, 675 F.2d at 1067 n. 4. The court in Lorber stated:

[I]t would appear that imposition of charges on non-permit users would not transform the charges into taxes. The non-permit user who discharges into the system also incurs a debt obligation, based on an implied contract. The source of the obligation is not the statute authorizing imposition of charges, but the non-permit user’s voluntary act of using the system.

Id. The water district’s authority in Lorber is analogous to that of the ICA in the instant case, in which the ICA imposed charges on Camilli after she failed to obtain insurance. Here, the ICA’s claim arose only because Camilli chose not to obtain alternative insurance. The claim should be considered to stem from the ICA’s implied voluntary contract with Camilli for subrogation of monies paid to Camilli’s employees. See Payne, supra, 27 B.R. at 817.

It may seem unfair to allow Camilli to discharge her debt to the ICA, since she violated Arizona law by failing to obtain insurance. However, Section 523 does not make every debt incurred in connection with a violation of state statute nondischargeable.

The Lorber case differs somewhat from the case at hand in that it involved charges for emitting waste and was brought under the former Bankruptcy Act. The issue presented and statutory authority applied in In re Suburban Motor Freight, Inc., 36 F.3d 484 (6th Cir.1994) (“Suburban II”), are virtually the same as those in the instant case. Suburban II is the only circuit court ease concerning whether a State’s claim for reimbursement of funds paid to injured workers should be characterized as a tax under the Bankruptcy Code. We should “give most respectful consideration to the decisions of the other courts of appeals and follow them whenever we can.” Colby v. J.C. Penney Co., Inc., 811 F.2d 1119, 1123 (7th Cir.1987). Absent a decision by our Court of Appeals or a conflict between circuits, the Panel should regard the authority of another circuit as highly persuasive. See Onyebuchim Onyeanusi v. Pan American World Airways, 767 F.Supp. 654, 655 n. 1 (E.D.Pa.1990), aff'd, 952 F.2d 788 (3rd Cir.1992).

Citing and elaborating on Lorber, the court in Suburban II held that the claim was not a tax, but merely a dischargeable fee. It noted that if the debtor had used private insurance, it would not have incurred any additional liability for reimbursement for claims payments made on its behalf. 36 F.3d. at 489. The court held that it would be unfair to give priority status to the State’s surplus fund while letting unpaid private insurers suffer along with the rest of the unsecured creditors. Id. We find the Sixth Circuit’s approach sound in refusing to elevate what is essentially an insurance subrogation claim to tax priority status.

y

CONCLUSION

We view the levy at issue to be in the nature of a fee rather than a tax, and therefore REVERSE.

1 . See, e.g., In re Suburban Motor Freight, Inc., 998 F.2d 338 (6th Cir.1993) (“Suburban I") (premiums owed to the State for workers' compensation insurance entitled to priority as excise taxes); New Neighborhoods v. W.Va. Workers' Comp. Fund, 886 F.2d 714 (4th Cir.1989) (same); Pan American Papers Mills, Inc., 618 F.2d 159 (1st Cir.1980) (same); In re Chateaugay Corp., 153 B.R. 632 (S.N.Y.1993) (state claims for unpaid workers' compensation premiums entitled to priority; state claims for reimbursement of funds paid to injured employee of uninsured employer not entitled to priority as excise taxes); In re Hutchinson, 135 B.R. 890 (Ariz.1992) (claim for reimbursement of funds paid to injured employee entitled to priority as excise tax); In re Metro Transp. Co., 117 B.R. 143 (E.Pa.1990) (premiums owed to the State for workers' compensation insurance not entitled to priority as excise tax); In re E.A. Nord Co., Inc., 75 B.R. 634 (W.Wash.1987) (premiums owed to the State for workers' compensation insurance entitled to priority as excise tax); In re Payne, 27 B.R. 809 (Kan.1983) (claim for reimbursement of funds paid to injured employee was dischargeable fee rather than nondischargeable excise tax); In re Beaman, 9 B.R. 539 (Or.1980) (claim for reimbursement of funds paid to injured employee was nondischargeable excise tax).