Lorber Industries of California

OCR transcription for search; preserved printed pages are authoritative

10

ii

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

AUTHENTI

| In re

LORBER INDUSTRIES OF CALIFORNIA

Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered

Main Document Page 1 of 10

OcT - 6 26

CLERK, 0.5, BANARUFTGY COURT
enna DISTRICT OF CALIFORNIA

Deputy Clerk

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA

Chapter 11
Debtor.

Case No. LA 06-10399 TD

MEMORANDUM OF DECISION

The objection of the California Self-Insurers’ Security Fund (Fund) to Debtor's

are my findings of fact and conclusions of law.

INTRODUCTION

plan confirmation was heard before me on August 29, 2006. Mr. Louis Cisz of Thelen
Reid & Priest appeared for the Fund and Mr. David Poitras of Jeffer, Mangels, Butler
& Marmaro appeared for the Debtor, Lorber Industries of California. Upon

consideration of the evidence and the briefs and argument of counsel, the following

The state legislature of California has created a “complete system of workers’

compensation.” California Labor Code section 3201.‘ Under this system employers

1A11 section references herein are to the California Labor

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

||Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered 10/06/06 11:15:11 Desc

Main Document Page 2 of 10

are strictly liable for their employees’ workers’ compensation claims, as set forth in the
statute. Section 3600. To ensure that injured workers actually receive compensation,
the California statute requires employers to either purchase workers’ compensation
insurance from private insurance agencies or to self-insure, subject to a certificate of
consent from the California Director of Industrial Relations (Director). Section 3700 (a)
& (b).

After obtaining the Director's approval to self-insure, empioyers must then
provide a security deposit and participate in the California Self-Insurers' Security Fund
(Fund). Section 3742. If a self-insured employer fails to make workers’ compensation
payments, the Director may order the Fund to pay the employer's obligations. Section
3701.5. If the Director orders the Fund to pay, then the Fund “shall have the right and
obligation to obtain reimbursement from an insolvent self-insurer” for the payments
that the Fund has made on the employer's behaif. Section 3744{a).

The Debtor here, commencing in 1992, used the self-insurance option to
provide for its employees’ workers’ compensation claims. The Debtor filed its chapter
11 petition this year and later defaulted on its workers’ compensation obligations. On
April 28, 2006, pursuant to sections 3743 and 3701.5, the Director ordered the Fund
to assume the Debtor's obligations for workers’ compensation. The Fund has filed a
Proof of Claim for an unknown amount seeking reimbursement for the obligations that
it assumed on the Debtor's behalf. The Fund believes that this claim is entitled to
priority under 11 U.S.C. § 507(a)(8)(E)(ii). The Debtor asserts that the Fund’s claim
should be treated as a general unsecured claim not entitled to priority.

DISCUSSION

Under 11 U.S.C. § 507(a)(8)(E)(ii) “an excise tax on... a transaction occurring

Code unless specifically otherwise indicated.

2

10

11

12

13

14

15

16

1?

18

19

20

21

22

23

24

25

26

| Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered 10/06/06 11:15:11 Desc

Main Document Page 3 of 10

during the three years immediately preceding the date of the filing of the petition’ is
entitled to priority status. Two issues exist in this case: (1) Can the Fund's claim be
considered an excise tax? and (2) Did the relevant transaction here occur during the
three years immediately preceding the Debtor’s petition date?

The Supreme Court has made it clear that state law labels are not binding in

determining whether an obligation is a tax. New York v. Feiring, 313 U.S. 283, 285

(1941). Thus, federal courts have applied a “functional examination” to determine if a

debt is a tax. See, U.S. v. Reorganized CF & | Fabricators of Utah, Inc., 518 U.S. 213

(1996). The Supreme Court has defined the term “tax” as a “pecuniary burden laid
upon individuals or property for the purpose of supporting the Government.” New
Jersey v. Anderson, 203 U.S. 483, 492 (1906).

The Lorber Test

In an earlier Lorber decision, the Ninth Circuit established a four-part test to

determine if a debt was a tax. In re Lorber Industries of California, 675 F.2d 1062 (9"
Cir. 1982). Under Lorber an obligation is a tax if it is: (1) an involuntary pecuniary
burden; (2) imposed by, or under authority of the legislature; (3) for public purposes,
including the purposes of defraying expenses of government or undertakings
authorized by it; and (4) under the police or taxing power of the state. Id. at 1066.

Here the Fund's claim satisfies all four elements of the Lorber test. First, the

Fund’s claim is “an involuntary pecuniary burden.” In re Camilli involved the claim of
an Arizona fund that was very similar to the California Fund at issue. In re Camilli, 94
F.3d 1330 (9th Cir. 1996). In Arizona employers were required to obtain workers’
compensation insurance. If they failed to make compensation payments then the
Arizona fund was required to make the payments for them and seek reimbursement.
In Camilli, the court found that the debtor’s obligation was not a voluntary one

because, in Camilli, the debtor had a “statutorily-created obligation to reimburse the

3

hr

ho

i

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered 10/06/06 11:15:11 Desc

Main Document Page 4 of 10

Special Fund once the Fund paid benefits to an uninsured employee. ... The
obligation to repay the Fund in this case is thus the product of legislative fiat; at the
time it arose, and the lien was established, it was wholly beyond the control of the
debtor.” Id. at 1333. Here the Fund's claim would also be considered involuntary
because like the Arizona fund at issue in Camilli, section 3744(a) requires the Debtor
to reimburse the Fund once the Fund has made payments on the Debtor’s behalf.

The Fund's claim here also meets the second prong of the Lorber test because

the obligation is imposed by the California legislature under section 3744. Next, under

the third element of Lorber, itis clear that the Fund’s purpose is to benefit the public

by providing for workers whose employers fail to provide them with proper workers’
compensation benefits. When the Fund was established the legislature stated that it
was a “necessary component of a complete system of workers’ compensation,
required by .. . the California Constitution, to have adequate provisions for the
comfort, health and safety, and general welfare of any and all workers and their
dependents.” Section 3740. Also, the fact that the legislature provided for a
reimbursement mechanism for the Fund seems to indicate that part of the purpose of
the statutory obligation is to defray “expenses of government or undertakings
authorized by it.” Section 3743(a).

The fourth requirement of Lorber is met because the legislature explicitly stated

that the formation of the workers’ compensation system was “an expression of the
police power.” Section 3201.
George’s Fifth Prong

Although the Fund's claim does meet the Lorber elements, the Ninth Circuit

more recently held in In re George that under some circumstances an additional test
would be required. 361 F.3d 1157, 1162 (9th Cir. 2004). The requirement of an

additional test was first hinted at in Camilli when the court distinguished the Arizona

4

Ww

nas

uw

10

i1

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered 10/06/06 11:15:11 Desc

Main Document Page 5 of 10

workers’ compensation fund from the sewer user charges that were at issue in Lorber.

Camilli, at 1333. The Camilli court stated that in Lorber, it “did not have occasion to

consider whether the elements we discussed in that case would, in all circumstances,

be sufficient to qualify an obligation as a tax.” Camilli, at 1333. The Ninth Circuit then

looked at an additional test that was used by the Sixth Circuit in Suburban | and
Suburban II. Id. In those cases the Sixth Circuit was concerned that if courts only

relied on the Lorber elements to determine if a debt was a tax then there would be too

many instances in which government claims were receiving priority over the claims of

private creditors. In re Suburban Motor Freight, 998 F.2d 338, 341 (6th Cir. 1993).

Thus the Sixth Circuit developed two additional requirements in order to refine the

third, public purpose element of Lorber: (1) that the pecuniary obligation be universally

applicable to similarly situated entities; and (2) that according priority treatment to the
government claim not disadvantage private creditors with like claims. In re Suburban
Motor Freight, 36 F.3d 484, 488 (6th Cir. 1994).

In Camilli, the Ninth Circuit found that the Arizona fund’s claim met the

additional requirements of the Suburban cases. Camilli, at 1334. The fund’s ciaim in

Camilli was distinguishable because (1) the fund in issue there was “not a state
monopoly, so that premium obligations to the state would not be accorded tax priority
as a universal obligation of all insured employers” and (2) the Arizona fund carried “its
statutorily-imposed burden alone” because “no private entity competes with the
[Arizona fund] to pay ‘insurance’ claims for which no insurance has been bought.” Id.

Because the fund’s claim in Camilli met the requirements of both Lorber and the

Suburban cases, the Ninth Circuit declined to decide whether the Suburban elements
needed to be satisfied in all cases. Id.
However, in 2004, when the Ninth Circuit decided In re George, the court

applied both the Lorber test and the additional requirement from Suburban that

5

10
11
12
13 |
14
15
16
17 |
18
19
20
21

|
23
24
25

26 |

Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered 10/06/06 11:15:11 Desc

Main Document Page 6 of 10

according priority treatment to the government claim not disadvantage private
creditors with like claims. In re George, at 1162. In George the employer failed to
obtain workers’ compensation insurance as required by California law. As a result, the
California Uninsured Employers Fund (CUEF) made the employer's workers’
compensation payments for the employer and CUEF sought reimbursement. The

Ninth Circuit held that the CUEF was distinguishable from the fund in Camilli for two

reasons. First, the court found that in California reimbursement claims for uninsured
employers are treated as claims for liquidated damages. Id. The court said that this
suggested that the “appropriate comparison is to other claimants holding an
entitlement to liquidated damages, some of whom could be non-governmental
entities.” Id. However, the court noted that the fact that the state of California labeled
these claims as “liquidated damages” was merely persuasive and not controlling but
that it did tend to “demonstrate the relative importance each state places on being
reimbursed.” Id.

Second, the court distinguished the California reimbursement claim from Camilli
because the employer there was uninsured and under California law governing
uninsured employers, it was possible that another “employer could have a competing
claim against the uninsured employer [whose obligations were at issue before the
court] if the worker has suffered a cumulative injury.” Id. However, the court noted,

under the Arizona state scheme in Camilli “only the last employer in whose

employment the injured worker was injuriously exposed has liability.” Id. Because a
“hypothetical creditor’ could be imagined under the California scheme and the claim
itself was labeled as one for ‘liquidated damages” under California law, the court in
George decided that the government's claim could not be considered a tax even

though the claim otherwise met the Lorber requirements. Id. at 1162-1163,

In George, the court relied on section 3717(a) of the California Labor Code to

6

10

11

L2

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered 10/06/06 11:15:11 Desc
Main Document Page 7 of 10

find that the legislature had labeled the fund's claim to be one for liquidated damages.
However, that section is not applicable to the Fund’s claim here because section
3717(a) only refers to claims by the Uninsured Employers Fund and does not apply to
the Self-Insurers’ Fund. Id. The George court found that the “liquidated damages”
claim would seem to indicate that an “appropriate comparison is to other claimants
holding an entitlement to liquidated damages, some of whom could be non-
governmental entities", even though it concluded for reasons discussed, that the label
itself is not controlling. In re George, at 1162.

The more important question here would seem to be whether or not a
hypothetical creditor can be imagined that would be subordinated if the government’s
claim was given priority. In George the court found that such a creditor existed
because under section 3716(b) of the California Labor Code dealing with the fund for
uninsured employers, if the fund made payments to the injured employee on behalf of
the uninsured employer, the fund had “no liability for claims of . . . cumulative injury.”
Thus, under section 5500.5 it was possible that a previous employer could be held
liable for the workers’ compensation benefits that the uninsured employer failed to pay
and thus seek reimbursement which would create a competing claim.

However, the Fund’s claim here is distinguishable because the Debtor was self-
insured, not uninsured. Whereas the California Uninsured Employers’ Fund
legislation creates an exception for cumulative injuries under sections 3716(b) and
5500.5, the legislation affecting the California Self-Insurers’ Security Fund specifies
that the Fund “shall assume the workers’ compensation obligations of an insolvent
self-insurer.” Section 3743(a). There is no exclusion for “claims of . . . cumulative
injury.” Thus, because the Fund here is fully assuming responsibility for compensating
the employee, there would seem to be no hypothetical situation in which a previous

employer could be held liable for benefits that a subsequent, uninsured, employer

7

10

11

12
13

14

15
16
17 |
18
19
20
21 |
22
23
24
25

2s |

Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered 10/06/06 11:15:11 Desc

Main Document Page 8 of 10

failed to make because the Fund would have already assumed payment of the
benefits. Thus, under the facts before me, the Fund seems to satisfy the additional
requirements for priority as imposed by George.

Because the Fund’s claim passes both the Lorber test and the additional test
required in George, this claim can be classified as an excise tax under 11 U.S.C. §
507(a)(8)(E)(ii).

Relevant “Transaction”

The final question before this court is what would be considered the relevant
“transaction” under 11 U.S.C. § 507(a)(8)(E)(ii). To answer this question courts look at
the date on which the particular tax was assessed. Franchise Tax Board v. Bracey, 77
F.3d 294 (9th Cir. 1996). To determine the date of assessment courts look at the
language of the applicable state taxing scheme. Id. The current case presents more
of a challenge because an assessment date is not specified within the California
Labor Code for tax purposes.

In George, the court determined the date of the relevant transaction by
pinpointing the event that triggered the California Uninsured Employers’ Fund’s claim.
In re George, at 1163. The court concluded that under California law neither hiring the
employee who became injured nor the injury itself triggered a CUEF claim. Instead

the court determined that it was the “failure to make the transaction of purchasing

workers’ compensation insurance” that caused CUEF'’s liability. Id. The court
determined that an “absence of a transaction” failed to meet the § 507(a)(8)(E)(ii)
requirement of “a transaction occurring during” the three years preceding bankruptcy.
Id.

In the current case the Fund did not start making payments until the Debtor
defaulted on its workers’ compensation obligations and the Director ordered the Fund

to assume Debtor's obligations. However, the Ninth Circuit in George adopted the

8

10
11
12
13 |
14
15
16
17 |
18

19

20
21
22
23
24
25

Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered 10/06/06 11:15:11 Desc

Main Document Page 9 of 10

view that the relevant transaction occurred when the CUEF became potentially liable.
Specifically, George stated: “What occasions such a claim is the failure to make the

transaction of purchasing workers’ compensation insurance (or applying for self-

insurance status).” Id. (Latter emphasis supplied.) In other words, what George said
as it relates to the motion now before me, albeit in dicta, was that the “relevant
transaction” occurred when the debtor failed to obtain insurance, or [for our purpose
here] when the Debtor obtained the Director's approval to self insure, not when the
employee was injured and the Fund had to pay. Thus, under the logic of George, it
seems that the relevant transaction in this case would be when the Debtor applied for
and was granted self-insured status. Because this occurred in 1992, the Fund's claim
would not fall within the “three years immediately preceding the date of the filing of the
petition.”
CONCLUSION

The Objection to the Plan Confirmation is overruled because the relevant
transaction under 11 U.S.C. §507(a)(8)(E}(ii) did not occur during the three years
immediately preceding the date of the filing of the petition. The Fund is entitled only to

a general unsecured claim.

IT 1S SO ORDERED.

Dated: jo[s [oe

Sut & TO rn Pas,
THOMAS B. DONOVAN
United States Bankruptcy Judge

il

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Case 2:06-bk-10399-TD Doc 220 Filed 10/05/06 Entered 10/06/06 11:15:11 Desc

Main Document Page 10 of 10

NOTICE OF ENTRY OF JUDGMENT OR ORDER
AND CERTIFICATE OF MAILING

TO ALL PARTIES IN INTEREST LISTED BELOW:
1. You are hereby notified that a judgment or order entitled:
MEMORANDUM OF DECISION
was entered on (0! b | Ole
2. | hereby certify that | mailed a true copy of the order or judgment to the persons
and entities listed below on _/ b/ b [oe _

Phil Strok, Esq. Alan Martin

Weiland Golden Smiley Sheppard Mullin Richter & Hampton
650 Town Center Drive, Suite 950 650 Town Center Drive, 4" Floor
Costa Mesa, CA 92626 Costa Mesa, CA 92626

David M. Poitras Office of the U.S. Trustee

Jeffer Mangels Butler & Marmaro LLP Patricia Beary

1900 Avenue of the Stars, 7" Floor Ernst & Young Plaza

Los Angeles, CA 90067 725 S. Figueroa St., 26" Fir

Los, Angeles, CA 90017

Louis Cisz

Thelen Reid & Priest LLP

101 Second Street, Suite 1800
San Francisco, CA 94105

Dated: (2/0 /ov Vim

10