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In re United Healthcare System

January 24, 2005


On Appeal from the United States District Court for the New Jersey (D.C. Civ. No. 03-01024) District Judge: Honorable Joseph A. Greenaway, Jr.

Before: Scirica, Chief Judge, Fisher, and Greenberg, Circuit Judges.

The opinion of the court was delivered by: Greenberg, Circuit Judge


Argued October 28, 2004


On this appeal, we must determine whether a non-profit organization's obligation to reimburse the New Jersey Department of Labor ("NJDOL") for unemployment compensation benefits NJDOL paid to its former employees is an "excise tax" under the Bankruptcy Code. United Healthcare System, Inc. ("United") was a non-profit healthcare services corporation that owing to its non-profit status under New Jersey law was permitted to elect to reimburse NJDOL retrospectively for any unemployment compensation benefits NJDOL actually paid to its former employees. United elected to pursue this reimbursement option instead of paying the quarterly unemployment contribution payments New Jersey law requires of most New Jersey employers. Following this election, United filed for bankruptcy. Both before and after United's bankruptcy filing, NJDOL paid unemployment compensation benefits to former United employees. NJDOL believes that its claim for reimbursement for the benefits it paid is entitled to priority under 11 U.S.C. § 507(a)(8)(E) which grants a priority to claims for excise taxes. The bankruptcy court and the district court agreed with NJDOL. For the reasons we explain below, we conclude that NJDOL's reimbursement claim is not entitled to priority under section 507(a)(8)(E) because the reimbursement obligation is not a tax for bankruptcy purposes under that section. We therefore will reverse.*fn1


There are no relevant facts in dispute on this appeal. United, which operated as the Children's Hospital of New Jersey, provided healthcare services in New Jersey. It obviously had financial difficulties as it filed a bankruptcy petition seeking reorganization under Chapter 11 of the Bankruptcy Code on February 19, 1997, and then on March 8, 1997, terminated the employment of most of its employees. NJDOL processed and, where appropriate, paid the unemployment compensation claims of United's former employees. Because United had elected to reimburse NJDOL for unemployment benefits actually paid rather than to make quarterly contributions to the state unemployment compensation fund, NJDOL sought repayment of the benefits it paid to former United employees. United, however, did not reimburse NJDOL for substantial benefits it paid on United's behalf.

As a part of United's reorganization plan, the appellant, Reconstituted Committee of Unsecured Creditors of United Healthcare System, Inc. ("the Committee"), succeeded to various rights and duties of United. In the bankruptcy proceedings, NJDOL submitted claims for the unemployment benefits it paid to former United employees for which it had not been reimbursed. NJDOL sought $941,302.30 (including interest) as reimbursement for unemployment benefits NJDOL paid to United employees whose employment United terminated "pre-petition" (prior to the filing of the bankruptcy petition).*fn2 NJDOL also sought reimbursement for unemployment compensation benefits it paid to United employees whose employment United terminated after the bankruptcy filing.

With interest, this "post-petition" claim amounted to $8,223,160.94.*fn3 NJDOL sought priority status for both the pre-petition and post-petition claims under section 507(a)(8)(E). The Committee objected to the granting of priority status for these claims, arguing that they should be classified as general unsecured claims.

On December 30, 2002, the bankruptcy court concluded that these pre-petition and post-petition reimbursement claims were entitled to priority as excise taxes under section 507(a)(8)(E).*fn4 In re United Healthcare Sys., Inc., 282 B.R. 330 (Bankr. D.N.J. 2002). The Committee appealed from this order to the district court which, by an unpublished order on November 13, 2003, affirmed without opinion the bankruptcy court's order. On December 12, 2003, the Committee appealed to this court.


The bankruptcy court had jurisdiction under 28 U.S.C. §§ 157(b) and 1334. The district court had appellate jurisdiction pursuant to 28 U.S.C. § 158(a)(1) and we have jurisdiction under 28 U.S.C. §§ 158(d) and 1291. Exercising the same standard of review as the district court, "[w]e review the bankruptcy court's legal determinations de novo, its factual findings for clear error and its exercise of discretion for abuse thereof." In re Trans World Airlines, Inc., 145 F.3d 124, 130-31 (3d Cir. 1998) (citing In re Engel, 124 F.3d 567, 571 (3d Cir. 1997), and Fellheimer, Eichen & Braverman, P.C. v. Charter Technologies, Inc., 57 F.3d 1215, 1223 (3d Cir. 1995)). Inasmuch as the parties agree that there are no relevant facts in dispute, our review encompasses only the legal determinations of the bankruptcy court as affirmed by the district court. We will employ a de novo review of those legal determinations.


A. A Non-Profit Employer's Reimbursement Obligation Under New Jersey Law

New Jersey law requires most employers to make quarterly contributions to the state's Unemployment Compensation Fund. N.J. Stat. Ann. § 43:21-7 (West 2004).*fn5 This standard statutory obligation requires an employer to make quarterly contributions to the fund, regardless of whether the state has paid or will pay unemployment benefits to its former employees. See id. We have classified an employer's obligation to make state unemployment compensation contributions as a tax for bankruptcy purposes. In re Wm. Akers, Jr., Co., 121 F.2d 846, 851 (3d Cir. 1941); see also Sipe v. Amerada Hess Corp., 689 F.2d 396, 402 (3d Cir. 1982) (stating that "it cannot be seriously disputed that the unemployment compensation and disability benefits contributions mandated by New Jersey law are 'taxes' within the meaning of the Tax Injunction Act").

Our inquiry, however, does not end with our recognition of the status of unemployment compensation contributions thereby permitting us to affirm the district court's order affirming the bankruptcy court. We cannot do so because, as a non-profit employer, United did not make contributions and thus we are concerned only tangentially with the status of contributions. Instead, as we have indicated it opted, pursuant to N.J. Stat. Ann. § 43:21-7.2 (West 2004), to reimburse NJDOL for any unemployment compensation benefits NJDOL actually paid to former United employees.*fn6 This provision presents non-profit employers with a choice as it provides that a non-profit employer either "shall pay contributions" to the fund or elect to reimburse NJDOL for benefits actually paid to former employees in lieu of contributions.

This statutorily-provided choice brings New Jersey law in compliance with the Federal Unemployment Tax Act ("FUTA"), 26 U.S.C. § 3301 et. seq., which established a federal "excise tax" equal to a certain percentage of the total wages paid by an employer in a calendar year. 26 U.S.C. § 3301. An employer's FUTA obligation is calculated based on "employment," as that term is defined in the Act. Service performed for a non-profit organization classified as such under the federal income taxation statutes is excepted, however, from the term "employment" for federal unemployment tax purposes. 26 U.S.C. § 3306(c)(8).*fn7 Wages paid for services performed in the employment of a qualifying non-profit organization, therefore, do not give rise to any federal unemployment tax.

In addition to establishing the federal unemployment tax, FUTA governs many aspects of state unemployment compensation systems, including how state unemployment compensation laws treat non-profit organizations. Each state must provide organizations exempted from federal unemployment tax pursuant to 26 U.S.C. § 3306(c)(8) with the opportunity to elect to make reimbursement payments in lieu of contributions. 26 U.S.C. § 3309(a). Accordingly, as we have explained, New Jersey has provided qualifying non-profit organizations with this option.

B. Classification of a New Jersey Non-Profit Employer's Reimbursement Obligation under the Bankruptcy Code

The Bankruptcy Code provides priority status to certain claims. 11 U.S.C. § 507. Unsecured claims of governmental units may be entitled to priority, but only if the statute expressly grants priority to the type of claim asserted. 11 U.S.C. § 507(a)(8) (providing that "[t]he following expenses and claims have priority in the following order:... (8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for--"). Section 507(a)(8)(E) affords priority status to an unsecured claim of a governmental unit to the extent it is for:

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.

The bankruptcy court determined, and the district court agreed, that NJDOL's claims for reimbursement of the unemployment benefits it paid to United's former employees are claims for excise ...

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