Court: United States Bankruptcy Court, C.D. California; August 24, 2017; Us Bankruptcy; United States Bankruptcy Court
Ridgecrest Healthcare, Inc. (the "Debtor") filed for Chapter 11 bankruptcy on September 16, 2013, which was later converted to Chapter 7 on September 4, 2014. Howard Ehrenberg serves as the Chapter 7 trustee (the "Trustee"). The California Department of Health Care Services ("DHS") filed a proof of claim for a general unsecured claim of $192,793.85 on March 31, 2014, later amending it to a priority unsecured claim of $446,609.20 on February 12, 2015, and subsequently reducing it to $432,250.01 on September 2, 2015. This claim is based on quality assurance fees ("QA Fees") related to California’s Medicaid program (Medi-Cal), which are imposed on skilled nursing facilities.
The Trustee filed a "Motion to Disallow Claim" on August 17, 2015, arguing that the claim amount was incorrectly calculated and not entitled to priority status under section 507(a)(8). DHS opposed this, maintaining its claim's priority status based on the assertion that QA Fees constituted an excise tax. After reviewing the arguments, the court determined that QA Fees are not an excise tax and thus denied priority status under section 507(a)(8), allowing DHS a general unsecured claim of $432,250.01. DHS appealed this decision, leading the United States District Court for the Central District of California to reverse and remand the case for further proceedings.
The District Court Order addressed whether QA Fees qualify as an excise tax on a transaction, thus granting priority under section 507(a)(8). It noted that the bankruptcy court's prior ruling lacked clarity regarding the application of the Ninth Circuit's test for determining excise taxes. The District Court did not apply this test itself but directed the bankruptcy court on remand to clearly define and apply the Ninth Circuit criteria to the QA Fees.
After the District Court's ruling, a status hearing was held, and a schedule for supplemental briefs was established, allowing both the Trustee and DHS to submit their arguments. A subsequent hearing took place on January 4, 2017, to review these briefs.
According to section 507, governmental unit claims can be prioritized if they pertain to an excise tax on a transaction occurring within three years prior to a petition filing (11 U.S.C. 507(a)(8)(E)(ii)). The court must first ascertain whether QA Fees are classified as an excise tax consistent with the District Court's order. If deemed an excise tax, the court will then evaluate if these fees are transactional in nature.
The Ninth Circuit's five-factor test for defining a fee as an excise tax includes: (1) the fee as an involuntary pecuniary burden; (2) legislation-imposed authority; (3) public purpose; (4) state police or taxing power; and (5) the hypothetical existence of a private creditor in a similar situation.
Regarding the QA Fees, the court must first assess if they represent an involuntary pecuniary burden. The Trustee contends that the fees are voluntary as they result from a skilled nursing facility operator's decision to apply for a license. However, the court disagrees, referencing In re Lorber Indus. of California, which emphasizes that the involuntary nature of a fee is determined by whether the charged party has contracted for the fee.
The Ninth Circuit's decision in Lorber I determined that fees charged to a debtor, a manufacturer discharging high volumes of wastewater, were not considered an involuntary pecuniary burden because they applied only to industrial users discharging large amounts of wastewater. In contrast, Quality Assurance (QA) Fees are levied on all skilled nursing facilities regardless of their activities. The Trustee's claim that these facilities voluntarily pay QA Fees by obtaining a license is rejected, as doing so would suggest that no tax could be seen as an involuntary burden. This argument parallels the flawed logic that income taxes are voluntary because individuals choose to work.
QA Fees are imposed on all skilled nursing facilities simply by virtue of their operation, not through any contract with the Department of Health Services (DHS), thus categorizing them as an involuntary pecuniary burden. The court confirmed that QA Fees are legislatively imposed, as they were enacted by the California legislature through Assembly Bill 1629 and codified in the California Health and Safety Code.
Regarding the public purpose of QA Fees, the Trustee contends these fees benefit only skilled nursing facilities, used for reimbursements and quality improvements, and that prioritizing claims based on these fees would harm other creditors. However, the Trustee failed to identify any such creditors. The statute clearly states that funds from QA Fees are meant to enhance federal participation in the Medi-Cal program and support quality improvements in skilled nursing facilities. Additionally, the imposition of QA Fees is contingent upon the Medi-Cal Long-Term Care and Reimbursement Act, which aims to ensure access to long-term care services, promote quality resident care, advocate for fair wages for nursing home workers, and enhance compliance and efficiency within the system.
QA Fees are established by the legislature to serve a public purpose, primarily supporting Medi-Cal funding, enhancing reimbursements and quality for health care facilities, ensuring access to long-term care, improving care quality, and promoting fair wages for nursing and home care workers. These objectives collectively aim to ensure residents have access to quality skilled nursing care.
The court must assess whether QA Fees fall under the state’s police or taxing power. The Trustee contends that QA Fees are primarily for higher reimbursements to skilled nursing facilities and, therefore, cannot be classified under the taxing power since they do not generate government revenue for the broader taxpayer benefit. However, the Trustee acknowledges that QA Fees are regulatory fees. Even if they are not strictly regulatory, the fees support Medi-Cal and facility improvements, indicating they do raise revenue under the taxing power.
Additionally, the court must evaluate whether a private creditor could be similarly situated to the government concerning the QA Fees. The Trustee argues that skilled nursing facilities also serve privately insured patients, suggesting those claims should not hold priority. However, to be comparable to the government, a creditor must have claims based on a flat fee corresponding to the number of patients daily. The legislation indicates that QA Fees are based on total revenue from all residents rather than being a reimbursement for specific services. Thus, no private creditor could impose a flat fee based on patient numbers similarly to the government. Consequently, this fifth factor is deemed satisfied.
The court concludes that QA Fees qualify as an excise tax, having satisfied all five factors of the functional test. However, further analysis is required to ascertain whether these fees constitute an excise tax "on a transaction" as mandated by 11 U.S.C. § 507(a)(8)(E)(ii). The Ninth Circuit's decision in Lorber II indicates that establishing a fee as an excise tax does not automatically imply it is tied to a transaction. Additionally, Ninth Circuit case law, including In re DeRoche, suggests a narrower interpretation of what constitutes a transaction, emphasizing that the tax should stem from a discrete, identifiable event. In DeRoche, the court identified the employment of a worker as the singular transaction leading to the excise tax. Other courts have similarly interpreted this to mean that not all excise taxes qualify under Section 507(a)(8)(E). The court critiques DHS's broad interpretation of "transaction," arguing that it risks disregarding the statutory language. At a recent hearing, DHS's counsel proposed various daily activities of skilled nursing facilities as potential transactions, prompting the court to seek specificity regarding the exact transaction related to QA Fees.
DHS's counsel contended that skilled nursing facilities engage in monthly transactions related to patient care. However, the court found that DHS failed to demonstrate that QA Fees are linked to any specific transaction. The evidence did not support that QA Fees arise from discrete transactions, as there was no analysis provided regarding how these fees correlate with any of the transactions identified by DHS’s counsel. QA Fees are not contingent on services such as meals or bed usage, nor are they charged upon the entry of new residents. Instead, the legislation and DHS’s proof of claim indicate that QA Fees are recurring charges based on the net revenue of skilled nursing facilities. As a result, even though the court recognized QA Fees as an excise tax, it concluded they are not imposed on individual transactions. Therefore, DHS's claim does not qualify for priority under section 507(a)(8)(E)(ii) and will be classified as a general unsecured claim. The Trustee is directed to prepare an order reflecting this decision. The motion was partially granted; the court did not address the Trustee's objection to the claim amount, which was resolved prior to the hearing. The bankruptcy court also approved a stay of the order pending appeal. Relevant factors from the Sixth Circuit's ruling in In re Suburban Motor Freight, Inc. emphasized that government claims should not disadvantage similarly situated private creditors, though the District Court Order noted that these considerations were largely nullified by In re George. The Trustee's arguments were based on these now-irrelevant elements.
