State of California Employment Development Dept. v. Hansen (In re Hansen)

Summarized by Laury Macauley , Macauley Law Group, a Professional Corporation
13 years 10 months ago

Citation:

State of California Employment Development Dept. v. Hansen (In re Hansen), --B.R.-- (9th Cir. B.A.P. April 18, 2012)

Tag(s):

Ruling:

The Ninth Circuit Bankruptcy Appellate Panel held that unemployment taxes assessed by the State of California's Employment Development Department do not constitute priority taxes under Bankruptcy Code Section 507(a)(8)(C) and therefore did not give rise to a nondischargeable debt pursuant to Bankruptcy Code Section 523(a)(1)(A). Because California unemployment taxes do not have to be collected and/or withheld by a debtor from a third party, they do not constitute the type of tax intended to be included within the meaning of Bankruptcy Code Section 507(a)(8)(C).

Procedural context:

Appeal from the United States Bankruptcy Court Court for the Eastern District of California (J. Russell) determining the dischargeability of a debt under 11 U.S.C. Sections 507(a)(8)(C) and 523(a)(1)(A), reviewed de novo.

Facts:

Michael Shane Hansen was the President of Onvoi Business Solutions, Inc., one of a group of related companies that provided human resources and staffing services to private clients in California ("Onvoi Entities"). In 2004, the California Employment Development Department ("EDD") issued a notice of assessment against the Onvoi Entities and against Mr. Hansen, individually, for unpaid unemployment taxes of $4,820,523.86. On January 6, 2010, Mr. Hansen and his wife filed a Chapter 7 bankruptcy petition. On March 30, 2010, the EDD initiated an adversary proceeding against both debtors, seeking a determination that the $3,788,969 still owed on account of unpaid unemployment taxes constituted a nondischargeable debt under Bankruptcy Code Section 523(a)(1)(A), because it was a tax of the kind specified in Bankruptcy Code Section 507(a)(8)(C). After several hearings on the matter, the Bankruptcy Court held that "an unemployment insurance tax that is assessed against an officer of a corporation under California law is a dischargeable obligation under bankruptcy law" and entered judgment in favor of the Debtors. The EDD appealed the decision to the Bankruptcy Appellate Panel, arguing that the plain meaning of Section 507(a)(8)(c) in describing a "tax required to be collected" did not contain requirements that it be collected "by the debtor" or "from a third party." In reviewing the decision of the Bankruptcy Court, Judge Markell, writing for the B.A.P., determined that 507(a)(8)(c) was sufficiently ambiguous to require an examination of the statutory legislative history. Among other things, Judge Markell reviewed a Joint Statement of Representative Edwards and Senator DeConcini that clarified that the statutory provision was intended to establish a priority for taxes "which the debtor was required by law to withhold or collect from others." 124 Cong. Rec. 32,415 (1978). Accordingly, Judge Markell resolved the statutory ambiguity in favor of the Debtors and affirmed the Bankruptcy Court's judgment of dischargeability of the unemployment tax debt.

Judge(s):

Markell, Pappas and Dunn, Bankruptcy Judges.

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