By: Valerie Hammel
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Under section 507(a)(8) of title 11 of the United States Code (the “Bankruptcy Code”), certain excise taxes are entitled to priority and paid before other unsecured claims. In In re Ridgecrest Healthcare, Inc., the United States Bankruptcy Court for the Central District of California held that the California Department of Health Care Services (DHS) was not entitled to priority status for a purported excise tax because the tax was not premised on a discrete transaction as required under § 507(a)(8)(e)(ii) of the Bankruptcy Code.[1] DHS imposed Quality Assurance Fees (“QA Fees”) on Ridgecrest Healthcare Inc., a skilled nursing facility. QA Fees are uniformly imposed on healthcare facilities to help finance California’s Medicaid program.[2] Facing financial distress resulting from management problems, direct competition, lease renewal issues, and unexpected expenses, Ridgecrest filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The chapter 11 case was later converted to chapter 7.[3] In the bankruptcy case, DHS asserted a priority claim for QA Fees[4] under § 507(a)(8).[5] The chapter 7 trustee objected to the priority status of the claim, arguing that the claim was not entitled to priority status under § 507(a)(8) because the claim was not an involuntary tax burden. Instead, according to the trustee, Ridgecrest had voluntarily contracted for DHS’s services.[6] The Bankruptcy Court held that because QA Fees are not an excise tax on a transaction, DHS’s claim could not be given priority status.[7] On appeal, the District Court reversed and remanded, ordering the Bankruptcy Court to apply the Ninth Circuit’s test for determining when a fee constitutes an excise tax.[8] The standard is a five factor test assessing whether the fees are: (1) an involuntary pecuniary burden; (2) imposed by or under the authority of the legislature; (3) for public purposes; (4) under the police or taxing power of the state; and (5) similar to a private creditor similarly situated to the government under the relevant statute.[9] After applying the standard, the Bankruptcy Court held that the QA Fees were not an excise tax on a transaction.
First, the court found that QA Fees were involuntary because they are imposed uniformly on all skilled nursing facilities. The court rejected the trustee’s argument that QA Fees were voluntary because they were only incurred because Ridgecrest decided to obtain a license to operate the facility.[10] Second, QA Fees were indisputably imposed by the legislature because they are imposed by California in the California Health and Safety Code.[11] Third, the court found that QA Fees had a clear public purpose because the legislative intent behind QA Fees was to fund California’s Medicare program.[12] Fourth, the California Health and Safety Code § 1324 provides that QA Fees are imposed in order to raise revenue for California to be able to improve skilled nursing facilities and fund Medi-Cal.[13] Therefore, the Ridgecrest court determined that the QA Fees were imposed under the taxing power of the state.[14] To satisfy the last element, the fee must be imposed uniformly.[15] The trustee argued that the QA Fees were not applied uniformly because Ridgecrest had privately insured patients who did not use Medi-Cal. However, the court found the fees to be applied to the Ridgecrest facility as a whole, and not on a per patient basis. As a result, the QA Fees were determined to be excise tax.[16]
Absent a discrete transaction, fees that are applied uniformly against entities will generally satisfy the involuntary pecuniary burden, which can capture many kinds of fees.[17] However, the implications of classifying fees as an excise tax will still vary depending on the particular statute or jurisdiction. For instance, § 507(a)(8)(e)(ii) required a fee to be imposed on a particular discrete transaction in order to be classified as an excise tax that can alter a claimant’s priority status.[18] The Ridgecrest court adopted a narrow interpretation of discrete transaction, concluding that QA fees are imposed on the public health facility as a whole and not on individual patients.
[1] In re Ridgecrest Healthcare, Inc., 571 B.R. 838, 846 (Bankr. C.D. Calif. Aug. 24, 2017).
[2] See Id.
[3] See Id.
[4] See Id.
[5] See Id. at 840.
[6] See Id.
[7] See Id.
[8] See Id.
[9] See Id.
[10] See id.
[11] See id.
[12] See id.
[13] See Cal. Health and Safety Code § 1324.
[14] See id. at 844.
[15] See id.
[16] See id; see also In re DeRoche, 287 F.3d 751, 756 (9th Cir. 2002) (holding that a fee imposed as a result of not carrying workers’ compensation insurance was related to the single transaction of employing a worker. In contrast, the excise tax in Ridgecrest was not a tax on a single transaction because it was a recurring fee).
[17] See id. at 842.
[18] See id. at 846.