In a recent ruling, the District Court for the Middle District of Florida affirmed a bankruptcy court’s ruling that the premiums arising under the Coal Industry Retiree Health Benefit Act of 1992 (the “Coal Act”) qualify as taxes for bankruptcy purposes and, thus, were not discharged in a Chapter 11 proceeding over two decades ago. The Court concluded that a discharge order does not terminate a debtor’s future obligations, which, in this case, included future premium obligations under the Coal Act that had not yet accrued at the time that the discharge order became effective.
The Court concluded that premium obligations under the Coal Act qualify as taxes because the payment is “undeniably involuntary,” assessed on a periodic basis, and made for the public purpose of ensuring the continued provision of benefits to retirees of coal mining companies.
In February 1993, the Coal Act was enacted to provide funding for health care benefits for retired miners by requiring coal mine operators to pay annual and monthly premiums through two new multiemployer plans. To ensure that the plans will continue to be funded, the Coal Act imposes liability on “related persons” of the signatory coal operators.
In 1989, Hillsborough Holdings Corporation and several of its subsidiaries, including U.S. Pipe and Walter Industries, filed for Chapter 11 bankruptcy relief, and confirmed a plan of reorganization in 1995. The confirmation order discharged all debts or claims against the debtors that had arisen prior to the effective date of the plan.
In 2015, Walter Industries filed for bankruptcy again and continued to fulfill its Coal Act obligations until 2016 when it terminated its individual employer plan and ceased to pay premiums under the Coal Act. Consequently, the Trustees of the plans filed suit against certain subsidiaries, including U.S. Pipe, alleging that as a “related person,” they were responsible for Walter Industries’ Coal Act obligations, which, they contended, were taxes and, thus, had not been extinguished by the Chapter 11 confirmation order’s discharge. In opposition, U.S. Pipe argued that the Coal Act obligations were claims that had existed prior to the confirmation order and were discharged by the Chapter 11 plan.
The bankruptcy court concluded that the Coal Act premiums are taxes for which the debtors (and “related persons”) remain liable, and, were not discharged in U.S. Pipe’s prior Chapter 11 proceeding. The District Court affirmed.
Coal Act Premiums Qualify as Taxes in Bankruptcy
U.S. Pipe contended that Congress defined “claim” very broadly in the Bankruptcy Code, and intended that all legal obligations of a debtor be dealt with in the bankruptcy proceeding. Under this broad definition, U.S. Pipe argued that the Coal Act premiums had been discharged by the confirmation order.
To determine whether the Coal Act premiums are taxes, the Court looked to a four-part test applied by the Ninth Circuit in In re Lorber Industries of California. Under the Lorber test, the premiums would qualify as taxes if they are: (1) an involuntary burden, regardless of name, laid upon individuals or property, (2) imposed by, or under authority of the legislature, (3) for public purposes, including defraying governmental expenses, and (4) under the police or taxing power of the state. The Court noted that the Second, Third, Fourth and Tenth Circuits have all specifically held that Coal Act premiums are taxes due to their “overwhelmingly involuntary nature, their explicitly stated public purpose, and their obvious potential to be imposed pursuant to a taxing power.”
Attempting to get around these circuits’ precedent, U.S. Pipe argued that a more recent precedent from the Eleventh and Fifth Circuits, holding that Coal Act premiums are not taxes for purposes of the Anti-Injunction Act, is the correct result.
The Court was not persuaded and found that the Fifth and Eleventh Circuits’ decisions were limited to the specific context of the Anti-Injunction Act, rather than extending to the broader question of whether an exaction is a tax for bankruptcy purposes.
Future Premiums are Nondischargeable Post-Bankruptcy Obligations
The next question was therefore when liability for the Coal Act obligations arose. U.S. Pipe argued that, even if the Coal Act premiums are taxes, the liability arose in 1993 after the Coal Act became effective, and were, thus, discharged in 1995.
The Court disagreed. Given that the Coal Act premiums are assessed on a periodic basis with each period giving rise to a new liability, the Court concluded that the 1995 discharge order would only discharge liabilities that already accrued and that a discharge order is not intended to terminate future obligations. Although Coal Act obligations may be discharged through bankruptcy when a debtor’s liability arises from the debtor’s pre-petition acts, a discharge order does not “insulate the debtor from the costs of post-bankruptcy acts.” Thus, future assessments and premium payments were held to lie beyond the scope of an earlier order of discharge.
With the economic crisis resulting from the COVID 19 pandemic unfolding, coupled with a decline in energy use and environmental restrictions on the coal industry, it is not unreasonable to expect a cascade of coal companies and business failures. As such, the District Court’s opinion is a stark reminder to these companies and their related persons that future Coal Act obligations have to be dealt with.
Read the opinion >>