JAMES K. COACHYS, Judge United States Bankruptcy Court.
This matter comes before the Court on the Objections of the Official Creditors' Committee ("the Committee") to Claim Nos. 217 and 218 filed by the Indiana Department of Environmental Management ("IDEM"). The Court conducted a hearing on the Committee's objections on September 20, 2001, and, at the Court's request, the parties then filed briefs on their respective positions. Having reviewed those briefs and other relevant authorities, the Court now issues the following Order, wherein it sustains the Committee's objections to IDEM's claims.
1. Claim No. 217
In Claim No. 217, IDEM states a priority claim against the Debtor for taxes, in the amount of $14,435.65, pursuant to Section 507(a)(8) of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. (the "Code"). IDEM's claim, as originally filed, consisted of five different invoices, each designated as a "Title V Permit Invoice" for the years 1994 through 1998. There is no dispute that the Debtor failed to pay these invoices as they became due and that they remained unpaid as of the commencement of this case. The Committee has objected to this claim, challenging IDEM's classification of the amount due as a "tax." Rather, the Committee maintains that the amount claimed is a "fee" and is, therefore, not entitled to priority. The Court agrees with the Committee.
This claim was later amended to assert a total claim of $11,631.84, of which $10,327.29 was alleged to be entitled to priority. Ultimately, IDEM agreed that only $7,470.76 is arguably entitled to priority.
IDEM eventually reduced its priority claim to include only those invoices for the years 1996, 1997 and 1998, i.e., those invoices for the three years preceding the commencement of this case. See n. 1, supra.
Each invoiced amount charged against the Debtor by IDEM consists of a dollar rate per unit of certain "certified emissions," plus a base fee, resulting in a final fee. For the purposes of determining whether this amount is entitled to priority, there is no difference between the various components of the "total fee."
The amounts due under the invoices are authorized under the Federal Clean Water Act. Title 42 U.S.C. § 7661a prohibits the operation of a plant that emits certain gases or materials without a permit. The permit must be issued by the individual states under a program approved by the Federal Administrator. See 42 U.S.C. § 7661a(b)(3). These state permit programs must comply with certain requirements under the Federal Clean Water Act, including:
(3)(A) A requirement under State or local law . . . that the owner or operator of all sources subject to the requirement to obtain a permit under this subchapter pay an annual fee, or the equivalent over some other period, sufficient to cover all reasonable (direct or indirect) costs required to develop and administer the permit program requirements of this subchapter . . . including the reasonable costs of —
(i) reviewing and acting upon any application for such permit,
(ii) . . . implementing and enforcing the terms and conditions of any such permit . . .
(iii) emissions and ambient monitoring,
(iv) preparing generally applicable regulations, or guidance,
(v) modeling analysis and demonstrations, and
(vi) preparing inventories and tracking emissions.
(emphasis added). Indiana has adopted an approved permit program, which provides in relevant part:
(a) The Title V operating permit program trust fund is established to provide a source of money for the implementation, enforcement, and administration of the operating permit program required to implement
42 U.S.C. § 7661 through 7661f of the federal Clean Air Act, as provided in sections 2 through 9 of this chapter.
(b) The expenses of administering the fund shall be paid from the money in the fund.
(c) The treasurer of state shall invest the money in the fund not currently needed to meet the obligations of the fund in the same manner as other public money may be invested. Interest that accrues from these investments shall be deposited in the fund.
(d) Money in the fund at the end of the state fiscal year does not revert to the state general fund.
(e) The sources of money for the fund are the following:
(1) Fees collected under the operating permit program required to implement
42 U.S.C. § 7661 through 7661f.
(2) Appropriations made by the general assembly.
(f) Money in the fund may be used only to pay the costs of the operating permit program activities described in section 3 of this chapter.
(g) Revenues that accrue to the fund are appropriated to the department for the purposes described in section 3 of this chapter.
IND. CODE § 13-17-8-1 (emphasis added).
In its brief, IDEM claims that the "annual fee" prescribed by the Clean Water Act constitutes an "excise tax" for purposes of Code § 507(a)(8)(E). That section provides in relevant part:
(a) The 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 — . . . .
(E) 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 . . . .
As the Committee correctly emphasizes, not all governmental exactions constitute a "tax"for purposes of § 507, just as not all taxes are "excise" in nature. A claim held by a governmental entity for an obligation that amounts to a "fee" rather than a "tax" is not entitled to priority. The Clean Water Act refers to the exaction at issue here as a "fee;" however, the label Congress places on the exaction is not controlling. See United States v. River Coal Co., 748 F.2d 1103, 1106 (6th Cir. 1984). Rather, the Court must discern the nature and purpose of the exaction to determine whether it constitutes a fee or a tax. If the exaction is determined to be a tax, the Court must then decide — for purposes of § 507(a)(8)(E) — whether it is an "excise tax."
The Supreme Court has identified certain distinctions between taxes and fees. See National Cable Television Ass'n., Inc. v. United States, 415 U.S. 336, 94 S.Ct. 1146, 39 L.Ed.2d 370 (1974). Congress may impose a tax without regard to the benefits bestowed on the taxpayer, considering only the need for revenue to fund the government's public functions. In contrast, a fee "is incident to a voluntary act, e.g., a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station. The public agency performing these services may exact a fee for a grant which, presumably, bestows a benefit on the applicant, not shared by other members of society." Id. at 340.
The basic principles stated in National Cable have been articulated and applied in a number of ways which this Court finds instructive. For example, in San Juan Cellular Tel. Co. v. Pub. Serv. Comm'n of Puerto Rico, 967 F.2d 683 (1st Cir. 1992), the First Circuit Court of Appeals stated the following:
The classic "tax" is imposed by the legislature upon many, or all, citizens. It raises money, contributed to a general fund, and spent for the benefit of the entire community. The classic "regulatory fee" is imposed by an agency upon those subject to its regulation. . . . It may serve regulatory purposes directly by, for example, deliberately discouraging particular conduct by making it more expensive. . . . Or, it may serve such purposes indirectly by, for example, raising money placed in a special fund to help defray the agency's regulation-related expenses.
Id. at 685; see also Union Pac. R.R. Co. v. Pub. Util. Comm'n, 899 F.2d 854, 856 (9th Cir. 1990) (concluding that utility commission's assessment was fee and not tax because it helped defray cost of performing regulatory duties imposed on commission); Schneider Transp., Inc. v. Cattanach, 657 F.2d 128, 132 (7th Cir. 1981), cert. denied, 455 U.S. 909 (1982) (department of transportation charge upon truck owners was fee where revenues used to help "identify authorized vehicles for regulatory purposes; however, other charges against truck owners were deemed to be tax because revenue was used to pay for highway construction); River Coal, 748 F.2d at 1103 (permit fee charged to coal operators to conduct surface mining constitutes fee, while reclamation fee charged against coal operators for purpose of restoring land and water effected by mining constitutes tax). Based on the distinctions between taxes and regulatory fees articulated above, the Court must conclude that the amount charged by IDEM to the Debtor constitutes a fee rather than a tax. The exaction is imposed only on those entities seeking permission to emit certain pollutants. The benefits of paying the statutory fee inures only to that entity and not to the public as a whole. The revenue is then segregated into a special fund and used to offset the cost of administering the permit program. Per statute, any collected but unspent fees cannot revert to the state's general fund. For these reasons, the exaction at issue here amounts to a classic regulatory fee. For the reasons stated above, the Court sustains the Committee's objection to Claim No. 217 to the extent IDEM has claimed priority status. The claim will be allowed only as a general unsecured claim and treated under Class 7 of the Debtor's confirmed plan.
2. Claim No. 218
In Claim No. 218, IDEM states a claim for $72,000 and alleges that such amount is entitled to priority as a tax-related penalty under Code § 507(a)(8)(G). The Committee has objected to this characterization, arguing that not only is the claimed amount not entitled to priority, but should be treated as a subordinated claim under Class 8 of the Debtor's plan. In its brief, IDEM concedes that the amount stated is not entitled to priority; however, IDEM insists that the claim should be treated as a general unsecured claim under Class 7 of the Debtor's plan, and not as a penalty claim under Class 8. Again, the Court agrees with the Committee.
Code § 507(a)(8)(G) gives priority status to "a penalty related to a [tax] claim of a kind specified in this paragraph and in compensation for actual pecuniary loss."
Section 1129 of the Code provides in relevant part that a plan can only be confirmed if:
(7) With respect to each impaired class of claims or interests —
(A) each holder of a claim or interest of such class —
(I) has accepted the plan; or
(ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title . . . .
11 U.S.C. § 1129(a)(7)(A). Under § 726 of the Code, the "payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or any multiple, exemplary, or punitive damages . . . to the extent such fine, penalty, forfeiture or damages are not compensation for actual pecuniary loss suffered by the holder of such claim" is entitled to "fourth" priority, i.e., behind any general unsecured claims. See
11 U.S.C. § 726(a)(4). Consistent with the above provisions, the Debtor provided under Class 8 of the plan that "unsecured claims for non-pecuniary loss penalties" would be paid only upon the full payment of Class 7's general unsecured claims. This classification scheme satisfies the "liquidation analysis" set forth in Code § 1129(a)(7)(A)(ii).
Since there is no question that IDEM's claim is for penalties not otherwise entitled to priority, the only question that remains, then, is whether, the penalties are compensation for "actual pecuniary loss."
In arguing against subordination of its claim, IDEM directs the Court to United States v. Reorganized CF I Fabricators of Utah, Inc., 518 U.S. 213, 116, S.Ct. 2106, 135 L.Ed.2d 506 (1996) for the proposition that the Debtor must treat IDEM's penalty claim as a general unsecured claim. That case addressed only whether, under § 510(c) of the Code, the bankruptcy court had erred when it approved the debtor's subordination of a non-pecuniary penalty claim filed by the Internal Revenue Service. Id. at 227-28. Examining subordination under the narrow light of § 510(c), the Supreme Court ultimately found that the bankruptcy court had indeed erred. However, the Court specifically avoided a determination of whether the Debtor's attempted subordination of the IRS's claim would have been authorized under § 1122(a) or Chapter 7 of the Code. The Court's opinion in CFI suggests that it would have reached a different conclusion had it examined and relied on these provisions. As such, the Court's decision in CF I is not determinative here.
Claim No. 218 relates to a malfunction that occurred at the Debtor's plant in Alexandria, Indiana. The Office of Air Management assessed the penalties because of the Debtor's failure to comply with certain regulations, which failures ultimately resulted in the release of pollutants into the air. See 326 IAC 1-6-4(b). The Debtor was also penalized for having failed to notify the Office of Air Management of the malfunction. See 326 IAC 1-6-2. In light of the Debtor's history of noncompliance, the $60,000 base penalty was increased by 20%, resulting in a total penalty of $72,000. The nature of these penalties does not indicate that they were intended to compensate IDEM for actual pecuniary loss and, thus, they are appropriately treated under Class 8 of the Debtor's plan.
Accordingly, the Court sustains the Committee's objection to IDEM's Claim No. 218. The Claim is not entitled to priority, as the parties agree, and is properly treated under Class 8 of the plan.