Opinion ID: 711058
Heading Depth: 2
Heading Rank: 2

Heading: Effect of the Supremacy Clause on the Issues Presented in this Case.

Text: 48 Article VI, clause 2, of the United States Constitution provides that the laws of the United States shall be the supreme Law of the Land. Consequently, when a certain state law which applies to an issue is found to be in direct conflict with a federal law governing the same issue, the state law will found to be pre-empted. Cipollone v. Liggett Group, Inc., 505 U.S. 504, 517, 112 S.Ct. 2608, 2619, 120 L.Ed.2d 407, 422-23 (1992), citing, Maryland v. Louisiana, 451 U.S. 725, 746, 101 S.Ct. 2114, 2128, 68 L.Ed.2d 576 (1981). See also, Pacific Gas & Electric Co. v. Energy Resources Conservation and Development Comm'n., 461 U.S. 190, 204, 103 S.Ct. 1713, 1722, 75 L.Ed.2d 752 (1983). Following this rule, when the application of a state's unemployment compensation laws result in a Chapter 11 debtor having to choose whether follow state law and pay unemployment contributions pre-confirmation (when making such payments runs afoul of the Bankruptcy Code), or to comply with the Bankruptcy Code and, as a result, pay penalties for failing to pay unemployment contributions (as required by state law), courts uniformly hold the state unemployment compensation laws to be superseded by the statutory provisions of the Bankruptcy Code. Draggoo Electric Co., Inc., 57 B.R. at 920; In re Active Steel Erectors, Inc., 53 B.R. at 854, citing, Elliott v. Bumb, 356 F.2d 749, 755 (9th Cir.1966), cert. denied, 385 U.S. 829, 87 S.Ct. 67, 17 L.Ed.2d 66 (1966). 49 Fair and orderly payment of creditors' claims is one of the primary goals of any bankruptcy proceeding. See Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549, Sen.Rep. No. 95-989, 95th Cong., 2d Sess. (1978) reprinted in 1978 U.S.C.C.A.N. 5787, 5808. To assure fair and orderly payment of creditors' claims, the provisions of the Bankruptcy Code prevent a Chapter 11 debtor from paying pre-petition unemployment contribution claims until after the date of confirmation of the debtor's plan. See 11 U.S.C. Sec. 1129(a)(9)(C); Wolverine Radio Co., 930 F.2d at 1150; Draggoo Electric Co., Inc., 57 B.R. at 920; In re Active Steel Erectors, Inc., 53 B.R. at 854. See also, Matter of Columbia Gas System, Inc., 136 B.R. 930, 940-41 (Bankr.D.Del.1992) (11 U.S.C. Sec. 1108 does not permit a Chapter 11 debtor to pay pre-petition debts prior to a plan's confirmation); In re Revco D.S., 91 B.R. 777, 781 (Bankr.N.D.Ohio 1988) (Chapter 11 debtor may not pay pre-petition tax debt prior to confirmation of a plan); In re Hoffman, 51 B.R. 42, 46 (Bankr.W.D.Ark.1985) (Chapter 11 debtor is not permitted to pay pre-petition debts under section 1108 of the Bankruptcy Code). 50 It follows that a state agency may not, by threatening the assessment of negative experience factors or penalties, effectively coerce a Chapter 11 debtor into granting the state agency a super-priority over other creditors.... when the state agency's pre-petition claims for unemployment contributions remain unpaid because a Chapter 11 bankruptcy proceeding is pending. In re Active Steel Erectors, Inc., 53 B.R. at 854. See also Draggoo Electric Co., Inc., 57 B.R. at 920 (a Chapter 11 debtor may not be forced to grant a state agency super-priority status in a Chapter 11 bankruptcy proceeding). Under such circumstances, the state laws which permit utilization of negative experience factors and the assessment of penalties to increase a Chapter 11 debtor's contribution rates must give way to the statutory provisions governing the orderly payment of claims in a Chapter 11 bankruptcy proceeding. 51 In this case, the Bankruptcy Code did not permit Plaintiff to pay its first quarter-1991 contributions except as provided by its Plan following the date of confirmation, i.e., June 2, 1992, well after the deadline set by section 3-107 of the OESA. 11 U.S.C. Secs. 1108, 1129(a)(9)(C). Thus, Plaintiff could not simultaneously satisfy the requirements of state and federal law with respect to the payment of its first quarter-1991 OESA contributions. Consequently, Plaintiff was confronted with the no win situation of having to choose whether to comply with state law, pay Defendant's claim prior to confirmation of its Plan, and take the chance that its Plan would not be confirmed; or to comply with federal law, leave Defendant's claim unpaid, and suffer the effective penalty of three consecutive years of increased contribution rates under section 3-107 of the OESA. 52 This is precisely the kind of circumstance the Supremacy Clause was meant to address. See Pacific Gas & Electric Co., 461 U.S. at 204, 103 S.Ct. at 1722; Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43, 83 S.Ct. 1210, 1217, 10 L.Ed.2d 248 (1963). In a very real sense, it was Plaintiff's compliance with the Bankruptcy Code which caused Plaintiff to miss the deadline imposed by section 3-107 of the OESA. In this circumstance, the application of section 3-107 of the OESA to cause an increase in Plaintiff's post-petition contribution rates directly conflicts with the requirements of the Bankruptcy Code and undermines the protective function that a Chapter 11 bankruptcy was intended to perform. Sen.Rep. No. 95-989, 1978 U.S.C.C.A.N. at 5809. 53 The Court's obligation to give full faith and credit to the OESA must give way to the Court's duty to effectuate the goals and purposes of the Bankruptcy Code when, as here, the provisions of the OESA and the Bankruptcy Code are in irreconcilable conflict. See e.g., Pacific Gas & Electric Co., 461 U.S. at 204, 103 S.Ct. at 1722; Wolverine Radio Corp., 930 F.2d at 1146; In re Active Steel Erectors, Inc., 53 B.R. at 853. Accordingly, this Court must hold section 3-107 of the OESA to be pre-empted, and Defendant's application of the provisions of section 3-107 to calculate an increase in Plaintiff's contribution rates for the 1992-94 calendar years forbidden under the Bankruptcy Code. See U.S. Const. art. VI, cl. 2; Pacific Gas & Electric Co., 461 U.S. at 204, 103 S.Ct. at 1722. 54