550 B.R. 741
W.D. Ky.2016Background
- Seven Counties Services, Inc. is a private non-profit community mental health center (CMHC) that has participated in the Kentucky Employees Retirement System (KERS) since the 1970s after executive action and state designation.
- Legislative changes in 2013 (Senate Bill 2) raised employer contribution requirements (capped at 24% for CMHCs), rendering Seven Counties insolvent and prompting its Chapter 11 petition to stop KERS contributions.
- KERS sued in bankruptcy court seeking (among other relief) to treat Seven Counties as a governmental unit (which would bar Chapter 11) and to compel continued contributions; Seven Counties sought a declaration that it could withdraw or reject its obligations.
- The bankruptcy court held Seven Counties is not a “governmental unit,” that the statutory framework and executive order created an enforceable (implied) contract between Seven Counties and KERS, that the contract is executory, and that Seven Counties may reject it in Chapter 11; it also held § 959(b) did not compel post-petition performance.
- On appeal the district court affirmed the bankruptcy court’s legal conclusions, corrected a factual error (the pension plan is a "multiple-employer" plan, not a "multi-employer" plan), and denied certification to the Kentucky Supreme Court.
Issues
| Issue | Plaintiff's Argument (KERS) | Defendant's Argument (Seven Counties) | Held |
|---|---|---|---|
| Whether district court should certify to KY Supreme Court whether participation is statutory or contractual | State law question unsettled; certification appropriate because issue is important to Kentucky | Not necessary; issue can be decided by applying contract principles incorporating statutes | Denied — certification unnecessary; court decided issue itself |
| Whether Seven Counties is a "governmental unit" (eligibility for Chapter 11) | Seven Counties functions as an instrumentality of the Commonwealth (state control, public funding, statutory scheme) | Seven Counties is a private non-profit with limited state control and lacks sovereign attributes (taxing, eminent domain, immunity) | Held not a governmental unit; qualifies as a "person" under § 101 and may seek Chapter 11 |
| Whether a contract exists between Seven Counties and KERS | Participation is statutory/regulatory, not a contract; no separate written contract and statute requires written Commonwealth contracts | Executive orders and statutes together constituted offer, acceptance, terms, and consideration — statutes incorporated into the contract | Held a contract exists: executive order accepted offer; statutory/regulatory framework supplies contract terms and consideration |
| Whether the contract is executory and rejectable under § 365 | Obligations (pension administration/benefits) run to employees, not the employer; not an executory contract | Both sides have ongoing future duties (contributions by employer; pension administration/benefits by KERS) making it executory | Held executory under Countryman/functional tests; Seven Counties may reject it in Chapter 11 |
| Whether § 959(b) or related provisions require post-petition compliance with KERS obligations | State interest in pension integrity and public welfare requires continued contributions despite bankruptcy | § 959(b) is limited to health/safety/welfare police-power laws; pension statutes are not that category and yield to Bankruptcy Code | Held § 959(b) does not compel Seven Counties to continue KERS contributions post-petition |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (U.S. 1979) (property rights and contract questions in bankruptcy are governed by state law)
- Halikas v. River Region Mental Health–Mental Retardation Bd., Inc., 667 F.2d 1026 (6th Cir. 1981) (prior federal decisions finding CMHC not a state agency)
- Chattanooga Mem’l Park v. Still (In re Jolly), 574 F.2d 349 (6th Cir. 1978) (discussing the executory-contract concept and functional analysis)
- Las Vegas Monorail Co. v. City of Las Vegas (In re Las Vegas Monorail Co.), 429 B.R. 770 (Bankr. D. Nev. 2010) (factors for determining when an entity is an "instrumentality" or governmental unit)
- Jones v. Board of Trustees of Kentucky Retirement System, 910 S.W.2d 710 (Ky. 1996) (state-law principle that pension statutes can create an inviolable contractual obligation)