901 F.3d 718
6th Cir.2018Background
- Seven Counties Services, Inc. is a Kentucky nonprofit community mental health center (CMHC) that for decades participated in the Kentucky Employees Retirement System (KERS).
- Rising employer contribution rates to KERS (around 24% in 2013, rising toward 27%) created severe financial pressure on Seven Counties, which filed Chapter 11 in April 2013 seeking to reject its KERS obligation.
- KERS sued, arguing (1) Seven Counties is a state "governmental unit"/instrumentality and thus ineligible for Chapter 11, and (2) the employer’s KERS obligations are statutory assessments (not executory contracts) that cannot be rejected and must be maintained during bankruptcy.
- Bankruptcy and district courts held Seven Counties was eligible under Chapter 11 and that its KERS relationship was an executory contract subject to rejection; the Sixth Circuit affirmed eligibility but certified the statutory-vs-contract question to the Kentucky Supreme Court.
- The Sixth Circuit majority applied a multifactor, control-focused instrumentality inquiry (creation, appointment of leadership, enabling statute, government funding, and power to abolish) and concluded Kentucky does not exercise the requisite degree of control over Seven Counties.
- Because Kentucky precedent does not clearly resolve whether participation/contributions are contractual or statutory, the Sixth Circuit certified the question to the Kentucky Supreme Court and held the appeal in abeyance.
Issues
| Issue | Plaintiff's Argument (KERS) | Defendant's Argument (Seven Counties) | Held |
|---|---|---|---|
| Whether Seven Counties is a "governmental unit"/instrumentality under 11 U.S.C. §101(27) and thus ineligible for Chapter 11 | Seven Counties functions as an instrumentality of Kentucky (public purpose, statutory regime, state oversight) and should be treated as a governmental unit | Seven Counties is a private nonprofit: not created by the State, board selected internally, not governed by an enabling statute, funded via contracts/Medicaid, and cannot be unilaterally destroyed by the State | Court held Seven Counties is not a governmental unit; affirmed Chapter 11 eligibility (majority focused on lack of sufficient state control) |
| Whether Seven Counties’ participation in KERS and contribution obligations are statutory assessments (non-rejectable) or contractual obligations (potentially executory/rejectable) | The relationship is statutory in nature—an obligation imposed by Kentucky law and not an executory contract—so it cannot be rejected in bankruptcy | The relationship is contractual and, if executory, may be rejected under 11 U.S.C. §365 | Court certified this dispositive question to the Kentucky Supreme Court for authoritative state-law interpretation and held appeal in abeyance |
| Whether statutory employer obligations to KERS must be performed during bankruptcy under 28 U.S.C. §959(b) | If obligations are statutory, §959(b) requires debtor to perform duties of a trustee in bankruptcy, including compliance with state statutory obligations | If obligations are contractual and rejected, §959(b) may not prevent rejection; executory-contract doctrine controls | Court reserved ruling pending Kentucky Supreme Court guidance; did not decide §959(b) application |
| Whether federal courts should defer to or seek state-court guidance on characterization of state pension obligations | KERS urged deference to state-law characterization and asked for certification | Seven Counties argued federal bankruptcy forum may decide federal bankruptcy issues | Court found state-law characterization determinative and, given absence of controlling Kentucky precedent, certified the question to the Kentucky Supreme Court |
Key Cases Cited
- United States v. Bekins, 304 U.S. 27 (Sup. Ct. 1938) (historical limit on federal bankruptcy interference with state sovereignty; supports Chapter 9 framework)
- Department of Employment v. United States, 385 U.S. 355 (Sup. Ct. 1966) (Red Cross treated as federal instrumentality for tax-immunity purposes; factors for determining instrumentality)
- First Nat’l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611 (Sup. Ct. 1983) (characteristics of government instrumentalities and role of enabling statutes/appointments)
- Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374 (Sup. Ct. 1995) (Amtrak characterized as federal instrumentality; pragmatic factors and statutory creation)
- In re Las Vegas Monorail Co., 429 B.R. 770 (Bankr. D. Nev. 2010) (multifactor instrumentality test emphasizing governmental control)
- In re Motors Liquidation Co., 777 F.3d 100 (2d Cir. 2015) (procedure for holding appeals in abeyance pending state-court resolution on certified questions)