OPINION CONCERNING TAX CLAIM OBJECTION
Before the Court is the Amended Objection of Old Careo Liquidation Trust Seeking to Disallow or, in the Alternative, to Reclassify the Tax Claims of John A. Do-nofrio, Summit County Fiscal Officer, filed on May 12, 2010 (ECF No. 7023) (the “Amended Objection”), to which the Summit County Fiscal Officer (the “Fiscal Officer”) responded on May 25, 2010 by filing the Response to Old Careo Liquidation Trust’s Objection to Claims of John A. Donofrio, Summit County Fiscal Officer (ECF No. 7096) (the “Amended Response”). The primary issue presented is whether the Fiscal Officer asserts valid claims based upon an alleged breach of two tax exemption agreements entered into by the parties. If these claims are valid, the secondary issue is whether the claims constitute priority tax claims under section 507(a)(8) of title 11 of the United States Code (the “Bankruptcy Code”).
The Court finds that the alleged breach occurred in June 2010 as a result of the closing of the Plant. The 1999 Agree-ment
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expired by its terms prior to the alleged breach in June 2010. Because the 1999 Agreement was not in force at the time of the alleged breach, the 1999 Agreement Claim
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should be disallowed and expunged. With respect to the 2000 Agreement,
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the “change to economic conditions” clause in that agreement excused performance by Old Careo; accordingly, the 2000 Agreement Claim
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should also be disallowed and expunged. Alternatively, even if Old Carco’s alleged breach of the 2000 Agreement were not excused, the Court finds that the alleged breach is non-material in that Old Careo has substantially complied with its obligations under that agreement. Thus, under this alternative, Summit County would be entitled only to damages corresponding to the period of the tax exemption subsequent to the alleged breach. However, because Summit County had completely phased-out its per
I. Jurisdiction
This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. § 1334 and Article VIII of the Plan. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. Background
On April 30, 2009 (the “Petition Date”), Old Careo LLC (f/k/a Chrysler LLC) (“Old Careo”) and twenty-four of its affiliated debtors and debtors in possession (the “Original Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On May 19, 2009, Alpha Holding LP (together with the Original Debtors, the “Debtors”) also filed a voluntary petition under chapter 11 of the Bankruptcy Code. The Debtors’ chapter 11 cases have been consolidated for procedural purposes and are being administered jointly by the May 1, 2009 and May 26, 2009 orders of the Court. (ECF Nos. 97, 2188.)
Approximately ten years before the Petition Date, Old Careo,
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the City of Twins-burg, Ohio (“Twinsburg”) and the County of Summit, Ohio (“Summit County,” and together with Old Careo and Twinsburg, the “Parties”), entered into two tax exemption agreements relating to the Twinsburg stamping plant (the “Plant”).
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On June 21, 1999, the Parties entered into the first Summit County Enterprise Zone Agreement (the “1999 Agreement”). (Stip. 2 ¶ 1.) Under the 1999 Agreement, which, by its express terms would be governed by and construed in accordance with Ohio law, the Parties agreed that, in exchange for Old Careo investing in machinery and equipment in the Plant as well as for exercising “reasonable efforts” (Stip. 2 ¶ 2) to retain a number of full-time positions at the Plant, Twinsburg and Summit County would grant a fifty-percent tax exemption (the “Exemption”) “for eligible new tangi
The Exemption was granted pursuant to section 5709.63 or section 5709.632 of the Ohio Code and applied to “eligible new tangible personal property acquired in conjunction with the Project” (1999 Agreement ¶ 5) over a period of ten years beginning “the first tax year for which the tangible personal property would first be taxable were that property not exempted from taxation.” (Id.) In the Stipulation of Facts Related to Claim Numbers 28465 and 28466, Filed By John A. Donofrio, Summit County Fiscal Officer, which was so ordered by the Court on September 9, 2010 (the “Stipulation”) (ECF No. 7450), the Parties stipulated that Old Careo first claimed the Exemption provided for under the 1999 Agreement in the year 2000. (Stip. 2 ¶ 3.)
Under the 1999 Agreement, paragraph one provided that Old Careo would “make investments in stamping presses and ancillary equipment, conveyor and ancillary equipment, crane, assembly and ancillary equipment and other miscellaneous equipment related to the Project.” (1999 Agreement 3 ¶ 1. Accord Stip. 2 ¶ 2.) The same paragraph also provided that Old Carco’s intent was to invest approximately $150,000,000 “plus or minus 10% in the Project.” (1999 Agreement 3 ¶ 1.) Furthermore, paragraph two of the 1999 Agreement provided that Old Careo would “use reasonable efforts to retain 465 full-time equivalent positions at the Plant....” (1999 Agreement 3 ¶ 2. Accord Stip. 2 ¶ 2.)
Paragraph six of the 1999 Agreement also required payment of an annual administrative fee to Summit County, and provided that the Parties agreed Old Careo would pay “an annual fee equal to the greater of one percent of the dollar value of incentives offered under the [Ajgreement or five hundred dollars ... [and] not exceeding] [t]wo [t]housand [f]ive hundred [d]ollars.... ” (1999 Agreement 6 ¶ 6. Accord Stip. 4 ¶ 20.)
Should Old Careo “materially fail[] to fulfill its obligations under [the] Agreement,” the City of Twinsburg and Summit County “may terminate or modify the exemptions from taxation granted under [the] Agreement and may require the repayment of the amount of taxes that would have been payable had the property not been exempted from taxation under [the] Agreement.” (1999 Agreement 7 ¶ 10.)
Twinsburg and Summit County also agreed to “perform such acts as are reasonably necessary or appropriate to ... maintain exemptions from taxation granted under [the] Agreement.” (Id. at 6-7 ¶ 8.)
On December 15, 2000, the Parties entered into a second Enterprise Zone Agreement (the “2000 Agreement” and, together with the 1999 Agreement, the “Tax Exemption Agreements”). (Stip. 2 ¶ 6.)
The 2000 Agreement contained similar terms as the 1999 Agreement and, as stat
[I]n exchange for Old Carco’s project ... to invest approximately $127,200,000 more in certain machinery and equipment to be used at the ... Plant and to use reasonable efforts to maintain 291 full-time employment positions at the ... Plant in connection with the 2000 Project, Old Careo would be entitled to a 50 percent Ohio personal property tax exemption for a ten-year period on eligible new tangible personal property utilized in conjunction with the 2000 Project.
(Stip. 2-3 ¶ 7. Accord Amend. Obj. Ex. B, 2000 Agreement 2 ¶ 1, 3 ¶ 2, 4 ¶ 5.)
The Parties stipulated that Old Careo “first claimed the ten-year tax exemption provided for under the 2000 Agreement in the year 2001.” (Stip. 3 ¶8.) The 2000 Agreement, which would also be governed by and construed in accordance with Ohio law (2000 Agreement 7 ¶ 16(B)), similarly provided for: (a) an annual administrative fee “equal to the greater of one percent of the dollar value of incentives ... or five hundred dollars ... [and] not exceeding] ... $2,500.00.” (2000 Agreement 4 ¶ 6; accord Stip. 4 ¶ 20); (b) a provision allowing Twinsburg and Summit County, in the event of a material breach by Old Careo, to “terminate or modify the exemptions from taxation ... and ... [to] require the repayment of the amount of taxes that would have been payable had the property not been exempted from taxation under th[e] [A]greement” (2000 Agreement 5 ¶ 10); and (c) a promise by Twinsburg and Summit County to “perform such acts as are reasonably] necessary or appropriate to ... maintain exemptions from taxation granted under [the] Agreement.” (I'd at ¶ 8.)
Both Tax Exemption Agreements contain a provision enumerating circumstances when Old Careo would not be considered in default. Specifically, paragraph 17(F) of the 1999 Agreement and paragraph 16(F) of the 2000 Agreement provide:
[Old Careo] shall not be considered ... in default in the performance of its obligations under this agreement as a result of any cause beyond its reasonable control, including but not limited to severe and unusual weather, acts of God, or explosion, riot, acts of civil disobedience or sabotage, change to economic conditions and productivity and technological changes, power failures or shortages, restraint by court order or order of public authority, action or omission by any government agency, labor strikes or other labor disturbances.
(1999 Agreement 11 ¶ 17(F); 2000 Agreement 7-8 ¶ 16(F).)
In June 2005, the Ohio state legislature (the “Ohio Legislature”) amended section 5711.22 of the Ohio Revised Code (the “Personal Property Tax Law”) governing the percentage of true value of personal property that is subject to personal property tax assessment in Ohio state, “phasing] out the personal property tax by gradually reducing the percentage of personal property true value to be listed and assessed.” (Stip. 4 ¶¶ 16, 17.). Paragraph 18 of the Stipulation contains a description of the relevant portion of the amended Personal Property Tax Law as follows:
[P]ersonal property is to be listed and assessed tax at the following percentages of true value: (a) for tax year 2005, 25 percent of true value; (b) for tax year 2006, 18-3/4 percent of true value; (c) for tax year 2007, 12-1/2 percent of true value; (d) for tax year 2008, 6-1/4 percent of true value; and (e) for tax year 2009 and each tax year thereafter, zero percent of true value.
On April 30, 2009, subsequent to the Petition Date and in connection with the filing of the chapter 11 cases, the Debtors, Fiat S.p.A. (“Fiat”), and New Careo Acquisition LLC n/k/a Chrysler Group LLC (“New Chrysler”), entered into a Master Transaction Agreement (as amended, and collectively with other ancillary and supporting documents, the “MTA”). Under the MTA, Old Careo agreed to transfer the majority of its operating assets to New Chrysler, and in exchange for those assets, New Chrysler would assume certain of the Debtors’ liabilities and pay to Old Careo $2 billion in cash (collectively with the other transactions contemplated by the MTA, the “Fiat Transaction”).
On May 31, 2009, the Court issued the Opinion Granting Debtors’ Motion Seeking Authority to Sell, Pursuant to 11 U.S.C. § 363, Substantially All of the Debtors’ Assets (the “Fiat Transaction Opinion”) (ECF No. 3073) as well as the Opinion and Order Regarding Emergency Economic Stabilization Act of 2008 and Troubled Asset Relief Program (ECF Nos. 3074, 3229).
On June 1, 2009, consistent with the Fiat Transaction Opinion, the Court entered the Order (I) Authorizing the Sale of Substantially All of the Debtors’ Assets Free and Clear of All Liens, Claims, Interests[,] and Encumbrances, (II) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in Connection Therewith and Related Procedures^] and (III) Granting Related Relief (ECF No. 3232) (the “Fiat Transaction Order”). On June 10, 2009, pursuant to the Fiat Transaction Order, the Fiat Transaction was consummated. Although the Plant was not sold to New Chrysler as part of the Fiat Transaction, it was licensed to New Chrysler and continued to operate after the Fiat Transaction closed. (Amend. Obj. Claim Hr’g Tr. 24:11-17, Sept. 16, 2010.) Under that license, it remained open an additional year, closing in June 2010. (See Stip. 3 ¶ 13.)
On June 9, 2009, the Twinsburg Tax Incentive Review Council (the “TIRC”) held its annual meeting (the “TIRC Annual Meeting”) to consider, among other things, the performance of Old Careo and other companies that are parties to enterprise zone agreements with Twinsburg and Summit County. The Stipulation provides that the notice, agenda, and minutes of the TIRC Annual Meeting (the “TIRC Meeting Documents”) contained in Exhibit Six of the Amended Response could be relied upon by the Parties and are admissible before the Court for the specified purposes in the Stipulation, to the extent that they do not limit or modify the terms of the Stipulation. (Stip. 3 ¶ 15.)
According to the TIRC Meeting Documents, regarding Old Carco’s compliance with the 1999 Agreement and based on the information provided by Old Careo:
[T]he company has made an actual investment in tangible personal property of $110,293,618. For calendar year 2008, the company reported a total payroll of $103,074,250 ([Tax Exemption Agreements] combined). The company reports having 1,665 full-time positions ( [Tax Exemption Agreements] combined).
The company previously met its commitment regarding tangible personal property (2007). The company did not provide a breakdown of employees for each individual ... agreement but combining reported numbers, the company appears to have exceeded its commitments regarding full-time positions, as well as total payroll.
(Amend. Resp. Ex. 6, TIRC Mtg. Docs., Mins, of TIRC Mtg. 3.)
[T]he company has made an actual investment in tangible personal property of $139,265,597. For calendar year 2008, the company reported a total payroll of $103,074,250 ([Tax Exemption Agreements] combined). The company reports having 1,665 full-time positions ( [Tax Exemption Agreements] combined).
The company exceeded its commitment regarding tangible personal property. The company did not provide a breakdown of employees for each individual ... agreement but combining reported numbers, the company appears to have exceeded its commitments regarding full-time positions, as well as total payroll.
(Mins, of TIRC Mtg. 4.) The Meeting Documents also reveal that as of 2009, 602 full-time employees were employed by Old Careo, compared to the 756 full-time employees Old Careo had agreed to retain under the Tax Exemption Agreements. (See id. at 5; Tr. 34:1-3.)
Furthermore, in anticipation of the impending sale of the Plant, the TIRC members at the TIRC Annual Meeting discussed whether the sale would give rise to a legal remedy, with one council member stating that “when the machinery starts leaving the facility, the [2000] Agreement will then become violated, at which [time] action can be taken.” (Mins, of TIRC Mtg. 5.) Notably, another attendee observed that “as of December 31, 2008, the Agreements are in compliance with the Ohio Revised Code.” (Id.) Finally, the TIRC members at the TIRC Annual Meeting agreed to “[c]ontinue the [2000] ... Agreement until a violation would occur such as machinery leaving the building, and then a special TIRC meeting [would] be called by this body.” (Id.) 11
On August 24, 2009, the council of Summit County (the “Summit County Council”) unanimously adopted a resolution accepting the TIRC recommendations to continue the Tax Exemption Agreements because Old Careo “fully met all of the requirements -” (See Amend. Resp., Ex. 7, Resolution No. 2009-300 § 1.) (Emphasis supplied.)
On October 19, 2009, less than two months after the Summit County Council had resolved that Old Careo fully complied with the Tax Exemption Agreements, the Fiscal Officer, on behalf of Summit County, filed proof of claim number 28465, asserting a priority tax claim of $3,736,928 under section 507(a)(8) of the Bankruptcy Code (the “1999 Agreement Claim”); and proof of claim number 28466, asserting a priority tax claim of $4,223,862 (the “2000 Agreement Claim,” and together with the 1999 Agreement Claim, the “Claims”). Both amounts relate to the aggregate realized personal property tax savings to Old Careo under the Tax Exemption Agreements. (See Stip. 2 ¶ 4, 3 ¶ 9.)
On November 19, 2009, the Court entered the Order, Pursuant to Sections 105 and 502 of the Bankruptcy Code and Bankruptcy Rules 2002, 3007, 9006, 9014[,] and 9019, (I) Granting Relief From Certain Limitations of Bankruptcy Rule 3007 and (II) Establishing Procedures for Objecting to and Settling Claims (the “Claims Procedure Order”) (ECF No. 5980).
On March 11, 2010, the Court entered the Order Authorizing Debtors to Sell Twinsburg, Ohio Stamping Plant Free and Clear of All Liens, Claims[,] and Encumbrances and Granting Related Relief (the “Plant Sale Order”). (ECF No. 6585; Stip. 3 ¶ 11.) Attached as Exhibit A of the Plant Sale Order was the Agreement of Purchase and Sale dated March 10, 2010, in which Maynards Industries (1991) Inc., a Delaware corporation, was the designated purchaser of the Plant. (See ECF No. 6585.)
On April 15, 2010, the Court entered the Order Granting Debtors’ and Debtors in Possession’s Twelfth Omnibus Objection Seeking to Reclassify Certain Claims, in which the Court, among other things, ordered the adjournment of the Claim Objection with respect to the 1999 Agreement Claim and the 2000 Agreement Claim. (ECF No. 6804.)
On May 12, 2010, the Debtors filed the Amended Objection, to which the Fiscal Officer responded on May 25, 2010 by filing the Amended Response.
As noted previously, the Plant remained open until June 2010. (Stip. 3 ¶ 13.) On June 1, 2010, the full-time positions relating to the 1999 Agreement and the 2000 Agreement were terminated. (Id. at ¶ 14.) In connection with the Plant closing, New Chrysler offered special benefits programs to eligible union-represented employees. (J. Suppl. Subm’n 2, ECF No. 7908.) Depending on the program chosen, union employees were offered amounts ranging from approximately $50,000 to $115,000, which are amounts in excess of what the employees were entitled to as retirees, and were offered relocation opportunities. (Id. at 2-4.) Non-union employees could also relocate to other open jobs, but were not otherwise eligible for the special benefits offered to union employees. (Id. at 5.) In addition, non-union employees could have received additional benefits that were negotiated on a case-by-case basis. (Id.)
On September 8, 2010, the Debtors filed the Reply in Support of Amended Objection of Old Careo Liquidation Trust Seeking to Disallow or, in the Alternative, to Reclassify the Tax Claims of John A. Do-nofrio, Summit County Fiscal Officer (ECF No. 7449) (the “Reply”).
On September 9, 2010, the Court signed the Stipulation, which, by its terms, could be used for, inter alia, any hearings on the Claims.
On September 16, 2010, the Court held a hearing (the “Hearing”). 12
In response to the Court’s request for a submission setting forth the employment severance benefits that were available
III. Arguments
Old Careo Liquidation Trust 13
Old Careo Liquidation Trust (the “Trust”) argues that the Claims should be disallowed because the Fiscal Officer has no valid claim for damages under the Tax Exemption Agreements. First, the Trust asserts that the purpose of the Tax Exemption Agreements was frustrated. (Amend. Obj. 8-10 ¶¶ 16-19.) In conjunction with this argument, the Trust asserts that the Tax Exemption Agreements have terminated and Summit County has substantially received the benefits for which it had bargained under the 2000 Agreement. (Id. at 11-13 ¶¶ 20-24.) Second, the Trust argues that, even if the Tax Exemption Agreements had not terminated, the Debtors did not breach the Tax Exemption Agreements because of the clause “change to economic conditions.” (Id. at 13-15 ¶¶ 25-27.) Third, the Trust argues that, if the Claims were allowed, they should be reclassified as general unsecured non-priority claims because they are not taxes and do not fall under section 507(a)(8) of the Bankruptcy Code. (Id. at 15-17 ¶¶ 29-33.) This section sets forth the substance of these three arguments in turn.
First, the Trust argues that the purpose of the Tax Exemption Agreements was frustrated due to the phaseout of the personal property taxes contemplated under the Tax Exemption Agreements pursuant to section 5711.22(G)(5) of the Ohio Revised Code (the “Ohio Code”). According to the Trust, the “purpose in entering into the [Tax Exemption] Agreements was to gain a competitive economic advantage by obtaining partial relief from Ohio personal property taxes.” (Id. at 10 ¶ 19.) The phaseout and resulting frustration of purpose relieved the Debtors from performing; thus, the Debtors have no liability under the Tax Exemption Agreements.
In footnote six of the Amended Objection, the Trust notes that while some cases have stated in dicta that Ohio courts do not widely accept the doctrine of frustration of purpose, none of the cases actually rejects the doctrine, “and [the Ohio courts] cite only to cases that recognize the doctrine, albeit while finding the doctrine to be inapplicable on the particular facts at issue.” (Id. ¶ 18 n. 6.)
Further, the Trust asserts that the 1999 Agreement terminated in 2009, arguing that based on the Stipulation, Old Careo first claimed the Exemption under the 1999 Agreement in the year 2000.
(Id.
at 11 ¶ 20; Tr. 25:7-14; Reply 6 ¶ 8.) Because the Exemption was claimed in 2000, the 1999 Agreement expired in 2009, its tenth year, and Summit County “received 100 of its bargained-for benefit under the 1999 Agreement.” (Amend. Obj. 11 ¶ 20; Tr.
Second, assuming that the Tax Exemption Agreements have not terminated, the Trust asserts that the Debtors were not in breach because paragraph 17(F) of the 1999 Agreement and paragraph 16(F) of the 2000 Agreement “expressly state that the [Djebtors cannot be considered in ... default of the contract!] as a result of circumstances beyond their reasonable control, including specifically changes to economic conditions.” (Tr. 29:12-15.) In support of this assertion, the Trust cites to the Affidavit of Ronald E. Kolka in Support of First Day Pleadings (the “Kolka Affidavit”) (ECF No. 23) and the Court’s findings of fact in
In re Chrysler LLC,
Third, assuming the validity of the Claims, the Trust argues that the Claims are general unsecured non-priority claims because the Claims are not taxes and do not fall under section 507(a)(8) of the Bankruptcy Code. (Amend. Obj. 15 ¶ 29.) The Trust sets forth three reasons for its assertion.
The Trust first focuses on its interpretation of the contractual provisions, arguing that the Claims are “repayments of the amount of taxes” but are not themselves taxes. The Trust points to the provisions in the Tax Exemption Agreements concerning breach, noting that they “provide only that, in the event of a material
The Trust points to the Ohio Code to support its argument that had the Tax Exemption Agreements imposed a lien on the amount of abated tax, such lien would be “a generic mortgage interest in real property or a security interest in goods, not a tax lien.” (Amend. Obj. 17 ¶ 31; Reply 9 ¶ 13 n. 7.)
According to the Trust’s interpretation of section 5709.631(B) of the Ohio Code, tax abatement agreements — such as the one entered by the Parties — must include certain default language. (Amend. Obj. 16 ¶ 30.) If the agreement includes a provision requiring repayment of an amount equal to abated taxes, which is the case in the tenth paragraph of the Tax Exemption Agreements, it may also include language authorizing the counties to secure the obligation with a lien on the property. (Id.) Had such lien language been included in the Tax Exemption Agreements, the imposed lien “would be in the nature of a generic mortgage interest in real property or a security interest in goods.” (Amend. Obj. 17 ¶ 31.) The Trust argues that under the enabling statute, “the obligation to pay an amount equal to abated taxes is not secured automatically by a lien as it would be if the obligation were a true tax rather than mere damages flowing from a breach of contract.” (Id. at 16-17 ¶ 31.)
Finally, the Trust cites
City of Dayton v. Cloud,
The Fiscal Officer 15
In the Amended Response, the Fiscal Officer sets forth several arguments addressing the Trust’s Amended Objection. First, the Fiscal Officer argues that the Claims under the Tax Exemption Agreements are "valid and should be allowed because the Tax Exemption Agreements are still in effect and the doctrine of “frustration of purpose” does not apply. (Amend. Resp. 3-6.) In conjunction with this argument, the Fiscal Officer asserts that the Tax Exemption Agreements have not run their course and Summit County did not receive substantially all of its bargained-for benefit. (Amend. Resp. 6-8.) Second, the Fiscal Officer asserts that the Plant closing was an event of default under the Tax Exemption Agreements and was not exempted under the “change to economic conditions” clause. (Amend. Resp. 8.) However, during the Hearing, counsel to the Fiscal Officer asserted that the initial breach of the Tax Exemption Agreements was the failure to retain a certain number of employees at the Plant, and not
First, the Fiscal Officer argues that the sale of the Plant and its subsequent closing constituted a fundamental failure of Old Careo to fulfill its obligations under the Tax Exemption Agreements. (Amend. Resp. 3.) During the Hearing, counsel to the Fiscal Officer referred to the TIRC Meeting Documents, arguing that the initial breach of the Tax Exemption Agreements was the failure to retain a specific number of employees (Tr. 32:22-23), and noting that Old Careo had only 602 employees retained as of the TIRC Annual Meeting, while the Tax Exemption Agreements specifically required a total of 756 employees. (Tr. 32:24-33:2.) Further, the Fiscal Officer asserts the validity of the Tax Exemption Agreements, citing to Old Carco’s personal property tax returns (Amend. Resp. 7, citing Exs. 10, 11) and its actions demonstrating recognition that the Tax Exemption Agreements had value because of Old Carco’s payment of the annual administrative fee required for both Tax Exemption Agreements. 17 (Amend. Resp. 5, 6.) Additionally, the Fiscal Officer disputes the application of the frustration of purpose doctrine, arguing that the doctrine has not been accepted in Ohio. (Amend. Resp. 6.) Counsel to the Fiscal Officer also argued during the Hearing that Old Careo could have renegotiated the Tax Exemption Agreements, such as negotiating a reduction in real estate tax, had it perceived that it was no longer receiving the benefit of its bargain. (Tr. 33:11-16.)
Second, the Fiscal Officer disputes the applicability of the “change to economic
Finally, asserting that “Summit County rests its elaim[s] upon the clear terms of the [Tax Exemption] Agreements as taxes” (Amend. Resp. 9), the Fiscal Officer observes that the Tax Exemption Agreements “do[ ] not state that the repayment is a damage provision and do[ ] not speak of damages. It speaks of taxes.” (Id.) Responding to the Trust’s argument regarding the lien issue, the Fiscal Officer points out that “[t]he right to place a lien upon the exempted property is not in the Agreements and is not required language in enterprise zone agreements.” (Id.) The Fiscal Officer does not dispute the Trust’s discussion of section 5709.63 of the Ohio Code, which section allows the imposition of a lien upon the exempted property, other than by arguing that the failure of Summit County to include such lien language does not change the nature of the claim from a tax to a damage claim.
The Fiscal Officer clarifies that Summit County is not basing the priority status of its claims on the fact that it is a governmental unit. (Id.) According to the Fiscal Officer, Dayton is inapposite as “the Supreme Court of Ohio specifically found that a[n] urban renewal service payment did not qualify as a tax, because the revenue raised by the fee would not be used for the direct support of the government for the administration of the law or for the payment of public expenses.” (Id. at 9-10). Here, in contrast, the Fiscal Officer argues that the Claims are taxes because as with any other personal property tax, the amounts collected would be used “for the direct support of the county for [the] administration of law or to pay public expenses as allowed by law” (id. at 10) and are, therefore, entitled to priority status under section 507(a)(8) of the Bankruptcy Code.
IV. Analysis
As noted, Old Careo and Summit County are parties to the Tax Exemption Agreements. The Exemption was granted pursuant to section 5709.63 or section 5709.632 of the Ohio Code and applied to “eligible tangible personal property acquired in conjunction with the [p]roject” over a period of ten years beginning “the first tax year for which the tangible personal property would first be taxable were that property not exempted from taxation.” (1999 Agreement ¶ 5; 2000 Agreement ¶ 5.)
The 1999 Agreement provided that Old Careo would invest in specified machinery. (1999 Agreement 3 ¶ 1. Accord Stip. 2 ¶ 2.) The agreement also stated Old Carco’s intent to invest approximately $150,000,000 “plus or minus 10% in the Project.” (1999 Agreement 3 ¶ 1.) Furthermore, the 1999 Agreement provided that Old Careo would “use reasonable efforts to retain 465 full-time equivalent positions at the Plant....” (1999 Agreement 3 ¶ 2. Accord Stip. 2 ¶ 2.)
The Parties stipulated that under the Tax Exemption Agreements, Old Careo would be entitled to the Exemption for a ten-year period and that the Exemption under the 1999 Agreement was first claimed in the year 2000 (Stip. 2 ¶¶ 2, 3), while the Exemption under the 2000 Agreement was first claimed in the year 2001 (id. 3 ¶ 8).
Alleged Breach Occurred as Result of Plant Closing
The Fiscal Officer argues in the Amended Response that the sale of the Plant and its subsequent closing in June 2010 constituted a fundamental failure of Old Careo to fulfill its obligations. (Amend. Resp. 3.) During the Hearing, however, counsel to the Fiscal Officer argued that the initial breach of the Tax Exemption Agreements was the failure to retain a specified number of employees (Tr. 32:22-23), noting that while the Tax Exemption Agreements required a combined number of 756 employees, as of the TIRC Annual Meeting on June 9, 2009, Old Careo had retained only 602 employees. (Tr. 32:24-33:2.) 18
Counsel to the Trust responded to the argument by objecting to the assertion that Old Careo was in breach of the Tax Exemption Agreements in June 2009 by arguing that the TIRC Meeting Documents reveal compliance at that time. (See Tr. 36:17-25.) The argument raised during the Hearing that the initial breach occurred in June 2009 due to the failure to maintain the specified number of employees.
Section 5709.631(B)(7) of the Ohio Code, which enumerates the provisions that must be contained in tax incentive agreements entered into by a county, provides that a county may terminate or modify the exemption if the other contracting party “materially fails to fulfill its obligations under [the] agreement,” and excludes from its provision the failure to retain the specified number of employees. Ohio Rev.Code § 5709.631(B)(7) (West 2010). This latter contingency is instead addressed in subsection (B)(12), which provides that should the number of employees fall below seventy-five percent of the number of employee positions estimated to be “created or retained” during any three-year period, the breaching party “shall repay” the amount of taxes previously exempted during that three-year period.
Id.
§ 5709.631(B)(12). A county could also “terminate or modify the exemptions from taxation granted under [the] agreement.”
Id.
The stated percentage and the three-year period, which are the thresholds for determining a material breach with respect to the retention of employees under the statute, are not included in the Tax Exemption Agreements. The omission of such thresholds evidences the Parties’ intent to treat the failure to retain the specified number of employees as a subsection (B)(7) default. By their terms, the Tax Exemption Agreements obligate Old Careo to use reasonable efforts to maintain the specified number of employees. There
Subject to certain exceptions such as “a waiver,” “legal excuse,” or “legal justification,” “a breach of contract is always a non-performance of duty under a contract.”
Tait v. N. Am. Equitable Life Assur. Co.,
Moreover, even if the burden is on Old Careo to show as an affirmative defense that it used reasonable efforts to retain the specified number of employees, the Court finds that Old Careo met that burden by pointing to the record in
In re Chrysler LLC,
Therefore, the alleged breach did not occur in June 2009 due to the failure to retain the specified number of employees because the Fiscal Officer did not demonstrate that Old Careo failed to use reasonable efforts to retain the specified number of employees. Rather, the alleged breach occurred—consistent with the Fiscal Officer’s original argument and the Summit County Council resolution—in June 2010 as a result of the Plant closing because that is the time the employees were terminated and the machinery and equipment were no longer in use.
Old Careo Has Fully Complied with the 1999 Agreement
Having established that the alleged breach occurred in June 2010 as a result of the Plant closing, the Court must ascertain when the 1999 Agreement expired. If the 1999 Agreement expired by its own terms prior to the alleged breach in June 2010, then Old Careo has fully complied with the 1999 Agreement.
The Trust argues that “the ten-year term of the 1999 Agreement expired on December 31, 2009.” (Amend. Obj. 11 ¶ 20.) The Fiscal Officer in the Amended Response counters that because the 1999 Agreement was effective in 2001, and because the Exemption was first claimed in 2001, the agreement would expire on December 31, 2010.
(See
Amend. Resp. 7.) However, attached as Exhibit Ten to the Amended Response is the personal property tax return of Old Careo for the 2007 taxable year, which followed the calendar year ending on December 31, 2007 (the “2007 Personal Property Tax Return”). The 2007 Personal Property Tax Return indicates that the agreement was effective
Therefore, the 1999 Agreement expired by its terms on December 31, 2009, prior to the alleged breach in June 2010. Because the 1999 Agreement was no longer in force prior to the Plant closing, Old Careo could not have breached the terms of the 1999 Agreement by closing the Plant after the agreement had expired.
“Change to Economic Conditions” Clause Excuses Default in Performance under 2000 Agreement
As noted, because Old Careo has fully complied with its obligations under the 1999 Agreement, the breach at issue relates only to the 2000 Agreement. The Fiscal Officer argues that the Exemption was first claimed under the 2000 Agreement in 2001 and that the 2000 Agreement expires at “the end of 2011.” (Amend. Resp. 7.) Contrary to the Fiscal Officer’s argument, however, the 2000 Agreement expired on December 31, 2010. The Parties stipulated that Old Careo “first claimed the ten-year tax exemption provided for under the 2000 Agreement in the year 2001” (Stip. 3 ¶ 8) and that the Exemption was for a ten-year period. (/¿.¶ 7.) Therefore, the 2000 Agreement was in force throughout the following years: 2001, its first year; 2002, its second year; 2003, its third year; 2004, its fourth year; 2005, its fifth year; 2006, its sixth year; 2007, its seventh year; 2008, its eighth year; 2009, its ninth year; and, would have expired on December 31, 2010, at the end of its tenth year. Hence, the Court will consider the arguments of the Parties as applying to the alleged breach of the 2000 Agreement in June 2010-ap-proximately six months before its expiration.
The Trust argues that the Debtors were not in breach of the Tax Exemption Agreements because paragraph 17(F) of the 1999 Agreement and paragraph 16(F) of the 2000 Agreement “expressly state that the [DJebtors cannot be considered in ... default of the contract[] as a result of circumstances beyond their reasonable control, including specifically changes to economic conditions.” (Tr. 29:12-15.) In support of this assertion, the Trust cites to the Kolka Affidavit and the Court’s findings of fact in
In re Chrysler LLC,
The Fiscal Officer argues two main points. First, the Fiscal Officer contends that a bankruptcy filing is not an excusing event under the Tax Exemption Agreements.
19
(Amend. Resp. 8.) Second, the
While Ohio law governs the 2000 Agreement, no reported Ohio decision interprets a force majeure clause similar to the one contained in the 2000 Agreement, which specifically excuses a default caused by circumstances outside of Old Carco’s “reasonable control,” including, but not limited to, a “change to economic conditions.”
21
A review of Ohio decisions interpreting force majeure clauses and considering impossibility of performance due to a change in economic conditions reveals that, as a general rule, financial difficulty does not excuse the defaulting party’s performance.
See, e.g., Stand Energy Corp. v. Cinergy Servs., Inc.,
Based on the terms of the 2000 Agreement, the “change to economic conditions” clause will only excuse Old Carco’s breach under that agreement if: (a) the Plant closing was caused by a change in economic conditions; and (b) such change in economic conditions was beyond Old Carco’s reasonable control.
In order to determine whether the Plant closing was caused by a “change to economic conditions,” the Court must first define the phrase. While no definition of a “change to economic conditions” is provided, either in the Tax Exemption Agreements or in legal resources, it is clear that the Financial Crisis constitutes such a change. As this Court previously determined in
In re Chrysler LLC,
The determination of whether the Financial Crisis, which the Court has identified as the event within the meaning of the “change to economic conditions” clause, ultimately caused the Plant closing may be determined by examining the events leading to the Debtors’ bankruptcy filing as well as the sale of the Plant and its subsequent closing. As noted below, the effects of the Financial Crisis on Old Careo led to the chapter 11 filing, the section 363 sale, the licensing of the Plant to New Chrysler, the expiration of the licensing agreement between New Chrysler and Old Careo, and, due to the substantial carrying costs associated with the Plant, its eventual court-approved sale. Therefore, the record is clear that the Plant closing was caused by a change in economic conditions.
Regarding the reasonable control element of the force majeure clause, the Trust points to both the Fiat Transaction Opinion and the Kolka Affidavit to demonstrate the existence of a change in economic conditions and the “extraordinary conditions” (Tr. 29:20) surrounding the filing of Old Carco’s bankruptcy and the sale of the Plant and its closing. According to the Trust, the events set forth in both the Fiat Transaction Opinion and the Kolka Affidavit support the argument that the bankruptcy filing and the alleged breach were beyond the reasonable control of Old Car-eo. (Tr. 29:23-30:7.) On the other hand, as noted, the Fiscal Officer argues that the Plant closing was not beyond Old Carco’s reasonable control (Amend. Resp. 8) and that how the Financial Crisis affected Old Careo was within its reasonable control. (See Tr. 34:22-35:4.)
In evaluating whether the “reasonable control” element of force majeure clauses has been met, courts consider two related notions:
First, a party may not affirmatively cause the event that prevents his performance. The rationale behind this requirement is obvious. If a contractor were able to escape his responsibilitiesmerely by causing an excusing event to occur, he would have no effective “obligation to perform.” [Citations omitted.] The second aspect of reasonable control is more subtle. Some courts will not allow a party to rely on an excusing event if he could have taken reasonable steps to prevent it. [Citations omitted.] The rationale behind this requirement is that the force majeure did not actually prevent performance if a party could reasonably have prevented the event from occurring. The party has prevented performance and, again, breached his good faith obligation to perform by failing to exercise reasonable diligence. [Citations omitted.]
Nissho-Iwai Co. v. Occidental Crude Sales, Inc.,
Regarding the first notion of “reasonable control,” Old Careo, as acknowledged by counsel to the Fiscal Officer, 22 did not actually cause the change in economic conditions.
Regarding the second notion of “reasonable control,” Old Careo must show its “diligence in taking reasonable steps to ensure performance.”
Nissho-Iwai Co.,
Two cases,
Hoosier
and
Chemetron,
inform the Court’s analysis; in determining whether the alleged breach in each case was excused, both cases (a) assessed the significance of the force majeure event, and (b) analyzed the conduct of the defendant surrounding such event. In
Hoosier,
the court considered the nature, scope, and predictability of the excusing event, the Financial Crisis.
Hoosier Energy Rural Elec. Coop. v. John Hancock Life Ins. Co.,
[T]he credit crisis facing the world’s economies in recent months is unprecedented and was not foretold by the world’s preeminent economic experts. The crisis certainly was not anticipated ... when the deal between [the parties] was being finalized. Restrospect will not assist [the non-breaching party] here, nor will an assertion that it was Hoosier Energy’s responsibility to prepare for and guard against any imaginable commercial calamity. After all, “foreseeable” is different from “conceivable.”
Id.
In
Chemetron,
the court observed that there was an inadequate showing that the excusing event — explosions of a compressor — was beyond the defendant’s reasonable control.
Chemetron Corp.,
Moreover, the defendant in
Chemetron
placed itself in a position of vulnerability to the force majeure event, rendering it unable to meet its supply obligations when the explosions occurred.
Id.
The defendant had removed from production liquid oxygen compressors in certain years, had taken out equipment for repairs, and had failed to replace such equipment, which actions reduced the defendant’s production capacity, and which affected the defendant’s ability to perform its obligations once the damaged compressor was placed out of service.
Id.
In contrast, the alleged breaching party in
Hoosier
did not place itself in a position of vulnerability to the force majeure event.
See Hoosier,
In 2007, prior to the Petition Date, Old Careo initiated an operational restructuring effort (the “Transformation Plan”) and pursued potential alliances with various automobile manufacturers.
In re Chrysler,
In 2007 and 2008, with the goal of increasing its size and ensuring a more global presence, Old Careo negotiated and pur
“In the fall of 2008, a global credit crisis affecting the liquidity markets impacted the availability of loans both to dealers and consumers, resulting in the erosion of consumer confidence and a sharp drop in vehicle sales.”
In re Chrysler LLC,
In late 2008, Old Careo, along with other entities, turned to the government to obtain new financing and, Old Careo, in particular, applied for an aggregate amount of $7 billion.
In re Chrysler LLC,
The TARP Loan Agreement, in which the U.S. Treasury, as lender, provided Old Careo with a three-year loan of four billion dollars for general corporate and working capital purposes, required Old Careo to: (a)submit a Viability Plan demonstrating its ability to achieve and sustain, inter alia, long-term viability, energy efficiency, and competitiveness in the U.S. marketplace; (b) include within such Viability Plan its ability to repay the TARP Financing; and (c) subject to a March 31, 2009 deadline, submit a written certification and report detailing the progress made in implementing the Viability Plan. (Kolka Aff. ¶¶ 68-69.)
Accord In re Chrysler LLC,
On February 17, 2009, Old Careo presented its February 2009 Submission to the Treasury, which provided for three possible scenarios: (a) the Stand-Alone Viability Plan; (b) the Alliance Viability Plan; and (c) an orderly wind-down plan for Old Carco’s operations if neither the Stand-Alone Viability Plan nor the Alliance Viability Plan could be achieved.
In re Chrysler LLC,
On March 30, 2009, the President’s Auto Task Force, which was put in place to evaluate Old Carco’s Viability Plan, advised Old Careo that it could emerge as a viable entity with Fiat as a strategic partner.
In re Chrysler LLC,
In addition, Old Careo negotiated with the U.S. Treasury for financing relating to the sale of its assets.
In re Chrysler LLC,
The record shows that, for at least two years prior to the Financial Crisis, and immediately thereafter, Old Careo took steps to address its loss in market share and any structural problems it may have had. In response to the Financial Crisis, which severely affected Old Carco’s liquidity and required it to obtain emergency financing from the U.S. Treasury, Old Car-eo actively pursued strategic alliances. This culminated in the Fiat Transaction and the section 363 sale. The alternatives explored and the efforts undertaken by Old Careo to remain viable including, inter alia, the Stand-Alone Viability Plan, the Alliance Viability Plan, and the chapter 11 filing to implement the Fiat Transaction, are sufficient to demonstrate that Old Car-eo exerted reasonable efforts to remain a viable business and to perform its obligations.
Further, the determination by New Chrysler not to continue operations at the Plant was simply a business decision of New Chrysler based on its anticipated production needs. The substantial carrying costs associated with the Plant would have rendered Old Carco’s retention of the Plant impossible, or at the least, unreasonably expensive. In the Plant Sale Order, the Court explained the primary reason for the sale of the Plant: “[S]ubstantial carrying costs for property taxes, utilities, securityU and other expenses associated with the Property” would revert to the Debtors upon the expiration of the licensing agreement, and as a result, the Debtors would have to bear such substantial carrying costs.
{See
Plant Sale Order 5
Moreover, a consideration of the state of the automotive industry shows that two out of the three major U.S. automobile manufacturers had filed for bankruptcy. (See e.g., In re Motors Liquidation Co., Case No. 09-50026, Vol. Pet., June 1, 2009, ECF No. 1.) In order to establish that Old Careo was in control of how it was positioned upon the occurrence of the Financial Crisis, the Fiscal Officer points to the fact that while Old Careo had filed for bankruptcy, Ford did not. (See Amend. Resp. 8.) The Fiscal Officer’s argument regarding Ford is simple: Ford weathered the crisis without having to sell its business; therefore, in spite of the change in economic circumstances, Old Careo, by better preparing itself, would have been able to meet its obligations. Thus, Old Carco’s inability to fulfill its obligation under the agreements was within its reasonable control and was not excused under the force majeure clause. The Fiscal Officer’s argument suggests that all companies within an industry should be able to respond to changes to economic conditions in the same manner. And to the extent one entity in an industry could meet its contractual obligations following the occurrence of a change in economic circumstances, all other entities in that industry would not be able to invoke as a defense a force majeure provision with a “change to economic conditions” clause. This proposition is not supported by any analyses, case law, principle of law, or any other legal underpinning. Moreover, on these facts, and as noted, where two out of the three major U.S. automobile manufacturers have filed for bankruptcy, the Fiscal Officer sets as the standard the financial condition of Ford versus the financial condition of Old Careo and General Motors Corporation (“GM”). 25 And while the Fiscal Officer generally points to the bad decisions of Old Carco’s management (see Amend. Resp. 8; Tr. 34:22-25), he does not point to a particular management decision or series of decisions that caused Old Carco’s vulnerability to the Financial Crisis, ultimately leading to the closing of the Plant. Neither did the Fiscal Officer reference decisions of Old Careo that may have differed from business decisions made by GM and Ford.
Further, the Fiscal Officer’s reference to Ford assumes, had Ford had the same contract as Old Careo, that Ford would have continued to perform under such contract as opposed to seeking relief under the “change to economic conditions” clause if it determined that the Plant was no longer needed. What Ford may have done under similar circumstances is pure speculation and provides no evidentiary value in determining whether the “change to economic conditions” clause in the force maj-eure provision of the contract excuses performance.
Therefore, the record supports the finding that: (a) the Plant closing was caused by a change in economic conditions; and (b) such change in economic conditions was beyond Old Carco’s control, Old Careo having demonstrated that it exerted reasonable efforts to remain a viable business, perform its obligations, and retain the Plant. The Court finds that the ability of
Old Careo Has Substantially Complied with Its Obligations Under the 2000 Agreement
Even if Old Careo’s alleged breach of the 2000 Agreement were not excused, the Court finds that the alleged breach is non-material in that Old Careo has substantially complied with its obligations under that agreement. Thus, under this alternative, Summit County would only be entitled to damages corresponding to the period of the Exemption subsequent to the alleged breach. However, because Summit County had completely phased-out its personal property taxes prior to the Plant closing, no amount would be due corresponding to the remaining term of the 2000 Agreement. 27
Under the substantial performance doctrine, “mere nominal, trifling, or technical departures are not sufficient to break a contract, and ... slight departures, omissions and inadvertences should be disregarded.”
Kichler’s, Inc. v. Persinger,
where a contract requires numerous performances by one or more of its parties, a party’s breach of a single term thereof does not discharge the non-breaching party’s obligations under the remainder of the contract unless performance of that single term is essential to the purpose of the agreement.
O’Brien v. Ohio State Univ.,
No. 06AP-946,
Under the 2000 Agreement, Old Careo promised “to invest approximately $127,200,000 more in certain machinery and equipment to be used at the ... [PJlant and to use reasonable efforts to maintain 291 full-time employment positions at the ... Plant....” (Stip. 2 ¶ 7.)
The TIRC Meeting Documents demonstrate that Old Careo has substantially performed under the 2000 Agreement. (See Mins, of TIRC Mtg. 4.) As of the date of the TIRC Annual Meeting, Old Careo had invested $139,265,597 in tangible personal property. (Id.) Thus, under the 2000 Agreement, Old Careo had made approximately 122% of the required capital investment. 28 With respect to Old Carco’s compliance with its obligation to retain 291 full-time employees, as of calendar year 2008, Old Careo reported retaining 1,665 full-time employees without itemizing which employees corresponded to either of the Tax Exemption Agreements. (Id.) This shows an excess of 909 employees in total over the combined requirement of 756 as of the 2008 calendar year. As of the date of the TIRC Annual Meeting, however, the number of employees retained dropped to 602, and again, Old Careo did not itemize which number of employees corresponded to either of the Tax Exemption Agreements. (Id. at 5.)
A party’s material breach of a contract “defeats the essential purpose of the contract or makes it impossible for the other party to perform.”
O’Brien,
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform ... will suffer forfeiture;
(d) the likelihood that the party failing to perform ... will cure his failure, taking account of all the circumstances including any reasonable [adequate] assurances; [and]
(e) the extent to which the behavior of the party failing to perform ... comports with standards of good faith and fair dealing.
O’Brien,
First, regarding the extent to which Summit County would be deprived of its reasonably expected benefits, Summit County expected Old Careo to invest in specified machinery that would meet certain threshold amounts, as well as to “use reasonable efforts to maintain” (Stip. 2 ¶ 7) a threshold number of full-time employees under the 2000 Agreement. Moreover, Summit County expected Old Careo to comply -with these obligations for ten years. In exchange for these benefits, Summit County granted Old Careo the Exemption. As noted, the Court finds that, consistent with the terms of the 2000 Agreement and the Stipulation, the 2000 Agreement expired on December 31, 2010, rather than December 31, 2011. Therefore, Old Careo had complied with the 2000 Agreement for at least nine-and-a-half years of the ten-year term. Hence, Summit County has received at least ninety-five percent of its reasonably expected benefits under the 2000 Agreement. Thus, the prong that considers the extent to which Summit County would be deprived of its reasonably expected benefits favors Old Careo.
Second, regarding the extent to which Old Careo could compensate Summit County for failing to perform under the 2000 Agreement, the injury to Summit County is economic and quantifiable. If the alleged injury is non-economic, then the non-breaching party cannot be fully compensated, and the breach may be characterized as material. See O’Brien, 2007-Ohio^833, at ¶ 71 (“[B]ecause [defendant] OSU’s injuries were mostly non-economic, it was not possible to fully compensate them. Although this factor weighs in favor of OSU, the fact that the actual injuries attributed to [plaintiff] O’Brien’s conduct were insubstantial de-emphasizes the need to be fully compensated.”). The injured party’s difficulty in proving with “sufficient certainty” the amount of the loss affects the adequacy of compensation. Restatement (Second) of Contracts § 241 (1981).
Here, the economic damages as a result of the breach would equal the tax savings corresponding to the remaining six months of the Exemption subsequent to the June 2010 breach. However, since the relevant personal property tax was phased-out “as of, and for, tax year 2009” (Stip. 4 ¶ 19), there would be no amount due for the remaining period of the 2000 Agreement. 29
Moreover, although the economic damage as a result of the failure to retain the 291 employees was not quantified by the Parties, such damage is quantifiable. The 2000 Agreement provides for an estimated yearly payroll projection of $22,290,000.60 attributable to the retained positions at the Plant. (2000 Agreement 3 ¶ 2.) While it is unclear whether the estimated payroll projection refers to the payroll of the 291 employees that Old Careo promised to exert reasonable efforts to retain or to the combined payroll of the current employees and the 291 employees
(see id.),
it is clear that the amount of the loss resulting from the unemployment of the 291 employees may be established with sufficient certainty.
30
Further, as noted, New Chrysler
Third, regarding the extent to which Old Careo, the party failing to perform, would suffer forfeiture if such failure to perform were treated as material, Old Careo would suffer substantial forfeiture while Summit County would receive a windfall. A finding that the party failing to perform would suffer substantial forfeiture should its breach be regarded as material supports the conclusion that the breach of the nonperforming party is not material.
See Waste Mgmt., Inc. v. Rice Danis Indus.,
Fourth, regarding the likelihood of Old Careo curing its alleged breach of the 2000 Agreement, taking into account all of the circumstances and Old Carco’s bankruptcy filing, there is no possibility of a cure because the Plant has closed and the positions have been eliminated. The likelihood of a cure supports a finding that the breach is not material. Restatement (Second) of Contracts § 241 (1981) (“The fact that the injured party already has some security for the other party’s performance argues against a determination that the failure is material.”). This factor weighs in favor of Summit County. However, as noted, when the alleged breach occurred in June 2010, Summit County had already completely phased-out its personal property tax. Under this reasoning, there would be no amount due for the remaining period of the 2000 Agreement. 34
Moreover, any economic injury due to the termination of the employees was offset by the amounts offered to the employees as part of their special benefits package. This finding diminishes the significance of the fourth prong in light of the circumstances and the Court accords the fourth prong less weight.
Fifth, regarding the extent to which the behavior of Old Careo comports with standards of good faith and fair dealing, and bearing in mind that “there is an implied duty of good faith in every contract”
O’Brien,
Therefore, having weighed the factors under the “five-prong test” for the existence of a material breach, the Court concludes that any alleged breach of the 2000 Agreement is non-material in that Old Careo has substantially complied with its obligations.
Ordinarily, contract damages are based on the injured party’s “expectation interest” and are aimed at “giv[ing] him the benefit of his bargain by awarding him a sum of money that will, to the extent possible, put him in as good a position as he would have been in had the contract been performed.”
Restatement (Second) of Contracts
§ 347 (1981). Under the doctrine of substantial compliance, “the substantially performing party may be required to pay damages to compensate the other party for the incomplete performance.” 6 Hon. Michael M. Baylson et al.,
Bus. & Com. Litig. Fed. Cts.
§ 68:27 (Robert L. Haig, ed., 2d ed. 2010) (citing 17A AmJur.2d
Contracts
§§ 611-620). The doctrine “will support a recovery of the contract price less allowance for defects in performance or damages for failure to
The 2000 Agreement Claim Is Not a Tax under Section 507(a)(8)
The Trust argues that, even if the Court were to find that the Claims are valid, the Claims are general unsecured non-priority claims because they are not taxes under the clear terms of the Tax Exemption Agreements and do not fall under section 507(a)(8) of the Bankruptcy Code. The Trust argues that the Claims are not taxes because the Tax Exemption Agreements only refer to a repayment of the amount of taxes, rather than specifically characterizing the amounts as taxes.
The Trust also argues that, had the Tax Exemption Agreements included language imposing a lien on the amount of abated tax, as was authorized under the enabling statute, such lien would be “a generic mortgage interest in real property or a security interest in goods, not a tax lien.” (Amend. Obj. 16-17 ¶ 31; Reply 9 ¶ 13 n. 7.) This contention therefore supports the argument that any claim under the agreements is for damages and is not a tax.
The Fiscal Officer counters that the Claims are taxes because, inter alia, as with any other personal property tax, the amounts collected would be used for public purposes and are, therefore, entitled to priority status under section 507(a)(8) of the Bankruptcy Code. Additionally, the Fiscal Officer argues that the fact that the Tax Exemption Agreements do not provide for Summit County to receive a lien to secure repayment of the taxes does not change the nature of the Claims from a tax to a damage claim.
There is no dispute that, absent the Tax Exemption Agreements, the amounts due under the Personal Property Tax Law would be characterized as a tax. The issue is whether damages flowing from a material breach of a tax exemption agreement based on the amount of taxes previously exempted should be characterized as a tax and subject to priority tax status under section 507(a)(8) of the Bankruptcy Code.
“The role of courts in examining contracts is to ascertain the intent of the parties.”
City of St. Marys v. Auglaize Cnty. Bd. of Comm’rs,
As correctly pointed out by the Trust, the Tax Exemption Agreements “sound[ ] in contract” (Tr. 32:5) because, as provided under paragraph 10 of the Tax Exemption Agreements, the repayment of the amount of taxes would be a consequence of any potential material breach. The Tax Exemption Agreements themselves do not specifically characterize the repayment of the amount of taxes as a tax, nor has the Fiscal Officer provided any statutory authority for labeling the amount of taxes previously exempt as a tax, other than concluding that the agreements “speak[] of taxes.” (Amend. Resp. 9.) Because the Tax Exemption Agreements do not characterize the repayment of the amount of taxes as a tax, and because the repayment of such amount would be a consequence of any potential material breach, the interpretation yielding a rational and probable result is that such amount is properly characterized as a contract damage claim.
Further, the legislative grant of tax exemptions, if containing the essential elements of a contract, is a contract within the purview of the contract clause of the Federal Constitution and of similar provisions in state constitutions.
See New Jersey v. Wilson,
Regarding the lien issue, the Court notes that the Fiscal Officer misconstrues the Trust’s argument. The Trust’s argument is not that a lien should be imposed, but that, had a lien actually been imposed, an examination of the enabling statute reveals that such lien would not be a tax lien but would operate in the same manner as a security interest in goods. According to the Trust, Summit County’s inability to secure the Claims with tax liens supports the fact that the Claims are not taxes. This assertion is not addressed by the Fiscal Officer. Moreover, such assertion supports the conclusion that if the Ohio Legislature had considered the repayment of the amount of taxes in the event of a material breach as a tax itself, then the Ohio Legislature would have enabled a county to provide for the benefits of a tax lien to secure the repayment. On the contrary, rather than providing the protection of a tax lien, the Ohio Legislature, in the enabling statute, provided the protection of a commercial lien to secure the repayment of the amount of taxes.
The Court is persuaded by the Trust’s argument. Where contract language is susceptible of two interpretations, that interpretation “which makes a rational and probable agreement must be preferred.”
Graham,
There are substantial differences between a tax lien imposed under chapter 5719 of title 57 of the Ohio Code (“Chapter 5719”) and a lien imposed under chapter 1309 of title 13 of the Ohio Code (“Chapter 1309”).
36
Under Chapter 5719, taxes lev
Chapter 5719 also empowers the county treasurer, when the taxpayer’s personal property taxes are past due and unpaid, to seize or distrain the goods and chattels of such taxpayer that are located in the county and to sell such goods and chattels, subject to specific publication requirements. Ohio Rev.Code Ann. § 5719.081 (West 2011). If the county treasurer cannot collect the personal property taxes by distraint, section 5719.082 provides for a remedy in which the county treasurer may have the court of common pleas of the respective county enter a “rule” that has the force and effect of a judgment against the taxpayer for payment of such taxes. Id. § 5719.082. Concurrently, the county treasurer must bring a civil action against the taxpayer for the recovery of unpaid personal property taxes, and such remedy is in addition to any other remedy provided by law for the collection of taxes, such as entering into a delinquent tax contract with the taxpayer for payment of the full amount of taxes in installments. Id. §§ 5719.05, 5719.08.
Chapter 1309 on secured transactions, which adopts the provisions of Revised Article 9 of the Uniform Commercial Code, provides for (i) the attachment of the security interest to the collateral,
id.
§ 1309.203, in contrast to a lien on the real property of the taxpayer, in the case of a tax lien;
38
(ii) the perfection of such security interest in the collateral, which generally requires the filing of a financing statement,
id.
§ 1309.310(A), unless, inter alia, the secured party has taken possession of the collateral,
see id.
§ 1309.313(A); and (iii) the rights of a secured party after default,
id.
§§ 1309.601-.628. Among other remedies, the secured party may, after default: (a) “reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest ... by any available judicial procedure ...”
id.
§ 1309.601(A)(1); (b) “take possession of the collateral” or “render equipment unusable and dispose of [such] collateral on a debtor’s premises”
id.
§ 1309.609(A), both judicially and extra-judicially, provided that, in the latter case, the secured creditor “acts without breach of the peace”
id.
§ 1309.609(B); and (c) sell, lease, license, or otherwise dispose of collateral,
id.
§ 1309.610(A), in a
Further, while the sections relating to the 2000 Agreement are logically contained in title 57 on Taxation of the Ohio Code, section 5709.631(B)(12) language relating to the lien that could be imposed on the exempt property specifically refers to chapter 1309, which is contained in title 13 of the Ohio Code on Commercial Transactions. This fact evidences the intent of the Ohio Legislature, with respect to the imposition of a lien, to provide for remedies under the Ohio Uniform Commercial Code rather than under title 57 on Taxation.
The substantial differences between the remedies available to the taxing authority for the collection of unpaid taxes under Chapter 5719 and those available to the secured creditor with a security interest in goods under Chapter 1309 support the assertion that, had the Ohio Legislature considered the repayment of the amount of exempted taxes as a tax, then the Ohio Legislature would have granted the local authority the power to accord broader rights to the county treasurer, such as those provided in Chapter 5719, including, inter alia, the power to impose a blanket notice type line, the power to collect personal property taxes by distraint, and the power to bring a civil action for the recovery of unpaid personal property taxes. However, section 5709.631(B)(12) of the Ohio Code permits the inclusion of a provision for “the repayment of the amount of taxes that would have been payable had the property not been exempted from taxation under [the 2000 Agreement,]” in the event of a material breach, and empowers local authority to secure repayment with a lien in the character of a security interest in goods, rather than a tax lien, id. § 5709.631(B)(12). The enactment of section 5709.631(B)(12) demonstrates the intent of the Ohio Legislature to treat any repayment of the amount subject of the Exemption as a contract damage claim rather than a tax claim.
To support the argument that the Claims are taxes, the Fiscal Officer emphasizes that the repayment of the previously exempted taxes would be used for public purposes. However, the Fiscal Officer overstates the analysis when he argues that any amount collected that is used as a source for payment of public expenses is a tax. As discussed below, the Court agrees that while it is correct to state that taxes are collected for public purposes, it is incorrect to state that all funds collected for public purposes are necessarily taxes.
“Whether an obligation is a ‘tax’ for bankruptcy purposes is a question of federal law determined independently of whether or not it is denominated as such in the statute from which it arises.”
City of New York v. Feiring,
In
Suburban I,
the Sixth Circuit discussed the four elements (the “Lorber Elements”) set forth in a Ninth Circuit case.
Suburban I,
(a) An involuntary pecuniary burden, regardless of name, laid upon individuals or property;
(b) Imposed by, or under the authority of the legislature;
(c) For public purposes, including the purposes of defraying expenses of government or undertakings authorized by it; [and]
(d) Under the police or taxing power of the state.
Suburban I
criticized the Lorber Elements, and the “public purposes” prong, in particular, as being too broad.
See Suburban I,
After the
Suburban
cases, the Supreme Court had occasion to address the issue of tax priority further in
United States v. Reorganized CF & I Fabricators of Utah, Inc.,
Thus, the 2000 Agreement Claim is based on a breach of contract provision that constitutes a simple damage claim and would not be entitled to priority under the Bankruptcy Code. 39
V. Conclusion
The alleged breach occurred in June 2010 as a result of the closing of the Plant. The 1999 Agreement expired by its terms prior to the alleged breach in June 2010. Because there was no contract in force at the time of the alleged breach, the 1999 Agreement Claim should be disallowed and expunged. However, if the 1999 Agreement were found to have expired on December 31, 2010, the Court’s findings with respect to the 2000 Agreement would be wholly applicable to the 1999 Agreement. With respect to the 2000 Agreement, the
“change to economic conditions” clause in that agreement excused performance by Old Careo; accordingly, the 2000 Agreement Claim should also be disallowed and expunged. Alternatively, even if Old Car-co’s alleged breach of the 2000 Agreement were not excused, the Court finds that the alleged breach is non-material in that Old Careo has substantially complied with its obligations under that agreement. Thus, under this alternative, Summit County would be entitled only to damages corresponding to the period of the Exemption subsequent to the alleged breach. However, because Summit County had completely phased-out its personal property taxes prior to the alleged breach in June 2010, no amount would be due corresponding to the remaining term of the 2000 Agreement. 40 Finally, even if the Court were to allow the 2000 Agreement Claim, in whole or in part, the claim would not be a tax and, therefore, would not be entitled to priority under section 507(a)(8) of the Bankruptcy Code. The claim would instead be reclassified as a general unsecured claim. 41
For the foregoing reasons, the Trust’s Amended Objection is granted. Counsel for the Trust is to settle an order consistent with this opinion.
Notes
. The 1999 Agreement is defined infra p. 4.
. The 1999 Agreement Claim is defined infra p. 11.
. The 2000 Agreement is defined infra p. 6.
. The 2000 Agreement Claim is defined infra p. 11.
. An alternative method of calculating the amount of damages would be to apply the percentage of the contract that remained against the total amount of taxes exempted. Here, the remaining six months of the ten-year (120-month) contract term is five percent. Five percent of $4,223,862, the 2000 Agreement Claim, is $211,193.10.
. General unsecured creditors are not entitled to a distribution under the Plan (as defined infra note 13) unless certain conditions are satisfied. (See Plan 39 § V(E)(3)(a) ("Unless the Class 3A Voting Condition is satisfied and the Available Net Daimler Proceeds exceed the Minimum Distribution Threshold, no distributions will be made to holders of Allowed General Unsecured Claims.”).) Therefore, if the 2000 Agreement Claim were reclassified as an unsecured claim, Summit County would not receive anything on account of its claim unless such conditions were satisfied. This would apply with equal force to the 1999 Agreement Claim if it were found to be valid.
. For the sake of convenience, this opinion references the name "Old Careo” for both the prepetition and postpetition Chrysler LLC entity.
. Based on the TIRC Meeting Documents (as defined infra p. 9), which the Parties stipulated they could rely upon and which were admissible evidence, the Parties, prior to entering into the tax exemption agreements at issue, had entered into tax exemption agreements in earlier years. Specifically, four agreements had previously been entered into by the Parties since 1993, and Old Careo had received approximately $14 million in "forgone taxes.” (Mins, of TIRC Mtg. 4-5.)
. At the hearing, counsel to the Trust (as defined infra note 13) observed that the tax exemption agreements do not explicitly state when Old Careo must exert "reasonable efforts” to retain the specified number of employees, nor do the tax exemption agreements state the length of time the employees must be retained. (Amend. Obj. Claim Hr’g Tr. 28:13-16, Sept. 16, 2010.) However, given that the Tax Exemption Agreements reference estimated payroll projections relating to these employee positions on a yearly basis (see 1999 Agreement 4 ¶ 2; 2000 Agreement 3 ¶ 2), it appears that the obligation to exert reasonable efforts to retain the specified number of employees would also be on a yearly basis.
. Regarding the 1999 Agreement, the TIRC also recommended that Summit County "[cjontinue the ... Agreement until a violation would occur such as machinery leaving the building, and then a special TIRC meeting [would] be called....” (Mins, of TIRC Mtg. 4.)
. The Parties did not request an evidentiary hearing. The facts considered by the Court are those facts contained in the Stipulation and the TIRC Meeting Documents, neither of which the Parties place in dispute and which they agree are admissible evidence. Further, in ruling on the issues raised, the Court also considered the facts contained in the Fiat Transaction Opinion and the Kolka Affidavit, as defined infra p. 16. The Fiscal Officer does not dispute the facts in the Fiat Transaction Opinion and the Kolka Affidavit, which are referenced in the Amended Objection and during the Hearing. Nor are there any assertions of fact by the Fiscal Officer that are inconsistent with any of the facts found by the Court in the Fiat Transaction Opinion. However, the Fiscal Officer does dispute the Trust's conclusion that the consequences of the “change to economic conditions” were beyond the reasonable control of Old Careo.
. On April 23, 2010, the Court entered the Order Confirming Second Amended Joint Plan of Liquidation of Debtors and Debtors in Possession, as Modified (ECF No. 6875), to which was attached as Annex I the Second Amended Joint Plan of Liquidation of Debtors and Debtors in Possession, as Modified, and which order was further modified by order of the Court dated April 28, 2010 (ECF No. 6923) (together with all exhibits, the "Plan”). Under the Plan, Old Careo Liquidation Trust, as successor in interest to the Debtors, has the authority to, among other things, "review and/or reconcile Claims, object to Claims not Allowed prior to the Effective Date and resolve such objections as set forth in Article VI....” (Plan 20 § IV(B)(3)(a)(viii)); and "to File, settle, compromise, withdraw or litigate to judgment objections to Claims.... ” {Id. at 42 § VI(B)(2)(b).)
. The Trust refers to the amount of alleged damages under the 2000 Agreement as $3,736,928 in a later section of the Amended Objection. (See Amend. Obj. 11 ¶21.) However, as indicated on page 11 of this opinion, the amount of alleged damages under the 2000 Agreement, as per the proof of claim, was $4,223,862. The amount of $3,736,928 may refer to the 1999 Agreement Claim because that amount corresponds to "[t]he aggregate realized personal property tax savings to Old Careo under the 1999 Agreement....” (Stip. 2 ¶ 4.)
. As the Court discusses in greater detail infra pp. 25-26, the 1999 Agreement expired by its terms prior to the Plant closing, which was the alleged breach. Therefore, the 1999 Agreement Claim should be disallowed and expunged. Hence, the arguments of the Fiscal Officer relating to both Tax Exemption Agreements are relevant only to the 2000 Agreement. If, however, the 1999 Agreement were found to have expired on December 31, 2010, the Court's findings and legal conclusions with respect to the 2000 Agreement would be applicable to the 1999 Agreement.
. During the Hearing, counsel to the Fiscal Officer presented an alternative to the initial argument asserting priority status to the Claims under section 507(a)(8). Counsel to the Fiscal Officer argued that the Claims are entitled to priority under section 507(c), which accords priority status to erroneous refunds of a governmental unit. (Tr. 36:7-11.) Although the argument was belatedly raised and is untimely, counsel to the Trust did not object to its introduction during the Hearing. Therefore, the Court will consider the argument. However, having considered the argument, the Court finds that counsel to the Fiscal Officer provided no basis for the argument that amounts based on a previously granted tax exemption, and which amounts later become the basis for claims under the circumstances governing this case, should be deemed a refund erroneously granted.
. The Fiscal Officer argues in the Amended Response that because Old Careo paid the annual administrative fees relating to the year 2009 on February 1, 2010, such fact demonstrates that Old Careo did not consider the Tax Exemption Agreements valueless as of that date. (Amend. Resp. 5.) In the Reply, the Trust argues that: (a) New Chrysler, and not Old Careo, paid the administrative fees; (b) the fact that New Chrysler voluntarily paid the administrative fees is irrelevant to the issue of the expiration dates of the Tax Exemption Agreements; and (c) to the extent that the voluntary payment by New Chrysler is relevant, the amount paid for each agreement, which was the minimum permissible fee, shows that Old Careo was receiving a de minimus benefit from the agreements, if at all. (Reply 3-4 ¶ 4.)
First, the Fiscal Officer does not dispute that the Tax Exemption Agreements were considered extant as of the TIRC Annual Meeting on June 9, 2009 and the Summit County Council resolution on August 24, 2009. Second, the payment of the administrative fees for the 2009 taxable year does not support a finding that the 1999 Agreement was extant in 2010. It simply shows an amount was due under that agreement for the year 2009 and was paid in 2010. Thus, the payment in 2010 for the 2009 taxable year is not inconsistent with the Court’s finding that the 1999 Agreement remained in effect until December 31, 2009.
. As a preliminary matter, the Court notes that the argument raised by the Fiscal Officer during the Hearing that the initial breach occurred in June 2009 was untimely. However, counsel to the Trust did not object to the Court’s consideration of the issue. Therefore, the Court will consider the argument.
. The Fiscal Officer misconstrues the Trust’s argument by asserting that a bankruptcy filing is not an excusing event. The Trust does not argue that Old Carco's filing is an excus
. "MS. VANVOROUS: ... I guess our point is that a lot of how those economic conditions affected various car companies was determined on [sic ] the way those car companies were run, and had been set up. And Chrysler obviously could not sustain itself during those economic conditions, and they needed to file bankruptcy. Other companies did not. Clearly, that’s within the control of the company as to how those economic conditions affected them." (Emphasis supplied.)
. As noted, paragraph 16(F) of the 2000 Agreement provides:
[Old Careo] shall not be considered ... in default in the performance of its obligations under this agreement as a result of any cause beyond its reasonable control, including but not limited to severe and unusual weather, acts of God, or explosion, riot, acts of civil disobedience or sabotage, change to economic conditions and productivity and technological changes, power failures or shortages, restraint by court order or order of public authority, action or omission by any government agency, labor strikes or other labor disturbances.
(2000 Agreement 7-8 V 16(F).)
. "THE COURT: So you think Chrysler’s responsible for the slowdown in the economy itself?
MS. VANVOROUS: No, your Honor." (Tr. 35:7-9.)
. The Parties entered into the Tax Exemption Agreements in 1999 and 2000 when Old Careo, as well as other U.S. automobile manufacturers, were already experiencing a decline in market share. For example, "sizable legacy costs” was one of the factors that contributed to the gradual loss in market share of Old Careo. (See Kolka Aff. 18 ¶ 39.)
. Capitalized terms otherwise undefined have the same meaning as provided under the Fiat Transaction Opinion and the Kolka Affidavit.
. Numerous supply companies within the industry also filed for bankruptcy protection during the years at issue. See e.g., Stephen Taub, Dana Joins Auto-Parts Bankruptcy List, CFO (Mar. 3, 2006), http://www.cfo.com/ article. cfm/5 5 9163 8?f=related.
. There is no doubt that many decision and policy makers inside and outside of the U.S. automobile industry share the blame for the decades-long deterioration of the industry’s dominance in the U.S. car market. See e.g., 4 Foreign Carmakers Post U.S. Sales Gains; Domestic Companies Show June Declines, Chi. Trib., July 4, 2000, at N3. However, the issue before the Court focuses on the reasonable control of Old Careo within the later stages of that deterioration while efforts were underway to address Old Carco's loss in market share. This decades-long deterioration does not make the change in economic circumstances such as the Financial Crisis an event over which Old Careo had reasonable control.
. See supra note 6 for an alternative method of calculating the amount of damages by applying the percentage of the contract that remained against the total amount of taxes exempted. Moreover, even if an amount were due under that alternative, the Court would still reclassify the 2000 Agreement Claim as a general unsecured claim under the final alternative argument discussed infra pp. 50-61.
. The actual investment of $139,265,597 divided by $114,480,000, the low estimate of the required capital investment of $127,200,000, equals 122%.
. See supra notes 6 and 27.
. If the estimated payroll projection of $22,290,000.60 refers to the 291 employees, then each employee was estimated to receive $76,597.94 annually. Given these numbers, the economic damage resulting from the failure to retain the aforementioned employees for the remaining six months of the 2000 Agreement is $38,298.97, which is half of each employee's annual salary. However, it is not clear whether the $22,290,000.60 pro
. The Court presumes that majority of the employees in the Plant were union-represented employees.
. See supra note 30.
. The administrative fee would not have been payable absent an exemption. (See 2000 Agreement 4 ¶ 6; Stip. 4 ¶ 20.)
. See supra notes 6 and 27.
. See supra notes 6 and 27.
. Certain sections of Chapter 1309 remained effective only until June 29, 2011. However, during the relevant period at issue, the above-
. “Tax duplicates” are prepared by the county auditor and are duplicates of the tax list containing a list of the general personal and classified property taxes that remain unpaid. See Ohio Rev.Code Ann. § 5719.04(A) (West 2011).
. Attachment also gives the secured party the rights to proceeds of the collateral upon the sale or disposition of such collateral as provided in section 1309.315. Ohio Rev.Code Ann. § 1309.203(F) (West 2011). Section 1309.315 on the secured party's rights on the disposition of the collateral and in the proceeds provides that the security interest: (i) continues in collateral notwithstanding sale or disposition of such collateral unless the secured party authorizes sale or disposition free of such security interest; and (ii) attaches to the identifiable proceeds of the collateral. Id. § 1309.315(A)(1), (2).
.The Trust further argues that, if the Claims were characterized as property taxes instead of damages based on a breach of contract, priority treatment only applies to the property tax "last payable without penalty after one year before the date of the filing of the petition[.]” (Reply 9-10 ¶ 14 (quoting 11 U.S.C. § 507(a)(8)(B).)) The Fiscal Officer does not respond to this issue either in the Amended Response or during the Hearing. Because the Court finds that the 2000 Agreement Claim is not a tax under the final alternative argument, the Court does not reach the issue of which portion of the property tax is entitled to priority tax status.
. See supra note 6.
. See supra note 7.