Washington, Employment Security Department v. Hovan, Inc. (In re Hovan, Inc.)

O’SCANNLAIN, Circuit Judge:

We must decide whether certain state tax obligations are punitive or compensatory for the purpose of determining the priority of bankruptcy claims.

I

The State of Washington appeals the district court’s affirmance of a bankruptcy court’s order, which determined that Washington’s penalty assessments for state tax obligations were general unsecured claims in the Chapter 11 bankruptcy of debtor Hovan, Inc. Washington contends that the assessments deserve priority status because they are compensatory rather than punitive.

Hovan filed a petition for relief under Chapter 11…