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UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
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No. 99-1399
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Keywords: res judicata, preclusive, tax claim, settlement
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August 31, 2000
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HOLYWELL CORPORATION & SUBSIDIARIES, PLAINTIFF-APPELLANT,
V.
UNITED STATES OF AMERICA, DEFENDANT-APPELLEE.
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Appeal from the United States District Court for the Western District
of Virginia, at Charlottesville. James C. Turk, District Judge.
(CA-97-131-3-C)
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Counsel Argued: Robert Metcalfe Musselman, Robert M. Musselman &
Associates, Charlottesville, Virginia, for Appellant. Robert William
Metzler, Tax Division, United States Department OF Justice, Washington,
D.C., for Appellee. ON Brief: Loretta C. Argrett, Assistant Attorney
General, Robert P. Crouch, Jr., United States Attorney, Bruce R. Ellisen,
Tax Division, United States Department OF Justice, Washington, D.C., for
Appellee.
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Before Widener, Circuit Judge, Claude M. Hilton, Chief United States
District Judge for the Eastern District of Virginia, sitting by
designation, and David A. Faber, United States District Judge for the
Southern District of West Virginia, sitting by designation.
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The opinion of the court was delivered by: Per Curiam
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UNPUBLISHED
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Argued: April 3, 2000
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Affirmed by unpublished per curiam opinion.
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Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
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OPINION
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Holywell Corporation appeals the dismissal of its suit for a refund of
tax payments, arguing that the district court erred in determining that
its suit was barred by the doctrine of res judicata. For the reasons
adduced below, we affirm.
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I.
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Holywell Corporation (Holywell) filed for Chapter 11 bankruptcy after
a real estate venture in Miami, Florida, failed. The bankruptcy estates
of the related entities were consolidated in a reorganization plan which
created a liquidating trust. The liquidating trust was vested with all
the assets of the debtors for distribution to creditors.
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Soon thereafter, the trustee initiated an adversary proceeding to
determine his obligation to file returns and pay tax on income generated
by property in the liquidating trust. The United States Supreme Court
held that the trustee was required to pay the tax due on income
attributable to the debtors' property in the liquidating trust. See
Holywell Corp. v. Smith, 503 U.S. 47, 52 (1992). The case was remanded
to the bankruptcy court, where, after extensive negotiations, the United
States accepted an offer of settlement by the trustee to settle the
income tax liabilities. The bankruptcy court approved this settlement in
1993 over Holywell's objection. Holywell appealed to the United States
District Court for the Southern District of Florida and the United
States Court of Appeals for the Eleventh Circuit, both of which
affirmed. See In re Holywell Corp., 177 B.R. 991 (S.D. Fla. 1995);
Holywell Corp. v. Smith, 208 F.3d 1009 (11th Cir. 2000) (unpublished,
table).
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In November of 1997, Holywell filed this suit in the United States
District Court for the Western District of Virginia, claiming that it is
entitled to a refund of over 10.6 million dollars. Holywell claims that
the trustee of the liquidating trust paid that amount in taxes which
should be credited to Holywell as beneficial owner of property
transferred to the trust. The district court granted the United States'
motion to dismiss, holding that Holywell's claim was barred by res
judicata. The court reasoned that Holywell was seeking a refund for
taxes paid as a result of the settlement approved by the bankruptcy
court, and was therefore barred from bringing its claim in the district
court.
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II.
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Holywell argues that the district court erred in determining that its
claim is barred by the doctrine of res judicata. A party invoking res
judicata must establish three elements: 1) a final judgment on the
merits in a prior suit, 2) an identity of the cause of action in both
the earlier and the later suit, and 3) an identity of parties or their
privies in the two suits. See Meekins v. United Tranportation Union, 946
F.2d 1054, 1057 (4th Cir. 1991).
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Generally, court-approved settlements receive the same res judicata
effect as litigated judgments. See Hoxworth v. Blinder, 74 F.3d 205, 208
(10th Cir. 1996); accord In re Medomak Canning, 922 F.2d 895, 900 (1st
Cir. 1990); cf. United States v. Wilson , 974 F.2d 514 (4th Cir. 1992)
(holding that bankruptcy court order approving tax settlement between
bankruptcy trustee and the United States constituted determination of
tax liabilities of debtor's estate even though debtor objected to
settlement). Holywell is claiming a refund of taxes paid by the trustee
of the liquidating trust. The amount of taxes owed was settled by
agreement between the trustee and the United States and was confirmed by
the bankruptcy court. Because the settlement was approved by court order
in a case now final, the earlier settlement order represents a final
judgment on the merits in a prior suit. The prior bankruptcy suit
(insofar as it determined the payment of the taxes at issue here) is
identical to the instant refund suit. The trustee and the United States
determined between themselves the proper amount of taxes to be paid.
That very figure is the amount at issue in the case at bar. Accordingly,
there is an identity of the cause of action.
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There is also an identity of the parties in the earlier bankruptcy
action and the current case. The United States and Holywell were both
named as defendants in the trustee's adversary proceeding. Both the
United States and Holywell were given an opportunity to voice their
approval, or object to, the settlement, and both received full hearing
of their arguments regarding the propriety of the settlement.
Accordingly, there is an identity of the parties in the two suits, and
each element of res judicata is present.
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III.
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Holywell argues that, regardless of the above discussion, the
bankruptcy court's order cannot be accorded res judicata effect because
the bankruptcy court was not a court of competent jurisdiction to
determine the tax liability of the liquidating trust. This argument
amounts to a collateral attack on the bankruptcy court's jurisdiction.
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"For federal judgments, lack of subject matter jurisdiction
generally has no bearing on the preclusive effect of a judgment."
18 James Wm. Moore et al., Moore's Federal Practice§ 131.30(1)(d)(iii)
(1999 3d ed.). Further, "[f]ederal courts have the authority to
determine whether they have jurisdiction, and `[t]heir determinations of
such questions, while open to direct review, may not be assailed
collaterally.'" In re Bulldog Trucking, Inc., 147 F.3d 347, 352
(4th Cir. 1998) (quoting Chicot County Drainage Dist. v. Baxter State
Bank, 308 U.S. 371, 376 (1940)).
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This general rule of finality is open only to narrow exceptions, and
"[m]ere error in the exercise of jurisdiction will not render a
prior judgment invalid." Bulldog Trucking, 147 F.3d at 352. The
exceptions to the rule of finality are situations where 1) the exercise
of jurisdiction constitutes a manifest abuse of authority, 2) allowing
the challenged judgment to stand would substantially encroach upon the
authority of another tribunal or agency of government, or 3) the
judgment was rendered by a court lacking capability to make an
adequately informed determination as to its own jurisdiction. See In re
Bulldog Trucking, Inc., 147 F.3d 347 (4th Cir. 1998) (adopting
Restatement (Second) of Judgments § 12 (1982)).
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Neither the second nor the third exceptions are at issue here, but
both parties have devoted significant argument to the first exception.
Both parties make detailed argument on the issue of whether the
bankruptcy court did or did not have jurisdiction to resolve the
question of the amount of the trustee's tax liability. And indeed the
question may be a close one. However, the very fact that both parties
can make reasonable arguments on the question suggests that the exercise
of jurisdiction by the bankruptcy court could not be"a manifest
abuse of authority." Accordingly, we find that the question of
whether the bankruptcy court properly exercised jurisdiction over the
tax liability question does not alter the res judicata effect of the
bankruptcy court's approval of the settlement between the trustee and
the United States.
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IV.
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For the foregoing reasons, the district court properly dismissed
Holywell's claim on res judicata grounds. We therefore affirm the
district court.
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We note that appellant has moved to file a reply brief containing
material unauthorized by the rules. That motion is hereby denied as
moot. The unauthorized material pertains to an argument that has not
been and need not be addressed herein.
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AFFIRMED
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