NEW HAVEN PROJECTS LTD. LIABILITY CO., DEBTOR-APPELLANT,
v.
CITY OF NEW HAVEN, FIRST UNION NATIONAL BANK, AS TRUSTEE FOR THE NEW HAVEN TLC TRUST 1995-1, AND BREEN CAPITAL INVESTMENT CORPORATION, APPELLEES, UNITED STATES TRUSTEE, TRUSTEE.
| [1] | UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term,
1999 |
| [2] | Docket No. 99-5073 |
| [3] | Keywords: section 505, discretion |
| [4] | September 14, 2000 |
| [5] | IN RE: NEW HAVEN PROJECTS LTD. LIABILITY CO., DEBTOR. NEW HAVEN PROJECTS LTD. LIABILITY CO., DEBTOR-APPELLANT, v. CITY OF NEW HAVEN, FIRST UNION NATIONAL BANK, AS TRUSTEE FOR THE NEW HAVEN TLC TRUST 1995-1, AND BREEN CAPITAL INVESTMENT CORPORATION, APPELLEES, UNITED STATES TRUSTEE, TRUSTEE. |
| [6] | Eugene Mittelman, Sherman, Citron & Karasick, P.C., (Howard
Karasick, on the brief), New York, Ny, for debtor- appellant. Marylou
Scofield, Assistant Corporation Counsel for the City of New Haven, New
Haven, Ct, for appellee City of New Haven. David Doyle, The Marcus Law
Firm, (Marjorie R. Gruszkiewicz, on the brief), New Haven, Ct, for
appellees First Union National Bank as Trustee for the New Haven Tlc
Trust 1995-1 and Breen Capital Investment Corporation. |
| [7] | Before: Sotomayor and Katzmann, Circuit Judges. *fn* |
| [8] | The opinion of the court was delivered by: Sotomayor, Circuit Judge |
| [9] | Argued: April 20, 2000 |
| [10] | Appeal from an order of the United States District Court for the
District of Connecticut (Eginton, J.) affirming a decision of the United
States Bankruptcy Court for the District of Connecticut (Dabrowski, B.
J.) to abstain from redetermining debtor's tax liability under 11 U.S.C.
§ 505 (1994). Affirmed. |
| [11] | Appeal from an order of the United States District Court for the
District of Connecticut (Warren W. Eginton, Judge) affirming a decision
of the United States Bankruptcy Court for the District of Connecticut
(Albert S. Dabrowski, Bankruptcy Judge). The bankruptcy court declined
to conduct a redetermination of tax liability as permitted under 11
U.S.C. § 505 for a debtor in bankruptcy proceedings. Debtor-appellant
argues that the bankruptcy court is required to conduct such a review
except under a certain narrow range of circumstances not present here.
Debtor-appellant further argues that even if the bankruptcy court were
to have broader discretion in deciding when to conduct a Section 505
review, the court in this case relied upon an erroneous finding in
reaching its decision, treating the only party likely to benefit from
Section 505 review as an insider creditor. (blue 4,5, 11) Rejecting both
of these contentions, we affirm. |
| [12] | BACKGROUND |
| [13] | The facts relevant to the instant appeal are not disputed by the
parties. (JA 15) On December 17, 1987, New Haven Projects No. 1
Corporation ("NHP Corp.") was organized under the laws of
Connecticut with Mitchel Maidman as its president and director. (red tax
lienholder brief ("T") 4) In August 1988, NHP Corp. conveyed
several real properties in New Haven, Connecticut ("the
Properties") to another entity, New Haven Associates Limited
Partnership ("NHP Partnership"), whose general partners were
Richard Maidman and NHP Corp. (red city brief ("C") 3-5; T
4-6) |
| [14] | Following its acquisition of the Properties, NHP Partnership obtained
mortgages secured by the Properties from the New Connecticut Bank and
Trust Company. (T 5) Shortly thereafter, the Federal Deposit Insurance
Corporation ("FDIC") exercised receivership over the bank and
became the creditor for the Properties' mortgages. (T 6) |
| [15] | In 1991, the City of New Haven ("City") reassessed the value
of NHP Partnership's Properties pursuant to Conn. Gen Stat. §12-62
(1993) to determine the market value of real estate for the purpose of
levying property taxes. (blue 4; T 6) The City increased its assessment
of the Properties from approximately $423,000 to over $980,000, and for
the years 1991-1995, the City levied taxes based on the new assessment.
(blue 4, T 6) NHP Partnership made no effort to contest the City's new
tax assessment within the one year statute of limitations imposed by
Connecticut law. See Conn. Gen. Stat. § 12-119 (1993). (C 5) NHP
Partnership then failed to pay these property taxes for the period
1991-1995. (T 6) The City filed liens against the Properties and later
transferred its rights under the tax liens to two entities, First
National Bank as Trustee for the New Haven TLC Trust 1995-1 and Breen
Capital Investment Corporation ("the Tax Lien Purchasers"). (T
6, C2) |
| [16] | On September 11, 1996, debtor-appellant New Haven Projects, LLC
("Debtor") was formed under the laws of Connecticut with Scott
Hurwitz as its resident agent. (C4; T7; A19) Debtor's address was given
as 432 East 87th Street, New York City, the same office address given
for Mitchel Maidman and Richard Maidman at the time NHP Corp. and NHP
Partnership were formed. (T 7) According to the record, NHP Corp. owned
99% of Debtor with the remaining 1% interest owned by New Haven Surplus,
LLC ("New Haven Surplus"), a Connecticut LLC, also with Scott
Hurwitz as its resident agent. (T7-8) |
| [17] | On September 12, 1996, one day after Debtor was formed, NHP
Partnership conveyed the Properties to Debtor. (C4) The following day,
September 13, 1996, Debtor filed a bankruptcy petition under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York. (blue 2; C2,6) On December 10, 1996, the
case was transferred to the United States Bankruptcy Court for the
District of Connecticut. (Exh. 16) Finally, on December 16, 1996, the
FDIC assigned its mortgages against the Properties to another entity,
the W.M. Maidman Family Limited Partnership ("Maidman Trust"),
also located at 432 East 87th Street, New York City. (C6; T8) |
| [18] | Debtor's bankruptcy petition listed several unsecured creditors
presenting a total of less than $8,000.00 in claims, representing at
most approximately one half of a percent of the debt structure of
Debtor. (Exh. 4; A23) |
| [19] | On September 15, 1997, Debtor moved the bankruptcy court to review and
reduce its tax liability for the period 1991-1995 pursuant to 11 U.S.C.
§ 505(a) (1994), and to determine tax liability for the period
following the filing of the bankruptcy petition pursuant to 11 U.S.C. §
503(b)(1)(B) (1994). (blue 2; C3; R5) The bankruptcy court declined to
conduct a Section 505 review, however, finding that the claims of the
unsecured creditors were de minimis, failing to justify Section 505
review, and that the secured creditor Maidman Trust was an insider
creditor, and, along with the Maidman family, controlled Debtor and its
predecessors such that any reduced tax assessment would result in a
windfall to Debtor and its affiliates at the expense of the City and the
Tax Lien Purchasers. (A 29-34) |
| [20] | On May 7, 1999, the district court affirmed the bankruptcy court's
decision and this appeal followed. (JA 3) |
| [21] | DISCUSSION |
| [22] | Reviewing this matter on appeal, "[t]he district court's order
affirming the bankruptcy court is `subject to plenary review.'"
Tudisco v. United States (In re Tudisco), 183 F.3d 133, 136 (2d Cir.
1999) (quoting Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere
Clubs, Inc.), 922 F.2d 984, 988 (2d Cir. 1990)). Accordingly, we review
conclusions of law de novo and findings of fact for clear error. Id. |
| [23] | Debtor challenges the bankruptcy court's decision to abstain from
redetermining the value of the Properties pursuant to 11 U.S.C. § 505,
which defines the parameters of a bankruptcy court's jurisdiction to
determine a debtor's tax liability as follows: |
| [24] | (a)(1) Except as provided in paragraph (2) of this subsection, the
court may determine the amount or legality of any tax, *fn1
any fine or penalty relating to a tax, or any addition to tax, whether
or not previously assessed, whether or not paid, and whether or not
contested before and adjudicated by a judicial or administrative
tribunal of competent jurisdiction. |
| [25] | (2) The court may not so determine- |
| [26] | (A) the amount or legality of a tax, fine, penalty, or addition to tax
if such amount or legality was contested before and adjudicated by a
judicial or administrative tribunal of competent jurisdiction before the
commencement of the case under this title . . . . 11 U.S.C. § 505(a)
(1994) (emphasis added). |
| [27] | Subject to certain limitations, § 505 empowers a bankruptcy court to
redetermine the amount of a debtor's tax liability even when a debtor
has failed to comply with state law procedures for challenging such
liabilities, including applicable state law statutes of limitations. See
In re Piper Aircraft Corp., 171 B.R. 415, 418 (Bankr. S.D. Fla. 1994);
see also Metropolitan Dade County v. Kapila (In re Home and Housing of
Dade County, Inc.), 220 B.R. 492, 494-95 (S.D. Fl. 1998) (stating that
under 11 U.S.C. § 505, "[t]he debtor is given a renewed
opportunity to contest the amount due for taxation, and the bankruptcy
court is not bound by time limits to determine the amount of taxes
applicable in any other forum"); In re 499 W. Warren Street Assocs.
Ltd., 143 B.R. 326, 329 (Bankr. N.D.N.Y. 1992) (same). As one bankruptcy
court has explained: |
| [28] | The broad grant of jurisdiction contained in § 505 makes no reference
to time periods imposed by state law. . . . [A] debtor as representative
of the bankruptcy estate is allowed to contest tax debts in the
bankruptcy court even though his prior inaction would bar him from
contesting them elsewhere. This is permitted on the ground that taxes
with their priority impose a special problem for creditors, and
creditors should not be prejudiced by a debtors's inaction. Ledgemere
Land Corp. v. Ashland (In re Ledgemere Land Corp.), 135 B.R. 193, 196-97
(Bankr. D. Mass. 1991). |
| [29] | Debtor argues that the bankruptcy court in this case was required to
redetermine its tax liability under § 505. According to Debtor, a court
may abstain from making such a redetermination only upon a showing that
uniformity of tax assessments is of significant importance to the
governmental entities involved. (blue at 6) While all parities agree
that the need to maintain a uniformity of tax assessments may certainly
be considered by a court in determining whether to reassess taxes under
§ 505, the dispute here surrounds whether a court may, in its
discretion, consider additional factors when deciding whether to conduct
a § 505 redetermination of tax liability. |
| [30] | In support of its interpretation of Section 505, Debtor relies upon
two bankruptcy court cases, In re Fairchild Aircraft and In re AWB
Associates. In Fairchild Aircraft, the bankruptcy court stated that
abstention from deciding a tax adjudication question under Section 505
is only appropriate upon a showing that uniformity of assessment is of
significant importance. No such showing has been made here. If the tax
rate were the subject of this motion, perhaps abstention might be
appropriate. Because the trustee only challenges the excessiveness of
the appraisal district's valuation of the estate's property, the taxes
to be paid by other taxpayers will not be affected, nor will uniformity
of assessment be placed in issue (i.e., the overall valuation
methodology used by the appraisal district is not being generally
attacked). In re Fairchild Aircraft Corp., 124 B.R. 488, 491 (Bankr. W.D.
Tex. 1991) (citations omitted). |
| [31] | The bankruptcy court in In re AWB Assoc., 144 B.R. 270, 277-78 (Bankr.
E.D. Pa. 1992), later quoted approvingly from the same opinion, finding
"that the correct analysis of the abstention issue is thusly
enunciated in Fairchild Aircraft." Id. at 276. Debtor relies,
therefore, on the explicit language of these cases that "abstention
from deciding a tax adjudication question under Section 505 is only
appropriate upon a showing that uniformity of assessment is of
significant importance." Fairchild Aircraft, 124 B.R. at 491
(emphasis added); AWB, 144 B.R. at 276 (quoting Fairchild Aircraft, 124
B.R. at 491). |
| [32] | To the extent that Fairchild Aircraft and AWB hold that a bankruptcy
court's jurisdiction under Section 505 is mandatory in the absence of
"uniformity of assessment" concerns, we firmly reject this
interpretation of the statute. To understand why, we look first to the
plain language of the statute that provides that "the court may
determine the amount or legality of any tax . . . ." 11 U.S.C. §
505(a)(1) (emphasis added). This Court has observed that "[t]he
verb `may' generally denotes a grant of authority that is merely
permissive." International Cablevision, Inc. v. Sykes, 997 F.2d
998, 1005 (2d Cir. 1993). We are persuaded that the ordinary meaning of
the word "may" applies here because nothing in § 505 suggests
otherwise and because Congress elsewhere in the Bankruptcy Code has
chosen the word "shall" to denote mandatory requirements.
Compare 11 U.S.C. § 505(a)(1) (1994) ("the court may determine . .
.") (emphasis added), with 11 U.S.C. § 503(b) (1994) ("After
notice and a hearing, there shall be allowed administrative expenses . .
. .") (emphasis added). As the Supreme Court has explained, "[i]t
is generally presumed that Congress acts intentionally and purposely
when it includes particular language in one section of a statute but
omits it in another." BFP v. Resolution Trust Corp., 511 U.S. 531,
537 (1994). |
| [33] | Second, contrary to Debtor's contention, nothing in the legislative
history of Section 505 favors the interpretation articulated by the
Fairchild Aircraft court. Subsections (a) and (b) of § 505 were
derived, with only stylistic changes, from section 2a(2A) of the
Bankruptcy Act [section 11(a)(2A) of former Title 11] . . . . As under
Bankruptcy Act [former] section 2a(2A), Arkansas Corp. Comm'n v.
Thompson, 313 U.S. 132 (1941), remains good law to permit abstention
where uniformity of assessment is of significant importance. 11 U.S.C.A.
§ 505, Historical and Statutory Notes at 723 (1993) (emphasis added). |
| [34] | In our view, this language simply clarifies that under the current
version of Section 505, a bankruptcy court has the discretion to abstain
from redetermining a debtor's tax liability where uniformity of
assessment is of significant importance. |
| [35] | Finally, we note that an overwhelming number of courts have observed
that § 505(a)(1) vests the bankruptcy court with general discretionary
authority to redetermine a debtor's tax liability. See, e.g., In re
Onondaga Plaza Maintenance Co., 206 B.R. 653, 656 (Bankr. N.D.N.Y. 1997)
(stating that a court's authority under Section 505 is
"discretionary"); In re Marcellus Wood & Trucking, Inc. v.
Michigan Employment Sec. Comm'n (In re Marcellus Wood & Trucking,
Inc.), 158 B.R. 650, 654 (Bankr. W.D. Mich. 1993) (same); In re Swan,
152 B.R. 28, 30 (Bankr. W.D.N.Y. 1992) (same); AWB, 144 B.R. at 275-76
(same); Queen v. United States (In re Queen), 148 B.R. 256, 259 (S.D.W.
Va. 1992) (same); El Tropicano, Inc. v. Garza (In re El Tropicano,
Inc.), 128 B.R. 153, 161 (Bankr. W.D. Tex. 1991) (same); Galvano, 116
B.R. at 372 (same). |
| [36] | Therefore, based on the plain language of the statute, its legislative
history, and relevant case law, we interpret the verb "may" in
11 U.S.C. § 505(a)(1) as vesting the bankruptcy court with
discretionary authority to redetermine a debtor's taxes. This authority
is not limited solely to instances where uniformity of tax assessments
is of significant importance. See Northbrook Partners, LLP v. Hennepin
(In re Northbrook Partners, LLP), 245 B.R. 104, 118 n.26 (Bankr. D.
Minn. 2000) ("The Fairchild Aircraft Co. court was correct in
recognizing that abstention under § 505(a) is appropriate where
`uniformity of assessment is of significant importance.' It was not
correct in holding that abstention is appropriate only then.")
(emphasis added). |
| [37] | The exercise of such discretion is, of course, subject to the explicit
limitations in Section 505 itself, and must be informed by the purpose
underlying the statute. Specifically, in determining whether to abstain
from redetermining tax liability in a given case, a court must assure
itself that the legislative purpose for drafting this provision, namely
to protect the interests of both debtors and creditors, is met.
Creditors are entitled to protection from the `dissipation of an
estate's assets' in the event that the debtor failed to contest the
legality and amount of taxes assessed against it. Having the bankruptcy
court adjudicate the matter may also afford an alternative forum for
proceedings that might otherwise delay the orderly administration of the
case and distribution to the debtor's creditors. Onondaga, 206 B.R. at
656 (citations and internal quotations omitted). See also City Vending
of Muskogee, Inc. v. Oklahoma Tax Comm'n, 898 F.2d 122, 125 (10th Cir.
1990) (stating that § 505 serves to protect "creditors from the
dissipation of the estate's assets which could result if the creditors
were bound by a tax judgment which the debtor, due to his ailing
financial condition, did not contest." (citations and internal
quotation marks omitted)); Piper Aircraft, 171 B.R. at 418 (quoting
Ledgemere Land, 135 B.R. at 196-97); AWB, 144 B.R. at 277-78. *fn2 |
| [38] | In light of these important considerations, bankruptcy courts have
properly looked to a number of factors when deciding whether to exercise
their authority under 11 U.S.C. § 505, including (1) the complexity of
the tax issue; (2) the need to administer the bankruptcy case in an
expeditious fashion; (3) the burden on the bankruptcy court's docket;
(4) the length of time necessary to conduct the hearing and to render a
decision thereafter; (5) the asset and liability structure of the
debtor; and (6) the potential prejudice to the debtor, the taxing
authority, and creditors. See Northbrook, 245 B.R. at 118; In re
D'Alessio, 181 B.R. 756, 759-60 (Bankr. S.D.N.Y. 1995); AWB, 144 B.R. at
276; Galvano, 116 B.R. at 372. |
| [39] | Applying a similar analysis to the case before us, the bankruptcy
court noted that some factors favored the exercise of jurisdiction under
§ 505, namely that the tax issues involved were not complex, (A 29) and
that redetermination of tax liability would not be overly time-consuming
or burdensome for the bankruptcy court. (A 30-31) The bankruptcy court
elected to abstain from engaging in a § 505 review, however, for two
principle reasons. First, the court observed that the amount of
unsecured debt was "de minimis." (A 31) Second, the court
determined that |
| [40] | [w]hat the Debtor is requesting in this case . . . would only benefit
the Debtor and [its] affiliates and insiders and the real controlling
interest, the Maidmans and Maidman Trust. |
| [41] | That benefit . . . would be an inappropriate windfall at great expense
to the City and to the Tax Lien Purchasers. The motion not only does not
advance . . . what the court views to be the primary purpose underlying
the enactment of Section 505, it serves no purpose contemplated by
Section 505 and, indeed, in this Court's view, defies the spirit of that
statute and visits undue prejudice on the responding parties. (A 37-38). |
| [42] | As an initial matter, we note, as did the bankruptcy court, that
certain factors counsel in favor of § 505 review. We also agree with
the bankruptcy court's conclusion that the unsecured creditors would not
meaningfully benefit from Section 505 review because their claims,
totaling less than $8,000, are de minimis. Finally, based on the
interrelationship between the Maidman Trust, the Maidman family members,
Debtor, and Debtor's affiliates, we find no clear error in the
bankruptcy court's factual finding that the Maidman Trust should be
treated as an insider of Debtor. To support its finding, the bankruptcy
court explained that |
| [43] | the Maidmans and/or the Maidman Trust control the Debtor, its members,
controlled the Debtor's predecessors and its members, and have exercised
full and complete control over those entities since their inception. . .
. |
| [44] | [T]heir hand and footprints are found throughout and all over these
entities. They formed and controlled the Debtor's predecessor; they
formed and controlled the Debtor's members or they are the Debtor's
members. . . . They, through the exercise of that control, created the
Debtor itself. The next day, the day following the creation of the
Debtor, they provided the Debtor or facilitated the provision to the
Debtor of all of its assets including specifically the [] Properties in
this case . . . . |
| [45] | They then caused by virtue of their control a [Section] 505 motion to
be filed with this court whose obvious purpose was to seek to advantage
themselves of the monetary benefit that would flow from the granting of
that motion and which the Court finds would create a six-figure windfall
to the Debtor, to the Debtor's affiliates, insiders, and to the related
controlling parties and entities which I referred to as the Maidmans and
the Maidman Trust. *fn3 (A 34-36) |
| [46] | Based on these findings, it is clear that an insider creditor-the
Maidman Trust-is the only party that would likely benefit from Section
505 review. At the same time, a reassessment of the Properties would
threaten to prejudice the Tax Lien Purchasers and the City of New Haven
as outside creditors. Section 505 was enacted to protect creditors from
the prejudice caused by an ailing debtor's failure to contest tax
assessments. See, e.g., City Vending of Muskogee, 898 F.2d at 125; Piper
Aircraft, 171 B.R. at 418; AWB, 144 B.R. at 277. It was not enacted to
afford debtors a second bite at the apple at the expense of outside
creditors. Because the exercise of Section 505 review in this case would
frustrate the purpose of the statute, we affirm the bankruptcy court's
decision to abstain from redetermining Debtor's tax liability. |
| [47] | CONCLUSION |
| [48] | We have considered Debtor's arguments and find them to be without
merit. Accordingly, the district court order affirming the bankruptcy
court's decision is affirmed. |
|
|
|
| Opinion Footnotes | |
|
|
|
| [49] | *fn* The Honorable Ellsworth A. Van Graafeiland was originally
assigned as a member of the panel but, due to illness, did not attend
oral argument or participate in the disposition of this appeal. The
appeal is being determined by the remaining members of the panel, who
are in agreement. See 2d Cir. R. § 0.14(b); Murray v. National Broad.
Co., 35 F.3d 45, 46 (2d Cir. 1994). |
| [50] | *fn1 The phrase "any tax"
encompasses both federal and state tax liabilities, including state real
property taxes, state sales taxes, city ad valorem taxes, federal income
taxes, and federal employment taxes. See In re Galvano, 116 B.R. 367,
372 n.6 (Bankr. E.D.N.Y. 1990) (citing cases). |
| [51] | *fn2 Congress has also built into
Section 505 "certain safeguards to protect states from unwarranted
federal intrusion." In re Super Van, Inc., 161 B.R. 184, 192
(Bankr. W.D. Tex. 1993). For example, if the amount or legality of a tax
was contested before and adjudicated by any judicial or administrative
tribunal of competent jurisdiction before the commencement of the
bankruptcy case, then relief under Section 505 is not available. See 11
U.S.C. § 505(a)(2)(A). See also See Northbrook Partners, 245 B.R. at
118 (recognizing the need to weigh the goals of promoting bankruptcy
relief against the state's interest in applying and enforcing its own
law). |
| [52] | *fn3 Debtor also contends that the
Maidman Trust must, as a matter of law, be deemed an outsider creditor
of Debtor because, as a successor to the FDIC, it is "cloaked with
all of the FDIC's rights and privileges," including the right to
outsider status. Appellant's Br. at 11-13 (citing Beal Bank, SSB v.
Nassau County, 973 F. Supp. 130 (E.D.N.Y. 1997)). The case cited by
Debtor, however, stands merely for the unremarkable proposition that
"an assignee takes all of the rights of the assignor, no greater
and no less." Beal Bank, 973 F. Supp. at 134. While the Maidman
Trust certainly acquired the rights afforded to the FDIC in relation to
the Properties, see, e.g., 12 U.S.C. § 1825(b)(2) (1994) (stating that
"[n]o property of the Corporation [i.e. FDIC] shall be subject to
levy, attachment, garnishment, foreclosure or sale without the consent
of the Corporation, nor shall any involuntary lien attach to the
property of the Corporation"), we are aware of no authority for the
proposition that the FDIC's outsider status constituted an assignable
right. |