299 F.3d 207 (3rd Cir. 2002), 00-2771, BA Properties, Inc. v. Govt. of U.S. Virgin Islands
|Citation:||299 F.3d 207|
|Party Name:||BA PROPERTIES INC.; Bank of America, N.T. & S.A. v. GOVERNMENT OF the UNITED STATES VIRGIN ISLANDS; Marie Bass, in her capacity as Recorder of Deeds; Gwendolyn Adams, in her capacity as Commissioner of Dep't of Finance, Appellants.|
|Case Date:||July 29, 2002|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued: Dec. 6, 2001.
Iver A. Stridiron, Attorney General, Frederick Handleman, Solicitor General, Richard M. Prendergast (argued), Assistant Attorney General, Office of the Attorney General of the Virgin Islands, St. Croix, Virgin Islands, for Appellants.
Maria T. Hodge (argued), Danielle C. Comeaux, Hodge & Francois, St. Thomas, Virgin Islands, for Appellees.
BEFORE: BECKER, Chief Judge, NYGAARD and COWEN,[*] Circuit Judges.
BECKER, Chief Judge.
This appeal presents a close and difficult question concerning the meaning of an exemption provision in the Virgin Islands Stamp Tax Act. At the first level, resolution of the case requires investigation of the law of real estate financing, with consequent impact on foreclosure practice in the U.S. Virgin Islands. Ultimately, however, the case turns on the application of the rules of construction governing tax exemptions, and particularly the strength of the rule that such exemptions are construed narrowly against the party seeking them.
BA Properties, Inc. ("BA") is a subsidiary of the Bank of America, N.T. and S.A., ("the Bank"), which represents the Bank with respect to real property acquired through foreclosure. When Pemberton Resorts, Inc. defaulted on a loan that was secured by a Bank of America, N.T. and S.A. mortgage on the Grand Palazzo Hotel in Estate Nazareth, St. Thomas, the Bank filed a foreclosure action in
the District Court of the Virgin Islands. The District Court approved a consent judgment and issued an order of foreclosure, fixing the debt at $29,418,123. The District Court's order instructed the U.S. Marshal's Service to seize and sell the property at auction. BA was the sole bidder at the marshal's sale, acquiring the property for $22,500,000, which it applied as a credit against the debt Pemberton owed to the Bank. The Marshal's Service conveyed title to BA via a marshal's deed.
The Virgin Islands Stamp Tax Act imposes a two percent excise on the value of real property transferred "by instrument of conveyance." 33 V.I.C. § 121(a)(1) (1994). The provision that gives rise to the question on appeal is an exemption specifying that the excise tax "shall not apply to a transfer of title . . . solely in order to provide or release security for a debt or obligation." 33 V.I.C. § 128(a)(2) (1994). When BA attempted to record the marshal's deed, the Recorder of Deeds in St. Thomas refused to record it until the Stamp Tax was paid. Instead of paying the tax, BA petitioned the Territorial Court of the Virgin Islands for a declaratory judgment that under § 128(a)(2), it was exempt from the Stamp Tax. It also sought a writ of mandamus ordering the Recorder to record the deed.
Following a hearing, the Territorial Court denied BA's petition, finding, with little explanation, that the post-foreclosure conveyance of property by marshal's deed at issue in this case was not executed "solely in order to provide or release security for a debt or obligation," and that the transaction was therefore subject to the Stamp Tax. However, the Appellate Division of the District Court of the Virgin Islands reversed, concluding that the transaction at issue in this case falls under the § 128(a)(2) exemption. We exercise plenary review over the Appellate Division's construction of the Stamp Tax statute, much as we would when reviewing a district court's construction of a statute. Following our established jurisprudence, we decline to apply the more deferential "manifest error" standard of review that BA urges us to use on account of the supposed implications for the development of indigenous Virgin Islands jurisprudence arising from Congress's creation of the Appellate Division.
We must begin our analysis with the rule of construction that "statutory exemptions from taxation, being a matter of grace, are to be strictly and narrowly construed," Tracy Leigh Dev. Corp. v. Gov't of the Virgin Islands, 501 F.2d 439, 443 (3d Cir. 1974) (citation omitted), and that any doubt is to be resolved against the taxpayer. While we do not think BA Properties' interpretation is unreasonable, we also think that the interpretation suggested by the GVIthat § 128(a)(2) was meant to apply to transactions in which a deed of trust is used as a mortgage substituteis not unreasonable. We therefore have no choice, applying the relevant rule of construction, but to reverse the order of the Appellate Division and reinstate the order of the Territorial Court. While this decision will of course be to the short-term revenue advantage of the GVI, it may very well impede the flow of credit to the Virgin Islands to finance similar projects because of the extent to which it increases the transaction costs in the event of foreclosure. The Virgin Islands Legislature may, of course, clarify or modify the scope of the exemption provided by § 128(a)(2) if it disagrees with the outcome of this case.
I. Relevant Statutes and the Rulings of the Territorial Court and the Appellate Division
The Virgin Islands Stamp Tax Act, 33 V.I.C. § 121(a)(1), provides that "[a] stamp
tax at the rate of two percent (2%) of the value of the property is imposed on the transfer of title to . . . [r]eal property by instrument of conveyance." An exemption provision in the Act, 33 V.I.C. § 128(a)(2), states that "[t]he tax imposed by this chapter shall not apply to a transfer of title . . . solely in order to provide or release security for a debt or obligation." 33 V.I.C. § 128(a)(2). The Territorial Court rested its oral opinion largely on the canon of statutory construction that exemptions from tax obligations are to be construed narrowly and in favor of the government. The Court concluded that the § 128(a)(2) exemption was intended to apply exclusively to a deed in lieu of foreclosure. A deed in lieu of foreclosure is a "deed by which a borrower conveys fee-simple title to a lender in satisfaction of a mortgage debt and as a substitute for foreclosure." Black's Law Dictionary 423 (7th ed.1999).
The Appellate Division reversed, relying on the provision in Virgin Islands law that a mortgage interest in property provides a lender with a remedy only against the mortgaged property, not against the debtor in its individual or institutional capacity. The Appellate Division noted that a foreclosure action is the only way that a lender may unilaterally recover mortgaged property in the case of default. A deed in lieu of foreclosure, the other method by which a lender may recover the secured property, must be executed voluntarily by the mortgagor. See Restatement (Third) of Property: Mortgages § 8.5 cmt. b (1997).1 Therefore, the Appellate Division reasoned, the only realistic way of releasing security for the debt or obligation, a conveyance by marshal's deed following a foreclosure sale, must be exempt from the Stamp Tax under § 128(a)(2).
The Government of the Virgin Islands ("GVI") timely appealed and now argues that: (1) it is clear from the plain language of § 128(a)(2) that BA's transaction was not exempt from the Stamp Tax; and (2) the language of § 128(a)(2) is at least ambiguous, i.e., it does not make clear that BA qualifies for the exemption, and that the Appellate Division erred by failing to resolve the ambiguity in the light most favorable to the taxing authority. The argument of the GVI is largely focused on the fact that multiple legal consequences follow from a creditor's purchase of the property securing its loan at a foreclosure sale, and therefore that the transaction cannot be said to be "solely . . . to provide or release security for a debt or obligation." 33 V.I.C. § 128(a)(2). The GVI also suggests that § 128(a)(2) is intended to apply to transactions in which parties use the deed of trust as a mortgage substitute.
The Territorial Court has general jurisdiction over matters of Virgin Islands law. Callwood v. Enos, 230 F.3d 627, 631 (3d Cir. 2000). The Appellate Division had appellate jurisdiction based on 4 V.I.C. § 33 (1997). This court has jurisdiction from the final order of the Appellate Division pursuant to 28 U.S.C. § 1291 and 48 U.S.C. § 1613a(c). Ordinarily, we would go directly to an analysis of the legal contentions of the parties with the understanding that the issues just described present legal issues subject to plenary review. However, because of the argument forcefully pressed by BA, citing In re Alison, 837 F.2d 619 (3d Cir. 1988), and Hess Oil Virgin Islands Corporation v. Richardson,
894 F.Supp. 211, 214-15 (D.V.I. 1995) ("HOVIC'), for the proposition that the Third Circuit should defer to the Appellate Division's interpretations of Virgin Islands law and review them only for "manifest error," we must first take up the standard of review question.
II. Standard of Review
In HOVIC, the Appellate Division of the District Court of the Virgin Islands purported to define the standard of review that the Third Circuit should apply when reviewing the Appellate Division's interpretation of local Virgin Islands law. HOVICs analysis proceeds from this court's statement in Alison that the creation of the Appellate Division "represents a step in th[e] direction" of "a local Virgin Islands appellate structure with greater autonomy with respect to issues of Virgin Islands law," rather than "the creation of a territorial federal appellate court with a place and role analogous to the place and role of the courts of appeals in the Article III court...
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