City of Perth Amboy v. Custom Distrib. Serv.

• Decision Date: 17 August 2000
• Docket Number: No. 99-5082,99-5082
• Citation: 224 F.3d 235
• Parties: (3rd Cir. 2000) IN RE: CUSTOM DISTRIBUTION SERVICES INC., Debtor CITY OF PERTH AMBOY, Appellant v. CUSTOM DISTRIBUTION SERVICES, INC
• Court: U.S. Court of Appeals — Third Circuit

Page 235

224 F.3d 235 (3rd Cir. 2000)

IN RE: CUSTOM DISTRIBUTION SERVICES INC., Debtor

CITY OF PERTH AMBOY, Appellant v. CUSTOM DISTRIBUTION SERVICES, INC.

No. 99-5082

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued September 8, 1999

Filed August 17, 2000

Appeal from the United States District Court for the District of New Jersey (D.C. Civil Action No. 98-cv-04289), District Judge: Honorable Garrett E. Brown, Jr. [Copyrighted Material Omitted]

Robert J. Cirafesi, Esquire (Argued) Alan J. Brody, Esquire Wilentz, Goldman & Spitzer 90 Woodbridge Center Drive, Suite 900 P.O. Box 10 Woodbridge, New Jersey 07095, Barry W. Frost, Esquire (Argued) David A. Martin, Esquire Teich, Groh, Frost & Zindler 691 State Highway 33 Trenton, New Jersey 08619, Attorneys for Appellee

John B. Hall, Esquire (Argued) Sheila N. Maddox, Esquire McManimon & Scotland, L.L.C. One Riverfront Plaza, Fourth Floor Newark, New Jersey 07102, Attorneys for Appellant

Before: SLOVITER and ROTH, Circuit Judges POGUE,¹ Judge

OPINION FOR THE COURT

ROTH, Circuit Judge:

This case involves a determination of a debtor's right to receive a refund and offset of certain real property taxes under the Bankruptcy Code. The District Court affirmed the Bankruptcy Court's redetermination of Custom Distribution Services' ("Custom") real estate tax liability and order of refund and offset of any overpayment of those taxes. The City of Perth Amboy (City) appealed, contending that the Bankruptcy Court did not have jurisdiction to entertain Custom's claim for refund and offset because Custom did not "properly request" refunds prior to filing its complaint in Bankruptcy Court as required by 11 U.S.C. S 505(a)(2)(B). The City also argues that Custom did not present sufficient evidence to establish property valuation different from that calculated by the City. For the reasons set out below, we will affirm in part and reverse in part.

I. Factual and Procedural History

In August 1981, Custom Distribution Services, Inc., purchased 22.5 acres of land containing approximately 15 structures in Perth Amboy, New Jersey. In 1987, Custom and the previous owner of the site, National Lead Industries, jointly commissioned Killiam Associates to conduct an environmental study of the site. The 1989 Killiam Report ("Report") concluded that soil and groundwater remediation would be necessary before any redevelopment of the site could commence.

In 1992, the United States Environmental Protection Agency identified Custom and National Lead Industries as potentially responsible parties for the contamination of the property under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), 42 U.S.C. S 9606 et seq. The property was subsequently put on the National Priority List pursuant to 42 U.S.C. S 9605(8) and is listed as a "Superfund Site." The property was also put on the Comprehensive Site List with the New Jersey Department of Environmental Protection under the Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et seq.²

On March 28, 1994, Custom filed a complaint in the Tax Court of New Jersey against the City, claiming that the City had overvalued the property for the 1994 tax year. Custom sought a reduction of that year's real property tax assessment and a refund of overpaid taxes with interest and costs. On May 23, 1995, however, the Tax Court dismissed the complaint at the request of Custom. Custom did not file tax appeals contesting the City's valuation of its property for any other years.

On October 12, 1994, Custom filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. In June 1996, it brought an adversary action against the City, seeking a reassessment of its municipal real estate tax obligations and tax refunds and/or tax offsets for the years 1992 through 1997. For those years, the City had valued the property as follows:

                1992--$3.82 million 
                1993--$3.82 million 
                1994--$3.84 million 
                1995--$3.84 million 
                1996--$3.84 million 
                        1997--unavailable
                

Custom had made the following payments:

                1992--paid in full 
                1993--paid in full 
                1994--paid in full 
                1995--partially paid 
                1996--unpaid 
                1997--unpaid
                

At the evidentiary hearing before the Bankruptcy Court, Custom presented a real estate expert to testify about the effects of environmental contamination on the value of the property. The City objected that the expert was not qualified to offer testimony on environmental contamination and clean-up costs. It also objected to the expert's reliance in his testimony on the Killiam Report and on letters from the Environmental Protection Agency and the New Jersey Department of Environmental Protection because the Report and the letters had not been admitted into evidence. The court overruled both objections.

The Bankruptcy Court issued its opinion on December 17, 1997. The court determined, inter alia, that the property was contaminated and stigma attached to the property, causing a diminution in the value of the property. The court held that it had discretion to reduce Custom's tax assessments for the 1992 through 1997 tax years pursuant to 11 U.S.C. S 505. On February 25, 1998, the Bankruptcy Court entered an order reducing the valuation of Custom's property as follows:

                1992--$1,071,808.00 
                1993--$1,070,936.00 
                1994--$1,017,808.00 
                1995--$1,007,592.00 
                1996--$1,024,984.00 
                1997--$1,020,819.00
                

The City was ordered to reassess Custom's real estate tax obligations based on the new valuations and to refund any overpayments, less any amount of "taxes, interest, or both, which may be applied against any other delinquencies, including water and sewer charges."

The City moved for reconsideration. Upon denial by the Bankruptcy Court, an appeal was taken to the District Court. In its brief and at oral argument, the City for the first time argued that 11 U.S.C. S 505(a)(2)(B) precluded the Bankruptcy Court from deciding Custom's right to a refund because Custom did not make proper refund requests under New Jersey law for any of the years at issue. The District Court rejected this argument and ruled that S 505(a)(2)(B) was not a jurisdictional statute but a defense that the City waived by not raising below. In Orders filed on January 19, 1999, and February 5, 1999, the District Court affirmed the judgment of the Bankruptcy Court.

The City now appeals to this Court.

II. Standard of Review

We exercise plenary review of the District Court's determinations reviewing the order of the Bankruptcy Court. See In re Trans World Airlines Inc., 145 F.3d 124, 130 (3d Cir. 1998). We review the Bankruptcy Court's legal determinations de novo, its factual findings for clear error, and its exercise of discretion for abuse thereof. Id. at 131.

III. Discussion

A. Jurisdiction to Adjudicate Tax Refunds under 11 U.S.C. S 505(a)

Section 505(a) of the Bankruptcy Code permits the bankruptcy court to adjudicate a debtor's tax liability. It states:

(1) Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, 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.

(2) The court may not so determine--

(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; or

(B) any right of the estate to a tax refund, before the earlier of--

(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or

(ii) a determination by such governmental unit of such request.

11 U.S.C. S 505 (1993). We have consistently interpreted S 505(a) as a jurisdictional statute that confers on the bankruptcy court authority to determine certain tax claims. In Quattrone Accountants, Inc., v. Internal Revenue Service, 895 F.2d 921, 923 (3d Cir. 1990), we stated: "when we review how the language and purpose of Section 505 has evolved, we conclude that Section 505 was intended to clarify the bankruptcy court's jurisdiction over tax claims . . . ." See also In re H & H Beverage Distributors, 850 F.2d 165, 166-67 (3d Cir. 1998); In the Matter of Ribs-R-Us, Inc., 828 F.2d 199, 202 (3d Cir. 1987).³

It is undisputed by either party that the Bankruptcy Court had jurisdiction, pursuant to S 505(a)(1), to reduce Custom's property tax assessments for the 1992 through 1997 tax years. The more difficult task lies in defining the precise contours of the jurisdictional grant embodied in S 505 with regard to refunds and offsets of taxes already paid by Custom. Although the bankruptcy court is given broad discretion to determine the debtor's tax liability in S 505(a)(1), S 505(a)(2)(B) precludes the bankruptcy court from determining the right of the estate to a tax refund before the earlier of 120 days after the trustee properly files a tax refund claim or a determination by the taxing authority denying the tax refund request. The City contends that the S 505(a)(2)(B) limitation on the bankruptcy court's jurisdiction applies here because Custom failed to contest the City's valuation pursuant to N.J.S.A. 54:3-21, which provides that a taxpayer must file an appeal to the county board of taxation on or before April 1 of the tax year, or 45 days from the time notices of assessment are mailed.⁴ According to the City, because Custom did not comply with state procedural requirements and request a reassessment for any of the tax years at issue, it failed to "properly request" refunds as required by S 505(a)(2)(B)(i). The Bankruptcy Court, the City therefore concludes, was without jurisdiction to order the City to refund any overpayments made by Custom.⁵

In evaluating the City's claim that the ...