Clerk of Circuit Court v. NVR Homes, Inc.
| Decision Date | 17 July 1998 |
| Docket Number | No. 97-1238-A.,97-1238-A. |
| Parties | CLERK OF THE CIRCUIT COURT FOR ANNE ARUNDEL COUNTY, MARYLAND, et al., Appellants, v. NVR HOMES, INC., Appellee/Cross-Appellant. |
| Court | U.S. District Court — Eastern District of Virginia |
Mark L. Earley, Attorney General of Virginia, Paul S. Stahl, Assistant Attorney General, Fairfax, VA, J. Joseph Curran, Jr., Attorney General of Maryland, Julia M. Freit, Assistant Attorney General, Baltimore, MD, for Maryland Circuit Court Clerks.
Mark L. Earley, Attorney General of Virginia, Paul S. Stahl, Assistant Attorney General, Fairfax, D. Michael Fisher, Attorney General of Pennsylvania, Robert C. Edmundson, Senior Deputy Attorney General, Pittsburgh, PA, for Commonwealth of Pennsylvania.
Arnold M. Weiner, Snyder, Weiner, Weltchek, Vogelstein & Brown, Pikesville, MD, Allan P. Hillman, Nathan D. Adler, Neuberger, Quinn, Gielen, Rubin & Gibber, PA, Baltimore, MD, James M. Sack, Sack & Associates, McLean, for NVR, Homes, Inc.
At issue in this bankruptcy appeal are the following questions:
During the 1980's, debtor NVR Homes Inc.1 grew into a leading home builder and mortgage lending facility. Operating chiefly in the Virginia and Maryland suburbs of Washington D.C., NVR engaged in the practice of buying residential lots, building houses thereon, and then selling the improved lots at a profit. In 1987, in furtherance of its business operations, NVR purchased Ryan Homes, a home construction company. In connection with that acquisition, NVR incurred approximately $235,000,000 in bank debt to a consortium of eight banks ("the Bank Group"). It also issued approximately $220,000,000 in subordinated debt securities, consisting of notes and debentures.
As the real estate market declined in the late 1980's, NVR's decreasing operating profits prevented it from complying with its substantial debt obligations. In the face of mounting financial pressure, NVR was forced to develop and implement an operational restructuring, and to initiate negotiations with the Bank Group on a proposed restructuring of its working capital. Although NVR made progress in implementing this restructuring, the Bank Group declined to continue funding the enterprise after May 31, 1992. As a result, NVR filed a voluntary Chapter 11 bankruptcy petition on April 6, 1992.
The bankruptcy court granted NVR's first day motions, thereby authorizing NVR, as debtor in possession, to sell properties free and clear of liens, and to obtain secured, priority financing. In essence, the bankruptcy court's orders authorized NVR to continue to conduct its day-to-day business substantially as it had prior to commencement of its reorganization case, i.e., to acquire and dispose of lots in the ordinary course of business, and thereby avoid liquidation. Consistent with this authorization, NVR, from April 6, 1992, through September 30, 1993, engaged in 5,571 real property transfers in the States of Maryland, Pennsylvania, Virginia, New York, Delaware, and North Carolina. During that time, NVR paid in excess of $8.3 million in transfer and recordation taxes to those states and to certain local jurisdictions within those states. Of this amount, approximately $6.3 million was paid to various Maryland jurisdictions,2 and approximately $600,000 was paid to various Pennsylvania jurisdictions.3 These Maryland and Pennsylvania jurisdictions are collectively referred to herein as the "Taxing Authorities."
Because the NVR plan of reorganization confirmed by the bankruptcy court on July 22, 1993 ("the Plan") is central to the disputes at bar, a brief description of its history and contents is in order. Initially, NVR had anticipated that its pre-petition debt could be restructured and retired over time. Its first plan of reorganization was based on this assumption. Yet, because the Bank Group members would not agree to any plan of reorganization that did not provide for expedited payment of their claims, NVR developed the Plan that was confirmed by the bankruptcy court, and which provided for a public debt offering sufficient to cover the debt to the Bank Group. Specifically, the Plan required the sale of Senior Notes "in such an amount as will provide the Debtors sufficient cash to pay the Allowed Class 2 Claims and Allowed Claims in other Classes that are to be paid in cash on the Effective Date." The Plan also provided for the cancellation of NVR's subordinated debt securities in exchange for the issuance of approximately 91.1% of the initially outstanding equity interests in NVR. Thus, under the Plan, NVR creditors holding notes and debentures would receive shares of NVR in return for the cancellation of their subordinated debt securities.
To facilitate its implementation, and pursuant to 11 U.S.C. § 1146(c), the Plan, in section 4.13, exempted NVR's issuance and exchange of these securities from state and local taxes. It also exempted from such taxes any transfer of NVR's property made "under, in furtherance of, or in connection with the Plan."4 And, in confirming the Plan, the bankruptcy court incorporated this language in its order, and retained jurisdiction over the "interpretation or enforcement of the Plan."
The Taxing Authorities were served with copies of the proposed Plan and related papers because they were creditors of the estate for taxes unrelated to the transfer and recordation taxes at issue here. None of the Taxing Authorities objected to the Plan, and, after the July 22, 1993 order confirming the Plan, none appealed, as they might have,5 to the district court.
So far as the record reflects, the Plan was implemented without significant incident; the specified securities issued free from state and local taxation, the Bank Group members received payment of NVR's pre-petition debt, the subordinated debt security holders received their equity interests in NVR, and NVR's debts were canceled. All of this was accomplished prior to September 30, 1993, at which time NVR emerged from its Chapter 11 bankruptcy. Importantly, throughout the period of bankruptcy—beginning April 6, 1992 with the filing of the petition, continuing through July 22, 1993 when the Plan was confirmed, and concluding September 30, 1993 when the Plan was fully implemented and the bankruptcy period ended—NVR continued to operate its business as a debtor in possession, buying property, constructing homes, and then selling the homes. NVR paid transfer and recordation taxes relating to these transactions to various state and local taxing jurisdictions.
Thereafter, during 1994-95, NVR, citing § 1146(c) and the Plan, sought refunds from the various jurisdictions. Some of the jurisdictions, namely Virginia, New York, Delaware, and North Carolina, and the local jurisdictions therein, refunded to NVR all of the taxes collected.6 However, the state and local taxing authorities in Maryland and Pennsylvania were less obliging.
In response, NVR initiated a contested matter pursuant to Rule 9014, Fed. R. Bankr.P.,7 requesting a declaration that its real property transfers during the period from April 6, 1992 through September 30, 1993 were exempt from taxation under the provisions of the Plan and under 11 U.S.C. § 1146(c). Notice of the motion was served on the Taxing Authorities, all of whom responded by filing motions for abstention, or alternatively, for dismissal or summary judgment.8 By order entered on April 4, 1996, the bankruptcy court granted NVR's motion, finding NVR's real property transfers from April 6, 1992 through September 30, 1993 to be exempt from transfer and recordation taxes under 11 U.S.C. § 1146(c).9
Shortly thereafter, the Taxing Authorities moved the bankruptcy court to reconsider its ruling in light of Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), in which the Supreme Court held that "the Eleventh Amendment restricts the judicial power under Article III, and Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction." Id. at 72-73, 116 S.Ct. 1114. In light of Seminole Tribe, the bankruptcy court granted the motion in part, holding that Congress' attempt to abrogate the states' Eleventh Amendment immunity through 11 U.S.C. § 106 was unconstitutional. See In re NVR L.P., 206 B.R. 831, 843-44 (Bankr.E.D.Va.1997).10 And absent abrogation of the Taxing Authorities' sovereign immunity, the bankruptcy court further held that NVR's motion for a declaration of tax exemption was an impermissible "suit" against "arms of the State" for Eleventh Amendment purposes. See id. Accordingly, the bankruptcy court amended its April 4, 1996 order to make explicit that the order was not binding on the Commonwealth of Pennsylvania or the Maryland circuit court clerks in their role as collectors of the state transfer tax. See id. at 852-53.11
On appeal, the Taxing Authorities argue that NVR's post-petition, pre-confirmation transfers of real property are not entitled to an exemption from transfer and recordation taxes under 11 U.S.C. § 1146(c).12 NVR disagrees, of course, and also cross-appeals, contending that none of the Taxing Authorities have a basis to invoke Eleventh Amendment immunity because NVR's motion for a declaration construing § 1146(c) was not a "suit" against one of the United States.
Findings of fact made by the bankruptcy court are reviewed for clear error. See Fed. R. Bankr.P. 8013; In re Stanley, 66 F.3d 664, 667 (4th Cir.1995). And, in this regard, a finding of fact is deemed to be clearly erroneous when, although there is some...
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