Davis v. W. Va. State Tax Dep't (In re Patriot Coal Corp.)

• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Writing for the Court: Keith L. Phillips, United States Bankruptcy Judge
• Citation: Davis v. W. Va. State Tax Dep't (In re Patriot Coal Corp.), 562 B.R. 632 (Bankr. E.D. Va. 2016)
• Decision Date: 22 November 2016
• Docket Number: 15–32450–KLP,Adv. Pro. No. 16–03109–KLP
• Parties: IN RE: PATRIOT COAL CORPORATION, et al., Debtors. Eugene Davis, solely in his capacity as Liquidating Trustee for the PCC Liquidating Trust, Plaintiff, v. West Virginia State Tax Department, Defendant.

562 B.R. 632

IN RE: PATRIOT COAL CORPORATION, et al., Debtors.

Eugene Davis, solely in his capacity as Liquidating Trustee for the PCC Liquidating Trust, Plaintiff,

v.West Virginia State Tax Department, Defendant.

15–32450–KLP

Adv. Pro. No. 16–03109–KLP

United States Bankruptcy Court, E.D. Virginia, Richmond Division .

Signed November 22, 2016

Kevin W. Barrett, Bailey & Glasser, LLP, Charleston, WV, for Defendant.

Jeremy S. Williams, Kutak Rock LLP, Richmond, VA, for Plaintiff.

MEMORANDUM OPINION

Keith L. Phillips, United States Bankruptcy Judge

Plaintiff, Eugene Davis, liquidating trustee (the "Trustee") for the PCC Liquidating Trust (the "Liquidating Trust"), successor-in-interest to Patriot Coal Corporation ("Patriot"), Panther, LLC ("Panther"), Catenary Coal Company ("Catenary"), and Coyote Coal Company ("Coyote") (collectively, the "Debtors"), filed a "Complaint for Turnover of Tax Refund" (the "Complaint") against the West Virginia State Tax Department (the "Tax Department") seeking the turnover of at least $5,082,011.72 in tax refunds and interest. In response, the Tax Department filed a motion to dismiss (the "Motion to Dismiss"), contending that the Complaint must be dismissed because this Court lacks jurisdiction to adjudicate the Trustee's claims on the basis of sovereign immunity. Alternatively, in the Motion to Dismiss, the Tax Department contends that the Court should abstain from adjudicating the Trustee's claims. For the reasons set forth below, the Motion to Dismiss will be granted.¹

BACKGROUND

The Tax Department seeks dismissal for lack of subject matter jurisdiction under Rule 12(b)(1).² When, as here, the jurisdictional facts are not in dispute, the Fourth Circuit has held that "the facts alleged in the complaint are taken as true, and the motion must be denied if the complaint alleges sufficient facts to invoke subject matter jurisdiction."³ In connection with its analysis, the Court may consider the documents attached to the Complaint and the Motion to Dismiss "so long as they are integral to the complaint and authentic."⁴ Viewed as such, the Trustee alleges the following facts.

On July 9, 2012, Patriot and 100 of its affiliates commenced voluntary cases under chapter 11 (the "Prior Cases") in the U.S. Bankruptcy Court for the Southern District of New York. On December 19, 2012, these cases were transferred to the U.S. Bankruptcy Court for the Eastern District of Missouri (the "Missouri Bankruptcy Court"). During the pendency of the Prior Cases, the Tax Department filed proofs of claim against fifteen entities, including the Debtors.⁵ On November 4, 2013, the parties entered into a settlement agreement (the "Settlement Agreement") that resolved all claims that the Tax Department had asserted against the fifteen entities. The Settlement Agreement, which was noticed and approved in accordance with the requirements of the Missouri Bankruptcy Court's Claims Settlement Order, released the Tax Department's claims and causes of action in exchange for allowed priority and unsecured claims against the Debtors. In section 7 of the Settlement Agreement, the parties agreed that the Missouri Bankruptcy Court would retain jurisdiction with respect to any disputes arising from or other actions to interpret, administer or enforce its terms.⁶

On February 6, 2015, Catenary, Coyote and Panther filed a Motion to Enforce the Settlement Agreement (the "Enforcement Motion") in the Missouri Bankruptcy Court. They alleged that they were entitled to tax refunds related to overpayment of coal severance taxes for the tax years 2011 and 2012 and that the Tax Department refused to pay the refund claims, in part, because of its erroneous understanding that it had been released from the refund claims pursuant to the Settlement Agreement. In its response to the Enforcement Motion, the Tax Department conceded that the Settlement Agreement did not preclude issuing the refunds but disputed the amounts claimed. The Tax Department asked that a hearing on the Enforcement Motion scheduled for March 2, 2015, be continued to allow the parties an opportunity to resolve the refund issues. In response to the Tax Department's concession, the Debtors withdrew the Enforcement Motion.

On May 12, 2015, Patriot and certain of its subsidiaries (including Panther, Catenary and Coyote) filed voluntary petitions under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Virginia.⁷ On October 9, 2015, the Court confirmed the Debtors' Fourth Amended Joint Plan of Reorganization (the "Plan"). Pursuant to the Plan, all of the assets of the Debtors' estates that were not sold, abandoned, or otherwise transferred vested in the Liquidating Trust on October 26, 2015, the effective date of the Plan. The Trustee is the duly appointed trustee for the Liquidating Trust.

The Trustee claims that the Tax Department owes Panther a severance tax refund for tax year 2012, Catenary a severance tax refund for tax year 2011, Coyote a severance tax refund for tax year 2012, and Patriot a business franchise tax refund for tax year 2014. In total, the Tax Department is alleged to be in possession of at least $5,082,011.72 in tax refunds and interest due and owing to the Liquidating Trust. Despite continuous demands for payment beginning in March 2014, the Tax Department has refused to pay the tax refunds.

In the Complaint, the Trustee alleges that the tax refunds owed to Panther, Patriot, Catenary and Coyote constitute property of the estate under 11 U.S.C. § 541 that is due and owing to the Liquidating Trust and is therefore subject to turnover pursuant to 11 U.S.C. § 542. He further alleges that more than 120 days have passed since the Plaintiff properly requested the return of the tax refunds and that because the Tax Department has refused the refund request, this Court may determine the refund liability under 11 U.S.C. § 505(a)(2)(B) and require the Tax Department to turn over the tax refunds.

On June 13, 2016, the Tax Department filed the Motion to Dismiss, in which it asserts that the Debtors and the Trustee failed to properly apply for the alleged refunds in accordance with state law and that the Trustee is seeking refunds that were properly set off against taxes owing before the Prior Cases were filed. The Tax Department also states that it did not file a proof of claim in Patriot's 2015 bankruptcy case despite being owed a balance of approximately $10,000,000 in coal severance taxes pursuant to the Settlement Agreement.

The Tax Department contends that regardless of the substance of the refund claims, the Complaint violates the sovereign immunity of the State of West Virginia under the Eleventh Amendment and must be dismissed. Alternatively, the Tax Department contends that the Court should abstain from hearing this suit pursuant to 28 U.S.C. § 1334(c)(1).

DISCUSSION

The district courts of the United States have original and exclusive jurisdiction "of all cases under title 11" and "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11."⁸ The United States District Court for the Eastern District of Virginia has referred all such proceedings to this Court under its General Order of Reference entered August 16, 1984. Accordingly, this Court has authority to hear and determine this matter and enter an appropriate order.⁹

On its face, the Trustee's claim appears to be within this Court's core jurisdiction because it is an action brought pursuant to § 542 of the Bankruptcy Code.¹⁰ Although the claim is now vested in the Liquidating Trust, the post-confirmation nature of this suit would not in itself deprive the Court of subject matter jurisdiction, since the Trustee's claim has a close nexus to this bankruptcy case and directly affects distributions under the Plan.¹¹ Nevertheless, the Tax Department asserts that the Court lacks jurisdiction to adjudicate this matter due to sovereign immunity.

Sovereign Immunity

The Eleventh Amendment to the United States Constitution provides "[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State." U.S. Const. Amend. XI. As a general rule, the Eleventh Amendment's principle of sovereign immunity prevents federal courts, including bankruptcy courts, from entering money judgments against a state.¹² A state's sovereign immunity can, however, be waived.¹³

In the Bankruptcy Reform Act of 1994,¹⁴ Congress revised and enacted the current version of 11 U.S.C. § 106.¹⁵

Subsection (a) of § 106 abrogates the sovereign immunity of all governmental units with respect to certain sections of the Bankruptcy Code, including the turnover provisions of § 542.

In 1996, the Supreme Court, in Seminole Tribe of Florida v. Florida ,¹⁶ determined that Congress has no authority under Article I of the Constitution to abrogate a state's sovereign immunity but held that it may do so when it is acting pursuant to its enforcement power under the Fourteenth Amendment. Citing Seminole Tribe , the Fourth Circuit, in Schlossberg v. Maryland (In re Creative Goldsmiths of Washington, D.C. ),¹⁷ found that Congress enacted § 106(a)'s abrogation of state sovereign immunity pursuant to its power under Article I's Bankruptcy Clause¹⁸ rather than its authority under the Fourteenth Amendment and, therefore, "Congress' effort to abrogate the states' Eleventh Amendment immunity through its 1994 enactment of 11 U.S.C. § 106(a) [was] unconstitutional and ineffective."¹⁹

Later, recognizing that Eleventh Amendment protections only apply to judicial proceedings constituting a "suit," the Fourth Circuit in In re NVR, LP ,²⁰ developed a general test for determining whether a federal judicial action must be deemed a suit against the state. The Fourth Circuit held that from a procedural...