Federal Deposit Ins. Corp. v. State of NY

• Decision Date: 31 July 1989
• Docket Number: No. 88 Civ. 1864 (JES).,88 Civ. 1864 (JES).
• Citation: 718 F. Supp. 191
• Parties: FEDERAL DEPOSIT INSURANCE CORP., Plaintiff, v. STATE OF NEW YORK and City of New York, Defendants.
• Court: U.S. District Court — Southern District of New York

718 F. Supp. 191

FEDERAL DEPOSIT INSURANCE CORP., Plaintiff, v. STATE OF NEW YORK and City of New York, Defendants.

No. 88 Civ. 1864 (JES).

United States District Court, S.D. New York.

July 31, 1989.

Thacher Proffitt & Wood, New York City, for plaintiff; Joel B. Harris, David G. Greene, John F. Finetti, of counsel.

Robert Abrams, Atty. Gen. State of N.Y., New York City, for defendant, State of N.Y.; Frederic L. Lieberman, Rosalie J. Hronsky, Asst. Attys. Gen., of counsel.

Peter L. Zimroth, Corp. Counsel of City of New York, New York City, for defendant, City of New York; Gale Zareko, Stanley Buchsbaum, Asst. Corp. Counsel, of counsel.

Hughes, Hubbard & Reed, New York City, for amici curiae; David R. Tillinghast, Merrikay S. Hall, Mary Anne Mayo, of counsel.

OPINION AND ORDER

SPRIZZO, District Judge:

The Federal Deposit Insurance Corporation ("FDIC") brings this action for declaratory and injunctive relief pursuant to 28 U.S.C. § 1345 (1982) against the State of New York ("State") and the City of New York ("City").¹ The FDIC has moved for summary judgment and the State and City have cross-moved for judgment on the pleadings or in the alternative for summary judgment. For the reasons that follow, the defendants' motion for judgment on the pleadings is granted and the FDIC's motion is denied.

BACKGROUND

In the early 1980s, it became apparent that many savings banks were facing severe losses brought about by the volatile interest rates of the previous decade. See S.Rep. No. 536, 97th Cong., 2d Sess. 4, reprinted in 1982 U.S.Code Cong. & Admin.News at 3055-59. These losses resulted from the increasingly large disparity between the relatively low returns on long term fixed rate mortgages and mortgage backed securities, and the costs associated with paying higher and higher interest rates and dividends in order to retain depositors in an increasingly competitive and deregulated market. Id. The losses generated by this phenomenon, in turn, drastically reduced the net worth of the financial institutions affected, thereby creating a very real risk of insolvency and heightening the possibility that a massive financial burden would eventually be thrust upon the nation's banking insurance agencies, of which plaintiff is one. Id.

Congress responded to this crisis in the savings bank industry by passing the Garn Act in the fall of 1982. One provision of that Act, 12 U.S.C. § 1823(i)², sought to bolster the net worth of ailing savings banks by allowing a qualifying bank³ to sell an instrument called a net worth certificate ("NWC") to the FDIC. In return, the FDIC issues a promissory note corresponding to the value of the NWC and paying an interest rate equal to the rate of dividend payment on the NWC. See 12 U.S.C. § 1823(i)(1)(B). The promissory note then becomes part of the bank's capital account, bolstering its net worth without actually taking any funds out of the United States Treasury. In short, the note is a paper asset guaranteed by the FDIC.

In addition to receiving the promissory note, a bank participating in the program becomes, by the terms of the Act, exempt from state and local taxes levied upon their deposits or the interest or dividends paid on those deposits.⁴ In December of 1982 the Bowery Savings Bank ("Bowery") issued $58,700,000 worth of the above-described net worth certificates.⁵

Nevertheless, the State and the City of New York taxed the interest paid on the Bowery's deposits during the calendar year 1982,⁶ and the City continues to hold approximately 1.7 million dollars of those taxes which the FDIC seeks to recover on the basis of an assignment taken from the Bowery.⁷ In addition, the City and the State taxed several other banks that had issued NWCs from January 1982 to December 1984. See Affidavit of David R. Tillinghast, Memorandum of Law of Amici Curiae, Ex. A at ¶¶ 17-18.

The State received petitions claiming an exemption from the State tax from fifteen of those banks, between September, 1986 and May, 1988. See Affidavit of Mark Volk ("Volk Aff.") at ¶ 3. Hearings on these petitions have been held in abeyance pending the outcome of the instant action. See id. at ¶ 10. On March 15, 1983, the Bowery requested a refund of prepaid taxes for 1982, and received that refund in June, 1982. See Plaintiff's Statement Pursuant to Rule 3(g) at ¶¶ 13-14. The State plans to reassess the Bowery's 1982 tax, but has not yet done so because the Bowery consented to extend the limitations period for assessment of that tax. See Volk Aff., Ex. B.⁸

The Bowery filed a refund claim with the City on March 15, 1983, and requested a hearing on March 1, 1985. See Affidavit of Ramon Cintron ("Cintron Aff.") at ¶ 2. That claim has not yet been processed because of delays necessitated by a 1985 New York Court of Appeals decision⁹ that required a recalculation of the Bowery's City taxes for the years 1973-81. See Affidavit of Maria Jones ("Jones Aff.") at ¶ 3. In addition, in order to conduct a hearing on all issues raised by the refund claim, the City conducted an audit of the Bowery for the 1982 tax year. See id. at ¶ 4. That audit was completed on October 18, 1988. See id. As a consequence, the City is now prepared to proceed with the hearing.

In March 1988, the FDIC, in its corporate capacity, brought this action seeking a declaratory judgment that the taxes imposed by the City and the State violate the Garn Act's tax exemption provisions and are therefore unconstitutional under the Supremacy Clause of Article VI of the United States Constitution. In addition, the FDIC seeks to enjoin any future tax assessment or collection for taxable years from January 1, 1982 through December 31, 1984 and, pursuant to an assignment from the Bowery, to recover the taxes paid by the Bowery to the City for 1982.¹⁰

While there can be little question that the Garn Act bars the imposition of the Franchise tax during any period when NWCs are outstanding, the dispute here concerns how Congress intended the term "period" to be construed. The State and the City maintain that they are entitled to collect taxes for any part of a year until an NWC is issued because "period" only means that time period during which NWCs are actually outstanding. The FDIC contends that no assessment of taxes for 1982 is permissible because period refers to the entire taxable year during which an NWC is issued.¹¹ The State and the City also contend that a variety of jurisdictional barriers, the Tax Injunction Act, the 11th Amendment, and lack of standing, prevent resolution of the merits of this action.

DISCUSSION

I. Subject Matter Jurisdiction

A. Tax Injunction Act

Defendants first contend that the FDIC is barred from maintaining this action by 28 U.S.C. § 1341 (1982), the Tax Injunction Act. Section 1341 provides that "the district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain speedy and efficient remedy may be had in the courts of such State."¹² Thus, had this action been brought by any of the banks subjected to the City and State taxes, there could be no question that the Tax Injunction Act would bar the claim.¹³ The FDIC contends, however, that it is a federal instrumentality, and therefore, that it falls within a judicially created exception to the Tax Injunction Act, i.e., the "Tax Injunction Act is inapplicable to suits brought by the United States to protect itself and its instrumentalities from unconstitutional state exactions," Moe v. Confederated Salish & Kootenai Tribes, 425 U.S. 463, 470, 96 S.Ct. 1634, 1640, 48 L.Ed.2d 96 (1976); see Matter of Levy, 574 F.2d 128 (2d Cir. 1978). The Court rejects that contention.

The policy underlying the federal instrumentalities doctrine is to protect the sovereignty of the United States from the threat that is created by taxing an entity whose interests are identical to those of the federal government. See Moe, supra, 425 U.S. at 470, 96 S.Ct. at 1639; see also Federal Reserve Bank of Boston v. Commissioner of Corps. and Taxation, 499 F.2d 60 (1st Cir.1974); Federal Land Bank v. Board of County Comm'rs, 582 F.Supp. 1507 (D.Colo.1984).

The FDIC, however, as this Court noted in Lapadula & Villani, Inc. v. United States, 563 F.Supp. 782 (S.D.N.Y.1983), is not an agency which is an integral part of the governmental mechanism. The FDIC's profits do not inure to the benefit of the United States, and its losses are not generally borne by the United States. Thus, the public treasury will be unaffected by its success or failure in recovering the debts owed to it as a successor in interest to the claims of the bank. Simply put, the FDIC is a separate legal entity serving a proprietary rather than a sovereign function.

Moreover, the FDIC does not receive appropriations from the United States Treasury (although it may borrow from the Treasury at prevailing interest rates), is funded by assessments on insured banks, is paid interest on its investments in the United States Treasury, and is taxed by the United States on such interest. See Reply Affidavit of Rosalie J. Hronsky at ¶¶ 2-4. All these factors show that the FDIC is an entity quite separate from the United States.¹⁴

It follows that the rationale underlying the exception makes it inapplicable where, as here, the federal instrumentality seeking the injunction is not the entity being taxed, and there is no burden upon either the United States or its alleged instrumentality resulting from that tax.¹⁵ Unlike the typical federal instrumentality case where the instrumentality itself has been subjected to state taxation, in this case it is the banks which have been taxed, not the sovereign. Any impact the taxes have upon the FDIC flows from its status as an assignee. However, as an assignee, it cannot have any greater right to enjoin the tax than its assignor the bank would have, and it is clear that the Tax Injunction Act would bar a similar suit by the bank. Under these...