Harker v. GYPC, Inc. (In re GYPC, Inc.)

• Decision Date: 08 February 2022
• Docket Number: Case No. 17-31030,Adv. No. 21-3025
• Citation: 639 B.R. 739
• Parties: IN RE: GYPC, INC., Debtor. Donald F. Harker, III, Chapter 7 Trustee, Plaintiff, v. GYPC, Inc. et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

639 B.R. 739

IN RE: GYPC, INC., Debtor.Donald F. Harker, III, Chapter 7 Trustee, Plaintiff,

v.GYPC, Inc. et al., Defendants.

Case No. 17-31030

Adv. No. 21-3025

United States Bankruptcy Court, S.D. Ohio, Western Division.

Signed February 8, 2022

Entered February 9, 2022

J. Michael Debbeler, Jeffrey M. Hendricks, Graydon Head & Ritchey, LLP, Cincinnati, OH, for Plaintiff.

Philip Bednar, US Department of Justice, Tax Division, Washington, DC, for Defendant United States of America by and through the Internal Revenue Service.

Spencer Shields Cowan, Aaron Mark Herzig, Michael Meyer, Taft Stettinius & Hollister LLP, W. Timothy Miller, Cincinnati, OH, for Defendants Christopher Cummings, Eric Webb.

DECISION DENYING THE MOTION TO DISMISS OF DEFENDANTS CHRISTOPHER F. CUMMINGS AND ERIC WEBB (DOC. 16)

Guy R. Humphrey, United States Bankruptcy Judge

Procedural and Factual Background

On October 1, 2021 the Chapter 7 Trustee, Donald F. Harker, III (the "Trustee"), commenced an adversary proceeding against GYPC, Inc. ("GYPC"), Christopher F. Cummings ("Cummings"), Eric Webb ("Webb"), and the United States of America. Doc. 1. In his complaint, the Trustee pleads a single count for the avoidance of post-petition transfers pursuant to 11 U.S.C. § 549. Specifically, the Trustee alleges the filing of two post-petition C Corporation tax returns should be avoided as unauthorized post-petition transfers. The Trustee asserts that those tax returns were filed without his authority. Cummings and Webb, the only two shareholders of GYPC (collectively, the "Shareholders"), have moved to dismiss this adversary proceeding for failure to state a claim upon which relief may be granted, and also argue the complaint should be dismissed because this court lacks subject matter jurisdiction.¹

GYPC filed a Chapter 11 petition on March 30, 2017. Estate Doc. 1. According to the complaint, Cummings released his rights in a Florida revocable trust on February 1, 2017, and this action caused a change to GYPC's tax status from a Subchapter S corporation to a C corporation. Doc. 1 at ¶ 10.² Before the case converted to Chapter 7, GYPC filed both its 2016 tax return and a partial year return covering the January 2017 pre-conversion period. Id. The filings of these pre-conversion S Corporation tax returns are not at issue in this adversary proceeding. The Chapter 11 case was converted to Chapter 7 on August 16, 2019. Estate Doc. 219. However, the Trustee is seeking to avoid the C Corporation returns that he alleges were filed post-conversion without his "knowledge or authority." Doc. 1 at ¶ 10. Specifically, he seeks to avoid the C Corporation GYPC tax returns for the partial year February 1 through December 31, 2017 and for the complete 2018 tax year (collectively, the "Post-Conversion Filed Returns"). Id. at ¶ 21. The Post-Conversion Filed Returns were filed on October 11, 2019. Id. at ¶ 10.

In 2020 the United States Internal Revenue Service ("IRS") initially issued a notice that it was not accepting the Post-Conversion Filed Returns. Id. Subsequently, on August 31, 2020, Cummings’ counsel notified the IRS that GYPC's S Corporation status had been terminated. Id. On September 4, 2020, apparently in response to the IRS's initial notices, the Trustee filed a 2019 tax return for GYPC as an S Corporation return. Id. But the IRS issued a new notice on September 28, 2020 that GYPC's S Corporation status was terminated as of February 1, 2017. Id. The IRS also filed a claim in GYPC's case, subsequently amended to $6,419,715.22, as the pre-petition termination of GYPC's S Corporation status transferred tax liability from the Shareholders to GYPC's bankruptcy estate. POC 35-1, 35-2.

The Trustee amended the Post-Conversion Filed Returns, the 2016 S Corporation Return, and the January 2017 S Corporation return. In re GYPC Inc. , Case No. 17-31030, 2021 WL 4618410, at *2, 2021 Bankr. LEXIS 2817, at *1 (Bankr. S.D. Ohio Oct. 5, 2021). These amended returns apparently moved deferred income from tax year 2017 back to GYPC's pre-petition 2016 S Corporation return. Id. The result of such amended returns, if ultimately accepted, would be the elimination of the GYPC bankruptcy estate tax liability for that income, with the tax liability flowing back to the Shareholders. Id. The court previously determined that neither Bankruptcy Code § 105 nor § 505(a)(1) are proper vehicles to determine the authority of the Chapter 7 Trustee to amend the S Corporation tax returns filed by the Shareholders, unless raised as part of the larger question § 505(a)(1) addresses, "the amount or legality of any tax." 2021 WL 4618410, at *2-4, 2021 Bankr. LEXIS 2817, at *3–5.

Motion to Dismiss for Lack of Subject Matter Jurisdiction

The initial question for the court, in this litigation or any other, is whether this bankruptcy court has subject matter jurisdiction to determine this adversary proceeding. Answers in Genesis of Ky., Inc. v. Creation Ministries Int'l, Ltd. , 556 F.3d 459, 465 (6th Cir. 2009) ("[F]ederal courts have a duty to consider their subject matter jurisdiction in regard to every case and may raise the issue sua sponte. "). The Shareholders have raised this issue in their motion to dismiss. See Fed. R. Civ. P. 12(b)(1) (made applicable by Fed. R. Bankr. P. 7012(b) ) (party may move to dismiss for "lack of subject-matter jurisdiction"). But even if the Shareholders had not raised it, this court has an ongoing and independent requirement to scrutinize its jurisdiction. Fed. R. Civ. P. 12(h)(3) (made applicable by Fed. R. Bankr. P. 7012(b) ) ("If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action."). Although the Shareholders are the parties moving to dismiss, the burden to establish subject-matter jurisdiction rests with the Trustee. Rogers v. Stratton Indus., Inc. , 798 F.2d 913, 915 (6th Cir. 1986) (cited in Rhiel v. Cent. Mortg. Co. (In re Kebe ), 444 B.R. 871, 875 (Bankr. S.D. Ohio 2011) ).

The Shareholders argue that this court does not have subject matter jurisdiction because federal courts are generally forbidden from entering declaratory relief on tax matters. The Declaratory Judgment Act states:

In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986, a proceeding under section 505 or 1146 of title 11 , or in any civil action involving an antidumping or countervailing duty proceeding regarding a class or kind of merchandise of a free trade area country (as defined in section 516A(f)(9) of the Tariff Act of 1930), as determined by the administering authority, any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

28 U.S.C. § 2201(a) (emphasis added). The parties do not dispute that the two exceptions relevant to bankruptcy courts do not apply.³

The Trustee responds that he is not seeking relief covered by the Declaratory Judgment Act (the "DJA") and this adversary proceeding is limited to a straight-forward attempt to avoid a post-petition transfer under Bankruptcy Code § 549. If that is the only interpretation of the complaint, the court's subject matter jurisdiction is clear. See In re Still v. Rossville (In re Chattanooga Wholesale Antiques, Inc. ), 930 F.2d 458, 461 n.2 (6th Cir. 1991) (quoted in Guinn v. Oakwood Properties, Inc. (In re Oakwood Markets, Inc. ), 203 F.3d 406 (6th Cir. 2000) (" 11 U.S.C. § 549(a) permits a trustee to avoid a post-petition transfer of property of the estate that occurs after commencement of the case and is not authorized by the Bankruptcy Code or by the Court.")). But the Shareholders point out that the complaint, in the "wherefore" clause, seeks a "declaration" that the filing of the post-petition, post-conversion tax returns were "not authorized and void," or alternatively to declare that the Trustee's amended returns "shall be considered the [tax] returns" of the Debtor. Doc. 1 at 7.

As an initial matter, the DJA "authorizes courts to issue declaratory judgments except with respect to Federal taxes." Torp. v. United States, No. 18-2114, 2019 WL 3402472, at *2, 2019 U.S. App. LEXIS 20032, at *4 (6th Cir. July 3, 2019) (cleaned up). See also Hollar v. United States (In re Hollar ), Adv. No. 94-6042, 1995 WL 753833, at *1-2, 1995 Bankr. LEXIS 1199, at *2-5 (Bankr. M.D.N.C. Aug. 9, 1995) (count seeking relief "with respect to federal taxes" under the DJA must be dismissed). This exception for disputes involving federal taxes is jurisdictional in nature. Rivero v. Fidelity Invs., Inc., 1 F.4th 340 (5th Cir. 2021). The DJA operates along with the Anti-Injunction Act, which provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person." Id. at *1-2 (quoting 26 U.S.C. § 7421(a) ). See Mine Workers 1992, Benefit Plan v. Leckie Smokeless Coal Co. (In re Leckie Smokeless Coal Co. ), 99 F.3d 573, 583-84 (4th Cir. 1996) ("The purposes of the two statutory provisions are to allow the Federal Government to assess and collect allegedly due taxes without judicial interference and to compel taxpayers to raise their objections to collected taxes in suits for refunds.").

The complaint, although perhaps not drafted with ideal precision, does not seek a declaratory judgment. The first statement seeking a "declaration" merely re-states the substantive elements of the § 549 claim allegations of the complaint. The second statement seeks a "declaration" addressing the Trustee's right to file or amend the C Corporation's returns if the original returns are avoided. While that statement is not a necessary finding to determine the §...