In re 995 Fifth Ave. Associates, LP

• Decision Date: 17 August 1993
• Docket Number: No. 93 Civ. 0026 (RPP).,93 Civ. 0026 (RPP).
• Parties: In re 995 FIFTH AVENUE ASSOCIATES, L.P., Debtor. 995 FIFTH AVENUE ASSOCIATES, L.P., Plaintiff-Appellee, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, James W. Wetzler, as Commissioner of Taxation and Finance, and Edward V. Regan, as Comptroller of the State of New York, Defendants-Appellees.
• Court: U.S. District Court — Southern District of New York

157 B.R. 942 (1993)

In re 995 FIFTH AVENUE ASSOCIATES, L.P., Debtor.

995 FIFTH AVENUE ASSOCIATES, L.P., Plaintiff-Appellee, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, James W. Wetzler, as Commissioner of Taxation and Finance, and Edward V. Regan, as Comptroller of the State of New York, Defendants-Appellees.

No. 93 Civ. 0026 (RPP).

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

August 17, 1993.

Robert J. Kaplan, New York City, for intervenor-appellants L.A. Cotton & Co., Inc. and Linda A. Guterman.

Lord Day & Lord, Barrett Smith, New York City by Laurence J. Kaiser, Karen M. Klein, for plaintiff-appellee 995 Fifth Ave. Associates L.P.

Robert Abrams, Atty. Gen. of the State of N.Y., New York City by David Cook, for defendants-appellees New York State Dept. of Taxation and Finance, et al.

OPINION AND ORDER

ROBERT P. PATTERSON, JR., District Judge.

Appellants, L.A. Cotton & Co., Inc. and Linda A. Guterman, its successor in interest (collectively, "LAC"), appeal from the November 16, 1992 order of the United States Bankruptcy Court for the Southern District of New York (Brozman, J.), denying its motion pursuant to 11 U.S.C. § 1109(b) to intervene as a party-plaintiff creditor in an adversary proceeding commenced by the bankrupt estate of plaintiff-appellee 995 Fifth Avenue Associates L.P. ("995"). For the reasons set forth below, the order of the Bankruptcy court is affirmed.

BACKGROUND

995 was the owner and operator of the Stanhope Hotel, located at 995 Fifth Avenue in New York City, and filed for Chapter 11 bankruptcy on February 4, 1988. 995's plan of reorganization under Chapter 11 was confirmed by the Bankruptcy Court in July 1989. Pursuant to that plan, 995 was to sell its interests in the Stanhope Hotel.

Appellant LAC is a creditor of 995's bankruptcy estate (the "Estate"), as is the New York State Department of Taxation and Finance (the "State").

995 filed a request for exemption from the New York State transfer gains tax under 11 U.S.C. § 1146(c), which exempts transfers of real property made pursuant to a confirmed plan from the payment of a "stamp tax or similar tax." The State denied 995's request for exemption, forcing 995 under protest to pay the assessed transfer gains tax in order to close the sale of the Stanhope Hotel. On January 13, 1989, the State removed approximately $2.6 million (the "Funds") out of the approximately $76 million in proceeds of the post-petition sale of 995's interest in the Stanhope Hotel, applying the $2.6 million to the payment of transfer gains taxes that the State claimed were due for the sale of the Stanhope Hotel. LAC claims that it received neither notice nor a hearing with respect to the State's removal of the Funds for tax purposes.

On February 28, 1989, 995 commenced an adversary proceeding seeking to recover the $2.6 million from the State on the grounds that the post-petition sale was exempt from the transfer gains tax and the State had unlawfully removed the funds from the property of the estate. 995 moved for summary judgment on its claim against the State, which argued that it was immune from suit pursuant to the Eleventh Amendment and that the New York transfer gains tax was not a "stamp tax or similar tax."

On August 1, 1990, the Bankruptcy Court granted summary judgment in favor of 995. R. at 72, 74. The Bankruptcy Court's order granting summary judgment contained four decretal paragraphs:

1. The Sale was and is exempt from the payment of the Gains Tax pursuant to Section 1146(c) of the Bankruptcy Code.

2. New York State has waived its sovereign immunity with respect to the Gains Tax for which it has filed a proof of claim in this case.

3. The State be, and they hereby are authorized and directed to refund to the Plaintiff, within eleven (11) days after the date of entry of this order, the Gains Tax Payment plus interest at the legal rate from the date on which the Gains Tax Payment was made through and including the date on which the refund directed by this order is delivered to the Plaintiff.

4. The State\'s cross-motion for summary judgment for failure to state a claim be, and the same hereby is denied.

Id. at 74.

On appeal, the district court affirmed the grant of summary judgment, finding that the State was not immune to suit under the Eleventh Amendment and that, because the New York transfer gains tax was a stamp tax or similar tax, 995 was entitled to an exemption from the transfer gains tax, and directing the State to refund the gains tax paid by 995. 116 B.R. 384 (S.D.N.Y.1990); 127 B.R. 533 (S.D.N.Y.1991).

By decision dated April 13, 1992, the Second Circuit Court of Appeals affirmed the district court's decision that the State was not immune from suit under the Eleventh Amendment. The Second Circuit held, however, that the transfer gains tax "is not a `stamp tax or similar tax,'" and reversed the district court's order "insofar as it directed New York State to refund gains tax paid by 995." 963 F.2d 503, 509, 513 (2d Cir.1992). The Supreme Court denied 995's petition for a writ of certiorari. See ___ U.S. ___, 113 S.Ct. 395, 121 L.Ed.2d 302 (1992).

On July 9, 1992, LAC moved, pursuant to 11 U.S.C. § 1109(b), to intervene in the adversary proceeding between the State and 995, relying solely on its status as a creditor of 995's estate. At the same time LAC filed an objection to the State's claim for transfer gains taxes. Both 995 and the State opposed LAC's motion to intervene pursuant to § 1109(b) on the grounds that (1) § 1109(b) does not apply to motions to intervene in adversary proceedings, (2) Rule 24 of the Federal Rules of Civil Procedure¹ is made applicable to adversary proceedings in bankruptcy by Bankruptcy Rule 7024, and (3) LAC's motion to intervene in the adversary proceeding between 995 and the State was untimely under Rule 24. See Fed.R.Civ.P. 24; see Bankr.R. 7024.

On December 15, 1992, LAC entered into a settlement agreement (the "Agreement") with Centrust Services Inc. ("Centrust"), pursuant to which LAC agreed to assign all of its claims against 995 and 995's estate to Centrust. Provision 3(f) of the Agreement states that the Agreement

"and the . . . assignments are not intended to affect Linda A. Guterman\'s standing as a creditor of . . . 995\'s Estate in the New York Bankruptcy Action. In light of Linda A. Guterman\'s continuing interest in a recovery out of the Estate, and in maximizing such recovery, nothing in this Agreement or the aforesaid assignments shall adversely effect, impede or impair Linda A. Guterman\'s right to intervene in any adversary proceeding between the Debtor and the State of New York, to object to any claim against the Estate . . . or to take any other action as she may deem necessary or proper to protect her continuing interest as a party in interest of the Estate."

995 Br.Ex.A.²

By order dated November 16, 1992, the Bankruptcy Court held that 11 U.S.C. § 1109(b) does not apply to adversary proceedings, and that LAC could intervene only pursuant to Fed.R.Civ.P. 24(b),³ made applicable to bankruptcy adversary proceedings by Bankruptcy Rule 7024. R. at 214-18.⁴ The Bankruptcy Court exercised its discretion to deny LAC's motion to intervene under Fed.R.Civ.P. 24(b). On January 28, 1993, LAC appealed the Bankruptcy Court's denial of its motion to intervene in the adversary proceeding. Both 995 and the State oppose the appeal.

DISCUSSION

The Court has jurisdiction over this bankruptcy appeal pursuant to 28 U.S.C. § 158(a). The Bankruptcy Court's findings of facts are reviewable only for clear error, while legal questions are subject to plenary review. Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 85 (2d Cir.1988).

Three issues are presented on this appeal: (1) whether under 11 U.S.C. § 1109(b) a creditor's right to intervene in an adversary proceeding commenced by a Chapter 11 debtor is absolute; (2) if so, whether the Second Circuit's judgment reversing the district court's affirmance of summary judgment in favor of 995 terminated the adversary proceeding, thereby leaving no proceeding in which LAC may intervene; and (3) if so, whether LAC remains a creditor for purposes of section 1109 after assigning its interest to the Resolution Trust Corporation and Centrust Services, Inc. (collectively, "Centrust"). Because § 1109(b) does not provide an absolute right to intervene in adversary proceedings, issues (2) and (3) need not be addressed.⁵

11 U.S.C. § 1109(b) provides:

A party in interest, including the debtor, the trustee, a creditor committee, an equity security holders\' committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.

LAC argues that § 1109(b) affords any creditor of a debtor's estate the absolute and unqualified right to intervene in an adversary proceeding that is brought by the debtor. 995 urges an interpretation of the term "case" in § 1109(b) that excludes "adversary proceedings."

A. Other Circuits

"Unfortunately, the Code does not explain the difference between a `case,' in which a creditor plainly may intervene, and an `adversary proceeding,' in which a creditor has a debatable right to intervene." In re Bumpers Sales, Inc., 907 F.2d 1430, 1433 (4th Cir.1990). As a result, there is a split of authority between the Third Circuit and the Fifth Circuit as to whether § 1109(b)'s guarantee of an absolute right to intervene in bankruptcy cases extends to an adversary proceeding commenced by a debtor. The Third Circuit in In re Marin Motor Oil, Inc., 689 F.2d 445 (3d Cir.1982), cert. denied, 459 U.S. 1206, 103 S.Ct. 1196, 75 L.Ed.2d 440 (1983), held that a creditors' committee had an absolute right to intervene in an adversary proceeding under § 1109(b). The Fifth Circuit in Fuel Oil Supply & Terminaling v. Gulf Oil Corp., 762 F.2d 1283 (5th Cir.1985), reached the opposite result and held that § 1109(b) does not confer upon creditors...