In re AH Robins Co., Inc.
| Decision Date | 21 June 1999 |
| Docket Number | Bankruptcy No. 85-1307-R. Adversary No. 97-1001. |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re A.H. ROBINS COMPANY, INCORPORATED, Debtor. A.H. Robins Company, Incorporated, Plaintiff, v. James Dieleuterio, Treasurer of the State of New Jersey, Robert K. Thompson, Director, Division of Taxation of the State of New Jersey, Joseph T. Deters, Treasurer of the State of Ohio, and James J. Lawrence, Tax Commissioner of the State of Ohio, Defendants. |
James C. Roberts, James S. Crockett, Jr., James M. Nolan, Mays & Valentine, Richmond, VA, for plaintiff.
Virginia W. Powell, Hunton & Williams, Riverfront Plaza, East Tower, Richmond, VA, Elise Porter, Assistant Attorney General, State Office Tower, Betty D. Montgomery, Attorney General of Ohio, Richard Farrin, Assistant Attorney General, Chief of Taxation, Columbus, OH, for Ohio defendants.
A.H. Robins Company, Incorporated ("Robins II") initiated this adversary proceeding by filing a petition for declaratory judgment. The defendants are the Treasurer and the Director of Taxation of the State of New Jersey and the Treasurer and the Tax Commissioner of the State of Ohio. The Complaint seeks a declaration respecting certain assets to which Robins II succeeded by virtue of a reorganization plan. The defendants have moved to dismiss the action for lack of subject matter jurisdiction or, alternatively, to abstain from the exercise of jurisdiction. For the reasons set forth below, the motion to dismiss for lack of subject matter jurisdiction is granted.
On August 21, 1985, A.H. Robins Company, Incorporated, ("Robins I") filed a voluntary petition for relief under Chapter 11 of 11 U.S.C. § 1001, et seq. At the time, Robins I was facing several thousand product liability actions throughout the United States and expected even more to be filed. Almost three years later, on July 26, 1988, the Sixth Amended and Restated Plan of Reorganization (the "Plan") was confirmed. New Jersey and Ohio were creditors of Robins I and received notice of the Plan, of the right to object to its terms and, of the hearing at which the Court considered confirmation of the Plan which resulted in the Confirmation Order by which the Plan was confirmed and put into effect. Neither State voiced any objection to the Plan or appealed the decision confirming it.
The Plan was the culmination of extensive negotiations involving Robins I, the official committees representing its creditors, the plaintiffs in the product liability actions and the equity security holders of Robins I, as well as prospective purchasers of Robins I. The purposes of the Plan were to provide funds by which Robins I could fund a trust, known as the "Claimants' Trust," to pay the product liability claimants and to permit Robins I to be acquired by Robins II so that Robins II could continue to engage in business as the successor to all the business and assets of Robins I. Plan at ¶ 1.79.
The Plan reflects that Robin II was formed for the express purpose of effectuating the acquisition of Robins I by American Home Products Corporation ("AHP"). In that respect, the formation of a merger subsidiary, i.e., Robins II, was essential to limit the liability of AHP; and, without that limitation of liability, the reorganization of Robins I would have been impossible and there would have been no funding for the Claimants' Trust. The merger qualified as a tax-free reorganization under Section 368(a)(1)(G) and Section 368(a)(2)(B) of the Internal Revenue Code. The merger was consummated on December 15, 1989 with the payment by AHP of $2.475 billion.
The Confirmation Order which approved the Plan and consummated the reorganization provides, inter alia, that:
The transfers of property by Robins to the Successor Corporation (i) are or will be legal, valid and effective transfers of property; (ii) vest or will vest the Successor Corporation with good title to such property free and clear of all liens, charges, claims, encumbrances, or interests, except as expressly provided in the Plan; (iii) do not and will not constitute fraudulent transfers or conveyances under the Code or under the laws of the United States, any State, territory, possession or the District of Columbia; and (iv) do not and will not subject the Successor Corporation or its Affiliates to any liability by reason of such transfer under the laws of the United States, any State, territory or possession thereof, or the District of Columbia based, in whole or in part, directly or indirectly, on any theory of law, including, without limitation, any theory of successor or transferee liability.
Confirm. Ord. at ¶ 13 (emphasis added).
Robins II succeeded to and was entitled to the benefits of, the property of the estate of Robins I. Plan at ¶¶ 1.79; 6.03. Among the property of the estate of Robins I to which Robins II succeeded was the net operating loss ("NOL") of Robins I and such rights to use and benefit from the NOL as Robins I would have had. The NOL was attributable principally to the funding of the Claimants' Trust.
The amount of NOL claimed by Robins II on its federal tax return for the taxable year ended December 1989 was $1,732,718,240. After the confirmation of the Plan, Robins II and certain of its affiliates timely filed corporate income tax and franchise tax returns with the State of Ohio and the State of New Jersey. In both instances, the tax returns were audited and each State disallowed some or all of the NOL deduction and thereupon issued tax assessments against Robins II. Thereafter, Robins II paid the assessments, which totaled $19,800,000 and applied for income and franchise tax refunds in that amount.
Subsequently, the New Jersey Director of Taxation determined that Robins II was not entitled to use the NOL of Robins I because Robins II was not the actual corporation that sustained the losses reflected in the NOL and thereupon denied the request for refund which had been filed with the State of New Jersey by Robins II. That decision is on appeal to the Tax Court of the State of New Jersey.
In like fashion, the Ohio Tax Commissioner denied the claim of Robins II for a refund, concluding that Robins II was not entitled to the NOL of Robins I because Robins I was not a taxpayer during the relevant taxable year. The decision of the Ohio Tax Commissioner is on appeal in the State court.
Confronted with what it perceived as the abridgement of the fundamental principles by which Robins II had paid $2.475 billion to permit the funding of the Claimants Trust and an affront to the order of this Court, Robins filed this declaratory judgment action. In it, Robins II seeks "an order in furtherance of the confirmed Plan declaring that Robins II is entitled to the full use and benefit of the NOL of Robins I and granting such other and further relief as the Court deems just and proper." Comp. at p. 6.
The defendants seek dismissal of the action pursuant to Fed.R.Civ.P. 12(b)(1) for the reason that the Court lacks subject matter jurisdiction in this action by virtue of the sovereign immunity conferred upon the States of Ohio and New Jersey pursuant to the Eleventh Amendment to the Constitution of the United States. The defendants also assert that the Court lacks jurisdiction in this action because of the Tax Injunction Act, 28 U.S.C. §§ 1341, 1334(b). Alternatively, the defendants move the Court to abstain from an exercise of subject matter jurisdiction herein if it is found to exist.
The Eleventh Amendment provides:
The 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.
The text of the Eleventh Amendment ostensibly restricts the diversity jurisdiction of federal courts, but the Supreme Court of the United States has "`understood the Eleventh Amendment to stand not so much for what it says, but for the presupposition . . . which it confirms.'" Seminole Tribe of Florida v. Florida, 517 U.S. 44, 54, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996) (citing Blatchford v. Native Village of Noatak, 501 U.S. 775, 779, 111 S.Ct. 2578, 115 L.Ed.2d 686 (1991)). That presupposition, first articulated in Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890), "has two parts: first, that each State is a sovereign entity in our federal system; and second, that `it is inherent in the nature of sovereignty not to be amenable to the suit of an individual without its consent.'" Seminole Tribe, 517 U.S. at 54, 116 S.Ct. 1114 (citing Hans, 134 U.S. at 13, 10 S.Ct. 504).
Of course, in certain limited circumstances, Congress may abrogate the Eleventh Amendment immunity and provide for suit against a sovereign State even absent its consent. To ascertain whether, in a federal statute, Congress has abrogated the sovereign immunity of the state, courts are to consider first whether Congress has "unequivocally expressed its intent to abrogate the immunity." Green v. Mansour, 474 U.S. 64, 68, 106 S.Ct. 423, 88 L.Ed.2d 371 (1985). Second, it is necessary to determine whether Congress acted "pursuant to a valid exercise of power." Id.
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