In re Brandt-Airflex Corp.
| Decision Date | 06 February 1987 |
| Docket Number | Adv. No. 886-0128-18.,Bankruptcy No. 885-50219-18 |
| Citation | 69 BR 701 |
| Parties | In re BRANDT-AIRFLEX CORP., Debtor. BRANDT-AIRFLEX CORP., as debtor-in-possession, Plaintiff, v. LONG ISLAND TRUST COMPANY, the New York State Tax Commission, and the United States of America (Department of the Treasury, Internal Revenue Service), Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Randy M. Kornfeld, Lester A. Lazarus, P.C., New York City, for debtor.
Michael Saltzman, Saltzman & Holleran (Co-Counsel) New York City, for debtor.
C. Gayden Wren, Cullen & Dykman, Garden City, N.Y., for Long Island Trust Co.
Jonathan N. Helfat, Otterbourg, Steindler, Houston & Rosen, New York City, for Creditors Committee.
Robert Drinan, Asst. Atty. Gen., Mineola, N.Y., for NYS Tax Commission.
Bridget Rowan, Tax Div., U.S. Dept. of Justice, Washington, D.C., for IRS.
Brandt-Airflex Corp., as debtor-in-possession ("Brandt"), commenced the captioned adversary proceeding pursuant to Part VII of the Rules of Bankruptcy Procedure. The complaint seeks a declaratory determination of Brandt's tax liability, if any, for delinquent withholding taxes for the years 1983, 1984 and the first quarter of 1985. The taxes are due and payable to the Internal Revenue Service ("IRS") and to the New York State Tax Commission ("NYS Tax Commission") under the provisions of I.R.C. § 3102(a), Deduction of tax from wages, and § 3402(a), Income tax collected at source (1979), and New York State Tax Law § 675, Employer's liability for withheld taxes.
Brandt contends that as a causal consequence of an "Overdraft Financing Agreement" which superseded a pre-existing secured loan instrument with the Long Island Trust Company ("LITC"), the tax liability deflected to LITC as the employer "in fact," thereby rendering LITC liable for the delinquent taxes. Brandt inter alia cites title 26, Sections 3505(a), (b) and (c) of the Internal Revenue Code, and Section 678, New York State Tax Law (McKinney 1975), and 11 U.S.C. § 505 (1979) in support of its contention.
All of the defendants have moved for a dismissal of the adversary proceeding upon the following grounds: (1) the bankruptcy court lacks subject matter jurisdiction to grant the relief prayed for by Brandt; (2) the complaint fails to state a claim upon which relief can be granted; (3) IRS and NYS Tax Commission invoke the doctrine of sovereign immunity as a bar to the action; and (4) LITC contends that the bankruptcy court lacks in personam jurisdiction asserting that it is not a proper party to the action.
Brandt is engaged in the business of fabricating, finishing and selling metal products used in the construction industry. The company employs approximately sixty people.
Brandt filed a Chapter 11 petition in bankruptcy on February 13, 1986 and continues to operate as a debtor-in-possession pursuant to 11 U.S.C. §§ 1107 and 1108 (1979).
The United States filed a proof of claim for unpaid employment taxes due and payable to the IRS pursuant to I.R.C. §§ 3102(a) and 3402(a) (1979), for 1983, 1984 and the first quarter of 1985 in the sum of $513,264.89.
On September 25, 1986, the NYS Tax Commission filed an amended claim against the estate for unpaid taxes pursuant to New York State Tax Law § 675 (McKinney 1975), in the sum of $11,847.40.
In June, 1979 Brandt and LITC entered into a secured loan agreement which was renegotiated in 1983, due to the debtor's deteriorating financial position.
The new agreement ("Overdraft Financing Arrangement") permitted LITC to assume financial control over Brandt in exchange for an additional line of credit.
Under the terms of the Overdraft Financing Agreement, LITC honored preapproved checks for Brandt's employees' wages. LITC was to notify Brandt before a check was issued if it would not be honored. This system was devised to avoid "bouncing" checks written on Brandt's account. The statements made at the hearing are ambiguous as to why these procedures failed, but it is clear that Brandt's checks to the taxing authority for payment of withholding taxes were not honored.
For the years 1983, 1984 and the first quarter of 1985, LITC advanced Brandt $2,200,000.00 for employee wages, but failed to provide any funds for the payment of withholding taxes pursuant to I.R.C. §§ 3102(a) and 3402(a) and New York State Tax Law § 675 (McKinney 1975).
The first issue that the court will address is whether it has subject matter jurisdiction. (The remaining issues will be treated sequentially.)
Title 28, Section 157(b)(3) contains a mandate requiring bankruptcy judges to decide in limine whether a proceeding is a core proceeding or is a proceeding that is otherwise related to a case under title 11.
Responsive to the statutory threshold requisite, the court finds that the instant adversary proceeding constitutes a core proceeding. Title 28 U.S.C.S. § 157(b)(2)(A) empowers the bankruptcy court to hear and determine matters integral to the administration of the estate. As heretofore noted, the IRS and the NYS Tax Commission have filed proofs of claim for delinquent taxes. The allowance or disallowance of claims is definitively earmarked and enumerated as a core proceeding by title 28 U.S.C. § 157(b)(2)(B) (1986).
The defendants have not in written context or upon oral argument addressed the Section 157(b)(2)(B) "core" aspect of the case. Rather, the thrust of defendants' disputation articulated by the IRS and subsumed by the NYS Tax Commission and LITC posits on the assertion that the court lacks jurisdiction or authority to fix the tax liability of LITC, a third-party non-debtor.
The defendants maintain that I.R.C. § 3505 (1979), and corresponding New York State Tax Law § 689(b) (McKinney 1975), comprise alternate remedial means available to the taxing authorities for the collection of delinquent taxes. Moreover, that said sections are designed exclusively for the benefit of the taxing authorities, thus tacitly negating any involvement by the bankruptcy court as intrusive. The pertinent text follows:
Section 3505(b) provides as follows:
Personal liability where funds are supplied. — If a lender, surety, or other person supplies funds to or for the account of an employer for the specific purpose of paying wages of the employees of such employer, with actual notice or knowledge (within the meaning of section 6323(i)(1)) that such employer does not intend to or will not be able to make timely payment or deposit of the amounts of tax required by this subtitle to be deducted and withheld by such employer from such wages, such lender, surety, or other person shall be liable in his own person and estate to the United States in a sum equal to the taxes (together with interest) which are not paid over to the United States by such employer with respect to such wages. However, the liability of such lender, surety, or other person shall be limited to an amount equal to 25 percent of the amount so supplied to or for the account of such employer for such purpose.
Section 3505(c) provides as follows:
Effect of payment. — Any amounts paid to the United States pursuant to this section shall be credited against the liability of the employer.
In adjunctive mode it is argued that title 11 U.S.C. § 505, Determination of tax liability (1986), contains a limitation factor restricting its jurisdictional ambit to matters concerning the tax liability of a debtor or debtor's estate only. Accordingly, its provisions do not impact upon or embrace the liability of a third-party non-debtor. The pertinent text of the statute follows:
(a)(1) Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.
In diametric posture to defendants' contentions, Brandt argues that the above statutes are applicable and that the bankruptcy court's jurisdictional reach encompasses the subject matter in issue.
Apart from a patent ipse dixit interpretation of the relevant statutes, the defendants rely upon scant and noncogent case references. The three cases cited by the defendants, to wit, viz., In re Interstate Motor Freight System, 62 B.R. 805 (Bankr. W.D.Mich.1986) ("Interstate Motor"); United States v. Huckabee Auto Co., 783 F.2d 1546 (11th Cir.1986); In re Booth Towing Services, 53 B.R. 1014 (W.D.Mo. 1985), reh'g. denied, 60 B.R. 372 (1985), are palpably inaccordant and readily distinguishable from the fact pattern and the law applicable to this case.
In sum, the above cases pertain to actions initiated by non-debtors seeking to enjoin the IRS from imposing and collecting tax penalties against them pursuant to various provisions of the federal and state tax laws.
A synoptic analysis of the cases follows: In the Booth case, a former officer of the debtor corporation commenced an adversary proceeding in the bankruptcy court to enjoin the IRS from collecting a personal penalty tax assessment, separate and distinct from the withholding tax due from the debtor's estate. Likewise, in Huckabee a former employee of the debtor's corporation initiated an adversary proceeding to restrain the IRS from collecting a separate penalty tax assessed against him. In Interstate Motor, a third-party plaintiff sought to enjoin the IRS from collecting an unpaid excise tax.
The substantive and fundamental distinctions between the above cases and the case at bar is conspicuous. The plaintiff herein is clearly not seeking to enjoin the taxing authorities from their statutory duty to collect taxes, but rather as a debtor-in-possession it has petitioned this court for a declaratory determination clarifying its tax liability...
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