In re CUSTOM CONTRACTORS LLC.

• Decision Date: 05 October 2010
• Docket Number: Bankruptcy No. 09-24404-BKC-PGH.,Adversary No. 10-03455-PGH.
• Citation: 439 B.R. 544
• Parties: In re CUSTOM CONTRACTORS, LLC, Debtor. Deborah C. Menotte, Trustee, Plaintiff, v. United States of America, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Florida

439 B.R. 544

In re CUSTOM CONTRACTORS, LLC, Debtor.

Deborah C. Menotte, Trustee, Plaintiff,

v.United States of America, Defendant.

Bankruptcy No. 09-24404-BKC-PGH.

Adversary No. 10-03455-PGH.

United States Bankruptcy Court,S.D. Florida,

West Palm Beach Division.

Oct. 5, 2010.

Custom Contractors, LLC, Fort Pierce, FL, pro se.

G. Steven Fender, Michael R. Bakst, Esq., Ruden McClosky P.A., West Palm Beach, FL, for Plaintiff.

Philip Doyle, Esq., Washington, DC, for Defendant.

MEMORANDUM ORDER DENYING MOTION TO DISMISS BY UNITED STATES OF AMERICA

PAUL G. HYMAN, Chief Judge.

THIS MATTER came before the Court for hearing on September 24, 2010, upon the United States of America's (the “Defendant” or the “IRS”) Motion to Dismiss (the “Motion”), and Deborah C. Menotte's (the “Trustee”) response thereto. For the reasons set forth below, the Court herewith denies the Motion.

BACKGROUND

Custom Contractors, LLC (the “Debtor”) filed a Chapter 7 petition on July 15, 2009 (the “Petition Date”). Brian Denson (“Denson”) was the principal of the Debtor. On July 29, 2010, the Trustee filed a Complaint to Avoid and to Recover Fraudulent Transfers (the “Complaint”), seeking to recover transfers from the Debtor to the IRS in the amount of $199,956.25 (the “Transfers”). The Trustee alleges that the Transfers were in payment of Denson's personal tax liability to the IRS, at a time when the Debtor was struggling to pay its bills, and that the Debtor never had any liability to the Defendant in any way. Counts I and III seek to recover, under 11 U.S.C. § 548, transfers that occurred within two years of the Petition Date (the “Two Year Transfers”). Counts II and IV seek to recover, under 11 U.S.C. § 544 and the Florida Uniform Fraudulent Transfer Act (“FUFTA”), transfers that occurred within four years of the petition date (the “Four Year Transfers”).

ARGUMENTS

The Defendant asserts that the doctrine of sovereign immunity deprives this Court of subject matter jurisdiction over Counts II and IV of the Complaint. The Defendant further asserts that the Court should dismiss the entire Complaint because the Trustee bears the burden of alleging and proving that the Defendant was not an innocent subsequent transferee under § 550(b) of the Bankruptcy Code. The Trustee responds that under § 106 of the Bankruptcy Code, the United States abrogated sovereign immunity for actions under § 544. The Trustee also asserts that the United States was an initial, not subsequent, transferee.

CONCLUSIONS OF LAW

I. Jurisdiction

The Court has jurisdiction over this matter under 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (H) and (O).

II. Standard for Motion to Dismiss

[1] [2] [3] Federal Rule of Civil Procedure 12(b)(6), made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7012, requires a complaint to allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 546, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ( abrogating Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). A court “weighing a motion to dismiss asks ‘ not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.’ ” Twombly, 550 U.S. at 583 n. 8, 127 S.Ct. 1955 ( quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974)). When considering a motion to dismiss, the allegations of the complaint are accepted as true and are construed in the light most favorable to the plaintiff. Mann v. Kendall Props. & Invs., LLC (In re AS Mgmt. Servs., Inc.), 2007 WL 2377082, at *2 (Bankr.S.D.Fla. Aug.16, 2007). This is true of both a motion to dismiss for failure to state a claim, and a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1). Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252, 1260 (11th Cir.2009) ( citing McElmurray v. Consol. Gov't of Augusta-Richmond County, 501 F.3d 1244, 1250 (11th Cir.2007)).

III. The Doctrine of Sovereign Immunity does not Deprive the Court of Subject Matter Jurisdiction

[4] [5] “The doctrine of sovereign immunity prevents suits against the United States except when Congress has ‘unequivocally expressed’ its consent to be sued.” Tolz v. United States (In re Brandon Overseas, Inc.), 2010 WL 2812944, *3 (Bankr.S.D.Fla. July 16, 2010) ( quoting United States v. Nordic Vill., Inc., 503 U.S. 30, 33-34, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992)). “Pursuant to § 106 of the Bankruptcy Code, the United States has waived sovereign immunity with respect to claims brought under certain Code sections, including § 544.” Id. However, § 544 only empowers a trustee to avoid a transfer “that is voidable under applicable law by a creditor holding an unsecured claim[.]” § 544(b)(1). In this case, the Trustee relies on FUFTA, Florida Statutes section 726.105, et seq. The Defendant argues its waiver of sovereign immunity under § 106 for an action arising under § 544 is inapplicable in this case, because no creditor could bring a claim against the Defendant under FUFTA. The Defendant asserts Florida's voluntary payment rule (the “VPR”) bars a creditor from seeking a tax refund from the IRS. The Defendant further asserts that the abrogation of sovereign immunity under § 106 does not extend to a state law cause of action, such as a claim under FUFTA.

1. The Voluntary Payment Rule does not Apply

[6] [7] Florida's VPR “generally prohibits actions for refunds of taxes voluntarily paid, absent a specific statutory remedy.” Brandon Overseas, Inc., at *3 (citing Florida case law). However, “no statutory provision authorizing a refund is necessary for [a] taxpayer to obtain a refund where payment of an illegal tax is involuntary.” Broward County v. Mattel, 397 So.2d 457, 459 (Fla. 4th DCA 1981). Moreover, Florida “courts are now taking a more liberal view as to whether certain types of taxes are ever in fact voluntarily paid since the urgent and immediate payment of them is compelled in order to avoid the harsh penalties imposed for non payment.” Id. at 460 (recognizing that the penalty for non-payment of certain taxes creates “technical or implied duress sufficient to make the payment of such taxes involuntary” even if the taxpayer does not protest at the time of payment). More recent Florida cases indicate that the VPR does not apply to a tax paid involuntarily, or subsequently determined to be illegal. ¹ See Bill Stroop Roofing, Inc. v. Metro. Dade County, 788 So.2d 365, 366-67 (Fla. 3d DCA 2001) (listing cases).

[8] Relying on the Florida common law set forth above, the Defendant argues that the VPR bars the relief sought by the Trustee in this adversary proceeding. However, the Defendant cites no cases applying the VPR to a suit seeking a refund from the IRS. This distinction is significant because an action seeking a refund from the IRS “may be maintained whether or not such tax, penalty, or sum has been paid under protest or duress.” 26 U.S.C. § 7422(b). In other words, a taxpayer is not precluded from seeking a refund of a tax paid to the federal government merely because the payment was voluntary. The result is no different here, where the Trustee seeks to recover a tax voluntarily paid to the IRS on a fraudulent transfer theory.

The Defendant cites one case to the contrary, United States v. Field (In re Abatement Envtl. Res., Inc.), 301 B.R. 830 (D.Md.2003), aff'd on other grounds, 102 Fed.Appx. 272 (4th Cir.2004). In Abatement, the trustee sought to avoid payments by the Debtor to the IRS, on account of the tax liability of the Debtor's principal, under Maryland's Uniform Fraudulent Conveyance Act (“MUFCA”). Id. at 832. The court determined that Maryland's General Assembly did not intend MUFCA to create an exception to Maryland's voluntary payment doctrine, and that the doctrine barred the trustee's suit against the IRS. Id. at 835. The court rejected the trustee's argument that the doctrine did not apply in an action against the federal government, stating that “the defense being recognized is a state law defense to a tax refund claim asserted against a taxing authority, not a defense available only to a state governmental unit. No Maryland case suggests that this protection should be analyzed differently for a local, state, or federal governmental unit.” Id. at 835 n. 6. The court observed that it “would be more than mildly anomalous, to say the least, if a state taxing authority could take advantage of the defense but the IRS (and other federal entities with the authority to collect taxes and other ‘governmental charges') could not.” Id. (emphasis in original).

[9] This Court, however, discerns no anomaly in refusing to apply a doctrine conceived to preclude state tax refunds in a suit seeking to recover federal tax payments, particularly when federal law itself eschews the doctrine. Contrary to the argument of the Defendant, this result does not violate the doctrine of intergovernmental immunity. “[I]ntergovernmental tax immunity bar[s] only those taxes that [are] imposed directly on one sovereign by the other or that discriminate [ ] against a sovereign or those with whom it deal[s].” Davis v. Mich. Dep't of Treasury, 489 U.S. 803, 815, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989). The Court's interpretation of Florida's VPR does not discriminate against the federal government, because federal law itself, rather than the State of Florida, determines the circumstances under which a taxpayer may seek a refund from the IRS. This Order merely recognizes that state law is inapplicable to expand or restrict those prerequisites. See M'Culloch v. Maryland, 17 U.S. 316, 436, 4 Wheat. 316, 4 L.Ed. 579 (1819) ( “the states have no power, by taxation or otherwise “to” in any manner control, the operations of the constitutional laws enacted by congress”). Therefore, the Defendant's argument that the VPR bars the Trustee's action fails.

2. The ...