In re Daniels

• Citation: 304 B.R. 695
• Decision Date: 16 July 2003
• Docket Number: Adversary No. 03-0071.,Bankruptcy No. 03-10845 SR.
• Parties: In re Josephine DANIELS, Debtor. Josephine Daniels, Plaintiff, v. County of Chester, Tax Claims Bureau, Leslie K. Bair, Director and Astro Group, LLC, Defendants.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

304 B.R. 695

In re Josephine DANIELS, Debtor Josephine Daniels, Plaintiff, v. County of Chester, Tax Claims Bureau, Leslie K. Bair, Director and Astro Group, LLC, Defendants.

Bankruptcy No. 03-10845 SR.

Adversary No. 03-0071.

United States Bankruptcy Court, E.D. Pennsylvania.

July 16, 2003.

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Lynelle A. Gleason, Newtown, PA, Steven A. Riley, Thomas L. Whiteman, West Chester, PA, for Defendants.

Robert F. Salvin, West Chester, PA, for Plaintiff.

OPINION

STEPHEN RASLAVICH, Bankruptcy Judge.

Introduction

The Debtor filed this adversary proceeding to void a tax sale of her home. She alleges that the Chester County Tax Claim Bureau, and the Bureau's director (Bair) violated her constitutional and civil rights by conducting a judicial sale of her home without notifying her. As the purchaser of the property, the Astro Group is alleged to be liable to her as the recipient of a fraudulent transfer.

The County and Bair (Moving Defendants) have filed a Motion to Dismiss the Complaint under F.R.C.P 12(b). Dismissal is sought as to both defendants on some theories and only as to particular defendants on others. As to both movants, it is argued the Court lacks subject matter jurisdiction and that the Complaint fails to state a claim of a civil rights violation or for the avoidance of a fraudulent transfer. As to Bair, it is maintained that her status as tax director affords her qualified immunity. The parties submitted briefs and argued their points at a hearing on May 6, 2003. The Court next took the matter under advisement. For the reasons set forth below, the Motion will be granted in part and denied in part.

Analysis

Does the Tax Injunction Act Deprive the Court of Subject Matter Jurisdiction?

The Moving Defendants first seek dismissal on the grounds that the Court lacks subject matter jurisdiction. See F.R.C.P. 12(b)(1). The Court's determination of subject matter jurisdiction is of paramount importance. It is duty bound-at any level of the proceedings-to address the issue when it is perceived. 2 Moore's Federal Practice, § 12.30[1] (Matthew Bender 3d ed.). See Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 132 n. 1, 116 S.Ct. 494, 133 L.Ed.2d 461 (1995) ("[o]f course, every federal court, whether trial or appellate, is obliged to notice want of subject matter jurisdiction on its own motion")(Ginsberg, J., concurring). Thus, the district court must determine questions of subject matter jurisdiction first, before determining the merits of the case. See 2 Moore's, supra, id.; see also Bell v. Hood, 327 U.S. 678, 682, 66 S.Ct. 773, 90 L.Ed. 939 (1946) ("Whether the complaint states a cause of action upon which relief can be granted is a question of law ... which must be stated after and before the court has assumed jurisdiction over the controversy.")

Once challenged, the party asserting subject matter jurisdiction has the burden of proving its existence. 2 Moore's supra, § 12.30[5]; see Robinson v. Overseas Military Sales Corp., 21 F.3d 502, 507 (2d Cir.1994) (burden of proving jurisdiction is on party asserting it); Boudreau v. United States, 53 F.3d 81, 82 (5th Cir.1995) cert denied 516 U.S. 1071, 116 S.Ct. 771, 133 L.Ed.2d 724 (1996) (burden of proof on plaintiff to show court had jurisdiction over claim under Flood Control Act of 1928); Bally Export Corp. v. Balicar, Ltd., 804 F.2d 398, 401 (7th Cir.1986) (plaintiff must prove jurisdiction exists once challenged by defendant). In determining whether this burden has been met, the court need not confine its evaluation to the face of the pleadings, but may review or accept any evidence such as affidavits or it may hold an evidentiary hearing. 2 Moore's supra, § 12.30[3].

The Moving Defendant's assert that the Tax Injunction Act¹ deprives the court of jurisdiction. The Act provides that "[t]he district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341. See Motion, 3. The Plaintiff responds that Bankruptcy Code § 505 carves out an exception to the Tax Injunction Act. Plaintiff's Memorandum, 8.

The Scope of the Tax Injunction Act

The Tax Injunction Act, first passed in 1937, was intended to prevent taxpayers from using federal courts to challenge the validity of state taxes under either state or federal law. Osceola v. Florida Dep't of Revenue, 893 F.2d 1231, 1232-33 (11th Cir.1990)(and cases cited therein). Its purpose is to "confin[e] federal court intervention in state government." Jefferson County, Alabama v. Acker, 527 U.S. 423, 433, 119 S.Ct. 2069, 2076, 144 L.Ed.2d 408 (1999), quoting Arkansas v. Farm Credit Servs. of Central Ark., 520 U.S. 821, 826-27, 117 S.Ct. 1776, 1780, 138 L.Ed.2d 34 (1997). The Act is a statutory limit on federal court jurisdiction where equitable jurisdiction might otherwise exist. See Great Lakes Dredge & Dock Co. v. Huffman, 319 U.S. 293, 298-99, 63 S.Ct. 1070, 1073, 87 L.Ed. 1407 (1943); Osceola, 893 F.2d at 1232.

The Exception for Bankruptcy Code § 505

Bankruptcy Code § 505 authorizes the Court to determine certain tax liabilities:

(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.

(2) The court may not so determine —

(A) the amount or legality of a tax, fine, penalty, or addition to tax if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under this title....

11 U.S.C. § 505(a).

To the extent that a bankruptcy court must determine a debtor's tax liability in an area where such a determination may otherwise be barred by the Tax Injunction Act, the overwhelming majority view is that Congress expressly conferred jurisdiction on bankruptcy courts to do so in § 505 of the Code. In re Hechinger Investment Co. of Delaware, Inc., 254 B.R. 306, 315 (Bankr.D.Del.2000). The Third Circuit "ha[s] consistently interpreted § 505(a) as a jurisdictional statute that confers on the bankruptcy court authority to determine certain tax claims." City of Perth Amboy v. Custom Distribution Serv., Inc. (In re Custom Distribution Serv., Inc.), 224 F.3d 235, 239-40 (3d Cir.2000). The legislative history of Section 505 emphasizes that it permits the bankruptcy court to determine the tax liability of a debtor "that has not been contested before or adjudicated by a judicial or administrative tribunal of competent jurisdiction before the bankruptcy case." Quattrone Accountants, Inc. v. I.R.S., 895 F.2d 921, 925 (3d Cir.1990) citing S.Rep. No. 989, 95th Cong., 2d Sess. 67, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5853; see also In re Century Vault Company, 416 F.2d 1035, 1041 (3d Cir.1969) (Bankruptcy Act § 2a(2A) — predecessor to Code § 550 — allowed trustee to review tax claim after time had run against the debtor for such a challenge).

The authority under section 505(a) to determine the amount or legality of a tax is discretionary. See Shapiro v. I.R.S., 188 B.R. 140, 143 (Bankr.E.D.Pa.1995); In re Mall at One Associates, L.P., 185 B.R. 1009, 1016. It "may or may not be exercised depending upon the equities of the particular situation." Starnes v. United States, 159 B.R. 748, 750 (Bankr.W.D.N.C.1993). In determining whether to undertake a section 505(a) review, a number of factors are considered relevant, including the following: (1) the complexity of the tax issue to be decided; (2) the need to administer the bankruptcy case in an orderly and efficient manner; (3) the burden on the bankruptcy court's docket; (4) the length of time required for trial and decision; (5) the asset and liability structure of debtors; and (6) the prejudice or potential prejudice to the debtor or the taxing authority. Starnes v. United States, supra at 750; In re AWB Associates, G.P., 144 B.R. 270, 276 (Bankr.E.D.Pa.1992). See also Shapiro v. I.R.S., supra at 143 (quoting In re Hunt, 95 B.R. 442, 445 (Bankr.N.D.Tex.1989)).

This analysis also requires courts to consider whether policy reasons underlying section 505 would be served by such a review. Two policies underlie § 505's grant of federal authority to determine state tax matters. First, § 505 allows the prompt resolution of a debtor's tax liability, where that liability has not yet been determined prior to the bankruptcy proceeding, in the same forum addressing the debtor's overall financial condition. See City of New York v. Fashion Wear Realty Co. (In re Fashion Wear Realty Co.), 14 B.R. 287, 290 (S.D.N.Y.1981); see also In re Stoecker, 179 F.3d 546, 549 (7th Cir.1999) ("If federal courts could not determine the debtor's liability for state taxes — if they had to abstain pending a determination of that liability in state court — bankruptcy proceedings would be even more protracted than they are."), aff'd sub nom. Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). Secondly, § 505 protects "creditors from the dissipation of the estate's assets which could result if the creditors were bound by a tax judgment which the debtor, due to his ailing financial condition, did not contest." In re Northwest Beverage, Inc., 46 B.R. 631, 635 (Bankr.N.D.Ill.1985) citing In re Century Vault Co., supra.

Were the Debtor's County Taxes Contested and Adjudicated Prepetition?

Again, the bankruptcy court will lack jurisdiction if the tax claim was both contested and adjudicated before this case was filed. The entire history of this assessment is not found in the record; however, some inference can safely be made. But...