In re Equip. Acquisition Res. Inc.

• Decision Date: 22 June 2011
• Docket Number: Bankruptcy No. 09 B 39937.,Adversary No. 10 A 00099.
• Parties: In re EQUIPMENT ACQUISITION RESOURCES, INC., Debtor.Equipment Acquisition Resources, Inc., Plaintiff,v.United States of America, Internal Revenue Service, Sheldon Player, Donna Malone, Mark Anstett, and Martha Anstett, Defendants.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

451 B.R. 454

108 A.F.T.R.2d 2011-5284

55 Bankr.Ct.Dec. 10

In re EQUIPMENT ACQUISITION RESOURCES, INC., Debtor.Equipment Acquisition Resources, Inc., Plaintiff,

v.United States of America, Internal Revenue Service, Sheldon Player, Donna Malone, Mark Anstett, and Martha Anstett, Defendants.

Bankruptcy No. 09 B 39937.

Adversary No. 10 A 00099.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

June 22, 2011.

Barry A. Chatz, Esq. and George P. Apostolides, Esq., Chicago, IL, for Debtor/Plaintiff.Patrick B. Gushue, Esq. and Peter Sklarew, Esq., for Defendant IRS.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the motion of defendant United States of America (the “United States”), on behalf of the Internal Revenue Service (the “IRS”), to dismiss Count IV of the first amended complaint of debtor-plaintiff Equipment Acquisition Resources, Inc. (the “Debtor”) pursuant to Federal Rule of Civil Procedure 12(b)(1) or, alternatively, for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) (both made applicable by Fed. R. Bankr.P. 7012(b)). For the reasons set forth herein, the Court denies the motion and orders the United States to disgorge 37.5 percent of the $2,324,288.00 payment made to the IRS by the Debtor on October 15, 2007, pursuant to the parties' settlement agreement approved by the Court on February 1, 2011.

I. JURISDICTION

The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. The matter falls within the Court's core jurisdiction under 28 U.S.C. § 157(b)(2)(A), (H), and (O). Additionally, the Court has jurisdiction to determine whether it has jurisdiction over Count IV of the first amended complaint. See, e.g., U.S. Catholic Conference v. Abortion Rights Mobilization, Inc., 487 U.S. 72, 79, 108 S.Ct. 2268, 101 L.Ed.2d 69 (1988); Flores–Leon v. INS, 272 F.3d 433, 437 (7th Cir.2001).

II. BACKGROUND

Prior to the commencement of its bankruptcy case, the Debtor was an Illinois corporation operating in the semiconductor manufacturing equipment sales and servicing industry. (First Am. Compl. ¶¶ 1, 7.) Organized as a subchapter S corporation, the Debtor itself was not subject to income taxation; rather, any income or loss of the company was taxable on a pro rata basis to the Debtor's shareholders. ( See Def. Br. in Supp. of Mot. to Dismiss at 2 ( citing 26 U.S.C. § 1366)).

According to the complaint, from September 2007 to October 2009, certain officers and agents of the Debtor engaged in “a massive fraud” by selling equipment at inflated prices, leasing the equipment back, misrepresenting the value of the equipment, and pledging certain pieces of equipment multiple times to various creditors in order to secure financing. (First Am. Compl. ¶ 8.) On October 8, 2009, after the fraud was discovered, the Debtor's officers and directors resigned. ( Id. ¶ 9.) Subsequently, the corporation's shareholders elected William A. Brandt, Jr. (“Brandt”) as both the sole member of the board of directors and the Debtor's chief restructuring officer. ( Id.)

On October 23, 2009, Brandt filed on behalf of the Debtor a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. ( Id. ¶¶ 1, 9; see Bankr.Case No. 09–39937, Dkt. No. 1.) Thereafter, on July 15, 2010, the Court approved the Debtor's second amended plan of liquidation, pursuant to which Brandt became the Debtor's plan administrator. (First Am. Compl. ¶ 10; see Bankr.Case No. 09–39937, Dkt. No. 322.) In that capacity, Brandt conducted an investigation which revealed that over the period October 15, 2007 to December 3, 2008, the Debtor made nine transfers to the IRS totaling $4,737,261.36 in payment of the taxes of the Debtor's individual officers and shareholders.¹ (First Am. Compl. ¶ 11.) Eight of the transfers were made within the two-year period prior to the filing of the petition. ( Id. ¶ 11 & Ex. A.) A single payment of $2,324,288.00 was made on October 15, 2007, just outside the two-year period. ( Id. ¶ 11 & Ex. B.)

On January 20, 2010, the Debtor filed a complaint against the United States, seeking to recover all nine transfers. ( See Adv. Case No. 10–00099, Dkt. No. 1.) The complaint originally contained two counts. Count I sought avoidance and recovery of the eight tax payments made in the two-year period prior to the bankruptcy filing pursuant to § 548(a)(1)(B) and § 550 of the Code, 11 U.S.C. §§ 548(a)(1)(B) and 550. Count II sought avoidance and recovery of all nine tax payments, including the October 15, 2007 payment, pursuant to § 544(b) of the Code, 11 U.S.C. § 544(b), and § 5(a)(2) of Illinois' Uniform Fraudulent Transfer Act (the “UFTA”), 740 Ill. Comp. Stat. 160/5(a)(2) (West 2008).

About ten months later, on December 1, 2010, the Debtor filed an amended complaint, which included counts against both the United States and the individual officers and shareholders whose tax liabilities were paid by the Debtor. ( See Adv. Case No. 10–00099, Dkt. No. 50.) Count II against the United States, seeking avoidance and recovery of all nine tax payments pursuant to both § 544(b) of the Code and § 5(a)(2) of the UFTA, appears as Count IV in the amended complaint. In its amended answer filed on January 13, 2011, the United States asserted ten defenses, the second of which reads as follows:

Count IV of the first amended adversary complaint is barred by the sovereign immunity of the United States of America for two reasons. First, a creditor holding an unsecured claim of the kind described in 11 U.S.C. § 544(b) could not avoid a fraudulent transfer to the United States under applicable non-bankruptcy law under similar circumstances. Second, under state law, the creditor of a debtor who fraudulently transfers money to the creditor of a relative or an affiliate in payment of the relative's or affiliate's debt to such creditor, where the creditor is aware of the fraud, cannot recover from the creditor of the relative or the affiliate. Since the IRS was without knowledge of the fraud when it accepted payment by the debtor for the tax debts of the Third–Party Defendants, there is no waiver of sovereign immunity for a state-law fraudulent transfer action against the United States. While § 544 is listed in § 106(a)(1), the statutory waiver of sovereign immunity must be strictly construed with all ambiguities resolved in favor of immunity.

(Am. Answer at 3 (emphasis in original); see Adv. Case No. 10–00099, Dkt. No. 59.)

On February 1, 2011, the Court dismissed all counts against the individual taxpayers and approved a settlement agreement reached by the parties (the “Agreement”), whereby all but one of the nine transfers were settled. ( See Bankr.Case No. 09–39937, Dkt. Nos. 382, 425; Adv. Case No. 10–00099, Dkt. No. 68.) The one that remains is the transfer of $2,324,288.00, made on October 15, 2007, more than two years prior to the filing of the petition. ( See Adv. Case No. 10–00099, Dkt. No. 68 at ¶ 4.) Pursuant to the Agreement, the United States will disgorge 37.5 percent of this transfer unless it is able to prevail on its asserted defense of sovereign immunity. ( See Bankr.Case No. 09–39937, Dkt. No. 382 at ¶ 7.) For purposes of the instant motion, there are no disputed facts. The sole issue is whether Count IV may be dismissed as a matter of law based on the United States' defense of sovereign immunity.

III. STANDARDS OF REVIEW

A. Applicable Rules

According to the United States, dismissal pursuant to Rule 12(b)(1) is sought in the first instance because the defense of sovereign immunity is jurisdictional. Alternatively, given the fact that it has already filed an answer to the Debtor's first amended complaint, the United States seeks judgment on the pleadings pursuant to Rule 12(c).

A motion under Rule 12(b)(1) requires dismissal of claims over which the court lacks subject matter jurisdiction. Fed.R.Civ.P. 12(b)(1) (made applicable by Fed. R. Bankr.P. 7012(b)). Jurisdiction is the “ ‘power to decide’ ” and must be conferred on a court in order for that court to hear a case or controversy. In re Dental Profile, Inc., No. 09 C 6160, 2010 WL 431590, at *1 (N.D.Ill. Feb. 1, 2010) ( quoting In re Chi., Rock Island & Pac. R.R. Co., 794 F.2d 1182, 1188 (7th Cir.1986)).

In deciding a Rule 12(b)(1) motion to dismiss, a court must accept as true all well-pleaded factual allegations in the complaint and draw reasonable inferences in favor of the plaintiff. Capitol Leasing Co. v. Fed. Deposit Ins. Corp., 999 F.2d 188, 191 (7th Cir.1993). When issues are jurisdictional, a court has the authority under Rule 12(b)(1) to consider evidence beyond the pleadings. United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir.2003); Berg v. eHome Credit Corp., No. 08 C 05530, 2011 WL 761486, at *1 (N.D.Ill. Feb.25, 2011); Baker Dev. Corp. v. Mulder (In re Mulder), 307 B.R. 637, 640 n. 2 (Bankr.N.D.Ill.2004). A plaintiff faced with a properly supported Rule 12(b)(1) motion bears the burden of establishing that the jurisdictional requirements have been satisfied. Dental Profile, 2010 WL 431590, at *1 ( citing Kontos v. U.S. Dep't of Labor, 826 F.2d 573, 576 (7th Cir.1987)); see also Coglianese v. Feiwell, No. 4:06–CV–19, 2008 WL 474213, at *4 (N.D.Ind. Feb. 19, 2008) (“When a defendant moves for dismissal pursuant to 12(b)(1), the plaintiff bears the heavy burden of demonstrating that the court has subject matter jurisdiction.”).

Rule 12(c), on the other hand, provides that “[a]fter the pleadings are closed—but early enough not to delay trial—a party may move for judgment on the pleadings.” Fed.R.Civ.P. 12(c) (made applicable by Fed. R. Bankr.P. 7012(b)). Thus, the Rule permits a party to move for judgment after the parties have filed the complaint and answer. Moss v. Martin, 473 F.3d 694, 698 (7th Cir.2007). When deciding a motion for...