In re First Cent. Financial Corp., Bankruptcy No. 98-12848-608. Adversary No. 99-1254-608.

• Citation: 269 BR 481
• Decision Date: 06 November 2001
• Docket Number: Bankruptcy No. 98-12848-608. Adversary No. 99-1254-608.
• Parties: In re FIRST CENTRAL FINANCIAL CORPORATION, Debtor. Superintendent of Insurance for the State of New York, as Liquidator of First Central Insurance Company, Plaintiff, v. First Central Financial Corporation, and Martin Ochs, Esquire, as Chapter 7 Trustee of First Central Financial Corporation, Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

269 B.R. 481 (2001)

In re FIRST CENTRAL FINANCIAL CORPORATION, Debtor.

Superintendent of Insurance for the State of New York, as Liquidator of First Central Insurance Company, Plaintiff, v. First Central Financial Corporation, and Martin Ochs, Esquire, as Chapter 7 Trustee of First Central Financial Corporation, Defendants.

Bankruptcy No. 98-12848-608. Adversary No. 99-1254-608.

United States Bankruptcy Court, E.D. New York.

November 6, 2001.

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William O. Purcell, Kirkpatrick & Lockhart, LLP, New York City, for the Superintendent of Insurance for the State of New York.

Martin P. Ochs, Ochs & Goldberg, LLP, New York City, Chapter 7 Trustee.

Norman N. Kinel, Sidley Austin Brown & Wood, LLP, New York City, for Martin P. Ochs, Chapter 7 Trustee.

MEMORANDUM DECISION

CARLA E. CRAIG, Bankruptcy Judge.

This matter comes before the Court on the motion of the Superintendent of Insurance for the State of New York (the "Superintendent" or "plaintiff"), in his capacity as Liquidator of First Central Insurance Company ("FCIC"), for summary judgment declaring that a certain federal income tax refund paid to, and held by the Chapter 7 Trustee of First Central Financial Corporation ("FCFC" or "debtor"), is property of FCIC. The trustee has cross-moved for summary judgment dismissing the complaint. Summary judgment is granted to the trustee for the reasons set forth below.

Jurisdiction

The jurisdiction of the bankruptcy court is set forth in 28 U.S.C. §§ 1334(b) and 157(b)(1) which provides that "bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 . . . and may enter appropriate orders and judgments, subject to review by the district court in an appeal." U.S. Lines, Inc. v. American Steamship Owners Mut. Prot. and Indem. Assoc., Inc. (In re U.S. Lines), 197 F.3d 631, 636 (2d Cir.1999). A bankruptcy judge may also hear non-core proceedings that are related to a case under title 11. In such proceedings, the bankruptcy judge shall not determine the issue, but shall submit proposed findings of fact and conclusions of law to the district court. 28 U.S.C. § 157(c).

In the first instance, the determination whether a claim is "core" is "reserved for the bankruptcy judge to determine." Corbett v. MacDonald Moving Serv., Inc., 124 F.3d 82, 90 (2d Cir.1997). Whether a matter is "core" depends on the nature of the proceeding. Resolution Trust Corp. v. Best Prod. Co., Inc. (In re Best Prod. Co., Inc.), 68 F.3d 26, 31 (2d Cir.1995). The dispute here involves a determination of whether a certain federal income tax refund received by the trustee post-petition belonged to the debtor or to its subsidiary. If the tax refund belongs to the debtor, the trustee must transfer the funds held in escrow into FCFC's bankruptcy estate. Thus, this proceeding is akin to a turnover proceeding and is concerned with the administration of the estate. Accordingly, this Court has jurisdiction over this core proceeding under 28 U.S.C. §§ 1334(b) and 157(b)(2)(A), (E), (O) and the Eastern District of New York standing order of reference dated August 28, 1986.¹ This Memorandum Decision constitutes the Court's findings of fact and conclusions of law to the extent required by Fed.R.Bankr.P. 7052.

Facts

The relevant facts set forth below are not in dispute except as otherwise indicated. The debtor, FCFC, is a holding company that owns all of the shares of FCIC, a New York regulated insurance company. (Doc. 22 ¶ 1.)² On January 28, 1998, the New York Supreme Court, Nassau County entered an order pursuant to N.Y.Ins.Law § 7402 (McKinney 2000) directing the Superintendent to rehabilitate FCIC. (Doc. 13 ¶ 2; Doc. 20 at 3-4.) Thereafter, by petition dated March 20, 1998, the Superintendent sought the entry of an order for the liquidation of FCIC, which order was entered on April 27, 1998. (Doc. 13 ¶ 2; Doc. 20 at 4.) On March 5, 1998, FCFC filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of New York. (Doc. 20 at 4.) By order dated April 30, 1998, FCFC's Chapter 11 case was converted to Chapter 7, and by order dated May 7, 1998, Martin P. Ochs was appointed the Chapter 7 Trustee of FCFC's estate (the "Trustee" or "defendant"). (Doc. 20 at 4.)

At issue in this adversary proceeding is whether a certain tax refund of approximately $2.5 million ("Tax Refund"), received by the debtor after the commencement of this case from the Internal Revenue Service ("I.R.S."), and currently held by the Trustee in a segregated interest bearing account, is property of the bankruptcy estate of FCFC. FCFC filed consolidated tax returns on behalf of itself and its wholly-owned subsidiaries, FCIC and Mercury Adjustment Bureau³ (collectively, the "Group"). All refund checks received in respect of the Group's consolidated tax filings were made payable to FCFC. (Doc. 20 at 5.) FCFC and FCIC executed a tax allocation agreement, undated on its face, entitled "Agreement of Tax Allocation Between First Central Financial Corp. and First Central Insurance Company" (the "Tax Allocation Agreement").

The Group's Tax History

In 1993, the Group paid a total of $2,480,458 in federal income taxes, which consisted of a 1992 federal income tax overpayment of $20,458, and FCIC's aggregate payment of $2,460,000. (Doc. 22 ¶ 5.) The Group's total tax liability for 1993 was $1,857,080, resulting in a tax overpayment of $623,378. (Doc. 22 ¶¶ 5, 6.) In 1994, the Group paid a total of $3,550,000 in federal income taxes, which consisted of the 1993 tax overpayment and FCIC's aggregate payment of $2,926,622. (Doc. 22 ¶ 6.) The Group's total tax liability for 1994 was $2,729,750, resulting in a tax overpayment of $820,250. (Doc. 22 ¶¶ 6, 7.) In 1995, the Group paid a total of $2,894,250 in federal income taxes, which consisted of the 1994 tax overpayment, and FCIC's payment of $2,074,000. (Doc. 22 ¶ 7.) The Group's total tax liability for 1995 was $807,247, resulting in a tax overpayment of $2,087,003. (Doc. 22 ¶ 7.) The Group filed an application for a refund of $1,700,000 for its 1995 tax overpayment, which it received in 1996, and which FCFC paid to FCIC. (Doc. 22 ¶ 8.) The balance of the 1995 tax overpayment was applied toward the Group's 1996 tax payment of $1,362,003, of which FCIC paid an aggregate of $975,000. (Doc. 22 ¶ 9.) The Group had no tax liability for 1996 or 1997, and made no federal income tax payments in 1997. (Doc. 22 ¶ 9, 10.)

In 1996 and 1997, the Group reported consolidated losses of $7,803,374 and $28,723,242, respectively, to the I.R.S. (Doc. 22 ¶¶ 11, 13.)

In 1993, 1994 and 1995, on a stand-alone basis, FCFC had losses aggregating at least $3,391,777. (Doc. 27 ¶ 12.) For those years, FCIC had no losses, but had taxable income. In 1996, on a stand-alone basis, FCIC had $7,419,101 in losses, and FCFC had $827,911 in losses. (Doc. 22 ¶ 12.)

In 1997, on a separate stand-alone basis, FCIC had $28,171,396 in losses, and FCFC had $575,124 in losses. (Doc. 22 ¶ 14.) In 1997, the Group received three checks in the aggregate amount of $3,701,465, representing a refund of taxes paid by the Group in 1993, 1994 and 1996, all of which were endorsed over by FCFC to FCIC. (Doc. 22 ¶¶ 16, 18.)

In December 1998, based upon the losses incurred by the Group in 1997, the Trustee filed a consolidated refund request on behalf of the Group and sought a refund of the remainder of taxes paid in 1994 and 1995. (Doc. 22 ¶ 19.) In response, the I.R.S. sent the Trustee a check for $2,501,599, the tax refund at issue in this adversary proceeding, made payable to "First Central Financial Corporation c/o Ochs Chptr 7 TTee Ochs and Goldberg" (the "Tax Refund"). (Doc. 22 ¶ 20.)

The Issues on this Motion

The Trustee contends that the Tax Refund is property of FCFC's estate. Property of the estate "is comprised of . . . all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). As reflected in the statutory language, Congress intended a broad range of property to be included in property of the estate. United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983); Official Comm. of Unsecured Creditors v. PSS Steamship Co., Inc. (In re Prudential Lines Inc.), 928 F.2d 565, 569 (2d Cir.1991); Garner v. Strauss (In re Garner), 952 F.2d 232, 233 (8th Cir. 1991) (finding that property held in tenancy by the entirety, where both spouses had jointly incurred the debt, was property of the estate even if only one spouse was in bankruptcy); Yaquinto v. Greer, 81 B.R. 870, 878 (N.D.Tex.1988) (finding that check payable to the debtor was included in the estate even if the identity of the party ultimately entitled to the funds was in dispute).

However, § 541(d) of the Bankruptcy Code makes it clear that, where the debtor holds bare legal title to the property (for example, as trustee), only the debtor's legal interest, but not the beneficial interest in the property, becomes property of the estate:

Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest . . . becomes property of the estate . . . only to the extent of the debtor\'s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.

11 U.S.C. § 541(d).

"It is necessary to examine whether the debtor owns the property absolutely, conditionally, or merely through some lesser relationship, such as a bailment, agency, or consignment, whereby the goods actually belong, save for the debtor's right to possession, completely to another." 5 Collier on Bankruptcy ¶ 541.061a (15th rev. ed.2001). The nature and extent of the debtor's interest in property is determined by applicable non-bankruptcy law. Crysen/Montenay...