In re HBG Servicenter, Inc.

• Decision Date: 11 January 1985
• Docket Number: Adv. No. 184-0152.,Bankruptcy No. 184-41576/77-21
• Citation: 45 BR 668
• Parties: In re HBG SERVICENTER, INC., Debtors. In re Robert WALSH and Geraldine Walsh, Debtors. Robert WALSH and Geraldine Walsh, Plaintiffs v. Robert ABRAMS, Attorney General of the State of New York, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

45 B.R. 668 (1985)

In re HBG SERVICENTER, INC., Debtors In re Robert WALSH and Geraldine Walsh, Debtors Robert WALSH and Geraldine Walsh, Plaintiffs v. Robert ABRAMS, Attorney General of the State of New York, Defendant.

Bankruptcy No. 184-41576/77-21, Adv. No. 184-0152.

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

January 11, 1985.

Robert J. Abrams, Atty. Gen., of N.Y., New York City, for defendant.

Corash & Hollender, Staten Island, N.Y., for debtors and plaintiffs.

OPINION

CECELIA H. GOETZ, Bankruptcy Judge:

The defendant herein, Robert Abrams, Attorney General of the State of New York, is moving to dismiss this adversary proceeding which seeks to enjoin him from continuing to prosecute the individual debtors, Robert and Geraldine Walsh, for sales tax violations. The Attorney General also asks that the relief requested be denied.

The debtors' complaint alleges that the relief requested in this adversary proceeding is needed to prevent the debtors' gas station business from closing down due to the continued criminal prosecution. The debtors, who have filed under Chapter 11 of Title 11, contend that they intend to propose a plan of reorganization which will call for the payment of all tax obligations and which "will fully take the place of any restitution which would be ordered in criminal proceedings." Complaint, par. 5. A preliminary and permanent injunction is requested.

The Attorney General predicates his motion on the grounds that upon the facts and the law plaintiffs have no right to relief and also that the Court lacks jurisdiction. His memorandum invokes the doctrine of sovereign immunity.

Affidavits, affirmations and memoranda in support of, and in opposition to, the Attorney General's motion have been received from both sides. From these documents it appears that both parties are willing to have the Court dispose of the matter on the papers now before it.

For purposes of the present motion, this Court will accept as true the facts alleged by the debtors and in particular by Richard A. LaRosa, the attorney for the debtors, who has been representing them since the commencement of the criminal prosecution which they now seek to enjoin.

The debtors are currently the sole owners of HBG Servicenter, Inc., which operates two gas stations in Staten Island. (HBG Servicenter, Inc. has also filed for relief under Chapter 11 of Title 11). The accountant the debtors used, George Green, was the man originally employed by Harold Stevenson who brought the debtors into the gas station business and whom they eventually bought out.

In 1983 Green and the Walshes were indicted under New York's Penal Law for "Grand Larceny" and "Offering a False Instrument for Filing." The indictment was based on the failure to pay sales taxes. Their attorney moved to dismiss the indictments on the ground that "there exists a jurisdictional and/or legal impediment to conviction of the defendants." Ex. 1 to Affidavits of Richard A. LaRosa, dated Nov. 26, 1984 ("Aff. 11/26/84"). His argument was based upon Section 1145(b) of the Tax Law which, it was argued, barred a prosecution under the Penal Law. The motion was denied.

Plea bargaining followed. According to the debtors' attorney: "Each and every conference with the Court and all negotiations with the Assistant Attorney General revolved around the issue of restitution. Restitution in the sum of $250,000 was discussed but it was clearly understood that the amount was to be determined by the Department of Taxes and Finance." Aff. 11/26/84 at 2.

On September 19, 1983, the debtors withdrew their plea of not guilty. Ex. 2 to Aff. 11/26/84. Robert Walsh pleaded guilty to offering a false instrument for filing in the first degree, a Class E felony; Geraldine Walsh offered a plea of guilty to Attempted offering of a false instrument for filing in the first degree, a Class A misdemeanor, in full satisfaction of the pending indictment.

When the prosecuting attorney was asked his recommendations as to sentencing, he responded:

"As to the defendant Robert Walsh, the People will recommend, at the time of sentence, that the defendant be incarcerated for a period of time.

As to the defendant Geraldine Walsh, the People will rely on the discretion of the Court as well as the pre-sentence report compiled by the Department of Probation."

Transcript of September 19, 1983, in Criminal Term, Part I of Supreme Court, State of New York, County of Richmond, Exhibit 2 to Aff. dated November 26, 1984 (hereinafter "TR").

The Court, after ascertaining that the Walshes understood their pleas, put the following questions to Mr. Walsh:

THE COURT: Now, were any promises made to you, Mr. Walsh, to induce you to plead guilty except the Court stated that in the event you made full restitution of an amount to be determined by the appropriate authorities of the State of New York, it is the Court\'s understanding at this point there is a dispute as to what the true amount that is owed under the taxes are.

Is that correct?

MR. LA ROSA: That is correct.

THE COURT: Is that correct, Mr. Kosloff?

MR. KOSLOFF: That is right.

THE COURT: And there are procedures pending now which should determine that amount; is that right?

MR. KOSLOFF: That is true.

THE COURT: Now, once that determination is made, it is the understanding of this Court that in the event you make full restitution of that amount—I have no idea of what that may be. It would probably run into six figures—that then the Court stated that it would take that into consideration and would sentence you to a period of probation of five years. And, also, I will impose a fine.

Do you understand that?

THE DEFENDANT R. WALSH: Yes.

THE COURT: The amount of the fine also to be determined at the time of sentence. TR at 9-10.

The Judge then turned to Mrs. Walsh, saying:

THE COURT: Now, with respect to you, Mrs. Walsh, did anybody make any promises to induce you to plead guilty except the Court said it would be guided by the Probation report and no jail sentence would be imposed in your case.

Do you understand that?

THE DEFENDANT G. WALSH: Yes.

THE COURT: Anybody make any other promises to you?

THE DEFENDANT G. WALSH: No. TR. at 10-11.

Before the hearing terminated, Mr. LaRosa put on the record the following statement: ". . . the plea by the defendants is—to count 9 is in no way an admission of the amount of sales tax that the State has assessed as of this time; that there is presently a proceeding pending; that the final amount of restitution to be paid by the defendants, Mr. and Mrs. Walsh, will be based upon an agreement that they reach with the State or by a judicial determination made by the Courts of this State." TR at 12-13. The Court replied "Okay." Ibid.

Evidently no agreement was reached as to the amount to be repaid because, according to the debtors' attorney, the Department of Taxation and Finance is demanding repayment of the sales taxes, plus interest and fraud penalties, bringing the total amount to approximately $900,000, whereas the debtors claim that the negotiated plea was solely for restitution of the unpaid sales taxes, approximating $250,000.

While this dispute was pending the New York Court of Appeals in People v. Valenza, 60 N.Y.2d 363, 469 N.Y.S.2d 642, 457 N.E.2d 748 (1983) dismissed similar indictments for unpaid sales taxes brought under the Penal Law on the ground that prosecution should have been under the Tax Law. Thereupon the Walshes' attorney filed a motion for reargument and reconsideration of his previous motion which the New York Supreme Court acted on favorably, dismissing the indictments against Robert Walsh and Geraldine Walsh. An appeal has been taken by the Attorney General from this dismissal. That appeal is now pending in the Appellate Division, Second Department. It is the continued prosecution of this appeal and of the criminal proceeding itself which the Walshes seek to enjoin.

In essence their argument is that the sole purpose of the criminal proceeding, as shown by its history, is restitution of the unpaid sales tax and that the debtors should be allowed the opportunity to repay this debt through the bankruptcy courts. The Attorney General vigorously denies that all he is seeking is restitution. However, because of the view this Court takes of the law it is not necessary to resolve this conflict in the facts. For purposes of the present motion it will be assumed that neither debtor will be incarcerated if restitution of the amount determined to be due is made so that, broadly speaking, restitution will be the end result of the pending criminal proceeding.

DISCUSSION

Defendant's jurisdictional argument need not detain us long. This proceeding appears to be clearly "related to a case under Title 11." Therefore, the District Court has jurisdiction of it pursuant to 28 U.S.C. § 157, added by the "Bankruptcy Amendments and Federal Judgeship Act of 1984." ("1984 Act"). By order of Chief Judge Jack B. Weinstein, dated July 12, 1984 and amended August 17, 1984, the District Courts of this District have referred to the bankruptcy judges in this District "all cases under Title 11 or related to a case under Title 11 filed in the Eastern District of New York." Therefore, this Court has jurisdiction over the proceeding.

What is a grey area is whether or not this is a "core" proceeding, within the meaning of 28 U.S.C. § 157(b) and (c). In non-core proceedings the bankruptcy judge may not enter a final order unless the parties consent thereto. The judge's power is limited to submitting proposed findings of fact and conclusions of law to the District Court. Any final order or judgment is to be entered by the District Judge. 28 U.S.C. § 157(a). In core proceedings, contrarywise, the bankruptcy judge's order is final, subject only to appeal. 28 U.S.C. § 157(b).

By statutory definition, "core proceedings include, but are not limited to— . . . (G) motions to terminate, annul, or modify the automatic stay; . . ." 28 U.S.C....