In re Holland Industries, Inc., Bankruptcy No. 87B-12109 (HCB)

• Decision Date: 28 June 1989
• Docket Number: Bankruptcy No. 87B-12109 (HCB),Adv. No. 89-5693A.
• Citation: 103 BR 461
• Parties: In re HOLLAND INDUSTRIES, INC., Debtor. HOLLAND INDUSTRIES, INC., 126 E. 35th Street Corp., and Camelot Consultants, Inc., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

103 B.R. 461 (1989)

In re HOLLAND INDUSTRIES, INC., Debtor.

HOLLAND INDUSTRIES, INC., 126 E. 35th Street Corp., and Camelot Consultants, Inc., Plaintiffs, v. UNITED STATES of America, Defendant.

Bankruptcy No. 87B-12109 (HCB), Adv. No. 89-5693A.

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

June 28, 1989.

COPYRIGHT MATERIAL OMITTED

Benito Romano, U.S. Atty., S.D. New York, New York City by Susan Johnston, for U.S.

Rivkin, Radler, Dunne & Bayh, New York City by Martin F. Brecker, for plaintiffs.

DECISION

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

This case involves the scope of bankruptcy court jurisdiction regarding rights of third parties in property of non-debtors when the owner of the property agrees to make it available for use by a debtor to reorganize.

The complaint in this adversary proceeding brought by the Debtor, Holland Industries, Inc., and by non-debtors 126 E. 35th Street Corp. ("126 E. 35th Street") and Camelot Consultants, Inc. ("Camelot") seeks an order vacating liens filed by the Internal Revenue Service (IRS) against property owned by the two non-debtors. The United States of America has moved this Court for an order, pursuant to Rule 7012(b) of the Bankruptcy Rules and Rule 12(b)(1) of the Federal Rules of Civil Procedure, dismissing the complaint for lack of subject matter jurisdiction.

The movants allege that this Court lacks jurisdiction to determine a tax liability of non-debtors. They further assert that under the Anti-Injunction Act, 26 U.S.C. § 7421 (1989), the Court lacks jurisdiction to prevent the IRS from attempting to collect taxes from non-debtors, and that the United States has not waived its sovereign immunity.

Plaintiffs respond that the Court has jurisdiction pursuant to 28 U.S.C. § 157 (1984 amended 1986) contending that the adversary proceeding is either a "core" or "related" proceeding as those terms are defined in 28 U.S.C. § 157(b) and (a), respectively. They further assert that the Anti-Injunction Act, 26 U.S.C. § 7421, does not bar a cause of action seeking to enjoin the IRS from lien imposition in a case such as this and that the section 106(a) waiver of sovereign immunity in bankruptcy proceedings, 11 U.S.C. § 106(a) (1984), is applicable here.

I.

On this motion, there is no material factual dispute.

This case was commenced on November 2, 1987 by Holland's filing of a voluntary petition for relief pursuant to Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. (the "Code"). The Debtor operates buses for public transportation and is operating its business as a debtor-in-possession under §§ 1107 and 1108 of the Code. A reorganization plan was filed with this Court pursuant to §§ 1121 and 1123 of the Code. By order entered April 27, 1989, Holland's Amended Disclosure Statement was approved as containing adequate information pursuant to section 1125 of the Code and a hearing on confirmation was scheduled for June 9, 1989 on the Debtor's plea that unless the plan were confirmed in early June 1989 it would fail. See In re Mountain View Coach Line, Inc., 99 B.R. 555, 557, 560-61 (Bankr.S.D.N.Y.1989). At Holland's request, the hearing on confirmation was adjourned to June 20, 1989 and subsequently to July 10, 1989.

According to the terms of the plan, Ambassador Factors Division of Fleet Factors Corp. has agreed to finance the Debtor with a $1.5 million secured line of credit to satisfy a pre-existing secured claim, and for working capital purposes. The loan is to be partially secured by a mortgage on real estate owned by 126 E. 35th Street (Complaint at ¶ 10). In addition, proceeds of approximately $200,000 from the sale of real estate owned by Camelot are to be lent to the Debtor (Complaint at ¶ 27). Both of the above properties are subject to federal tax liens. Significantly, plaintiffs do not allege that they have entered into a written contract transferring these property interests to the Debtor.

The tax liability underlying the federal tax liens is undisputed. As a result of the Debtor's failure to collect and pay over to the government withholding taxes in the amount of approximately $1 million, the IRS, pursuant to 26 U.S.C. § 6672 (1978), assessed 100% penalties against the Debtor's Chief Executive Officer, Michael Margolies. Alleging that Margolies transferred assets to 126 E. 35th Street and Camelot, which were subject to the section 6672 assessment, the IRS filed tax liens against these corporations in their nominee status on March 27, 1989 (Camelot) and on April 29, 1989 (126 E. 35th Street) (Complaint at ¶¶ 13, 28).

According to the plaintiffs, the transfers of both properties were made for good, valuable and equivalent consideration, were therefore not fraudulent transfers under New York Debtor and Creditor Law §§ 272, 273 (N.Y. Debt. & Cred. Law §§ 272, 273 (McKinney 1945 & Supp.1989) and thus cannot be subject to nominee liability (Complaint at ¶¶ 17, 30). They further assert that both liens were filed by the IRS without any prior assessments against either corporation and therefore are procedurally invalid. (Complaint at ¶¶ 12, 19, 29).

The plaintiffs allege that unless the liens are vacated prior to the confirmation hearing, confirmation of the plan will be "substantially impeded, if not defeated" (Complaint at ¶¶ 20, 28), due to reduced cash inflow and inability to proceed with the Ambassador financing. (Complaint at ¶ 11).

II.

Although 28 U.S.C. § 157 was crafted in response to and in light of the Supreme Court's decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (The vesting of broad jurisdictional power in non-Article III bankruptcy courts by the Bankruptcy Reform Act of 1978 held unconstitutional), the constitutional concerns raised by § 157 have been largely ameliorated by the Supreme Court's subsequent decisions in Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985) (Upholding Congress' Article I power to require binding non-Article III arbitration, subject to only limited judicial review, to resolve disputes among participants covered by the Federal Insecticide, Fungicide and Rodenticide Act) and Commodities Futures Trading Comm'n v. Schor, 478 U.S. 833, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1987) (Power of non-Article III agency to adjudicate a state law counter-claim related to subject matter of agency enforcement proceeding held constitutional).

Consequently, the bankruptcy court's jurisdiction turns largely on interpreting the statutes that grant that jurisdiction. E.g., Duck v. Munn (In re Mankin), 823 F.2d 1296, 1300 (9th Cir.1987), cert. denied, ___ U.S. ___, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988) (Action by debtor-in-possession to collect post-petition debt arising from sale of asset, even though it might depend entirely upon state law, is a matter concerning administration of the estate within the meaning of 28 U.S.C. § 157(b)(2)(A)).

In the Bankruptcy Amendments and Federal Judgeship Act of 1984, Congress revised 28 U.S.C. § 1334 to grant district courts original jurisdiction over bankruptcy cases and core proceedings arising in, arising under or related to bankruptcy cases. District courts are empowered by 28 U.S.C. § 157(a) to refer such cases and proceedings to bankruptcy judges. On reference, section 157(b) enables bankruptcy courts to "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 to hear, enter interlocutory orders and submit findings of fact and conclusions of law with respect to non-core proceedings that are related to a bankruptcy case. Lesser v. A-Z Associates (In Re Lion Capital Group), 46 B.R. 850, 853 (Bankr.S.D.N.Y.1985); 28 U.S.C. § 157(b), (c)(1).¹ Bankruptcy courts have no jurisdiction to entertain civil proceedings that are neither core proceedings nor related proceedings. E.g., Pacor v. Higgins, 743 F.2d 984, 994 (3d Cir.1984).

With these distinctions in mind, we turn to an analysis of plaintiffs' claim of jurisdiction.

A. Core Jurisdiction

Section 157(b)(2) enumerates a non-exhaustive list of core proceedings. By those examples, Congress defined core proceedings to be those having a close nexus to Congress' exercise of its Article I bankruptcy power, Pacor, 743 F.2d at 994; see also Lion Capital, 46 B.R. at 856, i.e.: those proceedings based on a right or status created by a provision of Title 11 and "those that are not based on any right expressly created by Title 11, but nevertheless, would have no existence outside of the bankruptcy." World Travel Vacation Brokers, Inc. v. Bowery Savings Bank (In re Chargit Inc.), 81 B.R. 243, 247 (Bankr.S. D.N.Y.1987) (quoting Wood v. Wood (In the Matter of Wood), 825 F.2d 90, 97 (5th Cir.1987). Plaintiffs allege that the injunction they are requesting readily falls into any of the following three statutory categories: section 157(b)(2)

(K) "determinations of the validity, extent, or priority of liens"

(L) "confirmation of plans"

(O) "other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship . . . "

None of these grounds apply. In referring to determination of the validity, priority and extent of liens, section 157(b)(2)(K) is to be construed to refer to liens on property of the estate. Such proceedings arise under several provisions of the Code such as section 506(a) (Amount of secured claim limited to value of collateral), section 362(d)(2) (Lack of debtor's equity is collateral part of ground for relief from the automatic stay) and the procedure for valuation "of a claim secured by a lien on property in which the estate has an interest" contained in Rule 3012 of the Rules of Bankruptcy Procedure. There is not the slightest indication in either § 157 or its legislative history that Congress sought to empower the bankruptcy courts with...