In re Hospitality Ventures/Lavista

• Decision Date: 18 August 2004
• Docket Number: Adversary No. 03-6596.,Bankruptcy No. 01-88200-PWB.
• Citation: 314 B.R. 843
• Parties: In re HOSPITALITY VENTURES/LAVISTA, a Georgia General Partnership, Debtor. Hospitality Ventures/Lavista, a Georgia General Partnership, Plaintiff, v. Heartwood 11, L.L.C., Vesta Holdings I, L.L.C., and Vesta Holdings, Inc., Defendants and Third-Party Plaintiffs, v. Dekalb County, Georgia, and Tom Scott, Tax Commissioner, Dekalb County, Georgia, Third-Party Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

314 B.R. 843

In re HOSPITALITY VENTURES/LAVISTA, a Georgia General Partnership, Debtor.

Hospitality Ventures/Lavista, a Georgia General Partnership, Plaintiff, v. Heartwood 11, L.L.C., Vesta Holdings I, L.L.C., and Vesta Holdings, Inc., Defendants and Third-Party Plaintiffs, v. Dekalb County, Georgia, and Tom Scott, Tax Commissioner, Dekalb County, Georgia, Third-Party Defendants.

Bankruptcy No. 01-88200-PWB.

Adversary No. 03-6596.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

August 18, 2004.

COPYRIGHT MATERIAL OMITTED

Joshua M. Katz, Louis G. McBryan, Macey, Wilensky, et al., Atlanta, GA, for debtor.

Bruce Z. Walker, Mark S. Marani, Cohen, Pollock, Axelrod & Small, Atlanta, GA, for Defendants and Third-Party Plaintiffs.

Mark A. Thompson, Assistant County Attorney, Decatur, GA, for Third-Party Defendants.

MEMORANDUM OPINION WITH REGARD TO MOTIONS FOR ABSTENTION

PAUL W. BONAPFEL, Bankruptcy Judge.

Section 505(a) of the Bankruptcy Code provides that the bankruptcy court "may determine the amount or legality of any tax ... whether or not previously assessed." Invoking this statute, the chapter 11 debtor seeks a redetermination of ad valorem taxes on its hotel, alleging that they were based on erroneously high assessments of its value.

The purchaser of the tax claims and the taxing authority have moved the Court to abstain under 28 U.S.C. § 1334(c)(1), which permits abstention "in the interest of justice, or in the interest of comity with State courts or respect for State law." Alternatively, noting § 505(a)'s language that a bankruptcy court may determine the amount or legality of a tax, they assert that the Court's jurisdiction to redetermine taxes under § 505(a) is discretionary and that the Court should decline to exercise it. In general, they contend that the Court should not review the taxes because granting relief would not benefit the debtor's unsecured creditors.

Because it is too late to challenge the taxes under state law, the debtor has no remedy if the Court abstains. Thus, abstention here is preclusive: It will effectively deny the remedy the debtor seeks under federal bankruptcy law. The Court concludes that § 1334(c)(1) permits abstention only if there is an alternative forum and that § 505(a) does not permit a bankruptcy court to decline to exercise jurisdiction other than under § 1334(c)(1). The Court will, therefore, deny the motions. In doing so, the Court does not decide whether any of the arguments raised by the abstention motions provides a defense to § 505(a) relief on the merits.

I. ISSUES IN THE ADVERSARY PROCEEDING

Hospitality Ventures/Lavista ("Debtor") filed its Chapter 11 petition on December 3, 2001, and has continued to operate its hotel, its only substantial asset. Debtor's complaint asserts that the DeKalb County Board of Tax Assessors valued the hotel for 1997 and 1998 at $6,178,700, close to three times more than the Board's valuation of $2,135,600 for the preceding two years (1995-96) and over three and a half times its valuation of $1,681,030 for the following four years (1999-2002). Debtor contends that the assessed values should have been $1,541,909 for 1997 and $1,466,897 for 1998. If reduction of assessments results in proportionate reduction of taxes, use of Debtor's values lowers 1997 taxes from about $99,300 to about $24,800 and 1998 taxes from about $93,400 to about $22,200, for total reductions of about $145,700.

Although Debtor failed to challenge the assessments within the time that Georgia law permits under O.C.G.A. § 48-5-311(e), § 505(a)¹ allows a chapter 11 debtor, as the representative of the bankruptcy estate, to contest ad valorem taxes on the ground that property was not properly assessed even if the debtor's prior failure to contest the assessment precludes any relief under state law. E.g., In re Piper Aircraft Corp., 171 B.R. 415 (Bankr.S.D.Fla.1994); In re East Coast Brokers & Packers, Inc., 142 B.R. 499 (Bankr.M.D.Fla.1992); In re AWB Assocs., G.P., 144 B.R. 270 (Bankr.E.D.Pa.1992); Ledgemere Land Corp. v. Town of Ashland (In re Ledgemere Land Corp.), 135 B.R. 193, 196 (Bankr.D.Mass.1991); In re A.H. Robins Co., 126 B.R. 227 (Bankr.E.D.Va.1991).

Defendant Vesta Holdings I, LLC, as nominee for Defendant Heartwood 11, LLC, successor by merger to Heartwood 11, Inc., (collectively, "Vesta Holdings"), acquired the tax claims and received partial payment under a payment agreement dated June 11, 1999. (Memorandum of Law in Support of Defendant's Motion for Abstention ¶ ¶ 1, 3 & Exhibit "A"; Proof of Claim of Vesta Holdings (claiming nothing for 1997 taxes and showing payment of $38,930.60 on 1998 taxes)). For purposes of § 505(a), the fact that a third party purchases tax claims is immaterial. See In re Piper Aircraft Corp., 171 B.R. 415 (Bankr.S.D.Fla.1994). After Debtor defaulted under the agreement, a tax sale was scheduled. On December 3, 2001, the day before the scheduled tax sale, Debtor filed its chapter 11 petition.

Georgia law provides that ad valorem taxes have a first priority lien on the real estate. O.C.G.A. § 48-2-56(b). Thus, the unpaid tax claims here have priority over the claim of about $2 million held by SLT Realty Limited Partnership ("SLT") that is secured by the hotel. Debtor's proposed chapter 11 plan divides SLT's claim into a secured claim of $1 million, which will be paid in full with interest, and an unsecured deficiency claim of $1 million, a small part of which will be paid like other unsecured claims. The proposed plan calls for unsecured creditors, whose claims, including SLT's, add up to a total of about $1.2 million, to receive their pro rata share of payments totaling $18,000, or 1.5 percent of their claims, over three years. As part of the plan, Debtor proposed to object under § 505(a) to the tax claims of Vesta Holdings and to pay the amounts allowed, with interest.

Vesta Holdings objected to the Court's consideration of the plan prior to determination of the amount of its claims. Debtor thereafter commenced this adversary proceeding, almost two years after the filing of the chapter 11 petition. Proceedings with regard to confirmation have been deferred pending developments in this proceeding. Thus, whether the plan as proposed meets the confirmation requirements of § 1129(a) and whether the outcome of this proceeding has any bearing on those issues are questions for another day.

Debtor's complaint seeks a refund from Vesta Holdings of the alleged overpayment of 1997 taxes and a determination of its remaining obligation for 1998 taxes based on reassessments of the hotel's value. Vesta Holdings answered, denying Debtor's right to relief, and filed a third party complaint against DeKalb County, Georgia, and its tax commissioner, Tom Scott (collectively, "DeKalb County"), which had received payments of the full amounts of the taxes assessed for 1997 and 1998. The third party complaint alleges that, if the Court orders a refund or reduction of Vesta Holdings' claims, DeKalb County must return to Vesta Holdings the amount of the refund or reduction or Vesta Holdings should be allowed to rescind its purchase of the tax claims. DeKalb County disputes any liability to Vesta Holdings.

The Court has jurisdiction under 28 U.S.C. § 1334(b) over Debtor's complaint for § 505(a) relief as a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (O). The Tax Injunction Act, 28 U.S.C. § 1341, does not restrict determination of taxes under 11 U.S.C. § 505(a). See In re Stoecker, 179 F.3d 546, 549 (7th Cir.1999); City Vending of Muskogee, Inc. v. Oklahoma Tax Comm'n, 898 F.2d 122, 123 (10th Cir.1990); Adams v. Indiana, 795 F.2d 27, 29 (7th Cir.1986).

II. THE ABSTENTION ISSUES

Vesta Holdings and DeKalb County have moved this Court to abstain under 28 U.S.C. § 1334(c)(1) or to decline to exercise jurisdiction under 11 U.S.C. § 505(a). In support of their motions, they point out that Debtor's proposed chapter 11 plan provides for only minuscule payment to unsecured creditors and that reduction of the tax claims will benefit only Debtor and the secured creditor, SLT, without affecting the distribution to unsecured creditors. They also argue that DeKalb County and its taxpayers will be substantially prejudiced if the taxes are reduced because DeKalb County has already collected the taxes (in exchange for its assignments of the claims). Moreover, they assert that § 505(a) review of tax claims will impair DeKalb County's collection of taxes through sales of tax liens, because purchasers who buy them will be buying potential lawsuits by debtors in bankruptcy who have not previously challenged their taxes. DeKalb County should not be subjected to such prejudice, they continue, where Debtor failed to take any action to challenge the taxes under either Georgia procedures or in this bankruptcy case for more than five years after the 1998 assessment and where the sole beneficiaries of any reduction will be Debtor and its secured lender.

The gravamen of their argument is that a bankruptcy court should abstain or decline to exercise discretionary jurisdiction under § 505(a) if granting relief will not serve a bankruptcy purpose of the statute — either the need for prompt determination of a tax so that the case can be promptly concluded or the need to protect creditors from an excessive tax that the debtor failed to challenge. Because neither purpose exists here, they conclude, the Court should not hear Debtor's claim.

(The arguments of DeKalb County and Vesta Holdings raise at least two other issues. One is whether § 505(a)(2)(B) precludes relief with regard to refund of a tax that has been paid in the absence of compliance with state law procedures. The second is whether the payment agreement was a prepetition contest and adjudication of the taxes that, under § 505(a)(2)(A), precludes relief. These issues relate to the merits of Debtor's entitlement to § 505(a) relief and are not addressed herein.)

Because Debtor...