In re Northeast Enterprises, Inc.
| Decision Date | 03 January 2005 |
| Docket Number | No. 02-38286 SR.,02-38286 SR. |
| Parties | In re NORTHEAST ENTERPRISES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Jay G. Ochroch, Fox Rothschild O'Brien & Frankel, LLP, Philadelphia, PA, for Debtor.
Before the Court is the Debtor's Amended Objection to the Tax Claims of the Commonwealth of Pennsylvania. The Objection is opposed. For the reasons set forth below, the Objection to the claims is denied.
The Department of Revenue (Revenue) filed two claims (# 21 for $19,234.48 and # 27 for $254,164.57) and the Department of Labor & Industry (L & I) one (# 26 for $7342.82). The Debtor objected to all three for two reasons: that each was filed in an incorrect amount and that after adjustment, the total of the three claims is more than offset by the $205,000 in unpaid employer contributions which L & I is holding in a reserve account. See Amended Objection ¶¶ 3,5. The Objection seeks a setoff of the adjusted total amount of the three claims against the funds held in reserve and payment of the differential (about $77,000) to the Debtor. Id. Both Departments oppose this arrangement.
At the hearing the parties were able to stipulate to the amount of all three claims before the proposed setoff. Transcript (T-) 44, 48. That narrowed the dispute to the permissibility of the setoff. The parties submitted briefs on this issue and the matter was taken under advisement.
Debtor maintains that the funds held by L & I in reserve are property of the estate (see Debtor's Brief, 4) and are, therefore, subject to setoff. And, says the Debtor, not only may the "reserve" funds be setoff against the sales tax claims, but the setoff should take effect retroactively to setoff off the principal amount of the tax claims in full satisfaction of what was owed. In other words, argues the Debtor, interest and penalties were improperly assessed where there was sufficient money on hand elsewhere within the Commonwealth (i.e., at L & I) to pay the tax. Any amount in excess of the principal tax debt should be refunded to it, says the Debtor. See Amended Objection, prayer.
Revenue defers to L & I on the issue of the permissibility of the setoff. It disagrees, however, with the contention that if the setoff is proper, then that means that its claim should not contain an interest and penalties component. See Revenue's Brief.
L & I argues that the Debtor may not setoff the funds against the tax claim because it has no rights in the funds. L & I's Brief, 2-11. Moreover, even if the Debtor could request a refund of the contributions to L & I, the Bankruptcy Code, it argues, prohibits this Court from granting a refund without the request having been first made at the state level. Id., 12-13.
Because the Debtor's second argument is a corollary to the first, the Court will begin with the setoff question. Section 553 of the Bankruptcy Code preserves the right of setoff:
Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case...
11 U.S.C. § 553. The Supreme Court has explained the applicability of setoff in bankruptcy cases:
The right of setoff (also called "offset") allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding "the absurdity of making A pay B when B owes A." Studley v. Boylston Nat. Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 57 L.Ed. 1313 (1913). Although no federal right of setoff is created by the Bankruptcy Code, 11 U.S.C. § 553(a) provides that, with certain exceptions, whatever right of setoff otherwise exists is preserved in bankruptcy.
Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 289, 133 L.Ed.2d 258 (1995). In order to possess a right of setoff, there must be a mutuality of obligations between the debtor and the creditor asserting a right to setoff. As stated by the Third Circuit Court of Appeals, "[t]o be mutual, the debts must be in the same right and between the same parties, standing in the same capacity." In re Bevill, Bresler & Schulman Asset Management Corp., 896 F.2d 54, 59 (3d Cir.1990) (quoting L. King, 4 Collier on Bankruptcy, ¶ 553.04[3], at 553-22 (15th ed.1979)); accord, e.g., In re Davidovich, 901 F.2d 1533, 1537 (10th Cir.1990). The term "debt" is defined in § 101 to mean "liability on a claim." 11 U.S.C. § 101(12) In almost every respect, the definition of "debt" tracks the definition of "claim." Pennsylvania Dep't of Publ. Welfare v. Davenport, 495 U.S. 552, 558, 110 S.Ct. 2126, 2130-31, 109 L.Ed.2d 588 (1990). "Claim" is defined as "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. § 101(5) As a general rule, an obligation that would constitute a proper prepetition claim under § 553 if asserted by a creditor will likewise constitute a proper prepetition debt if asserted by the debtor. 5 Collier on Bankruptcy, ¶ 553.03[2][a].
The contention that the reserve account is property of the estate is an implied claim against L & I for those funds. What interest, if any, does the Debtor have in those contributions? While § 541 broadly defines "property of the estate," the Court must turn to applicable non-bankruptcy law to determine if the Debtor has an interest in these funds. See Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917, 59 L.Ed.2d 136 (1979) ().
The Pennsylvania Unemployment Compensation Law (the UC Law) was enacted to secure to employees some degree of economic security and remove the effect of seasonal unemployment and economic depression. Department of Labor and Industry v. New Enterprise Rural Electric Co-op., 352 Pa. 413, 416, 43 A.2d 90, 92 (1945). The UC Law requires employers to make contributions for the privilege of offering employment. Id. The required contributions are set by formulae — referred to as "experience ratings" — found in the Act. See 43 P.S. § 781 et seq. For each employer, L & I maintains a reserve account. 43 P.S. § 782. The reserve is the amount contributed less the amounts paid out in employee claims. Id. The parties stipulate that the Debtor's reserve account has a positive balance of about $205,000.
Debtor's argument that the contributions in the reserve account are "assets" of the employer who makes them is based on Baldwin-Lima-Hamilton Corp., v. Dep't of L & I, 48 Pa.D. & C.2d 341, 1969 WL 7844 (1969). For its part, L & I reads that case for the contrary proposition. As the parties disagree on what might be dispositive authority, a thorough analysis of that case is warranted.
In Baldwin, BLH Pa., a Pennsylvania corporation, merged into Armour and Company, a Delaware corporation. On the very same day as that merger, Armour transferred the assets it had acquired from BLH Pa to BLH Del, a Delaware corporation newly formed and wholly owned by Armour. After the merger, L & I attributed the BLH Pa reserve account and experience rating to BLH Del under the successor-in-interest provisions of the UC Law.1 This meant that BLH Del — an ostensibly new business — would have to pay the substantially higher contribution rate that BLH Pa — an established entity — had been assessed. BLH Del obtained administrative review of the assessment but its request for adjustment was denied by the agency. 48 D. & C.2d at 342-43.
On appeal to the Court of Common Pleas, the higher assessment was struck down. That court held that the successor-in-interest provisions of the Act did not apply to BLH Del. 48 Pa.D. & C.2d at 347. But the Baldwin Court's rationale was not based on a finding that the funds in reserve were (or were not) an asset of the employer. Notwithstanding, both parties quote Baldwin in more than one instance for this very proposition. This Court is thus constrained to quote the case at length to show that neither reading can be supported:
The insurmountable barrier to acceptance of the department's ultimate conclusion is the initial premise upon which it rests, that the reserve account balance of BLH Pa. was an asset in the hands of Armour as a result of its merger with BLH Pa. This begs the very question in issue.
An employer reserve account balance is purely a creature of the Unemployment Compensation Law. Absent the statute, it simply would not exist. As created by the statute, it is but one element of a concept known as experience rating by which an employer's contribution rate is determined. The experience rate to which a particular employer will be entitled is based upon three factors: (1) the funding factor; (2) the experience factor, and (3) the State Adjustment factor. It is in the funding factor that the employer's reserve account plays a part, and it is essentially a book account on the records of the department to which the employer's contributions are credited and against which certain benefit claims are debited. At any one time it may reflect a credit or debit balance.
This is the "asset" of BLH Pa. which the department urges passed by operation of law to Armour when the two merged under a merger agreement providing for the transfer and assignment of all property, franchises, etc., of BLH Pa. to Armour upon the effective date of the merger.
Assuming arguendo that immediately prior to the merger the reserve account balance of BLH Pa., being a credit, was something of value to it and thus an asset of BLH Pa., it does not and cannot follow that by application of...
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...the issue of refund determination and that case was determined in favor of the taxing authority. See In re Northeast Enterprises, Inc., 318 B.R. 625, 630-631 (Bankr. E.D. Pa. 2005)(bankruptcy court lacked jurisdiction to determine refund of reserve account for payment of future unemployment......