In re La Paloma Generating Co.

Decision Date25 July 2018
Docket NumberCase No.: 16-12700 (CSS) (Jointly Administered),Related Docket No. 1040
Citation588 B.R. 695
Parties IN RE LA PALOMA GENERATING COMPANY, et al., Debtors.
CourtU.S. Bankruptcy Court — District of Delaware

RICHARDS, LAYTON & FINGER, P.A., Mark D. Collins, Jason M. Madron, One Rodney Square, 920 North King Street, Wilmington, DE 19801 AND GREENBERG TRAURIG LLP, C. Stephen Davis, Colin W. Fraser, 3161 Michelson Drive, Suite 1000, Irvine, CA 92612, Counsel for La Paloma Liquidating Trust

XAVIER BECERRA, Attorney General of California, Matthew C. Heyn, Hutchinson Meltzer, Dustin Osborn, Office of the California Attorney General, 300 S. Spring Street, Suite 1702, Los Angeles, CA 90013, Counsel for California Air Resources Board

OPINION1

Sontchi, C.J.

INTRODUCTION

The crucial background to this motion is that the La Paloma Generating Company, LLC paid all property taxes assessed to the Facility, and thereafter sought a refund of the amounts paid. Now, the La Paloma Liquidating Trust (together with the La Paloma Generating Company, LLC and affiliated debtors, "La Paloma") on the one hand,2 and the California State Board of Equalization ("SBE") and Kern County on the other, are parties to litigation in the Superior Court of the State of California, Los Angeles County concerning the taxable value of the Facility for purposes of computing the Debtors' property tax liability for tax years 2012 to 2016. The Debtors assert that the property values used by SBE and Kern County resulted in the Debtors paying approximately $14 million in excess property taxes over the past five years. The Debtors brought a motion pursuant to section 505 of the Bankruptcy Code requesting that the Court determine the value of the Facility and the Debtors' entitlement to related property tax refunds (the "Determination Motion"). The Court subsequently agreed to hear the taxable value issue in an appropriate order (the "Determination Order"), and set the issue for trial on March 6-9, 2018 (the Bankruptcy Court litigation known, collectively, as the "Tax Dispute").

In the meanwhile, SBE filed a motion for summary judgment ("SBE's Motion") asserting that this Court does not have jurisdiction to hear the Tax Dispute as established in the Determination Motion and Order. SBE's Motion is premised on two grounds: (i) that the Court does not have subject matter jurisdiction to hear the Tax Dispute pursuant to section 505 of the Bankruptcy Code ; and (ii) that the Court has no jurisdiction to decide the Tax Dispute on state sovereign immunity grounds.

As reasoned further below, the Court narrows the Tax Dispute pursuant to limitations established in section 505 and grants SBE's state sovereign immunity defense as to the remainder of the refund claim. The Court will consequently GRANT SBE's Motion.

JURISDICTION

The question of this Court's jurisdiction over the Tax Dispute is central to SBE's Motion. "A court has jurisdiction to determine whether or not it has subject matter jurisdiction over a proceeding."3 Accordingly, the Court may determine whether to dismiss the litigation set out in the Determination Motion and Order for lack of subject-matter jurisdiction.

STANDARD OF REVIEW

Although filed as a motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure, SBE's Motion asserts that this Court lacks jurisdiction to grant the relief initially requested in the Determination Motion. In fact, SBE has essentially moved to dismiss under Federal Rule of Civil Procedure, Rule 12(b)(1), made applicable pursuant to Federal Rule of Bankruptcy Procedure, Rule 7012(b), to contest this Court's subject matter jurisdiction over the Tax Dispute. Both parties acknowledged that the motion to dismiss standard might be applicable to the SBE Motion.4 The Court accordingly will exercise its discretionary power under Bankruptcy Rule 9014(c) to apply the Rule 12 standard of review to SBE's Motion.5

A motion under Federal Rule 12(b)(l) may be treated as either a "facial attack" on the complaint or, as in the present case, a "factual challenge" to the Court's subject matter jurisdiction.6 "Facial attacks ... contest the sufficiency of the pleadings, and the trial court must accept the complaint's allegations as true."7 In contrast, a factual challenge "concerns the actual failure of a plaintiffs claims to comport factually with the jurisdictional prerequisites," and permits the court to independently evaluate all the evidence to resolve disputes over jurisdictional facts.8 Although the plaintiff bears the burden of persuasion when subject matter jurisdiction is challenged, the legal standard for surviving a Federal Rule 12(b)(l) motion is a low one.9 "A claim may be dismissed under Rule 12(b)(l) only if it 'clearly appears to be immaterial and made solely for the purpose of obtaining jurisdiction' or is 'wholly insubstantial and frivolous.' "10 "Moreover, dismissal for lack of jurisdiction is not appropriate merely because the legal theory alleged is probably false, but only because the right claimed is 'so insubstantial, implausible, foreclosed by prior decisions of this Court, or otherwise completely devoid of merit as not to involve a federal controversy.' "11

BACKGROUND
A. Procedural Background

On December 6, 2016, La Paloma filed a voluntary petition for relief under chapter 7 of title 11 of the United States Code, which the Court later authorized to be jointly administered with certain affiliated cases.12

On March 16, 2017, La Paloma filed the Determination Motion under Debtors' Motion for Entry of an Order, Pursuant to 11 U.S.C. § 505, Determining the Taxable Value of the Facility and Debtors' Entitlement to Related Property Tax Refunds .13 Pursuant to the Determination Motion, La Paloma sought entry of an order providing that this Court will exercise its authority under section 505 of title 11 of the United States Code (the "Bankruptcy Code") to (i) determine the taxable value of the Facility for tax years 2012 through 2016, and (ii) require the SBE and Kern County, California ("Kern County" and together with La Paloma and the SBE, the "Parties") meet and confer with La Paloma regarding a proposed scheduling order for pre-trial matters, as well as granting related relief.

In response to the Determination Motion, on March 30, 2017, the SBE timely filed the Objection by the California State Board of Equalization to Debtors' Motion for Entry of an Order, Pursuant to 11 U.S.C. § 505, Determining the Taxable Value of the Facility and Debtors' Entitlement to Related Property Tax Refunds ("SBE's Objection").14 Kern County did not file a response to the Determination Motion. On April 7, 2017, the Debtors filed the Debtors' Reply to the Objection of the California State Board of Equalization to Debtors' Motion for Entry of an Order, Pursuant to 11 U.S.C. § 505, Determining the Taxable Value of the Facility and Debtors' Entitlement to Related Property Tax Refunds in further support of the Determination Motion.15

The Court later heard the matter and ruled that it will "exercise jurisdiction over this issue and dispute under 505" and observed "all the factors, 505(a) have been met, at least on a facial basis."16 At the conclusion of the hearing, the Court subsequently entered the Determination Order providing the relief sought in the Determination Motion. Pursuant to the Determination Order, this Court made a finding that it has "jurisdiction to consider the Motion and the relief requested therein" and ordered that it "shall determine the taxable value of the Facility for tax years 2012 through 2016 pursuant to section 505(a) of the Bankruptcy Code."17

In May 2017, the parties agreed on a form of scheduling order which the Court entered (the "Stipulated Order"). Specifically, in the Stipulated Order, the Parties stipulated to the following:

WHEREAS, the Court having jurisdiction pursuant to 28 U.S.C. § 1334 ; and this being a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and, accordingly, this Court may enter appropriate orders and judgments including final orders with respect to the tax dispute; and venue being proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409 ; and the Court having determined that a hearing (the "Hearing") will be held to determine the taxable value of the Facility for tax years 2012 through 2016 pursuant to section 505(a) of the Bankruptcy Code on the dates set forth below and that certain deadlines to facilitate discovery and other pre-Hearing matters ought to be set.18

On November 6, 2017, the Court approved a plan of confirmation, which created the La Paloma Liquidating Trust and authorized such entity to continue litigating the Tax Dispute post-confirmation.19

The Court scheduled the Tax Dispute for trial on March 6-9, 2018. On January 30, 2018, SBE filed a Motion for Summary Judgment as to its Jurisdictional Defenses .20 The Court heard argument on SBE's Motion at the start of trial. At the conclusion of the argument, the Court made some preliminary statements concerning its ruling and took the matter under advisement.21 As jurisdiction to hear the Determination Motion is a gating issue, the Court canceled the substantive trial on the Determination Motion until it could issue this Opinion on SBE's Motion. This is the Court's decision thereon.

B. Relevant Factual Background22
i. The Parties

La Paloma owned and operated the La Paloma electric generating facility located in Kern County, California (the "Facility") until December 4, 2017. La Paloma is a state assessee for purposes of property taxation and has been assigned identification number 1112 by the SBE.

The SBE is now, and at all times relevant hereto has been, the state agency with jurisdiction to assess the property of designated categories of companies, including the Facility, pursuant to California Constitution article XIII, section 19, Revenue and Taxation Code Section 721.

Kern County is now, and at all times relevant hereto was, a political subdivision of the State of...

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