In re Ual Corp.

• Decision Date: 03 January 2006
• Docket Number: No. 02 B 48191.,02 B 48191.
• Citation: 336 B.R. 370
• Parties: In re UAL CORPORATION, et al., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

Page 370

336 B.R. 370

In re UAL CORPORATION, et al., Debtors.

No. 02 B 48191.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

January 3, 2006.

James H.M. Sprayregen, Todd F. Maynes, Marc Kieselstein, David R. Seligman, Erik W. Chalut, James J. Mazza, Jr., Kirkland & Ellis LLP, Chicago, IL, for United Air Lines, Inc.

Patrick J. Fitzgerald, Henry J. Riordan, Washington, DC, for United States of America, Department of the Treasury, Internal Revenue Service.

MEMORANDUM OF DECISION

EUGENE R. WEDOFF, Bankruptcy Judge.

These Chapter 11 cases are before the court on the debtors' motion for a determination of tax liability under § 505(a) of the Bankruptcy Code (Title 11, U.S.C.). The debtors seek a ruling that property to be distributed under their proposed Chapter 11 plan is not "wages" subject to federal taxes. The Internal Revenue Service has opposed the motion, not only on its merits, but also on the ground that this court has no jurisdiction to grant the requested relief. As discussed below, the IRS's jurisdictional argument is correct; the debtors' motion must be denied because § 505(a) does not authorize it and the Declaratory Judgment Act, 28 U.S.C. § 2201, therefore prohibits the court from considering it.¹

Jurisdiction

District courts have exclusive jurisdiction over bankruptcy cases, pursuant to 28 U.S.C. § 1334(a), and they have concurrent jurisdiction over all civil proceedings "arising under" the Bankruptcy Code, pursuant to 28 U.S.C. § 1334(b). The determination of tax liability provided for by § 505(a) "arises under" the Bankruptcy Code, and so is within the district court's jurisdiction. See Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir. 1987) ("Congress used the phrase `arising under title 11' to describe those proceedings that involve a cause of action created or determined by a statutory provision of title 11.").

Pursuant to 28 U.S.C. § 157(a) and its own Internal Operating Procedure 15(a), the District Court for the Northern District of Illinois has referred its bankruptcy cases to the bankruptcy court of this district. When presiding over a referred case, the bankruptcy court has jurisdiction under 28 U.S.C. § 157(b)(1) to enter appropriate orders and judgments in core proceedings within the case. Proceedings "arising under" the Bankruptcy Code are core proceedings. Wood, 825 F.2d at 96. Thus, if the debtors' motion were properly brought under § 505(a), this court would have jurisdiction to enter a final order deciding it.

The IRS has challenged the court's jurisdiction on the ground that the relief requested by the debtors' motion is not within the scope of § 505(a). This court may decide the resulting jurisdictional question. See Visioneering Const. & Dev. Co. v. United States Fid. & Guar. (In re Visioneering Const.), 661 F.2d 119, 122 (9th Cir. 1981) ("The bankruptcy court clearly has the power in the first instance to determine whether it has jurisdiction to proceed.").

Factual Background

The few facts relevant to the pending motion are not in dispute.

On December 9, 2002, United Air Lines, Inc. and twenty-seven related entities (collectively "United") filed the Chapter 11 cases now before the court. In the course of administering these cases, United entered into revised collective bargaining agreements with all of its major unions. Under the new agreements, any plan of reorganization that United proposes or supports must provide for the issuance of securities or other property for distribution to employees represented by the unions.

On September 7, 2005, United proposed a plan of reorganization, and a hearing on this plan is scheduled for January 18, 2006. The plan provides for property to be distributed to union employees pursuant to the revised collective bargaining agreements.

United's pending motion, initially filed in 2004 and renewed in August of 2005, seeks a determination that the property distribution to union employees proposed in its plan is not subject to federal income and employment taxes. The IRS asserts a number of arguments in opposition to the motion, including the jurisdictional argument noted above.

Discussion

United's motion is straightforward in seeking a declaratory judgment—"an order declaring that the distribution of property to individuals represented by the Debtors' unions pursuant to the Debtors' Plan of Reorganization will not be `wages.'" Debtors' Motion at 18.² In the Declaratory Judgment Act, Congress authorized courts to enter orders of the sort sought by United. The Act provides that "any court of the United States . . . may declare the rights and other legal relations of any interested party seeking such a declaration." 28 U.S.C. § 2201(a).

However, this grant of judicial power is subject to two limitations. First, the Act provides that declaratory judgments may only be entered in "a case of actual controversy." Id. This restriction reflects a constitutional limit on the jurisdiction of all federal courts. The judicial power accorded by Article III of the Constitution applies only to "cases or controversies," and so does not allow federal courts to decide "abstract, hypothetical or contingent questions." Preiser v. Newkirk, 422 U.S. 395, 401, 95 S.Ct. 2330, 45 L.Ed.2d 272 (1975). To be justiciable, a controversy must be one that calls for "an adjudication of present right upon established fact." Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 242, 57 S.Ct. 461, 81 L. Ed. 617 (1937).

Second, the Declaratory Judgment Act denies any power to enter a declaratory judgment "with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986, [or] a proceeding under section 505 or 1146 of title 11." 28 U.S.C. § 2201(a). This exclusion of tax matters from the scope of cases subject to declaratory judgment is not required by the Constitution, but rather is an exercise of Congress's power to define the jurisdiction of lower federal courts. "The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute." Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995).

The IRS has challenged this court's jurisdiction to award United the relief it seeks under both the "case or controversy" limitation of Article III and the statutory limitation respecting federal tax questions. Because the narrower, tax-focused limitation applies to United's motion, it is not necessary to determine whether a dispute regarding the consequences of a proposed Chapter 11 plan presents a constitutional case or controversy.³

A. The necessity of a proceeding under § 505

Under the tax limitation of the Declaratory Judgment Act, lower federal courts are denied the power to issue declaratory judgments with respect to federal taxes except in three specified proceedings—(1) actions pursuant to § 7428 of the Internal Revenue Code of 1986, (2) proceedings under § 505 of the Bankruptcy Code and (3) proceedings under § 1146 of the Bankruptcy Code. 28 U.S.C. § 2201(a); Sterling Consulting Corp. v. United States, 245 F.3d 1161, 1165-66 (10th Cir. 2001).

Curiously, the last of these three exceptions—for § 1146 of the Bankruptcy Code—never has effect, since § 1146 applies only to state and local tax matters (and United accordingly makes no claim that it can obtain the declaration it seeks under § 1146).⁴ Section 7428 of the Internal Revenue Code, 26 U.S.C. § 7428, is also inapplicable to United's motion, since it deals only with the tax-exempt status of organizations. Thus, in order for this court—or any court—to declare the effect of a proposed bankruptcy plan on federal tax liability, as United requests, that relief must be within the scope of § 505 of the Bankruptcy Code. If § 505 does not govern United's request, then the Declaratory Judgment Act bars the court from considering it.

B. The language of § 505(a) and its judicial interpretation

In relevant part, § 505 provides as follows:

(a) (1) Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

The scope of this provision is problematic. Its only express limitations on the bankruptcy court's jurisdiction to determine "the amount or legality of any tax" are the ones set out in § 505(a)(2), and these limitations deal not with subject matter jurisdiction, but only with the interaction of bankruptcy adjudication with that of other tribunals.⁵ Thus, read literally, without regard to its context, § 505(a) would establish bankruptcy jurisdiction to determine any tax dispute, whenever it arose and whomever it involved, effectively creating a "second tax court" in bankruptcy. See Brandt-Airflex Corp. v. Long Island Trust Co. (In re Brandt-Airflex Corp.), 843 F.2d 90, 96 (2d Cir. 1988) (referring to such a result as "absurd").

Unsurprisingly, the courts have balked at such an unbounded interpretation of § 505(a). For example, "virtually all the courts which have considered the issue have concluded that section 505(a) does not extend the bankruptcy court's jurisdiction to parties other than the debtor." Mich. Employment Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1139 (6th Cir. 1991) (collecting authorities); see also United States v. Prescription Home Health Care, Inc. (In re Prescription Home Health Care, Inc., 316 F.3d 542, 547 (5th Cir. 2002) ("While [§ 505(a)] speaks of `any tax', it grants jurisdiction to determine the tax liabilities of the debtor and the estate, not those of third parties . . . .").

But in contrast to this consensus as to whose tax issues may be adjudicated under § 505(a), the courts have reached no consensus as to when a tax issue must...