Kravitz v. Cal. State Bd. of Equal. (In re La Paloma Generating Co.)

• Citation: 607 B.R. 794
• Decision Date: 19 September 2019
• Docket Number: Bankr. Case No. 16-12700-JTD (Jointly Administered),Civ. No. 18-1759-LPS
• Parties: IN RE: LA PALOMA GENERATING COMPANY LLC, et al., Debtors. Peter Kravitz, solely in his capacity as the Liquidating Trustee of the La Paloma Liquidating Trust, Appellant, v. California State Board of Equalization, Appellee.
• Court: U.S. District Court — District of Delaware

607 B.R. 794

IN RE: LA PALOMA GENERATING COMPANY LLC, et al., Debtors.Peter Kravitz, solely in his capacity as the Liquidating Trustee of the La Paloma Liquidating Trust, Appellant,

v.California State Board of Equalization, Appellee.

Bankr. Case No. 16-12700-JTD¹ (Jointly Administered)

Civ. No. 18-1759-LPS

United States District Court, D. Delaware.

Signed September 19, 2019

Jason Michael Madron, Mark David Collins, Richards, Layton & Finger, PA, Wilmington, DE, for Appellant.

Hutchison B. Meltzer, Matthew C. Heyn, California Department of Justice Office of the Attorney General, Los Angeles, CA, Edward K. Black Department of Justice Wilmington, DE for Appellee.

MEMORANDUM

HONORABLE LEONARD P. STARK

I. INTRODUCTION

Pending before the Court is an appeal (D.I. 1) by Peter Kravitz, in his capacity as liquidating trustee ("Liquidating Trustee") of the La Paloma Liquidating Trust ("Trust") from the Bankruptcy Court's July 25, 2018 decision, In re La Paloma Generating Company , 588 B.R. 695 (Bankr. D. Del. 2018) ("Opinion"), and related order (B.D.I. 1207)² ("Order"). The appeal stems from litigation between Appellant and the California State Board of Equalization ("SBE") whereby La Paloma Generating Company, LLC and its affiliated debtors ("Debtors" or "La Paloma") sought a property tax refund for the 2012–2016 tax years (the "Tax Dispute") on account of real property taxes paid in connection with the Debtors' formerly-owned electric generating facility located in Kern County, California (the "Facility").

In connection with the Tax Dispute, the Bankruptcy Court entered its Opinion ruling on SBE's Motion for Summary Judgment as to its Jurisdictional Defenses (B.D.I. 1040) ("Summary Judgment Motion"), which was treated as a motion to dismiss for lack of subject matter jurisdiction. See La Paloma , 588 B.R. at 702. In SBE's supporting brief (B.D.I. 1043), SBE argued that the Bankruptcy Court had no jurisdiction to decide the Tax Dispute, based on Eleventh Amendment sovereign immunity. (AA702) In the alternative, SBE argued that if the Bankruptcy Court does have jurisdiction to adjudicate the Tax Dispute, then Appellant's potential tax refund should be "capped" by operation of Section 505 of the Bankruptcy Code. (AA703-04) In his thorough Opinion, the Honorable Judge Christopher S. Sontchi determined that SBE is correct about its Eleventh Amendment sovereign immunity defense and, consequently, that the Tax Dispute must be dismissed. See La Paloma , 588 B.R. at 735. The Opinion, however, included additional substantive rulings adverse to Appellant with respect to aspects of the merits of the Tax Dispute. See id. at 709-16.

Appellant moved for reconsideration of the Opinion (AA1579-1602) ("Motion for Reconsideration") to vacate those findings, which the Bankruptcy Court denied (AA1697-98) ("Denial Order"). Appellant has timely appealed the Opinion, Order, and the Denial Order. (D.I. 1) The merits of the appeal are fully briefed. (D.I. 18, 19, 20, 21, 22 & 23) The Court did not hear oral argument because the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument.

II. BACKGROUND

A. The Tax Dispute

The Tax Dispute was litigated initially in the Superior Court of the State of California, Los Angeles County (the "Superior Court"), and later in the Bankruptcy Court. On January 3, 2017, La Paloma filed its complaint in the Superior Court, which alleges that the assessed property values developed by SBE and used by Kern County, California ("Kern County") to assess certain property taxes for the 2012–2016 tax years (the "Property Taxes") far exceeded the fair market values of the Facility. (AA81-93) Accordingly, La Paloma sought an adjustment in the assessed valuation of the Facility and a determination that the Property Taxes properly payable to Kern County should be significantly reduced. (AA89-90)

On December 6, 2016, the Debtors each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. (AA1-56) On November 6, 2017, the Bankruptcy Court entered an order (AA479-595) (the "Confirmation Order") confirming the Debtors' Chapter 11 plan ("Plan"). On December 4, 2017, the Plan became effective. (AA596-98) In accordance with Article VI of the Plan and paragraph 62 of the Confirmation Order, on the Plan's effective date, (i) a certain liquidating trust agreement was executed by the Debtors and the Liquidating Trustee (i.e., Appellant), and (ii) certain liquidating trust assets (which included the Debtors' tax refund claim) were deemed transferred to the Liquidating Trust. (AA453-56; AA513) In accordance with the Plan, Appellant is the judicial substitute for the Debtors in their Chapter 11 cases.

On March 16, 2017, the Debtors filed their 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 (AA61-94) (the "Determination Motion"). Pursuant to the Determination Motion, the Debtors sought entry of an order providing that the Bankruptcy Court would exercise its authority under Section 505 of the Bankruptcy Code to adjudicate the Tax Dispute and Debtors' asserted entitlement to a refund of the Property Taxes, rather than the Superior Court. (AA71) SBE objected to the Determination Motion, and Kern County filed no response. (AA95-127) Following a hearing, the Bankruptcy Court granted the Determination Motion and ruled that it would "exercise jurisdiction over this issue and dispute under 505" and observed that "all the factors, 505(a) have been met, at least on a facial basis." (AA178) In sum, by granting the Determination Motion, the Bankruptcy Court ruled that it, rather than the Superior Court, would hear the Tax Dispute. (AA178-81) After the Determination Motion was granted, the litigation in the Superior Court was stayed.

La Paloma and SBE thereafter entered into a series of stipulated orders that were approved by the Bankruptcy Court to govern the litigation of the Tax Dispute, including discovery and briefing. (AA130-33; AA203-04; AA599-01; AA636-39) Pursuant to the schedule approved by the Bankruptcy Court in certain of those orders, on January 30, 2018, SBE filed the Summary Judgment Motion and brief in support thereof. (AA693-94; AA695-725) Appellant opposed the Summary Judgment Motion. (AA726-88) In its supporting brief, SBE asserted, in the first instance, that it was entitled to an Eleventh Amendment sovereign immunity defense that deprived the Bankruptcy Court of any jurisdiction to hear the Tax Dispute. (AA702) In the alternative, SBE asserted that if the Bankruptcy Court had jurisdiction to adjudicate the Tax Dispute, then the Debtors' maximum recovery was "capped" by operation of Section 505 of the Bankruptcy Code. (AA703-04)

B. The Opinion

On March 6, 2018, the Bankruptcy Court heard oral argument on the Summary Judgment Motion. (AA1305-1481) At the conclusion of that hearing, the Bankruptcy Court adjourned the trial on the Tax Dispute pending issuance of a decision on the Summary Judgment Motion. La Paloma , 588 B.R. at 704 ("As jurisdiction to hear the [Tax Dispute] is a gating issue, the Court canceled the substantive trial on the [Tax Dispute] until it could issue this Opinion on SBE's Motion.") On July 25, 2018, the Bankruptcy Court entered the Opinion and Order granting the Summary Judgment Motion. (AA1510-75; AA1576-78)

Following a detailed and thorough analysis of the parties' arguments, Judge Sontchi determined that SBE is entitled to its asserted Eleventh Amendment sovereign immunity defense and, consequently, that "the Tax Dispute must be dismissed from this court" ("Sovereign Immunity Ruling"). La Paloma , 588 B.R. at 717-35. The Sovereign Immunity Ruling included an "intricate dissection" clarifying the intersection of bankruptcy law and sovereign immunity.³ The Sovereign Immunity Ruling is not at issue in this appeal.

Instead, the subjects of this appeal are certain additional rulings adverse to Appellant with respect to the Tax Dispute (" Section 505 Findings"), which were set forth in the context of the Bankruptcy Court's subject matter jurisdiction analysis under Section 505 of the Bankruptcy Code. See La Paloma , 588 B.R. at 709-16. Indeed, the Bankruptcy Court began with its subject matter jurisdiction analysis, noting that, "[f]ollowing Third Circuit law, to the extent the non-sovereign immunity defense can resolve SBE's [Summary Judgment] Motion, there is no need to address the Eleventh Amendment defense. Accordingly, this Court will first review the § 505 statutory argument and then turn to the issue of sovereign immunity." Id. at 710.⁴

Section 505 of the Bankruptcy Code provides that a bankruptcy 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 ...." 11 U.S.C. § 505(a)(1). However, Section 505 contains certain limitations and provides that a court may not determine:

(B) any right of the estate to a tax refund, before the earlier of–

(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or

(ii) a determination by such governmental unit of such request ....

11 U.S.C. § 505(a)(2). The Third Circuit has interpreted the "properly requests such refund" language of Section 505 as a limitation of the bankruptcy court's jurisdiction to determine the right to refunds: a bankruptcy court may award such refunds if they have been "properly requested" from the governmental unit. See City of Perth Amboy v. Customer Distribution Servs. Inc. (In re Custom Distribution Servs. Inc.) , 224 F.3d 235, 243–44 (3d Cir. 2000). SBE argued that Section 505 limits the Bankruptcy Court's subject matter jurisdiction because: (i) no "trustee" had requested a refund (as La Paloma requested the refund prior to the Petition...