Miller v. United States (In re All Resort Grp., Inc.)

• Decision Date: 31 March 2020
• Docket Number: Bankruptcy Case No. 17-23687,Adversary Proceeding No. 18-2089
• Citation: 617 B.R. 375
• Parties: IN RE: ALL RESORT GROUP, INC., Debtor. David L. Miller, as Chapter 7 Trustee of the Bankruptcy Estate of All Resort Group, Inc., Plaintiff, v. United States of America, Defendant.
• Court: U.S. Bankruptcy Court — District of Utah

617 B.R. 375

IN RE: ALL RESORT GROUP, INC., Debtor.David L. Miller, as Chapter 7 Trustee of the Bankruptcy Estate of All Resort Group, Inc., Plaintiff,

v.United States of America, Defendant.

Bankruptcy Case No. 17-23687

Adversary Proceeding No. 18-2089

United States Bankruptcy Court, D. Utah.

Signed March 31, 2020

Reid W. Lambert, Elizabeth R. Loveridge, Strong and Hanni P.C., Salt Lake City, UT, for Plaintiff.

Virginia Cronan Lowe, Landon Yost, US Dept. of Justice, Tax Division, Washington, DC, for Defendant.

MEMORANDUM DECISION

R. KIMBALL MOSIER, U.S. Bankruptcy Judge More than two years before it filed bankruptcy, All Resort Group, Inc. (All Resort) paid personal tax debts of two of its principals. After All Resort's case converted to chapter 7, David Miller, the trustee of its bankruptcy estate (Trustee), commenced this adversary proceeding against the United States to avoid those payments as fraudulent transfers and recover them for the benefit of the estate. Neither party has disputed any of the facts concerning the payments. Since all that remains is to apply the law to the facts, both parties have appropriately asked the Court to resolve this adversary proceeding on summary judgment. The particular legal question framed by the parties' cross-motions is whether sovereign immunity or preemption preclude a bankruptcy trustee from using 11 U.S.C. § 544(b) to recover payments made to the Internal Revenue Service (IRS).

After considering the relevant filings in this adversary proceeding, including the parties' motions and memoranda, after considering the parties' oral arguments, and after conducting an independent review of applicable law, the Court issues the following Memorandum Decision denying the United States' motion and granting the Trustee's motion.

I. JURISDICTION

The Court's jurisdiction over this adversary proceeding is properly invoked pursuant to 28 U.S.C. § 1334 and § 157(b)(1). This matter is a core proceeding within the definition of 28 U.S.C. § 157(b)(2)(H), and the Court may enter a final order. Venue is appropriate under 28 U.S.C. § 1409.

II. FACTUAL BACKGROUND

The Court finds that there is no genuine dispute as to the following facts. All Resort filed a voluntary chapter 11 petition in this Court on April 28, 2017. After the necessary debtor-in-possession financing failed to materialize, All Resort itself sought conversion of its case to one under chapter 7.¹ The Court converted the case on September 14, 2017,² and the United States Trustee appointed David Miller as chapter 7 trustee.

On June 23, 2014 All Resort made two payments to the IRS that are the focus of this adversary proceeding. Both payments came from All Resort's bank account at Zions Bank and consisted of funds belonging to All Resort. The first was in the amount of $71,829.68 and it satisfied a personal federal tax debt owed by Gordon Cummins, who was an officer and director of All Resort and a shareholder in the company. The second was in the amount of $73,309.10 and it satisfied a personal federal tax debt of Richard Bizzaro, who was also an officer and director of All Resort and a shareholder in the company. The Trustee filed a complaint to avoid those payments as fraudulent transfers under 11 U.S.C. §§ 544(b) and 548(a),³ the former of which incorporates a claim under the Utah Uniform Fraudulent Transfer Act (UUFTA),⁴ and recover them under § 550.

Prior to the payments at issue, Robin Salazar filed a charge of employment discrimination against All Resort on August 15, 2011. She subsequently commenced a civil proceeding against All Resort in the United States District Court for the District of Utah on November 25, 2014. Salazar later settled that lawsuit but did not receive the full amount of the settlement before All Resort filed bankruptcy. All Resort scheduled the remaining obligation to Salazar as a $55,000 unsecured claim,⁵ and she later filed a claim for that amount.⁶ Neither All Resort nor the Trustee have objected to Salazar's claim.⁷

III. DISCUSSION

A. Legal Standard Under Rule 56

Under Federal Rule of Civil Procedure 56(a), made applicable in adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, the Court is required to "grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."⁸ Substantive law determines which facts are material and which are not. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment."⁹ Whether a dispute is "genuine" turns on whether "the evidence is such that a reasonable [fact finder] could return a verdict for the nonmoving party."¹⁰ In sum, the Court's function at the summary judgment stage is to "determine whether there is a genuine issue for trial."¹¹

The moving party bears the burden to show that it is entitled to summary judgment,¹² including the burden to properly support its summary judgment motion as required by Rule 56(c).¹³ If the moving party has failed to meet its burden, "summary judgment must be denied," and the nonmoving party need not respond because "no defense to an insufficient showing is required."¹⁴ Once the moving party meets its initial burden, "the burden shifts to the nonmoving party to demonstrate a genuine issue for trial on a material matter."¹⁵ The nonmoving party may not rely solely on allegations in the pleadings, but must instead designate "specific facts showing that there is a genuine issue for trial."¹⁶ The nonmoving party also "must do more than simply show that there is some metaphysical doubt as to the material facts."¹⁷

When considering a motion for summary judgment, the Court views the record and draws all reasonable inferences therefrom in the light most favorable to the nonmoving party,¹⁸ but the Court does not weigh the evidence or make credibility determinations.¹⁹ "On cross-motions for summary judgment, each motion must be considered independently."²⁰

The Court notes that the United States has characterized its motion, though captioned and presented as one for summary judgment, as "more in the nature of" a Rule 12(b)(1) or 12(b)(6) motion.²¹ Failure of Congress to waive sovereign immunity with respect to a particular claim deprives a court of subject-matter jurisdiction over that claim,²² and a Rule 12(b)(1) motion is a common method to challenge jurisdiction based on the defense of sovereign immunity. As a general rule, a motion challenging subject-matter jurisdiction under Rule 12(b)(1) cannot be treated as one for summary judgment.²³ An exception to that rule exists that requires a court to "convert a Rule 12(b)(1) motion to one under Rule 12(b)(6), or for summary judgment, ‘if the jurisdictional question is intertwined with the merits of the case.’ "²⁴ That intertwining occurs "when subject matter jurisdiction is dependent upon the same statute which provides the substantive claim in the case."²⁵ The Court concludes that its subject-matter jurisdiction is inextricably intertwined with the merits in this case. The Trustee's substantive claim is under § 544(b),²⁶ and the Court's ability to hear this case depends entirely on whether Congress's waiver of sovereign immunity encompasses such a claim, including the underlying state substantive law incorporated through § 544(b). Accordingly, the Court will treat the United States' motion as it has been presented: as one for summary judgment.

B. Legal Standard Under § 544(b)

Section 544(b)(1) provides that a "trustee may avoid any transfer of an interest of the debtor in property ... that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title."²⁷ Unlike §§ 547, 548, and 549, which are wholly bankruptcy law causes of action created by the Code, § 544(b) permits a trustee to assert claims that are "available to a debtor's creditors outside of a bankruptcy case" under applicable non-bankruptcy law.²⁸ In order to invoke that law, however, a trustee "must first show that there is an actual creditor holding an allowable unsecured claim who, under state law, could avoid the transfer[ ] in question," but "if there are not creditors within the terms of section 544(b) against whom the transfer is voidable under the applicable law, the trustee is powerless to act so far as section 544(b) is concerned."²⁹ Since the trustee's rights under § 544(b) are derivative of the actual creditor's, the trustee is often metaphorically described as standing in the shoes of the actual creditor and is therefore "subject to the same defenses a transferee would have in a state fraudulent conveyance action brought by the actual creditor."³⁰ Absent waiver, one defense available to transferees that are governmental units in such actions is sovereign immunity.

The United States does not dispute that All Resort paid $71,829.68 and $73,309.10 from its own funds to the IRS on June 23, 2014 in satisfaction of the personal federal tax debts of Cummins and Bizzaro, respectively; that All Resort did not receive reasonably equivalent value in exchange for those transfers; and that All Resort was insolvent at the time of the transfers. In short, the United States concedes that the Trustee has proved all the elements of his § 544(b) and UUFTA claim, save one: that there be an actual creditor who could avoid the transfers at issue. With respect to the actual creditor requirement, the United States admits that Robin Salazar was a creditor of All Resort prior to June 23, 2014 and that she filed a claim in this case. But the United States argues that Salazar cannot serve as the actual creditor because sovereign immunity, asserted as a defense, would bar her suit against the United States under the UUFTA to recover All Resort's payments for the tax debts of Cummins and Bizzaro. As a consequence, the Trustee cannot satisfy...