United States v. Bond

• Decision Date: 13 August 2014
• Docket Number: Docket No. 12–4803–bk.
• Citation: 762 F.3d 255
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. Edward P. BOND, Liquidating Trustee of the Liquidating Trust U/A/W PT1 Communications, Inc., Defendant–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

762 F.3d 255

UNITED STATES of America, Plaintiff–Appellee,

v.Edward P. BOND, Liquidating Trustee of the Liquidating Trust U/A/W PT1 Communications, Inc., Defendant–Appellant.

Docket No. 12–4803–bk.

United States Court of Appeals, Second Circuit.

Argued: March 17, 2014.

Decided: Aug. 13, 2014.

Laurence May, Cole, Schotz, Meisel, Forman & Leonard, P.A., New York, N.Y., (Therese Scheuer, on the brief), for Appellant.

Peter Sklarew (Kenneth W. Rosenberg, Kathryn Keneally, Assistant Attorney General, Bruce R. Ellisen, on the brief), United States Department of Justice, Tax Division, Washington, D.C. (Loretta E. Lynch, United States Attorney for the Eastern District of New York, Brooklyn, N.Y., of counsel), for Appellee.

Before: JACOBS, SACK and LOHIER, Circuit Judges.

DENNIS JACOBS, Circuit Judge:

Pursuant to the Chapter 11 plan of reorganization in this case, all tax refund claims of a bankruptcy estate were assigned to a liquidating trust. Edward P. Bond, the trustee of the liquidating trust (“Liquidating Trustee”), filed a federal income tax refund claim in bankruptcy court. The government asserted (1) that its waiver of sovereign immunity for bankruptcy court adjudication of tax refund claims filed by bankruptcy trustees did not confer on the bankruptcy court jurisdiction to decide such claims filed by the Liquidating Trustee, and (2) that in any event the refund claim was subject to an offset on account of other taxes owed by the Liquidating Trust. The United States Bankruptcy Court for the Eastern District of New York (Craig, C.J.) ruled that the Liquidating Trustee was entitled to a $3.8 million tax refund, and that the reorganization extinguished the government's setoff rights. The United States District Court for the Eastern District of New York (Cogan, J.) affirmed the $3.8 million tax refund, but reversed the extinguishment of setoff rights.

The district court did not reach the merits of the government's setoff claim, or remand the issue to the bankruptcy court. Rather, the district court held that the government's setoff rights could be asserted in a separate federal cause of action pursuant to the Judgment Setoff Act, 31 U.S.C. § 3728. In this appeal, the Liquidating Trustee seeks a mandate directing affirmance of the April 29, 2011 final order (“Final Order”) of the bankruptcy court in toto, and argues that the issue of the bankruptcycourt's subject matter jurisdiction over the refund claim was waived when the government withdrew its own appeal in this case.

We hold that the bankruptcy court lacks jurisdiction over the Liquidating Trustee's refund claim and that the jurisdictional defense was not waived by the government's withdrawal of its appeal. Section 505(a) of the Bankruptcy Code (“Code”) allows a tax refund suit in bankruptcy court only after a refund claim is filed with the IRS by “the trustee” in bankruptcy. (A debtor-in-possession has the status “of a trustee serving in a case under this Chapter,” 11 U.S.C. § 1107; in this opinion, all references to a bankruptcy trustee include the debtor-in-possession.) Here, however, the refund claim was filed by the Liquidating Trustee, a representative of the estate who was appointed under the reorganization plan and whose status is distinct from that of a trustee in bankruptcy. Because Congress authorized a bankruptcy trustee (not a plan-appointed estate representative) to administratively exhaust a refund claim before bringing that claim in bankruptcy court, and the refund claim here was not filed with the IRS by a bankruptcy trustee, the bankruptcy court lacked jurisdiction to award the refund.

BACKGROUND

Debtors PT–1 Communications, Inc., PT–1 Long Distance, Inc., and PT–1 Technologies, Inc. (collectively, “PT–1”), filed for bankruptcy on March 9, 2001. Because the filing ended its tax year prematurely, PT–1 filed two federal income tax returns for the 2001 calendar year: one for January 1–March 8, 2001 (“Stub Period”), and one for March 9–December 31, 2001 (“Short Period”). The Short Period return (filed in September 2002) reported tax due of $6,706,172, which was paid in full. In August 2004, the United States government filed an administrative-expense request in the bankruptcy court seeking an additional $2 million in interest and penalties for the Short Period. The government asserted no pre-petition claims against PT–1.

Prior to adjudicating the government's claim, the bankruptcy court confirmed a Chapter 11 reorganization plan (“Plan”) on November 23, 2004. The Plan created two new entities: Reorganized PT–1 (“New PT–1”), which carried on the debtors' long-distance phone business, and the liquidating trust, from which unsecured creditors were to be paid pro rata.¹ New PT–1's assets consisted of approximately $2.5 million cash, $10 million in accounts receivable, $1 million on deposit with telecommunications providers, and approximately $1 million of property, plant and equipment. The liquidating trust succeeded to most of PT–1's assets, valued at $39–$49 million. Among these assets were “all rights in and to any tax refunds due to the Debtors for tax years ending prior to January 1, 2005.” The Plan provided for the appointment of the Liquidating Trustee to manage the liquidating trust. (No bankruptcy trustee had been appointed; PT–1 had operated as debtor-in-possession.)

The Plan became effective on January 31, 2005.

Six weeks later, on March 14, 2005, the Liquidating Trustee counterclaimed against the government in bankruptcy court, seeking a refund of the Short Period taxes paid.² About six months later, in September 2005, the Liquidating Trustee filed a request with the IRS for the same refund, which is still pending.

In a series of four decisions issued between 2006 and 2009, the bankruptcy court decided the government's administrative-expense tax claim (and others) and the Liquidating Trustee's refund counterclaim. In re PT–1 Commc'ns, Inc., 357 B.R. 217 (Bankr.E.D.N.Y.2006); 386 B.R. 402 (Bankr.E.D.N.Y.2007); 403 B.R. 250 (Bankr.E.D.N.Y.2009); 447 B.R. 115 (Bankr.E.D.N.Y.2011). In sum, the bankruptcy court dismissed all the government's claims, and granted summary judgment in favor of the Liquidating Trustee on his counterclaim. In so doing, the court held that the government's setoff and recoupment rights were extinguished by a Plan provision (set out in the margin ³), and rejected the government's argument that sovereign immunity barred the refund suit. 403 B.R. at 261–65, 271–73.

The Final Order of the bankruptcy court, issued April 29, 2011, specified the relief appropriate under its four prior decisions and awarded the Liquidating Trustee a $3.8 million refund (plus interest) for the Short Period. See Final Order, In re PT–1 Commc'ns, Inc., No. 1–01–12655 (Bankr.E.D.N.Y. Apr. 29, 2011), ECF No. 1243. It also disallowed all the government's tax claims and enjoined the government from exercising rights of setoff or recoupment. Id.

The government appealed to the United States District Court for the Eastern District of New York, arguing, inter alia, that sovereign immunity (i) foreclosed bankruptcy court jurisdiction over the refund counterclaim, and (ii) prevented the government from being bound by the anti-set-off and anti-recoupment provision of the Plan.

As to the Liquidating Trustee's refund counterclaim, the district court upheld bankruptcy court jurisdiction, rejecting the government's argument that the filing of an administrative tax refund request with the IRS by a bankruptcy trustee is a prerequisite to jurisdiction. United States v. Bond, 486 B.R. 9, 26–30 (E.D.N.Y.2012). The district court acknowledged that the Code confers jurisdiction only when a certain period has elapsed after “ the trustee properly requests such refund” from the government, 11 U.S.C. § 505(a)(2)(B), but ruled that the jurisdictional limitation “is in essence a timing and exhaustion of remedies provision” and therefore “does not limit the bankruptcy court's ability to adjudicate tax disputes to only those brought by bankruptcy trustees.” Bond, 486 B.R. at 26. As to the Plan provision barring recoupment and setoff, the district court agreed with the government, and vacated the portion of the Final Order that bound the government to the anti-setoff provision of the Plan. Id. at 45.

Both parties filed appeals. The government challenged the affirmance of the tax refund award; and the Liquidating Trustee challenged the vacatur of the order extinguishing the government's future setoff rights.

The government withdrew its appeal in March 2013. On the happy assumption that the litigation was thus over, the Liquidating Trustee advised the government that he would likewise withdraw his cross-appeal, and proposed that the parties jointly calculate the amount of interest due and arrange for payment. By responsive letter, the government declined to pay the refund because it intended to exercise the setoff and recoupment rights that the district court had reestablished. The Liquidating Trustee continued pursuing this appeal.

On June 3, 2013, the Liquidating Trustee moved the district court for (a) an order directing payment of the tax refund awarded in the Final Order; and (b) a clarification (under Fed.R.Civ.P. 62.1) or an indicative ruling as to whether the government could in fact assert setoff rights against possible tax liabilities from certain PT–1 transactions.

Before the district court ruled on the clarification motion, the government filed an action in the Eastern District of New York under the Judgment Setoff Act, 31 U.S.C. § 3728, which provides the government an independent cause of action to offset a judgment against it. See Complaint for Recoupment and Setoff, United States v. Bond, No. 13–3414 (E.D.N.Y. June 14, 2013). That case, which was assigned to Judge Cogan as related, is stayed pending the outcome of this appeal. Stay Order, United States v. Bond, No. 13–3414 (E.D.N.Y. Jan. 13, 2014).

On October 31, 2013, the district court...