United States v. Federal Deposit Insurance Corporation, C.A. No. 93-0621-L (D. R.I. 9/__/1995)
| Decision Date | 01 September 1995 |
| Docket Number | C.A. No. 93-0621-L. |
| Parties | UNITED STATES OF AMERICA, Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Eastland Savings Bank, and ALLAN M. SHINE, as Receiver of Budlong Manufacturing Co., Inc., Defendants. |
| Court | U.S. District Court — District of Rhode Island |
This matter is before the Court on motions filed by both defendants to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(b)(6). Defendants, Federal Deposit Insurance Corporation ("FDIC") and Allan M. Shine ("Shine"), seek to dismiss the claims brought by the United States on behalf of the Internal Revenue Service ("IRS") to recover a capital gains tax generated by the sale of corporate property in a state court receivership. For the reasons expressed below, defendants' motions are granted.
On August 12, 1988, Budlong Manufacturing Co., Inc. ("Budlong") was petitioned into receivership in the Providence County Superior Court in the case of Southern Industries of Clover, Ltd. v. Budlong Manufacturing, Co., Inc. (Case no. 88-3826). Shine was appointed Temporary Receiver of Budlong on August 18, 1988, and his appointment was made permanent on September 9, 1988.
Budlong's two largest creditors were Eastland Savings Bank ("ESB") and Eastland Bank ("EB"). They were both secured. ESB held a first mortgage on and first security interest in Budlong's real and personal property located at 564 Pontiac Avenue, Cranston, Rhode Island pursuant to a Mortgage, Security Agreement and Assignment of Leases and Rents dated April 30, 1985. The amount secured by ESB's mortgage lien was approximately $652,000.00. EB held a first security interest in all of Budlong's remaining assets, including its accounts receivable, inventory, equipment, machinery, other personal property, and all proceeds. These liens were created by a Security Agreement dated May 16, 1986. The amount secured was over $1,100,000.00.
On October 17, 1988, the Superior Court allowed in full the secured claims of ESB and EB. In addition, the Court established the priority of their liens on Budlong's real and personal property and other assets.
Following Superior Court orders dated October 18, 1988; March 30, 1988; and December 27, 1989; Shine managed a series of sales of Budlong's property. From the sales and the collection of other sums due Budlong, Shine acquired $1,972,849.44. From these funds, he distributed $1,818,261.05 to ESB and EB to pay their claims. The remaining funds (in excess of $150,000.00) were used to pay the expenses incurred in making the sales and collecting the amounts due the receivership, such as auctioneer fees, environmental site survey costs, accounting expenses, appraisal fees, and Shine's fee for acting as Receiver.
After Shine oversaw the sale of Budlong's property, he filed Budlong's final federal income tax return. On that return, Shine reported a capital gains tax liability owed by Budlong in the amount of $403,030.00 resulting from the sale of its assets. Shine, however, did not schedule or pay this tax liability. The United States points out that Shine failed even to mention this capital gains tax liability in his First and Final Report filed with the Superior Court on July 16, 1990.
On July 23, 1990, Shine received a statement from the IRS of Taxes Due as an Expense of Administration of an estate, including a capital gains tax of $403,030.00, interest of $25,019.25, and a penalty of $22,166.65. Shine filed an Objection to this statement in Superior Court on August 3, 1990.
The Superior Court conducted a hearing on the Receiver's First and Final Report on October 3, 1990. The attorney representing the IRS knew about the hearing but did not attend. On October 29, 1990, the Court entered an order approving Shine's First and Final Report. In addition, the Superior Court expressly approved Shine's recommendations as to the amount of each claim, directed the disbursement of certain funds in Shine's possession, authorized Shine to abandon all Budlong's books and records, discharged Shine and cancelled his bond, and dissolved Budlong's corporate status.
On March 9, 1991, the United States, on behalf of the IRS, moved to vacate the Superior Court's order of October 29, 1990, which approved the Receiver's First and Final Report. ESB and EB filed an opposition to this motion. The Superior Court held a hearing on April 10, 1991, and issued an order on May 22, 1991, vacating the order of October 29, 1990. In addition, it required Shine to produce certain documents relating to the sales of Budlong's property and the claims of Budlong's creditors.
Following this proceeding, the United States filed three motions: (1) a Motion for a Second and Supplemental Report of the Receiver; (2) a Motion for leave to conduct Further Discovery and for Necessary Process; (3) and a Motion to Charge Eastland Bank and Eastland Savings Bank and for an Evidentiary Hearing. The Superior Court heard arguments on these Motions on August 15, 1991. On October 9, 1991, the Superior Court entered an order that granted the United States' Motion for Leave to Conduct Further Discovery, deferred ruling on the Motion to Charge and for an Evidentiary Hearing, and denied without prejudice the Motion for a Second and Supplemental Report of the Receiver.
The Budlong receivership was inactive for more than a year. Then, on December 11, 1992, the Director of the Rhode Island Department of Business Regulation petitioned ESB and EB into receivership in the Superior Court. The FDIC was appointed Receiver of both banks.
On March 12, 1993, the United States filed a proof of claim with the FDIC as ESB and EB's Receiver, for the unpaid taxes as an administrative expense in the amount of $450,215.90. This claim was filed under the administrative claims procedure set forth in 12 U.S.C. § 1821(d) (1989) of the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA").
The FDIC notified the United States that its claim was disallowed under 12 U.S.C. § 1821(d)(5)(D) because the United States had failed to prove its claim to the FDIC's satisfaction.1 As a result, the United States initiated this action in this Court pursuant to 12 U.S.C. § 1821(d)(6)(A) asserting that the IRS claim for the capital gains tax should be paid as an administrative expense. The United States prays that the claim be paid in full from either: 1) the funds received by ESB and EB from the sale of the collateral; or 2) the funds the FDIC holds as their Receiver. The United States' fall back position is that Shine should, at least, pay the United States a pro rata share from funds he received and used for payment of administrative expenses. Defendants contend that the Complaint fails to state a claim as a matter of law because neither had a legal obligation to pay the capital gains tax in the circumstances of this case.
When deciding a motion to dismiss under Fed. R. Civ. P. 12(b)(6), a court must accept the plaintiff's allegations as true. In re Ballard Shipping Co., 810 F. Supp. 359, 361 (D.R.I. 1990), aff'd. in part, rev'd. in part, 32 F.3d 623 (1st Cir. 1994). The court may only grant a motion to dismiss if the plaintiff cannot prove any facts supporting its claim for relief. Rockwell v. Cape Cod Hospital, 26 F.3d 254, 255 (1st Cir. 1994); Morgan v. Ellerthorpe, 785 F. Supp. 295, 299 (D.R.I. 1992). The defendant must show that the plaintiff's claim is insufficient as a matter of law. National Credit Union Admin. Bd. v. Regine, 795 F. Supp. 59, 62 (D.R.I. 1992). In short, the court, viewing the complaint in the light most favorable to the plaintiff and resolving every doubt in its favor, must decide whether the allegations set forth any valid claim for relief. 5A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1357 (1990).
The above stated facts are undisputed. There is only one legal issue presented and it focuses on the priority of the payment of claims in the Budlong receivership. The United States contends that the capital gains tax generated by the sale of Budlong's assets constitutes an operating expense of the receivership analogous to those enumerated by § 506(c) of the Bankruptcy Code, 11 U.S.C. §§ 501-510 (1988), and therefore should have been paid by Shine as an administrative expense. Defendants FDIC and Shine argue that the capital gains tax generated by the sale of Budlong's assets is instead a general administrative expense, analogous to those enumerated in § 503(b)(1)(B) of the Bankruptcy Code and was not paid by Shine as Receiver because it was an inferior claim and no funds were available to pay it.
Of course, it is Rhode Island receivership law that applies to this case. Therefore, the question more precisely is whether, as a matter of Rhode Island law, a capital gains tax generated from the sale of receivership property is an operating expense of the receivership to be deducted from the secured creditors' collateral proceeds, or a general administrative expense to be paid from the general funds of the receivership.
Rhode Island has no statute that sets forth the priority of claims in receivership proceedings. As a result, Rhode Island courts deciding issues in this area frequently look to federal bankruptcy law for guidance. Leonard Levin Co. v. Star Jewelry Co., Inc., 175 A. 651, 653 (R.I. 1934). Federal bankruptcy law provides that if the property managed by the receiver is sold to pay debts, the proceeds of the sale are used first to satisfy valid liens on the property, next for any exemptions the debtor may claim, and finally to pay claims enumerated in 11 U.S.C. § 726. In re Lambdin, 33 B.R. 11, 13 (Bankr. M.D. Tenn. 1983). Establishing priority of claims is necessary because if the funds are insufficient to pay all claims, some claims must remain unsatisfied. Id.
Pre-petition and post-petition taxes enjoy different priority positions. Pre-petition...
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