Wetzler v. F.D.I.C.
Decision Date | 13 October 1994 |
Docket Number | No. 1273,D,1273 |
Citation | 38 F.3d 69 |
Parties | James W. WETZLER, as Commissioner of Taxation and Finance of the State of New York, and the New York State Department of Taxation and Finance, Plaintiffs-Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of the Seamen's Bank for Savings, F.S.B., Defendant-Appellee. FEDERAL DEPOSIT INSURANCE CORPORATION, Counter-Claimant, v. James W. WETZLER and New York State Department of Taxation and Finance, Counter-Defendants. ocket 93-9068. |
Court | U.S. Court of Appeals — Second Circuit |
Kathleen V. Gunning, Counsel, F.D.I.C., Washington, DC (Ann S. Duross, Asst. Gen. Counsel, Robert D. McGillicuddy, Senior Counsel, F.D.I.C., Washington, DC; Steven A. Hammond, Merrikay S. Hall, and Kevin M. Crotty, Hughes, Hubbard & Reed, New York City, of counsel), for defendant-appellee F.D.I.C.
O. Peter Sherwood, Corp. Counsel of the City of New York, Attorney for the City of New York, New York City (Edward F.X. Hart, Frances J. Henn, and Stanley Buchsbaum, Corp. Counsel of the City of New York, of counsel), filed a brief for amicus curiae the City of New York.
Before: TIMBERS, * CARDAMONE and WINTER, Circuit Judges.
The question we are called upon to resolve is whether Seamen's Bank (Seamen's), a federal savings bank chartered under the Home Owners' Loan Act of 1933, must pay New York State's bank franchise tax during a time when it was receiving financial assistance from the Federal Deposit Insurance Corporation (FDIC). Seamen's Bank, with its principal office at 30 Wall Street, New York City, was originally founded, as its name suggests, to serve people and businesses engaged in the seafaring trade. It is one of the oldest banks in the United States, having been chartered in New York in 1829. Subsequently it became a federally chartered savings bank. To aid banks like Seamen's that, within the past decade, were veering towards the shoals of financial insolvency, Congress enacted a law authorizing the FDIC to throw them a lifeline. In the case before us, with Seamen's at the time somewhat stabilized by the FDIC's lifeline, but still in danger of foundering, the State of New York urges a construction of the law enacted to save banks that would effectively cast off the FDIC's lifeline to Seamen's, and let the bank drift again towards financial disaster.
of Taxation and Finance (State) appeal from a judgment entered on September 10, 1993 by the United States District Court for the Southern District of New York (McKenna, J.) granting defendant Federal Deposit Insurance Corporation's motion for summary judgment and denying the State's cross-motion for summary judgment, and dismissing its action. We turn to examine the statutes at issue, the facts, and the proceedings in the district court.
Because this case involves a tax dispute covering the years 1982-1984, the federal and New York state statutes that were in effect during those years are frequently cited, even though both statutes have since been repealed. The controversy before us stems from the enactment on October 15, 1982 of the Garn-St. Germain Depository Institutions Act of 1982, Pub L. No. 97-320, Sec. 202, 96 Stat. 1469, 1489 ( )(repealed by Pub.L. No. 97-320, Sec. 206, 96 Stat. 1496 (1982), Pub.L. No. 100-86, Sec. 509(b), 101 Stat. 635 (1987), and Pub.L. No. 101-73, Sec. 217(7), 103 Stat. 258 (1989)) (Garn Act). The Garn Act was Congress' response to the financial plight of the nation's savings banks in the early 1980s, many of which were losing money because so many of their loans were in long-term residential mortgages that carried low interest rates. See S.Rep. No. 536, 97th Cong., 2d Sess. 1, 2, reprinted in 1982 U.S.C.C.A.N. 3054, 3055, 3056; S.Conf.Rep. No. 641, 97th Cong., 2d Sess. 85-86, reprinted in 1982 U.S.C.C.A.N. 3054, 3128-29.
A cornerstone of the Garn Act was Congress' decision to authorize the FDIC to purchase capital instruments from qualified banks, to be known as "net worth certificates," which the banks would issue. See 12 U.S.C. Sec. 1823(i)(1)(A). In exchange for such a certificate, the FDIC would give the bank a promissory note. The issued certificates became part of the bank's capital account and, as such, increased the bank's net worth; hence, the name given these instruments. The bank could pay dividends on the certificates at a rate equal to the interest on the promissory notes given it by the FDIC. See id. Sec. 1823(i)(1)(B). FDIC v. New York, 928 F.2d 56, 57 (2d Cir.1991) (quoting S.Rep. No. 536 at 10, reprinted in 1982 U.S.C.C.A.N. at 3063).
In order to be a qualified institution within the meaning of the Garn Act, a depository institution must, inter alia, have (1) had a net worth equal to or less than three percent of its assets, (2) incurred losses for two quarters prior to receiving assistance, and (3) maintained investments in residential mortgages or mortgage-backed securities aggregating at least 20 percent of its loan portfolio. See 12 U.S.C. Sec. 1823(i)(2)(A), (B) and (F).
Coupled with the net worth certificate program, Congress included a series of measures to ensure that the assistance would have some substance. One of those measures, enacted at 12 U.S.C. Sec. 1823(i)(9), was aimed at alleviating ailing institutions' burden of paying state and local taxes. It provides:
During any period when a qualified institution has outstanding net worth certificates issued in accordance with this subsection, such institution shall not be liable for any State or local tax which is determined on the basis of the deposits held by such institution or the interest or dividends paid on such deposits.
12 U.S.C. Sec. 1823(i)(9) (1988) (emphasis added). The construction to be given to the just cited section is the subject of this appeal.
The tax sought to be collected from Seamen's Bank is the New York Franchise Tax on Banking Corporations, Article 32, N.Y. Tax Law, Secs. 1450-1468 (McKinney 1975 & Supp.1994) (Bank Franchise Tax). Section 1451 imposed a tax on every bank exercising its franchise or doing business within New York. For the relevant years the tax was measured by the bank's entire net income or the portion of its net income allocated to New York. See id. Sec. 1455(a). When a savings bank or savings and loan association had no net income, the State imposed the greater of two alternative taxes: a nominal tax of $250 or a deposit-based tax that depended on the amount of interest or dividends credited to the banks' depositors within the period. See id. Sec. 1455(b).
Having set forth the statutory context, we pass to the underlying facts, which the parties have stipulated. Seamen's Bank was a qualified institution within the meaning of the Garn Act for a portion of the last quarter of 1982, the first, second and third quarters of 1983, and the second quarter of 1984. Accordingly, it issued net worth certificates on several occasions, the first time being December 29, 1982, and it had certificates outstanding from that date through the end of 1984.
During this period the bank and the State wrestled over the question of the bank's tax liability under the state's Bank Franchise Tax in light of the Garn Act, and in particular the tax exemption created by Sec. 1823(i)(9). For the taxable period that ended December 31, 1982 Seamen's franchise tax return asserted that all the interest credited to customers during 1982 was exempt from the state franchise tax pursuant to Sec. 1823(i)(9), not just the amount credited to depositors during the last three days of 1982, when Seamen's first held outstanding certificates. Seamen's therefore computed its tax due at the $250 minimum--which was not exempt under the Garn Act--less claimed credits of $51,471, reducing the tax due to zero.
Taking exception to the bank's reliance on Sec. 1823(i)(9), the State issued a Statement of Audit Adjustment and Notice of Deficiency with respect to the taxable year 1982. The State's figures showed that Seamen's had an estimated total tax deficiency for 1982 of $637,225, plus $198,673.80 in interest on that amount as of July 26, 1985, for a total due and owing the State of New York of $835,898.80.
A similar pattern of events unfolded for the next two years. On its tax return for the taxable period ending December 31, 1983, the bank again computed its tax at the minimum $250 figure. The State responded with a similar adjustment and notice setting forth an estimated total deficiency for 1983 of $1,167,116.47 ($815,000 in tax and $352,116.47 in interest), as of September 14, 1987. This deficiency was later reduced by the State, first to $201,438.51, and then to $178,638.51. In March 1990 the State applied a refund due Seamen's for the taxable year that ended December 31, 1988. This reduced Seamen's tax liability to zero, while penalties were reduced to approximately $3,000, and outstanding interest remained unchanged. The same scenario occurred for the taxable period ending December 31, 1984. For the 1984 taxable year the State estimated a total deficiency of $1,324,745.93, as of September 6, 1990, reflecting $775,000 in taxes and...
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