In Re: Hinsley ( 2003 )

United States Court of Appeals
Fifth Circuit
F I L E D
May 28, 2003
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
_____________________
No. 01-21175
_____________________
In the Matter of: GEORGE R HINSLEY
Debtor
------------------------------------
PATRICIA JO HINSLEY; GEORGE R HINSLEY
Appellees
v.
HARRIS COUNTY, State of Texas; CITY OF HOUSTON; HOUSTON
INDEPENDENT SCHOOL DISTRICT; FEDERAL DEPOSIT INSURANCE
CORPORATION
Appellants
In the Matter of: GEORGE R HINSLEY
Debtor
------------------------------------
GEORGE R HINSLEY; PATRICIA JO HINSLEY
Appellees
v.
FEDERAL DEPOSIT INSURANCE CORPORATION
Appellant
_________________________________________________________________
Appeals from the United States District Court
for the Southern District of Texas
H-97-CV-2694
_________________________________________________________________
Before KING, Chief Judge, and DeMOSS and CLEMENT, Circuit Judges.
KING, Chief Judge:*
*
Pursuant to 5TH CIR. R. 47.5, the court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIR. R.
47.5.4.
At issue on appeal is the district court’s determination of
the debtor’s tax liability on certain real property owned by the
debtor and abandoned by the bankruptcy estate. We reverse the
district court’s order on tax liability and render judgment in
favor of the appellants.
FACTUAL and PROCEDURAL BACKGROUND
The general facts underlying this bankruptcy case are set
forth in two prior opinions of this court and will not be repeated
herein. See Hinsley v. Boudloche (In re Hinsley), 201 F.3d 638(5th Cir. 2000); Hinsley v. Boudloche (In re Hinsley), No. 97-
20967, 149 F.3d 1179 (5th Cir. July 15, 1998) (unpublished).
Relevant for the purposes of this controversy are the facts related
to a piece of property purchased in 1985 by a partnership of which
the debtor, George Hinsley (“Mr. Hinsley”), was the general
partner.
Western Bank Westheimer loaned the partnership $3.8 million to
purchase the property, which is located at 6200 Kansas, Houston,
Texas (the “Kansas property”). In October 1987, the Federal
Deposit Insurance Corporation (“FDIC”) succeeded to the rights of
Western Bank Westheimer, including its rights related to the note
on the Kansas property. Mr. Hinsley thereafter defaulted on the
1985 Western Bank Westheimer note and, in May 1992, the FDIC
2
obtained a judgment against Mr. Hinsley in the amount of $4.849
million.
Mr. Hinsley filed for bankruptcy protection in 1995. On June
17, 1998, the district court granted the trustee’s notice of intent
to abandon the Kansas property. The estate thus abandoned any
interest in the Kansas property in favor of Mr. Hinsley. Later, in
May 2000, as part of a settlement agreement related to an adversary
proceeding brought by the trustee of Mr. Hinsley’s estate – to set
aside certain alleged “fraudulent transfers” between Mr. Hinsley
and his wife Patricia Hinsley (“Ms. Hinsley”) – Ms. Hinsley
acquired the note held by the FDIC and secured by the deed of trust
lien on the Kansas property. Ms. Hinsley thus acquired lien rights
in and to the Kansas property.
On May 18, 2001, after all of the bankruptcy estate matters
were essentially resolved, Mr. Hinsley filed a motion for
redetermination of tax liability pursuant to 11 U.S.C. § 505,
requesting that the district court reassess the amount of tax
liability of Mr. Hinsley for ad valorem property taxes on the
Kansas property for the tax years 1988 through 2000. Specifically,
he contended that the tax valuation of the Kansas property
throughout the years in question exceeded the actual fair market
value of the Kansas property because the property had major
contamination problems. The appellants, Harris County, the State
of Texas, The City of Houston and Houston Independent School
District (together, the “taxing authority”), opposed the motion for
3
redetermination of tax liability, arguing that the district court
did not have jurisdiction to make the requested valuation and,
alternatively, that the district court should, in its discretion,
abstain from making the requested valuation.
On November 1, 2001, following a hearing on Mr. Hinsley’s
motion for redetermination, the district court determined the tax
liability on the Kansas property for the tax years 1988 through
2001 to be $389,359.76. The taxing authority and the FDIC timely
appealed.
ANALYSIS OF RELEVANT ISSUES ON APPEAL
The district court’s order granting Mr. Hinsley’s motion for
redetermination is brief. It states, in full, that:
The court determines that the tax liability for the
debtor, an owner through the debtor, or the F.D.I.C. for
ad valorem property taxes assessed by Harris County, the
State of Texas, the City of Houston, and the Houston
Independent School District on the property at 6200
Kansas, Houston, Texas (fully described in exhibit A) for
the tax years January 1, 1988, through July 30, 2001, is
$389,259.76.
Implicit in the order is a decision not to abstain (as the taxing
authority requested) from exercising jurisdiction over the debtor’s
motion for redetermination of the ad valorem taxes on the Kansas
property. We review a decision to abstain or not to abstain for
abuse of discretion. See Matter of Howe, 913 F.2d 1138, 1143 (5th
Cir. 1990). Although, in its order, the district court gave no
reasons for its decision to exercise jurisdiction, rather than
4
remanding for what would likely be a useless exercise, we have
evaluated the reasons for and against exercising jurisdiction;1 we
find that the district court abused its discretion in not
abstaining; and we render judgment for the taxing authority.2
A. 11 U.S.C. § 505
Title 11 of the United States Code § 505 provides, in relevant
part, that “[e]xcept as provided in paragraph (2) of this
subsection, the 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, and
whether or not contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction.” 11 U.S.C.
§ 505(a) (emphasis added). Thus, as stated by this court, “absent
the express statutory limitations in § 505(a)(2)(A) and (B),
1
As stated, the district court did not specifically make a
ruling on the abstention question. It also did not mention 11
U.S.C. § 505, nor did it cite to our recent § 505 case, In re
Luongo, 259 F.3d 323 (5th Cir. 2001), or weigh any of the Luongo
factors relevant to the § 505 abstention inquiry. Indeed, during
the hearing on the debtor’s motion for redetermination, the
district court responded to the taxing authority’s request to
discuss procedural abstention issues under § 505 by stating,
“Skip that. Let’s get down to what happened if [the debtor’s
counsel] was right [regarding the over-valuation of the
property].” The degree of deference afforded the district
court’s implied decision to abstain is thus limited in these
circumstances.
2
Although we reverse the district court’s order on
abstention grounds, we reject the implication in the district
court’s order that the FDIC can be liable for taxes on a piece of
property it does not own. As set forth in the order of sale,
liquidation, and payment, entered August 16, 2000, the FDIC was
ordered to transfer its lien, not ownership, to Ms. Hinsley.
5
[neither of which has any application here], bankruptcy courts have
universally recognized their jurisdiction to consider tax issues
brought by the debtor, limited only by their discretion to
abstain.” Luongo v. Luongo (In re Luongo), 259 F.3d 323, 329 (5th
Cir. 2001).
Approximately three months before the district court’s order
was entered, our court discussed certain factors that must be
considered by the bankruptcy court in deciding whether it should
exercise discretion to abstain from making a valuation pursuant to
§ 505. Luongo, 259 F.3d at 331-32. In so doing, we stated that:
When bankruptcy issues are at the core of a dispute, it
would be absurd for a bankruptcy court to abstain from
deciding those matters over which it has particular
expertise. On the other hand, simply because tax law is
somehow implicated does not automatically trigger
abstention . . . Accordingly, we hold that where
bankruptcy issues predominate and the Code’s objectives
will potentially be impaired, bankruptcy courts should
generally exercise jurisdiction. Conversely, absent any
bankruptcy issues or implication of the Code’s
objectives, it is usually appropriate for the bankruptcy
court to decline or relinquish jurisdiction.
Id. (internal footnote omitted). The specific non-exhaustive
examples of “bankruptcy issues” the court alerted to were “ensuring
the efficient administration and equitable distribution of the
estate for the benefit of the creditors and protecting the debtor’s
right to a fresh start.” Id. at 332.
B. Application of § 505 Abstention Factors to this Case
6
Weaving the facts of this case through the factors cited in
Luongo, we are satisfied that abstention is appropriate here. All
issues related to the bankruptcy estate had been resolved when Mr.
Hinsley filed his motion for redetermination. Of more importance
to the relevant factors, however, the property to be valued in Mr.
Hinsley’s motion for redetermination is not property of the
bankruptcy estate, nor will bankruptcy law or the Bankruptcy Code
be implicated in the requested tax valuation. Because the trustee
of Mr. Hinsley’s estate specifically abandoned the property
relevant to this tax redetermination motion through a notice of
intent to abandon property nearly three years before Mr. Hinsley
filed his motion for redetermination, it simply cannot be said that
bankruptcy issues will predominate in the requested valuation.
See, e.g., In re Dewnsnup, 908 F.2d 588 (10th Cir. 1990) (when
abandoned, property ceases to be property of the bankruptcy
estate). In the hearing on Mr. Hinsley’s motion for
redetermination, the trustee of Mr. Hinsley’s estate stated his
position regarding whether the ad valorem tax should be adjusted as
follows: “Well, Your Honor, I don’t have a dog in that fight.”
This admission underscores the evident fact that the beneficiaries
of the reduction in tax liability for the Kansas property are Mr.
Hinsley (the owner of the Kansas property) and Ms. Hinsley (a
lienholder on the property), not the estate. Although Ms. Hinsley
is also an unsecured creditor in the estate of Mr. Hinsley, her
enjoyment of a reduction in the tax liability that primes her lien
7
on the Kansas property can be tied to the estate in only an
extremely attenuated sense.
Several courts have noted the creditor (rather than debtor)
oriented policy goals of § 505. See, e.g., 99 Invest. v. Maricopa
Cty. (In re 99 Invest.), No. 98-16576, 205 F.3d 1352, at *1 (9th
Cir. Dec. 16, 1999) (unpublished) (holding that “[a] determination
of tax liability would not advance the creditor-oriented policy
goals of § 505"); Kearns v. Kearns (In re Kearns), 219 B.R. 823,
827 (8th Cir. 1998) (“[I]f the estate is not to receive the refund,
the matter does not belong in bankruptcy court. The general
unsecured creditors, not the debtor, are the intended beneficiaries
of section 505(a)”); In re American Motor Club, Inc., 139 B.R. 578,
581 (Bankr. E.D.N.Y. 1992) (stating that courts should abstain from
making a § 505 valuation if the impact of abstention on the general
administration of the estate is minimal); Millsaps v. United States
(In re Millsaps), 133 B.R. 547, 554-555 (Bankr. M.D. Fla. 1991)
(“Although Congress extended jurisdiction to the bankruptcy court
to determine the debtors’ personal tax liability under section
505(a)(1), the debate in the House of Representatives leading to
the passage of the section clearly shows that, when there is no
need for a determination of the amount of the tax for estate
administration purposes, Congress did not intend or foresee that
the bankruptcy court would be the forum for this litigation.”),
aff’d, 138 B.R. 87 (M.D. Fla. 1991).
8
In Luongo, we cautioned against taking too narrow a view of
the goals of the Bankruptcy Code, stating that “[t]he bankruptcy
court’s responsibility in administering the estate is not only to
achieve a fair and equitable distribution of assets to the
creditors, but also to ‘relieve the honest debtor from the weight
of oppressive indebtedness and permit him to start afresh.’” 259
F.3d at 330 (citation omitted). We did so, however, under very
different factual circumstances than we are presented with here.
There, the Internal Revenue Service (“IRS”) setoff the debtor’s
overpayment for tax year 1997 against her unpaid 1993 tax liability
that had been discharged in bankruptcy. Id. at 327. The tax
liability issue presented to the bankruptcy court thus dealt almost
entirely with bankruptcy law (including the interpretation of
apparent conflicting sections of the Bankruptcy Code) and related
to a debt that had been discharged by the same bankruptcy court in
the earlier bankruptcy proceeding. Id. Faced with a situation
where factors integral to the Code’s objectives – the debtor’s
“rights to the integrity of her discharge and to the use of her
exemptions” – were present, we thus upheld the bankruptcy court’s
decision not to abstain. Id. at 332.
We do not see Luongo as inconsistent with our holding today.
The tax valuation on non-estate property subject to state taxation
does not implicate the Code’s objectives. It is undisputed that,
despite possible environmental contamination, the property here is
worth at least as much as the taxes owing on it. The extent to
9
which the “fresh start” objective of the Bankruptcy Code is
implicated is thus minimal, particularly given that neither the
debtor nor the trustee made any effort to contest the allegedly
inflated valuation on the Kansas property as avenues to challenge
the state tax valuation passed them by. See New Haven Projects
Ltd. Liab. v. City of New Haven (In re New Haven Projects Ltd.
Liab.), 225 F.3d 283, 290 (2d Cir. 2000) (“Section 505 was enacted
to protect creditors from the prejudice caused by an ailing
debtor’s failure to contest tax assessments . . . It was not
enacted to afford debtors a second bite at the apple at the expense
of outside creditors.”); Brandt-Airflex Corp. v. Long Island Trust
Co. (In re Brandt-Airflex Corp.), 843 F.2d 90, 96 (2d Cir. 1988)
(“[T]he bankruptcy court pointed out quite correctly that a literal
reading of § 505 makes the Bankruptcy Courts a second tax court
system, empowering the Bankruptcy Courts to consider ‘any’ tax
whatsoever, on whomsoever imposed.”); Northbrook Partners LLP v.
Cty. of Hennepin (In re Northbrook Partners LLP), 245 B.R. 104, 121
(Bankr. D. Minn. 2000) (“[T]he fresh start cannot be used as a rote
mantra against the basic limitations of a federal system.”); In re
Swan, 152 B.R. 28, 30 (Bankr. W.D.N.Y. 1992) (“What the Debtor is
requesting in this case is nothing more than an attempt to gain a
second bite of the apple, which would only benefit her and not her
creditors, a result never intended under Section 505.”). Further,
as discussed, the trustee here abandoned the property that is
central to the tax liability issue in Mr. Hinsley’s motion.
10
Although Mr. Hinsley attempts to posture this litigation as
interwoven with the bankruptcy estate, Ms. Hinsley’s interest in
the property bears little, if any, relation to her capacity as an
unsecured creditor in the estate and the Kansas property is simply
not property of the bankruptcy estate.
In contrast to the situation confronted in Luongo, bankruptcy
issues do not predominate here, nor will performing the valuation
further the efficient administration or equitable distribution of
the estate for the benefit of the creditors. Where, as here, the
only parties likely to benefit from the resolution of a debtor’s
dispute with the taxing authority are the debtor and his lienholder
on property that is not a part of the estate, there is no warrant
for a bankruptcy court to assume decision-making power over the
dispute.
CONCLUSION
Upon a careful review of the record and relevant law, this
court holds that the district court abused its discretion in
failing to abstain. Further, because abstention is appropriate
under the facts of this case, we REVERSE and RENDER judgment in
favor of the appellants.
11