STATE OF MARYLAND; Montgomery County; Baltimore County, Plaintiffs-Appellants, v. ANTONELLI CREDITORS’ LIQUIDATING TRUST; Realco-Ritchie Center LLC; BK Belmont LLC; Camberwell Properties LLC, Defendants-Appellees, United States of America, Intervenor-Appellee.
No. 96-1111.
United States Court of Appeals, Fourth Circuit.
Argued April 9, 1997. Decided Aug. 26, 1997.
Before NIEMEYER, LUTTIG, and MICHAEL, Circuit Judges.
Affirmed by published opinion. Judge NIEMEYER wrote the opinion, in which LUTTIG and Judge MICHAEL joined.
OPINION
NIEMEYER, Circuit Judge:
The State of Maryland and two of its counties, Montgomery County and Baltimore County, (collectively, “Taxing Authorities“) brought suit in state court to recover “in excess of $95,000” in state and county transfer and recordation taxes. The Taxing Authorities sued the Antonelli Creditors’ Liquidating Trust (“Liquidating Trust“) as transferor of three parcels of real property, as well as the three purchasers of those parcels. They also sued for transfer and recordation taxes in connection with other unspecified transfers by the Liquidating Trust. After removing the case to federal court pursuant to
On cross-motions for summary judgment, the district court held that the State of Maryland and Montgomery County are bound by the bankruptcy court‘s confirmation order and may not challenge it collaterally in a subsequent court proceeding. Because the reasonableness of the notice of the bankruptcy plan to Baltimore County was “questionable,” however, the court ruled against Baltimore County on the merits, applying
On appeal, the Taxing Authorities argue that they were not required to object to the plan‘s provisions regarding recording taxes because they had insufficient notice of the plan‘s provisions and because they were not creditors for such taxes at the time. They claim, therefore, that they are not bound by the bankruptcy court‘s order confirming the plan. They also contend that
For reasons somewhat different from those articulated by the district court, we affirm.
I
In 1991, after a soured real estate market adversely affected the financial liquidity of Judith and Dominic F. Antonelli, Jr., who were involved in over 150 real estate projects, creditors filed petitions for involuntary bankruptcy against the Antonellis under Chapter 7 of the Bankruptcy Code. The Antonellis had nearly 2,000 creditors with over $200 million in claims and over $100 million in assets, consisting mostly of interests in real property. On the Antonellis’ motion, the bankruptcy court converted the Chapter 7 proceeding into a Chapter 11 proceeding to
The creditors’ committee and the Antonellis negotiated for months to develop a plan of reorganization, working through four distinct versions of a plan. Ultimately, the bankruptcy court confirmed the “Fourth Amended Joint and Consolidated Plan of Reorganization,” which had been approved by holders of 93% of the unsecured claims. The bankruptcy court confirmed the plan by order dated November 13, 1992; the district court affirmed, In re Antonelli, 148 B.R. 443 (D.Md. 1992); and we affirmed, 4 F.3d 984 (4th Cir. 1993) (Table).
The approved plan of reorganization required that the Antonellis transfer substantially all of their property interests to the Liquidating Trust for liquidation “as rapidly as market conditions allow.” By using a trust, the Antonellis and the creditors hoped to avoid the expense and delay of having the bankruptcy court separately approve each of more than 150 property sales. The trust agreement explicitly limited the function of the Liquidating Trust to “activities reasonably necessary to, and consistent with accomplishment of, [trust] purposes,” which were:
liquidating the [trust property] as rapidly as market conditions allow, consistent with the objective of maximizing value and taking into consideration tax effects and business impediments, distributing the proceeds therefrom in accordance with the terms of this Agreement and the Plan, accelerating the process of conveying identified properties to Project Creditors and engaging in any and all other activities of the Trust which shall be incidental thereto. Proceeds from the liquidation of [trust property] shall be distributed by the Plan Committee in accordance with the terms of this Agreement.
While the plan thus created the Liquidating Trust to take title to property of the bankruptcy estate, to sell it, and to distribute the proceeds, the bankruptcy court retained jurisdiction over implementation of the plan.
Relying on
In accordance with Section 1146(c) of the Bankruptcy Code, neither the Bankruptcy Estate, the Debtors, the holders of Claims, the Custodian, the Liquidating Trust nor any third-party purchaser of assets of the Liquidating Trust shall be liable for any stamp tax or similar tax on the issuance, transfer or exchange of a security or any item of property, or the making or delivering of an instrument of transfer under the Plan, by or to the Bankruptcy Estate or the Debtors or by or to the Custodian or the Liquidating Trust.
The State of Maryland, Montgomery County, and Baltimore County were served with copies of the plan and related papers because all three entities were creditors of the estate for unpaid income and property taxes. Also, the State of Maryland and Montgomery County received additional copies of the plan in connection with an adversary action filed by the creditors’ committee against them, as well as other states and municipalities, to declare that transfers from the Liquidating Trust to third-party purchasers would indeed be tax exempt. That action, however, was dismissed on motion of the State of Maryland and Montgomery County who alleged that the controversy was not ripe. The bankruptcy court observed that the proposed third-party transfers were not sufficiently “imminent” because, among other things, “the Plan must still be confirmed.” In re Antonelli, 1992 WL 435879 at *3 (Bankr.D.Md. 1992).
One week after dismissing the adversary proceeding, the bankruptcy court held a confirmation hearing. None of the Taxing Authorities appeared at the hearing on confirmation of the proposed plan, and, after the court approved the plan by order dated November 13, 1992, none appealed to the district court.
In accordance with the plan, the Antonellis transferred their property to the Liquidating Trust, which began selling the property of the bankruptcy estate. In November 1993, it sold a residence in Montgomery County
Almost a year later, however, in May 1995, the Taxing Authorities filed this action against the Liquidating Trust as well as the three purchasers of the properties located in Montgomery County and Baltimore County, seeking to recover more than $95,000 in state and county transfer and recordation taxes. The Taxing Authorities also sought to recover similar taxes in an unspecified amount in respect to other unspecified transfers. The defendants removed the case to the district court, and following cross-motions for summary judgment, the district court entered judgment in favor of the defendants.
With respect to the State of Maryland and Montgomery County, the district court ruled that they had sufficient notice of the plan‘s provisions and failed to take action to challenge them at the time, thereby precluding them from collaterally attacking the bankruptcy court‘s order confirming the plan. The district court relied in large part on the fact that the State of Maryland and Montgomery County had been named defendants in the declaratory judgment proceeding that raised the tax issue. Because Baltimore County was not named in that adversary action, the district court concluded that notice to it was more questionable. Accordingly, the court decided to rule on the merits, holding that “both the literal terms of [11 U.S.C.] § 1146(c) and the interests of the public in sound and efficient administration of bankruptcy estates support the application of § 1146(c) to transfers made by the Liquidating Trust.” 191 B.R. at 646. This appeal followed.
II
The Taxing Authorities contend that they are not bound by the bankruptcy court‘s order confirming the plan of reorganization because “[t]he basic notion of finality underlying res judicata and preclusion [requires] that a person receive[ ] adequate due process notice.” They claim that they did not receive sufficient notice to alert them to object to the plan because they were not yet creditors for transfer and recordation taxes. Those taxes would become due only when deeds memorializing transactions from the Liquidating Trust to the third-party purchasers were recorded, long after the plan was approved. Since the plan involved only future transfers, the Taxing Authorities claim they were not in a position to act.
As an initial matter, we note that to the extent the order confirming the Plan incorporates
While the Taxing Authorities may be ready to acknowledge the precedence of federal bankruptcy law over state taxing provisions, they argue that the bankruptcy court in its confirmation order interpreted
The bankruptcy court‘s interpretation of
The Taxing Authorities’ arguments fail to recognize the larger structure of the plan of reorganization, which specifically required both levels of transfer to take place in order to liquidate the debtors’ assets and distribute the proceeds to the creditors. The interposition of the Liquidating Trust between the debtors and the ultimate purchasers was simply a procedural mechanism to facilitate the plan‘s overall purpose of orderly and efficient liquidation. The trust was created solely to mediate the transfers that were essential to the plan.
Regardless of our opinion as to the possible merits of the arguments now raised by the Taxing Authorities, however, we conclude that they are procedurally barred from now making them. They had the knowledge, choice, and opportunity to object to the bankruptcy court‘s order or to appeal it to the district court, and they pursued neither course. It is noteworthy that when the State of Maryland and Montgomery County were sued in the declaratory judgment action raising this very issue, only these two entities among all of those named as defendants chose not to obtain a court ruling on the issue. Rather, they moved to dismiss the action because no plan had yet been approved. But when the plan was approved, they elected neither to object nor to appeal. While they certainly were not required to challenge the plan, they cannot later seek to challenge it collaterally. As we stated recently in Spartan Mills v. Bank of America Illinois, 112 F.3d 1251 (4th Cir. 1997):
The judicial system‘s need for order and finality requires that orders of [bankruptcy] courts having jurisdiction to enter them be obeyed until reversed, even if proper grounds exist to challenge them. A challenge for error may be directed to the ordering court or a higher court, as rules provide, but it may not be made collaterally unless it is based on the original court‘s lack of jurisdiction.
Id. at 1255; see also Celotex Corp. v. Edwards, 514 U.S. 300, 305, 115 S.Ct. 1493, 1498, 131 L.Ed.2d 403 (1995);
Each of the Taxing Authorities received a copy of the proposed reorganization plan, which included the now-contested paragraph 9.5. While the plan and related documents were concededly complex because of the size of the estate and the number of projects and creditors involved—making it understandable that the Taxing Authorities might not want to sift through all of the information provided—that fact does not make the information that was provided insufficient. On the contrary, the notice given provided explicitly that the transfers both from the debtors to the Liquidating Trust and from the trust to third-party purchasers would not be taxable. The Taxing Authorities also received a document entitled Second Amended Disclosure Statement which gave them a complete listing of the estate‘s properties and their location, alerting them to the fact that the confirmed plan would require transfers of properties in their jurisdictions. Finally, the State of Maryland and Montgomery County were directed to the specific import of the tax exemption provision since they were made parties to a declaratory judgment proceeding on that issue.
In short, the Taxing Authorities, including Baltimore County, had sufficient notice of both the plan and the order confirming it to put them on legal notice of the plan‘s tax exempt provisions. Having received that notice and failed to present any objection, they are now barred from collaterally attacking the bankruptcy court‘s order. See Celotex, 514 U.S. at 311, 115 S.Ct. at 1501; Spartan Mills, 112 F.3d at 1257-58.
IV
While the Taxing Authorities cannot collaterally attack the substance of the bankruptcy court‘s order, even if it may have been in error, they can and do question whether the bankruptcy court had jurisdiction to approve the plan, and in particular to include paragraph 9.5 exempting certain transfers covered by the plan. They contend first that the bankruptcy court‘s order confirming the plan exceeded the scope of authority given by
A
With regard to the scope of bankruptcy court authority under
Section 1146 is not a jurisdictional limitation on the bankruptcy court any more than is any substantive law. It does not define the court‘s power but at most directs how that power should be exercised. Moreover, the Supreme Court has made clear that the jurisdictional grant relevant here,
At best, the Taxing Authorities’ arguments about the scope of
Section 1146(c) of the Bankruptcy Code reads:
The issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax.
(Emphasis added). Thus, according to the statutory language, transfers of property from the Liquidating Trust to third-party purchasers are exempt from “a stamp tax or similar tax” if the transfers occur “under a plan.”
There can be little doubt that the terms of the plan and the trust agreement in this case required transfers both from the debtors to the Liquidating Trust and from the Liquidating Trust to third-party purchasers. Section 7.1 of the plan provides that “all of the property shall be liquidated, sold, transferred and/or distributed in accordance with the terms of this Plan and the Trust Agreement.” Indeed, the essence of the plan was to have the Liquidating Trust take title to the Antonellis’ properties, sell the properties, and distribute the proceeds to creditors.
The Taxing Authorities press further, however, arguing essentially that the confirmation order lacks validity because such two-step transactions are not explicitly condoned by the Bankruptcy Code. They maintain that “nothing in [11 U.S.C.] § 1123 refers to subsequent transfers or sales by either an entity to which the debtor‘s property is transferred or by an interested party to whom the debtor‘s property is distributed in kind.” While the Taxing Authorities concede that transfers from the debtors to the Liquidating Trust are covered by the tax exemption of
If such second-step transfers were expressly prohibited by the Bankruptcy Code, a contrary court order could perhaps raise questions about invalidity, but that is not the case here. Section 1123 of the Bankruptcy
Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . . provide adequate means for the plan‘s implementation, such as . . . transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan;
Subject to subsection (a) of this section, a plan may . . . provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests; . . . and [may] include any other appropriate provision not inconsistent with the applicable provisions of this title.
We have no doubt that the Liquidating Trust is an “adequate means” for liquidating substantially all of the Antonellis’ property and distributing its proceeds to creditors. Its terms thoroughly describe how the trust is to effect liquidations and so limit its authority. Use of a liquidating trust is certainly not a patently invalid means. Moreover, there has been no suggestion that the use of a liquidating trust is inappropriate. To the contrary, it seems entirely appropriate to use a liquidating trust to sell and distribute an extremely large estate, such as the Antonellis‘, which would otherwise consume a large amount of judicial resources and dissipate much of the estate in legal costs. And finally, the Taxing Authorities have failed to point us to any provision of the Bankruptcy Code which is inconsistent with the use of a liquidating trust. They argue, rather, that based on our decision in In re Eastmet Corp., § 1123 cannot be construed to extend
In Eastmet, we held that the recording of a mortgage to secure a loan used to purchase property from a bankruptcy estate was not itself within the scope of
Unlike the deed of trust financing for third-party purchasers that was involved in Eastmet, the transfers from the Liquidating Trust to third-party purchasers were required by the plan of reorganization as well as by the specific terms of the trust agreement that regulated the conduct of the Liquidating Trust. In fact, the Liquidating Trust‘s transfers of properties were the core mechanism by which the plan proposed to liquidate the Antonellis’ assets and distribute the proceeds to creditors. In one aspect of its function, the Liquidating Trust stood in the shoes of the Antonellis, holding title to their property, and in another aspect it acted on behalf of creditors by collecting and distributing the proceeds from the sale of that property. It was the sole function of the Liquidating Trust to mediate the relationship between debtor, third-party purchaser, and creditor. By contrast, in Eastmet, the mortgages obtained by third-party purchasers were not necessary to the reorganization effort. Third parties could have financed their purchases or used their own capital to make them, and neither alternative was addressed
We conclude, accordingly, that the bankruptcy court‘s order, which was affirmed on two levels of appeal, was far from claiming merely a frivolous pretense to validity.
B
The Taxing Authorities contend for the first time on appeal that the Eleventh Amendment—immunizing the states from private suits in federal court—barred the bankruptcy court from exercising jurisdiction over them in the confirmation proceeding. They contend that they have not waived their Eleventh Amendment immunity. See Seminole Tribe of Florida v. Florida, 517 U.S. 44, 72 n.16, 116 S.Ct. 1114, 1132 n.16, 134 L.Ed.2d 252 (1996). Because the bankruptcy court had no authority in its confirmation order to bind the states to the bankruptcy plan, they argue, they are entitled to attack collaterally the bankruptcy court‘s order confirming the plan.
At the outset we note that the State of Maryland may, for the first time on appeal, raise Eleventh Amendment immunity because that immunity has jurisdictional aspects. See Schlossberg v. Maryland, 119 F.3d 1140 (4th Cir. 1997). But we doubt whether the counties can do so. It has long been the law that the Eleventh Amendment does not bar suits in federal court against political subdivisions of the state. See, e.g., Mount Healthy City Sch. Dist. Bd. of Educ. v. Doyle, 429 U.S. 274, 280, 97 S.Ct. 568, 572, 50 L.Ed.2d 471 (1977); Lincoln County v. Luning, 133 U.S. 529, 530, 10 S.Ct. 363, 364, 33 L.Ed. 766 (1890); cf. Pennhurst State Sch. and Hosp. v. Halderman, 465 U.S. 89, 123, 104 S.Ct. 900, 920, 79 L.Ed.2d 67 (1984) (allowing Eleventh Amendment immunity for state and county officials where relief “substantially concerns . . . an arm of the State,” the state funded the county program almost entirely, and state cooperation was essential to the county program). But even should all three Taxing Authorities be entitled to interpose an Eleventh Amendment defense, we conclude that it is not applicable here.
The Eleventh Amendment, which provides, “The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State,”
The confirmation order in this case was not entered in a suit “against one of the United States” filed by a private party. The state was not named a defendant, nor was it served with process mandating that it appear in a federal court. While it was served with notice of the proposed plan and its confirmation, it was free to enter federal court voluntarily or to refrain from doing so. This is to be distinguished from the case in which a debtor, a trustee or other private person files an adversary action against the state in the
While resolution of an adversary proceeding against a state depends on court jurisdiction over that state, the power of the bankruptcy court to enter an order confirming a plan, including a provision interpreting
It is true that if a state wishes to challenge a bankruptcy court order of which it receives notice, it will have to submit to federal jurisdiction. As the Supreme Court explained in New York v. Irving Trust Co., 288 U.S. 329, 333, 53 S.Ct. 389, 391, 77 L.Ed. 815 (1933):
The federal government possesses supreme power in respect of bankruptcies. If a state desires to participate in the assets of a bankrupt, she must submit to appropriate requirements by the controlling power; otherwise, orderly and expeditious proceedings would be impossible and a fundamental purpose of the Bankruptcy [Code] would be frustrated.
The state, of course, well may choose not to appear in federal court. But that choice carries with it the consequence of foregoing any challenge to the federal court‘s actions. While forcing a state to make such a choice may not be ideal from the state‘s perspective, it does not amount to the exercise of federal judicial power to hale a state into federal court against its will and in violation of the Eleventh Amendment. Instead, it is the result of Congress’ constitutionally authorized legislative power to make federal courts the exclusive venue for administering the bankruptcy law.
For the foregoing reasons, we affirm the judgment of the district court.
AFFIRMED.
PAUL V. NIEMEYER
UNITED STATES CIRCUIT JUDGE