PAUL D. BORMAN, District Judge.
On April 1, 2015, the United States of America filed the instant civil action against Defendants Brian Krasicky and PNC Bank, NA. (ECF No. 1.) The United States alleges that Defendant Krasicky distributed assets of Page Distribution, Inc. in violation of 31 U.S.C. § 3713(b) and that Defendant PNC Bank, as a successor in interest to National City Bank, inequitably received funds to which the United States was entitled to priority pursuant to § 3713(a).
Now before the Court is Defendants' Motion to Dismiss. (ECF No. 10.) The United States filed its response and Defendants thereafter filed their reply. (ECF Nos. 13 & 15.) A hearing on this matter was held on Thursday, January 7, 2016 at 2:00 PM.
For the following reasons, the Court finds Defendants' motion to dismiss should be GRANTED.
On or about April 5, 2007, National City Bank loaned $10 million dollars to Page Distribution, Inc. ("Page"). (Defs.' Mot. Ex. 1, at PG ID 60, Promissory Note.) Thereafter, in 2008, the loan was increased to $12.5 million. (Id. at PG ID 68, Modification of Promissory Note.) These loans were secured by a Commercial Security Agreement dated July 18, 2001, in which National City Bank was granted a security interest in all existing or later acquired assets, including inventory. (Id. at PG ID 97.) National City Bank then filed a UCC-1 financing statement with the Ohio Secretary of State on February 22, 2001 reflecting this security interest. (Id. at PG ID 103-105.)
Ultimately, Page defaulted on its obligations to National City Bank because it had insufficient assets to pay its liabilities. (Compl. ¶ 7; see Defs.' Mot., Ex. 2, Order Granting Motion of the Appointment of a Receiver ("Order of Appointment"), PG ID 107.) On March 9, 2009, the Court of Common Pleas of Lucas County, Ohio granted National City Bank's Motion for Appointment of Receiver ("Receiver Order") and appointed Defendant Brian Krasicky as the Receiver of the business operations and assets of Page. (Order of Appointment at PG ID 107, Compl. ¶ 6.) The Court of Common Pleas of Lucas County also held that "National City has perfected security interests in all of [Page's] personal property, business operations, including its accounts receivables, contracts, and other intangibles." (Defs.' Mot., Ex. 2, Order Granting Motion of the Appointment of a Receiver, PG ID, 107, at ¶ 1.)
Pursuant to the Children's Health Insurance Program Reauthorization Act of 2009, P.L. 111-3, § 701(h) (2009), a floor stocks tax ("FST") arose on tobacco products held by Page on April 1, 2009. (Compl. ¶ 8; see P.L. 111-3, § 701(h)(3)(A) "A person holding tobacco products, cigarette papers, or cigarette tubes on April 1, 2009, to which any tax imposed by paragraph (1) applies shall be liable for such tax.").) This tax was due on August 1, 2009. (Compl. ¶ 9; P.L. 111-3, § 701(h)(3)(C) ("The tax imposed by paragraph (1) shall be paid on or before August 1, 2009.").)
Defendant Krasicky, as Receiver, was responsible for filing returns and paying taxes that arose from the operations of Page. (Compl. ¶ 10.)
On July 31, 2009, Defendant Krasicky sent an "unsigned and incomplete form entitled `2009 Floor Stocks Tax Return' to the Alcohol and Tobacco Tax and Trade Bureau." (Compl. ¶¶ 12-13; see also Defs.' Mot., Ex. 5, 7/31/2009 Letter and Form.) This form was accompanied by a document entitled "Page Distribution Federal Excise Tax Ending Inventory 3-31-09" and a letter signed by Defendant Krasicky which provided that Page owed a FST liability of $437,459.15. (Compl. ¶ 13; Ex. 5, 7/31/2009 Letter, Form.)
It is undisputed that Defendant Krasicky, as Receiver for Page, did not make any payment towards the FST liability and Plaintiff asserts that as of April 1, 2015, Page is indebted to the United States for the tax, including penalties and interest, in the amount of $763,501.63. (Compl. ¶ 15.) Plaintiff alleges that after April 1, 2009, and despite having notice of the FST liability, Defendant Krasicky distributed more than the amount owed for the FST to "creditors other than the United States, including PNC Bank." (Id. ¶¶ 11, 19-20.)
On April 1, 2015, the United States filed the current action against Defendants Krasicky and PNC Bank, as a successor in interest to National City Bank. (Compl. ¶ 5.) The United States alleges that Defendant Krasicky is personally liable for the FST and any penalties and interest pursuant to 31 U.S.C. § 3713(b) for "each distribution, to persons and entities other than the United States, of Page Distribution, Inc.'s assets, to which the United States was entitled to priority under 31 U.S.C. § 3713(a)." (Compl. ¶ 21.) The United States also claims that Defendant PNC Bank is liable "for restitution for each distribution that it or National City Bank received of Page Distribution, Inc.'s assets to which the United States was entitled to priority under 31 U.S.C. § 3713(a), under Ohio law, or under the Receiver Order." (Id. ¶ 21.)
FED. R. CIV. P. 12(b)(6) allows for the dismissal of a case where the complaint fails to state a claim upon which relief can be granted. When reviewing a motion to dismiss under Rule 12(b)(6), a court must "construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor of the plaintiff." DirectTV, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007). But the court "need not accept as true legal conclusions or unwarranted factual inferences." Id. (quoting Gregory v. Shelby County, 220 F.3d 433, 446 (6th Cir. 2000)). "[L]egal conclusions masquerading as factual allegations will not suffice." Eidson v. State of Term. Dep't of Children's Servs., 510 F.3d 631, 634 (6th Cir. 2007).
The Supreme Court explained that "a plaintiff's obligation to provide the grounds of his `entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level. . . ." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citations omitted). Dismissal is only appropriate if the plaintiff has failed to offer sufficient factual allegations that make the asserted claim plausible on its face. Id. at 570. In Ashcroft v. Iqbal, 556 U.S. 662 (2009) the Supreme Court clarified the concept of "plausibility" stating:
Id. at 678. A plaintiff's factual allegations, while "assumed to be true, must do more than create speculation or suspicion of a legally cognizable cause of action; they must show entitlement to relief." LULAC v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007) (citing Twombly, 550 U.S. at 555-556) (emphasis in LULAC). Thus, "[t]o state a valid claim, a complaint must contain either direct or inferential allegations respecting all the material elements to sustain recovery under some viable legal theory." Bredesen, 500 F.3d at 527 (citing Twombly, 550 U.S. at 562).
In addition to the United States' allegations in its complaint, the Court will consider the documents attached to Defendants' motion and referenced in the pleadings: the filings in the Lucas County Court of Common Pleas, including the Receiver's Reports; the agreements between National City Bank and Page; and Defendant Krasicky's signed cover letter dated July 31, 2009. Although these documents are outside the pleadings, the Sixth Circuit has recognized that a lower court "may consider any matter of which a court may take judicial notice without converting a party's motion to dismiss into a motion for summary judgment." Weiner v. Klais and Co., Inc., 108 F.3d 86, 88 (6th Cir. 1997). Further, the "documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in a plaintiff's complaint and are central to her claim." Id. at 89. In a motion to dismiss, a court may also rely upon matters of public record. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008). As the attached documents are referenced in the United States' complaint, central to its claims, and in the instance of the filings in Lucas County Court of Common Pleas, are matters of public record; these documents will be considered by the Court in evaluating the Defendants' Motion to Dismiss.
The Federal Priority Statute (also sometimes referred to as the Federal Insolvency Statute) provides:
31 U.S.C. § 3713(a).
The United States argues that it has a claim for the FST imposed against the receivership estate of Page. It further contends that the Receivership Order was an "act of bankruptcy" under the Federal Priority Statute, and that Defendant Krasicky violated the same when he paid other debts before the United States' claim for the FST liability. (Pl.'s Resp. at 3.)
The Federal Priority Statute "grants an unqualified priority of payment for all claims due to the United States from an insolvent debtor." Straus v. United States, 196 F.3d 862, 864 (7th Cir. 1999). The text of the statute has remained "virtually unchanged since its enactment in 1797." United States v. Estate of Romani, 523 U.S. 517, 524 (1998). However, the Supreme Court has concluded on several occasions that a specific policy set forth in a later federal statute should control over the Federal Priority Statute, despite the fact that the Federal Priority Statute was not expressly amended. Romani, 523 U.S. 517, 530-31 (1998) (finding that the specific provisions of the Tax Lien Act of 1966 controlled when the United States claimed a preference in the insolvent estate of a delinquent taxpayer); United States v. Guaranty Trust Co. of N.Y., 280 U.S. 478, 485 (1930) (finding the Federal Priority Statute inapplicable to the insolvency of a railroad under the Transportation Act of 1920).
Here, Defendants rely upon the Supreme Court's decision in Romani to argue that Count I of the United States' claim against Defendant Krasicky fails as a matter of law because the Tax Lien Act of 1966, 26 U.S.C. § 6321, et seq. (the "Tax Lien Act") provides that Defendant PNC Bank's perfected security interest has priority over the United States' later tax lien.
The Tax Lien Act provides that:
26 U.S.C. § 6321. The Tax Lien Act further provides that: "[t]he lien imposed by section 6321
Defendants argue that these provisions of the Tax Lien Act and the Federal Priority Statute result in a "plain inconsistency," because the Federal Priority Statute states that the United States shall be paid first when the debtor is insolvent, but the Tax Lien Act provides that a federal tax lien is not valid against an earlier "holder of a security interest" such as Defendant PNC Bank. Defendant contends that pursuant to § 6321, the United States' FST liability became a tax lien upon Defendant Krasicky's failure to pay, and because Defendant PNC Bank was a "holder of a security interest" (as recognized by the Ohio State Court in its order granting the motion for appointment of a receiver), the FST lien was not valid against it without the required filing pursuant to § 6323(a).
In Romani, a court entered a judgment for $400,000 in favor of a third-party, Romani Industries, and against Francis J. Romani. 523 U.S. at 519. This judgment was recorded and therefore was, as a matter of state law, considered a "perfected" lien on Romani's real property. Id. Thereafter, the IRS filed multiple tax liens on the same property in the amount of $490,000. Id. at 520.
When Romani died years later, his estate consisted of only $53,001. Id. Because Romani's property was "encumbered by both the judgment lien and the federal tax liens" the estate's administrator sought permission from the state court to transfer the property to the judgment creditor in lieu of execution. Id.
Id. (internal footnote omitted). The state courts then denied the Government's objection to the transfer and found an inconsistency between the Federal Priority Statute, that required that the United States be paid first over all competing claims, and the Tax Lien Act which stated that a federal tax lien is not valid against judgment lien creditors until certain notice is given. Id.
In Romani, the Supreme Court examined the history of both the Tax Lien Act and the Federal Priority Statute and clarified that "the proper inquiry is how best to harmonize the impact of the two statutes on the Government's power to collect delinquent taxes." Id. at 523-30. The Supreme Court reasoned that "the 1966 amendments to the Tax Lien Act bespeak a strong condemnation of secret liens, which unfairly defeat the expectations of innocent creditors and frustrate `the needs of our citizens for certainty and convenience in the legal rules governing their commercial dealings.'" Id. at 534 (citation omitted). The Supreme Court ultimately held that the Tax Lien Act should control and the prior judgment lien had priority over the United States' federal tax liens. Id.
The Romani decision resulted in an IRS "policy not to assert its priority under section § 3713(a) over a prior perfected interest that otherwise has priority under section 6323 of the Internal Revenue Code." IRS Chief Counsel Advice, 200210063, 2002 WL 368437 (March 8, 2002) (attached as Defs.' Ex. 7). Indeed, the IRS Manual provides that "The Federal Priority Statute does not apply if, before the insolvency proceeding begins, another person has obtained an interest in the property that would prevail over the federal tax lien under IRC 6323." IRM, 5.17.13.3, at (1) (07-09-2012) (attached as Pl.'s Ex. 1). The IRS Manual goes on to clarify that:
Id. at (1)(b), (d).
The United States attempts to distinguish Romani by arguing that the FST liability is not a "tax lien" for purposes of § 6323(a), but rather must be considered an "administrative expense" that arose during the receivership. Therefore, the United States contends that the FST liability does not fit into one of the narrow provisions (i.e., purchaser, holder of security, mechanic's lienor, or judgment creditor) of the Tax Lien Act. The United States then argues that there is a difference between pre-receivership and post-receivership priority.
In Romani, it was agreed by the parties that by the terms of § 6323(a) the federal liens "were not valid against the lien created by the earlier recording of Romani Industries' judgment." Id. at 524. In the instant action, the United States does not concede that its FST liability is invalid against the earlier perfected security interest of Defendant PNC Bank — rather, the United States argues that the Tax Lien Act does not apply because the FST liability is an "administrative expense" versus a "tax lien."
At its base, the United States' argument rests upon finding the timing of the tax accrual dispositive. The United States claims that because the FST accrued after the receivership order was entered, it must be classified as an "administrative expense," and pursuant to Ohio case law (all predating 1966) secured creditors are not protected from such an expense. The United States argues that the Tax Lien Act recognizes such a scheme in its definition of "security interest" which provides that a security interest exists "if, at such time, the property is in existence and the interest has become protected under local law. . ." 26 U.S.C. § 6323(h)(1). The United States contends that this indicates that the validity of the security interest is relative to whether it would be protected under local law from a similarly situated creditor. (ECF No. 13, Pl.'s Br. at 6-7.)
First, it appears from the clear terms of the Tax Lien Act that Defendant PNC Bank had a security interest in Page's assets. Its interest was recorded in 2001 and later recognized as "perfected" by an Ohio Court. The United States argues that a secured interest only exists to the extent that it is generally protected by local law, and here, local law would allow the payment of administrative expenses, and therefore, Defendant PNC Bank does not have a security interest against administrative expenses. This argument ignores the rest of the pertinent statutory definition that provides a "security interest" exists if "the interest has become protected under local law
The United States relies upon Southern Railroad Co. v. United States, 306 F.2d 119 (5th Cir. 1962) for the proposition that taxes should be construed as administrative expenses if the tax accrues after receivership. In Southern Railroad, the Fifth Circuit addressed the issues of tax priority and administrative costs in the context of a railroad that was subject to an equity receivership for decades. The lower court "allowed the tax claims of the United States and various State political entities to share pro rata the whole of this balance [for distribution] as partial, but preferential, payment of their allowed claims." Id. at 122. The holder of all bonds and "disappointed business creditor" Southern Railway Company appealed and argued that "the mortgage lien is superior to tax claims as there can be no question of equitable priority or apportionment" and failing that status sought to have the Fifth Circuit evaluate the "relative priority" between its claims and the tax claims. Id. at 123. Critically, in Southern Railroad, the Fifth Circuit recognized that "the tax claims are not asserted in the usual terms of a lien having an absolute statutory priority. Thus, the Federal Government candidly acknowledges that it does not in any way rely on" the Federal Priority Statute and that is a "forthright recognition of at least this fact of life that this statutory priority gives way to a valid recorded first mortgage." Id. (emphasis added) (citing 31 U.S.C.A. § 191 and 31 U.S.C. § 3466, earlier versions of 31 U.S.C. § 3713.) In the present action, however, the United States claims priority for its one-time tax pursuant to the Federal Priority Statute, in the face of a perfected security interest as defined by the Tax Lien Act. Additionally, the parties themselves agreed that the payroll taxes at issue "should be classified as operating expenses of the Railroad," while in the present action, there is no agreement between the parties that the one time FST should constitute an administrative expense.
The United States also argues that the inconsistency in Romani only arises when a tax lien arises before a receivership. However, the Court finds that the pertinent issue in this case is not the timing of the liability but whether it falls within the ambit of the federal Tax Lien Act, i.e. whether the FST liability is a "tax lien." As defined by the Tax Lien Act, it appears that the FST liability became a tax lien automatically when the tax was assessed and not paid after demand. See United States v. Galletti, 541 U.S. 114, 118, 122 (2004) (discussing and explaining the "assessment" of taxes under the federal system, summarizing an assessment occurs "where the Secretary rejects the self-assessment of the taxpayer or discovers that the taxpayer has failed to file a return, the Secretary calculates the proper amount of liability and records it in the Government's books."). The United States admitted during oral argument that a lien was "incidentally created" through the United States' demand for payment of the FST.
While true that this case does not implicate the concerns of "secret liens" that the Supreme Court warned of in Romani, it appears that upon its plain terms, the Tax Lien Act controls where the FST was a "tax lien" pursuant to § 6321. Further, while the United States cites the IRS Manual to support its paradigm of post-receivership taxes being distinguishable from pre-receivership taxes, the IRS Manual does not actually support such an interpretation and in fact states in no uncertain terms: "The general rule is that if the creditor would prevail against the IRS under IRC 6323 outside of an insolvency, it will also prevail against the IRS in the insolvency." IRM 5.17.13.3 (1)(d). In the present case, outside of an insolvency, the Defendants' perfected interest would prevail against the FST tax lien.
The United States relies upon Southern Railroad Co. v. United States, 306 F.2d 119 (5th Cir. 1962), for the proposition that taxes should be construed as administrative expenses if the tax accrues after receivership. The Court finds Southern Railroad is distinguishable. In Southern Railroad, the Fifth Circuit addressed the issues of tax priority and administrative costs in the context of a railroad that was subject to an equity receivership for decades. The lower court "allowed the tax claims of the United States and various State political entities to share pro rata the whole of this balance [for distribution] as partial, but preferential, payment of their allowed claims." Id. at 122. The holder of all bonds and "disappointed business creditor" Southern Railway Company appealed and argued that "the mortgage lien is superior to tax claims as there can be no question of equitable priority or apportionment" and failing that status sought to have the Fifth Circuit evaluate the "relative priority" between its claims and the tax claims. Id. at 123. Critically, in Southern Railroad, the Fifth Circuit recognized that "the tax claims are not asserted in the usual terms of a lien having an absolute statutory priority. Thus, the Federal Government candidly acknowledges that it does not in any way rely on" the Federal Priority Statute and that is a "forthright recognition of at least this fact of life that this statutory priority gives way to a valid recorded first mortgage." Id. (emphasis added) (citing 31 U.S.C.A. § 191 and 31 U.S.C. § 3466, earlier versions of 31 U.S.C. § 3713.) In the present action, however, the United States claims priority for its one-time tax pursuant to the Federal Priority Statute, in the face of a perfected security interest as defined by the Tax Lien Act. Additionally, the parties themselves agreed in Southern Railroad that the payroll taxes at issue "should be classified as operating expenses of the Railroad," while in the present action, there is no agreement between the parties that the one time FST should constitute an administrative expense. Southern Railroad, 306 F.2d at 127-28.
Further, to the extent that the United States relies upon Law Offices of Jonathan A. Stein v. Cadle Co., 250 F.3d 716 (9th Cir. 2001) and Straus v. United States, 196 F.3d 862 (7th Cir. 1999), such reliance is misplaced because both cases are consistent with Defendants' argument and do not speak to administrative expenses or the relevance of a when a tax lien accrues.
In Cadle, a taxpayer incurred a tax liability to the United States and the government attempted to levy his compensation. Cadle, 250 F.3d at 718. The employer refused to honor the levy and continued to pay the taxpayer. Id. The government then sued to enforce the levy on that taxpayer's wages and obtained a judgment pursuant to 26 U.S.C. § 6332(d). However, prior to the United States filing a notice of lien and judgment as required by state law, a different party had successfully sued the employer on an unrelated matter and filed his judgment with the Secretary of State. Id. Both of the parties claimed priority; the judgment creditor under the Tax Lien Act and the government under the Federal Priority Statute. The Ninth Circuit held that the government did not have a tax lien as described in § 6321 against the employer and therefore, the Tax Lien Act was not applicable and the Federal Priority Statute controlled. Specifically, the Ninth Circuit explained:
Id. at 719. The Ninth Circuit then distinguished the liability at issue, "failure to surrender property subject to a levy" verus the creation of a tax lien, noting that "Quicksilver did not fail to pay a tax; it failed to honor a levy. It did not become liable for a tax; it became liable for the value of the property it failed to turn over." Id. at 720.
In the present action, although the United States expends much effort in casting its FST liability as an "administrative expense" it appears on its face that the FST is a tax that arose against Page, that was owed, demanded, and not paid. At that time, under the terms of the Tax Lien Act, the FST became a "tax lien." Therefore, unlike Cadle, which involved a judgment to enforce a levy, the present action involves the failure to pay a tax after demand. For this reason, the United States' reliance on Cadle is unpersuasive.
In Straus, a furniture retailer entered into an assignment for the benefit of creditors with Anita Straus, who then liquidated the assets of the corporation. Straus, 196 F.3d at 863. Prior to the assignment the retailer had been liable to both the United States and Illinois for unpaid taxes. Id. The United States and Illinois both claimed priority over the net proceeds of the liquidation of the retailer. Id. All but one of Illinois' assessments predated the United States assessments, and based on this fact, Illinois argued that it had priority over the United States claims. Id. at 864. The Seventh Circuit examined the recent Supreme Court decision in Romani, but rejected Illinois' argument that Romani should be interpreted broadly based on policy concerns "to protect choate liens from later-arising federal tax liens" based on "the policies of protecting commercial expectations and the uniform treatment of solvent and insolvent taxpayers alike." Id. The Seventh Circuit concluded that while the Supreme Court did justify its decision in Romani with reference to policy concerns, "it ultimately relied on the long-standing proposition noted above that the general federal priority rule should give way to a specific, inconsistent provision in a later federal statute." Id. at 865-66 (citation omitted). The Seventh Circuit found that Illinois had failed to show "its tax liens fall within the specifically enumerated categories in the Tax Lien Act" or any other later statutory provision that was inconsistent with the Federal Priority Statute. Id. at 866.
The United States' reliance on Straus is misplaced. In Straus, Illinois based its arguments solely upon the policy concerns regarding the protection of commercial expectations regarding choate liens against solvent and insolvent taxpayers. More to the point, the Seventh Circuit found for the federal government because Illinois' tax liens did not fall within one of the enumerated categories in the Tax Lien Act. Here, while it is true that the policy concern in Romani regarding secret liens is not present, it is undisputed that Defendant PNC was a holder of a perfected security interest and therefore falls within one enumerated categories of § 6323(a).
In summary, the United States' reliance on the Straus and Cadle decisions are unpersuasive. Further, while the United States attempts to categorize the federal tax that accrued during the receivership as an administrative expense pursuant to state law, the FST became a "tax lien" pursuant to the clear terms of the Tax Lien Act when the government made its demand for payment that went unheeded. The Tax Lien Act controls over Ohio's treatment of post-receivership taxes. In such a situation, the Court finds that pursuant to Romani the United States' FST tax lien is not valid against Defendant PNC's earlier recorded security interest.
Accordingly, the Court finds that under the clear terms of the Tax Lien Act and Romani, the United States' claim against Defendant Krasicky fails as a matter of law.
The Court notes that there is no dispute that the claim against Defendant PNC Bank is a derivative claim that rises and falls upon the liability of Defendant Krasicky. Accordingly, where the Court has found that the claim against Defendant Krasicky fails as a matter of law, the claim against Defendant PNC Bank also fails.
For all these reasons, the Court GRANTS Defendant's Motion to Dismiss (ECF No. 10).
IT IS SO ORDERED.
