Appeal from an order of the United States District Court for the Eastern District of New York (Platt, J.) reversing grant of summary judgment in favor of plaintiff by the Bankruptcy Court for the Eastern District of New York (Parente, J.), on the ground that plaintiff had no right to relief under section 3505 of the Internal Revenue Code, 26 U.S.C. § 3505, or section 678 of the New York Tax Law. Affirmed.
Timbers, Winter and Altimari, Circuit Judges.
The plaintiff appeals from an order of the United States District Court for the Eastern District of New York, Thomas C. Platt, Judge, reversing a grant of summary judgment in favor of plaintiff entered by the United States Bankruptcy Court for the Eastern District of New York, C. Albert Parente, Bankruptcy Judge. Plaintiff claimed entitlement to tax credits pursuant to 26 U.S.C. § 3505 and N.Y. Tax Law § 678. The district court held that plaintiff did not have any right to relief under either of these code sections, and accordingly dismissed plaintiff's complaint for lack of jurisdiction. We agree that the bankruptcy court did not have jurisdiction to hear this case, and we affirm the decision of the district court.
Brandt-Airflex Corporation ("Brandt") is in the business of metal fabrication and finishing. Its principal place of business is East Farmingdale, New York, where it employs approximately 60 people. In 1979, Brandt entered into a secured lending agreement with the Long Island Trust Company ("LITC"). According to Brandt, its deteriorating financial condition led it to renegotiate the lending agreement in 1983. Under this new agreement, the "Overdraft Financing Agreement," LITC would honor preapproved checks issued by Brandt.
During 1983, 1984, and the first quarter of 1985, LITC advanced funds to Brandt for the payment of employee wages. LITC did not, however, provide funds for the federal and state withholding taxes which Brandt was obligated to pay to the taxing authorities.
On February 13, 1985, Brandt filed a petition for reorganization under Chapter Eleven of the Bankruptcy Code. The Internal Revenue Service and the New York State Tax Commission both filed claims against the bankrupt estate for unpaid taxes. These unpaid taxes included federal income and social security taxes which Brandt was obligated to withhold from employees' wages pursuant to 26 U.S.C. §§ 3102(a) and 3402(a), as well as state income taxes required to be withheld under N.Y. Tax Law § 675 (McKinney 1987).
On April 30, 1986, Brandt commenced the instant adversary proceeding in bankruptcy court. Brandt contended that it was not liable for the unpaid taxes, because I.R.C. § 3505(b) and its state-law counterpart, N.Y. Tax Law § 678(b) had the effect of shifting liability for the withholding taxes to LITC. These two statutes impose liability for withholding taxes, under certain circumstances, upon a lender which "supplies funds to or for the account of an employer for the specific purpose of paying wages of the employees of such employer." Id.
In its complaint, Brandt sought a declaration of its tax liability pursuant to section 505(a)(1) of the Bankruptcy Code. More specifically, Brandt requested a declaration that it was entitled to a tax credit in the amount of LITC's alleged liability, and a declaration that the taxing authorities' claims against Brandt's estate be reduced by such amount. Brandt also requested that the bankruptcy court "order the IRS and the Tax Commission to collect from LITC for all of the employment tax liabilities which are now, allegedly to be due and owing by Brandt."
All the defendants filed motions to dismiss on various grounds, including lack of jurisdiction. The bankruptcy court converted these motions sua sponte into motions for summary judgment. On February 6, 1987, the bankruptcy court entered summary judgment in favor of Brandt. See In re Brandt-Airflex Corp., 69 B.R. 701 (Bankr. E.D.N.Y. 1987). The court concluded that:
1. LITC was a direct cause of the tax accrual.
2. The Overdraft Agreement rendered the plaintiff financially impotent and unable to meet the tax obligation.
3. LITC was the employer in fact and primarily liable for the delinquent taxes.
4. The taxing authorities will not be prejudiced by proceeding to collect ...