Court Opinion

ID: 3049975
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:29:24.836288+00
Date Added: 2024-06-11T11:49:22.289903
License: Public Domain

[PUBLISH]

               IN THE UNITED STATES COURT OF APPEALS

                        FOR THE ELEVENTH CIRCUIT            FILED
                          ________________________ U.S. COURT OF APPEALS
                                                            ELEVENTH CIRCUIT
                                  No. 09-10994                 MAY 4, 2010
                            ________________________            JOHN LEY
                                                                 CLERK
                   D. C. Docket No. 03-00354-CV-OC-10-GRJ

OLD WEST ANNUITY AND LIFE INSURANCE COMPANY,
et al.,

                                                      Plaintiff-Counter-Claimant,

UNITED STATES OF AMERICA,

                                Intervenor Plaintiff-Counter-Defendant-Appellant,

                                      versus

THE APOLLO GROUP,
a California corporation,

                                                            Defendant-Appellee,

CAMP COAST TO COAST, INC.
THE AFFINITY GROUP, INC.,

                                                  Intervenor Plaintiffs-Appellees,

HANS SCHULZ,
a Trustee of the Schulz Family Trust, dated
1/1/88, et al.,

                                                                     Defendants.
                               _______________________

                      Appeal from the United States District Court
                          for the Middle District of Florida
                           _________________________

                                       (May 4, 2010)

Before EDMONDSON, BARKETT and BALDOCK,* Circuit Judges.

PER CURIAM:

       This appeal is one by the Government from the district court’s allocation of

surplus proceeds from the sale of real property in a foreclosure action. A

bankruptcy estate owned the real property; several creditors obtained relief from

the automatic stay to pursue this foreclosure action. The Government contends

that the district court erred in these ways: (1) by applying Florida law instead of

federal common law to determine whether the Government could recover from the

surplus proceeds for tax liens against the property for taxes owned by the debtor’s

alleged alter ego; and (2) by distributing the surplus proceeds in satisfaction of the

Government’s and Coast’s liens instead of distributing the funds to the bankruptcy

       *
        Honorable Bobby R. Baldock, United States Circuit Judge for the Tenth Circuit, sitting
by designation.

                                               2
trustee or applying the Bankruptcy Code’s priority scheme.

      We affirm.

                                  I. BACKGROUND

      Old West Annuity and Life Insurance Company (“Old West”) commenced

this foreclosure action in Florida state court, seeking to foreclose its mortgage lien

on a campground in Clermont, Florida (the “Campground”) owned by Apollo

Group, Inc. (“Apollo”). Apollo acquired the Campground in an auction associated

with the bankruptcy of All Seasons Resorts, Inc. (“All Seasons”). Soon after Old

West initiated the foreclosure action in a Florida state court, Apollo itself filed a

petition under Chapter 11 of the Bankruptcy Code in the Northern District of Ohio.

The filing of Apollo’s bankruptcy petition automatically stayed the Florida

foreclosure action. See 11 U.S.C. § 362. Two years later, the bankruptcy court

granted Old West relief from the automatic stay, allowing Old West to assert its

rights to the Campground by continuing with the foreclosure action.

      Soon after, the Government filed a proof of claim for unpaid taxes in the

bankruptcy court. The claim was based on unpaid tax assessments against Apollo

for approximately $21,000 and unpaid assessments against All Seasons in excess

                                            3
of $10 million. The Government contends that Apollo is the alter ego of All

Seasons, making Apollo liable for All Seasons’s delinquent taxes. The bankruptcy

court granted the Government relief from the stay to establish and enforce tax liens

against the Campground. The Government then locally recorded notice of its tax

assessments and intervened in this foreclosure action in state court. The

Government later removed this case (the foreclosure action) to federal district court

in Florida.

      The bankruptcy court then granted creditors Camp Coast to Coast, Inc. and

Affinity Group, Inc. (“Coast”) relief from the automatic stay. Coast had won a

substantial money judgment against Apollo in a California case several years

earlier. After Coast obtained relief from the stay, it domesticated its California

judgment in Florida. Coast obtained an order from a Florida court declaring its

judgment lien against the Campground; the lien was recorded and thus perfected.

Coast then intervened in this foreclosure action. The district court ordered the sale

of the Campground, with the liens of Old West, the Government, and Coast to

attach to the proceeds of the sale to the same extent, and in the same priority, that

they attached to the property prior to the sale. The sale resulted in proceeds of $4.4

million.

      By then, the bankruptcy court had converted the bankruptcy case from

                                           4
Chapter 11 to Chapter 7. The Government sought and obtained an order from the

bankruptcy court confirming that the conversion to Chapter 7 did not affect that

court’s earlier stay-relief orders. The proceedings in the foreclosure action

continued: Old West undisputedly held the first priority lien on the Campground,

and the Government undisputedly held the second priority lien for Apollo’s taxes.

The contentious issue in the district court was whether the Government could also

recover for the taxes owed by Apollo’s alleged alter ego, All Seasons; if so, the

Government’s recovery would deplete the remaining proceeds and preclude

recovery by Coast. The district court granted Old West summary judgment and

disbursed $2.9 million of the proceeds in satisfaction of its undisputed first priority

claim. The district court set the alter ego issue for trial.

       Meanwhile, the Government filed an administrative claim in the bankruptcy

court for the bankruptcy estate’s tax liabilities resulting from the sale of the

Campground, which amounted to over $1.8 million (more than the remaining

proceeds in the district court’s register). The Government then filed a

supplemental complaint in the district court seeking to have the funds in the district

court’s register returned to the bankruptcy trustee for distribution in accordance

with the Bankruptcy Code. After that, the Government filed a motion specifically

requesting the transfer of the money. Coast opposed the motion on standing

                                             5
grounds; so the Government obtained an order from the bankruptcy court allowing

the Government to represent the estate in the foreclosure proceedings in the district

court to “assert such claims or rights on behalf of the estate which the Trustee may

be entitled to assert in that action, including whether the bankruptcy estate has a

senior right to the funds that are now held in the registry of that court.” The

bankruptcy court’s order noted, however, that it “is not ruling, and has never

previously ruled, on the issue of whether [11 U.S.C.] § 544(a) grants the estate

priority over the lien claim of” Coast.

       Now asserting the section 544(a) rights of the trustee, the Government

continued to argue in the district court that the funds there should be returned to the

bankruptcy court or, in the alternative, that the district court should distribute the

remaining funds in accordance with the Bankruptcy Code.1 The crux of the

Government’s argument was that the bankruptcy court did not intend its stay-relief

orders to constitute an abandonment of the Campground property and that

therefore the surplus proceeds remained the property of the estate and were subject

       1
         In the district court, Coast argued that it was improper for the Government to assert the
trustee’s claims because those claims were unsupported by any pleadings. Although Coast
mentions the lack of supporting pleading in a footnote in its appellate brief, Coast has not
presented substantive argument on this point on appeal; the issue is therefore waived. See
United States v. Flores, 572 F.3d 1254, 1265 n.3 (11th Cir. 2009) (noting that bare allegations
without citation of “any authority” or supporting facts are waived); Marek v. Singletary, 62 F.3d
1295, 1298 n.2 (11th Cir. 1995) (“Issues not clearly raised in the briefs are considered
abandoned.”). We express no opinion on the propriety of the Government’s assertion of the
trustee’s rights in a motion mid-trial.

                                                 6
to the Bankruptcy Code.

       The district court acknowledged that the trustee had not formally abandoned

the Campground, but denied the Government’s motion to transfer the surplus

proceeds. Interpreting the bankruptcy court’s orders, the district court determined

that, pursuant to its concurrent jurisdiction over the Campground and in the

absence of a contrary order from the bankruptcy court, its task was to adjudicate

the rights of the parties before it and to distribute the remaining sales proceeds.

The district court also rejected the Government’s attempt to assert the trustee’s

strong arm powers under section 544, concluding that those powers can only defeat

liens arising pre-petition.2

       After holding a bench trial on the alter ego issue, the district court concluded

that it must apply Florida law -- as opposed to the federal common law advocated

by the Government -- when determining liability.3 The district court concluded

that the Government did not meet its burden to establish alter ego liability under

Florida law; therefore, the court concluded that the Government was only entitled

       2
          The district court also noted that it was “very much aware of the real motivation behind
the United States’ motion”: to receive an automatic disbursement of the funds without needing to
litigate the alter ego question. The district court declined to allow “the United States at this very
late stage in the litigation to forum shop and essentially negate this Court’s proceedings, or to
use its derivative Trustee standing in such a self-serving manner.”
       3
        The district court viewed this determination as critical because of the substantial
differences between the Florida and federal common law alter ego tests.

                                                  7
to recover for Apollo’s taxes (and not All Seasons’s taxes) and that Coast was

entitled to the remaining foreclosure funds. The Government now appeals.

                                  II. DISCUSSION

A.    Applicable Law to Determine Alter Ego Liability

      At trial, the Government argued that Apollo is the alter ego of All Seasons,

making Apollo liable for All Seasons’s tax liabilities. The Government contends

that the district court should have applied the federal common law alter ego test

instead of the test under Florida law.

      The Government contends that, because the tax code is a nationwide federal

program, this Court must apply the framework established by United States v.

Kimbell Foods, Inc., 99 S. Ct. 1448, 1458-59 (1979), to determine whether federal

common law or state law determines alter ego liability. Coast, on the other hand,

contends that Aquilino v. United States, 80 S. Ct. 1277 (1960), and Drye v. United

States, 120 S. Ct. 474 (1999), require this Court to look to state law. Other circuits

appear uniform in their application of state law to this issue. See, e.g., United

States v. Scherping, 187 F.3d 796, 801-02 (8th Cir. 1999) (“Generally, federal

                                           8
courts will look to state law to determine whether an entity is an alter ego of a

taxpayer.”); Floyd v. I.R.S., 151 F.3d 1295, 1298-99 (10th Cir. 1998) (applying

state law); Towe Antique Ford Foundation v. I.R.S., 999 F.2d 1387, 1391 (9th Cir.

1993) (“We apply the law of the forum state in determining whether a corporation

is an alter ego of the taxpayer.”); Zahra Spiritual Trust v. United States, 910 F.2d

240, 242 (5th Cir. 1990) (“ In determining whether the appellants are the alter egos

of the taxpayers, and whether the taxpayer has an interest in property to which the

government's tax lien attached, we look to state law.”)

      In Drye, the Supreme Court applied a two-part analysis to determine

whether a federal tax lien could attach to an inheritance that had been disclaimed

by the taxpayer under state law. 120 S. Ct. at 478, 481-83. The Court noted that,

pursuant to the federal tax code, “the Government may impose a lien on any

‘property’ or ‘rights to property’ belonging to the taxpayer.” Id. at 480. Courts,

however, must look first to “state law to determine what rights the taxpayer has in

the property the Government seeks to reach.” Id. at 481. Then, federal law

determines “whether the taxpayer’s state-delineated rights qualify as ‘property’ or

‘rights to property’ within the compass of the federal tax lien legislation.” Id. at

481. If the Government is able to attach a lien to a state property interest

qualifying either as property or a right to property under the federal tax code,

                                           9
federal law then determines the priority of that lien. Aquilino, 80 S. Ct. at 1280-

81.

      The Government claims that we should view the alter ego question not as a

question of property under the Aquilino and Drye framework, but instead as an

issue of the taxpayer’s identity -- an issue it believes a uniform federal common

law standard should control per the test established by Kimbell Foods. But that

inquiry is not the one Drye, a case which has not been overruled, instructs us to

make. The question we must answer is this one: Despite being titled in Apollo’s

name, does the Campground belong to All Seasons or does All Seasons have rights

to the Campground? A number of facts or legal theories might support the notion

that All Seasons has a property interest in the Campground subject to the reach of

the Government’s tax lien. To determine what interests All Seasons might have in

the Campground, if any, we must look to state law. Drye, 120 S. Ct. at 481. The

Supreme Court has confirmed the continued validity of this framework as recently

as 2002. See United States v. Craft, 122 S. Ct. 1414, 1420-21 (2002).

      Applying this framework preserves the “proper balance between the

legitimate and traditional interest which the State has in creating and defining the

property interest of its citizens, and the necessity for a uniform administration of

the federal revenue statutes.” Aquilino, 80 S. Ct. at 1281. We decline the

                                          10
Government’s invitation to conclude -- against the clear weight of authority -- that

alter ego analysis is not properly within the Aquilino and Drye framework. The

district court therefore correctly concluded that Florida law supplied the pertinent

alter ego test. The Government does not contend that, if Florida law controls, the

district court incorrectly applied Florida law to the facts of this case. We therefore

affirm the district court’s judgment that the Government’s claim on the

Campground is limited to the taxes owed by Apollo.

B.    The District Court’s Distribution of the Proceeds in Satisfaction of the

      Parties’ Liens

      As an alternative route to recover the surplus proceeds, the Government,

asserting the section 544(a) rights of the bankruptcy trustee, also argues that the

surplus proceeds from the Campground sale must be returned to the bankruptcy

trustee or distributed by the district court according to the Bankruptcy Code’s

priorities because (despite the bankruptcy court’s orders authorizing the

Government and Coast to proceed) the bankruptcy estate has not formally

abandoned the property. The Government contends that the bankruptcy trustee’s

hypothetical lien under 11 U.S.C. § 544(a) primes -- that is, takes priority over --

                                          11
the Government’s own lien and Coast’s lien, both of which were perfected after the

bankruptcy petition date although with authorization from the bankruptcy court.

The Government says that, under the pertinent sections of the Bankruptcy Code, its

administrative claim for taxes owed by the bankruptcy estate as a result of the

Campground’s sale is entitled to priority over both Coast’s lien and its own lien for

Apollo’s old taxes.

       Coast argues that the Bankruptcy Code is inapplicable to this foreclosure

action when all the parties to the action have express authorization from the

bankruptcy court to proceed against the collateral. In the alternative, Coast argues

that, even under the Bankruptcy Code, it will be entitled to the disputed proceeds

because it now has a perfected lien that is not subject to avoidance by the

bankruptcy trustee.

       We conclude that, even if the Government is correct that the district court

should have transferred the surplus proceeds to the trustee to distribute according

to the Bankruptcy Code or that the district court itself should have applied the

Bankruptcy Code’s priorities, Coast would be entitled to the disputed proceeds

actually awarded to it by the district court. We therefore affirm the judgment of

the district court.

       Upon a debtor’s filing of a bankruptcy petition, his legal and equitable

                                          12
interests in property become the property of the bankruptcy estate. 11 U.S.C.

§ 541(a)(1). The filing of a petition also operates as an automatic stay, preventing

the creation, perfection, or enforcement of any lien against the estate’s property.

11 U.S.C. § 362(a)(4). The bankruptcy court may grant creditors relief from the

stay after notice and a hearing. 11 U.S.C. § 362(d). A stay-relief order is a final

order that is immediately appealable, Borg-Warner Acceptance Corp. v. Hall, 685

F.2d 1306, 1309 (11th Cir. 1982), and not subject to collateral attack, F.D.I.C. v.

Shearson-American Exp., Inc., 996 F.2d 493, 498 (1st Cir. 1993). A bankruptcy

court’s order lifting the automatic stay is not equivalent to an abandonment of the

estate’s property. Catalano v. Comm’r, 279 F.3d 682, 686-87 (9th Cir. 2002).

When a bankruptcy trustee abandons estate property, the estate is completely

divested of any interest in the abandoned property. Id. On the other hand, when a

bankruptcy court grants a creditor relief from the automatic stay for part of the

estate’s property, the bankruptcy estate retains a residual interest in that property.

See id. But, a stay-relief order normally allows the relieved creditor to realize its

interest in the collateral, Killebrew v. Brewer (In re Killebrew), 888 F.2d 1516,

1519-20 (5th Cir. 1989), by, for example, pursuing a foreclosure action. If such a

foreclosure sale results in proceeds in excess of the relieved creditor’s interest, the

surplus proceeds normally belong to the estate. Id.

                                           13
      That the trustee has not formally abandoned the Campground is undisputed,

but the lack of formal abandonment is not dispositive in this case. For the

Campground, the bankruptcy court granted three creditors relief from the

automatic stay. The bankruptcy court’s order permitted Old West to “assert[] its

rights to” the Campground, “including proceeding with the foreclosure sale.” The

order pertinent to the Government allowed the Government to “assert and to

enforce its claim in the Florida foreclosure action to the extent permitted by that

court.” The order for Coast allowed Coast to “perfect its lien against the

[Campground] and to participate in all respect as a party in the Foreclosure

Litigation and/or to initiate or participate in any other foreclosure action against the

[Campground].” The order for Coast further stated that it appeared to the

bankruptcy court that Apollo “has no equity in the [Campground] and the

reorganization of Debtor is unlikely, and that therefore, the [Campground] is not

necessary for an effective reorganization.”

      The bankruptcy court’s stay-relief orders may seem unusual or even

confused to some people, but those orders remain valid and are not subject to

collateral attack in this case. See Shearson-American Exp., 996 F.2d at 498

(“[O]rders of the bankruptcy court modifying the stay . . . , even if erroneous, are

entitled to respect and are not subject to collateral attack.”). The appropriate forum

                                           14
to challenge the stay-relief orders was the bankruptcy court; the Government and

Coast proceeded against the collateral in the district court as authorized by the

bankruptcy court’s orders. The somewhat exceptional circumstances before us

reflect the results of these earlier orders.

       The district court properly determined that the Government had the second

priority lien on the Campground for Apollo’s taxes and that Coast had the third

priority lien. The question we must resolve is what effect, if any, the

Government’s assertion of the trustee’s “strong arm” power under section 544(a)

has on the priorities for distribution of the proceeds. In addition to acting as an

automatic stay, the filing of a bankruptcy petition grants the bankruptcy trustee the

rights and powers of a hypothetical perfected judgment lien creditor.4 11 U.S.C.

§ 544(a). This status attaches “as of the commencement of the case,” id., and does

not terminate until the property ceases being the property of the estate, In re

Parrish, 171 B.R. 138, 141 (Bankr. M.D. Fla. 1994). Because the Campground

remains the property of the estate, the trustee’s hypothetical lien seems to attach to

the property. State law generally determines the rights attributable to such a lien

creditor. Weed v. Washington (In re Washington), 242 F.3d 1320, 1322-23 (11th

Cir. 2001). And under Florida law, the trustee’s hypothetical judgment lien will

       4
         Florida law also includes “[a] trustee in bankruptcy from the date of the filing of the
petition” within the definition of a “Lien creditor.” Fla. Stat. § 679.1021(zz).

                                                 15
generally prime any judgment liens arising later in time, including Coast’s and the

United States’ in this case. See Franklin Fin., Inc. v. White, 932 So. 2d 434, 436-

37 (Fla. 4th Dist. Ct. App. 2006) (“When a judgment is recorded, the judgment lien

takes priority over any liens recorded thereafter.”).

       But, accepting for the sake of argument that the trustee’s lien remains

attached to the Campground, establishing the priority of that hypothetical lien does

little to resolve this case ultimately. The trustee’s lien is no actual lien -- it is not

monetized; it is a tool intended to bring assets into the bankruptcy estate for

distribution according to the Bankruptcy Code. See Kapila v. Atl. Mortgage &

Inv. Corp. (In re Halabi), 184 F.3d 1335, 1337 (11th Cir. 1999). The Bankruptcy

Code gives the trustee other tools as well. Section 544(a) also allows the trustee to

avoid a transfer of the debtor’s property that is avoidable by a creditor holding a

judgment lien. In the typical bankruptcy case, the trustee will invoke section

544(a) to avoid any interest inferior to his own. But, the trustee can only use the

section 544(a) avoidance power to avoid pre-petition transfers.5 11 U.S.C.

§ 544(a) (“The trustee . . . may avoid any transfer of property of the debtor . . . .”

(emphasis added)); 5 Collier on Bankruptcy ¶ 544.01 (2009); see also In re

       5
          We accept that section 549 allows the trustee to avoid post-petition transfers in certain
circumstances. 11 U.S.C. § 549(a) (“[T]he trustee may avoid a transfer of property of the estate .
. . .” (emphasis added)). But the section 549 avoidance power is inapplicable in this case
because the bankruptcy court authorized the transactions. 11 U.S.C. § 549(a)(2)(B).

                                                16
Branam, 247 B.R. 440, 444 (Bankr. E.D. Tenn. 2000); In re Stoops, 209 B.R. 1, 3

(Bankr. M.D. Fla. 1997). Coast’s lien and the United States’ lien arose post-

petition and are therefore out of the reach of the section 554(a) avoidance power.

In this case, the Government does not even attempt to assert the trustee’s section

544(a) avoidance power.

      The unusual procedural history of this case thus leads to an unusual result:

even when we assume that the trustee has a hypothetical lien that takes priority

over the two secured creditors’ liens, the secured creditors’ liens cannot be avoided

by the trustee. For better or for worse, Coast and the Government (in its non-

trustee capacity) are now secured creditors. Cf. In re Concord Mill Ltd.

Partnership, 136 B.R. 896, 901-02 (Bankr. D. Mass. 1992) (concluding creditor

that perfected lien post-petition during relief from the automatic stay was allowed

to keep perfected interest after reimposition of stay); In re Spaude, 112 B.R. 304,

307 (Bankr. D. Minn. 1990) (“Where a creditor has invoked remedies and settled

its property rights in good faith reliance upon the termination of the automatic stay

in Bankruptcy, the Court should not and may not invoke its broad equitable powers

to void the results of the creditor’s action-even if doing so would enable the debtor

to make full use of statutory remedies previously unavailable to him under the

Code.”). And Coast and the United States remain secured creditors under

                                          17
bankruptcy law -- regardless of whether that law is applied by the district court or

by the bankruptcy court if the surplus proceeds were transferred to the trustee --

because the trustee cannot avoid their liens under section 544(a) or 549(a).

       Under the Bankruptcy Code, secured creditors are generally entitled to be

paid from their collateral. See 11 U.S.C. § 725; Monarch Air Serv., Inc. v. Solow

(In re Midway Airlines, Inc.), 383 F.3d 663, 669 (7th Cir. 2004) (“Secured claims

are paid (or the collateral returned) before any distribution is made to priority

claimants or to unsecured general creditors.”). The Government’s tax claim on the

gain associated with the sale of the Campground is an administrative claim that is

entitled to priority over unsecured claims under 11 U.S.C. § 726(a)(1).

“Administrative expenses, however, do not have priority over secured claims.”

Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 120 S. Ct. 1942,

1946 (2000). Therefore, even if the Government is correct that bankruptcy law

governs this case, the Government cannot recover on its administrative tax claim to

the detriment of Coast. 6

                                     III. CONCLUSION

       6
         The government is before this Court representing the interests of the trustee. The only
basis the Government (as trustee) asserts for divesting Coast of its priority is that under the
Bankruptcy Code, administrative claims are superior to Coast’s claim. Given the circumstances
here, we reject that contention, but we only decide the issue presented to us.

                                               18
      We affirm the district court’s conclusion that Florida law determines the

alter ego liability issue in this case. Because we conclude Coast is entitled to the

disputed surplus proceeds even if the Government is correct about the applicability

of bankruptcy law to this action, we affirm the judgment of the district court.

      AFFIRMED.

                                          19