Tuesday, March 3, 2020
The cases and rulings of relevance to agricultural producers, ag businesses and rural landowners continue to churn out. In today’s post a take a brief look at three of them – a couple of bankruptcy-related cases and a case involving a claim of constitutional takings.
“Shared Responsibility” Payment Is Not a “Tax”
United States v. Chesteen, No. 19-30195 (5th Cir. Feb. 20, 2020), rev’g., No. 18-2077, 2019 U.S. Dist. LEXIS 29346 (E.D. La. Feb. 25, 2019).
In a bankruptcy proceeding, some unsecured creditors receive a priority in payments over other unsecured creditors. These are termed “priority claims” and they are not subject to being discharged in bankruptcy. Priority claims are grouped into 10 categories with descending levels of priority. 11 U.S.C. §507(a)(1)-(10). One of those priority claims is for “allowed unsecured claims of governmental units” to the extent the claims are for “a tax on or measured by income or gross receipts…”. 11 U.S.C. §507(a)(8). But, does that provision apply to the penalty that had to be paid through 2018 for not having an acceptable form of government-mandate health insurance under Obamacare – the so-called “Roberts Tax”? The U.S. Court of Appeals for the Fifth Circuit recently answered that question.
In the case, the debtor filed Chapter 13 bankruptcy. The IRS filed a proof of priority claim for $5,100.10, later amending the claim to $5,795.10 with $695 of that amount being an excise tax under I.R.C. §5000A as a result of the debtor’s failure to maintain government mandated health insurance under Obamacare. The debtor objected to the $695 amount being a priority claim that could not be discharged, and the bankruptcy court agreed, finding that the “Roberts Tax” under Obamacare was not a priority claim, but rather a dischargeable penalty in a Chapter 13 case. On appeal, the federal trial court reversed, holding that the penalty was a tax that was a non-dischargeable priority claim. The trial court noted that the creditor bore the burden to establish that the Roberts Tax was a priority claim and noted that it was the purpose and substance of the statute creating the tax that controlled whether the tax was a tax or a penalty. The trial court noted that a tax is a pecuniary burden levied for the purpose of supporting government while a monetary penalty is a punishment for an unlawful act or omission. On this point, the trial court noted that Chief Justice Roberts, in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), upheld the constitutionality of Obamacare on the basis that the “shared responsibility payment” was a tax paid via a federal income tax return and had no application to persons who did not pay federal income tax. The trial court noted that the amount was collected by the IRS and produced revenue for the government. It also did not punish an individual for any unlawful activity and, the trial court noted, the IRS has no criminal enforcement authority if a taxpayer failed to pay the amount.
On further review, the appellate court reversed, reinstating the bankruptcy court’s determination. The appellate court held that the “Roberts Tax” was not entitled to priority in bankruptcy because it was not among the types of taxes listed in the bankruptcy code to have priority treatment under 11 U.SC. §507(a)(8)(E)(i). The appellate court noted that the “Roberts Tax” could not be a priority tax claim in a debtor’s bankruptcy estate because the “tax” applied only when a person failed to buy the government-mandated health insurance, rather than when a transaction was entered into. As such, the “Roberts Tax” was a penalty that could be discharged in bankruptcy. The appellate court also noted that the “tax” zeroed out the “tax” beginning in 2019, thereby nullifying any tax effect that it might have had.
Cram-Down Interest Rate Determined
In re Country Morning Farms, Inc., No. 19-00478-FPC11, 2020 Bankr. LEXIS 307 (E.D. Wash. Feb. 4, 2020).
Under the reorganization provisions of the Bankruptcy Code (Chapters 11, 12 and 13), a debtor can reorganize debts and pay for most (but not all) secured property by paying the present value of the collateral (what the collateral is presently worth) rather than the entire debt. The procedure for doing this is commonly known as a “cram down” – the terms of the repayment are forced upon the creditor. The debtor must pay the present value of the collateral (the creditor’s allowed secured claim) via the reorganization bankruptcy. Because the repayment of the written-down debt will be paid over time in accordance with the reorganization plan, an interest rate is attached to ensure that the creditor receives the present value of the claim. But, what is the appropriate interest rate in such a setting and how is it determined? Over the years, courts struggled in determining the appropriate interest rate to use in a reorganization bankruptcy cram-down setting. The U.S. Supreme Court settled the waters with a decision in 2004 by using the “Prime Plus” method. The issue of the appropriate interest rate was again as issue in a dairy bankruptcy case from the state of Washington.
In the case, the debtor filed Chapter 11 bankruptcy and the debtor and the bank could not agree on the appropriate interest rate to be used in the debtor’s reorganization plan. The parties agreed that the “Prime Plus” method set forth in Till v. SCS Credit Corp., 541 U.S. 465 (2004) was the appropriate method to determine the “cram down” interest rate.” The parties agreed that the prime rate was presently 4.75 percent and that an additional amount as a “risk factor” should be added to the prime rate. The debtors proposed a 6 percent interest rate, based on the risk associated with their dairy business. The bank claimed that the appropriate interest rate was 7.75 percent – the highest rate factor under the Till analysis. The bank cited the length of the plan, the volatility of the dairy market, the debtor’s capital structure, and conflicting projections from an expert when determining the appropriate risk factor. The court determined that the appropriate interest rate was 7 percent which raised the interest rate on some of the debtor’s loans and lowered it on others.
Reversion to Agricultural Use Classification Not a Taking
Bridge Aina Le’a, LLC v. State Land Use Commission, No. 18-15738, 2020 U.S. App. LEXIS 5138 (9th Cir. Feb. 19, 2020).
Sometimes, a governmental body enacts a statute or promulgates a regulation that restricts a private property owner’s use of their property. The restriction on land use may be so complete that, in effect, the restriction amounts to the government “taking” the property. However, these regulatory restrictions on private property usage do not involve a physical taking of the property but can still give rise to Fifth Amendment concerns and trigger the payment of “just compensation” to the landowner. The legal issues concerns the point at which a defacto regulatory taking has occurred.
In a key case decided in 1978, the U.S. Supreme Court set forth a multi-factored balancing test for determining when governmental regulation of private property effects a taking requiring compensation. In Penn Central Transportation Co. et al. v. New York City, the 438 U.S. 104 (1978), the Court held that a landowner cannot establish a “taking” simply by being denied the ability to exploit a property interest believed to be available for development. Instead, the Court ruled that in deciding whether particular governmental action effects a taking, the character, nature and extent of the interference with property rights as a whole are the proper focus rather than discrete segments of the owner’s property rights. Later, the Court determined that the touchstone for deciding when a regulation is a taking is whether the restriction on property usage is functionally equivalent to a physical taking of the property. Lingle, et al. v. Chevron U.S.A. Inc., 544 U.S. 528 (2005). The issue of a regulatory taking came up in a recent case from Hawaii.
Under the facts of the recent case, 1,060 acres of undeveloped land on the northeast portion of the Island of Hawaii were designated as conditional urban use. For the 40 prior years, the tract was part of a 3,000-acre parcel zoned for agricultural use. In 1987, the landowner at the time sought to develop a mixed residential community of the 1,060 acres as the first phase of development on the entire 3,000 acres. The landowner petitioned the defendant to reclassify the 1,060 acres as urban. The defendant did so in 1989 on development conditions that ran with title to the land. The land remained undeveloped at the time the plaintiff acquired it in 1999. In 2005, the defendant amended the condition so that fewer affordable housing units needed to be developed. Developmental progress was hampered by the requirement that the plaintiff prepare an environmental impact statement for the development project.
In late, 2008, the defendant ordered the plaintiff to show cause for the nondevelopment. In the summer of 2010, some affordable housing units had been constructed, but upon inspection they were determined to not be habitable. The developer then stated that it lacked the funds to complete the development. In 2011, the defendant ordered the land’s reversion to its prior agricultural use classification due to the unfulfilled representations that the land would be developed. The land was given its conditional urban use classification based on those representations. The plaintiff was one of the landowners and challenged the reversion as illegal, and that it amounted to an unconstitutional regulatory taking of the land. The trial court jury found for the plaintiff on the constitutional claim and the trial court denied the defendant’s motion for a judgment as a matter of law.
On further review, the appellate court reversed The appellate court stated held that no taking had occurred under the multi-factor analysis of Penn Central Transportation Company v. City of New York, 438 U.S. 104 (1978), because the reclassification did not result in the taking of all of the economic value of the property. Rather, the land retained substantial economic value, albeit at a much lesser amount than if it were classified as urban and developed. An expert valued the land at approximately $40 million as developed land and $6.36 million with an agricultural use classification. The appellate court held that the $6.36 million was neither de minimis nor derived from noneconomic uses. Thus, the defendant was entitled to judgment as a matter of law on the issue that a complete economic taking had occurred. It had not. The appellate court also held that the reversion did not interfere substantially with the plaintiff’s investment-backed expectations given that the development conditions were present at the time the plaintiff acquired the property and the plaintiff could expect them to be enforced. The appellate court also determined that the defendant acted properly in protecting the plaintiff’s due process rights by holding hearings over a long period of time. Thus, the appellate court concluded, no reasonable jury could conclude that the reversion effected a taking under the Penn Central factors. The appellate court vacated the trial court’s judgment for the plaintiff and reversed the trial court’s the trial court’s denial of the defendant’s motion for judgment as a matter of law, affirmed the trial court’s dismissal of the plaintiff’s equal protection claim and remanded the case.
The developments of relevance to agricultural interests keep rolling in. There will be more discussed in future posts.