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In re USA United Fleet Inc.

United States Bankruptcy Court, E.D. New York

April 29, 2013

In re USA UNITED FLEET INC., a/k/a SHORELINE FLEET, INC., et al., Chapter 7, Debtors.

          Andrew Goldman, Esq., Craig Goldblatt, Esq., Nancy Manzer, Esq., WILMER CUTLER PICKERING HALE AND DORR, New York, NY, Attorneys for Reliant Transportation, Inc.

          Eric T. Schneiderman, Esq., Terri Gerstein, Esq., Steven Koton, Esq., ATTORNEY GENERAL OF THE STATE OF NEW YORK, New York, NY, Attorneys for the New York State, Department of Labor Jerome Feller.


          JEROME FELLER, Bankruptcy Judge.

         Following a sale pursuant to 11 U.S.C. § 363(b) of certain assets of the debtors ("Debtors") in these jointly administered Chapter 7 cases, the New York State Department of Labor ("DOL") used the Debtors' prepetition unemployment insurance experience rate ("experience rating") to calculate the post-petition unemployment insurance tax liability of the purchaser, Reliant Transportation, Inc. (f/k/a MV Transportation, Inc.) ("Reliant"). Reliant seeks a determination that under the sale order and Section 363(f), its purchase of the Debtors' assets was free and clear of successor liability for the Debtors' experience rating. The DOL argues this Court lacks subject-matter jurisdiction under 11 U.S.C. § 505(a)(1) and/or the Tax Injunction Act, 28 U.S.C. § 1341 ("TIA"); and, even if it did have jurisdiction, it should find that a rating associated with an employer account is a computational device used to determine prospective tax rates, and not an "interest" of the DOL in property within the meaning of Section 363(f).

         Based on the entire record and applicable law, the Court concludes: (i) it has subject-matter jurisdiction to interpret and enforce the sale order; (ii) the DOL has an interest in the assets purchased by Reliant within the meaning of Section 363(f); and (iii) this interest was subject to the "free and clear" provisions of the sale order and Section 363(f).


         Prior to filing their petitions, the Debtors provided New York City school bus transportation services pursuant to six contracts with the City's Department of Education ("DOE Contracts"). On July 6, 2011, eight of the debtors ("United Debtors") filed voluntary petitions for relief under Chapter 11 of title 11 of the United States Code ("Bankruptcy Code"). The United States Trustee sought to convert each of the cases to Chapter 7 pursuant to 11 U.S.C. § 1112(b)(4). One of the grounds was the United Debtors' failure to disclose their transfer of the DOE Contracts to certain non-debtor affiliates ("Northeast Debtors"). ECF No. 29-1 at 2. On July 29, the United Debtors' cases were converted to Chapter 7, and a trustee was appointed to administer their estates. ECF No. 45. On August 10, the Northeast Debtors filed petitions for relief under Chapter 7 of the Bankruptcy Code, and the same trustee was appointed to their cases.

         That same day, the trustee sought an expedited hearing on the approval of a $12 million sale to Reliant of the United Debtors' 400 or more buses and the Northeast Debtors' DOE Contracts ("Acquired Assets"). ECF Nos. 100; 101. The trustee requested shortened notice on grounds that "the DOE Contracts will lose their value within the next few weeks unless a purchaser can come in and immediately utilize the Buses to perform under the DOE Contracts." ECF No. 100-2 ¶ 4. The trustee stated that he had "been advised that should it appear that the Debtors cannot perform under the DOE Contracts, [] the DOE will offer the DOE Contracts for bid to other bus companies[, ]" and if this were to occur "the value of the assets of these Chapter 7 estates will plummet precipitously, to the detriment of the estates and their respective creditors." Id. ¶ 6.[1]

         The Court granted the trustee's application, scheduled a sale hearing for August 15, 2011, and established the time and manner of service. ECF No. 102. Service was completed on August 10 as directed by the Court. ECF No. 126. The DOL was served at various locations and does not contest service. Id. On August 15, the Court held the sale hearing, approved the sale, and entered the sale order. ECF No. 140. On August 18, the sale closed.

         Under the sale order, Reliant received the Acquired Assets "free and clear" of "interests" which third parties may have in those assets. "Interests" are defined to include "any and all interests (including any successor, transferee or similar liability), liens..., claims..., liabilities, ... charges, obligations, rights, restrictions, [] and encumbrances in or with respect to any of the Acquired Assets...." ECF No. 140 ¶ I. The sale order further provides, "[n]o Interests, and no successor, transferee or similar liability claim, shall bear against or attach or otherwise affect the Acquired Assets or the Buyer except as set forth in" the Asset Purchase Agreement. Id. ¶ 6; see id. ¶ 10 ("At closing, all right, title and interest in and to the Acquired Assets shall immediately vest in Buyer... free and clear of any and all Interests in or with respect to any of the Acquired Assets, and without any successor, transferee or similar liability"). The Court retained jurisdiction to interpret, implement, and enforce the terms of the sale order. Id. ¶ 25.

         By letters dated May 11 and June 28, 2012, the DOL informed Reliant that "[a]s a result of the total transfers of experience... all effective August 15, 2011, your tax rates and/or your experience rating account balances have been revised" pursuant to "New York State Unemployment Insurance Law which provides for the transfer of employment and unemployment experience when one employer acquires, in whole or in part, the business of another." ECF No. 378 (Attachment A). The DOL explained in the June 28 letter that:

As a result of the transfers, your account registered an excess negative balance transfer on December 31, 2011 in the amount of $1, 685, 976.97....
We have adjusted your returns using the revised rate for the year 2011 based on total taxable wages of $10, 975, 411, and adjusted your return using the revised rate for the year 2012 based on taxable wages of $10, 074, 596. Your account is now underpaid $1, 220, 902.13.

Id. The DOL subsequently debited $1, 306, 733.77 from Reliant's bank account. ECF No. 358 ¶ 5.

         Reliant filed its motion on January 28, 2013, and sought a hearing prior to the expiration of its time to initiate an appeal under state law. ECF Nos. 358; 359. The Court granted this request, and the parties stipulated to an adjourned hearing date. ECF Nos. 360; 367. The DOL filed opposition on February 15 (ECF No. 378), and Reliant filed a reply on February 22 (ECF No. 382). A hearing was held on February ...

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