In Re: Vernon 4540 Realty LLC

Background

Vernon 4540 Realty LLC was created to develop property at 45-40 Vernon Boulevard in Long Island City, Queens, New York City. The property was a contaminated brownfield site. New York’s brownfield program provides tax credits based on qualifying remediation expenses. The debtor received a certificate of completion from the New York State Department of Environmental Conservation and applied for the credits through Brent Carrier, its managing member.

Because the debtor elected pass-through tax treatment, the resulting tax refund—amounting to at least $1.3 million—would be paid to Carrier in his capacity as the debtor’s managing member. The appellees, 45-50 Vernon LP, JSMB 4540 LLC, JSMB 4540 MM LLC, and CSC 4540, LLC, commenced an adversary proceeding seeking a declaration that the refund was property of the debtor’s bankruptcy estate and an order requiring Carrier to turn it over when received.

The Bankruptcy Court granted summary judgment for the appellees. It declared the refund property of the debtor’s estate, appointed an examiner to pursue the debtor’s interests in the tax credits, ordered Carrier to turn over the refund and supporting documents to the examiner, and enjoined the debtor from distributing the refund until further order. The Bankruptcy Court later denied Carrier’s motions to vacate, alter, amend, or reconsider that ruling.

District Court Review

The District Court concluded that it had jurisdiction to review both the summary-judgment ruling and the reconsideration ruling. Although Carrier’s notice of appeal identified only the reconsideration ruling, his appeal papers showed a clear intent to challenge the underlying summary-judgment ruling, and the appellees identified no prejudice from reviewing it.

The District Court reviewed the grant of summary judgment anew. Summary judgment is appropriate when the record shows no genuine dispute over a fact that could affect the result and the moving party is entitled to judgment under the law.

Ownership of the Tax Refund

The court held that the Tax Refund was property of the debtor’s bankruptcy estate as a matter of law. Bankruptcy Code Section 541 generally includes all of a debtor’s legal or equitable interests in property existing when the bankruptcy case begins, including a future income-tax refund to the extent of the debtor’s interest under non-bankruptcy law.

The court found no genuine dispute that the refund was attributable to the debtor. The debtor—not Carrier—applied to participate in the brownfield program, entered the relevant agreement with the Department of Environmental Conservation, made the remediation expenditures, and was named in the certificate of completion. The court also noted that the refund would be paid to Carrier only because of the debtor’s pass-through tax status and would be paid for the debtor’s benefit.

The court rejected Carrier’s argument that refunds associated with pass-through entities belong exclusively to their owners. It distinguished the authorities on which Carrier relied because those cases involved owners who had made the payments generating the refunds. Here, the remediation expenses were paid by the debtor, not Carrier. The court therefore affirmed the Bankruptcy Court’s summary judgment ruling.

Reconsideration

Carrier also challenged the denial of his motion under Rule 60(b)(2), which allows relief from a final order based on newly discovered evidence that could not have been discovered earlier through reasonable diligence. The District Court reviewed that denial for abuse of discretion, meaning it asked whether the Bankruptcy Court acted outside the range of permissible decisions.

Carrier relied on a purported amended operating agreement stating that he would own all brownfield tax credits attributable to the debtor. The District Court agreed that the document did not qualify as newly discovered evidence. It was dated November 14, 2013, signed only by Carrier in his personal capacity and as the debtor’s managing member, and appeared to have been available to him before the Bankruptcy Court considered the summary-judgment motion. Carrier also did not show that he had been justifiably unaware of the document or had exercised due diligence to produce it earlier.

The court further concluded that Carrier had not shown the document probably would have changed the outcome. Even if it purported to transfer the tax credits to Carrier, that did not alter the fact that the refund was directly traceable to remediation expenses paid by the debtor. The District Court therefore held that the Bankruptcy Court did not abuse its discretion in denying reconsideration.

Disposition

The District Court affirmed both the Bankruptcy Court’s Reconsideration Order and its underlying Summary Judgment Order. The Clerk was directed to terminate the appeal and close the case.