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Thursday, July 29, 2004

Tax Relief.  In Superintendent of Insurance for the State of New York v. Ochs (In re First Central Financial Corp., the Second Circuit decided whether a tax refund, to which an insurance company in rehabilitation was entitled pursuant to a written contract with its parent, was part of the bankruptcy estate of the parent.  The parent filed a consolidated tax return for itself, the insurance company and another subsidiary.  Because the insurance company was the only one of the three entities that had income, it paid the entire tax burden.  Pursuant the agreement with its parent, it would be entitled to any refund up to the amount it would have been entitled had it filed separately.  The past practice was that the refunds were paid to the insurance company.  But when the parent went into bankruptcy, things changed.  The trustee took the position that the $2.5 million refund it received was part of the bankruptcy estate.  The Superintendent of Insurance took the position that the parent was holding the refund in trust for the insurance company, and asked the bankruptcy court to impose a constructive trust on the funds.  The Bankruptcy Court declined to do so, and the District Court affirmed.

The Second Circuit held that the existence of a written contract relating to how tax refunds would be allocated was fatal to any claim of unjust enrichment, an essential element of a constructive trust claim.  Also, the Court noted that the remedy of a constructive trust was "fraud-rectifying" rather than "intent-enforcing."  As there was no allegation of fraud, the remedy was found not be appropriate.  Finally, while recognizing that bankruptcy law does not trump New York constructive trust,  courts are required to "act very cautiously" to minimize conflict with the Bankruptcy Code.  As a result, bankruptcy courts are reluctant to impose constructive trusts without a substantial reason for doing so.

The insurance company can, of course, file a claim as an unsecured creditor.  As the Second Circuit noted: "While [the insurance company] may understandably chafe at being required to accept less than it was entitled to receive under the Agreement, the short -- and conclusive -- answer is that this is not injustice, it is bankruptcy."

The decision can be found here.

Comments:
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Hi there Blogger...Googled for chapter 11 bankruptcy and here is where I landed. No regrets...good entertaining read on this post, although not exactly what I was originally searching for.
How I also wish I can get the time to write interesting blogs like this. This is what makes the net so amazingly diverse. Anyways..on with my search for chapter 11 bankruptcy. All the best Blogger.
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