Summary
noting that a bankruptcy court's decisions based upon equitable grounds are reviewed for abuse of discretion
Summary of this case from In re ChiraOpinion
Civil Action No. 03-3018, c/w 03-3245, BANKR. No. 01-10086 Jointly administered with 01-10087, 01-10088, 01-10089, and 01-10090, Section: I/1.
September 3, 2004
ORDER AND REASONS
Before the Court is the appeal of the Louisiana Department of Revenue ("LDR") from two orders of the United States Bankruptcy Court, entered on August 4 and October 1, 2003, sustaining the debtor's objections in part and disallowing certain claims made by the LDR against the estate of the debtors, J.C.C. Holding Company and Jazz Casino Company, L.L.C. (collectively, "JCC"). Also before the Court is the consolidated cross-appeal filed on behalf of JCC from the order of the United States Bankruptcy Court, entered on August 4, 2003, allowing the LDR's administrative claim. Pursuant to 28 U.S.C. § 158(a)(1), this court has jurisdiction of this appeal from final orders of the bankruptcy court.
In re Jazz Casino Co., L.L.C., Civil Action 03-3018, Section I., Bankr. No. 01-10086 c/w 01-87, 01-88, 01-89, 01-90 ("Jazz I").
In re Jazz Casino Co., L.L.C., Civil Action 03-3254, Section I., Bankr. No. 01-10087 ("Jazz II").
28 U.S.C. § 158(a) states in pertinent part that:
The district courts of the United States shall have jurisdiction to hear appeals (1) from final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title.28 U.S.C. § 157(b) states in pertinent part that:
(b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11 . . . and may enter appropriate orders and judgments, subject to review under section 158 of this title.
(2) Core proceedings include, but are not limited to —
(A) matters concerning the administration of the estate;
(B) allowance of disallowance of claims against the estate. . . .
FACTS AND BANKRUPTCY PROCEEDINGS
I. Factual Background A. Wide Area Progressive Agreements and SystemJCC operates a casino in New Orleans, Louisiana. During the period from January 1, 1999, through December 31, 2002, JCC entered into a number of Wide Area Progressive Agreements ("WAP Agreements") with IGT, a manufacturer and licensed supplier of gaming devices. The LDR seeks to impose a lease tax on the WAP transactions on the ground that the WAP Agreements constitute taxable leases of tangible personal property.
IGT has developed a system for the computerized linking of "wide area progressive" slot machines ("WAP System"). A WAP System is a group of electronically linked progressive slot machines, connected by a central computer, that offers the players of WAP slot machines the opportunity to play for large jackpot prizes. The attraction of the WAP System is that the jackpot prize grows in accordance with the amount of play by all of the players on all the linked slot machines. Because the WAP System links slot machines located in multiple casinos, participation in the WAP System affords JCC the ability to offer players the opportunity to play for a jackpot prize larger than that which JCC alone could typically offer.
See Jazz I, Rec. Doc. No. 1, Bankruptcy record ("Jazz I Rec."), JCC's supplemental memorandum in support of Jazz Casino Company, L.L.C.'s contentions concerning non-liability for sales/use tax and JCC's ex parte motion for leave of court to file exhibits into evidence and for order admitting exhibits into evidence (collectively, "JCC Supp. Mem."), Exs. 13, 15, IGT's system of internal controls ("IGT's Int. Controls"), p. 2; id., Ex. 18, deposition testimony of Jerome Fremin ("Dep. Fremin"), p. 68; id., Ex. 17, deposition testimony of Bruce Rowe ("Dep. Rowe"), p. 14; id., Ex. 20, affidavit of Susan E. Abernathy ("Aff. Abernathy"), ¶ 9.
IGT's Int. Controls, p. 2; Dep. Fremin, p. 68; Aff. Abernathy, ¶ 10.
JCC Supp. Mem., Ex. 18, deposition testimony of Jerome Fremin ("Dep. Fremin"), pp. 19-20; IGT's Int. Controls, p. 2; Dep. Rowe, pp. 14, 33; Aff. Abernathy, ¶ 10.
The WAP System consists of six major components. The three primary components are the following: (i) the central computer complex and communications controller, both located at IGT's offices in Harahan, Louisiana; (ii) casino communications devices ("CCOMs"), which are located in the casinos and connected with the WAP slot machines and central computer complex by a communications network; and (iii) the WAP slot machines located on the casino floor. The WAP Agreements provide for the transfer of possession, but not title, to JCC of the slot machines provided by IGT pursuant to the WAP Agreements.
JCC Supp. Mem., Ex. 14, schematic drawing of the WAP System attached as Ex. A.; Aff. Abernathy, ¶ 11 (describing all six major components of the WAP System).
Aff. Abernathy, ¶ 12; see JCC Supp. Mem., Exs. 1-12, WAP Agreements.
Each WAP slot machine can only operate within the integrated WAP System. If there is a break in communication between a WAP slot machine and the CCOM, the slot machine ceases to function. If a WAP slot machine that is the first in line in the chain of communication to the CCOM loses communication with the CCOM, every other slot machine on that communication line will cease to function. If communications are interrupted between a CCOM and the central computer, the CCOM keeps the WAP slot machines running for a limited period of time established by the Louisiana State Police.
Dep. Fremin, pp. 55-56, 65-67; Aff. Abernathy, ¶ 30.
Pursuant to the WAP Agreements, IGT retains the right to have the WAP slot machines located at a mutually agreeable position on the casino's main gaming floor. Additionally, IGT is authorized, in its sole discretion, to make any modifications to the WAP system and choose the slot machines it will provide to JCC. IGT operates the WAP System and monitors the WAP slot machines 24 hours a day, 365 days a year. Additionally, the WAP Agreements provide that the fee payed by JCC to IGT is a percentage of the "Gross Handle." IGT designs the games, sets the payout odds and determines the size of the WAP jackpot prizes, subject to regulatory approval by the Louisiana gaming authorities. JCC has no control or input over the amount of the progressive jackpot prize or the payout odds. IGT's WAP slot machines provide the only method to win the WAP jackpot prize and IGT does not allow casinos that do not use IGT slot machines to participate in the WAP System. Additionally, IGT customers are not allowed to purchase IGT slot machines under any circumstances.
WAP Agreements, ¶ 1.
Id. at ¶ 10.
Although the CCOM is located at the JCC casino, JCC does not have access to the CCOM. Dep. Fremin, pp. 43, 47; Aff. Abernathy, ¶ 19. Only IGT or its designated agent holds the key to each WAP slot machine's central processing unit ("CPU") which contains the computer programming that controls the games. Dep. Fremin, 28-30, 48, 50; Aff. Abernathy, ¶ 19.
Id. at ¶ 3; Aff. Abernathy, ¶ 14. The continuous monitoring consists of two-way communications to and from the slot machines and the central computer. Dep. Fremin, pp. 44-46, 60; Aff. Abernathy, ¶ 14. The continuous monitoring requires that IGT personnel physically sit at a computer screen and review data transmitted to IGT which tells IGT what is occurring on every WAP slot machine on the system. Aff. Abernathy, ¶ 15.
Id. at ¶¶ 2-3. The "Gross Handle" is the sum of all wagers accepted by a particular group of WAP slot machines at a given location. Id. at ¶ 3.
Aff. Abernathy, ¶¶ 22-24; see also WAP Agreements, ¶ 2; Dep. Fremin, pp. 60-62.
Aff. Abernathy, ¶¶ 23-24; see Dep. Fremin, p. 70.
Aff. Abernathy, ¶ 25.
Dep. Rowe, p. 31; Aff. Abernathy, ¶ 25.
With respect to the WAP slot machines, JCC's responsibilities include cleaning the slot machines, removing, adding, and counting money, and fixing jammed bill and coin acceptors. It is undisputed that JCC provides the first response to maintenance problems with the WAP slot machines. However, if there is a maintenance problem that is considered "material," IGT is responsible for the repair. Additionally, JCC will pay out any prize won on the WAP slot machines that is less than the top progressive jackpot prize.
See Dep. Rowe, pp. 61-62; Aff. Abernathy, ¶ 29; Jazz I Rec., deposition testimony of Dan Boudreaux ("Dep. Boudreaux"), p. 29.
Dep. Fremin, p. 20.
Dep. Rowe, pp. 34-36.
Id. at pp. 33-34.
B. The Sale of 198 Stand-Alone Slot Machines
The LDR also seeks to collect sales and use tax on the sale of 198 stand-alone slot machines by Harrah's Operating Company ("Harrah's") to JCC. Harrah's, a JCC affiliate, purchased all of the assets of a casino in Missouri, including 198 used stand-alone slot machines, which Harrah's refurbished and sold to JCC for its use in JCC's New Orleans casino.
JCC Supp. Mem., Ex. 19, affidavit of Kathleen T. Floyd ("Aff. Floyd"), ¶¶ 11-16.
C. Procedural History and Actions of the United States Bankruptcy Court
On January 4, 2001, JCC and affiliated entities filed voluntary petitions for relief pursuant to chapter 11 of the Bankruptcy Code. On that same date, the United States Bankruptcy Court entered an order consolidating the cases for administrative purposes. The bankruptcy court also issued an order fixing March 15, 2001, as the bar date for filing proofs of claim. On March 8, 2001, the bankruptcy court granted JCC's ex parte motion to extend the claims bar date to April 30, 2001. On March 19, 2001, the bankruptcy court confirmed JCC's plan of reorganization and the plan became effective on March 29, 2001.
On April 17, 2001, the LDR filed proof of claim number 33 in the amount of $1,024,312.88. JCC filed an objection to that claim. On October 18, 2001, the LDR filed proof of claim number 34 which amended and replaced claim number 33, seeking sales and use taxes in the amount of $1,023,906.88. On June 28, 2002, the LDR filed proof of claim number 37 which amended and replaced claim number 34, seeking sales and use tax in the amount of $477,724.74. Also on June 28, 2002, the LDR filed proof of claim number 36, an administrative tax claim (the "Administrative Claim"), seeking sales and use tax in the amount of $111,119.54. Claim number 34, amended by claim number 37, represented the amount of alleged tax liability owed by JCC for the pre-petition tax period from January 1, 1999, through January 4, 2001. The Administrative Claim represented the amount of alleged tax liability owed by JCC for the post-petition audit period from January 5, 2001, through March 2001.
Jazz I Rec., Supplemental hearing memorandum filed on behalf of the LDR and attached exhibits ("LDR Supp. Mem."), Ex. B, affidavit of Douglas T. Driscoll ("Aff. Driscoll"), ¶ 4.
The post-petition audit period extended through December 31, 2001. Id. However, it is undisputed that the Administrative Claim represents the alleged tax liability attributable to the first three months of the post-petition audit period only.
On August 1, 2002, JCC filed objections to proof of claim numbers 34 and 37, and it also filed an objection to the Administrative Claim. JCC objected to the Administrative Claim on the grounds that (i) it was untimely; (ii) the LDR had not provided JCC with any documentation supporting the claim; and (iii) it was not liable for any taxes owed during the relevant audit period. On April 22, 2003, JCC filed a supplemental objection to proof of claim numbers 33, 34, 37, and the Administrative Claim ("Supplemental Objection"). In addition to JCC's general denial of tax liability raised in its original objection, JCC objected to all of the LDR's proofs of claims, including the Administrative Claim, on the grounds that (i) the WAP Agreements were non-taxable service contracts; and (ii) the sale of the 198 stand-alone slot machines by Harrah's to JCC was a non-taxable isolated or occasional sale.
Jazz I Rec., Jazz Casino's objection to proof of claim numbers 34 and 37 filed by the State of Louisiana, Department of Revenue; Jazz Casino's objection to late filed administrative tax claim filed by the State of Louisiana, Department of Revenue ("Admin. Obj").
Admin. Obj., at ¶¶ 10-11.
Jazz I Rec., Jazz Casino's supplemental objection to proofs of claim nos. 33, 34, and 37 and the Administrative Claim filed by the State of Louisiana, Department of Revenue ("JCC Supp. Obj.").
Id. at ¶ 9(a) and (b). The LDR does not dispute that the substantive basis for JCC's alleged tax liability was the same in proof of claim numbers 33, 34, 37 and the Administrative Claim. According to the LDR in its appeal brief, the transactions sought to be taxed in all of its bankruptcy claims stemmed from (i) the WAP Agreements; (ii) certain leases of non-progressive, stand-alone slot machines; and (iii) the sale of the 198 slot machines by Harrah's to JCC. See Jazz I Rec., Rec. Doc. No. 2, Original brief filed by appellant, the Louisiana Department of Revenue, at pp. 4-5. The record also reflects that the LDR proofs of claims also encompassed a claim for tax on various miscellaneous taxable items. See Aff. Driscoll, ¶ 6. In the bankruptcy proceedings, JCC did not dispute $45,631.44 of claim number 37, which was attributable to the purchase of those miscellaneous items.
The bankruptcy court set a hearing on JCC's objections for June 12, 2003. Prior to the hearing date, both parties filed pre-hearing memorandum on the issues of whether the WAP Agreements were taxable leases and whether the Harrah's/JCC sale of stand-alone slot machines was a taxable sales transaction. After a conference in chambers with counsel on June 12, 2003, the bankruptcy court advised the parties that it would take the objections under submission on the briefs and, accordingly, the court granted the parties an additional 30 days to file simultaneous briefs. On July 14, 2003, both parties submitted supplemental briefs and exhibits to the bankruptcy court pertaining to JCC's objections to the taxation of the WAP Agreements and the Harrah's/JCC sale of stand-alone slot machines. Simultaneously, JCC filed a second supplemental brief addressing only the timeliness of the Administrative Claim.
LDR Supp. Mem.; JCC Supp. Mem.
See Jazz II, Rec. Doc. No. 1, Bankruptcy record ("Jazz II Rec."), Supplemental brief in support of Jazz Casino's objection to late-filed administrative tax claim filed by the State of Louisiana Department of Revenue. In JCC's timeliness brief, JCC alerted the bankruptcy court that the substantive tax issues raised by JCC in opposition to the LDR's proofs of claims and the Administrative Claim were addressed in its supplemental brief concerning its claimed non-liability for the taxes sought by the LDR. Id. at p. 1.
On August, 4, 2003, the bankruptcy court issued a memorandum opinion holding that (1) the WAP Agreements were not taxable leases; (2) the sale of the 198 stand-alone slot machines was a non-taxable isolated or occasional sale; and (3) the LDR's late-filed Administrative Claim would be allowed because the LDR's failure to file the Administrative Claim was the result of "excusable neglect." In its memorandum opinion, the bankruptcy court did not consider any substantive objections to JCC's alleged tax liability with respect to the Administrative Claim. Accordingly, the bankruptcy court entered an order (i) overruling JCC's objection to the late-filed Administrative Claim; (ii) allowing the Administrative Claim in the amount of $111,119.54; and (iii) sustaining JCC's objection to proof of claim number 37 to the extent that it was disputed.
Jazz I Rec., Memorandum opinion entered August 4, 2003 ("Aug. 4 Mem. Op."). The bankruptcy court also sustained JCC's objection to proof of claim 34 because the LDR admitted that proof of claim 37 amended proof of claim number 34. Additionally, the court allowed proof of claim number 37 in the amount of $45,631.44, which represented the undisputed portion of that claim. Those two rulings are not at issue in this appeal.
Jazz I Rec., Order entered August 4, 2003 ("Aug. 4 Ord.").
On August 11, 2003, the LDR filed a notice of appeal from the bankruptcy court's August 4, 2003, order. On August 14, 2003, JCC filed a motion for correction and/or reconsideration of that order arguing that (i) the bankruptcy court's rulings with respect to proof of claim number 37 and the Administrative Claim were inconsistent because the substantive basis for JCC's tax liability was the same with respect to claim number 37 and the Administrative Claim; and (ii) the bankruptcy court should not have allowed the LDR's late-filed Administrative Claim. On October 1, 2003, the bankruptcy court issued an order and reasons granting JCC's motion for reconsideration and disallowing the Administrative Claim in its entirety. The bankruptcy court agreed with JCC that because the Administrative Claim sought the same type of taxes sought in proof of claim numbers 34 and 37, the Administrative Claim should have been disallowed. The court stated:
Jazz I Rec., Reasons for Order entered October 1, 2003 ("Oct. 1 Reas.").
Clearly, Proof of Claim Nos. 34 and 37 and the Administrative Claim are all based on the same taxes. Thus, when the Court determined that Jazz Casino did not in fact owe the taxes, all three claims should have been disallowed. Instead, the Court acknowledges that its Order ignored the clear impact the substantive finding as to Proof of Claim Nos. 34 and 37 had on the validity of the Administrative Claim and that the resulting rulings as to these matters are inconsistent.
Id. at 4. Although the bankruptcy court stated that the August 4, 2003, order made substantive findings with respect to both proof of claim number 34 and proof of claim number 37, the bankruptcy court's memorandum opinion shows that after the court determined that claim number 37 amended claim number 34 and after it disallowed proof of claim number 34 on that ground, the court made substantive findings only with respect to the taxes sought in proof of claim number 37. See Aug. 4 Mem. Op., at 3.
The court concluded that, based on its revision of the August 4, 2003, memorandum opinion, the issue of whether the court would allow the LDR's late-filed Administrative Claim on the ground of "excusable neglect" was moot.
Id.
On October 10, 2003, the LDR filed a notice of appeal in the bankruptcy court with respect to the bankruptcy court's October 1, 2003, order. On October 20, 2003, JCC filed its notice of cross appeal in the bankruptcy court in order to preserve its objection to the timeliness of the Administrative claim. On December 8, 2003, this Court consolidated the two appeals.
Jazz I, Rec. Doc. No. 3; Jazz II, Rec. Doc. No. 5.
II. Issues Presented
1. Whether the United States Bankruptcy Court denied the LDR due process pursuant to the Louisiana or United States Constitutions by failing to conduct a trial and, instead, taking JCC's objections under submission on the briefs, exhibits, depositions and affidavits.
2. Whether the United States Bankruptcy Court erred in finding that the sale of 198 stand-alone slot machines by Harrah's Operating Company to JCC is a non-taxable "isolated or occasional sale" pursuant to La.Rev.Stat. Ann. § 47:301(10)(c)(ii).
3. Whether the United States Bankruptcy Court erred in finding that the WAP Agreements between JCC and IGT were non-taxable transactions involving tangible personal property and the performance of a service pursuant to La.Rev.Stat. Ann. §§ 47:301, 47:302(B) and La. Admin. Code tit. 61, § 4301(C), as amended by La. Reg. 28:2254 (December 2002).
4. Whether the United States Bankruptcy Court abused its discretion in its October 1, 2003, decision by reversing its August 4, 2003, order and disallowing the LDR's Administrative Claim on the ground that there was no substantive basis for the claimed taxes.
Although not presented in LDR's statement of issues on appeal, see Rec. Doc. No. 2, at 2, the LDR elsewhere in its brief states that the bankruptcy court erred in holding that certain leases of non-progressive stand-alone slot machines were not taxable transactions. See id., at 6. There is no record of an objection by JCC to LDR's claims insofar as those claims sought to tax leases of non-progressive, stand-alone slot machines. Moreover, although the LDR's pre-hearing and supplemental briefs to the bankruptcy court mentioned leases of non-progressive stand-alone slot machines, the LDR's brief to the bankruptcy court makes clear that the only two issues submitted for consideration in connection with JCC's objections were the following:
A. Whether the progressive slot machine least [sic] transactions constitute Louisiana taxable leases pursuant to the provisions of revised statute 47:302b [sic] and revised statute 47:301(7) or constitute non-taxable leases, i.e. services, under LAC 61:I 4302.
B. Whether the sales of non-progressive slot machines are Louisiana taxable sales transactions or non-taxable isolated or occasional sales.
LDR Supp. Mem., at 2. Given this statement of issues, the bankruptcy court did not address whether leases involving non-progressive stand-alone slot machines were taxable transactions. Due to the LDR's imprecise draftsmanship in its brief to this Court, it is unclear whether the LDR is attempting to raise an issue with respect to whether leases of non-progressive, stand-alone slot machines are taxable transactions. To the extent that the LDR is attempting to do so on appeal, such an issue has not been adequately preserved and this Court does not address it. See Butler Aviation Int'l, Inc. v. Whyte (In re Fairchild Aircraft Corp.), 6 F.3d 1119, 1128 (5th Cir. 1993) (stating that in order for an issue to be preserved for appeal, "the argument must be raised to such a degree that the trial court may rule on it."). Furthermore, the LDR has not identified what portion of its claims in the bankruptcy court were attributable to such leases nor has it pointed to any record evidence in support of such a claim.
Additionally, the LDR, in its original appellant's brief, and JCC, on cross-appeal, present the following issue for decision in the event that this Court reverses the bankruptcy court's October 1, 2003, order:
5. Whether, if the United States Bankruptcy Court erred in reversing its August 4, 2003, order, the court correctly allowed the LDR's untimely Administrative Claim on the basis of "excusable neglect" pursuant to Fed.R.Bankr. 9006(b).
LAW AND ANALYSIS
A. Standard of ReviewIn reviewing the bankruptcy court's determination of whether to allow or disallow a proof of claim or an administrative claim against a debtor's estate, which are "core" bankruptcy proceedings, "the district court is bound to review the bankruptcy court's decision under the same standards that [an appellate court applies] to an ordinary district court opinion." Coston v. Bank of Malvern (In Re Coston), 991 F.2d 257, 261 n. 3 (5th Cir. 1993), citing Matter of Hipp, Inc., 895 F.2d 1503, 1517 (5th Cir. 1990). When reviewing the bankruptcy court's findings of fact, the district court applies the clearly erroneous standard. Fed.R.Bankr.P. 8013; A.T.T v. Mercer (In re Mercer), 246 F.3d 391, 402 (5th Cir. 2001) ( en banc). "If a finding is not supported by substantial evidence, it will be found to be clearly erroneous." In re Westcorp Enter., 230 F.3d 717, 725 (5th Cir. 2000) (citation and internal quotation omitted). A bankruptcy court's factual findings will be reversed only if, after considering all of the evidence, the appellate court is "left with the definite and firm conviction that a mistake has been committed." In re Luhr Bros., Inc., 325 F.3d 681, 684 (5th Cir. 2003) (internal quotation and citation omitted); Norris v. First Nat'l Bank in Luling (In re Norris), 70 F.3d 27, 29 (5th Cir. 1995). "Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." In re Luhr Bros., 325 F.3d at 684.
See 28 U.S.C. § 157(b)(2)(A) and (B).
A court of appeals applies the same clear error standard as the district court in reviewing the bankruptcy court's factual findings. In re Mercer, 246 F.3d at 402.
The district court reviews the bankruptcy court's conclusions of law and mixed questions of fact and law de novo. In re Universal Seismic Assoc., Inc., 288 F.3d 205, 207 (5th Cir. 2002); In re Mercer, 246 F.3d 391, 402 (5th Cir. 2001); Century Indemnity Co. v. National Gypsum Settlement Trust (In re National Gypsum Co.), 208 F.3d 498, 504 (5th Cir. 2000). "'When reviewing mixed questions of law and fact, [we] . . . reverse only if the findings are based on a misunderstanding of the law or a clearly erroneous view of the facts.'" Nationwide Mut. Ins. Co. v. Dunning, 252 F.3d 712, 716 (5th Cir. 2001) (quoting Tokio Marine Fire Ins. Co. v. FLORA MV, 235 F.3d 963, 966 (5th Cir. 2001)).
Decisions that are within the bankruptcy court's discretion or decisions based upon equitable grounds are reviewed for abuse of discretion. See In re Coastal Plains, 179 F.3d 197, 205 (5th Cir. 1999); I.R.S. v. Kolstad (In re Kolstad), 928 F.2d 171, 173 (5th Cir. 1991). However, "'[t]he abuse of discretion standard includes review to determine that the discretion was not guided by erroneous legal conclusions.'" Coastal Plains, 179 F.3d at 205 (quoting Koon v. United States, 518 U.S. 81, 100, 116 S. Ct. 2035, 2048, 135 L. Ed.2d 392 (1996)).
B. Procedural Due Process
The hearing on JCC's objections to the LDR's claims was originally scheduled to be held on June 12, 2003. After a conference in chambers on that day, the bankruptcy court granted an additional thirty days to file simultaneous briefs. Both parties filed supplemental briefs which included numerous documentary exhibits, deposition testimony, and affidavits. The LDR asserts that the bankruptcy court's decision to take the matter under submission on the briefs instead of holding a trial denied LDR due process pursuant to the Fourteenth Amendment of the United States Constitution and Article I, section 2 of the Louisiana Constitution. JCC asserts that the LDR waived any due process argument by failing to object on the record and by failing to raise the issue in the bankruptcy court despite numerous opportunities to do so.
Aug. 4 Mem. Op., at 1.
See LDR Supp. Mem.; JCC Supp. Mem.
"It is well established that [reviewing courts] do not consider arguments or claims not presented to the bankruptcy court." Gilchrist v. Westcott, 891 F.2d 559, 561 (5th Cir. 1990) (upholding the district court's refusal to consider an argument "that was not raised at the appropriate stage in the proceeding"). To be preserved for appeal, "the argument must be raised to such a degree that the trial court may rule on it." Butler Aviation Int'l, Inc. v. Whyte (In re Fairchild Aircraft Corp.), 6 F.3d 1119, 1128 (5th Cir. 1993). Although the LDR argues that it orally objected to submitting its case on the briefs, there is no record of such an objection. The LDR did not raise its due process argument in its supplemental brief submitted to the bankruptcy court thirty days after the conference in chambers. Nor did the LDR raise the issue in a motion for reconsideration or in its opposition to JCC's motion for reconsideration. Under these circumstances, the LDR is deemed to have waived this issue on appeal.
However, even if the LDR's due process issue had not been waived, the LDR's due process claim is meritless. The Fourteenth Amendment to the United States Constitution provides that "[n]o State shall . . . deprive any person of life, liberty, or property, without due process of law. . . ." Article I, section 2, of the Louisiana Constitution provides that "[n]o person shall be deprived of life, liberty, or property, except by due process of law." To state a due process claim pursuant to both the Fourteenth Amendment and the Louisiana Constitution, a litigant must demonstrate state action. Coggin v. Longview Indep. Sch. Dist., 337 F.3d 459, 463-64 (5th Cir. 2003) ( Fourteenth Amendment) (citation omitted); Price v. U-Haul Co. of Louisiana, 745 So.2d 593, 594, 599-600 (La. 1999) (Louisiana Constitution). A bankruptcy court's decision with respect to the necessity of an evidentiary hearing does not implicate any state action and, therefore, the Fourteenth Amendment and the Louisiana Constitution are inapplicable. See Rowe v. Ocwen Fed. Bank Trust, 220 B.R. 591, 595-96 (E.D.Tex. 1997); see also Godchaux v. Estopinal, 83 So. 690, 692 (La. 1919) (noting the distinction between actions of the state court and actions of the courts of the United States for purposes of assessing state action pursuant to the Fourteenth Amendment).
Moreover, to the extent that the LDR asserts a violation of due process pursuant to the Fifth Amendment of the United States Constitution, the LDR's claim is equally without merit. A State or state agency is not entitled to constitutional due process protection. South Carolina v. Katzenbach, 383 U.S. 301, 323, 86 S. Ct. 803, 815-16, 15 L. Ed.2d 769 (1966) ("The word 'person' in the context of the Due Process Clause of the Fifth Amendment cannot, by any reasonable mode of interpretation, be expanded to encompass the States of the Union. . . ."); State of Pa. v. Riley, 84 F.3d 125, 130 n. 2 (3d Cir. 1996); see also Conn. State Dept. of Social Serv's v. Thompson, 242 F. Supp.2d 127, 158 n. 35 (D. Conn. 2003) (implying that the Department of Social Services was not protected by the Fifth Amendment if it were asserting its own due process rights); New York State Dept. of Social Serv's v. Bowen, 661 F.Supp. 1537, 1542 n. 8 (S.D.N.Y. 1987) (noting that the New York State Department of Social Service's claim that HHS policies violated its Fifth Amendment due process rights was "meritless"), rev'd on statutory grounds, 846 F.2d 129 (2d Cir. 1988). Accordingly, constitutional due process under either the United States or Louisiana Constitution is not implicated in this case.
The Fifth Amendment provides, in pertinent part, "[n]o person shall . . . be deprived of life, liberty, or property, without due process of law. . . ." U.S. CONST. amend. V.
C. Sale of 198 Stand-Alone Slot Machines
The LDR contends that the bankruptcy court's decision that the sale of 198 stand-alone slot machines by Harrah's to JCC was a non-taxable "isolated or occasional sale" is clearly erroneous.
Louisiana levies sales tax "upon the sale at retail, the use, the consumption, the distribution, and the storage for use or consumption in this state of each item or article of tangible personal property. . . ." La.Rev.Stat. Ann. § 47:302(A). One statutory limitation on the definition of a taxable sale appears in La.Rev.Stat. Ann. § 47:301(10)(c)(ii), which provides in pertinent part:
The term "sale at retail" does not include . . . an isolated or occasional sale of tangible personal property by a person not engaged in such business.Id.
The LDR's regulation interpreting the term "business" provides:
The term business does not include isolated and occasional sales by persons who do not hold themselves out as engaged in business. This exclusion clearly applies to sales made by the owners of property who had acquired the property for use or consumption, and is not engaged in selling similar property on a repeated or continuing basis.
La. Admin. Code tit. 61, § 4301(C), "Business" (c).
In determining whether a sale is a non-taxable "isolated or occasional sale," Louisiana courts have focused on the degree to which a taxpayer is in the business of selling the particular property or service sought to be taxed. Compare Con-Trux Constr. v. La. Dept. of Revenue and Taxation, 711 So.2d 324, 327 (La.App. 2d Cir. 1998) (holding that sales of concrete crushing services amounting to 4% of the taxpayer's revenue were non-taxable isolated and occasional sales); Marmac Corp. v. McNamara, 546 So.2d 585, 587-88 (La.App. 1st Cir. 1989) (affirming district court's conclusion that an entity that leased barges and sold an average of 0.25% of its fleet per month was not in the business of selling barges), with McNamara v. Oilfield Constr. Co., Inc., 417 So.2d 1311, 1318 (3d Cir. 1982) (affirming trial court's conclusion that an average of 2.5 sales per month of signs, cattle guards, lumber, nails and aluminum gates constituted a part of a construction company's regular business and were, therefore, taxable sales).
The LDR's regulation interpreting the definition of a "retail sale" provides in pertinent part:
It is not the intention of this Chapter to impose a tax on an isolated or occasional sale, frequently termed a casual sale, except with respect to the sale of motor vehicles, which are specifically covered by R.S. 47:303(4). The primary consideration in determining whether a sale meets exemption requirements is whether the seller is in the business, or holds himself to be in the business, of selling merchandise or tangible personal property of similar nature, and not solely upon the frequency of the transactions. As examples, a firm engaged in the retail grocery business who sold a cash register originally acquired for their own use is not engaged in the business of selling cash registers, and the sale would be exempt; an office machine firm who sold carpeting acquired for their own use is not in the business of selling carpets, and the sale would be exempt; the periodic sale of articles by auction to recover storage, repair or labor liens unpaid by the owner of the property are exempt, provided the person forcing the sale does not hold himself out to be in the business of selling such merchandise.
La. Admin. Code tit. 61, § 4301(C), "Retail Sale or Sale at Retail" (e) (emphasis supplied).
The bankruptcy court found as follows:
Harrah's bought all assets of a casino in Missouri, including 198 stand alone slot machines. Harrah's refurbished these machines and sold them to JCC for use in its New Orleans casino. The Senior Tax Manager of Harrah's, Kathleen T. Floyd, signed an affidavit which states that Harrah's is in the business of providing gaming and entertainment services and holds itself out as such. Ms. Floyd also stated that Harrah's has never been in the business of selling slot machines and has not held itself out as such.
The LDR contends that because Harrah's bought the slot machines with the intent to sell them, Harrah's is engaged in the business of selling slot machines even though Harrah's does not normally do this.
This Court has not been presented with evidence to show that Harrah's held itself out as being in the business of selling slot machines, which is the "primary consideration in determining whether a sale meets exemption requirements." La. Admin. Code tit. 61:I:4301(C) ("Retail Sale or Sale at Retail" [(e)]). Also, this Court has not been presented with evidence to show that this is anything but an isolated incident. . . .
Aug. 4 Mem. Op., at 10-11.
It is undisputed that the sale of the 198 slot machines was an isolated incident. However, the LDR relies on the opinion testimony of Earl Millet, Director of its New Orleans regional office, to argue that Harrah's was, with respect to this particular transaction, engaged in the business of selling slot machines. Millet testified that the LDR's position was that Harrah's was in the business of selling slot machines because it bought tangible personal property with the intent to resell it and it was an entity capable of holding assets and reselling such assets. However, the record is utterly devoid of any factual evidence supporting Millet's conclusion that Harrah's was in the business of selling slot machines. Nor is there any evidence to support Millet's testimony that Harrah's bought the slot machines with the intent to resell those slot machines. Because the bankruptcy court's finding that the sale of the 198 stand-alone slot machines was an "isolated or occasional" sale was supported by the evidence, that determination is not clearly erroneous.
See Dep. Millet, at pp. 105, 107.
D. Lease Tax on the WAP Agreements
In proof of claim numbers 34 and 37, and the Administrative Claim, the LDR sought to collect lease tax claiming the WAP Agreements between JCC and IGT constituted taxable leases of slot machines and the computerized games contained therein as well as taxable support and maintenance agreements. On appeal, the LDR challenges the bankruptcy court's decision that the WAP Agreements were not taxable leases within the meaning of La.Rev.Stat. Ann. §§ 47:301 and 47:302(B) and La. Admin. Code tit. 61, § 4301(C), as amended by La. Reg. 28:2254 (December 2002).
Pursuant to Louisiana law, a tax is levied "upon the lease or rental within the state of each item or article of tangible personal property. . . ." La.Rev.Stat. Ann. § 47:302(B). La.Rev.Stat. Ann. § 47:301(7)(a) defines "lease or rental" as follows:
"Lease or rental" means the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter, for consideration, without transfer of the title of such property.
La.Rev.Stat. Ann. § 47:301(16)(a) defines "tangible personal property" as follows:
"Tangible personal property" means and includes personal property which may be seen, weighed, measured, felt or touched, or is any other manner perceptible to the senses.
A limitation on the definition of "lease or rental" appears in La. Admin. Code tit. 61, § 4301(C), "Lease or rental", as amended by La. Reg. 28:2254, Definition of Lease or Rental, (December 2002) (hereinafter referred to as § 4301(C)). As amended, section 4301(C) provides guidance in distinguishing between taxable lease transactions and non-taxable transactions involving both tangible personal property and the performance of a service. See La. Reg. 28:2254, ¶ 2. Section 4301(C) provides in pertinent part: Lease or Rental-
a. General. The lease or rental of tangible personal property for a consideration in Louisiana is a transaction that is subject to the sales or use tax. The term lease or rental means the grant to another of the right to use and possess tangible personal property for a period of time and for a consideration without the transfer of title to the property. In a lease transaction, the lessee obtains possession or use of the tangible personal property, so that the lessee has enjoyment of the property during a certain time period. Re-leases or sub-leases and re-rentals or sub-rentals are also considered as leases or rentals.
. . .
c. Transactions involving both the providing of tangible personal property and the performance of a service.
i. A lease or rental does not include providing tangible personal property with an operator who provides some additional service for a fixed or indeterminate period of time when the essence of the transaction is the performance of a service. The essence of the transaction is to provide a service when obtaining the tangible personal property is not an end in and of itself but rather furnishes the mechanism through which a service is provided.
ii. In order to determine the essence of a transaction involving both the performance of a service and the providing of tangible personal property, the facts and circumstances of each transaction must be examined. The following factors suggest, but are not necessarily conclusive, that the essence of the transaction is for the performance of a service:
(a). in order for the tangible personal property to perform as designed, the owner's operator maintains control over the property. This level of control by the owner's operator involves more than maintaining, inspecting, or setting-up the property;
(b). the contract between the owner of the property and the person receiving the services and property provides for the performance of a specific job that requires services for a certain number of hours or until completion of a specific job;
(c). the performance of the job using the tangible personal property is conducted in a manner determined by the owner of the property;
(d). the owner of the tangible personal property is responsible for choosing the particular piece of property to be used in the transaction; or
(e). the owner of the tangible personal property has a standard business practice of not allowing customers to rent the property separately from the services provided.Id. (italics in original).
Applying the factors set forth in the LDR's regulation, the bankruptcy court held that the WAP Agreements were not taxable leases of slot machines:
The "essence" of the contract between Jazz Casino and IGT is not the lease of slot machines. It is the service of having wide area progressive slot machines that are capable of paying out large jackpots. While IGT does not operate these slot machines in the way that a fork-lift operates a fork-lift, without the link to IGT these would be ordinary stand alone slot machines. That is the service provided by IGT. "Obtaining the [slot machines] is not an end in and of itself but rather [they furnish] the mechanism through which a service is provided." La. Admin. Code tit. 61.I:4301(C)(c)(i).
There are several factors that weigh against the W.A.P. Agreements being taxable leases. IGT provides 24-hour monitoring. IGT also provides collection and accounting of the progressive prizes. The W.A.P. Agreements are not for a fixed price; IGT is compensated based on the "Gross Handle," or amount the slot machines are used. IGT, in its sole discretion, can remove the machines that do not provide sufficient revenues. IGT can also, in its sole discretion, make certain modifications to the machines themselves and improve payout odds. IGT also "has a standard business practice of not allowing customers to rent the [slot machines] separately from the services provided." La. Admin. Code. tit. 61.I:4301(C)(c)(ii)(e).
In making this statement, the bankruptcy court was apparently addressing the testimony of Raymond Tangney, the LDR's senior sales and use tax policy consultant, who testified as follows:
A. There are some things, some property, that needs to be operated in order to perform its intended function. And in cases where a property needs to be operated in order to perform its intended function, the question of control is paramount.
There are some classes of property that do not need to be operated in order to perform their intended functions, and in those cases, the question of control is certainly not critical.
. . .
Q. And so it would be important to know who controls all of those functions?
A. In order — the word "control" that we consider at the Department of Revenue — in order to determine whether a type of property that needs control is being controlled, we're looking for personal control. . . .
. . .
With a human being controlling the thing. You talk about our regulation talked about the control. I mean control is important to certain classes of property. And let's say you have construction machinery, and . . . the construction machinery won't perform its intended function without someone sitting in the driver's seat running the construction machinery. Is that person the owner or is it . . . the lessee.
Dep. Tangney, pp. 59-61.
Aug. 4 Mem. Op, at 7-8(alterations in original).
On appeal, the LDR only challenges the bankruptcy court's determination with respect to the "control" factor set forth in § 4301(C)(c)(ii)(a). The LDR argues that the WAP Agreements are not non-taxable transactions involving "tangible personal property and the performance of a service" because IGT does not maintain physical control over the WAP slot machines. According to the LDR, computer monitoring is not the type of "control" envisioned by the LDR when it promulgated the amendment to § 4301(C) and, therefore, the transactions involving WAP slot machines are not excluded from the definition of a taxable "lease or rental." Additionally it asserts that, as a factual matter, the sole object of the WAP Agreements is providing slot machines and computer software contained in the WAP slot machines in order to increase gaming activity.
It is undisputed that the WAP slot machines are "tangible personal property" within the meaning of La.Rev.Stat. Ann. § 47:301(16)(a).
Reviewing the bankruptcy court's interpretation of § 4301(C) de novo and its factual findings for clear error, the Court finds no error in the bankruptcy court's determination that the "essence" of the WAP Agreements was not the lease of slot machines. The LDR's myopic emphasis on whether IGT maintains physical or personal control over the slot machines suggests that it deems physical control of tangible personal property, or more properly, the lack of IGT's physical control over the slot machine, dispositive of the question of whether the WAP Agreements constitute taxable leases. However, section 4301(C)(c)(ii) plainly directs that "the facts and circumstances of each transaction must be examined" and that none of the specifically enumerated factors are "necessarily conclusive." Accordingly, the bankruptcy court correctly examined the nature of the WAP Agreements and the existence of facts relevant to other enumerated factors in making its determination. Moreover, the LDR's argument that IGT provides only computer monitoring and that it lacks physical control over the slot machines ignores the type of control made relevant in the regulation. Section 4301(C)(c)(ii)(a) directs that the relevant "control" is that which is necessary "in order for the tangible personal property to perform as designed." Id.
To the extent that the bankruptcy court's determination depended upon an interpretation of § 4301(C) combined with the application of its interpretation to its factual findings, it is a determination with respect to a mixed question of fact and law which this Court will reverse only if it "based on a misunderstanding of the law or a clearly erroneous view of the facts." Dunning, 252 F.3d at 716(citation omitted); see also Dresser Indus. v. Comm'r Internal Revenue, 911 F.2d 1128, 1133 (5th Cir. 1990) (applying de novo standard of review to a U.S. tax court's interpretation of the Internal Revenue Code).
Substantial record evidence supports the bankruptcy court's finding that without the computerized linking and monitoring services provided by IGT personnel, the WAP slot machines would not perform as intended. In addition to the documentary evidence submitted by JCC, the LDR's expert witness on the functionality of slot machines, Jerome Fremin, acknowledged that the purpose of the WAP System was to provide players the opportunity to play for very large jackpot prizes. Fremin testified that IGT determines the payout odds of the WAP slot machines and that IGT maintains exclusive control over the central computer and communications equipment components of the WAP System. Moreover, the record evidence amply demonstrates that the slot machines provided by IGT contain multiple security features and electronic components that are specifically designed to enable the machines to function within the WAP System.
Dep. Fremin, pp. 68-69.
Id., pp. 40,59-62, 70.
See Dep. Fremin, pp. 54-59; Aff. Abernathy, ¶ 20. Abernathy averred that the security features and modifications include:
(a) a "card cage open" detector which allows the central computer to immediately receive and print a message when the card cage is accessed; (b) IGT serialized evidence tape over the reel and game EPROM[s] [Erasable Programmable Read Only Memory] and the Ram and processor chips, in addition to an independent of the Louisiana regulatory agency's security tape; (c) a lock on the card cage controlled by IGT or its agent; (d) IGT serialized evidence tape attached to the card cage processor board and the machine housing to provide additional security against unauthorized card cage access; (e) monitoring of the slot machine by the CCOM approximately every 1 to 2 seconds; (f) a special software feature which locks up the slot machine if there is a break in communications between the machine and the CCOM for 8 seconds; (g) the addition of optical sensors for machine monitoring; and (h) modified software to allow the slot machines to communicate with the CCOM.Id.
The LDR's argument that the WAP Agreements are merely leases of slot machines mischaracterizes the nature of the WAP System. Although the slot machines are provided pursuant to those Agreements, the provision of tangible personal property is but one aspect of the WAP Agreements between IGT and JCC. As the bankruptcy court properly concluded, absent the services provided by IGT, the WAP slot machines would function as ordinary stand-alone slot machines rather than wide area progressive slot machines. Additionally, the bankruptcy court made findings of fact that support the third, fourth and fifth factors enumerated in § 4301(C)(c)(ii)(c)-(e), none of which the LDR challenges on appeal. The bankruptcy court was correct as a matter of law that the regulation contemplates the consideration of all of the enumerated factors. Consequently, the court's finding that "obtaining the tangible personal property is not an end in and of itself but rather furnishes the mechanism through which a service is provided," § 4301(C)(c)(i), is not clearly erroneous.
E. Whether the Bankruptcy Court Erred in Reversing its Order Allowing the LDR's Administrative Claim
The LDR contends that the bankruptcy court abused its discretion by granting JCC's motion for reconsideration and disallowing the Administrative Claim. Specifically, the LDR contends that the bankruptcy court abused its discretion by (i) failing to apply Fed.R.Bankr.P. 7015 to the proceedings; and (ii) allowing JCC to raise a new defense in its supplemental objection to the LDR's Administrative Claim.
Bankruptcy Rule 9024 provides that Fed.R.Civ.P. 60 "applies to cases under the Code." Stangel v. United States, 68 F.3d 857, 859 n. 2 (5th Cir. 1996). Fed.R.Civ.P. 60(b) grants a court the authority to relieve a party from an order based, inter alia, on "mistake, inadvertence," or "any other reason justifying relief." Rule 60(b)(1) (6). The Fifth Circuit has stated:
One purpose of Rule 60(b)(1) is to permit the trial court to reconsider and correct "obvious errors of law" without forcing the parties to engage the machinery of appeal. Nevertheless, the utility of Rule 60(b)(1) is limited by the desire for finality of judgments and predictability of judicial process.United States v. 329.73 Acres of Land, More or Less, Situated in Grenada and Yalobusha Counties, State of Mississippi, 695 F.2d 922, 925 (5th Cir. 1983) (citation omitted). Although Rule 60(b) relief is not ordinarily warranted simply because a trial court applies an incorrect legal standard, see id., relief pursuant to Rule 60(b)(1) is warranted where the trial court inadvertently overlooks some controlling principle of law or factual evidence presented to it. Harrison v. Byrd, 765 F.2d 501, 503 (5th Cir. 1985).
In its October 1, 2003, opinion, the bankruptcy court acknowledged that the Administrative Claim and proof of claim numbers 34 and 37 were, in fact, based upon the same tax liability and that it had "ignored the clear impact the substantive finding as to Proof of Claim Nos. 34 and 37 had on the validity of the Administrative Claim and that the resulting rulings as to these matters are inconsistent."
Oct. 1 Reas., at 4.
The LDR does not dispute that the Administrative Claim is a claim for the same type of taxes sought in claims 34 and 37, i.e., lease tax with respect to WAP Agreements. Nevertheless, seizing on the bankruptcy court's oversight in allowing the Administrative Claim purely on timeliness grounds, the LDR argues that even if there is no substantive validity to its claim, the bankruptcy court abused its discretion by disallowing the Administrative Claim on that ground because JCC failed to file a motion for leave to supplement its original objection in violation of Fed.R.Bankr.P. 7015.
According to the LDR, the only bases for JCC's original objection to the Administrative Claim were that it was not timely filed and it was not properly supported with documentation. Therefore, it reasons that JCC's supplemental objection, which specifically argued that the WAP Agreements were non-taxable service contracts, raised a "new" defense. It argues that because JCC filed its supplemental objection without first filing a motion for leave to supplement the original objection, in contravention of Fed.R.Bankr.P. 7015, the bankruptcy court was precluded from considering JCC's substantive objection to tax liability in connection with the Administrative Claim. The LDR's theory fails because it is not supported by the law or by the record.
The LDR also argues that JCC failed to timely file its supplemental objection pursuant to the provisions of the bankruptcy plan. However, the plan is not included in the LDR's designation of record on appeal. As stated by the Fifth Circuit, an appellant has "the burden of ensuring that the record on appeal include[s] all of the items relevant and necessary to its position." Ichinose v. Homer Nat'l Bank (In re Ichinose), 946 F.2d 1169, 1174 (5th Cir. 1991) (noting that the district court correctly ruled on the record before it and stating that an appellant "cannot complain of the absence of relevant [documents] when it failed to submit a designation of additional items to be included in the record on appeal"). Therefore, the Court will not address the LDR's argument based on the provisions of the plan.
The filing of an objection to a proof of claim initiates a contested matter "unless the objection is joined with a counterclaim asking for the kind of relief specified in Bankruptcy Rule 7001." Simmons v. Savell (In re Simmons), 765 F.2d 547, 552 (5th Cir. 1985); see I.R.S. v. Taylor (In re Taylor), 132 F.3d 256, 260 (5th Cir. 1998). If an objection is joined with a counterclaim seeking the type of relief specified in Bankruptcy Rule 7001, "it becomes an adversary proceeding under Rule 3007 and is governed by the procedures set out in Part VII of the Bankruptcy Rules." In re Simmons, 765 F.2d at 552 n. 5. Bankruptcy Rule 7015, a rule contained within Part VII of the bankruptcy rules, provides that Fed.R.Civ.P. 15 "applies in adversary proceedings."
Neither party contends that JCC's objection was joined with such a counterclaim.
Pursuant to Fed.R.Bankr.P. 7001, "[a]n adversary proceeding is governed by the rules of this Part VII.
Fed.R.Civ.P. 15 provides in pertinent part:
(a) Amendments. A party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served or, if the pleading is one to which no responsive pleading is permitted and the action has not been placed upon the trial calendar, the party may so amend it at any time within 20 days after it is served. Otherwise a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.
. . .
(d) Supplemental Pleadings. Upon motion of a party the court may, upon reasonable notice and upon such terms as are just, permit the party to serve a supplemental pleading setting forth transactions or occurrences or events which have happened since the date of the pleading sought to be supplemented. Permission may be granted even though the original pleading is defective in its statement of a claim for relief or defense. If the court deems it advisable that the adverse party plead to the supplemental pleading, it shall so order, specifying the time therefore.
In contrast, Bankruptcy Rule 9014 governs contested matters "not otherwise governed" by the bankruptcy rules. Fed.R.Bankr.P. 9014; In re Simmons, 765 F.2d at 552. Bankruptcy Rule 9014 provides that, in addition to specifically enumerated Part VII rules not relevant in this case, a bankruptcy court "may at any stage in a particular matter direct that one or more of the other rules in Part VII shall apply." Although some courts have applied Rule 7015 in the context of adjudicating objections to a proof of claim in non-adversary proceedings when both parties have invoked and relied on the rule, see e.g., In re Enjet, 220 B.R. 312, 314 (E.D.La. 1998), there is no requirement that the bankruptcy court must do so when, as in the present case, neither party has relied on the rule throughout the litigation of an objection to a proof of claim.
Additionally, apart from Rule 7015, a bankruptcy court may allow an amendment to a proof of claim pursuant to its equitable jurisdiction. In re Kolstad, 928 F.2d at 175; United States v. Johnson, 267 B.R. 717, 721 (N.D.Tex. 2001). As noted by the Fifth Circuit:
The leading Fifth Circuit case on allowance of amendments to proofs of claim is In re Kolstad, 928 F.2d 171 (5th Cir.) cert. denied 502 U.S. 958, 112 S. Ct. 419, 116 L. Ed.2d 439 (1991). In Kolstad, we explained that "[a]mendments to timely creditor proofs of claim have been liberally permitted to 'cure a defect in the claim as originally filed, to describe the claim with greater particularity or to plead a new theory of recovery on the facts set forth in the original claim.'" Id. at 175 (quoting In re Int'l Horizons, Inc., 751 F.2d 1213, 1216 (11th Cir. 1985)). However, "courts that authorize amendments must ensure that corrections or adjustments do not set forth wholly new grounds of liability." Kolstad, 928 F.2d at 175.In re Waindel, 65 F.3d 1307, 1311-1312 (5th Cir. 1995). In Kolstad, the Fifth Circuit stated that a determination whether to allow an amendment generally involves two questions: (1) whether the claimant was attempting to assert a "new" claim that could not have been foreseen from the earlier claim; and (2) the amount of prejudice, if any, caused by the delay. In re Kolstad, 928 F.2d at 176 n. 7.
Although this case involves an amendment to an objection to a proof of claim rather than an amendment to a proof of claim, the Court is comfortable finding that the Kolstad principles are relevant in this case.
The bankruptcy court concluded that it was not required to apply Bankruptcy Rule 7015, that JCC had not attempted to raise a wholly "new" objection in its supplemental objection, and that it would allow JCC's supplemental objection under its equitable jurisdiction. Further, because the JCC was not liable for the taxes sought in the LDR's Administrative Claim, the court held that the issue of whether that claim should be allowed on procedural grounds was moot.
Oct. 1 Reas., at 5-6.
This Court find no abuse of discretion. JCC's original objection stated that, in addition to objecting to the Administrative Claim based upon timeliness and a lack of documentary support, the "JCC denies any liability for the taxes sought." The supplemental objection merely stated with more particularity the precise legal basis for the objection. Moreover, this Court does not find that the LDR was prejudiced by the bankruptcy court's consideration of the supplemental objection. Both parties submitted multiple memoranda of fact and law to the bankruptcy court addressing whether the WAP Agreements constituted taxable leases. Significantly, in its brief submitted to the bankruptcy court, the LDR clearly recognized that the validity of the Administrative Claim depended upon a finding that the WAP Agreements were taxable leases. It was not until the bankruptcy court found against the LDR that it raised any issue with respect to the bankruptcy court's ability to consider JCC's supplemental objection as it related to the Administrative Claim. Because the bankruptcy court had found that the LDR could not, in fact, collect the taxes sought in the Administrative Claim, the bankruptcy court did not abuse its discretion by correcting its August 4, 2003, order and disallowing the Administrative Claim.
JCC Supp. Obj. at ¶ 9(b).
See LDR Supp. Mem., p. 35-36. The LDR states: "Upon finding that the contracts between Jazz Casino and IGT constituted a taxable lease transaction, the next question for the Court's consideration is the proper treatment of the Department's administrative claim."
For the same reasons, even had the bankruptcy court concluded that Fed.R.Civ.P. 15 applied, this Court would not find any abuse of discretion in the bankruptcy court's decision to correct its August 4, 2003, order and disallow the Administrative Claim. Rule 15(b) provides in pertinent part, "[w]hen issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings." Fed.R.Civ.P. 15(b). Applying Rule 15(b), the Fifth Circuit has held that even if a party fails to raise an affirmative defense in an operative pleading, an issue is tried by express or implied consent when the issue has been raised at a "pragmatically sufficient time," the opposing party has not been prejudiced in opposing the defense, and the opposing party has actively sought to defeat the defense on the merits without raising any objection to the assertion of the defense. See Lafreniere Park Foundation v. Broussard, 221 F.3d 804, 808 (5th Cir. 2000).
The issue of whether the WAP Agreements were taxable leases was unquestionably one of the central issues in the bankruptcy proceeding. Moreover, the LDR does not dispute that the Administrative Claim seeks to impose lease tax on those agreements. As noted above, both parties submitted multiple memoranda of law addressing the taxability of the WAP Agreements and the LDR never objected to JCC's liability defense with respect to the Administrative Claim prior to the bankruptcy court's consideration of the issue. Given these circumstances, the validity of the taxes sought in the Administrative Claim was tried by either express or implied consent even if JCC's supplemental objection were entirely disregarded.
Because this Court finds no error in the bankruptcy court's October 1, 2003, order, this Court need not reach the issue of whether the bankruptcy court properly allowed the LDR to file its Administrative Claim late on the basis of excusable neglect. As the bankruptcy court properly concluded, because the WAP Agreements are not taxable leases, its holding with respect to the timeliness of the Administrative Claim is moot.
III. Conclusion
Accordingly, for the above and foregoing reasons, the order of the bankruptcy court entered August 4, 2003, disallowing claim number 37 in part, and the order of the bankruptcy court entered October 1, 2003, disallowing the Administrative Claim, are hereby AFFIRMED. Judgment shall be entered in favor of appellees, Jazz Casino Company, L.L.C. and J.C.C. Holding Company, DISMISSING the appeal filed on behalf of appellant, the Louisiana Department of Revenue.
The consolidated cross-appeal, filed on behalf of Jazz Casino Company, L.L.C., is DISMISSED AS MOOT.