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Opinions – 8/14/13: 4th U.S. Circuit Court of Appeals

Bankruptcy Law

Preference avoidance 

BOTTOM LINE: Chapter 11 litigation trustee for estate of debtor company was not entitled to avoid and recover premium payments that debtor company transferred to its insurer’s managing general underwriter, which later transferred them to the insurer, because underwriter was a mere conduit for the premium payments, and a party cannot be both a mere conduit and an entity for whose benefit a transfer was made.

CASE: In Re: Railworks Corporation. Guttman v. Construction Program Group, No. 13-1931 (decided July 28, 2014) (Judges Keenan, FLOYD & Cogburn (Sitting by Designation)). RecordFax No. 14-0728-60, 14 pages.

COUNSEL: Annapoorni Sankaran, Greenberg Traurig, LLP, Houston, TX, for Appellant. Zvi Guttman, Law Offices of Zvi Guttman, PA, Baltimore, MD, for Appellee.

FACTS: On September 20, 2001, Railworks Corporation filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. TIG Insurance Company provided general liability, automobile, and workers’ compensation insurance to Railworks. Construction Program Group (“CPG”) was TIG’s managing general underwriter.

Before CPG became TIG’s managing general underwriter, Sherwood Insurance Services and TIG entered into a General Agency Agreement, with an effective date of December 15, 1996, in which Sherwood agreed to provide to TIG its expertise in soliciting, developing, marketing, underwriting, and issuing contracts of insurance. The Agreement provided that Sherwood would collect, receive, and account for the premiums on the insurance policies. Because CPG at some point became Sherwood’s successor in interest, the relationship that previously existed between Sherwood and TIG became one between CPG and TIG, with the Agreement continuing to define the relationship between the two parties.

Zvi Guttman, the Chapter 11 Litigation Trustee for the estate of Railworks Corporation, subsequently filed a complaint seeking to avoid and recover premium payments that Railworks transferred to CPG during the 90 days preceding the filing of the Chapter 11 bankruptcy petition. The parties later filed cross-motions for summary judgment. The bankruptcy court denied Guttman’s motion for summary judgment and granted CPG’s motion, which had the effect of not allowing Guttman to avoid and recover the premium payments that Railworks transferred to CPG during the 90 days before Railworks’ filing for bankruptcy.

On appeal, the district court vacated and remanded the bankruptcy court’s judgment. CPG appealed to the 4th Circuit, which reversed the district court’s decision and remanded with instructions to reinstate the bankruptcy court’s judgment.

LAW: Two bankruptcy statutes were at play in this appeal: the preference avoidance statute, 11 U.S.C. §547, and the recovery statute, 11 U.S.C. §550. Section 547 defines certain transfers that were made out of the debtor’s estate before the filing of the bankruptcy petition as “preferences” and allows the trustee to avoid them. Vogel v. Russell Transfer, Inc., 852 F.2d 797, 798 (4th Cir. 1988). A preference is a transfer that enables a creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer had not been made and he had participated in the distribution of the assets of the bankrupt estate. See Union Bank v. Wolas, 502 U.S. 151, 160-61 (1991).

Under §547(b), there are six elements that must be proved in order for a transfer to be set aside as preferential. The transfer must have been: (1) of an interest of the debtor in property; (2) to or for the benefit of a creditor; (3) for or on account of an antecedent debt owed by the debtor before the transfer was made; (4) made while the debtor was insolvent; (5) made on or within ninety days of the filing of the bankruptcy petition; and (6) it must enable the creditor to receive a greater percentage of its claim than it would under the normal distributive provisions in a liquidation case under the Bankruptcy Code. Morrison v. Champion Credit Corp. (In re Barefoot), 952 F.2d 795, 798 (4th Cir. 1991). As set forth in §550(a)(1), to the extent that a transfer is avoided under §547, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from the initial transferee of such transfer or the entity for whose benefit such transfer was made. 11 U.S.C. §550(a)(1).

The Bankruptcy Code does not define the term “initial transferee.” Under the applicable “dominion and control,” an initial transferee must: (1) have legal dominion and control over the property; and (2) exercise this legal dominion and control. Grayson Consulting, Inc. v. Wachovia Sec., LLC (In re Derivium Capital LLC), 716 F.3d 355, 362 (4th Cir. 2013). A party cannot be an initial transferee if he is a “mere conduit” for the party who had a direct business relationship with the debtor. In re Se. Hotel Props. Ltd. P’ship, 99 F.3d 151, 155–56 (4th Cir. 1996).

In the present case, it was undisputed that under the terms of the Agreement, CPG was a “mere conduit” for TIG. The Agreement created an express trust, with CPG as trustee in favor of TIG. Therefore, while CPG had physical control over the transfers it received, it did not have the legal right to use them as it pleased. Instead, the Agreement mandated that CPG, the agent, hold the funds in trust for TIG, the principal.

Consequently, because CPG was unquestionably a mere conduit for the premium payments between Railworks and TIG, and a party cannot be both a mere conduit and an entity for whose benefit a transfer was made, Guttman was unable to recover the premium payment transfers under §550. As such, the bankruptcy court’s decision granting summary judgment to CPG was correct.

Accordingly, the district court’s decision was reversed and remanded with instructions to reinstate the bankruptcy court’s judgment.

Health Care

Affordable Care Act 

BOTTOM LINE: The Internal Revenue Service’s final rule implementing the premium tax credit provision of the Affordable Care Act, interpreting the ACA as authorizing the IRS to grant tax credits to individuals who purchase health insurance on both state-run insurance “Exchanges” and federally-facilitated “Exchanges,” was a permissible construction of ambiguous statutory language and was therefore a permissible exercise of the agency’s discretion.

CASE: King, Hurst, Levy, Luck v. Burwell, et al., No. 14-1158 (decided July 22, 2014) (Judges GREGORY, Thacker & Davis). RecordFax No. 14-0722-60, 46 pages.

COUNSEL: Michael Carvin, Jones Day, Washington, for Appellants. Stuart Delery, United States Department of Justice, Washington, for Appellees. Stuart Raphael, Office of the Attorney General of Virginia, Richmond, VA, for Amicus Commonwealth of Virginia.

FACTS: The plaintiffs, Virginia residents who did not want to purchase comprehensive health insurance, brought this suit challenging the validity of an Internal Revenue Service final rule implementing the premium tax credit provision of the Patient Protection and Affordable Care Act (“ACA”). The final rule interpreted the ACA as authorizing the IRS to grant tax credits to individuals who purchase health insurance on both state-run insurance “Exchanges” and federally-facilitated “Exchanges” created and operated by the Department of Health and Human Services (“HHS”). The plaintiffs contended that the IRS’s interpretation was contrary to the language of the statute, which, they asserted, authorized tax credits only for individuals who purchased insurance on state-run Exchanges.

Virginia has declined to establish a state-run Exchange and is therefore served by the prominent federally-facilitated Exchange known as HealthCare.gov. Without the premium tax credits, the plaintiffs would be exempt from the individual mandate under the unaffordability exemption. With the credits, however, the reduced costs of the policies available to the plaintiffs subjected them to the minimum coverage penalty. According to the plaintiffs, as a result of the IRS Rule, they would incur some financial cost because they would be forced either to purchase insurance or pay the individual mandate penalty. The plaintiffs’ complaint alleged that the IRS Rule exceeded the agency’s statutory authority, was arbitrary and capricious, and was contrary to law in violation of the Administrative Procedure Act (“APA”), 5 U.S.C. §706.

The district court disagreed, finding that the statute as a whole clearly evinced Congress’s intent to make the tax credits available nationwide. The district court granted the defendants’ motion to dismiss.

The plaintiffs appealed to the 4th Circuit, which affirmed.

LAW: The plaintiffs faced a direct financial burden in that they were forced either to purchase insurance or pay the penalty: a concrete economic injury directly traceable to the IRS Rule. That harm was actual or imminent, and was directly traceable to the IRS Rule. As such, the plaintiffs had standing to present their claims.

Because this case concerned a challenge to an agency’s construction of a statute, it was necessary to apply the two-step analytic framework set forth in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). First, a court looks to the “plain meaning” of the statute to determine if the regulation responds to it. Chevron, 467 U.S. at 842-43. If it does, that is the end of the inquiry and the regulation stands. Id. However, if the statute is susceptible to multiple interpretations, the court then moves to the second step and defers to the agency’s interpretation so long as it is based on a permissible construction of the statute. Id. at 843.

The statute in question here, 26 U.S.C. §36B provides that the premium assistance amount is the sum of the monthly premium assistance amounts for all “coverage months” for which the taxpayer is covered during a year. A “coverage month” is one in which the taxpayer is covered by a qualified health plan enrolled in through an Exchange established by the State under §1311 of the Act. 26 U.S.C. §36B(b)(2)(A). Similarly, the statute calculates an individual’s tax credit by totaling the “premium assistance amounts” for all “coverage months” in a given year. Id. §36B(b)(1). The “premium assistance amount” is based in part on the cost of the monthly premium for the health plan that the taxpayer purchased “through an Exchange established by the State under §1311. Id. §36B(b)(2).

Based solely on the language and context of the most relevant statutory provisions, it could not be said that Congress’s intent was so clear and unambiguous as to foreclose any other interpretation. Grapevine Imports, Ltd. v. United States, 636 F.3d 1367, 1377 (Fed. Cir. 2011). Both parties offered reasonable arguments and counterarguments that made discerning Congress’s intent difficult. Simply put, the statute was ambiguous and subject to at least two different interpretations. As such, it was necessary to move to Chevron’s second step, asking whether the agency’s action is based on a permissible construction of the statute. Chevron, 467 U.S. at 843.

Given the importance of the tax credits to the overall statutory scheme, it was reasonable to assume that Congress created the ambiguity in this case with at least some degree of intentionality. See City of Arlington v. F.C.C., 133 S. Ct. 1863, 1868 (2013). Certainly, the Act was intended as a major overhaul of the nation’s entire health insurance market. See Nat’l Fed’n of Indep. Bus. v. Sebelius, 132 S. Ct. 2566, 2580 (2012). With only 16 state-run Exchanges currently in place, the economic framework supporting the Act would crumble if the credits were unavailable on federal Exchanges. Confronted with the Act’s ambiguity, the IRS crafted a rule ensuring the credits’ broad availability and furthering the goals of the law. The IRS Rule was a permissible construction of the statutory language. In the face of this permissible construction, deference to the IRS Rule was required. See Scialabba v. Cuellar de Osorio, No. 12-930, 573 U.S. ___, ___, slip op. at 14 (June 9, 2014).

Accordingly, the judgment of the district court was affirmed.

Immigration Law

Special rule cancellation of removal 

BOTTOM LINE: Where the only credible evidence showed that applicant for “special rule” cancellation of removal under the Nicaraguan Adjustment and Central American Relief Act was first seen by a border patrol agent 17 miles from the U.S. border and was taken into custody eight miles later, Board of Immigration Appeals erred as a matter of law in finding that applicant failed to prove he was not apprehended at “time of entry.”

CASE: De Leon v. Holder, No. 13-1651 (decided July 30, 2014) (Judges MOTZ & King) (Judge Duncan dissenting). RecordFax No. 14-0730-60, 22 pages.

COUNSEL: Cherylle Corpuz, Cherylle Corpuz, Esq. PC, Philadelphia, PA, for Petitioner. Jeffery Leist, United States Department of Justice, Washington, for Respondent.

FACTS: In 1997, Congress enacted the Nicaraguan Adjustment and Central American Relief Act (“NACARA”) to amend the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (“IIRIRA”). NACARA authorizes individuals from certain countries, including Guatemala, to seek discretionary relief from removal under the more lenient standards that predated IIRIRA. Section 203 of NACARA allows aliens from Guatemala to apply for what is known as “special rule” cancellation of removal.

An applicant for special rule cancellation of removal must satisfy a number of requirements. Only one of one of these was at issue in the present case: the applicant must prove that he was not “apprehended at the time of entry” if he entered the United States on any occasion after December 31, 1990. As defined by the Board of Immigration Appeals, “entry” into the United States for immigration purposes requires: (1) a crossing into the territorial limits of the United States; (2) inspection and admission by an immigration officer or actual and intentional evasion of inspection; and (3) freedom from official restraint.

Oscar De Leon was a Guatemalan national residing in the United States. De Leon first entered the United States illegally with his uncle in 1988, and ultimately settled in Delaware, where he resided with his wife and his three United States-citizen children. In July 2003, a border patrol agent, Galen Huffman, apprehended De Leon north of the Arizona-Mexico border as he returned to the United States from an unauthorized trip to Latin America. Shortly after De Leon’s apprehension by Agent Huffman, immigration officials released him on bond.

In 2005, De Leon submitted an application for special rule cancellation of removal under NACARA, as well as applications for other forms of immigration relief. An immigration judge denied these applications and ordered De Leon removed to Guatemala. The BIA affirmed the IJ’s denial of De Leon’s other applications, but concluded that the IJ provided an improper basis for denying NACARA relief. Accordingly, the BIA remanded the case for the IJ to reconsider whether De Leon qualified for special rule cancellation of removal under NACARA.

The IJ subsequently denied De Leon’s application for special rule cancellation of removal under NACARA and ordered him removed to Guatemala. The BIA affirmed the decision.

De Leon appealed to the 4th Circuit, which granted De Leon’s petition for review and remanded the case to the BIA for further proceedings.

LAW: In order to prove that he was not apprehended at his “time of entry,” De Leon was required to prove: (1) a crossing into United States territory; (2) admission by or evasion from an immigration officer; and (3) freedom from official restraint. De Leon conceded that he entered the United States on July 30, 2003, and that on that day Agent Huffman observed him at a milepost 17 miles north of the border and took him into custody eight miles later. On appeal, he argued that the BIA erred as a matter of law in concluding that he did not enter the country free of official restraint.

Official restraint may take the form of surveillance, unbeknownst to the alien. In re Pierre, 14 I. & N. Dec. 467, 469 (BIA 1973). Thus, De Leon came under restraint as soon as Agent Huffman spotted him at milepost nine, where the BIA found that Agent Huffman “first saw” him and began following him. The BIA did not suggest, let alone find, that before arriving at milepost nine De Leon was under any constraint emanating from the government that would otherwise prevent him from physically passing on. Correa v. Thornburgh, 901 F.2d 1166, 1172 (2d Cir. 1990). Before any government official first observed him, De Leon necessarily enjoyed the “freedom to go at large and mix with the population” unconstrained by government surveillance. Pierre, 14 I. & N. Dec. at 469. He therefore entered free from official restraint.

As such, De Leon did indeed bear the burden of proving that he entered the United States free from official restraint. See Pastora v. Holder, 737 F.3d 902, 905 (4th Cir. 2013). He met that burden by relying on Agent Huffman’s written report, which, the BIA expressly found, constituted the “only credible and reliable evidence” in the record and showed that Agent Huffman “first saw” De Leon at milepost nine, 17 miles beyond the border. Nevertheless, that the government, rather than De Leon, offered this evidence was of no consequence. See United States v. Riley, 363 F.2d 955, 958 (2d Cir. 1966).

For these reasons, De Leon’s petition for review was granted and the case remanded to the BIA to consider De Leon’s application for NACARA relief in light of the proper legal standard.

DISSENT: It was undisputed that De Leon presented no credible evidence to carry his burden of proving freedom from official restraint upon entry into the United States as required by NACARA. 8 U.S.C. §1229a(c)(4). As the BIA explained below, the law required only that De Leon establish the circumstances of his entry into the United States by providing some credible evidence regarding when and how he entered the United States. Because De Leon was not credible, there was only evidence of his apprehension by Agent Huffman. Nothing was known of the circumstances of De Leon’s entry, including whether he was observed by a government official. Without evidence regarding De Leon’s entry, the majority necessarily and without explanation shifted to the government the burden of proving what happened before De Leon was apprehended.