IN THE COURT OF APPEALS OF OHIO
TENTH APPELLATE DISTRICT
American Home Products Corporation,
:
nka Wyeth, as successor in interest to
A.H. Robins Company, Incorporated,
:
Appellants-Appellants,
:
No. 02AP-759
v.
:
(B.T.A. No. 97-T-1215)
Roger W. Tracy,
:
(REGULAR CALENDAR)
Appellee-Appellee.
:
D E C I S I O N
Rendered on March 27, 2003
Baker & Hostetler, LLP, Edward J. Bernert and Elizabeth A.
McNellie; Jeffrey T. Ferriell and Kevin H. Giordano, for
appellants.
Jim Petro, Attorney General, and Richard C. Farrin, for
appellee.
APPEAL from the Ohio Board of Tax Appeals.
DESHLER, J.
{¶1}
Appellant American Home Products Corporation, nka W yeth, ("AHP")
appeals from a decision of the Ohio Board of Tax Ap peals ("BTA") which sustained a
determination by appellee Roger W. Tracy, the Ohio Tax Commissioner, denying part of
a corporate franchise tax refund claimed by one of
AHP's subsidiaries, A.H. Robins
Company, Inc. ("Robins II"). Robins II is the succe ssor pursuant to bankruptcy
No. 02AP-759
2
reorganization proceedings to the original A.H. Rob ins Company, hereinafter referred to
as "Robins I." The partial denial of the refund so ught by AHP and its subsidiaries was
based on a denial by the commissioner of a carry-fo rward net operating loss ("NOL") for
the last year of business for Robins I.
{¶2}
Robins II was incorporated as a wholly-owned subsid iary of AHP for the
purpose of undertaking the acquisition by AHP of th e assets of Robins I, a manufacturer
of prescription drugs and over-the-counter medicati ons. Robins I, which was apparently
an otherwise successful ongoing concern, was forced to seek reorganization under
Chapter 11 of the United States Bankruptcy Code bec ause of thousands of product
liability lawsuits arising from its manufacture and distribution of an intra-uterine birth
control device known as the Dalkon Shield. The pet ition for bankruptcy was filed in
1985 in the United States Bankruptcy Court for the
Eastern District of Virginia,
Richmond Division. Because of the multiplicity of i ssues engendered by the Dalkon
Shield tort litigation, the district court retained its original jurisdiction and the matter was
heard before a district court judge and bankruptcy judge concurrently. Three years after
the petition was filed, the court approved the sixt h and final proposed reorganization
plan. In re A.H. Robins (E.D.Va. 1988), 88 B.R. 742, aff'd. sub nom; Menard-Sanford v.
Mabey (C.A.4, 1989), 880 F.2d 694, cert. denied, and
Menard-Sanford v. A.H. Robins
(1989), 493 U.S. 959, 110 S.Ct. 376. The principa l aspect of this plan was to create a
claimants' trust that would be used to pay the prod uct liability claims in the Dalkon
Shield litigation. The other ongoing businesses of
Robins I were acquired by AHP
through Robins II, by means of a merger of the two
companies. The acquisition price
included stock and a large cash payment that was us ed to partially fund the claimants'
trust. With the exchange of stock on the effective
date of merger of December 15,
1989, Robins I ceased to exist and Robins II carrie d on the surviving aspects of the
business, free from further liability for the Dalko n Shield claims.
{¶3}
The order entered by the bankruptcy court approving the reorganization
plan provided that all assets of Robins I would be
transferred to Robins II. It did not
specifically mention NOL's as assets to which Robin s II would succeed, although the
No. 02AP-759
3
bankruptcy court in later proceedings indicated tha t the property transferred to Robins II
would include "such rights to use and benefit from
the NOL as Robins I would have
had." In re A.H Robins Co. (E.D.Va. 1999), 235 B.R. 406, 408. None of the ord ers
entered by the bankruptcy court identified the year s or specified the amounts of such
NOL's to which Robins II would succeed.
{¶4}
For purposes of the present case, it is important t o note that the state of
Ohio, as a creditor of Robins I, was fully notified
of the proceedings in the bankruptcy
court and given the opportunity to participate in h earings and bring objections to the
reorganization plan ultimately adopted. The record
reflects that the state filed no
objections to the plan and did not join in subseque nt appeals from the bankruptcy
court's order brought by various other parties to t he proceedings.
{¶5}
Robins II and other AHP subsidiaries subsequently a ttempted to claim a
deduction for Ohio franchise tax purposes for NOL's incurred by Robins I in prior years.
The tax commissioner allowed some NOL carry forward , but disallowed those portions
of the NOL based on losses incurred by Robins I dur ing the period of January 1, 1989
through the termination of the corporation on Decem ber 15, 1989. The commissioner
based this denial on the fact that, Robins I having
merged out of existence on
December 15, 1989, was not a "taxpayer" as defined
under Ohio franchise tax law for
the 1990 tax year. Because Robins I was not a "tax payer" during the 1990 tax year, it
could not record an NOL for the preceding year that
could be transferred to, and
claimed by, Robins II in subsequent years.
{¶6}
Believing that the commissioner's order contradicte d the terms of the
reorganization plan approved by the bankruptcy cour t, AHP twice sought an order from
the bankruptcy court under that court's continuing jurisdiction to interpret the approved
plan of reorganization. The state of Ohio and the
state of New Jersey, which had also
denied an NOL carryover under state tax law grounds , filed motions to dismiss on the
basis that the federal judiciary, including the ban kruptcy court, was barred by the
Eleventh Amendment to the United States Constitutio n from exercising jurisdiction over
the matter:
No. 02AP-759
4
{¶7}
"The judicial power of the United States shall not
be construed to extend
to any suit in law or equity, commenced or prosecut ed against one of the United States
by citizens of another state, or by citizens or sub jects of any foreign state." Eleventh
Amendment, U.S. Constitution.
{¶8}
The bankruptcy court found the Eleventh Amendment a pplicable and
dismissed the motions for lack of jurisdiction. In re A.H. Robins Co. (1989), supra; In re
A.H. Robins Co. (E.D.Va. 2000), 251 B.R. 312. These decisions cont ain some dicta
(some of which we have quoted earlier with respect
to NOL's) from which the parties to
the present appeal draw, not surprisingly, diametri cally opposed inferences.
{¶9}
AHP thereafter appealed the commissioner's decision to the Ohio BTA.
The BTA rendered a decision upholding the commissio ner's determination, and AHP
has timely appealed, bringing the following single assignment of error:
{¶10}
"The Ohio Board of Tax Appeals erred in sustaining
the Tax
Commissioner's decision to assess American Home Pro ducts Corporation, nka Wyeth,
as successor in interest to A.H. Robins Company, In corporated for its use of an Ohio
Net Operating Loss acquired as part of a Bankruptcy
Plan of Reorganization of A.H.
Robins Company."
{¶11}
Several issues are raised under AHP's sole assignme nt of error. First,
AHP asserts that the BTA erred in failing to give r es judicata effect to the bankruptcy
court order approving the reorganization plan, whic h specified that all property of Robins
I (which AHP asserts would include the NOL for 1989 ) would be transferred to Robins II.
AHP also asserts that the BTA erred in failing to a cknowledge that certain bankruptcy
code provisions, particularly 11 U.S. Bankruptcy Co de Section 1123(a), would control
the transfer of property and give the successor ent ity the right to the 1989 NOL,
notwithstanding any Ohio tax law to the contrary.
AHP further asserts that the BTA
erred in finding that Robins I did not posses an NO L for franchise tax purposes for 1989.
{¶12}
Our standard of review upon appeal from the BTA is
simply defined: The
decision of the BTA will be affirmed unless it is f ound to be unreasonable or unlawful.
R.C. 5717.04; Ohio Natl. Bank v. Franklin County Bd. of Revision (Mar. 30, 2001),
No. 02AP-759
5
Franklin App. No. 00AP-1161. If this court finds th e decision of the BTA to be
unreasonable or unlawful, we may reverse the decisi on, or modify it and enter final
judgment in accordance with the modification.
Compuserve, Inc. v. Limbach (1994), 93
Ohio App.3d 777, 782.
{¶13}
APH's first argument asserts that the 1988 bankrupt cy court order
confirmed the plan of reorganization under which al l assets of Robins I, including the
NOL, would be transferred to Robins II, and that pr inciples of res judicata, specifically
the doctrine of collateral estoppel, should bar any attempt by the commissioner "from
challenging the transfer of this asset." (Appellant 's brief. at 13.)
{¶14}
The term res judicata encompasses both the doctrine s of claim preclusion
and issue preclusion. It is the latter which is at
issue in this case. Issue preclusion, or
collateral estoppel, precludes the re-litigation of matters in a subsequent proceeding
between the parties to a prior action or those in p rivity with them. Whitehead v. Genl.
Tel. Co. (1969), 20 Ohio St.2d 108, paragraph one of the syl labus. This bar upon re-
litigation applies even to instances in which a par ty is prepared to present new evidence
or new causes of action not presented in the first
action, or to seek remedies or forms of
relief not sought in the first action.
Grava v. Parkman Twp. (1995), 73 Ohio St.3d 379,
383:
{¶15}
"A valid, final judgment rendered upon the merits b ars all subsequent
actions based upon any claim arising out of the tra nsaction or occurrence that was the
subject matter of the previous action. (Paragraph t wo of the syllabus of Norwood v.
McDonald [1943], 142 Ohio St. 299, 27 O.O. 240, 52 N.E.2d 6 7, overruled; paragraph
two of the syllabus of Whitehead v. Gen. Tel Co. [1969], 20 Ohio St.2d 108, 49 O.O.2d
435, 254 N.E.2d 10, overruled to the extent inconsi stent herewith; paragraph one of the
syllabus of Norwood, supra, and paragraph one of the syllabus of
Whitehead, supra,
modified; 1 Restatement of the Law 2d, Judgments [1 982], Sections 24-25, approved
and adopted.)" Id., syllabus.
{¶16}
This bar on re-litigation, of course, applies eve n where the initial litigation
forum was in federal court and subsequent litigatio n was undertaken in state court:
No. 02AP-759
6
{¶17}
"A claim litigated to finality in the United States
district court cannot be
relitigated in a state court when the state claim i nvolves the identical subject matter
previously litigated in the federal court, and ther e is present no issue of party or privity."
Rogers v. Whitehall (1986), 25 Ohio St.3d 67, syllabus.
{¶18}
We must note, however, that the Ohio Supreme Court has not completely
abandoned, despite the broadened scope of collatera l estoppel enunciated in Grava, all
exceptions to the general rule of issue preclusion.
Grava specifically relied on the
restatement, which itself contains exceptions that were noted by the supreme court in a
subsequent decision:
{¶19}
"[R]ecognized exceptions to the general rule of issue preclusion apply
to the case at bar. Specifically, 1 Restatement of
the Law 2d, Judgments (1980) 273-
274, Section 28, states:
{¶20}
" 'Although an issue is actually litigated and dete rmined by a valid and final
judgment, and the determination is essential to the judgment, relitigation of the issue in
a subsequent action between the parties is not prec luded in the following
circumstances:
{¶21}
"* * *
{¶22}
"(5) There is a clear and convincing need for a new
determination of the
issue (a) because of the potential adverse impact o f the determination on the public
interest or the interests of persons not themselves
parties in the initial action, (b)
because it was not sufficiently foreseeable at the time of the initial action that the issue
would arise in the context of a subsequent action,
or (c) because the party sought to be
precluded, as a result of the conduct of his advers ary or other special circumstances,
did not have an adequate opportunity or incentive t o obtain a full and fair adjudication in
the initial action.' " State v. Williams (1996), 76 Ohio St.3d 290, 295.
{¶23}
Keeping in mind that under Williams and Grava there will subsist many
possible circumstances in which claim preclusion wi ll not apply to issues not fully
litigated or specifically passed upon in a prior ac tion, and even those that were fully
passed upon, we recognize that the scope of claim p reclusion is particularly difficult to
No. 02AP-759
7
establish where the initial proceeding took place i n federal bankruptcy court, because of
the extraordinarily wide scope of issues typically presented in bankruptcy proceedings.
This proposition was noted in the case of Eastern Minerals v. Mahan (2000), 225 F.3d
330:
{¶24}
"A bankruptcy case is not a discrete lawsuit. It i s commenced by the filing
of a petition for relief, which then provides a for um in which any number of adversary
proceedings, contested matters, and claims will be litigated. Claim preclusion only bars
claims arising from the same cause of action previo usly raised, not every conceivable
claim that could have been brought in the context o f a bankruptcy case over which the
court would have had jurisdiction. * * * Claim prec lusion would have a broad scope
indeed if it barred every claim over which a bankru ptcy court might have had
jurisdiction." Id. at 337, and fn.12.
{¶25}
In the present case, the principal order of the ban kruptcy court confirming
the reorganization clearly contemplated the transfe r of all assets of Robins I, including
any NOL carryover to which Robins I would be entitl ed to Robins II. The BTA's
determination, however, was not that there was a ba r to transfer of the NOL, as
appellant's brief seems to assert, but, rather, tha t no NOL could be claimed by Robins I
for 1989, based upon termination of the corporation on December 15, 1989, and thus
there was no NOL to which the successor corporation
could succeed. As the BTA
pointed out, the commissioner allowed Robins II a d eduction for carry forward NOL's for
taxable years prior to 1989 and only disallowed the NOL carryover for 1989 itself.
{¶26}
We agree with the BTA that, while the right to tran sfer any NOL to which
Robins I was entitled is implicit in the confirmed
reorganization plan, the existence and
amount of an NOL for each of the various years invo lved is not set forth in the
bankruptcy court order, and must be defined under s tate law. While Robins II clearly
retained "such rights to use and benefit from the N OL as Robins I would have had," as
the bankruptcy court stated in its 1999 decision on
motions, this language is equally
supportive of the converse proposition that Robins
II could not succeed to any NOL
rights which Robins I did not possess.
No. 02AP-759
8
{¶27}
"Property interests are created and defined by stat e law. Unless some
federal interest requires a different result, there is no reason why such interests should
be analyzed differently simply because an intereste d party is involved in a bankruptcy
proceeding. Uniform treatment of property interest s by both state and federal courts
within a State serves to reduce uncertainty, to dis courage forum shopping, and to
prevent a party from receiving 'a windfall merely b y reason of the happenstance of
bankruptcy.' " Butner v. United States (1979), 440 U.S. 48, 54-55, 99 S.Ct. 914.
{¶28}
Butner has been widely relied upon, albeit with differing results depending
on the facts and local law, in subsequent cases inv olving interpretation of bankruptcy
court orders. See, e.g., Abele v. Phoenix Sons Ltd. Partnership (C.A.9, 1995), 73 F.3d
218, 219: "Since the Bankruptcy Code itself does no t determine the existence and
scope of a debtor's interest in property, these thr eshold issues are properly resolved by
reference to state law."
{¶29}
On the facts before us, considering applicable Ohio
tax statutes, the
chronology of proceedings, and the bankruptcy court 's order, we conclude that res
judicata does not bar the Ohio Tax Commissioner fro m making an independent
determination of the tax matters raised and finding under Ohio law that Robins I had no
NOL in 1989 to transfer to Robins II. While the ba nkruptcy court order approved a plan
that provided in general terms that Robins II would
succeed to the assets of Robins I
(which can certainly be assumed to include any NOL
available to Robins I) that order
did not explicitly define the scope of such an NOL.
Pursuant to Butner, we must
assume that the bankruptcy court did not presume to
create a tax benefit to either
Robins I or Robins II that would not have existed u nder Ohio tax law absent the
bankruptcy proceedings, at least not without specif ic delineation of such a benefit to
which the Ohio tax authorities would explicitly hav e consented as parties to the
bankruptcy proceedings. No such specific descriptio n of the NOL exists in the
reorganization plan or the bankruptcy court's 1988 order adopting the plan, and thus the
determination of the availability of an NOL for 198 9 was properly left for determination
by the commissioner.
No. 02AP-759
9
{¶30}
We next examine AHP's contention that the provision s of 11 U.S.
Bankruptcy Code Section 1123(a), by operation of th e supremacy clause of the U.S.
Constitution, preempts state taxation law and entit les AHP to the NOL carryover from
1989. The relevant provisions of that section of t he bankruptcy code state as follows:
{¶31}
"Notwithstanding any otherwise applicable nonbankru ptcy law, a plan
shall--
{¶32}
"(1) designate, subject to section 1122 of this tit le, classes of claims, other
than claims of a kind specified in section 507(a)(1 ), 507(a)(2), or 507(a)(8) of this title,
and classes of interests;
{¶33}
"(2) specify any class of claims or interests that
is not impaired under the
plan;
{¶34}
"(3) specify the treatment of any class of claims o r interests that is
impaired under the plan;
{¶35}
"(4) provide the same treatment for each claim or i nterest of a particular
class, unless the holder of a particular claim or i nterest agrees to a less favorable
treatment of such particular claim or interest;
{¶36}
"(5) provide adequate means for the plan's implemen tation, such as--
{¶37}
"(A) retention by the debtor of all or any part of
the property of the estate;
{¶38}
"(B) transfer of all or any part of the property of
the estate to one or more
entities, whether organized before or after the con firmation of such plan;
{¶39}
"(C) merger or consolidation of the debtor with one or more persons;
{¶40}
"(D) sale of all or any part of the property of the
estate, either subject to or
free of any lien, or the distribution of all or any
part of the property of the estate among
those having an interest in such property of the es tate[.] * * *"
{¶41}
AHP does not directly attack the BTA's interpretati on of Ohio's statutory
tax scheme under which the commissioner determined that neither Robins I nor Robins
II was entitled to an NOL carryover based on losses
incurred by Robins I in 1989. We
will therefore not undertake a complete reiteration of Ohio's governing franchise tax
statutes. In brief, pursuant to R.C. 5733.04(E), t he Ohio NOL deduction is permitted
No. 02AP-759
10
only for a taxpayer's allocated and apportioned los s, as incurred during a taxable year.
R.C. 5733.04 defines the term "taxpayer" and "taxab le year":
{¶42}
"(B) 'Taxpayer' means a corporation subject to the tax imposed by section
5733.06 of the Revised Code.
{¶43}
"* * *
{¶44}
"(E) 'Taxable year' means the period prescribed by division (A) of section
5733.031 of the Revised Code upon the net income of
which the value of the taxpayer's
issued and outstanding shares of stock is determine d under division (B) of section
5733.05 of the Revised Code or the period prescribe d by division (A) of section
5733.031 of the Revised Code that immediately prece des the date as of which the total
value of the corporation is determined under divisi on (A) or (C) of section 5733.05 of the
Revised Code.
{¶45}
"(F) 'Tax year' means the calendar year in and for
which the tax imposed
by section 5733.06 of the Revised Code is required
to be paid."
{¶46}
The income from the proceeding year is used in dete rmining a
corporation's franchise tax, but only if the corpor ation was a "taypayer" as defined under
the statute. If the corporation was not a "taxpaye r" on January 1 of the ensuing tax
year, the proceeding period would not be a "taxable
year" and net income from that
period would not be subject to Ohio franchise tax.
The corollary which applies to the
present case is that, if the corporation is not sub ject to Ohio franchise tax for the
ensuing year, losses from the previous year could n ot be used as a deduction by the
corporation or a successor pursuant to merger.
Gulf Oil Corp. v. Lindley (1980), 61
Ohio St.2d 23, 30-31.
{¶47}
"Had [the subject corporation] existed on January 1, 1975, this accounting
period would have been for the fiscal and taxable y ear ending July 28, 1974. But [the
subject corporation] was not in business on January
1, 1975. Thus the fiscal year
ending July 28, 1974 was not a taxable year for it
under R.C. 5733.04 (i)(1);
consequently, these losses did not occur in a taxab le year and cannot be deducted.
Despite [the subject corporation's] incurring of a
net operating loss, the franchise tax
No. 02AP-759
11
does not recognize the loss as a deduction. Theref ore, neither it nor its successor may
deduct the loss." Litton Industrial Products, Inc. v. Limbach (1991), 58 Ohio St.3d 169,
171.
{¶48}
Similarly, if Robins I had existed on January 1, 19 90 in the present case, it
would have been a taxpayer for the 1990 tax year, a nd the calendar year ending
December 31, 1989, would have been a taxable year f or Robins I. Since, however,
Robins I was not in business on January 1, 1990, Ro bins I was not a taxpayer for the
1990 tax year, and the period of January 1, 1989 to
December 15, 1989, was not a
taxable year for Robins I. Pursuant to Gulf Oil and Litton, the loss incurred during that
period did not occur in a taxable year, and neither
Robins I nor its successor, Robins II,
had a right to deduct the NOL.
{¶49}
Although neither Gulf Oil nor Litton involved a bankruptcy reorganization,
no distinction is made under Ohio tax law regarding
the form of reorganization.
Corporations merged out of existence during the cou rse of the tax year are not
"taxpayers" for franchise tax purposes for losses i ncurred during the year in which the
corporation ceased to exist, and the NOL incurred i n the final year will not be carried
forward.
{¶50}
The only distinction which could be made from a ban kruptcy proceeding,
and the one that is here argued by AHP, is that the
language of 11 U.S. Bankruptcy
Code Section 1123(A), "[n]otwithstanding any otherw ise applicable non-bankruptcy
law," refers to both federal and state law and supe rsedes state tax law in the present
case in permitting continuity of property interests without impairment deriving from the
corporate transition imposed by the reorganization
plan.
The NOL having been
enumerated as property to be transferred to the suc cessor corporation, AHP argues, no
state tax principles that would subject Robins II t o a decrease in the NOL amount
allowed should be permitted. We do not find this a rgument persuasive. There is no
indication that Congress intended the bankruptcy co de to supersede any relevant state
statute which might peripherally be interpreted to conflict with a bankruptcy order, even
where the statute and bankruptcy order could be har monized, as they can in the present
No. 02AP-759
12
case. The holding in Butner is ample support for the concept that "there is no
reason
why [property interests] should be analyzed differe ntly simply because an interested
party is involved in a bankruptcy proceeding."
Butner, at 55. The kind of massive
preemption of all state law regulating property int erests, including tax law, which AHP
advocates, would have imponderable consequences. B y far the better reasoning, as
was adopted by the BTA, is that, while property may
be allocated in a bankruptcy
proceeding, the extent and nature of that property,
unless specifically defined,
enumerated, and stipulated to before the bankruptcy court by interested parties, may
yet be determined under applicable state law. We a ccordingly find that the BTA did not
err in determining the amount of NOL applicable und er state law, and that this
determination did not conflict with applicable prov isions of the federal bankruptcy code.
{¶51}
In summary, we find that the BTA did not err in ref using to give res
judicata effect to the confirming order of the bank ruptcy court; that the BTA did not err in
concluding that applicable federal bankruptcy statu tes did not preempt Ohio tax law on
these facts; and that the BTA did not err in findin g that neither Robins I nor Robins II
was entitled to an NOL to be carried forward from 1 989. The decision of the BTA is
therefore reasonable and lawful, and is affirmed.
Judgment affirmed.
BOWMAN and TYACK, JJ. concur.
____________