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A district court lacked jurisdiction to declare that the receiver in the Credit Bancorp scandal could favor the interests of the investment firm’s customers over tax debts owed the federal government, the 2nd U.S. Circuit Court of Appeals ruled Thursday. Finding that the government had not waived its sovereign immunity, the 2nd Circuit also ruled that the lower court did not have the power to declare that receiver Carl H. Loewenson Jr. would incur no personal liability for tax debts of Bancorp or the receivership under the Federal Debt Priority Statute, 31 U.S.C. � 3713(b). The ruling in Securities and Exchange Commission v. Credit Bancorp, Ltd., 01-6158 was the latest in a case brought by the Securities and Exchange Commission alleging the investment firm ran a huge Ponzi scheme by persuading investors to transfer cash and securities so the firm could engage in what was billed as “riskless arbitrage.” Second Circuit Senior Judge Amalya Kearse said that while the firm “promised to pay customers dividends based on the value of the unencumbered assets transferred by the customer,” and did pay some dividends, it paid them “only out of deposits it received from the other customers.” The result, she said, was that more than 200 customers lost tens of millions of dollars. Following the filing of the SEC’s suit, Southern District of New York Judge Robert W. Sweet froze Bancorp’s assets and appointed Loewenson, an attorney with Morrison & Foerster’s New York office, as receiver. In November 2000, Loewenson asked Sweet for a declaration that Credit Bancorp’s “customers have priority over the United States … for payment from the customer-deposited assets,” as well as the proceeds from those assets and cash receipts from the receivership. The attorney also asked the judge to find that the receiver had “discharged his obligations pursuant” to the debt priority statute. The statute gives the government priority, in some circumstances, over other claimants as to payments of debts, including taxes, that are owed by an insolvent debtor. It also holds representatives of an estate liable for the unpaid claims of the government. Loewenson and the government eventually signed a stipulation concerning Credit Bancorp’s tax liability for the period up to Loewenson’s appointment, and Sweet went on to approve of Loewenson’s plan. A later agreement was reached between the government and Loewenson in which the government pledged not to seek a federal tax lien on some assets, but reserved the right to seek a lien on other assets. However, with government still insisting it had not waived its sovereign immunity, Loewenson then renewed his request for a declaration from Sweet, arguing that the assets obtained by the receivership should be considered part of a constructive trust and could not be used to satisfy the company’s tax liabilities. Sweet issued the declaration, finding that the government had waived immunity under 28 U.S.C. � 2410(a)(1), a Judicial Code provision that permits certain actions “to quiet title to … real or personal property on which the United States has or claims a mortgage or other lien.” Judge Sweet found that while the section “does not constitute a waiver with respect to challenges to the merits of the federal government’s tax assessment or lien,” it does constitute a waiver “with respect to disputes concerning the priority of competing liens.” Moreover, he said, “suits to determine lien priority under the quiet title provision of Section 2410 are not barred by the Declaratory Judgment or Anti-Injunction Acts.” On the appeal, Judge Kearse said that while the Declaratory Judgment Act, 28 U.S.C. � 2201(a), waives the sovereign immunity of the United States for some actions, “it explicitly excludes from that waiver the power to declare rights or obligations with respect to federal taxes.” Therefore, she said, the act “deprived the district court of the power to grant the declarations sought by the receiver.” Kearse then said that very same “absence of power is reflected in the Anti-Injunction Act,” 26 U.S.C. � 7421(a), which states that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” “Although the district court’s order in the present case is not in the form of an injunction, there can be no doubt that the purpose of the Receiver’s Priority Declaration Motion was to preclude any possibility of the Government’s collection of taxes out of specified Bancorp property or from the Receiver,” she said. Kearse then rejected the receiver’s argument that the assets were being held in constructive trust. Concerning Judge Sweet’s view of the debt priority statute, Kearse said Congress did not intend “that either a refusal by the United States to disavow the possibility that it may have a lien in the future after tax liability is determined, or a refusal to forgo the priority for debts to the United States …,” in the statute, constitute a “claim of lien such as to waive the government’s sovereign immunity.” Foreclosing the government’s right to assert a lien, she said, “imperils the government’s tax revenues in precisely the way the Anti-Injunction Act is meant to foreclose … .” Chief Judge John M. Walker Jr. and Judge Jon O. Newman joined in the opinion. Assistant U.S. Attorneys Edward Chang and Jeffrey Oestericher represented the government. Charles L. Kerr, Oliver Metzger, Andrew J. Fields, Nancy R. Thomas and Eleonore Dailly of Morrison & Foerster represented Loewenson, who also argued the case.

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