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Bennett v. Bascom

United States District Court, E.D. Kentucky, Central Division, Lexington

March 26, 2018

BENJAMIN R. BENNETT, as General Partner, as Limited Partner, and as Executor and Testamentary Trustee of Estate of Duane H. Bennett, Sr., a limited partner and SARAH BENNETT KHAN, a limited partner Petitioners,



         This matter is before the Court on the motions for summary judgment filed by the two intervening petitioners in the matter: the United States of America and Kingdom Energy Resources, LLC. (DE 17, 40.) In addition, before this action was removed, the respondents filed a motion for partial summary judgment in state court, which remains pending.

         I. Background

         The issue on these motions is which group or entity should be awarded a little over $2 million currently being held in escrow pursuant to an order by the Fayette Circuit Court. The dispute over the funds is rooted in the 2006 death of Duane Bennett, Sr., who was the general partner of two limitedpartnerships: Black Star Land & Mining, Ltd. and Manalapan Land Company. The decedent owned a 40 percent partnership interest in each company. The 14 respondents were limited partners of the companies.

         After his death, the IRS assessed federal estate tax liabilities against his estate totaling $2, 783, 848.74 (DE 17-3, Decl.) His estate made some payments to the IRS and the total amount of federal estate tax owed by the estate as of May 1, 2017 was $2, 107, 498.55. (DE 17-3, Decl.) Statutory additions for interest, penalties, and costs continue to accrue on the balance. (DE 17-3, Decl.)

         The IRS recorded Notices of Federal Estate Tax Liens with the Bell and Harlan County Clerks in August 2010 and in May 2016, respectively, and Notices of Federal Tax Liens with the same counties in May 2016. (DE 17-3, Decl.)

         In June 2015, the executor of the estate filed an action in Fayette Circuit Court asking for the appointment of a receiver to wind up the two companies' affairs. (DE 1-1, Petition.) The state court appointed a receiver who located a company that agreed to purchase all of the assets of the limited partnerships. (DE 40-2, Assset Purchase Agreement.) That buyer is one of the intervening petitioners in this matter: Kingdom Energy Resources, LLC.

         Kingdom Energy did not purchase the ownership interests of the general partner or the limited partners. It purchased the assets of the limited partnerships. (DE 40-2, Asset Purchase Agreement.) Each partner was entitled to a portion of the proceeds from the sale of those assets according to the partner's ownership interest. Certain of the limited partners moved the state court to distribute the proceeds of the asset sale to the limited partners according to their proportionate ownership interest in the companies. (DE 16-4 Jt. Mot. at CM-ECF p. 88.)

         Because the decedent owned 40 percent of the companies, his estate under normal conditions would be entitled to 40 percent of the proceeds of the sale. Certain of the limited partners, however, objected to distributing any amounts to the estate, arguing that the estate owed “significant amounts of money in unpaid loans” to both of the limited partnerships “as evidence by each company's corporate records.” (DE 16-4, Response at CM-ECF p. 99.) Specifically, these limited partners asserted that the estate still owed Manalapan $796, 086.19 and that it owed Black Star $1, 515, 581.62 for a total debt of $2, 311, 667.81. (DE 16-4, Response at CM-ECF p. 99.) These limited partners argued that the estate's debt to the partnerships should be deducted or set off against the amounts otherwise due the estate from the sale proceeds. (DE 16-4, Response at CM-ECF p. 100.)

         The state court ordered the receiver to distribute to all of the limited partners except the estate their share of the sale proceeds. (DE 16-4, Order at CM-ECF p. 24.) The court ordered that the estate's share of the sale proceeds should be held in an escrow account maintained by the receiver pending further court orders. (DE 16-4, Order at CM-ECF p. 24.) The amount held in escrow at the time of the briefing on these motions was $2, 117, 525. (DE 17-12, Mot. for Partial Summ. J. at 2.)

         After the parties conducted discovery on the issue, certain of the limited partners argued again in a motion for partial summary judgment filed in state court that, before he died, the decedent borrowed roughly $1 million from each of the two limited liability companies. (DE 17-12, Motion for Partial Summ. J.) These partners asserted that “there is no dispute between the parties that the Estate, but for the setoff, would be entitled to receive 40% of the remaining proceeds from the sale of the assets of the limited partnerships.” (DE 17-12, Motion for Partial Summ. J. at 5.) The limited partners argued, however, that the “partnerships are entitled to a setoff for the full amount of the distribution held in escrow” for the money owed to the partnerships by the estate. (DE 17-12, Mot. at 1, 5.)

         There was a problem, however, with the limited partners' argument. If the estate did owe debts to the limited partnerships as the limited partners contended in their motion for partial summary judgment, there was no dispute that Kingdom Energy bought those loans when it purchased the partnership's assets. (DE 40-2, Asset Purchase Agreement, at CM-ECF p. 178.) Kingdom Energy bought “all of the [partnerships'] assets, rights, obligations, and liabilities.” (DE 40-2, Asset Purchase Agreement, § 2.1.) An exhibit to the agreement makes clear that this includes “[a]ny loans or promissory notes made payable to” the partnerships. (DE 40-2, Asset Purchase Agreement, Ex. B, ¶ 7.)

         Thus, the estate would be required to pay the $2, 311, 667.81 debt to Kingdom Energy and not to the limited partners. As the estate pointed out in its response to the limited partners' motion for partial summary judgment, after the signing of the asset purchase agreement, the limited partnerships no longer had any right to collect on the loans to the decedent. The limited partnerships no longer owned the loans and, thus, could not collect on them. (DE 17-14, Response at 3.).

         Perhaps in recognition of this problem, in their reply brief on the motion for partial summary judgment, the limited partners no longer argue that the roughly $2 million paid by the limited partnerships to the decedent constituted loans. Instead, they argue the payments to the decedent constituted “excessive distributions” to which he was not entitled. The limited partners argue that, in this situation, Kentucky law requires “an equitable true up or offset prior to dissolution” to correct the overpayment to the decedent and to equalize the payments among the limited partners. (DE 17-15, Reply at 3.) In support of that argument, the limited partners cite a Kentucky statute providing that a “limited partnership's obligation to make a distribution is subject to offset for any amount owed to the limited partnership by the partner. . . .” KRS 362.2-507 (emphasis added).

         Before the state court could resolve the issue of whether the estate's share of the sale proceeds should be distributed to the limited partners or to Kingdom Energy, the United States learned of the litigation and moved to intervene, arguing that the estate's share of the sale proceeds should be awarded to it to satisfy the estate's tax liabilities. The United States then removed the action to this Court.

         Accordingly, there is now a little over $2 million being held in escrow pursuant to the state court's orders. Three groups or entities claim a right to it: the limited partners, the United States, and Kingdom Energy.

         No party has filed a motion to remand the action to state court and each party has fully briefed in this Court its claim to the escrowed funds. This Court has jurisdiction of this action under 28 U.S.C. §§ 1442(a)(1), 1444, and 2410(1), (5). See Martinez v. Republic of Cuba, No. 10-22095-CIV, 2010 WL 11451793, at *2 (S.D. Fla. Nov. 19, 2010) (“This Court agrees with the United States that in certain circumstances the federal government, as an intervenor, may remove to federal court because a civil action is essentially brought ‘against' it. As the cases the United States relies upon indicate, such circumstances exist where the United States has a pecuniary, property, or direct interest at risk.”); Marriage of Dyche & Beat v. United States, No. CIV.A. 05-1116-WEB, 2005 WL 1993457, at *3 (D. Kan. Aug. 16, 2005) (finding removal proper under 28 U.S.C. § 1442(a)(1) where the United States moved to intervene in a state-court action to protect its interest in collecting estate taxes).

         II. ...

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