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Park Restoration, LLC v. Trustees of Conneaut Lake Park, Inc.

United States District Court, W.D. Pennsylvania

September 24, 2019

PARK RESTORATION, LLC, Appellant
v.
TRUSTEES OF CONNEAUT LAKE PARK, INC., Appellee

          MEMORANDUM OPINION

          SUSAN PARADISE BAXTER UNITED STATES DISTRICT JUDGE

         I. Relevant Factual and Procedural History

         On August 1, 2013, a fire destroyed the Beach Club, a historical property owned by the Trustees of Conneaut Lake Park, Inc. ("Trustees") and managed by Park Restoration, LLC. As a result of the fire, Park Restoration, the Trustees, and four Taxing Authorities asserted competing claims to $611, 000 in insurance proceeds.

         In accordance with state law, the insurer required its insured, Park Restoration, to obtain a certificate from the local municipal treasurer stating whether back taxes were owed on the property.[1] Park Restoration received a certificate showing the Trustees owed $478, 260.75 in delinquent property taxes.[2] These delinquent taxes dated to 1996, well before Park Restoration signed its management agreement with the Trustees in 2008, and the delinquent taxes were owed on the entire 55.33-acre parcel on Conneaut Lake, not just the single acre that included the Beach Club.

         Because of the tax delinquency, the insurer notified Park Restoration that it would transfer $478, 260.75 of the $611, 000 insurance proceeds to the Taxing Authorities. Park Restoration filed a declaratory judgment action in the Court of Common Pleas of Crawford County and the insurer interpleaded the $611, 000 with the state court. The Trustees filed for bankruptcy and the declaratory judgment action was transferred to the United States Bankruptcy Court for the Western District of Pennsylvania.

         In the Bankruptcy Court, Park Restoration argued that 40 Pa. Stat. 638 "applies solely to those situations where the fee owner of the property is insured and where the tax liabilities at issue are the financial responsibility of the owner as well." In re Trustees of Conneaut Lake Park, Inc., 543 F.R.D. 193, 198 (Bankr. W.D. Pa. 2015). The Trustees responded that Park Restoration was not entitled to any of the insurance proceeds because Park Restoration insured the Trustees' property and they sought the remaining insurance proceeds after the Taxing Authorities were compensated.

         The Bankruptcy Court granted partial summary judgment for the Taxing Authorities and Park Restoration holding that under § 638 the Taxing Authorities had a right to full payment of the delinquent taxes ($478, 260.75), and that Park Restoration, as the named insured, was entitled to the balance of the insurance proceeds.

         Park Restoration and the Trustees filed cross-appeals to the United States District Court for the Western District of Pennsylvania. Park Restoration argued, for the first time, that because the insured property constituted only 9% of the tax value of the 55.33-acre parcel, Park Restoration's insurance proceeds should apply pro rata to the tax debt. It also argued that anything more would be an unconstitutional taking under both the Pennsylvania and U.S. Constitutions. Meanwhile, the Trustees claimed entitlement to the balance of the insurance proceeds because they owned the Beach Club. The District Court affirmed the Bankruptcy Court's summary judgment for Park Restoration as against the Trustees, but reversed the Bankruptcy Court's summary judgment for the Taxing Authorities as against Park Restoration. In re Trustees of Conneaut Lake Park Inc., 551 B.R. 577, 584-85 (W.D. Pa. 2016).

         The Taxing Authorities appealed the District Court's judgment to the Third Circuit which reversed the District Court holding that "without a legally cognizable property interest [in the insurance proceeds], Park Restoration [had] no cognizable takings claim." In re Trustees of Conneaut Lake Park Inc., 855 F.3d 519, 526 (3d Cir. 2017).[3]

         The Bankruptcy Court confirmed the Trustees' plan of reorganization.[4] ECF No. 7, Appendix at page 0262. The plan provided that the Taxing Authorities' claim was to be paid in full, using in part, the insurance proceeds.[5]

         Then, Park Restoration initiated this adversary proceeding in the Bankruptcy Court arguing that because $478, 260.75 of the insurance proceeds was paid to the Taxing Authorities on account of the Secured Tax Claims, Park Restoration may now step into the shoes of the Taxing Authorities and seek payment from the Trustees through 11 U.S.C. § 509. In response to the subrogation claim, the Trustees moved to dismiss arguing, inter alia, that Park Restoration failed to state a claim because it did not meet the technical requirements of § 509. After a detailed analysis, the Bankruptcy Court dismissed the complaint holding that Park Restoration failed to state a claim for subrogation as contemplated by § 509.[6] ECF No. 7, Appendix at pages 0064-0089.

         Pending here is Park Restoration's appeal from the September 29, 2018 Bankruptcy Court order dismissing the amended complaint at Adversary Proceeding No. 18-1024 with prejudice. The parties agree that the issue here is whether the Bankruptcy Court erred in finding that Park Restoration failed to state a claim for subrogation under the Bankruptcy Code.

         II. Standard of Review

         This Court has jurisdiction over the appeal under 28 U.S.C. § 158 and ...


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