BearingPoint, Inc.

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
_______________________________________
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In re: 	) 	Chapter 11
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BearingPoint, Inc., et al, 	) 	Case No. 09-10691 (REG)
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Debtors. 	) 	Jointly Administered
_______________________________________)
BENCH DECISION ON LIQUIDATING
TRUSTEE’S OBJECTION TO CLAIM NOS. 1019
AND 1076 OF THE MINISTRY OF FINANCE FOR
THE REPUBLIC OF INDONESIA
APPEARANCES:
McKOOL SMITH P.C.
Counsel to the Liquidating Trustee
One Bryant Park, 47th Floor
New York, NY 10036
By: 	Peter S. Goodman, Esq.
600 Travis, Suite 7000
Houston, TX 77002
By: 	Basil A. Umari, Esq. (argued)
Blake H. Bailey, Esq.
MINISTRY OF FINANCE OF THE REPUBLIC OF INDONESIA
Counsel to the Ministry of Finance of the Republic of Indonesia
Gedung Djuanda I, 15th Floor
J1. Wahidin No. 1
Jakarta 10710
By: 	Hana Kartika (argued)
Indra Surya
Astera Primanto Bhakti
R. Fendy Dharma Saputa
Budi Setiabudi.
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ROBERT E. GERBER
UNITED STATES BANKRUPTCY JUDGE
In this contested matter in the chapter 11 cases of the reorganized Debtor
BearingPoint, and its affiliates, Liquidating Trustee John DeGroote moves to disallow
two claims filed by the Republic of Indonesia, in the amounts of approximately $389,000
and $3.5 million, respectively. While the Trustee reserves his rights to object on the
merits of the claims, he bases his objection now on a separate doctrine under U.S. law,
commonly referred to as the “Revenue Rule.”
Because I determine that the Revenue Rule is firmly entrenched in the law of the
Second Circuit, which, of course, is binding upon me as a judge in that Circuit, and
because it does indeed apply as the Trustee contends that it does, the two claims must be
disallowed.
The following are my Findings of Fact and Conclusions of Law in connection
with this determination.
Findings of Fact
As facts I find that the Republic of Indonesia filed two proofs of claim in this
Court, to recover on taxes allegedly owed by BearingPoint subsidiary PT Barents
Indonesia, a nondebtor, to the Republic of Indonesia. I make no finding as to whether or
not those taxes are actually owing by PT Barents, but assume for the purposes of this
analysis that they are.
The Republic of Indonesia asserts (and once more, for the purposes of this
analysis I assume its assertions to be true) that under Indonesia law, the controlling
shareholder of a corporate subsidiary present in Indonesia is responsible for the
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subsidiary’s taxes if they’re not paid by the subsidiary in Indonesia. BearingPoint LLC
owns 99% of the stock of its subsidiary PT Barents Indonesia, which plainly makes it a
majority shareholder. Though I don’t think it matters, I also find that another Debtor in
the chapter 11 cases before me, BearingPoint affiliate Peloton Holdings LLC, holds the
remaining 1%.
Both sides agree that what Indonesia is trying to recover are taxes. They appear
to be wholly or principally a combination of VAT and/or Sales Taxes, and Income Tax,
along with interest on the unpaid sums.
Conclusions of Law
I discuss the law in greater detail than I otherwise might, so that the Republic of
Indonesia can be comfortable that this is not an arbitrary decision.
I assume, without deciding, that at least BearingPoint LLC, and possibly
BearingPoint Inc. and Peloton as well, are liable, under Indonesian law, for the taxes that
PT Barents failed to pay. But the issue, from the perspective of a United States
Bankruptcy Judge sitting in the Second Circuit, is whether under United States law, and
“Revenue Rule” in particular, the Indonesian Government can pursue its claim in the
United States courts.
The Revenue Rule is a longstanding common law doctrine providing that courts
of one sovereign will not enforce final tax judgments or unadjudicated tax claims of other
sovereigns. It has been defended on several grounds, including respect for sovereignty,
concern for judicial role and competence, and separation of powers. See Attorney
General of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 109 (2d Cir.
2001).
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By reason of the RJ Reynolds decision, the Revenue Rule is, of course, fully
binding on me as a judge of a lower court in the Second Circuit. But to the extent it
matters, the rule has been laid down by the United States Supreme Court. See Banco
Nacional de Cuba v. Sabbatino, 376 U.S. 398, 413-14 (1964) (noting the view that many
courts in the United States have adhered to the principle that “a court need not give effect
to the penal or revenue laws of foreign countries”); Oklahoma v. Gulf, Colo. & Santa Fe
Ry. Co., 220 U.S. 290, 299 (1911) (“The rule that the courts of no country execute the
penal laws of another applies not only to prosecutions and sentences for crimes and
misdemeanors, but to all suits in favor of the state for the recovery of pecuniary penalties
for any violation of statutes for the protection of its revenue or other municipal laws, and
to all judgments for such penalties.” (quoting State of Wisconsin v. Pelican Ins. Co., 127
U.S. 265, 291 (1888))); See also United States v. First Nat'l City Bank, 321 F.2d 14, 23-
24 (2d Cir. 1963) (“It has long been a general rule that one sovereignty may not maintain
an action in the courts of another state for the collection of a tax claim.”), rev'd on other
grounds, 379 U.S. 378 (1965).
The RJ Reynolds decision speaks of the historic and jurisprudential underpinnings
of the Revenue Rule, but since the Second Circuit’s decision in that case would be
binding on me no matter how well or poorly its rationale were articulated, I needn’t
repeat that discussion here. Similarly, while if there were a dispute as to the issue, the
U.S. court would have to examine whether the substance of the claim is, either directly or
indirectly, one for tax revenues, see RJ Reynolds, 268 F.3d at 130, I needn’t do so here,
as the fact that we here have claims for taxes is undisputed.
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In its response, the Republic of Indonesia does not challenge the existence of the
Revenue Rule, or its application. Instead, in paragraphs 9, 10 and 12 of its response in
particular, the Republic of Indonesia makes eloquent pleas for fairness. But while I
understand the Republic of Indonesia’s frustration with the impairment of its revenue
collection, and I always try to be fair, I nevertheless am a U.S. judge sworn to apply, as
best I can, U.S. common law as higher courts have established it. The Republic of
Indonesia’s arguments insufficiently recognize that under U.S. law, bankruptcy judges
are not free to decide issues based on personal views of fairness. See e.g., In re
Momentum Mfg. Corp., 25 F.3d 1132, 1136 & n. 4 (2d Cir. 1994) (“It is well settled that
bankruptcy courts are courts of equity, empowered to invoke equitable principles to
achieve fairness and justice in the reorganization process . . . We have repeatedly
emphasized the importance of the bankruptcy court's equitable power.” But “[t]his power
is not unlimited. Thus, a bankruptcy court may not exercise this power in contravention
of provisions of the Code.”); In re Joint Eastern & Southern District Asbestos Litig., 982
F.2d 721, 751 (2d Cir. 1992) (“[A] reorganization is assuredly governed by equitable
considerations, but that guiding principle is not a license to courts to invent remedies that
overstep statutory limitations.”); See also In re Aquatic Dev. Group, Inc., 352 F.3d 671,
680 (2d Cir. 2003) (Straub, J., concurring) (“[T]his Court has repeatedly cautioned that
105(a) ‘does not “authorize the bankruptcy courts to create substantive rights that are
otherwise unavailable under applicable law, or constitute a roving commission to do
equity.” ’ ” (quoting In re Dairy Mart Convenience Store, Inc., 351 F.3d 86 (2d Cir
2003))), and my 2009 decision in General Motors, In re General Motors Corp., 407 B.R.
463, 517 & n. 136 (Bankr. S.D.N.Y. 2009), discussing the authority in this area.
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Rather, bankruptcy judges are constrained by statutory provisions or, as here,
precedent that is binding upon them by higher courts.
I wish to emphasize that this has nothing to do with the fact that the foreign taxing
authority here happens to be the Republic of Indonesia, or the specifics of Indonesia’s tax
regime. It is a rule of general application, which in RJ Reynolds, by way of example, was
applied against the Government of Canada as to taxes not particularly different from
those that many states and municipalities in this country impose.
BearingPoint is to settle an order in accordance with this decision. The time to
appeal from this decision will run from the time of the resulting order, and not from the
date of this decision.
Dated: New York, New York 	s/Robert E. Gerber
November 5, 2010 	United States Bankruptcy Judge
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