Fleetboston Financial Corporation v. Advanta Corp., 03-0220 (2003)

Citation: Not availableDocket: C.A. No. PB 03-0220

Court: Superior Court of Rhode Island; August 13, 2003; Rhode Island; State Appellate Court

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The Court is considering Defendants' Motion to Dismiss the First Amended Complaint for Declaratory Judgment filed by FleetBoston Financial Corp and its affiliates against Advanta Corp and its related entities. The case is based on the Rhode Island Uniform Declaratory Judgments Act and seeks judicial declarations regarding indemnification provisions in a Limited Partnership Agreement. 

Specifically, Fleet requests a declaration that Advanta must indemnify it for tax-related damages arising from income recognized due to assets contributed by Advanta to Fleet Credit Card Services, L.P. Additionally, Fleet seeks a declaration that Advanta is not entitled to indemnification for damages stemming from alleged violations of the agreement by Fleet. A third count in the complaint is now moot.

The underlying facts involve Fleet’s 1998 acquisition of Advanta's consumer credit card business, structured as a limited partnership where Advanta contributed approximately $12 billion in credit card receivables and held a 1.3% partnership interest, while Fleet held 98.7%. Fleet claims it entered this arrangement with a tax indemnification provision to protect against adverse tax consequences. The partnership reported a significant bad debt deduction on its federal tax return, which Fleet asserts was improperly treated by Advanta, who claimed a deduction on its corporate tax returns without notifying Fleet, thereby violating the partnership agreement's dispute resolution clause.

In 2001, the IRS audited both the Partnership and Advanta concerning a bad debt deduction, disallowing $508 million of the $800 million claimed by the Partnership on its 1998 tax return through a 60-day letter, and issuing a 30-day letter to Advanta disallowing the same deduction. This action aimed to prevent inconsistent claims regarding the same transaction. The IRS also assessed a taxable gain of $47.4 million from the Partnership’s sale of its interest in the Royal Bank of Scotland Joint Venture, proposing that this gain should be allocated to Advanta, a determination which the Partnership, through Fleet, agreed to. The tax issues remain unresolved and are pending appeal with the IRS Office of Appeals, potentially leading to litigation in Tax Court.

The current case involves demands for indemnification from Advanta under the Limited Partnership Agreement, as well as a counter-demand from Advanta based on a narrower indemnification provision tied to the IRS's treatment of the joint venture sale. Additionally, other disputes related to the Limited Partnership Agreement have been litigated in the Delaware Court of Chancery. 

Advanta contends that the case is not ripe for adjudication, arguing that there is no justiciable controversy until a final determination on the tax issues is made, essentially claiming that the Court is being asked for an advisory opinion, which is not within its jurisdiction. Conversely, Fleet asserts that there is a real and present controversy suitable for declaratory judgment under the Uniform Declaratory Judgments Act in Rhode Island, arguing that the issues raised do not constitute an advisory opinion but a legitimate legal conflict requiring resolution. The Court has considered extensive oral arguments and written briefs to reach its determination.

The Superior Court has jurisdiction to declare rights and legal relations. Advanta's motion, although labeled as a motion to dismiss, does not specify the applicable subsection of the Superior Court Rule of Civil Procedure 12(b). It is inferred that the motion may be under Rule 12(b)(1), questioning the court's subject matter jurisdiction, but the statute precludes a successful motion on that basis. The Court interprets the complaint as seeking Declaratory Relief, not Advisory Relief. Advanta's likely assertion falls under Rule 12(b)(6), claiming the Amended Complaint fails to state a claim for relief, relying on Sullivan v. Chafee, which necessitates an "actual justiciable controversy." Advanta contends that previous cases indicate a lack of justiciable controversy when claims are unripe and abstract, particularly if they rely on future events. The Rhode Island Uniform Declaratory Judgments Act allows for contract construction before a breach, but there is little case law interpreting this section. The Court identifies a real controversy arising on January 7, 2003, when Advanta rejected a demand for indemnification, solidified by Advanta's subsequent demand on January 8. The key issue is whether a justiciable controversy exists between the parties or if a resolution awaits further determinations by the IRS or other competent authority regarding the tax implications involved.

The parties agree that a resolution regarding the right to contract indemnification is contingent on the outcome of a lengthy tax dispute with the Internal Revenue Service. Fleet seeks to proceed with its action, citing Section 2 of the Uniform Declaratory Judgments Act (UDJA), which allows individuals with a contractual interest to seek judicial clarification of their rights. Fleet emphasizes that Section 3 of the UDJA permits judicial interpretation of contracts before or after a breach. According to Fleet, a ruling on its complaint will clarify the parties' indemnity rights and potentially expedite dispute resolution, as delaying could incur significant costs for Advanta due to the "gross up" provision in their Limited Partnership Agreement.

Fleet contends that Advanta's motion to dismiss under 12(b)(6) should be denied unless it is evident that no facts could support the claim for relief. Fleet argues that the act should be liberally construed, as mandated by the legislature. Advanta counters that indemnification should not be determined until underlying liabilities are established, but Fleet asserts that the IRS's 60-day letter already established its liability. Fleet seeks indemnification for costs incurred, including legal fees, arguing that a genuine dispute over indemnification terms constitutes a justiciable issue.

The Court acknowledges that a declaratory judgment is an appropriate means for a party to clarify its contractual obligations regarding defense or indemnification. It sees no material difference between Fleet seeking a determination of its indemnity rights and other parties seeking similar clarifications. The Court notes that a controversy is justiciable if sufficient facts are presented to support a conceivable legal claim for relief.

Fleet argues that resolving the pending tax issues with the Internal Revenue Service will clarify the amount of indemnification owed, asserting that a factual basis already exists for such indemnification. Consequently, the court finds that a legitimate case and controversy exists, leading to the denial of the Motion to Dismiss under Rule 12(b)(6). This decision does not address the merits of the underlying issues nor does it imply any exercise of the Court's authority under Section 6 of the Act regarding declaratory judgments. Counsel for the prevailing parties is instructed to draft an order reflecting this decision, to be settled with notice to Advanta's counsel. Additionally, Advanta's withdrawal of its demand to represent the Partnership on February 24, 2003, has rendered Count III in the First Amended Complaint moot.