Cal. Franchise Tax Bd. v. Wilshire Courtyard (In re Wilshire Courtyard)
| Decision Date | 07 April 2015 |
| Docket Number | BAP No. CC-10-1275-SaPaKi |
| Parties | In re: WILSHIRE COURTYARD, Debtor, CALIFORNIA FRANCHISE TAX BOARD, Appellant v. WILSHIRE COURTYARD; JEROME H. SNYDER GROUP I, LTD.; LEWIS P. GEYSER REVOCABLE TRUST; GEYSER CHILDREN'S TRUST, FBO JENNIFER GEYSER, LEWIS P. GEYSER, TRUSTEE; WENDY K. SNYDER; JEROME H. SNYDER; GEYSER CHILDREN'S TRUST, FBO DANIEL GEYSER, LEWIS P. GEYSER, TRUSTEE; RUSSELL & RUTH KUBOVEC, DECEASED, KUBOVEC FAMILY TRUST, RITA FARMER, TRUSTEE; WILLIAM N. SNYDER; JOAN SNYDER; GEYSER CHILDREN'S TRUST, FBO DOUGLAS GEISER, LEWIS P. GEYSER, TRUSTEE; LON J. SNYDER; SNYDER CHILDREN'S TRUST, FBO WILLIAM N. SNYDER, LEWIS P. GEYSER, TRUSTEE, Appellees. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
NOT FOR PUBLICATION
MEMORANDUM1Argued and Submitted on July 25, 2014 at Pasadena, California
Appeal from the United States Bankruptcy Court for the Central District of California
2
Appearances: Lisa W. Chao appeared for Appellant California Franchise Tax Board; Kenneth John Shaffer of Quinn Emmanuel Urquhart & Sullivan, LLP appeared for Appellees Wilshire Courtyard, Jerome H. Snyder Group I, Ltd., Lewis P. Geyser Revocable Trust, Wendy K. Snyder, Jerome H. Snyder, Geyser Children's Trust, FBO Jennifer Geyser, Lewis P. Geyser, Trustee, Geyser Children's Trust, FBO Daniel Geyser, Lewis P. Geyser, Trustee, Russell & Ruth Kubovec, Deceased, Kubovec Family Trust, Rita Farmer, Trustee, William N. Snyder, Joan Snyder, Geyser Children's Trust, FBO Douglas Geyser, Lewis P. Geyser, Trustee, Lon J. Snyder and Snyder Children's Trust, FBO William N. Snyder, Lewis P. Geyser, Trustee.
Before: SARGIS,3 PAPPAS, and KIRSCHER, Bankruptcy Judges.
The parties to this bankruptcy case, and the appeals arising therefrom, survived the real estate crash of the late 1990s, the Y2K "disaster" with the turning of the Millennium, and the real estate implosion of the 2000s, all while fighting over the effect of the April 1998 confirmation of a chapter 11 plan. The complexities of the arguments have increased and the reasons for supporting or rejecting the reasoning of the bankruptcy court have grown. In considering the appeal, this Panel returns to the basics of what was actually decided by the bankruptcy court, the evidence presented, arguments of the parties, and the plain language of the Bankruptcy and Internal Revenue Codes.
For the issues presented on appeal, the ruling of thebankruptcy court that the order confirming the chapter 11 plan determined whether the plan provided for a sale of property is REVERSED. Based upon this Panel's de novo review of the summary judgment, the decision of the bankruptcy court granting summary judgment is AFFIRMED.
This is the second time that the appeal of the bankruptcy court's order at issue has been before this Panel. Previously, this Panel considered whether proper post-confirmation jurisdiction existed for determination of the underlying issues. Concluding that such post-confirmation jurisdiction did not exist, this Panel reversed and ordered that the matter be remanded with instructions to dismiss. In re Wilshire Courtyard, 459 B.R. 416, (9th Cir. BAP 2011).
The Ninth Circuit Court of Appeals reversed, concluding that post-confirmation jurisdiction existed, and remanded to this Panel for further proceedings. Wilshire Courtyard v. Cal. Franchise Tax Bd. (In re Wilshire Courtyard), 729 F.3d 1270 (9th Cir. 2013) ("Wilshire I").
This dispute began when Wilshire Courtyard, a California general partnership, ("Debtor"), filed a chapter 11 bankruptcy case on January 8, 1997 ("Wilshire Bankruptcy Case"). Debtor developed and owned two commercial complexes on Wilshire Boulevard in Los Angeles containing almost a million square feet of rental office space (the "Property"). The lender holding the debt secured by the first position lien on the Property ("SeniorSecured Claim") was Continental Bank, N.A., which secured claim subsequently came to be held by the successor "Senior Secured Creditors" in the Wilshire Bankruptcy Case. Various other entities held subordinated secured debt. Early in the Wilshire Bankruptcy Case, Continental was acquired by Bank of America, N.A. ("BofA"). BofA served as the loan servicer and trustee for the Senior Secured Creditors in the Wilshire Bankruptcy Case. Debtor's total secured debt aggregated almost $350 million. After Debtor defaulted on the Senior Secured Claim in July 1996, and a foreclosure sale was scheduled for January 9, 1997, Debtor filed its chapter 11 bankruptcy petition.
Appellant California Franchise Tax Board ("CFTB") was listed in the creditor mailing matrix filed by Debtor in the Wilshire Bankruptcy Case. Though CFTB received notice of the commencement of the case, CFTB did not file a proof of claim, did not assert any other claim, did not oppose the chapter 11 Plan, and did not otherwise investigate or participate in the Wilshire Bankruptcy Case.
The Senior Secured Creditors, Debtor, and the Debtor's partners ("Partners") negotiated the terms of a joint, consensual chapter 11 plan of reorganization ("Joint Plan"). Under the terms of the Joint Plan, the Debtor was restructured from a California general partnership to a Delaware limited liability company — Wilshire Courtyard, LLC ("Wilshire LLC"). After confirmation, Wilshire LLC continued to own and operate the Property. Under the terms of the Joint Plan, Wilshire LLC arranged for a new, nonrecourse loan for approximately $100,000,000, secured by afirst deed of trust on the Property ("New Secured Financing").
For their part in the reorganization through the Joint Plan, the Senior Secured Creditors agreed to contribute $23,000,000 to Wilshire, LLC, and to release the balance of their secured indebtedness, in part, for receipt of the New Secured Financing proceeds. Additionally, the Senior Secured Creditors acquired a 99% ownership interest in the reorganized Wilshire LLC. For the Partners, confirmation resulted in their receipt of the remaining 1% interest in Wilshire LLC. In addition, the Partners also received approximately $3,500,000 in cash, and a $450,000 loan from the Senior Secured Creditors' entity created to acquire their 99% interest in Wilshire LLC. Other creditors holding the junior secured claim ("Co-Investors"), agreed to accept a $2,500,000 payment on their $221,000,000 secured claim, and to forgive the balance of the claim. Administrative expenses and general unsecured claims totaling around $900,000 were paid in full through the Joint Plan. These transactions in the Joint Plan by which Wilshire LLC became the successor to the Debtor, the New Secured Financing obtained, claims paid, and the releases granted are referred to as the "Transaction."
Debtor's Second Amended Disclosure Statement was approved by the bankruptcy court on February 19, 1998. Notice of the confirmation hearing for the Joint Plan was sent by Debtor to interested parties in the Wilshire Bankruptcy Case on February 12, 1998. However, CFTB was neither served with a copy of the proposed plan nor given notice of the confirmation hearing.
After the confirmation hearing, the bankruptcy court entered an Order Confirming the Joint Plan of Reorganization on April 14,1998 ("Confirmation Order"). CFTB acknowledges that it received the "Notice of Order Confirming Chapter 11 Plan" from the Clerk of the bankruptcy court. The Notice stated in relevant part that, This Confirmation Order is the epicenter from which the present dispute emanates.
The Joint Plan having been confirmed, the Wilshire Bankruptcy Case was closed on October 22, 1998. Wilshire LLC contends, and CFTB has not effectively disputed, that the confirmed plan was implemented and consummated. The restructure of the Debtor was accomplished, the Transaction was implemented and the Joint Plan was completed, and Wilshire LLC became the successor to the Debtor.
After confirmation and consummation of the Joint Plan, the Partners reported approximately $208,000,000 in aggregate cancellation of debt income ("CODI") on their individual 1998 California state tax returns. On November 15, 2002, CFTB sent Wilshire LLC and the Partners an "Audit Issue Presentation Sheet" ("AIPS"). The AIPS informed them that CFTB challenged the Partners' characterization of the tax consequences of the Transaction affected by the confirmed Joint Plan as CODI. Rather than $208,000,000 in CODI, CFTB argued that the Partners should have reported approximately $231,000,000 in capital gain income arising from the Transaction. CFTB contends that the treatment of the Senior Secured Creditors' Claim and the Co-Investors' Claim and interests under the Joint Plan constituted a disguised sale ofthe Property. Based on the AIPS, CFTB issued notices of proposed assessments to the Partners on June 15, 2004, totaling approximately $13,000,000 in unpaid income taxes.
The Partners disputed CFTB's assertion that the Transaction resulted in income to the Debtor and the Partners. Over the next five years, CFTB and the Partners engaged in several California state administrative hearings relating to this dispute.
On May 27, 2009, the dispute shifted from the state administrative proceedings back to the bankruptcy court. Wilshire LLC filed an ex parte motion to reopen the Wilshire Bankruptcy Case. Wilshire LLC argued that through the AIPS and the continuing administrative hearings, CFTB was attempting to collaterally attack the Confirmation Order and Joint Plan by recharacterizing the terms of the Joint Plan as effecting a disguised sale...
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