California Franchise Tax Bd. v. Courtyard (In re Courtyard)

• Decision Date: 19 September 2011
• Docket Number: Bankruptcy No. LA 97–10771 PC.,BAP No. CC–10–1275–PaKiSa.
• Citation: 55 Bankr.Ct.Dec. 167,2011 Daily Journal D.A.R. 15417,459 B.R. 416,11 Cal. Daily Op. Serv. 12956,161 Lab.Cas. P 82128
• 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: U.S. Bankruptcy Court — Southern District of Iowa

11 Cal. Daily Op. Serv. 12,956

161 Lab.Cas. P 82,128

2011 Daily Journal D.A.R. 15,417

459 B.R. 416

55 Bankr.Ct.Dec. 167

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.

BAP No. CC–10–1275–PaKiSa.

Bankruptcy No. LA 97–10771 PC.

United States Bankruptcy Appellate Panel, of the Ninth Circuit.

Argued and Submitted on May 13, 2011.Decided Sept. 19, 2011.

Appeal from the United States Bankruptcy Court for the Central District of California, Hon. Samuel Bufford, Bankruptcy Judge and Hon. Vincent Zurzolo, Chief Bankruptcy Judge, Presiding.¹Todd M. Bailey, Rancho Cordova, CA, appeared for Appellant California Franchise Tax Board.

Lewis P. Geyser, Solvang, CA, appeared for Appellees 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.

Lewis R. Landau appeared for Appellee Wilshire Courtyard.Before: PAPPAS, KIRSCHER and SARGIS,²Bankruptcy Judges.

OPINION

PAPPAS, Bankruptcy Judge.

In this complicated dispute, the Panel is asked to review the opinions and orders of the bankruptcy court entered in a reopened chapter 11 ³ real estate partnership reorganization case, and in particular, the state tax consequences of confirmation of the debtor's plan for its former partners. While the substantive issues raised in this appeal involve interesting, complex questions about the interplay of bankruptcy and tax law, we may not comment on those issues. Instead, the Panel is compelled to reverse the bankruptcy court's ruling that it had subject matter jurisdiction to adjudicate the issues in this contest, to vacate the orders of the bankruptcy court, and to remand this matter to the bankruptcy court with instructions that it dismiss.

FACTS ⁴

Events Before the Reopening of the Bankruptcy Case.

Wilshire Courtyard (“Wilshire”) was a California general partnership. ⁵ We refer to its general partners, the appellees in this appeal, collectively as the “Wilshire Partners.”

Wilshire began operations in 1984. By 1987, Wilshire had developed and owned two commercial complexes on Wilshire Boulevard in Los Angeles containing almost a million square feet of rental office space (the “Property”).

In 1989, Wilshire entered into several financing agreements concerning the Property. As a result of these transactions, the secured lender holding the first position lien on the Property was Continental Bank, N.A. (“Continental”); various other entities held subordinated secured debt. Wilshire's combined secured debt aggregated almost $350 million. Wilshire defaulted on the Continental loan in July 1996, and Continental scheduled a foreclosure sale for July 9, 1997. In response, Wilshire filed a chapter 11 bankruptcy petition on July 8, 1997.

Appellant California Franchise Tax Board (“CFTB”) was listed in the creditor's matrix filed by Wilshire. CFTB acknowledges that it received the initial notice of the commencement of the case sent out by the clerk of the bankruptcy court. However, for the reasons discussed below, CFTB did not file a proof of claim, assert any other claim, nor otherwise participate in Wilshire's bankruptcy case.

Early in the bankruptcy case, Continental was acquired by Bank of America (“BA”).⁶ BA, Wilshire, and the Wilshire Partners eventually negotiated a joint, consensual plan of reorganization. Under the terms of the joint plan, when it became effective, Wilshire would be restructured from a California general partnership to a Delaware limited liability company. It would continue to own and operate the Property. Wilshire would arrange for a new, nonrecourse loan for $100 million, secured by a first deed of trust on the Property.

For its part in the reorganization, BA agreed to contribute $23 million to the reorganized Wilshire, and to release its secured indebtedness, in exchange for its receipt of the $100 million in new loan proceeds. In consideration of its agreements, BA would receive a 99 percent ownership interest in the reorganized Wilshire; the Wilshire Partners would receive the remaining one percent interest. For giving up almost all of their former equity in the business, the Wilshire Partners would also receive $3.5 million in cash, and a $450,000 loan.

Wilshire's disclosure statement was approved by the bankruptcy court on February 19, 1998. The disclosure statement did not address the state tax consequences for the Wilshire Partners as a result of the transactions proposed in the reorganization plan.

Notice of the confirmation hearing concerning the joint plan was sent by Wilshire to interested parties in the bankruptcy case on February 12, 1998. However, CFTB was not served with a copy of the proposed plan nor given notice of the confirmation hearing.⁷

After the confirmation hearing, the bankruptcy court entered an Order Confirming the Joint Plan of Reorganization on April 14, 1998. CFTB acknowledges that it received the “Notice of Order Confirming [Wilshire's] Chapter 11 Plan” from the clerk of the bankruptcy court, which stated in relevant part that, “Notice is hereby given of the entry of an order of this Court confirming a Plan of Reorganization. A copy of the order and the plan itself are contained in the Court file located at the address listed herein.”

A plan having been confirmed, the Wilshire case was closed by the bankruptcy court in an order entered on October 22, 1998. Wilshire contends, and CFTB has not effectively disputed, that the confirmed plan was implemented and consummated, in that the restructure of the reorganized Wilshire, and the various transfers and transactions contemplated by the confirmed plan, were all completed.

After the plan was confirmed, the various Wilshire Partners reported approximately $208 million in aggregate cancellation of debt income (“CODI”) on their individual 1998 California state tax returns. Then, on November 15, 2002, CFTB sent Wilshire and the Wilshire Partners an “Audit Issue Presentation Sheet” (“AIPS”). The AIPS informed them that CFTB challenged the Wilshire Partners' characterization of the tax consequences of the transactions effected by the confirmed chapter 11 plan as CODI. Rather than $208 million in CODI, CFTB argued that the Wilshire Partners should have reported approximately $231 million in capital gain income arising from the plan transactions, because the treatment of their interests under the plan constituted a disguised sale of the Property. Based on the AIPS, CFTB issued notices of proposed assessments to the Wilshire Partners on June 15, 2004, totaling approximately $13 million in unpaid income taxes.

The Wilshire Partners disputed CFTB's position. Over the next five years, CFTB and The Wilshire Partners engaged in several rounds of administrative hearings relating to this dispute.⁸

Reopening of the Bankruptcy Case.

On May 27, 2009, the contest shifted back to the bankruptcy court. Wilshire filed an ex parte motion to reopen the bankruptcy case. As cause for reopening, Wilshire argued that, through the AIPS and the continuing administrative hearings, CFTB was attempting to collaterally attack the confirmed chapter 11 plan by characterizing its terms as effecting a disguised sale of the Property while, according to the plan, Wilshire had retained ownership of the Property. The bankruptcy court granted the motion and entered an order reopening the bankruptcy case on June 4, 2009.

Wilshire then filed a motion for an Order to Show Cause Re Contempt (“OSC”) on June 23, 2009. The bankruptcy court entered the OSC on August 12, 2009, directing CFTB to appear before the bankruptcy court to show why it should not be held in contempt for collaterally attacking, and by refusing to act in accordance with, the plan and confirmation order.

CFTB responded to the OSC on August 27, 2009, arguing that Wilshire had not given CFTB adequate notice of the terms of the proposed plan, the time for objecting to the plan, or of the confirmation hearing, so CFTB was not bound by the plan and confirmation order; Wilshire lacked standing to prosecute the OSC motion; issuance of a contempt order by the bankruptcy court against CFTB would be fundamentally unfair, because the state tax consequences of the plan terms were never considered, and would have been beyond the authority of the bankruptcy court to determine; and Wilshire was guilty of laches because it had delayed raising these issues in the bankruptcy case for six years.

Wilshire replied on September 9, 2009, arguing that CFTB received adequate notice of the filing of the bankruptcy case and proceedings and entry of the confirmation order; Wilshire had both prudential and constitutional standing to seek enforcement of the confirmation order. CFTB could not prove its affirmative defense of laches.

The bankruptcy court held an initial hearing on the OSC on September 15, 2009. Wilshire and CFTB appeared by counsel; the Wilshire Partners, however, were not represented. After hearing arguments of counsel, the bankruptcy court directed the parties to submit further briefing whether a contempt motion...