Wilshire Courtyard v. Cal. Franchise Tax Bd.

• Decision Date: 10 September 2013
• Docket Number: No. 11–60065.,11–60065.
• Court: U.S. Court of Appeals — Ninth Circuit
• Parties: In re WILSHIRE COURTYARD, Debtor, 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 Geyser, Lewis P. Geyser, Trustee; Lon J. Snyder; Snyder Children's Trust, FBO William N. Snyder, Lewis P. Geyser, Trustee, Appellants, v. California Franchise Tax Board, Appellee.

729 F.3d 1279

In re WILSHIRE COURTYARD, Debtor,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 Geyser, Lewis P. Geyser, Trustee; Lon J. Snyder; Snyder Children's Trust, FBO William N. Snyder, Lewis P. Geyser, Trustee, Appellants,

v.California Franchise Tax Board, Appellee.

No. 11–60065.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 6, 2013.

Filed Sept. 10, 2013.

Roy T. Englert, Jr. (argued), Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, D.C.; Daniel L. Geyser, McKool Smith, P.C., Dallas, TX; David Gould, Gould & Gould, LLP, Calabasas, CA; Lewis R. Landau, Calabasas, CA; Lewis P. Geyser, Solvang, CA, for Appellants.

Bonnie Holcomb (argued) and Marta L. Smith, Deputy Attorneys General; W. Dean Freeman, Supervising Deputy Attorney General; Paul D. Gifford, Senior Assistant Attorney General; Kamala D. Harris, Attorney General, Los Angeles, CA, for Appellee.

Howard E. Abrams, Atlanta, GA, for Amicus Curiae.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel, Kirscher, Pappas, and Sargis, Bankruptcy Judges, Presiding. BAP No. 10–1275.

Before: DOROTHY W. NELSON and RICHARD A. PAEZ Circuit Judges, and SUZANNE B. CONLON, District Judge.^*

OPINION

PAEZ, Circuit Judge:

Spanning an entire city block on the “Miracle Mile” portion of Wilshire Boulevard in central Los Angeles are two commercial buildings at the center of a fifteen-year-old bankruptcy proceeding, eleven-year-old state tax dispute, and the present case about the scope of a bankruptcy court's post-confirmation subject matter jurisdiction. The buildings were owned by a California general partnership, Wilshire Courtyard, which filed for chapter 11 bankruptcy after defaulting on secured debt. As part of the bankruptcy, the partnership was reorganized into a limited liability company (“LLC”) with a 1% ownership interest in the property, over $200 million of partnership debt was forgiven, and the individual partners reported cancellation of debt income on their tax returns. The California Franchise Tax Board (“CFTB”) now wishes to assess $13 million in unpaid income taxes on the individual partners, characterizing the transaction as a disguised sale and the reported cancellation of debt income as capital gains.

In 2009, the reorganized LLC asked the bankruptcy court to reopen the case to protect the confirmed reorganization plan from CFTB's “collateral attack.” The only question we must decide is whether the bankruptcy court had jurisdiction to reopen the bankruptcy proceeding. We hold that the bankruptcy court had jurisdiction, reverse the Bankruptcy Appellate Panel (“BAP”), and remand for further proceedings.

I. Background

As we do not address the merits of the underlying issue, we present an abridged version of the facts as recounted by the BAP. See CFTB v. Wilshire Courtyard (In re Wilshire Courtyard), 459 B.R. 416, 419–23 (9th Cir. BAP 2011).

A. Events before reopening of the bankruptcy case

Wilshire Courtyard was a California general partnership (“Debtor” or “Wilshire Partnership”) that developed and owned two commercial complexes on Wilshire Boulevard (“the Property”). After defaulting on its financing arrangements concerning the Property, amounting to almost $350 million in secured debt, Debtor filed a chapter 11 bankruptcy petition in July 1997. Id. at 419. CFTB was listed in the creditor's matrix and received initial notice of the commencement of the bankruptcy proceeding. Id. The secured creditors, Debtor, and the individual non-debtor Wilshire partners (“Wilshire Partners”) negotiated a Joint Plan of Reorganization (“Plan”). Id. As relevant here, Debtor was restructured from a California general partnership into a Delaware limited liability company (“Reorganized Wilshire”) that continued to own and operate the Property. Id.¹ The senior secured creditors took a 99% ownership interest in Reorganized Wilshire, with the Wilshire Partners retaining the remaining 1%. Id. The senior secured creditors contributed $23 million to Reorganized Wilshire and released the secured indebtedness in exchange for the receipt of $100 million in new loan proceeds. Id. Debtor's disclosure statement, approved by the bankruptcy court in February 1998, did not address the state tax consequences for the Wilshire Partners and recommended that partners consult their own tax advisors. Id. The bankruptcy court confirmed the Plan on April 14, 1998 (the “Confirmation Order”), and closed the chapter 11 case in October 1998. Id. at 420.

After the Plan was confirmed, the various Wilshire Partners reported approximately $208 million in aggregate cancellation of debt income on their individual 1998 state tax returns. Id. In November 2002, CFTB audited the Wilshire Partnership and challenged the characterization of the tax consequences of the transactions in the Plan as cancellation of debt income. Id. CFTB took the position that the Wilshire Partnership and ultimately the individual partners should have reported $231 million in capital gain income because the Plan had effected a disguised sale of the Property. Id. In June 2004, CFTB issued notices of proposed assessments to individual partners totaling $13 million in unpaid state income taxes. Id. Although Wilshire Partners and CFTB engaged in several rounds of administrative hearings over the next five years, the administrative proceedings were suspended when Reorganized Wilshire sought relief in the bankruptcy court.

B. Bankruptcy court proceedings

In May 2009, Reorganized Wilshire filed a motion to reopen the bankruptcy case, arguing that CFTB was attempting to collaterally attack the confirmed Plan. Id. The bankruptcy court granted the motion, and ordered CFTB to show cause why it should not be held in contempt. Id. at 420–21. The bankruptcy court also ordered that the Wilshire Partners be joined as parties. Id. at 421. Reorganized Wilshire and the Wilshire Partners filed a joint motion for summary judgment asserting that the tax assessment was precluded by the Plan and Confirmation Order. Id. In response, CFTB argued that the bankruptcy court lacked subject matter jurisdiction to rule on the motion. Id.

Following hearings on the order to show cause and summary judgment motion, the bankruptcy court granted summary judgment to Reorganized Wilshire and the Wilshire Partners, and held that the terms of the confirmed plan also applied to the Wilshire Partners. In re Wilshire Courtyard, 437 B.R. 380 (Bankr.C.D.Cal.2010). At the hearing, the bankruptcy court explained that a finding in the 1998 Confirmation Order (“Finding V”) ² meant that the transaction in the plan was not a sale for any purpose, and thus there was no gain to be taxed to the partnership. See459 B.R. at 422. In its written opinion the bankruptcy court held that the “interests of the partners are wholly derivative from the status of the property in the partnership. In consequence, [CFTB] cannot recharacterize the plan transactions at the partner level without recharacterizing them at the partnership level as well.” 437 B.R. at 383.

The bankruptcy court also ruled that it had subject matter jurisdiction for three reasons. Id. at 384. First, the bankruptcy court retained subject matter jurisdiction even post-confirmation because the case involved the interpretation of the confirmed Plan. Id. The bankruptcy court explained that the determination of income at the partnership level “requires interpretation of the plan and confirmation order.” Id. Second, a bankruptcy court retains jurisdiction to interpret and enforce its own orders. Id. Third, CFTB's argument that the court did not have jurisdiction with respect to the non-debtor Wilshire Partners was unavailing because “this case involves income tax attributes at the individual partner level that derive directly from the plan confirmation order.” Id. (citing United States v. Basye, 410 U.S. 441, 448, 93 S.Ct. 1080, 35 L.Ed.2d 412 (1973)).³ CFTB appealed to the BAP.

C. Bankruptcy Appellate Panel proceedings

The BAP reversed the bankruptcy court's jurisdictional ruling. Id. at 424–34. The BAP analyzed each prong of the statute prescribing the bankruptcy's court's jurisdiction, 28 U.S.C. § 1334(b): “the district courts [and by reference pursuant to 28 U.S.C. § 157, the bankruptcy courts] shall have original but not exclusive jurisdiction of all civil proceedings arising undertitle 11, or arising in or related to cases under title 11.” Id. at 424 (emphasis added) (alteration in original).

The BAP reasoned that this case did not meet “arising under” or “arising in” jurisdiction because the right to relief sought in this case is not created by title 11: “No provision of the bankruptcy code dealing with the state tax consequences is at issue, nor were other chapter 11 provisions used by Wilshire in an attempt to restructure the tax consequences of plan confirmation.... [T]his contest is at bottom a tax dispute between the Wilshire Partners and CFTB arising under California state tax law, not the bankruptcy code.” Id. at 425. The BAP also rejected the bankruptcy court's interpretation of Finding V—that no sale had occurred—as a basis for jurisdictionbecause the disclosure statement and Plan made “no mention of the ‘sale/no-sale’ attributes of the property transfers, or of the state tax consequences to the Wilshire Partners.” Id. at 424 n. 11. The BAP interpreted § 1334(b)'s “arising in” provision as referring to causes of action which are not expressly rooted in the bankruptcy code but are “unique” to the bankruptcy process, have no “independent existence” outside of bankruptcy, and which cannot not be brought...