Argued and Submitted March 6, 2013-Pasadena, California
Appeal from the Ninth Circuit Bankruptcy Appellate BAP No. 10-1275 Panel Kirscher, Pappas, and Sargis, Bankruptcy Judges, Presiding
Roy T. Englert, Jr. (argued), Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, D.C.; Daniel L. Geyser, Gibson, Dunn & Crutcher, LLP, Dallas, Texas; David Gould, Gould & Gould, LLP, Calabasas, California; Lewis R. Landau, Calabasas, California; Lewis P. Geyser, Solvang, California, 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, California, for Appellee.
Howard E. Abrams, Atlanta, Georgia, for Amicus Curiae.
Before: Dorothy W. Nelson and Richard A. Paez Circuit Judges, and Suzanne B. Conlon, District Judge.[*]
Reversing the judgment of the Bankruptcy Appellate Panel, the panel held that the bankruptcy court had jurisdiction to reopen a bankruptcy proceeding to consider the tax consequences of the reorganization, pursuant to a chapter 11 plan, of the debtor, a general partnership that owned two commercial buildings in Los Angeles, into a limited liability company with a 1% ownership interest in the property.
As part of the bankruptcy, 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 sought to assess $13 million in unpaid income taxes on the partners, characterizing the transaction as a disguised sale and the reported cancellation of debt income as capital gains. The reorganized LLC asked the bankruptcy court to reopen the case.
The panel agreed with the BAP that the bankruptcy court had neither "arising under" nor "arising in" subject matter jurisdiction over the dispute. But it disagreed with the BAP's holding that the bankruptcy court lacked post-confirmation "related to" jurisdiction. The panel reaffirmed that a "close nexus" exists between a post-confirmation matter and a closed bankruptcy proceeding sufficient to support jurisdiction when that matter affects the "interpretation, implementation, consummation, execution, or administration of the confirmed plan." The panel concluded that the ultimate merits question of the sale/non-sale attributes of the transaction depended in part on interpretation of the confirmed plan and confirmation order. In addition, the parties disputed the distinctly federal question of whether 11 U.S.C. § 346 (preempting state tax law) applies to non-debtor general partners of a debtor partnership that was dissolved as part of the reorganization. The panel also concluded that post-confirmation jurisdiction was consistent with the equitable objectives of the Bankruptcy Code.
Holding that the character of the core transaction of the debtor's bankruptcy was an issue that the bankruptcy court had jurisdiction to decide, the panel remanded the case to the BAP to determine in the first instance whether the bankruptcy court's answer to this question gave due consideration to the "economic realities" of the transaction as structured under the plan and confirmation order.
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.
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 (B.A.P. 9th Cir. 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. 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 ...