In re: Wilshire Courtyard, No. 11-60065 (9th Cir. 2013)
Annotate this CaseThis case concerned the California Franchise Tax Board's wish to assess $13 million in unpaid income taxes on the individual partners of a general partnership that owned the property at issue, the Wilshire Courtyard. At issue on appeal was whether the bankruptcy court had jurisdiction to reopen the bankruptcy proceeding where the partnership was reorganized into a limited liability company. The court concluded that the bankruptcy court had neither "arising under" nor "arising in" subject matter jurisdiction over the present dispute; the bankruptcy court did, however, have "related to" jurisdiction over the present dispute; and bankruptcy court jurisdiction did not violate the Tax Injunction Act, 28 U.S.C. 1341. Accordingly, the court reversed the bankruptcy appellate panel's judgment and remanded for further proceedings.
Court Description: Bankruptcy. 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.
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