Wilshire Courtyard v. California Franchise Tax Board ( 2013 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE: WILSHIRE COURTYARD, No. 11-60065
Debtor,
BAP No.
10-1275
WILSHIRE COURTYARD; JEROME H.
SNYDER GROUP I, LTD.; LEWIS P.
GEYSER REVOCABLE TRUST; OPINION
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.
2 IN RE: WILSHIRE COURTYARD
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Kirscher, Pappas, and Sargis, Bankruptcy Judges, Presiding
Argued and Submitted
March 6, 2013—Pasadena, California
Filed September 10, 2013
Before: Dorothy W. Nelson and Richard A. Paez Circuit
Judges, and Suzanne B. Conlon, District Judge.*
Opinion by Judge Paez
SUMMARY**
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.
*
The Honorable Suzanne B. Conlon, District Judge for the U.S. District
Court for the Northern District of Illinois, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN RE: WILSHIRE COURTYARD 3
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
4 IN RE: WILSHIRE COURTYARD
“economic realities” of the transaction as structured under the
plan and confirmation order.
COUNSEL
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.
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
IN RE: WILSHIRE COURTYARD 5
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 (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
6 IN RE: WILSHIRE COURTYARD
$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
1
According to the order confirming the Plan, “Wilshire Courtyard LLC
and Reorganized Wilshire Courtyard are successors of the debtor for
purposes of Bankruptcy Code sections 1123, 1129, and 1145.”
IN RE: WILSHIRE COURTYARD 7
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
8 IN RE: WILSHIRE COURTYARD
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. See 459 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
2
Finding V in the Confirmation Order reads: “The Joint Plan and the
agreements, settlements, transactions and transfers contemplated thereby
do not provide for, and when consummated will not constitute, the
liquidation of all or substantially all of the property of the Debtor’s Estate
under Bankruptcy Code section 1141(d)(3)(A).” 459 B.R. at 422.
IN RE: WILSHIRE COURTYARD 9
States v. Basye, 410 U.S. 441, 448 (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 under title 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 jurisdiction because the disclosure statement and
Plan made “no mention of the ‘sale/no-sale’ attributes of the
3
The bankruptcy court cited Basye for the proposition that “partnerships
are individual taxable entities and conduits through which taxpaying
obligations pass to individual partners,” and thus that income character
must be determined at the partnership level. 437 B.R. at 384 (citing 410
U.S. at 448).
10 IN RE: WILSHIRE COURTYARD
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 in another forum. Id. at 425 (citing
Battle Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124,
1131 (9th Cir. 2010)).
Turning to “related to” jurisdiction, the BAP held that the
bankruptcy court had misapplied the “close nexus” test when
it concluded that interpretation of the Plan and Confirmation
Order established a sufficiently close nexus for “related to”
jurisdiction. Id. at 427. Rather, the BAP held that a nexus is
sufficiently close to give rise to post-confirmation jurisdiction
only when “the outcome of the issues before the bankruptcy
court . . . potentially impact[s] the debtor, the estate, or the
implementation of the plan of reorganization,” and the tax
consequences for the Wilshire Partners would affect none of
these. Id. at 427, 430.
Finally, the BAP concluded that without any statutory
basis for jurisdiction, the bankruptcy court could not exercise
supplemental jurisdiction under 28 U.S.C. § 1367(a). Id. at
430–31. It also rejected the bankruptcy court’s reliance on
ancillary jurisdiction to “enable [the bankruptcy court] to
vindicate its authority and effectuate its decrees.” Id. at 431.
Once again, the BAP reasoned that the claim here would have
no effect on the reorganized debtor (Reorganized Wilshire) or
the administration of the bankruptcy estate, because the
bankruptcy court’s orders interpreting the Plan “did not act to
preserve a benefit negotiated in the plan or, indeed, have any
effect on the plan of reorganization.” Id. at 431, 434.
IN RE: WILSHIRE COURTYARD 11
Reorganized Wilshire and the Wilshire Partners timely
appealed.
II. Standard of Review
We review de novo questions of subject matter
jurisdiction. Montana v. Goldin (In re Pegasus Gold Corp.),
394 F.3d 1189, 1193 (9th Cir. 2005). The burden of
establishing subject matter jurisdiction rests on the party
asserting that the court has jurisdiction. McNutt v. GM
Acceptance Corp., 298 U.S. 178, 182–83 (1936).
III. Discussion
The resolution of this case turns on a careful parsing of
questions relevant to the jurisdictional issue as distinct from
questions relevant to the merits. To some extent, the two are
intertwined; the dispute ultimately involves difficult
questions about overlapping state tax and federal bankruptcy
laws. See In re Wilshire Courtyard, 459 B.R. at 418.4
Nonetheless, the jurisdictional nexus in this case rests on the
need to interpret the Plan and Confirmation Order to resolve
the merits questions.
4
As we analyze the statutory bases for post-confirmation bankruptcy
court jurisdiction, we bear in mind the “general rule” that “when the
question of jurisdiction and the merits of the action are intertwined,
dismissal for lack of subject matter jurisdiction is improper.” Williston
Basin Interstate Pipeline Co. v. An Exclusive Gas Storage Leasehold &
Easement in the Cloverly Subterranean, Geological Formation, 524 F.3d
1090, 1094 (9th Cir. 2008) (internal alterations and quotation marks
omitted).
12 IN RE: WILSHIRE COURTYARD
A. Statutory jurisdiction
We begin with the statutory scheme. Like all federal
courts, the jurisdiction of the bankruptcy courts is created and
limited by statute. Celotex Corp. v. Edwards, 514 U.S. 300,
307 (1995); In re Ray, 624 F.3d at 1130. Bankruptcy courts
have subject matter jurisdiction over proceedings “arising
under title 11, or arising in or related to cases under title 11.”
28 U.S.C. § 1334(b); see also id. 28 U.S.C. § 157(b)(1).5 We
examine each potential basis below.
1. “Arising under” and “arising in” jurisdiction
We begin where we agree with the BAP: the bankruptcy
court had neither “arising under” nor “arising in” subject
matter jurisdiction over the present dispute.
“Arising under” and “arising in” are terms of art. Harris
v. Wittman (In re Harris), 590 F.3d 730, 737 (9th Cir. 2000).
Proceedings “arising under” title 11 involve causes of action
created or determined by a statutory provision of that title. Id.Similarly, proceedings “arising in” title 11 are not those
created or determined by the bankruptcy code, but which
would have no existence outside of a bankruptcy case.
Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431,
1435–37 (9th Cir. 1995).
The Wilshire Partners argue that the bankruptcy court had
“arising under” subject matter jurisdiction to reopen the case
because the tax dispute is “determined” by 11 U.S.C. § 346.
5
Because we hold that the bankruptcy court had “related to”
jurisdiction, we do not address the parties’ arguments regarding
supplemental or ancillary jurisdiction.
IN RE: WILSHIRE COURTYARD 13
Section 346 preempts state tax law in favor of specific
provisions detailed in several subsections. 11 U.S.C. § 346(a).
The Wilshire Partners argue that § 346(j)(1) determines the
result in the present dispute. The relevant version of that
statute provides:
Except as otherwise provided in this
subsection, income is not realized by the
estate, the debtor, or a successor to the debtor
by reason of forgiveness or discharge of
indebtedness in a case under this title.
Id. § 346(j)(1) (1997).6
The Wilshire Partners’ argument fails because it presumes
the answer to the merits question presented to the bankruptcy
court: whether the disputed transaction was a cancellation of
indebtedness or a disguised sale. For that question, § 346(j)
does not provide the substantive rule of decision. Nor does
that question require “resolution of a substantial question of
bankruptcy law.” See Haw. Airlines, Inc. v. Mesa Air Grp.,
Inc., 355 B.R. 214, 217 (D. Haw. 2006). The merits
question—whether the Plan resulted in a disguised sale or
forgiveness of debt—is one that appears to involve a close
look at the economics of the disputed transaction, which will
warrant analysis of the Plan and Confirmation Order as well
6
The Bankruptcy Abuse Prevention and Consumer Protection Act
(BAPCPA) of 2005 amended 11 U.S.C. § 346(j)(1) to read: “For purposes
of any State or local law imposing a tax on or measured by income,
income is not realized by the estate, the debtor, or a successor to the
debtor by reason of discharge of indebtedness in a case under this title,
except to the extent, if any, that such income is subject to tax under the
Internal Revenue Code of 1986.” We consider only the pre-2005 version
here.
14 IN RE: WILSHIRE COURTYARD
as reference to state and federal tax and partnership law.7 See,
e.g., Comm’r v. Tufts, 461 U.S. 300, 309–10 (1983)
(upholding the Commissioner’s consideration of the
economic realities of disputed transactions, including
consideration of the assumptions behind those transactions);
Frank Lyon Co. v. U.S., 435 U.S. 561, 573 (1978) (“In
applying this doctrine of substance over form, the Court has
looked to the objective economic realities of a transaction
rather than to the particular form the parties employed.”);
Basye, 410 U.S. at 448; 2925 Briarpark, Ltd. v. Comm’r,
163 F.3d 313, 317–19 (5th Cir. 1999) (looking to treasury
regulations, federal income tax law, and the “particular facts”
of the transaction record to characterize whether a partnership
realized “a gain from dealings in property” or cancellation of
indebtedness income). The merits question does not rest on a
substantive provision of the Bankruptcy Code. We decide
here only whether the bankruptcy court has jurisdiction to
resolve the complex merits question.
Wilshire Partners dispute the BAP’s conclusion that “no
provision of the bankruptcy code is at issue” by arguing that
§ 346 was explicitly “at issue” because it “undergirded”
Reorganized Wilshire’s motion to reopen under 11 U.S.C.
7
We do not address whether or not the bankruptcy court’s reliance on
Finding V in the Confirmation Order is sufficient to characterize the
transactions at issue as something other than a sale. Similarly, we decline
to address the Wilshire Partners’ argument that Finding V settles the
matter as to the application of § 346. Resolution of these merits questions
will require interpreting the Plan in conjunction with the Confirmation
Order. Indeed, the Confirmation Order itself states that “to the extent there
is any conflict between the Joint Plan and this Order, this Order shall
control.” On remand, the BAP may consider these issues in the first
instance.
IN RE: WILSHIRE COURTYARD 15
§ 1146(d) (1997).8 Section 1146(d) permits bankruptcy courts
to
authorize the proponent of a plan to request a
determination, limited to questions of law, by
a State or local governmental unit charged
with responsibility for collection or
determination of a tax on or measured by
income, of the tax effects, under section 346
of this title and under the law imposing such
tax, of the plan. In the event of an actual
controversy, the court may declare such
effects after the earlier of (1) the date on
which such governmental unit responds to the
request under this subsection; or (2) 270 days
after such request.
Bankruptcy courts have restricted the post-confirmation
availability of § 1146(d), and we have not addressed the
issue.9 We need not decide the issue here. The § 1146(d)
procedural mechanism for obtaining a determination from a
8
Section 1146(d) was recodified in 2005 as § 1146(b).
9
See, e.g., Kmart Corp. v. Ill. Dep’t of Revenue (In re Kmart Corp.), No.
02 B 02474, 2012 WL 1744708 (Bankr. N.D. Ill. May 15, 2012); Allis-
Chalmers Corp. v. Goldberg (In re Hartman Material Handling Sys.,
Inc.), 141 B.R. 802, 813 n.16 (Bankr. S.D.N.Y. 1992); S. Rep. No. 989,
95th Cong., at 133 (2d Sess. 1978) (“Subsection (d) permits the court to
authorize the proponent of a reorganization plan to request from the
Internal Revenue Service (or State or local tax authority) an advance
ruling on the tax effects of the proposed plan. If a ruling is not obtained
within 270 days after the request was made, or if a ruling is obtained but
the proponent of the plan disagrees with the ruling, the bankruptcy court
may resolve the dispute and determine the tax effects of the proposed
plan.”)
16 IN RE: WILSHIRE COURTYARD
state taxing authority or the IRS of the tax consequences of a
proposed reorganization plan—authorizing the bankruptcy
court to do so only if the taxing authority fails to respond
within 270 days—does not transform § 346(j)(1) into a
substantive right to relief where the relief sought depends on
the characterization of a plan transaction. Section 346(j)
addresses the tax consequence of a transaction once the
definitive character of “forgiveness or discharge of
indebtedness” has been determined. It does not, by itself,
create a right to relief sufficient to establish “arising under”
subject matter jurisdiction when the character of the
transaction is disputed.
The Wilshire Partners do not argue that this case “arises
in” the jurisdiction of the bankruptcy court, and we agree
with the BAP that this case does not present an issue unique
to bankruptcy proceedings “that has no independent existence
outside of bankruptcy and could not be brought in another
forum.” In re Ray, 624 F.3d at 1131. “[T]he fact that a matter
would not have arisen had there not been a bankruptcy case
does not ipso facto mean that the proceeding qualifies as an
‘arising in’ proceeding.” 1-3 Collier on Bankruptcy
¶ 3.01[3][e][iv] (Myron M. Sheinfeld, Fred T. Witt & Milton
B. Hyman, 16th ed. Dec. 2011). Had Wilshire negotiated a
similar deal with its creditors outside of bankruptcy, the same
dispute with CFTB over whether to categorize the income as
cancellation of debt income or capital gains may have arisen.
2. “Related to” jurisdiction
We disagree with the BAP’s holding that the bankruptcy
court did not have “related to” jurisdiction over the present
dispute. “A bankruptcy court’s ‘related to’ jurisdiction is very
broad, including nearly every matter directly or indirectly
IN RE: WILSHIRE COURTYARD 17
related to the bankruptcy.” Sasson v. Sokoloff (In re Sasson),
424 F.3d 864, 868 (9th Cir. 2005) (internal quotation marks
omitted).
The test for post-confirmation “related to” jurisdiction
was modified from the seminal pre-confirmation Pacor test
for “related to” jurisdiction, which had been previously
adopted by the Ninth Circuit in Fietz v. Great W. Savings (In
re Fietz), 852 F.2d 455, 457 (9th Cir. 1988) (citing Pacor,
Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)). Surveying
the courts that had applied a limited version of the Pacor test
in the post-confirmation context, we recognized that the
Pacor test of whether “‘the outcome of the proceeding could
conceivably have any effect on the estate being administered
in bankruptcy. . . . [I]f the outcome could alter the debtor’s
rights, liabilities, options, or freedom of action . . . and which
in any way impacts upon the handling and administration of
the bankrupt estate’” was “somewhat overbroad in the post-
confirmation context.” Pegasus Gold Corp., 394 F.3d at
1193, 1194 (quoting In re Fietz, 852 F.3d at 457).10
The “close nexus” test determines the scope of
bankruptcy court’s post-confirmation “related to”
jurisdiction. Pegasus Gold Corp., 394 F.3d at 1194. As
adopted from the Third Circuit, the test encompasses matters
“affecting the ‘interpretation, implementation, consummation,
execution, or administration of the confirmed plan.’” Id.(quoting Binder v. Price Waterhouse & Co. (In re Resorts
Int’l, Inc.), 372 F.3d 154, 166–67 (3d Cir. 2004)). The close
10
We note that all of the cases surveyed finding post-confirmation
subject matter jurisdiction under some modified version of the Pacor test
dealt with bankruptcy proceedings that had been confirmed but not
completely consummated. See id. at 1193–94.
18 IN RE: WILSHIRE COURTYARD
nexus test “recognizes the limited nature of post-confirmation
jurisdiction but retains a certain flexibility.” Id.Applying the close nexus test in Pegasus Gold, we held
that “related to” jurisdiction existed because some claims
concerning post-confirmation conduct—specifically, alleged
breach of the liquidation/reorganization plan and related
settlement agreement as well as alleged fraud in the
inducement at the time of the plan and agreement—would
“likely require interpretation of the [settlement agreement and
plan].” Id. The claims and remedies could also “affect the
implementation and execution” of the as-yet-unconsummated
plan itself. Id.In contrast, the close nexus test was not satisfied in Sea
Hawk Seafoods, Inc. v. Alaska (In re Valdez Fisheries
Development Association, Inc.), 439 F.3d 545, 548 (9th Cir.
2006). The bankruptcy court there had reopened a dismissed
chapter 11 case—in which no plan had ever been
confirmed—to determine whether a settlement agreement
between a creditor (a seafood processing plant) and former
debtor (a fisheries development association) also protected
the State of Alaska from the creditor processing plant’s
fraudulent conveyance claim, where the State was also a
creditor but not a party to the settlement agreement. Id. at
546–47. The district court affirmed the bankruptcy court’s
reopening of the case. We reversed because “there was no
confirmed plan and there is no claim that the dispute between
two creditors, [the processing plant and the State], would
have any effect on the now-closed bankruptcy estate.” Id. at
548. The creditors’ dispute was outside the scope of
bankruptcy court post-confirmation jurisdiction because the
dispute “implicate[d] the term of a settlement agreement
approved by the court as a precondition of the dismissal of
IN RE: WILSHIRE COURTYARD 19
[debtor’s] bankruptcy. But that agreement has been fully
implemented with respect to [the debtor].” Id.Contrary to the BAP’s characterization, Valdez Fisheries
did not restrict or refine the meaning of the close nexus test.
Rather, we simply concluded that the claims in the case were
outside those matters “affecting the interpretation,
implementation, consummation, execution, or administration
of the confirmed plan.” Pegasus Gold Corp., 394 F.3d at
1194. Because there was no confirmed plan in Valdez
Fisheries, we reached the same conclusion separately under
both the pre-confirmation Fietz/Pacor test and the post-
confirmation Pegasus Gold “close nexus” test.
In interpreting Valdez Fisheries, the BAP improperly
conflated the two tests. The BAP reasoned that “to show a
close nexus, the outcome of a dispute must ‘alter the debtor’s
rights, liabilities, options, or freedom of action or in any way
impact upon the handling and administration of the bankrupt
estate.’” In re Wilshire Courtyard, 459 B.R. at 429 (quoting
In re Fietz, 852 F.2d at 457). The BAP’s reasoning makes the
pre-confirmation Fietz/Pacor test of whether a separate civil
proceeding could “alter the debtor’s rights, liabilities, options
or freedom of action . . . [or] in any way impact[] upon the
handling and administration of the bankruptcy estate,” part
and parcel of the post-confirmation Pegasus Gold post-
confirmation “close nexus” test. The two are distinct. The
BAP recognized why when it stated,“[t]he Pacor test,
however, proved less than useful in determining related to
jurisdiction after confirmation of a plan because the
bankruptcy estate no longer exists.” Id. at 427 (emphasis
added).
20 IN RE: WILSHIRE COURTYARD
Similarly, we do not read Ray, 624 F.3d at 1134, to have
“refined” the Pegaus Gold “close nexus” test to incorporate
the Fietz/Pacor test. In re Wilshire Courtyard, 459 B.R. at
430. The lack of jurisdiction in Ray was premised on the fact
that the dispute there was a matter of pure state law that “did
not necessarily depend upon resolution of a substantial
question of bankruptcy law” and which could have existed
“entirely apart from the bankruptcy proceeding.” 624 F.3d at
1135. The breach of contract claim that the state court in Ray
referred to the bankruptcy court had a relationship to the
bankruptcy proceeding only because the bankruptcy court had
approved a settlement agreement that sold property free and
clear of the right of first refusal. The dispute in Ray, unlike
that in Pegasus Gold, did not involve “implementation and
execution of [the bankruptcy plan].” Id. at 1134 (quoting In
re Valdez Fisheries, 439 F.3d at 548).
The BAP “distill[ed]” too narrow a version of the “close
nexus” test from Valdez Fisheries and Ray: “[T]o support
jurisdiction, there must be a close nexus connecting a
proposed post-confirmation proceeding in the bankruptcy
court with some demonstrable effect on the debtor or the plan
of reorganization.” In re Wilshire Courtyard, 459 B.R. at 430(emphasis added). Valdez Fisheries and Ray simply applied
the Pegasus Gold “close nexus” test to the unique—and
distinguishable—facts of those cases. We reaffirm that a
close nexus exists between a post-confirmation matter and a
closed bankruptcy proceeding sufficient to support
jurisdiction when the matter “affect[s] the interpretation,
implementation, consummation, execution, or administration
of the confirmed plan.” Pegasus Gold Corp., 394 F.3d at
1194 (internal citation and quotation marks omitted).
IN RE: WILSHIRE COURTYARD 21
The Pegasus Gold “close nexus” test requires
particularized consideration of the facts and posture of each
case, as the test contemplates a broad set of sufficient
conditions and “retains a certain flexibility.” Id. Such a test
can only be properly applied by looking at the whole picture.
First, the ultimate merits question depends in part on the
interpretation of the confirmed Plan. Id. While it is true that
the Plan itself is ambiguous as to the sale/non-sale issue and
makes no mention of state tax consequences,11 determination
of the sale/non-sale attributes of the transaction requires a
close look at the economics of the transaction as detailed in
the Plan and Confirmation Order. See, e.g., Tufts, 461 U.S. at309–310, 2925 Briarpark, Ltd., 163 F.3d at 317–19. The
disputed transaction, described in detail in the Plan and
Confirmation Order, was presumably consummated as
described, making interpretation of both essential to
classifying the character of the transaction.
Understanding “interpretation” to include the
Confirmation Order as well as the Plan finds further support
in the logic of ancillary jurisdiction—a close cousin to
“related to” jurisdiction—because it is well recognized that a
bankruptcy court has the power to interpret and enforce its
own orders. In the recent decision Travelers Indemnity
Company v. Bailey, 557 U.S. 137, 151 (2009), the Supreme
Court upheld the bankruptcy court’s jurisdiction to enter a
11
As CFTB noted in its opposition to the motion for summary judgment
in the bankruptcy court, the Plan itself says nothing about a sale of the
Properties and does not reference the Bankruptcy Code provisions that
provide for a sale of the Property. The Confirmation Order does not
comment on whether the debtor retained property of the estate, the tax
consequences of the plan, or whether the plan could be treated as a sale for
tax purposes.
22 IN RE: WILSHIRE COURTYARD
“Clarifying Order” interpreting the scope of an injunction
contained in a prior order confirming a chapter 11 plan
entered in 1986 because the bankruptcy court “plainly had
jurisdiction to interpret and enforce its own orders.” Travelers
was the insurer of an asbestos supplier who filed for chapter
11 bankruptcy protection when faced with the prospect of
overwhelming liability. Id. at 140. To address the needs of
future injured claimants, the bankruptcy court and parties
confirmed a plan of reorganization in 1986 that created a
settlement trust. Id. at 141. Travelers and other insurers
contributed to the trust on the condition that they were
protected by an injunction against future direct claims from
injured persons. Id. at 141–42. The settlement order was
incorporated by reference in the bankruptcy court’s order
confirming the chapter 11 plan. Id. at 142. Over a decade
later, direct actions against Travelers commenced, and
Travelers sought the bankruptcy court’s protection. Id. at
142–43. The bankruptcy court issued a Clarifying Order in
2004, providing that the 1986 orders barred the direct actions.
Id. at 145. The Second Circuit ultimately reversed on
jurisdictional grounds, holding that the direct actions were
based on a different theory of liability than was covered by
the scope of the original injunction and that the claims did not
seek remedy from the res of the bankruptcy estate. Id. at 147.
The Supreme Court reversed on the “easy” jurisdictional
issue of whether the bankruptcy court could enter the
Clarifying Order. Id. at 151 (citing Local Loan Co. v. Hunt,
292 U.S. 234, 239 (1934)). The citation to Hunt signals the
Supreme Court’s interpretation that ancillary jurisdiction
exists where necessary to preserve a benefit the parties
initially bargained for. “That a federal court of equity has
jurisdiction of a bill ancillary to an original case or
proceeding in the same court, whether at law or in equity, to
IN RE: WILSHIRE COURTYARD 23
secure or preserve the fruits and advantages of a judgment or
decree rendered therein, is well settled.” Hunt, 292 U.S. at
239.
The bankruptcy court in Travelers had ancillary
jurisdiction to enter the Clarifying Order interpreting the
original plan and incorporated injunction precisely because
the injunction was critical to the plan’s approval. The BAP
identified in its analysis that which we find exactly relevant
to the present appeal: “the record clearly indicates that the
essential parties (the debtor and the insurance companies)
would not have agreed to plan confirmation without the
settlement agreement and injunction . . . . The Clarifying
Order related to an injunction that had been negotiated and
considered an essential part of the plan of reorganization.” In
re Wilshire Courtyard, 459 B.R. at 433 (emphasis added). We
agree with the BAP’s characterization of the Travelers
opinion, but not its application of that opinion to the present
case. Here, Reorganized Wilshire and the Wilshire Partners
forcefully argue that the “feasibility of any reorganization in
this case—which is the entire point of chapter 11
proceedings—was contingent on the cancellation of debt.”
The Plan itself referenced a number of Bankruptcy Code
sections that included the authority to discharge debt. Indeed,
the discharge of debt seems central to the conceptual
framework of the reorganization plan. Interpretation of the
Plan and Confirmation Order is the only way for a court to
determine the essential character of the negotiated Plan
transactions in a way that reflects the deal the parties struck
in chapter 11 proceedings. Under Travelers and Hunt, this is
reason enough for the bankruptcy court to exercise
jurisdiction in this case.
24 IN RE: WILSHIRE COURTYARD
Second, the BAP erred in holding that only state law
claims are at issue in the present dispute. In re Wilshire
Courtyard, 459 B.R. at 432. Even if the primary question of
whether the transaction resulted in capital gains or forgiven
debt were a question of pure state tax law, the parties also
dispute the distinctly federal question of whether 11 U.S.C.
§ 346 applies to non-debtor general partners of a debtor
partnership that was dissolved as part of the reorganization.
The “non-debtor” parties in this case are partners of the
former Debtor Partnership that filed a voluntary chapter 11
petition.12 CFTB argues that it seeks to assess tax liability
only against the non-debtor partners, not the non-taxable
partnership, and that the latter does not have standing to
assert bankruptcy court jurisdiction. CFTB further argues that
by its terms, 11 U.S.C. § 346(j)(1) excludes the non-debtor
partners of a debtor partnership, referring only to “the estate,
the debtor, or a successor to the debtor,” and because of this
12
It is not clear from the record whether the general partnership was
dissolved as a consequence of the reorganization after the voluntary
bankruptcy petition was filed. Nevertheless, even if the partnership was
dissolved, under California’s Uniform Partnership Act, “a partnership
continues after dissolution only for the purpose of winding up its business.
The partnership is terminated when the winding up of its business is
completed.” Cal. Corp. Code § 16802 (1994). Moreover, we disagree with
CFTB’s characterization that this dispute is one of pure state law between
the non-debtor Wilshire Partners and CFTB. In particular, we note that
11 U.S.C. § 346(c)—which also preempts state law, as provided by
§ 346(a)—may bear on the unsettled bankruptcy law question of whether
§ 346(j)(1) applies to non-debtor partners. “The commencement of a case
under this title concerning a corporation or a partnership does not effect
a change in the status of such corporation or partnership for the purposes
of any State or local law imposing a tax on or measured by income.”
11 U.S.C. § 346(c)(1). We do not address the complicated intersection of
bankruptcy and partnership law, but note that it may be relevant to the
bankruptcy court’s ultimate determination of the merits.
IN RE: WILSHIRE COURTYARD 25
the bankruptcy court lacks jurisdiction to determine the tax
liabilities of the non-debtor partners. That legal question is an
unsettled one, but ultimately a merits determination and not
itself dispositive as to the bankruptcy court’s post-
confirmation subject matter jurisdiction.
CFTB argues that the identical phrasing in 11 U.S.C.
§ 505(c) and 11 U.S.C. § 346(j)(1) limiting the application of
those statutes to “the estate, the debtor, or a successor to the
debtor” requires us to conclude that the bankruptcy court
lacked jurisdiction here. CFTB relies on American Principals
Leasing Corporation v. United States, 904 F.2d 477 (9th Cir.
1990). There, we held that the bankruptcy court lacked
jurisdiction to determine the “tax liabilities of non-debtor
partners” under § 505(c). Id. at 481–82. Our holding in
American Principals does not aid our interpretation of § 346
because, as explained supra, § 346 is not a basis for
bankruptcy court jurisdiction, and has never been interpreted
to be a “jurisdictional” statute. In contrast, we have
consistently interpreted § 505 as jurisdictional because it
explicitly confers upon or deprives the bankruptcy court of
certain authority. See Cent. Valley AG Enters. v. United
States, 531 F.3d 750, 755 (9th Cir. 2008).
Moreover, the facts of American Principals are inapposite
to the present case. There, the tax dispute concerned pre-
bankruptcy petition activities reported by non-debtor partners
on their pre-bankruptcy tax returns—not transactions that
were consummated by the partnership as part of a bankruptcy
reorganization plan or proceeding. Id. at 479. We held that
§ 505, which permits a bankruptcy court to “determine the
amount or legality of any tax,” did not permit the bankruptcy
court to determine the tax liabilities of non-debtor partners.
Id. at 481. Here, the jurisdictional question does not rest on a
26 IN RE: WILSHIRE COURTYARD
determination of tax liabilities, although that may be the
ultimate consequence of the bankruptcy court’s decision. The
jurisdictional question here centers on whether the Plan
transactions were a sale or a cancellation of debt income and
whether that determination bears a sufficiently “close nexus”
to the original bankruptcy proceeding. Secondary to that
jurisdictional inquiry is whether § 346(j) applies to non-
debtor partners of a debtor partnership.13
Finally, post-confirmation jurisdiction in this case is
consistent with the equitable objectives of the Bankruptcy
Code. Here, the bankruptcy court has “related to” subject
matter jurisdiction under the Pegasus Gold test despite the
fact that the Plan transactions have been long since
consummated—unlike those in Pegasus Gold. To restrict
post-confirmation jurisdiction only to cases where successful
consummation depends on bankruptcy court monitoring
would have the practical effect of excluding state tax
determinations from bankruptcy court oversight, rendering
13
Moreover, we note that in 2002 CFTB audited the original debtor
“Wilshire Courtyard Partnership” as the taxpayer for the year 1998. After
the bankruptcy case was reopened on Reorganized Wilshire’s motion and
while the Order to Show Cause was pending, the bankruptcy court ordered
the joinder of the non-debtor partners. Although the tax bill would
ultimately be paid by the non-debtor partners, taxable income is
“ascertained and reported” at the level of the partnership. Basye, 410 U.S.
at 448. Only after ascertaining income is the partnership’s existence
“disregarded since each partner must pay tax on a portion of the total
income as if the partnership were merely an agent or conduit through
which the income passed.” Id.; see also Thompson v. Comm’r, 631 F.2d
642, 649 (9th Cir. 1980) (“Partnership income or loss is determined at the
partnership level and not at the level of the individual partners. The
distributive share of income or loss of the individual partners can be
determined only by reference to the income or loss of the partnership
itself.”)
IN RE: WILSHIRE COURTYARD 27
11 U.S.C. § 346 a nullity.14 Moreover, such a stringent
interpretation ignores the fact that tax consequences of
reorganization are fundamental to virtually every corporate
bankruptcy. Parties to bankruptcy proceedings negotiate
against the backdrop of the tax-policy legislative choices
codified in the Bankruptcy Code. Here, Reorganized Wilshire
and the Wilshire Partners argue that the feasibility of any
reorganization was contingent on the cancellation of debt.
Had the Wilshire Partners known that CFTB would reclassify
the core transaction of the reorganization as a sale and
attempt to treat the discharged debt as capital gains, they may
never have consented to the reorganization plan, perhaps
opting to liquidate the property to the highest bidder,
potentially resulting in less or no taxable income for CFTB to
assess. Reorganization is often contingent upon the debtor’s
or plan proponents’ assumption of a cancellation of debt that
chapter 11 proceedings typically facilitate.15 Restricting post-
confirmation jurisdiction on the grounds that the transactions
were long ago consummated and thus taxation would have no
14
A leading treatise identifies the temporal problem presented by tax
disputes in bankruptcy proceedings: “[T]axable income and associated tax
attributes of the confirmation transactions are always be determined and
reported on tax returns filed post confirmation, so by definition, any
subsequent audit dispute as to the tax treatment of confirmation
transactions will occur post confirmation.” 11 Collier on Bankruptcy
¶ TX12.02[2][b][ii] (Myron M. Sheinfeld, Fred T. Witt & Milton B.
Hyman, 16th ed. Dec. 2011) (alteration in original). We see no practical
distinction between post confirmation and post consummation of a
bankruptcy plan and related transactions.
15
We do not mean that this assumption automatically decides whether
cancellation of debt is cancellation of debt income or capital gains income.
As discussed supra, that is a merits question that a bankruptcy court must
resolve in the event it is disputed. See Tufts, 461 U.S. at 308–09, 310;
2925 Briarpark Ltd., 163 F.3d at 317.
28 IN RE: WILSHIRE COURTYARD
effect on the debtor or estate effectively refashions the terms
of the deal the parties to the bankruptcy struck in chapter 11
proceedings.
Thus, under the “close nexus” test, post-confirmation
jurisdiction in this case extends to matters such as tax
consequences that likely would have affected the
implementation and execution of the plan if the matter had
arisen contemporaneously. This application of the Pegasus
Gold test does not prejudice either taxing entities or
bankruptcy parties, nor requires the tax consequences to be
assessed before transactions are consummated and taxes are
due. It merely allows the bankruptcy court to retain
jurisdiction over post-confirmation, post-consummation
disputes related to the interpretation and execution of the
confirmed Plan as if they had arisen prior to consummation.
Thus, we reject CFTB’s argument that jurisdiction was
lacking because the bankruptcy case had been long since
closed by the time the tax dispute began, and that neither the
Plan nor Reorganized Wilshire could be affected.
B. Bankruptcy court jurisdiction does not violate the
Tax Injunction Act
CFTB argues that bankruptcy is not an exception to the
Tax Injunction Act, and that here the non-debtor partners are
attempting to use a debtor’s bankruptcy to shield themselves
from the state’s tax collection efforts. The Tax Injunction Act
provides that “the district courts shall not enjoin, suspend or
restrain the assessment, levy or collection of any tax under
State law where a plain, speedy and efficient remedy may be
IN RE: WILSHIRE COURTYARD 29
had in the courts of such State.” 28 U.S.C. § 1341.16 We have
also held, however, that the bankruptcy court may exercise
jurisdiction over proceedings that would otherwise violate the
Act where the relief sought was necessary to the enforcement
of specific Bankruptcy Code provisions. The Act “did not
abridge the power specifically granted to the bankruptcy court
to make such judgments as may be necessary for the
enforcement of the provisions of the Bankruptcy Act. The
process of dealing with state tax assessments is one essential
to the administration of a bankruptcy estate and does not
amount to a suit against the state.” Goldberg v. Ellett (In re
Ellett), 254 F.3d 1135, 1149 (9th Cir. 2001) (citing Cal. State
Bd. of Equalization v. Goggin, 191 F.2d 726, 728 (9th Cir.
1951)); accord In re Hechinger Inv. Co. of Delaware, Inc.,
335 F.3d 243, 247 n.1 (3d Cir. 2003) (“It is well established,
however, that the Tax Injunction Act does not prevent a
Bankruptcy Court from enforcing the provisions of the
Bankruptcy Code that affect the collection of state taxes.”).
Here, the merits question that the bankruptcy court has
jurisdiction to decide is a necessary predicate to the
enforcement of 11 U.S.C. § 346(j), should the court
determine that the transactions were a cancellation of debt
income and not a disguised sale under California state law.
Indeed, as we recognized in Ellett, “it is quite apparent that
the Act is incompatible with the Bankruptcy Code’s detailed
scheme governing the dischargeability of tax debts.” 254 F.3d
at 1149. CFTB’s argument, like Wilshire’s argument about
§ 346 “determining” the outcome of this dispute, presupposes
16
CFTB supports its argument with cases that deal with a different
statute, the Anti-Injunction Act, 26 U.S.C. § 7421(a), though that statute
is not the basis of CFTB’s argument. We do not address the applicability
of 26 U.S.C. § 7421(a) here.
30 IN RE: WILSHIRE COURTYARD
the answer to the merits question: that tax is due because the
core transaction was a disguised sale resulting in capital
gains. We only address here whether the bankruptcy court
had jurisdiction to decide that question.17
Conclusion
The character of the core transaction of the Debtor’s
bankruptcy is an issue that the bankruptcy court has
jurisdiction to decide. We remand this 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. The real relief sought in this
case involves complexities of tax, partnership, and
bankruptcy law, which we do not here decide. What we do
determine is that the bankruptcy court had subject matter
jurisdiction to make the determination, as it is sufficiently
closely related to the bankruptcy proceeding. We therefore
reverse the BAP’s judgment and remand to the BAP for
further proceedings consistent with this opinion.
REVERSED AND REMANDED.
17
Similarly, we need not address whether the bankruptcy court may
enjoin the collection of state taxes against non-debtor partners, see In re
Ellett, 254 F.3d at 1149 n.7, because we leave for the BAP to consider in
the first instance the bankruptcy law question of whether 11 U.S.C.
§ 346(j) applies to non-debtor partners.