Majestic Star Casino, LLC v. Barden Development, Inc.
2013 U.S. App. LEXIS 10186
3rd Cir.2013Background
- Case arises in Chapter 11 reorganization; issue is voidability/avoidance of postpetition revocation of S-corp/QSub status
- BDI and Barden, as non-debtor parent and shareholder, seek to challenge revocation that affected MSC II’s QSub status
- MSC II was a QSub wholly owned by BDI, ultimately owned by Majestic Holdco/BDI chain
- BDI/MSC II revoked S-corp and QSub status post-petition without court authorization; IRS involved
- Bankruptcy Court granted relief to reinstate S/QSub status; on direct appeal, court vacates and remands to dismiss for lack of jurisdiction
- Plan and emergence from bankruptcy affected tax attributes and potential COD tax implications for Debtors and creditors
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Debtors have standing to challenge the revocation | MSC II's estate has a property interest; Debtors can challenge | Standing requires direct stakeholder with rights; third-party standing absent | Debtors lack standing to challenge; dismiss for lack of jurisdiction |
| Whether MSC II’s QSub status is property of the estate | QSub status is property of the estate under §541 | QSub status is not property of the estate; contingent, non-assignable | QSub status is not property of the estate; not within §541(a)(1) ownership |
| If property, whether the property is owned by the estate or the non-debtor parent | Even if property, estate owns it | Property belongs to parent/shareholders, not the estate | Even if considered property, it is not properly estate property; ownership remains with parent |
| Whether revocation constitutes a voidable transfer under §§ 362, 549, 550 | Revocation affected transfer of property of the estate | Revocation not a transfer of estate property; no transferee | Not a valid transfer under 362/549/550 given standing and property findings |
Key Cases Cited
- Segal v. Rochelle, 382 U.S. 375 (Supreme Court 1966) (NOL carrybacks/rights as property of estate influencing tax refunds)
- Prudential Lines, Inc. v. Gam, Ltd., 928 F.2d 565 (2d Cir. 1991) (NOL carryforwards constitute property of the debtor’s estate)
- In re Russell, 927 F.2d 413 (8th Cir. 1991) (NOL carryforwards and tax attributes; property considerations)
- In re Fruehauf Trailer Corp., 444 F.3d 203 (3d Cir. 2006) (pension surplus property; contingent interests may be property under 541)
- Atlantic Business & Community Corp., 901 F.2d 325 (3d Cir. 1990) (possession-based property interests; limits on 362(a)(3))
- Butner v. United States, 440 U.S. 48 (Supreme Court 1979) (state law controls property rights unless federal interest dictates otherwise)
- Drye v. United States, 528 U.S. 49 (Supreme Court 1999) (I.R.C. tax attributes; federal control over property interests)
- Westmoreland Human Opportunities, Inc. v. Walsh, 246 F.3d 233 (3d Cir. 2001) (broad 541(a)(1) property definition limitations)