Wilshire Courtyard v. California Franchise Tax Board
2013 U.S. App. LEXIS 18777
| 9th Cir. | 2013

Background

  • Wilshire Courtyard owned two Wilshire Boulevard complexes; after default, it restructured as a Delaware LLC with 1% ownership for partners and >$200 million in debt discharged.
  • Partners reported cancellation of debt income; California Franchise Tax Board sought $13 million in state taxes, characterizing the plan outcomes as a disguised sale.
  • In 2009, Reorganized Wilshire moved to reopen the bankruptcy to shield the confirmed plan from state tax collateral attack; CFTB disputed jurisdiction.
  • Bankruptcy court granted reopening and summary judgment for Wilshire; CFTB appealed, contending no subject-matter jurisdiction existed.
  • BAP reversed, holding no post-confirmation jurisdiction under 28 U.S.C. §1334(b) for this dispute; Wilshire and partners appealed again to the Ninth Circuit.

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Whether the bankruptcy court had post-confirmation jurisdiction (arising under/in/related to) to resolve tax treatment of plan transactions. Wilshire argues related to jurisdiction under Pegasus Gold close nexus. CFTB contends no arising under/in/related to jurisdiction; dispute is a state tax matter between non-debtor partners and state tax authority. Yes; court held jurisdiction existed under related to, remanding for merits.
Whether § 346(j)(1) can determine tax outcomes or create arising under jurisdiction, and whether it applies to non-debtor partners. Wilshire contends § 346(j)(1) is a tax Merits issue, not a jurisdictional basis, but supports related-to analysis. CFTB asserts § 346(j)(1) underpins the merits and preempts state law. § 346(j)(1) does not create arising under jurisdiction; merits require plan interpretation; court retains related-to jurisdiction.
Whether § 1146(d) provides a procedural route for tax effects determinations and its impact on jurisdiction. Wilshire notes § 1146(d) contemplates tax effect determinations related to plans. CFTB argues § 1146(d) does not transform § 346(j)(1) into jurisdictional relief. Section 1146(d) does not itself create jurisdiction; merits require interpretation of plan.
Whether the Tax Injunction Act bars bankruptcy court jurisdiction over state tax collection in this context. Wilshire argues Act permits bankruptcy courts to handle tax collection matters necessary to enforce bankruptcy provisions. CFTB contends Act bars such relief. Remains permissible; Tax Injunction Act does not bar jurisdiction where relief is needed to enforce bankruptcy provisions.
Does post-confirmation jurisdiction extend to matters that affect interpretation or execution of the confirmed plan even after long post-consummation periods? Wilshire emphasizes interpretation of Plan and Confirmation Order is necessary for determining merits. CFTB claims no nexus since plan was long consummated and effects are purely tax. Yes; close nexus test permits jurisdiction where interpretation/execution of plan is implicated.

Key Cases Cited

  • Harris v. Wittman (In re Harris), 590 F.3d 730 (9th Cir. 2000) (defines arising under/in terms of title 11 jurisdiction)
  • Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431 (9th Cir. 1995) (distinguishes arising under vs arising in)
  • In re Ray, 624 F.3d 1131 (9th Cir. 2010) (post-confirmation related-to scope as refined by Pegasus Gold)
  • Pegasus Gold Corp. v. Sasson, 394 F.3d 1193 (9th Cir. 2005) (defines close nexus for post-confirmation jurisdiction)
  • Sea Hawk Seafoods, Inc. v. Alaska (In re Valdez Fisheries Development Association, Inc.), 439 F.3d 545 (9th Cir. 2006) (limits post-confirmation jurisdiction when plan not implicated)
  • Travelers Indemnity Co. v. Bailey, 557 U.S. 137 (U.S. 2009) (ancillary jurisdiction to preserve benefits of a plan)
  • Tufts, Comm'r v., 461 U.S. 300 (1983) (substance-over-form approach for tax consequences in bankruptcy)
  • Basye v. United States, 410 U.S. 441 (1973) (partnerships as conduits for tax attributes; impact on jurisdiction)
  • Local Loan Co. v. Hunt, 292 U.S. 234 (1934) (ancillary/related doctrines in jurisdictional analysis)
  • American Principals Leasing Corp. v. United States, 904 F.2d 477 (9th Cir. 1990) (distinguishes § 505 vs § 346 for jurisdictional reach)
  • In re Ellett, 254 F.3d 1135 (9th Cir. 2001) (Tax Injunction Act compatibility with bankruptcy enforcement)
  • Cent. Valley AG Enters. v. United States, 531 F.3d 750 (9th Cir. 2008) (interpretation of bankruptcy tax-related jurisdiction)
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