Wilshire Courtyard v. California Franchise Tax Board

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. at

309–310, 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.