In Re: Wilshire Courtyard

Under the “close nexus” test, a closed bankruptcy proceeding adequately supports subject matter jurisdiction if the matter affects the “’interpretation, implementation, consummation, execution, or administration of the confirmed plan.’”

At issue is a Chapter 11 bankruptcy, which closed in 1998. The California Franchise Tax Board (“CFTB”) audited the original general partnership, reorganized as an LLC under the plan, in 2002. The CFTB claimed wrongful characterization of tax consequences in the reorganization plan. The disputed issue amongst the parties is whether $13 million claimed as unpaid income taxes by non-debtor partners on their individual tax returns was in fact unpaid income taxes or a disguised sale. However, the only issue addressed by the panel was whether the bankruptcy court had jurisdiction to decide such a disputed issue. The panel spent much time discussing failed arguments because the parties did not focus on the jurisdictional question alone, but, instead, presupposed the answer to the merits question in the jurisdictional arguments. According to 28 U.S.C. § 1334(b), “[b]ankruptcy courts have subject matter jurisdiction over proceedings ‘arising under title 11 or arising in or related to cases under title 11.’” The Ninth Circuit held the case did not satisfy the “arising under” term because the statute at issue, 11 U.S.C. § 346(j), only comes into play after discharge. This case did not satisfy the “arising in” term because this case could have arisen outside of a bankruptcy proceeding. However, considering the “whole picture” of this situation, the “close nexus” test and, thus, the “related to” term were satisfied. The panel did not apply the Pacor test because it is recognized as overbroad in the post-confirmation context. Because the reorganization plan depended on the cancellation of debt, the discharge of debt was found to be central to the plan. Therefore, interpretation of the plan renders a “close nexus” between the closed bankruptcy proceeding and the case at hand and the bankruptcy court has subject matter jurisdiction. REVERSED AND REMANDED.