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NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-10-1275-SaPaKi

)

WILSHIRE COURTYARD, ) Bk. No. 97-10771

)

Debtor, )

___________________________________)

)

CALIFORNIA FRANCHISE TAX BOARD, )

)

Appellant )

)

v. ) M E M O R A N D U M1

)

WILSHIRE COURTYARD; JEROME H. )

SNYDER GROUP I, LTD.; LEWIS P. )

GEYSER REVOCABLE TRUST; 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 )

GEISER, LEWIS P. GEYSER, TRUSTEE; )

LON J. SNYDER; SNYDER CHILDREN’S )

TRUST, FBO WILLIAM N. SNYDER, )

LEWIS P. GEYSER, TRUSTEE, )

)

Appellees. )

___________________________________)

Argued and Submitted on July 25, 2014

at Pasadena, California

Filed - April 7, 2015

Appeal from the United States Bankruptcy Court

for the Central District of California

FILED

APR 07 2015

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may have

(see Fed. R. App. P. 32.1), it has no precedential value. See 9th

Cir. BAP Rule 8024-1.

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Honorable Samuel Bufford, Bankruptcy Judge and

Honorable Vincent Zurzolo, Bankruptcy Judge, Presiding2

 

Appearances: Lisa W. Chao appeared for Appellant California

Franchise Tax Board; Kenneth John Shaffer of Quinn

Emmanuel Urquhart & Sullivan, LLP appeared for

Appellees Wilshire Courtyard, Jerome H. Snyder

Group I, Ltd., Lewis P. Geyser Revocable Trust,

Wendy K. Snyder, Jerome H. Snyder, Geyser

Children's Trust, FBO Jennifer Geyser, Lewis P.

Geyser, Trustee, 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 and Snyder

Children's Trust, FBO William N. Snyder, Lewis P.

Geyser, Trustee.

 

Before: SARGIS,3 PAPPAS, and KIRSCHER, Bankruptcy Judges.

The parties to this bankruptcy case, and the appeals arising

therefrom, survived the real estate crash of the late 1990s, the

Y2K “disaster” with the turning of the Millennium, and the real

estate implosion of the 2000s, all while fighting over the effect

of the April 1998 confirmation of a chapter 11 plan. The

complexities of the arguments have increased and the reasons for

supporting or rejecting the reasoning of the bankruptcy court have

grown. In considering the appeal, this Panel returns to the

basics of what was actually decided by the bankruptcy court, the

evidence presented, arguments of the parties, and the plain

language of the Bankruptcy and Internal Revenue Codes.

For the issues presented on appeal, the ruling of the

2 Bankruptcy Judges Bufford and Zurzolo each entered orders

that are implicated in this appeal.

3 The Honorable Ronald H. Sargis, Bankruptcy Judge for the

Eastern District of California, sitting by designation.

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bankruptcy court that the order confirming the chapter 11 plan

determined whether the plan provided for a sale of property is

REVERSED. Based upon this Panel’s de novo review of the summary

judgment, the decision of the bankruptcy court granting summary

judgment is AFFIRMED.

APPELLATE HISTORY

This is the second time that the appeal of the bankruptcy

court’s order at issue has been before this Panel. Previously,

this Panel considered whether proper post-confirmation

jurisdiction existed for determination of the underlying issues. 

Concluding that such post-confirmation jurisdiction did not exist,

this Panel reversed and ordered that the matter be remanded with

instructions to dismiss. In re Wilshire Courtyard, 459 B.R. 416,

(9th Cir. BAP 2011). 

The Ninth Circuit Court of Appeals reversed, concluding that

post-confirmation jurisdiction existed, and remanded to this Panel

for further proceedings. Wilshire Courtyard v. Cal. Franchise Tax

Bd. (In re Wilshire Courtyard), 729 F.3d 1270 (9th Cir. 2013)

(“Wilshire I”). 

CHAPTER 11 BANKRUPTCY CASE

 AND CONFIRMED CHAPTER 11 PLAN

This dispute began when Wilshire Courtyard, a California

general partnership, ("Debtor"), filed a chapter 11 bankruptcy

case on January 8, 1997 (“Wilshire Bankruptcy Case”). Debtor

developed and owned two commercial complexes on Wilshire Boulevard

in Los Angeles containing almost a million square feet of rental

office space (the "Property"). The lender holding the debt

secured by the first position lien on the Property (“Senior

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Secured Claim”) was Continental Bank, N.A., which secured claim

subsequently came to be held by the successor “Senior Secured

Creditors” in the Wilshire Bankruptcy Case. Various other

entities held subordinated secured debt. Early in the Wilshire

Bankruptcy Case, Continental was acquired by Bank of America, N.A.

("BofA"). BofA served as the loan servicer and trustee for the

Senior Secured Creditors in the Wilshire Bankruptcy Case. 

Debtor's total secured debt aggregated almost $350 million. After

Debtor defaulted on the Senior Secured Claim in July 1996, and a

foreclosure sale was scheduled for January 9, 1997, Debtor filed

its chapter 11 bankruptcy petition.

Appellant California Franchise Tax Board ("CFTB") was listed

in the creditor mailing matrix filed by Debtor in the Wilshire

Bankruptcy Case. Though CFTB received notice of the commencement

of the case, CFTB did not file a proof of claim, did not assert

any other claim, did not oppose the chapter 11 Plan, and did not

otherwise investigate or participate in the Wilshire Bankruptcy

Case.

Confirmed Chapter 11 Plan

The Senior Secured Creditors, Debtor, and the Debtor’s

partners (“Partners”) negotiated the terms of a joint, consensual

chapter 11 plan of reorganization (“Joint Plan”). Under the terms

of the Joint Plan, the Debtor was restructured from a California

general partnership to a Delaware limited liability company —

Wilshire Courtyard, LLC (“Wilshire LLC”). After confirmation,

Wilshire LLC continued to own and operate the Property. Under the

terms of the Joint Plan, Wilshire LLC arranged for a new,

nonrecourse loan for approximately $100,000,000, secured by a

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first deed of trust on the Property (“New Secured Financing”).

For their part in the reorganization through the Joint Plan,

the Senior Secured Creditors agreed to contribute $23,000,000 to

Wilshire, LLC, and to release the balance of their secured

indebtedness, in part, for receipt of the New Secured Financing

proceeds. Additionally, the Senior Secured Creditors acquired a

99% ownership interest in the reorganized Wilshire LLC. For the

Partners, confirmation resulted in their receipt of the remaining

1% interest in Wilshire LLC. In addition, the Partners also

received approximately $3,500,000 in cash, and a $450,000 loan

from the Senior Secured Creditors’ entity created to acquire their

99% interest in Wilshire LLC. Other creditors holding the junior

secured claim (“Co-Investors”), agreed to accept a $2,500,000

payment on their $221,000,000 secured claim, and to forgive the

balance of the claim. Administrative expenses and general

unsecured claims totaling around $900,000 were paid in full

through the Joint Plan. These transactions in the Joint Plan by

which Wilshire LLC became the successor to the Debtor, the New

Secured Financing obtained, claims paid, and the releases granted

are referred to as the “Transaction.”

Debtor’s Second Amended Disclosure Statement was approved by

the bankruptcy court on February 19, 1998. Notice of the

confirmation hearing for the Joint Plan was sent by Debtor to

interested parties in the Wilshire Bankruptcy Case on February 12,

1998. However, CFTB was neither served with a copy of the

proposed plan nor given notice of the confirmation hearing. 

After the confirmation hearing, the bankruptcy court entered

an Order Confirming the Joint Plan of Reorganization on April 14,

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1998 (“Confirmation Order”). CFTB acknowledges that it received

the "Notice of Order Confirming Chapter 11 Plan" from the Clerk of

the bankruptcy court. The Notice stated in relevant part that,

"Notice is hereby given of the entry of an order of this Court

confirming a Plan of Reorganization. A copy of the order and the

plan itself are contained in the Court file located at the address

listed herein." This Confirmation Order is the epicenter from

which the present dispute emanates.

The Joint Plan having been confirmed, the Wilshire Bankruptcy

Case was closed on October 22, 1998. Wilshire LLC contends, and

CFTB has not effectively disputed, that the confirmed plan was

implemented and consummated. The restructure of the Debtor was

accomplished, the Transaction was implemented and the Joint Plan

was completed, and Wilshire LLC became the successor to the

Debtor.

After confirmation and consummation of the Joint Plan, the

Partners reported approximately $208,000,000 in aggregate

cancellation of debt income ("CODI") on their individual 1998

California state tax returns. On November 15, 2002, CFTB sent

Wilshire LLC and the Partners an "Audit Issue Presentation Sheet"

("AIPS"). The AIPS informed them that CFTB challenged the

Partners' characterization of the tax consequences of the

Transaction affected by the confirmed Joint Plan as CODI. Rather

than $208,000,000 in CODI, CFTB argued that the Partners should

have reported approximately $231,000,000 in capital gain income

arising from the Transaction. CFTB contends that the treatment of

the Senior Secured Creditors’ Claim and the Co-Investors’ Claim

and interests under the Joint Plan constituted a disguised sale of

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the Property. Based on the AIPS, CFTB issued notices of proposed

assessments to the Partners on June 15, 2004, totaling

approximately $13,000,000 in unpaid income taxes.

The Partners disputed CFTB's assertion that the Transaction

resulted in income to the Debtor and the Partners. Over the next

five years, CFTB and the Partners engaged in several California

state administrative hearings relating to this dispute.

Enforcement of Joint Plan and Confirmation Order

On May 27, 2009, the dispute shifted from the state

administrative proceedings back to the bankruptcy court. 

Wilshire LLC filed an ex parte motion to reopen the Wilshire

Bankruptcy Case. Wilshire LLC argued that through the AIPS and

the continuing administrative hearings, CFTB was attempting to

collaterally attack the Confirmation Order and Joint Plan by

recharacterizing the terms of the Joint Plan as effecting a

disguised sale of the Property. Wilshire LLC asserted that the

Joint Plan provided for Wilshire LLC, as the reorganized Debtor,

to retain ownership of the Property and did not provide for a sale

of the Property. The bankruptcy court granted the motion and

entered an order reopening the Wilshire Bankruptcy Case on June 4,

2009.

Wilshire LLC then filed a motion for an Order to Show Cause

Re Contempt ("OSC") on June 23, 2009.4 The bankruptcy court

issued the OSC on August 12, 2009, directing CFTB to appear before

4 Ex. 4, p. 24. (All references to the Record are from the

Exhibits presented by Appellant CFTB, Exhibits 1 - 34, identified

by Exhibit (“Ex.”) number and the page number at which the

referenced document or specific text may be located in the

Record.)

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the bankruptcy court to show why it should not be held in contempt

for collaterally attacking, and by refusing to act in accordance

with, the Joint Plan and Confirmation Order.5

CFTB responded to the OSC on August 27, 2009, arguing that

Wilshire LLC had not given CFTB adequate notice of the terms of

the Joint Plan prior to confirmation, of the time for objecting to

the plan, or of the confirmation hearing.6 Therefore, CFTB

asserted it was not bound by the Joint Plan and Confirmation

Order. Further, CFTB asserted that Wilshire LLC lacked standing

to prosecute the OSC motion and issuance of a contempt order by

the bankruptcy court against CFTB would be fundamentally unfair

because the state tax consequences of the plan terms were never

considered by the bankruptcy court. CFTB also argued that the

bankruptcy court lacked the authority to determine such taxes. If

the court decided the court had authority to determine and

Wilshire LLC had standing to prosecute the motion, Wilshire LLC

was guilty of laches. CFTB asserted that laches bars the

determination because Wilshire LLC delayed raising these issues in

the Wilshire Bankruptcy Case during the six-year period after

confirmation that the CFTB was prosecuting the issue in the state

administrative proceedings.

Wilshire LLC replied on September 9, 2009, arguing that:

(1) CFTB had received adequate notice of the filing of the

Wilshire Bankruptcy Case and proceedings and entry of the

Confirmation Order; and (2) Wilshire LLC had both prudential and

5 Ex. 22; p. 697.

6 Ex. 6; p. 33.

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constitutional standing to seek enforcement of the Confirmation

Order. Additionally, Wilshire LLC argued that CFTB could not

prove an affirmative defense of laches.7

The bankruptcy court held an initial hearing on the OSC on

September 15, 2009. Wilshire LLC and CFTB appeared by counsel; 

however, the Partners were not represented at the hearing. Only

Wilshire LLC had sought the issuance of the OSC.8 After hearing

arguments of counsel, the bankruptcy court directed the parties to

submit further briefing whether a contempt motion was proper under

the circumstances of this case, and suggested that the Partners

should be joined as parties to the proceedings.

After a continued status conference, on March 12, 2010,

acting under authority of Rule 7019,9 made applicable in contested

matters by Rule 9014(c), the bankruptcy court ordered the joinder

of the Partners in the proceedings. None of the Partners objected

to the joinder order.

Motion for Summary Judgment

or Summary Adjudication of Issues

Eleven months after the OSC was filed, Wilshire LLC and the

Partners filed a joint Motion for Summary Judgment or Summary

Adjudication of Issues on May 3, 2010 (“Motion for Summary

7 Ex. 7; p. 50.

8 Ex. 4, p. 24; Notice of and Motion for Issuance of Order to

Show Cause.

9 All Rule references are to the Federal Rules of Bankruptcy

Procedure, Rules 1001–9037, and all Civil Rule references are to

the Federal Rules of Civil Procedure 1–86. Rule 7019 makes Fed.

R. Civ. P. 19 for joinder of parties applicable in bankruptcy

adversary proceedings.

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Judgment or Summary Adjudication”). In the motion, they repeated

Wilshire LLC's earlier contentions concerning CFTB's receipt of

adequate notice in the Wilshire Bankruptcy Case, that CFTB's

characterization of the Transaction as a disguised sale amounted

to a collateral attack on the Joint Plan, and that the

Confirmation Order should be enforced under applicable provisions

of the Bankruptcy Code.

CFTB filed an opposition to the Motion for Summary Judgment

or Summary Adjudication on June 9, 2010, generally countering

these arguments. In addition to its earlier arguments, CFTB also

argued that the bankruptcy court lacked subject matter

jurisdiction to decide the motion and that, if it had

jurisdiction, the bankruptcy court should abstain from considering

the tax issues. Further, CTFB argued that if the bankruptcy court

was inclined to resolve the tax issues and determine whether the

Transaction did indeed result in CODI rather than capital gain,

CFTB requested a six-month continuance to undertake discovery on

that issue.

Wilshire LLC and the Partners responded to CFTB's opposition

on June 16, 2010, generally repeating and supporting their earlier

arguments.

The bankruptcy court conducted a hearing on both the OSC and

summary judgment motion on June 22, 2010, at which all the parties

were represented by counsel. The bankruptcy court rejected CFTB's

request to submit additional briefing, and denied its request for

additional time to conduct discovery. On July 15, 2010, the

bankruptcy court issued an Order for Summary Adjudication of

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Issues and Continued Hearing (“Summary Adjudication Order”).10 In

the Summary Adjudication Order the court made the following

pertinent findings and conclusions:

1. That jurisdiction existed under 28 U.S.C. §§ 1334(b) and

1346(a), and 11 U.S.C. §§ 346(a) and 346(j) to interpret the

terms of the Joint Plan and Confirmation Order.

2. Finding “V” (page 6 line 17) of Confirmation Order11 states,

“The Joint Plan and all agreements, settlements, transactions

and transfer 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); . . .”

3. The bankruptcy court further concluded that “[b]ecause the

[Joint] Plan did not implement a sale or exchange, the

release or forgiveness under the [Joint] Plan did not create

capital gain income reportable by the [Debtor].”

The Summary Adjudication Order further provided that within

ten days of the entry of that Order, CFTB must vacate the

assessments which are based on the Joint Plan effectuating a

disguised sale or that the Transaction was a sale or exchange. 

CFTB was further ordered to cease and desist from taking further

action in contempt of the Confirmation Order. The bankruptcy

court ordered that it would conduct a further hearing concerning

the impact, if any, of Stackhouse v. United States, 441 F.2d 465

(5th Cir. 1971), to consider whether there could be a different

tax result for the Partners than for the Debtor (the

partnership).12

10 Ex. 31, p. 1078.

11 Ex. 22, p. 702

12 Summary Adjudication Order, Ex. 31, p. 1080; and Hearing

Transcript (“Hrg. Tr.”) of June 22, 2010 hearing, Ex. 32,

pp. 1124: 16-23, 1125: 1-15.

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Second Hearing on Motion for Summary Judgment

and August 31, 2010 Written Decision

The bankruptcy court held a second hearing on July 20, 2010,

on the Motion for Summary Judgment or Summary Adjudication. Early 

in the hearing, the court noted that the Summary Adjudication

Order interpreting Finding “V” was effective only as to Wilshire

LLC, but only tentative as to the individual Partners based on the

court having ordered further briefing and argument on the

“Stackhouse issue.” After hearing the arguments of the parties,

the bankruptcy court announced it would grant summary judgment in

favor of both Wilshire LLC and the Partners. Among the statements

made by the bankruptcy court at the hearing were that:

(a) “Section 1141 provides that all creditors are bound by the

plan. This includes [CFTB];” (b) “In this case the plan’s results

also apply to the Debtor’s partners,. . .;” and (c) “so [CFTB’s]

actions are in contempt of the confirmation order and [CFTB] is

ordered to cease and desist.”13

On August 31, 2010, the bankruptcy court issued a written

Decision entitled “Opinion on the Summary Judgment Motion”

(“August 31 Decision”).14 No further order was issued after the

July 20, 2010 continued hearing. In the August 31 Decision the

bankruptcy court made the following determinations:

1. “[B]ecause [CFTB] received both the case commencement notice

and a notice of entry of the confirmation order, the notice

provided to [CFTB] was constitutionally adequate and did not

deny [CFTB] its due process rights.” Ex. 38, p. 1486. 

13 Ex. 37; Hr'g Tr., p. 1479:1-3; 8-9; 18-19 (July 20, 2010

Continued Hearing on Motion for Summary Judgment or Summary

Adjudication).

14 Ex. 38, p. 1483.

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2. “[T]he interests of the Partners are wholly derivative from

the status of the Property in the partnership.” Id.,

p. 1483. 

3. “The confirmation order specifically provided that the plan

and transactions thereunder ‘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.’” 

Id., p. 1484 

4. “Because the [CFTB] is bound by the chapter 11 plan, . . .,

the action now taken by [CFTB] [to recharacterize the

Transaction as a disguised sale] in contravention of the plan

is an impermissible collateral attack on confirmation order.” 

Id., p. 1487. 

5. “[CFTB’s] attempt to recharacterize the [Transaction] as a

disguised sale would nullify the effect of the [1980

Bankruptcy Tax Act which overturned Stackhouse] and would

ignore the interplay between § 346 and relevant IRC

Provisions [IRC § 108(a)(1)] allowing debtor to exclude CODI

from its realizable income.” Id., p. 1488 

6. [W]hen there is a cancellation of indebtedness at the

partnership level . . . , there is no realized taxable

income, even at the partner level, when a partnership does

not realize CODI.” Id.

October 4, 2010 Order Granting Summary Judgment

On October 4, 2010, the bankruptcy court entered a final

"Order Granting Summary Judgment" (“Summary Judgment Order”).15

This final order was consistent with the August 31 Decision, with

the court making some additional findings and conclusions, which

are paraphrased as follows:

1. The court summarily adjudicates and interprets Finding “V” of

the Confirmation Order to establish that the transaction

implemented under the Joint Plan is not a sale or exchange

for any purpose.

2. The court summarily adjudicates and interprets Finding X of

the Confirmation Order and the Joint Plan Article VI.A.2 to

establish that the transfers and transactions implemented

under the Joint Plan are not a sale of partnership interests

by the existing Partners.

15 Ex. 39, p. 1491.

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3. The court summarily adjudicates and interprets Finding “X” of

the Confirmation Order to establish that the transfers and

transactions contained in Joint Plan Article VI.A., and

specifically Article VI.A.2., to be a capital contribution to

Wilshire LLC in return for receiving the LLC interests.

4. The court summarily adjudicates and interprets Finding “Y” of

the Confirmation Order and Joint Plan Article VII.A and C to

establish that the junior secured claim in the approximate

amount of $221 Million is released and discharged for payment

of $2.5 Million as provided in Joint Plan Article V.C-2.

5. The court summarily adjudicates and interprets Bankruptcy

Code § 346 (as it existed in 1997) as applying to the State

of California so that income is not realized by (1) the

bankruptcy estate, (2) debtor, or (3) successor to debtor by

reason of forgiveness or discharge of indebtedness under

Title 11.

6. The excluded discharge of indebtedness is income subject to

passthrough pursuant to IRC Section 702(a) resulting in a

basis increase under IRC Section 705.

7. The CFTB Assessments (Ex. 14, pp. 223-257) of taxes on the

Partners constitute an impermissible collateral attack on the

Confirmation Order and Joint Plan based on the requirement on

a government unit to raise the tax avoidance issue either at

or before the confirmation hearing, or in the event of fraud

within 180 days thereafter as provided in 11 U.S.C.

§§ 1129(d) and 1144.

8. CFTB is ordered to vacate the Assessments within ten days of

the entry of this Order Granting Summary Judgment.

THE SUMMARY ADJUDICATION ORDER, SUMMARY JUDGMENT ORDER,

AND THE AUGUST 31 DECISION ARE PROPERLY ON APPEAL

On July 26, 2010, CFTB filed a Notice of Appeal (“First

Notice of Appeal”) in connection with the Motion for Summary

Judgment or Summary Adjudication.16 The First Notice of Appeal

states that CFTB appeals to the Bankruptcy Appellate Panel from:

(1) the Summary Adjudication Order (filed July 15, 2010), (2) the

“July 20, 2010 Decision,” and (3) “any judgment, order or decree

related to such decision, which has not, as yet, been issued.”

16 Ex. 33, p. 1128.

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On October 13, 2010, CFTB filed a second Notice of Appeal in

connection with the Motion for Summary Judgment or Adjudication

(“Second Notice of Appeal”).17 The second Notice states that CFTB

appeals to the Bankruptcy Appellate Panel from: (1) the July 15,

2010 Order for Summary Adjudication and Continuing Hearing,

(2) the July 20, 2010 oral decision of the bankruptcy court and

any judgment, order or decree related to that oral decision, which

has not, as yet been issued, (3) the August 31 Decision, and

(4) the Order Granting Summary Judgment.

CFTB argues that the bankruptcy court lacked jurisdiction to

issue the Summary Judgement Order on October 4, 2010, because CFTB

filed a Notice of Appeal of the Summary Adjudication Order on

July 25, 2010. CFTB contends that the Summary Judgment Order

filed on October 4, 2010, altered and expanded the Summary

Adjudication Order previously filed on July 15, 2010, which was

the subject of the July 25, 2010 Notice of Appeal. In support of

this contention, CFTB cites Rains v. Flinn (In re Rains), 428 F.3d

893, 904 (9th Cir. 2005) for the basic legal principle that, once

a notice of appeal is filed, the bankruptcy court may not finally

adjudicate substantial rights directly involved in the appeal. 

CFTB concludes that the August 31 Decision is the judgment or

order from which it has appealed, and the October 4, 2010 Order

altered that judgment or order. CFTB’s arguments miss the mark on

several points.

First, subject to exceptions not applicable here, an appeal

may be taken as a matter of right only from a final judgment or

17 Ex. 40, p. 1496.

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order. 28 U.S.C. § 158(a)(1). The final judgment or order

requirement is intended to preclude piecemeal litigation, conserve

judicial energy, and eliminate delays caused by interlocutory

appeals. Catlin v. United States, 324 U.S. 229, 233-34 (1945). 

“In the ordinary course a ‘final decision’ is one that ends the

litigation on the merits and leaves nothing for the court to do

but execute the judgment.” Ray Haluch Gravel Co. v. Cent. Pension

Fund of the Int’l Union of Operating Eng’rs & Participating

Emp’rs, 134 S. Ct. 773, 779 (2014)(quoting Catlin, 324 U.S. at

233).

It is clear from the history of hearings and orders in the

Wilshire Bankruptcy Case beginning with the Summary Adjudication

Order, through the hearings and oral statements from the

bankruptcy court at the July 20, 2010 hearing, the issuance of the

August 31 Decision, and ultimately the Summary Judgment Order, the

final order from which an appeal could be taken as a matter of

right was not issued by the court until October 4, 2010. The CFTB

incorrectly seeks to treat the August 31 Decision, the Summary

Adjudication Order, and the statements of the court at the two

hearings as the “final orders” for purposes of appeal – all of

which predated the issuance of the actual final order, the

October 4, 2010 Summary Judgment Order.18

In substance, CFTB complains that the bankruptcy court

conducted multiple proceedings and afforded the parties several

18 CFTB’s First Notice of Appeal foretells that a final order

is to come, stating that CFTB is appealing from not only the

Summary Adjudication Order and Decision, but from any other order

or decree relating to the motion “which has not, as yet, been

issued.” Ex. 33, p. 1128.

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opportunities to consider interim rulings and further brief

specific issues. Beginning with the bankruptcy court’s July 20,

2010 oral statements, and continuing through the August 31

Decision and the final Summary Judgment Order on October 4, 2010,

the final legal conclusions made by the bankruptcy court evolved

as the judge considered the evidence and arguments. Once the

Summary Judgment Order was entered, the universe of the bankruptcy

court’s findings of fact and conclusions of law was fixed and the

final, appealable order issued. The bankruptcy court did not

issue such a final order, but continued the hearing on the

“Stackhouse Issue” to determine whether the tax assessments could

be made against the Partners.

The Summary Adjudication Order

Cannot Be a Final Order

Further, the Summary Adjudication Order did not purport to be

a final determination of the Contested Matter, but only a “summary

adjudication.” The term “summary adjudication” is not a federal

procedural term, but one under California state law. “Summary

adjudication” is a procedure by which the state court judge may

determine some of the claims or issues, but does not conclude the

action before the court. The final judgment is, and must be,

subsequently issued.19

In federal court the analogous rule is found in Civil

Rule 56(a), as incorporated by Rule 7056, providing for partial

summary judgment on a claim or defense. As noted in MOORE’S FEDERAL

19 See 6 Witkin, Cal. Proc. 5th, §§ 267 - 277, Proceedings

Without Trial, for general discussion of the state law principle

of summary adjudication.

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PRACTICE, CIVIL § 56.122 (Matthew Bender 3d Ed.), “Of course, the

reference to ‘judgment’ in the term ‘partial summary judgment’ is

a misnomer. Any ruling that disposes of less than all issues and

fewer than all parties in an action is not a judgment within the

meaning of Rule 54.” A partial summary judgment order is “not an

inherently final order.” Mueller v. Auker, 576 F.3d 979, 1002

(9th Cir. 2009); SEIU, Local 102 v. Cnty. of San Diego, 60 F.3d

1346, 1350 (9th Cir. 1994). 

Further, CFTB’s assertion that the Summary Adjudication Order

is a “final order” does little to avoid piecemeal litigation, and

actually has the effect of creating piecemeal, fragmented,

potentially inconsistent litigation between the CFTB and Wilshire

LLC on the one hand, appealing the Summary Adjudication Order, and

then CFTB and Partners in appealing the Summary Judgment Order. 

The Summary Judgment Order is the final order from which CTFB

could appeal. The bankruptcy court properly exercised

jurisdiction over the Motion for Summary Judgment or Summary

Adjudication through and including the issuance of the Summary

Judgment Order. CFTB timely appealed the final order.

STANDARDS OF REVIEW

The bankruptcy court’s decision to grant or deny a summary

judgment is reviewed de novo by the appellate court. Botosan v.

Paul McNally Realty, 216 F.3d 827, 830 (9th Cir. 2000). The same

standards used by the bankruptcy court under Civil Rule 56, as

made applicable by Rules 7056 and 9014, apply upon appellate

review. Meade v. Cedarapids, Inc., 164 F.3d 1218, 1221 (9th Cir.

1999). Facts determined for summary judgment proceedings are not

entitled to the clearly erroneous standard of appellate review.

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Audrey, Inc. v. Casey (In re Audre, Inc.), 216 B.R. 19, 25 (9th

Cir. BAP 1997); Gertsch v. Johnson & Johnson, Finance Co.

(In re Gertsch), 237 B.R. 160, 165 (9th Cir. BAP 1999). Summary

judgment is not proper if material factual issues exist for trial. 

Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995).

An appellate court may base its ruling on any ground

supported by the record. Danning v. Miller (In re Bullion Reserve

of N. Am.), 922 F.2d 544. 546 (9th Cir. 1991); Gilbert v. BenAsher, 900 F.2d 1407, 1410 (9th Cir. 1990), cert. denied, 498 U.S.

865 (1990).

STANDING, CONSTITUTIONALLY SUFFICIENT

NOTICE, BINDING ORDER CONFIRMING PLAN,

AND NO DETERMINATION OF NATURE OF TRANSACTION

CFTB first asserts that Wilshire LLC, as successor to the

reorganized Debtor, does not meet the minimum Constitutional

standing requirements for a party with an actual case or

controversy to be adjudicated by the federal courts. U.S. CONST.

art 3, sec. 2. A determination of standing is subject to de novo

review on appeal. La Asociacion de Trabajadores de Lake Forest v.

City of Lake Forest, 624 F.3d 1083, 1087(9th Cir. 2010). 

Federal courts are not forums for hypothetical claims or

litigation by persons who do not have rights which are the subject

of the federal court proceeding (with limited exceptions to this

rule, such as class action and other special representative

proceedings authorized by Congress). Ne. Fla. Chapter of the

Associated Gen. Contractors of Am. v. City of Jacksonville, Fla.,

508 U.S. 656, 663 (1993). Standing must be determined to exist

before the court can proceed with a case. Sacks v. Office of

Foreign Assets Control, 466 F.3d 764, 771 (9th Cir. 2006).

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A person must have a legally protected interest, for which

there is a direct stake in the outcome, to have standing in

federal court. This fundamental requirement arises under the

Constitution. Arizonans for Official English v. Ariz., 520 U.S.

43, 64 (1997). The Supreme Court provided a detailed explanation

of the Constitutional case or controversy requirement in

Northeastern Florida Chapter of the Associated General Contractors

of America v. City of Jacksonville, Florida, supra 508 U.S. at

663. In that decision, the court explained that a party seeking

to invoke federal court jurisdiction must demonstrate: (1) injury

in fact, not merely conjectural or hypothetical injury; (2) a

causal relationship between the injury and the challenged conduct;

and (3) the prospect of obtaining relief from the injury as a

result of a favorable ruling is not too speculative. Id. 

CFTB asserts that Wilshire LLC lacks standing because the

taxes at issue are to be paid by the Partners, not the Debtor,

citing Culver, LLC v. Chiu (In re Chiu), 266 B.R. 743, 748 (9th

Cir. BAP 2001), aff’d, 304 F.3d 905 (9th Cir. 2002). Wilshire LLC

counters, arguing that as the entity in which the tax event is

determined, and then passed through to the Partners, it has

standing to determine the taxes arising from the operation of its

business, citing Sprint Communications Co., L.P. v. APCC Servs.,

Inc., 554 U.S. 269, 287 (2008).

The tax liabilities or benefits of the Partners are wholly

derivative of the tax consequences of the Transaction created by

and for Debtor through the Joint Plan. Determination of taxable

income for a partnership is done in the same manner as for an

individual, with that income or loss then passed through from the

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partnership to the partners. United States v. Basye, 410 U.S.

441, 448 (1973); 26 U.S.C. §§ 703, 701. The partnership is

regarded as an independently recognizable entity apart from the

aggregate of its partners. Only once its income is ascertained

and reported, then the existence of the partnership may be

disregarded and then each partner is attributed a tax attribute

for a portion of the total, treating the partnership as merely a

conduit through which the partnership’s income has passed. Id.20

For partnerships, the California Revenue and Taxation Code

incorporates the provisions of Subchapter K of Chapter 1 of

Subtitle A of the Internal Revenue Code (26 U.S.C. §§ 701-776). 

Cal. Rev. & Tax Code § 17851 (with specific statutory exceptions

not applicable to the issue before the court). 

Wilshire LLC, as the successor to Debtor, is the “person”

whose transaction is the subject of the controversy to determine

whether income was generated for tax purposes for the partnership. 

After the taxation income determination from the Transaction is

made for the partnership (Debtor), then the partnership serves as

the conduit through which the income (or loss) is passed through

20 Footnote 8 in United States v. Basye, 410 U.S. at 448,

quotes the legislative history, echoing the Solicitor General’s

remarks that it is odd to be debating the issue of income being

determined at the partnership and that being then passed through

to the partners. “The legislative history indicates, and the

commentators agree, that partnerships are entities for purposes of

calculating and filing informational returns but that they are

conduits through which the taxpaying obligation passes to the

individual partners in accord with their distributive shares. See,

e. g., H. R. Rep. No. 1337, 83d Cong., 2d Sess., 65-66 (1954);

S. Rep. No. 1622, 83d Cong., 2d Sess., 89-90 (1954); 6 J. Mertens,

Law of Federal Income Taxation § 35.01 (1968); S. Surrey &

W. Warren, Federal Income Taxation 1115-1116 (1960); Jackson,

Johnson, Surrey, Tenen & Warren, The Internal Revenue Code of

1954: Partnerships, 54 Col. L. Rev. 1183 (1954).”

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to the Partners. Wilshire LLC, the successor which emerged from

the confirmed Joint Plan, has standing to litigate the Joint Plan

issues concerning the nature of the Transaction. Once such

determination is made, then Wilshire LLC can properly report such

income or losses (or correct previously reported information) to

the Partners for inclusion on their tax returns. 

The bankruptcy court’s determination that Wilshire LLC has

standing to prosecute the Order to Show Cause and obtain a

determination of the Transaction is correct and is affirmed.

CFTB Was Provided Constitutionally Sufficient Notice

Of The Wilshire Bankruptcy Case

This Panel having determined that Wilshire LLC has standing,

next considers CFTB’s assertion that it is not bound by the

provisions of the Confirmation Order. This argument operates on

two levels: first, whether CFTB was bound by the reorganization of

the Debtor and Transaction provided for in the Joint Plan and the

Confirmation Order; and second, whether specific findings made in

the Confirmation Order bind Wilshire LLC, the Partners, and CFTB

concerning the nature of the Transaction (whether it was a sale or

a non-sale reorganization of the Debtor with debt forgiveness

under the Bankruptcy Code). CFTB conflates these two separate

issues.

In the Summary Adjudication Order, the bankruptcy court

determined that Finding “V” of the Confirmation order establishes

that the Transaction was not a sale or exchange for any purpose.21

The bankruptcy court subsequently issued the August 31 Decision

21 Ex. 31; Summary Adjudication Order, p. 1078.

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which concluded that notice of filing of the Wilshire Bankruptcy

Case and the subsequent notice that the Confirmation Order had

been entered provided constitutionally sufficient notice that

CFTB’s rights and interests were determined through confirmation

of the Joint Plan.

The touchstone for a question of whether sufficient notice

was provided for Constitutional Due Process purposes for a

determination of a person’s rights or interest in property is

Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950). 

Such constitutionally sufficient notice must be “[r]easonably

calculated, under all the circumstances, to apprise interested

parties of the pendency of the action and afford them an

opportunity to present their objections.” Id. at 314. In the

context of bankruptcy proceedings, the issue of Due Process was

recently addressed by the Supreme Court in United Student Aid

Funds, Inc. v. Espinosa, 559 U.S. 260 (2010). Having received

notice of the plan and its contents prior to the bankruptcy court

confirming the chapter 13 plan, the Supreme Court found that such

notice satisfied United Student Aid Funds, Inc.’s Due Process

rights. Id. at 272. As restated in Tulsa Professional Collection

Services, Inc. v. Pope, 485 U.S. 478, 484 (1988), notice is

constitutionally sufficient when it is reasonably calculated,

under all the circumstances, to apprise interested parties of the

pendency of the action and afford them an opportunity to present

their objections. 

Here, CFTB received notice of both the Wilshire Bankruptcy

Case and the Confirmation Order. Had it chosen to act, such as

requesting special notice, CFTB could have monitored the Wilshire

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Bankruptcy Case. CFTB cannot now complain that it was not invited

by the Debtor to assert whatever rights or objections CFTB might

possibly have to the Joint Plan which was moving toward

confirmation.

The bankruptcy court’s determination that CFTB received

sufficient notice of the Wilshire Bankruptcy Case and the

proceedings which led to the Confirmation Order is affirmed. The

terms of the Joint Plan and Confirmation Order bind Wilshire LLC,

the Partners, and CFTB to the Joint Plan.

Findings in the Confirmation Order Stating the

Nature of the Transaction Are Not Binding on CFTB

As the Panel reads Wilshire LLC’s and the Partners’ briefs,

they contend that the Confirmation Order not only confirms the

Joint Plan, but “binds” CFTB to a determination stated in the

Confirmation Order that, for purposes of tax treatment, the

Transaction is not a sale of the partnership assets or interests. 

This argument overstates the effect of the Confirmation Order. 

For this proposition, Wilshire LLC and the Partners direct

the Panel to the progeny of Lawrence Tractor Co. v. Gregory

(In re Gregory), 705 F.2d 1118, 1123 (9th Cir. 1983). In Gregory

the Ninth Circuit Court of Appeals affirmed the lower courts,

concluding that notice of a chapter 13 bankruptcy case was

sufficient notice to the creditor that confirmation of the plan

could lead to the discharge of its debt. The notice of the

bankruptcy case put the creditor on inquiry notice that its claim

could be affected, including discharged as provided by the

Bankruptcy Code, which required the creditor to investigate the

case. If the creditor had so acted, it would have seen that

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debtor was seeking to confirm a chapter 13 plan which provided a

0% percent dividend for the creditor’s claim and a discharge of

that debt upon completion of the Chapter 13 plan.

In 2009, the Ninth Circuit again addressed this issue in Joye

v. Franchise Tax Board (In re Joye), 578 F.3d 1070 (9th Cir.

2009). In Joye, the CFTB (same party as in this appeal) received

notice of the Joye bankruptcy case having been filed and that

September 3, 2001, was the claims bar date set for governmental

claims. The CTFB, with knowledge of the Joye bankruptcy case, did

not file a proof of claim until October 15, 2001. In Joye, the

court concluded that while having notice of the bankruptcy case,

the CFTB “[i]gnored the Joyes’ bankruptcy proceeding ‘at its

peril.’” Id. at 1080. 

In the present case, Wilshire LLC does not contend that the

proposed Chapter 11 plan or the bankruptcy court file provided

notice that confirmation of the Joint Plan would constitute a

determination that the Transaction was not a sale. Nor is it

asserted that notice was provided that confirmation of the Joint

Plan would determine the tax consequences flowing from the

Transaction. Rather, Wilshire LLC only argues that by virtue of

adding language stating such a “determination” to the order

subsequently signed by the bankruptcy judge, that language now

binds CFTB. 

A review of the Second Amended Disclosure Statement,

Section III, Part H, titled “Tax Consequences of Joint Plan,”

imparts the following information with respect to the tax

consequences of confirmation: “CREDITORS AND INTEREST HOLDERS

CONCERNED WITH HOW THE JOINT PLAN MAY AFFECT THEIR TAX LIABILITY

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SHOULD CONSULT WITH THEIR OWN ACCOUNTANTS, ATTORNEYS, AND/OR

ADVISORS.”22 It continues to state, “The Proponent CANNOT and DOES

NOT represent that the tax consequences contained below are the

only tax consequences of the Joint Plan because the Tax Code

embodies many complicated rules that make it difficult to state

completely and accurately all of the tax implications of any

action.”23 This Section H of the Second Amended Disclosure

Statement restates several times that no representation concerning

the actual tax consequences of confirmation and performance of the

plan would be made by Debtor.

For the Partners, the Second Amended Disclosure Statement

states that there will be a discharge of indebtedness and Partners

will recognize cancellation of indebtedness income (“CODI”). The

Second Amended Disclosure Statement continues, stating that the

Partners may elect to treat the CODI as provided in § 108 of the

Internal Revenue Code. Such § 108 treatment may allow the CODI to

be excluded from income or Partners may elect to offset it against

operating losses.24 The Joint Plan does not contain any provision

either characterizing the Transaction or the tax effects of the

Transaction.25

The Joint Plan and the Confirmation Order do not constitute

the final determination of the Transaction for tax purposes. Such

determination was properly the subject of the subsequent post22 Id., p. 496:20-22.

23 Id., p. 496:25-27, 497:1-2.

24 Id., p. 498:3-13.

25 Ex. 12; Second Amended Disclosure Statement, pp. 515-561.

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confirmation judicial proceedings in the bankruptcy court which

are the subject of this appeal. The bankruptcy court properly

considered CFTB’s contentions, rejecting Wilshire LLC’s contention

that the Joint Plan and Confirmation Order is a final order

previously determining that issue between Wilshire LLC and CFTB.

THE BANKRUPTCY COURT CORRECTLY DETERMINED

THAT THE TRANSACTION WAS NOT A SALE

The Ninth Circuit Court of Appeals remanded this appeal to

the Bankruptcy Appellate Panel to make a merits determination of

whether the bankruptcy court gave “due consideration to the

‘economic realities’ of the transaction as structured through the

[Joint] Plan and Confirmation Order.” These “economic realities”

are a consideration of whether there are “tax independent

considerations” for the transaction and that the economic

substance of the transaction “is not shaped solely by taxavoidance features that have meaningless labels attached . . . .” 

Frank Lyon Co. v. United States, 435 U.S. 561, 583-584 (1978). So

long as there are significant and genuine non-tax attributes to

the transaction, the form of the transaction adopted by the

parties governs for tax purposes. Id. See also Sollberger v.

Commissioner, 691 F.3d 1119, 1124, n.6 (9th Cir. 2012) (The court

conducts a flexible, case-by-case analysis of whether the burdens

and benefits of ownership have been transferred. There are not

hard and fast rules of thumb which can be used for such a

determination, and no single factor is controlling. The

transaction must be viewed in light of realism and practicality.)

The bankruptcy court determined the Transaction eleven months

after the Order to Show Cause was issued. The bankruptcy court

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issued three documents stating the findings and conclusions upon

which the Summary Judgment Order is based. For the flexible,

case-by-case analysis of whether “tax independent considerations”

exist and the economic substance of the Transaction, this Panel,

through its de novo review, considers the evidence presented and

the findings of fact and conclusions of law to be drawn therefrom.

First Hearing on Motion for

Summary Judgment or Summary Adjudication

The hearing on the Motion for Summary Judgment or Summary

Adjudication was conducted on June 22, 2010. In its Opposition26

and at the June 22, 2010 hearing27 CFTB did not argue that tax

independent considerations did not exist or that the economic

realities of the Transaction demonstrated that they were only tax

driven. Rather, CFTB’s arguments focused on why the bankruptcy

court did not have jurisdiction (which jurisdiction the Ninth

Circuit established does exist in Wilshire I) and why 11 U.S.C.

§ 346(j) did not apply to the Transaction under the confirmed

Joint Plan. CFTB stated at the hearing, “We’re not challenging,

your Honor, the aspects of the plan.”28 Rather, CFTB asserted that

the court does not have jurisdiction to determine the issue if

11 U.S.C. § 346 applied, and the application of the Internal

Revenue Code to treat the Transaction as a sale of partnership

26 Ex. 24; Opposition to Motion for Summary Judgment or

Adjudication, p. 875.

27 Ex. 32; Transcript, p. 1085.

28 Ex. 32; Transcript, p. 1114:8-9.

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interests by the Partners.29 At the conclusion of the June 22,

2010 hearing the bankruptcy court did not state any findings of

fact or conclusions of law on the record.

Request for Continuance Was Properly Denied

As part of its Opposition, CFTB requested a six-month

continuance so that it could conduct discovery on the issue of

whether the Transaction resulted in cancellation of indebtedness.30

The scope of the requested discovery is set forth in Paragraph 22

of the Declaration of Robert Babcock (“Babcock Declaration”) filed

in opposition to the Motion for Summary Judgment or Summary

Adjudication.31 The scope of the discovery described relates to

the underlying substance of the Transaction, with discovery to be

conducted of the Debtor, creditors, Partners, and Wilshire LLC.

CFTB also filed an Ex Parte Motion for Continuance if the

bankruptcy court did not discharge the Order to Show Cause based

on CFTB’s legal arguments. CFTB requested the continuance to

allow an additional six months to conduct discovery.32

The continuance for CFTB to undertake such discovery was not

granted by the court. The bankruptcy court’s denial of the

request for further discovery before ruling on the motion for

summary judgment is reviewed for abuse of discretion. Chance v.

Pac-Telerac, Inc., 242 F.3d 1151, 1161 n.6 (9th Cir. 2011). The

29 Ex. 32; Transcript, p. 1114: 1-4, 18-22.

30 Ex. 24; Opposition, p. 1:19-21, 2:1-14.

31 Ex. 34; Babcock Declaration, p. 1138.

32 Ex. 19; Conditional Ex Parte Motion to Continue Hearing,

p. 316.

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burden is on the party seeking further discovery to show that it

diligently pursued its previous discovery opportunities and that

evidence it seeks exists. Id., citing Nidds v. Schindler Elevator

Corp., 113 F.3d 912 920 (9th Cir. 1996), and Conkle v. Jeong,

73 F.3d 909, 914 (9th Cir. 1995).

In the Opposition, CFTB theorized that the Transaction

resulted in capital gain, and therefore there was no cancellation

of indebtedness income which could have been excluded pursuant to

Internal Revenue Code (“IRC”) § 108 (26 U.S.C. § 108) and

11 U.S.C. § 346(j) would not be applicable. CFTB argued that the

Transaction consisted of a sale of 99% of the properties of Debtor

for $3,500,000 and cancellation of $284,570,000 of indebtedness.33

CFTB treated the Transaction as in substance being a sale by the

Partners of 99% of their partnership interests to the Senior

Secured Creditors who acquired such 99% interest in the Debtor to

be their 99% interest in Wilshire LLC. CTFB further contended

that the Transaction violated IRC § 701 (which provides that a

partnership shall not be subject to the income tax imposed), and

that by applying the step-transaction doctrine CFTB can treat the

Transaction as one by which Debtor sold a 99% interest in the

properties or that the Partners sold 99% of their interests in the

Debtor. Evidence was not presented to support these arguments. 

As Wilshire LLC and the Partners argue, the briefing and

hearing schedule on the Motion for Summary Judgment or Summary

Adjudication was set pursuant to a stipulation between CFTB and

33 Ex. 24; Opposition, p. 916:1-9.

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Wilshire LLC (“Scheduling Stipulation”).34 As part of the

Stipulation, dated April 22, 2010, CFTB, Wilshire LLC, and the

Partners agreed and stipulated to several matters. First, the

bankruptcy court had issued an order joining all of the Partners

into this Contested Matter. Second, no objection to the joinder

by any of the Partners was filed and the Partners were parties to

this Contested Matter. CFTB, Wilshire LLC, and the Partners then

stipulated that the hearing on the Motion for Summary Judgment or

Summary Adjudication occur on June 22, 2010. Further, the Motion

for Summary Judgment or Adjudication would be filed by May 3,

2010, Opposition filed by June 7, 2010, and Replies filed by

June 15, 2010.

In denying the request for a continuance to undertake

discovery, the bankruptcy court noted that no discovery had been

attempted by CFTB during the one year that this Contested Matter

had been pending. CFTB argued that the issues relating to

11 U.S.C. § 346(j) had not been raised until the filing of the

Motion for Summary Judgment or Summary Adjudication. The

bankruptcy court noted that the issue of whether 11 U.S.C. § 346

applied had been fully briefed by the parties. 

The bankruptcy court further noted that in its September 8,

2009 Reply to CFTB’s Response to the Order to Show Cause,

Wilshire LLC asserted that the grounds for contempt included the

assertion that CFTB’s conduct constituting a collateral attack on

the Confirmation Order and Joint Plan in violation of 11 U.S.C.

34 Ex. 13; Joint Status Report, p. 166.

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§ 346(j).35 The Reply expressly quoted the language of 11 U.S.C.

§ 346(j)(1) stating that no income is realized from the

forgiveness or discharge of indebtedness in a case under

Title 11.36 There was no “surprise” that 11 U.S.C. § 346 was a

basis for the relief requested (contempt for a collateral attack

on the Confirmation Order and Joint Plan) from September 8, 2009

forward, and the record shows that CFTB was aware that 11 U.S.C.

§ 346 was at issue when it entered into the Scheduling

Stipulation.

No adequate basis is shown for reversing the bankruptcy

court’s denial of the Ex Parte Motion for Continuance. No basis

is shown for granting relief to CFTB from the stipulation setting

the schedule for filing and hearing cross-summary judgment

motions. Neither in its brief nor at oral argument on this appeal

has CFTB provided any explanation of how it was prevented from

conducting discovery during that one-year period after the motion

for the OSC was filed. Denial of the request for a continuance is

affirmed.

Bankruptcy Court Determination That

The Transaction Was Not A Sale

In the Summary Adjudication Order the bankruptcy court

determined that: (1) Finding “V” of the Confirmation Order

establishes “[T]hat the transaction implemented under the Plan is

not a sale or exchange;” and (2) that since the transaction was

35 Ex. 7; Wilshire LLC’s Reply to Opposition to CFTB Response

to Order to Show Cause, pp. 67:1 - 68:17.

36 Id.; p. 67:3-6.

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not a sale or exchange, “[t]he release or forgiveness of

indebtedness under the Plan did not create capital gain income

reportable by [Debtor].”37 The court then continued the hearing

for further briefing and oral argument on the Stackhouse issue.

The bankruptcy court conducted a further hearing and issued

the August 31 Decision.38 It first determined that the Joint Plan

“does not effect a sale of the partners’ interest in the

partnership property.” The bankruptcy court further stated,

consistent with the Summary Adjudication Order, that the Joint

Plan restructured the Debtor from a general partnership into a

limited liability company (Wilshire LLC), with Wilshire LLC, the

restructured Debtor, continuing to own the Properties. The

bankruptcy court repeated the prior finding and determination

pursuant to Finding “V” of the Confirmation Order. 

The bankruptcy court, in connection with the substance of the

Transaction, made the determination that CFTB’s interpretation of

the tax laws and the Transaction “would nullify the effect of the

[Bankruptcy Tax Act of 1980] at the partner level in a

[cancellation of indebtedness] scenario and would ignore the

interplay between § 346 and relevant IRC provisions allowing the

debtor to exclude [cancellation of indebtedness income] from its

realizable income.” The bankruptcy court concluded that the

Bankruptcy Tax Act of 1980 overruled Stackhouse v. United States,

441 F.2d 465 (5th Cir. 1971), which had previously interpreted the

IRC to allow for income to be determined in one manner for a

37 Ex. 31; p. 1079.

38 Ex. 38; p. 1483.

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partnership and then in a different manner by the IRS for the

individual partners.

The August 31 Decision concludes with the bankruptcy court

expressly stating that the Transaction: (1) resulted in discharge

of indebtedness; (2) was not a disguised sale; and (3) did not

result in a capital gain.

The court then issued the Summary Judgment Order on

October 4, 2009, which includes the following determinations by

the court concerning the Transaction. First, the court

interpreted and adjudicated Finding “X” of the Confirmation Order

to establish that the Transaction was not a sale of the

partnership interests. Second, that there was a capital

contribution by the Senior Secured Creditors for their interest in

the restructured Debtor, Wilshire LLC, as part of the Transaction. 

Third, that Finding “Y” of the Confirmation Order established that

the $221,000,000 claim secured by the second deed of trust was

released and discharged solely in exchange for the payment of

$2,500,000 as provided in the Joint Plan.

Upon De Novo Review, The Evidence Presented Supports the 

Determination That The Transaction Was Not a Sale

The CFTB complains that the bankruptcy court did not, and

could not, have really considered the “economic realities” of the

transaction because it was not presented with evidence of the

transaction by CFTB. As discussed above, this Panel, upon

completing its de novo review, concurs with the decision of the

bankruptcy court in denying CFTB’s request for a continuance to

begin discovery on the eve of the stipulated hearing on the Motion

for Summary Judgment or Summary Adjudication. CFTB was aware

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since September 2009 that the 11 U.S.C. § 346 discharge or

forgiveness of indebtedness was at the core of Wilshire LLC’s

contention that CFTB was engaging in an impermissible collateral

attack of the confirmed Joint Plan and Confirmation Order. CFTB’s

strategy decision to not present any additional evidence does not

mean that the bankruptcy court did not have evidence from which it

made its decision, and this Panel can conduct its de novo review.

The federal judicial process is not a GIGO (garbage in,

garbage out) system. Irrespective of the sufficiency of the legal

briefs, a federal judge has the responsibility to make his or her

decision based on the correct law. United Student Aid Funds, Inc.

v. Espinosa, 559 U.S. at 277. However, the federal judge is

dependant on the parties to present the competent, credible

evidence from which the judge is to make the required findings of

fact. In making the requisite findings of fact and making the

conclusions of law therefrom, the judge should not go outside the

record unless the facts are matters of common knowledge or capable

of certain verification (Fed. R. Evid. 201, Judicial Notice). 

Clicks Billards, Inc. v. Sixshooters, Inc., 251 F.3d 1252, 1267

(9th Cir. 2001). A party cannot complain that it would have

conducted discovery or presented other evidence if it had known in

advance the findings of fact and conclusions of law which the

court was going to draw from the discovery and other evidence

presented at the hearing or trial.

For the bankruptcy court, the evidence of the Transaction

provided by Wilshire LLC, the Partners, and CFTB consists

substantially of the Disclosure Statement and Joint Plan. The

bankruptcy court concluded that the Transaction was not a sale or

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exchange, but a restructure by which the Debtor partnership was

reorganized into Wilshire LLC, a limited liability company. While

CFTB theorizes whether, if evidence existed and were produced, a

court at sometime in the future might determine that the

Transaction is not as stated in the Joint Plan, no such evidence

was presented by CFTB to the bankruptcy court.

In conducting the de novo review, this Panel concurs that

(1) there is not any conflicting evidence of any material fact and

(2) there are no genuine issues of material fact – only a dispute

as to the legal conclusions drawn from the undisputed evidence. 

From the evidence presented, the bankruptcy court did not err in

concluding that the Joint Plan and Transaction constituted a

reorganization of the Debtor into Wilshire LLC, and such

reorganization was not a sale, transfer, or a disguised

foreclosure or deed in lieu of foreclosure. The Disclosure

Statement describes a very complex business transaction by which

the Senior Secured Creditors acquire a 99% interest in Wilshire,

LLC, the successor reorganized Debtor that emerges from bankruptcy

through the Joint Plan. For the Partners, 99% of their interests

in the Debtor are lost, with them having only a 1% interest in

Wilshire LLC, the reorganized successor to Debtor.

The Joint Plan and Disclosure Statement identify the

following assets and claims to be addressed. As of the Second

Amended Disclosure Statement, the assets of the Debtor and

bankruptcy estate are listed to have a value of $164,645,000,

which are subject to the Senior Secured Creditors’ lien

($173,570,000 claim) and the Co-Investors’ Junior lien

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($221,000,000 claim).39 Under the Debtor’s liquidation analysis,

this exhausts any value in the assets, or as may be more commonly

stated, all creditors and interest holders, other than the Senior

Secured Creditors (on at least a portion of their secured claim),

are “out of the money.” The Liquidation Analysis identifies an

additional $850,000 to $900,000 in general unsecured claims which

would also “be out of the money” in a Chapter 7 liquidation.

The Disclosure Statement also informs creditors that a

settlement was reached and approved by the Court among the Debtor,

acting as the then debtor in possession,40 Senior Secured

Creditors, and California Federal Bank. The settlement resolved a

lease dispute with California Federal Bank and provided for a new

lease of the Property for the Joint Plan. Under the settlement,

California Federal Bank also agreed to pay the Estate $27,825,000,

assign its existing leases and subleases to the Estate, enter into

a new five year lease, dismiss the pending adversary proceeding,

and execute mutual releases.

The Joint Plan provides for Wilshire LLC to obtain New

Secured Financing of $95,000,000 to $100,000,000 to be paid to the

Senior Secured Creditors. The difference between the $123,000,000

portion of the Senior Secured Claim and the payment from the New

Secured Financing would constitute the Senior Secured Creditors’

capital contribution to acquire the 99% interest in Wilshire LLC. 

39 Ex. 21; Disclosure Statement, p. 509 Liquidation Analysis,

and pp. 491-492, Article III, D, Class B and C-2 (Senior Secured

Claim), and Class C-2 (Co-Investor Secured Claim).

40 The debtor in possession serves as the fiduciary of the

bankruptcy estate in the place of, and exercising many of the

powers of, a Chapter 11 trustee. 11 U.S.C. § 1107.

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The $40,570,000 balance of the Senior Secured Creditors’ Claim was

to be paid $40.57, with the remainder of the Senior Secured claim

discharged and the parties executing releases.

For the Co-Investors’ Claim in the amount of $221,000,000,

they were to be paid $2,500,000, with the balance of the

obligation being discharged and the parties executing releases.41

Under the Joint Plan the creditors holding $850,000 to

$900,000 in general unsecured claims were paid in full.

The Disclosure Statement provides information about the preand post-petition operation of the Property by the Debtor and the

Bankruptcy Estate. This included a discussion of the dispute with

California Federal Bank and commencing the Wilshire Bankruptcy

Case to prevent the Senior Secured Creditors from proceeding with

a foreclosure sale. It further discussed the active prosecution

of the case by the Debtor and the Secured Creditors, including an

attempt to have a bankruptcy trustee appointed. The final

approved disclosure statement was forged from drafts advanced by

the Debtor and objections asserted by the U.S. Trustee, Secured

Creditors, and California Federal Bank. During the Wilshire

Bankruptcy Case the creditors who chose to be active conducted

discovery, investigated the operation of the Debtor’s business,

evaluated competing claims, and participated in advancing a

chapter 11 plan. By early October 1997, Debtor, Secured

Creditors, and Co-Investors entered into a Memorandum of

Understanding which was the foundation for the Joint Plan. 

Ultimately, the parties in the Wilshire Bankruptcy Case structured

41 Ex. 21; Disclosure Statement 491-492. Ex. 21; Plan Art.

VII A. and C., pp. 545, 546.

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the Joint Plan and moved forward to implement the Transaction

through confirmation of the Joint Plan.42

The uncontested evidence presented shows that this was not

only a highly complex real estate partnership bankruptcy case, but

one in which the various parties (Debtor, competing creditors with

secured claims, third-party lessee – all natural enemies) acted in

their own economic self-interests. This is not a case in which

the only active parties were the debtor and insider creditors

constructing a reorganization based on personal tax issues, not

business economic realities.

The evidence presented shows that the Joint Plan was created

by the Debtor, BofA, Senior Secured Creditors, Co-Investors

holding the Junior Secured claim, California Federal Bank, and

creditors holding general unsecured claims based on the economic

realities of the assets and claims, not as a tax avoidance plan. 

This is a case where the Debtor had limited assets and extensive

debts which far outstripped the assets. The creditors and Debtor

fashioned a plan which made the economic results for creditors,

even those holding general unsecured claims, dramatically better. 

To the extent that the Partners considered the tax consequences of

the Transaction, such consideration did not drive the economic

realities decision of the creditors in supporting the Joint Plan.43

42 Ex. 21: Disclosure Statement, pp. 483-487.

43 It should not be forgotten that in the chapter 11 process

the creditors not only vote to accept or reject a plan, but

creditors are not dependent on a “take it or leave it” plan put

forward by the debtor. Creditors may advance their own chapter 11

plan to compete in the bankruptcy marketplace for creditor votes. 

11 U.S.C. §§ 1121(c), 1129(a)(7) and (b).

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There was no conflicting evidence presented to the court,

only arguments about the legal conclusions to be drawn from the

evidence. The bankruptcy court did not err in concluding that the

Joint Plan was based on the economic realities of the Transaction,

that the Transaction was not a sale, and that the Transaction was

not shaped by tax-avoidance features or purpose.

The bankruptcy court’s determination that the Transaction was

a restructure of the Debtor and not a sale is affirmed. 

THE FORGIVENESS OF DEBT THROUGH THE JOINT PLAN

DOES NOT RESULT IN REPORTABLE INCOME FOR FEDERAL

AND STATE TAXES FOR THE PARTNERS

Having concluded that the Joint Plan and Transaction were not

a disguised sale or other than the reorganization and restructure

of the Debtor as stated in the Joint Plan, the bankruptcy court

further determined that the discharge or forgiveness of debt

through that Joint Plan was not income to the partnership. 

It has long been recognized that providing deductions or

exclusions for income arising from cancellation or discharge of

indebtedness through a bankruptcy case was a necessary and

integral part of the bankruptcy laws. Claridge Apartments Co. v.

Commm’r, 323 U.S. 141, 149 (1944)(discussing the Chandler Act

provisions to encourage the freer use of bankruptcy reorganization

and avoid otherwise unnecessary or premature liquidations). 

The term “gross income,” from which a tax calculation begins,

is defined in IRC § 61. This non-exclusive list “means all income

from whatever source derived.” Some statutory examples

[identified by numbering used in the statute] are (1) compensation

for services, (2) gross income from business, (3) gains from

dealings in property, (8) alimony, and (12) income from discharge

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of indebtedness. In 2925 Briarpark, Ltd. v. Comm’r, 163 F.3d 313

(5th Cir. 1993), the Fifth Circuit Court of Appeals reviewed a

decision of the United States Tax Court concerning a sale of

property by a partnership. In Briarpark, the partnership sold

property subject to $24,562,763 in liens for $10,936,532. As part

of the sale, the creditor released Briarpark and the guarantor

(who was insolvent) of approximately $14,000,000 of liability in

excess of the sales proceeds paid to the creditor. On its tax

return, Briarpark reported $14,468,154 of cancellation of

indebtedness income relating to the sale. 

The Fifth Circuit noted that gross income pursuant to IRC

§ 61 comes in many forms, with two of the examples being “gains

derived in dealing in property” (IRC § 61(a)(3)) and “income from

discharge of indebtedness” (IRC § 61(a)(12)). Because the

practical effect of the Briarpark transaction was to sell the

property to a buyer, then the purchase price paid and the debt

forgiveness were determined by the Tax Court (the trial court) to

be part of a single transaction for income defined as “from a sale

or exchange” of property. In closing, the Fifth Circuit

emphasized that it is for the trial court, upon consideration of

the entire transaction, to determine the factual category (dealing

in property or cancellation of indebtedness) of the income for

taxation purposes.44

The Transaction which occurred in this case is the

reorganization of Debtor into Wilshire LLC. The bankruptcy court

determined that the reorganization was not a sale or transfer of

44 Id. at 318.

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property. As part of the reorganization, the former interests of

the Partners were cancelled and a creditor obtained a 99% interest

in Wilshire LLC for a portion of its secured claim. The

confirmation of the Joint Plan included forgiveness of the

indebtedness, as part of a complex restructuring of the Debtor and

creditors’ rights and interest. 

After considering the evidence presented, the bankruptcy

court determined that the forgiveness of debt through the Joint

Plan constituted cancellation of debt income, not capital gain.45

Upon de novo review, this Panel makes the same determination. The

Transaction and restructuring of the complex rights and interests

of the bankruptcy estate, Senior Secured Creditors, Co-Investors,

creditors holding general unsecured claims, and Partners,

resolving lease disputes, and creating the new successor

Wilshire LLC, is consistent with the forgiveness of debt, not with

a sale of the Property. 

Merely because the restructuring of the Debtor, the emergence

of the successor entity, the forgiveness of indebtedness, the New

Refinance Loan, and issuance of the interests in the reorganized

debtor all occur in one document, the Chapter 11 Plan, that does

not mean that it is just one big sale transaction. In every

bankruptcy case, the confirmation of the Chapter 11 plan fixes the

rights and interests, provides for the forgiveness of

indebtedness, and binds the parties (11 U.S.C. § 1141) in one fell

swoop. 

The Joint Plan provides for the forgiveness of indebtedness

45 Ex. 40; August 31 Decision, p. 1507.

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as one of multiple plan provisions. Some creditors forgave

substantial amounts for the payment of a modest amount (recovering

“only” $2,500,000 on a $212,000,000 claim, rather than getting

nothing), while the Senior Secured Creditors forgave indebtedness

and contributed $23,000,000 to the reorganized Debtor. As part of

this complex Transaction, the Senior Secured Creditors acquired

99% of the interest in Wilshire LLC.

As noted by the Ninth Circuit Court of Appeals in Wilshire I,

bankruptcy plans are often dependent on the cancellation of

indebtedness relief in bankruptcy to facilitate a reorganization. 

A reorganization produces better economic results for all and

preserves a business operation, rather than merely shutting

everything down and liquidating the pieces. Such a reorganization

often, as in the Wilshire Bankruptcy Case, is a complex reordering

of rights and interests, forgiving debt, incurring new

obligations, making capital contributions, and deferring payment. 

This is much more complex than - “sell the property and pay the

money.”

The evidence presented to the bankruptcy court, for which

there were no material facts in dispute, supports the

determination that the Transaction resulted in the forgiveness of

debt and “cancellation of debt income,” not “gains from dealings

in property.”

The Bankruptcy Code And Internal Revenue Code 

Provide For No Realization of Income From Forgiveness

Of Indebtedness In A Bankruptcy Case 

To facilitate reorganizations under the Bankruptcy Code

rather than forcing liquidations of business and financial

enterprises, Congress has provided for special tax treatment when

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indebtedness is discharged or forgiven through a bankruptcy case. 

In this appeal, the provisions of 11 U.S.C. § 346(a) and (j) as

they existed in 1998 are at issue.

 § 346. Special tax provisions

 (a) Except to the extent otherwise provided in this

section, subsections (b), (c), (d), (e), (g), (h), (i),

and (j) of this section apply notwithstanding any State

or local law imposing a tax, but subject to the Internal

Revenue Code of 1986.

. . .

 (j)(1) 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. . . .

In addition to § 346, the Internal Revenue Code itself has a

specific section addressing income generated from the discharge of

indebtedness. In pertinent part, IRC § 108 provides: 

§ 108. Income from discharge of indebtedness

(a) Exclusion from gross income.

 (1) In general. Gross income does not include any

amount which (but for this subsection) would be

includible in gross income by reason of the discharge

(in whole or in part) of indebtedness of the taxpayer

if–

 (A) the discharge occurs in a title 11 case, . . .

 (2) Coordination of exclusions.

 (A) Title 11 exclusion takes precedence.

Subparagraphs (B), (C), and (D) of paragraph (1) shall

not apply to a discharge which occurs in a title 11

case. . . .

The Debtor that was reorganized into Wilshire LLC was a

partnership. While the tax liabilities and attributes for a

partnership are passed through to the partners, the income or loss

(tax attributes) are first determined at the partnership, and then

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those attributes are passed through to the partners.

The plain language of 11 U.S.C. § 346(j) states, “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 [Title 11].” IRC § 108 confirms that if a discharge of

indebtedness occurs in a case under Title 11, then that basis for

such discharge shall control over all others. By Confirmation of

the Joint Plan in the Wilshire Bankruptcy Case, Debtor was

forgiven debt of $40,570,000 of the Secured Creditors’ Claim and

$218,500,000 of the Co-Investor’s Claim.46

No income is realized by either the bankruptcy estate or

Debtor for such forgiveness of indebtedness. Properly applying

the provisions of 11 U.S.C. § 346(j) and IRC 108(a), the Debtor,

bankruptcy estate, and Wilshire LLC did not obtain income from the

forgiveness of debt. There being no income for the Debtor, there

is no income to pass through to the Partners by virtue of the

forgiveness of indebtedness in the Wilshire Bankruptcy Case under

Title 11. It may well be that there are other adjustments of tax

attributes (IRC § 108(b)) or partnership basis (IRC § 705), but

the determination of whether there is income or loss is computed

at the partnership, not the individual partners.47

The determination by the bankruptcy court that discharge or

46 Ex. 21; Disclosure Statement Classes C-1 and C-2, p. 492. 

Ex. 21; Joint Plan Classes C-1 and C-2, p. 537, and Article VII

Discharge and Release, pp. 545-546.

47 IRC § 704 provides that a partner’s share of income, gain,

loss, deductions, or creditors (once determined for the

partnership) are distributed among the partners pursuant to the

partnership agreement.

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forgiveness of indebtedness exclusion from income applies to the

Debtor and results in there not being income from discharge of

indebtedness for the Partners is affirmed.

CONCLUSION

We REVERSE the bankruptcy court’s determination that the

Confirmation Order itself was a determination whether the

Transaction was a sale or not a sale of property. 

We AFFIRM, upon de novo review, the bankruptcy court’s entry

of summary judgment in favor of Wilshire LLC and the Partners. In

so affirming, this Panel determines: (1) Wilshire LLC has standing

to file and prosecute the OSC; (2) CFTB received sufficient notice

for the Confirmation Order to be binding on CFTB; (3) the proper

appeal is taken from the Summary Judgment Order filed on

October 4, 2010; (4) the Transaction, based upon the economic

realities of the Transaction, was not motivated by tax avoidance;

(5) the Transaction was not a sale, but provided for the

forgiveness of debt owed by the Debtor; (6) the forgiveness of

debt through the Joint Plan was subject to the provisions of 11

U.S.C. § 346 (in effect as of the confirmation of the Joint Plan)

and 26 U.S.C. § 108; (7) the tax consequences of the Transaction

are determined at the Debtor, the partnership, and such tax

consequences are then passed through to the Partners; and (8) the

forgiveness of debt did not result in income realized by the

Debtor or passed through to the Partners.

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