In re: Wilshire Courtyard

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: September 19, 2011
• Docket: CC-10-1275-PaKiSa
• Status: Published

Opinion

FILED 1 ORDERED PUBLISHED SEP 19 2011 SUSAN M SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL O F TH E N IN TH C IR C U IT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-10-1275-PaKiSa 6 ) WILSHIRE COURTYARD, ) Bk. No. LA 97-10771 PC 7 ) Debtor. ) 8 ___________________________________) ) 9 CALIFORNIA FRANCHISE TAX BOARD, ) ) 10 Appellant, ) v. ) O P I N I O N 11 ) WILSHIRE COURTYARD; JEROME H. ) 12 SNYDER GROUP I, LTD.; LEWIS P. ) GEYSER REVOCABLE TRUST; GEYSER ) 13 CHILDREN’S TRUST, FBO Jennifer ) Geyser, Lewis P. Geyser, Trustee; ) 14 WENDY K. SNYDER; JEROME H. SNYDER; ) GEYSER CHILDREN’S TRUST, FBO ) 15 Daniel Geyser, Lewis P. Geyser, ) Trustee; RUSSELL & RUTH KUBOVEC, ) 16 DECEASED, KUBOVEC FAMILY TRUST, ) Rita Farmer, Trustee; WILLIAM N. ) 17 SNYDER; JOAN SNYDER; GEYSER ) CHILDREN’S TRUST, FBO Douglas ) 18 Geiser, Lewis P. Geyser, Trustee; ) LON J. SNYDER; SNYDER CHILDREN’S ) 19 TRUST, FBO William N. Snyder, ) Lewis P. Geyser, Trustee, ) 20 ) Appellees. ) 21 ___________________________________) 22 Argued and submitted on May 13, 2011 at Pasadena, California 23 Filed - September 19, 2011 24 Appeal from the United States Bankruptcy Court 25 for the Central District of California 26 Hon. Samuel Bufford, Bankruptcy Judge and Hon. Vincent Zurzolo, Chief Bankruptcy Judge, Presiding.1 27 28 1 As explained below, Bankruptcy Judges Bufford and Zurzolo each entered orders that are implicated in these appeals. 1 Appearances: Todd M. Bailey appeared for Appellant California Franchise Tax Board. 2 Lewis P. Geyser appeared for Appellees Jerome H. 3 Snyder Group I, Ltd., Lewis P. Geyser Revocable Trust, Wendy K. Snyder, Jerome H. Snyder, Geyser 4 Children's Trust, FBO Jennifer Geyser, Lewis P. Geyser, Trustee, Geyser Children's Trust, FBO 5 Daniel Geyser, Lewis P. Geyser, Trustee, Russell & Ruth Kubovec, Deceased, Kubovec Family Trust, Rita 6 Farmer, Trustee, William N. Snyder, Joan Snyder, Geyser Children's Trust, FBO Douglas Geyser, Lewis 7 P. Geyser, Trustee, Lon J. Snyder and Snyder Children's Trust, FBO William N. Snyder, Lewis P. 8 Geyser, Trustee. 9 Lewis R. Landau appeared for Appellee Wilshire Courtyard. 10 11 Before: PAPPAS, KIRSCHER and SARGIS,2 Bankruptcy Judges. 12 PAPPAS, Bankruptcy Judge: 13 14 In this complicated dispute, the Panel is asked to review the 15 opinions and orders of the bankruptcy court entered in a reopened 16 chapter 113 real estate partnership reorganization case, and in 17 particular, the state tax consequences of confirmation of the 18 debtor’s plan for its former partners. While the substantive 19 issues raised in this appeal involve interesting, complex 20 questions about the interplay of bankruptcy and tax law, we may 21 not comment on those issues. Instead, the Panel is compelled to 22 23 2 The Honorable Ronald H. Sargis, Bankruptcy Judge for the 24 Eastern District of California, sitting by designation. 3 25 Because this bankruptcy case was filed over a decade ago, unless otherwise indicated, all chapter, section and rule 26 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as 27 enacted and promulgated prior to the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 28 Pub. L. 109-8, 119 Stat. 23. The Federal Rules of Civil Procedure are referred to as “Civil Rules.”

-2- 1 reverse the bankruptcy court’s ruling that it had subject matter 2 jurisdiction to adjudicate the issues in this contest, to vacate 3 the orders of the bankruptcy court, and to remand this matter to 4 the bankruptcy court with instructions that it dismiss. 5 FACTS4 6 Events Before the Reopening of the Bankruptcy Case. 7 Wilshire Courtyard (“Wilshire”) was a California general 8 partnership.5 We refer to its general partners, the appellees in 9 this appeal, collectively as the “Wilshire Partners.” 10 Wilshire began operations in 1984. By 1987, Wilshire had 11 developed and owned two commercial complexes on Wilshire Boulevard 12 in Los Angeles containing almost a million square feet of rental 13 office space (the “Property”). 14 In 1989, Wilshire entered into several financing agreements 15 concerning the Property. As a result of these transactions, the 16 secured lender holding the first position lien on the Property was 17 Continental Bank, N.A. (“Continental”); various other entities 18 held subordinated secured debt. Wilshire’s combined secured debt 19 aggregated almost $350 million. Wilshire defaulted on the 20 Continental loan in July 1996, and Continental scheduled a 21 foreclosure sale for July 9, 1997. In response, Wilshire filed a 22 chapter 11 bankruptcy petition on July 8, 1997. 23 Appellant California Franchise Tax Board (“CFTB”) was listed 24 in the creditor’s matrix filed by Wilshire. CFTB acknowledges 25 4 26 The material facts in this appeal are undisputed. 5 27 Through the chapter 11 process, Wilshire was transformed from a general partnership to a limited liability company; in this 28 opinion, “Wilshire” refers to both the original partnership as well as the reorganized debtor/limited liability company.

-3- 1 that it received the initial notice of the commencement of the 2 case sent out by the clerk of the bankruptcy court. However, for 3 the reasons discussed below, CFTB did not file a proof of claim, 4 assert any other claim, nor otherwise participate in Wilshire’s 5 bankruptcy case. 6 Early in the bankruptcy case, Continental was acquired by 7 Bank of America (“BA”).6 BA, Wilshire, and the Wilshire Partners 8 eventually negotiated a joint, consensual plan of reorganization. 9 Under the terms of the joint plan, when it became effective, 10 Wilshire would be restructured from a California general 11 partnership to a Delaware limited liability company. It would 12 continue to own and operate the Property. Wilshire would arrange 13 for a new, nonrecourse loan for $100 million, secured by a first 14 deed of trust on the Property. 15 For its part in the reorganization, BA agreed to contribute 16 $23 million to the reorganized Wilshire, and to release its 17 secured indebtedness, in exchange for its receipt of the $100 18 million in new loan proceeds. In consideration of its agreements, 19 BA would receive a 99 percent ownership interest in the 20 reorganized Wilshire; the Wilshire Partners would receive the 21 remaining one percent interest. For giving up almost all of their 22 former equity in the business, the Wilshire Partners would also 23 receive $3.5 million in cash, and a $450,000 loan. 24 Wilshire’s disclosure statement was approved by the 25 26 6 According to the plan of reorganization eventually 27 approved by the bankruptcy court, BA was acting as a trustee and servicer for several secured creditors. For convenience, and 28 because it is not essential in this appeal, we will refer to all of these secured creditors collectively as “BA.”

-4- 1 bankruptcy court on February 19, 1998. The disclosure statement 2 did not address the state tax consequences for the Wilshire 3 Partners as a result of the transactions proposed in the 4 reorganization plan. 5 Notice of the confirmation hearing concerning the joint plan 6 was sent by Wilshire to interested parties in the bankruptcy case 7 on February 12, 1998. However, CFTB was not served with a copy of 8 the proposed plan nor given notice of the confirmation hearing.7 9 After the confirmation hearing, the bankruptcy court entered 10 an Order Confirming the Joint Plan of Reorganization on April 14, 11 1998. CFTB acknowledges that it received the “Notice of Order 12 Confirming [Wilshire’s] Chapter 11 Plan” from the clerk of the 13 bankruptcy court, which stated in relevant part that, “Notice is 14 hereby given of the entry of an order of this Court confirming a 15 Plan of Reorganization. A copy of the order and the plan itself 16 are contained in the Court file located at the address listed 17 herein.” 18 A plan having been confirmed, the Wilshire case was closed by 19 the bankruptcy court in an order entered on October 22, 1998. 20 Wilshire contends, and CFTB has not effectively disputed, that the 21 confirmed plan was implemented and consummated, in that the 22 restructure of the reorganized Wilshire, and the various transfers 23 and transactions contemplated by the confirmed plan, were all 24 7 25 While Wilshire and the Wilshire Partners argue that CFTB received effective notice or had knowledge of the bankruptcy 26 proceedings by other means, Wilshire apparently did not serve notice of the plan and confirmation hearing on CFTB because it had 27 not filed proofs of claim in the bankruptcy case. Of course, for its part, CFTB did not consider itself to be a “creditor” in the 28 bankruptcy case, since the general partnership Wilshire was not a taxable entity.

-5- 1 completed. 2 After the plan was confirmed, the various Wilshire Partners 3 reported approximately $208 million in aggregate cancellation of 4 debt income (“CODI”) on their individual 1998 California state tax 5 returns. Then, on November 15, 2002, CFTB sent Wilshire and the 6 Wilshire Partners an “Audit Issue Presentation Sheet” (“AIPS”). 7 The AIPS informed them that CFTB challenged the Wilshire Partners’ 8 characterization of the tax consequences of the transactions 9 effected by the confirmed chapter 11 plan as CODI. Rather than 10 $208 million in CODI, CFTB argued that the Wilshire Partners 11 should have reported approximately $231 million in capital gain 12 income arising from the plan transactions, because the treatment 13 of their interests under the plan constituted a disguised sale of 14 the Property. Based on the AIPS, CFTB issued notices of proposed 15 assessments to the Wilshire Partners on June 15, 2004, totaling 16 approximately $13 million in unpaid income taxes. 17 The Wilshire Partners disputed CFTB’s position. Over the 18 next five years, CFTB and The Wilshire Partners engaged in several 19 rounds of administrative hearings relating to this dispute.8 20 Reopening of the Bankruptcy Case. 21 On May 27, 2009, the contest shifted back to the bankruptcy 22 court. Wilshire filed an ex parte motion to reopen the bankruptcy 23 case. As cause for reopening, Wilshire argued that, through the 24 AIPS and the continuing administrative hearings, CFTB was 25 26 8 CFTB states in its brief that, upon reopening of the 27 bankruptcy case, and receipt of the Order to Show Cause discussed below, the CFTB hearing officer suspended work on the 28 administrative hearings. There is no other information in the record concerning the status of those administrative hearings.

-6- 1 attempting to collaterally attack the confirmed chapter 11 plan by 2 characterizing its terms as effecting a disguised sale of the 3 Property while, according to the plan, Wilshire had retained 4 ownership of the Property. The bankruptcy court granted the 5 motion and entered an order reopening the bankruptcy case on June 6 4, 2009. 7 Wilshire then filed a motion for an Order to Show Cause Re 8 Contempt (“OSC”) on June 23, 2009. The bankruptcy court entered 9 the OSC on August 12, 2009, directing CFTB to appear before the 10 bankruptcy court to show why it should not be held in contempt for 11 collaterally attacking, and by refusing to act in accordance with, 12 the plan and confirmation order. 13 CFTB responded to the OSC on August 27, 2009, arguing that 14 Wilshire had not given CFTB adequate notice of the terms of the 15 proposed plan, the time for objecting to the plan, or of the 16 confirmation hearing, so CFTB was not bound by the plan and 17 confirmation order; Wilshire lacked standing to prosecute the OSC 18 motion; issuance of a contempt order by the bankruptcy court 19 against CFTB would be fundamentally unfair, because the state tax 20 consequences of the plan terms were never considered, and would 21 have been beyond the authority of the bankruptcy court to 22 determine; and Wilshire was guilty of laches because it had 23 delayed raising these issues in the bankruptcy case for six years. 24 Wilshire replied on September 9, 2009, arguing that CFTB 25 received adequate notice of the filing of the bankruptcy case and 26 proceedings and entry of the confirmation order; Wilshire had both 27 prudential and constitutional standing to seek enforcement of the 28 confirmation order. CFTB could not prove its affirmative defense

-7- 1 of laches. 2 The bankruptcy court held an initial hearing on the OSC on 3 September 15, 2009. Wilshire and CFTB appeared by counsel; the 4 Wilshire Partners, however, were not represented. After hearing 5 arguments of counsel, the bankruptcy court directed the parties to 6 submit further briefing whether a contempt motion was proper under 7 the circumstances of this case, and suggested that the individual 8 Wilshire Partners should be joined as parties to the proceedings. 9 After a continued status conference, on March 12, 2010, 10 acting under authority of Rule 7019, made applicable in contested 11 matters by Rule 9014(c), the bankruptcy court ordered the joinder 12 of the Wilshire Partners in the proceedings. None of the Wilshire 13 Partners objected to the joinder order. 14 Wilshire and the Wilshire Partners filed a joint Motion for 15 Summary Judgment or Summary Adjudication of Issues on May 3, 2010. 16 In the motion, they repeated Wilshire’s earlier allegations 17 concerning CFTB’s receipt of adequate notice in the chapter 11 18 case, that CFTB’s characterization of the plan transactions as a 19 disguised sale amounted to a collateral attack on the plan, and 20 that the confirmation order should be enforced under applicable 21 provisions of the Bankruptcy Code. 22 CFTB filed an opposition to the summary judgment motion on 23 June 9, 2010, generally countering these allegations. In addition 24 to its earlier arguments, CFTB also argued that the bankruptcy 25 court lacked subject matter jurisdiction to decide the motion, and 26 that even if it had jurisdiction, the bankruptcy court should 27 abstain from considering the tax issues. If the bankruptcy court 28 was inclined to resolve the tax issues, and to decide whether the

-8- 1 plan transactions did indeed result in CODI rather than capital 2 gain, CFTB requested a six-month continuance to undertake 3 discovery on that issue. 4 Wilshire and the Wilshire Partners responded to CFTB’s 5 opposition on June 16, 2010, generally repeating and supporting 6 their earlier arguments. 7 The bankruptcy court conducted a hearing on both the OSC and 8 summary judgment motion on June 22, 2010, at which all the parties 9 were represented by counsel. The bankruptcy court rejected CFTB’s 10 request to submit additional briefing, and denied its request for 11 additional time for discovery. After hearing from the parties, 12 the bankruptcy court addressed the issues, and in particular, 13 focused on one particular finding it had made in the Confirmation 14 Order, providing that: 15 V. The Joint Plan and all agreements, settlements, transactions and transfer contemplated thereby do not 16 provide for, and when consummated will not constitute, the liquidation of all or substantially all of the 17 property of the Debtor’s Estate under Bankruptcy Code section 1141(d)(3)(A)[.] 18 19 Order Confirming the Debtor’s Joint Plan of Reorganization Dated 20 December 12, 1997 at ¶ V (entered April 14, 1998) (“Finding V”). 21 Interpreting the meaning of this provision of the order, the 22 bankruptcy judge stated: “I’m determining that the finding in the 23 confirmation order is that the transaction provided for in the 24 plan was not a sale for any purpose. . . . [B]ecause it’s not a 25 sale there’s no tax imposed on the partnership. There’s no gain 26 to be taxed [to] the partnership.” Hr’g Tr. 40:7-15 (June 22, 27 2010). However, the bankruptcy court was uncertain as to the tax 28 consequences to the Wilshire Partners, and requested further

-9- 1 briefing from the parties. 2 Both parties filed supplemental briefs. On July 15, 2010, 3 the bankruptcy court entered an Order for Summary Adjudication, 4 memorializing its oral ruling at the June 22 hearing that, 5 according to Finding V, “the transaction under the plan is not a 6 sale or exchange for any purpose.” 7 The bankruptcy court held a second hearing on the summary 8 judgment motion on July 20, 2010. Early in the hearing, the court 9 noted that its July 15, 2010 order interpreting Finding V was 10 effective only as to Wilshire, and only tentative as to the 11 individual Wilshire Partners. After hearing the arguments of the 12 parties, the bankruptcy court announced it would grant summary 13 judgment to Wilshire and the Wilshire Partners. Among the rulings 14 made by the bankruptcy court were that: (a) § 1141 provides that 15 all creditors are bound by the plan, and this includes the CFTB; 16 (b) the terms of the confirmed plan also apply to the Wilshire 17 Partners; (c) and the CFTB’s actions constitute contempt of the 18 confirmation order, and CFTB would be ordered to cease and desist. 19 Hr’g Tr. 30:1-3; 8-9; 18-19 (July 20, 2010). 20 On July 26, 2010, CFTB filed a timely appeal of the 21 bankruptcy court’s July 15, 2010 order, its July 20 oral rulings, 22 together with “any judgment, order or decree related to the July 23 20, 2010 decision.” 24 On August 31, 2010, the bankruptcy court entered a published 25 “Opinion on Summary Judgment Motion” (the “Opinion”). In re 26 Wilshire Courtyard, 437 B.R. 380 (Bankr. C.D. Cal. 2010). In it, 27 the court defended its subject matter jurisdiction on three 28 grounds. First, it held, the bankruptcy court had continuing,

-10- 1 post-confirmation jurisdiction over matters with a “close nexus” 2 to the bankruptcy case. Second, it opined that CFTB’s alleged 3 violation of the confirmation order required interpretation of 4 that order, and the court had jurisdiction to interpret and 5 enforce its own orders. And third, the bankruptcy court decided 6 that, since this case required it to make income tax 7 determinations regarding the non-debtor partners, which in turn 8 required the court to make a determination of the nature of the 9 income at the partnership/debtor level, these determinations also 10 involved interpretation and enforcement of its confirmation order. 11 In re Wilshire Courtyard, 437 B.R. at 384. 12 Moving to the merits of the contest, the essential holding of 13 the Opinion can be summarized in an excerpt: 14 The court holds that the interests of the [Wilshire Partners] are wholly derivative from the status of the 15 property in the partnership. In consequence, [C]FTB cannot recharacterize the plan transactions at the 16 partner level without recharacterizing them at the partnership level as well. Because [C]FTB has not 17 brought any such recharacterization application before this court (and cannot because the statute of 18 limitations has run), [C]FTB is prohibited by the plan from claiming that the partners can be taxed on the plan 19 transactions as a sale generating taxable income. 20 Id. at 383. 21 On October 4, 2010, the bankruptcy court entered a final 22 “Order Granting Summary Judgment.” With some minor discrepancies, 23 this final order was consistent with the Opinion.9 24 9 Up to this point, the proceedings in the bankruptcy court 25 were conducted, and the decisions and orders entered, by presiding Bankruptcy Judge Bufford. Because of his retirement, this final 26 order was entered by then-Chief Bankruptcy Judge Zurzolo without further hearings. While it is not critical to our analysis, we 27 presume Judge Zurzolo also entered the order without conducting an independent review and analysis of the issues of law previously 28 (continued...)

-11- 1 On September 13, 2010, CFTB filed an amended notice of 2 appeal, now seeking review of the July 15 order, the July 20 oral 3 decision, the August 31 Opinion, and the October 4, 2010 Order 4 Granting Summary Judgment. 5 JURISDICTION 6 CFTB challenges the bankruptcy court’s decision that it had 7 subject matter jurisdiction to resolve the issues in this case. 8 This contention is addressed in detail below. There is no 9 challenge to the Panel’s jurisdiction over this appeal, however, 10 which is clear under 28 U.S.C. § 158. 11 ISSUE 12 Whether the bankruptcy court had subject matter jurisdiction 13 to adjudicate the issues in this appeal. 14 STANDARD OF REVIEW 15 The existence of subject matter jurisdiction is a question of 16 law reviewed de novo. Atwood v. Fort Peck Tribal Court 17 Assiniboine, 513 F.3d 943, 946 (9th Cir. 2008); Carpenter v. FDIC 18 (In re Carpenter), 205 B.R. 600, 604 (9th Cir. BAP 1997). De novo 19 review is independent, with no deference given to the trial 20 court's conclusions. See First Ave. W. Bldg., LLC v. James (In re 21 Onecast Media, Inc.), 439 F.3d 558, 561 (9th Cir. 2006). 22 DISCUSSION 23 The bankruptcy court lacked subject matter jurisdiction to adjudicate the Wilshire Partners’state tax obligations. 24 CFTB asserts numerous arguments challenging the merits of the 25 26 9 (...continued) 27 decided by Judge Bufford. And because we determine, infra, that the bankruptcy court lacked subject matter jurisdiction to enter 28 its various orders, we need not examine any of the possible inconsistencies between the Opinion and the final order.

-12- 1 bankruptcy court’s rulings that CFTB may not pursue recovery from 2 the Wilshire Partners for capital gains taxes allegedly due under 3 state law. Wilshire and the Wilshire Partners dispute CFTB on 4 each substantive point, urging the Panel to affirm the decisions 5 of the bankruptcy court. However, before we may review the 6 parties’ arguments concerning the substance of this dispute, the 7 Panel must conclude that the bankruptcy court had subject matter 8 jurisdiction to make its decisions. Because we decide that the 9 bankruptcy court lacked jurisdiction to adjudicate the individual 10 Wilshire Partners’ state tax obligations, the Panel will not 11 address the other issues or arguments of the parties in this 12 appeal. 13 The decisions of the Ninth Circuit guide us to our 14 conclusion.10 In determining the scope of a bankruptcy court’s 15 jurisdiction, we begin with the statutory scheme, because the 16 “jurisdiction of the bankruptcy courts, like that of other federal 17 courts, is grounded in, and limited by, statute.” Battle Ground 18 Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124, 1130 (9th Cir. 2010) 19 (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995)). A 20 bankruptcy court’s jurisdiction is, generally, prescribed by 28 21 U.S.C. § 1334(b). In addition to granting jurisdiction to 22 bankruptcy courts over bankruptcy cases, the statute provides that 23 10 24 The Panel is cognizant of the Supreme Court’s recent decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), wherein the 25 court holds that a bankruptcy court lacks “constitutional authority to enter a final judgment on a state law counterclaim 26 that is not resolved in the process of ruling on a creditor's proof of claim.” Id. at 2620. However, we conclude that the 27 Supreme Court’s decision is inapposite to the issues raised in this case involving a post-confirmation challenge to the 28 bankruptcy court’s jurisdiction to decide the tax dispute between the Wilshire Partners and CFTB.

-13- 1 “the district courts [and by reference pursuant to 28 U.S.C. 2 § 157, the bankruptcy courts] shall have original but not 3 exclusive jurisdiction of all civil proceedings arising under 4 title 11, or arising in or related to cases under title 11.” 5 Because in many respects the bankruptcy courts’ statutory 6 jurisdiction is narrow in focus, we individually examine each 7 potential basis for the bankruptcy court’s assertion of subject 8 matter jurisdiction, below. 9 1. “Arising under” and “arising in” jurisdiction. 10 Only when a right to relief is created by title 11 does an 11 action to enforce that right “arise under title 11.” Harris v. 12 Wittman (In re Harris), 590 F.3d 730, 737 (9th Cir. 2009); see 13 H.R. Rep. No. 595, 95th Cong., 1st Sess. 445 (1977). Similarly, 14 proceedings “arising in” bankruptcy cases, for purposes of the 15 jurisdictional statute, are also usually easy to identify as those 16 that, although not based on any right granted in title 11, would 17 not exist outside a bankruptcy case, such as matters related to 18 the administration of the bankruptcy estate. Maitland v. Mitchell 19 (In re Harris Pine Mills), 44 F.3d 1431, 1435-37 (9th Cir. 1995). 20 Neither of these statutory bases for jurisdiction can be invoked 21 in this case. 22 In our view, adjudication of the dispute between the Wilshire 23 Partners and CFTB does not implicate either the bankruptcy court’s 24 arising under or arising in jurisdiction. No provision of the 25 bankruptcy code dealing with state tax consequences is at issue, 26 nor were other chapter 11 provisions used by Wilshire in an 27 attempt to restructure the tax consequences of plan confirmation. 28 Instead, reduced to its essence, the contest in the bankruptcy

-14- 1 court in this case concerned whether, because of the terms of the 2 order confirming Wilshire’s reorganization plan,11 the Wilshire 3 Partners owe the State of California $13 million in taxes on what 4 CFTB characterizes as their income from capital gains. The 5 parties acknowledge that this dispute did not arise until long 6 after confirmation of the Wilshire plan, when CFTB issued the AIPS 7 in 2002, and then in 2004 assessed the Wilshire Partners for this 8 tax liability. While originally casting their motion as one for a 9 finding that CFTB was guilty of “contempt,” the real relief sought 10 from the bankruptcy court in the motion filed by Wilshire, and 11 later joined by the Wilshire Partners, was a declaration from the 12 bankruptcy court that, as a result of confirmation of the plan, 13 the individual Wilshire Partners received cancellation of debt 14 income, not capital gains, and an order prohibiting CFTB from 15 collecting the taxes and vacating the assessments. Viewed in this 16 fashion, this contest is at bottom a tax dispute between the 17 Wilshire Partners and CFTB arising under California state tax law, 18 11 19 In making its decision, the bankruptcy court relied not on any express provision of Wilshire’s plan characterizing the 20 transactions as something other than a sale of Wilshire’s assets, but instead, on a “finding” made in its order confirming the plan. 21 We do not say here that, in a case where a chapter 11 debtor clearly invokes the substantive provisions of title 11 to 22 restructure debtor-creditor relations, to modify rights of third parties, or to transfer bankruptcy estate property, the bankruptcy 23 court lacks jurisdiction to interpret and enforce those plan provisions on those who are bound by its terms, and to prevent a 24 collateral attack or serial litigation concerning the confirmation order. But this is not such a case, as it is undisputed that the 25 disclosure statement and chapter 11 plan filed by Wilshire, served on its creditors, and eventually confirmed by the bankruptcy court 26 simply makes no mention of the “sale/no-sale” attributes of the property transfers, or of the state tax consequences to the 27 Wilshire Partners of confirmation of that plan. Such an “after the fact” declaration by the bankruptcy court giving CFTB no 28 inkling of what was intended is not an adequate basis for the bankruptcy court’s decision to assume jurisdiction.

-15- 1 not the bankruptcy code. In other words, the Wilshire Partners’ 2 right to relief, if any, does not “arise under” any provision of 3 the bankruptcy code. 4 It is equally clear that this dispute does not “arise in” a 5 case under the bankruptcy code. Under the case law, this language 6 in the jurisdictional statute refers to an “administrative matter 7 unique to the bankruptcy process that has no independent existence 8 outside of bankruptcy and could not be brought in another forum, 9 but whose cause of action is not expressly rooted in the 10 bankruptcy code.” In re Ray, 624 F.3d at 1131. Wilshire and the 11 Wilshire Partners do not argue that the critical issues raised by 12 the contempt motion in these proceedings could not have been 13 prosecuted in state court. Indeed, the parties were actively 14 litigating the Wilshire Partners’ alleged tax liability in the 15 state administrative proceedings that were on-going at the time 16 Wilshire sought to reopen the bankruptcy case. The Wilshire 17 Partners certainly could have sought relief from CFTB’s tax 18 assessment in those proceedings, and if necessary, in state court. 19 The Wilshire Partners disagree, and instead suggest that this 20 contest could not “feasibly be adjudicated in any alternate forum 21 due to the procedures applicable to the adjudication of tax 22 disputes.” Wilshire Partner’s Reply Br. at 7 (emphasis added). 23 They explain that, under California law, a taxpayer has no 24 recourse to the state courts until after a disputed tax is paid, 25 at which point the taxpayer may sue for a refund. Nast v. St. Bd. 26 of Equalization, 46 Cal. App. 4th 343, 346-47 (Cal. Ct. App. 27 1996). According to the Wilshire Partners, they lack an 28 “accessible alternate venue” for the adjudication of the tax

-16- 1 dispute, because it could not “feasibly be adjudicated” in the 2 state court, apparently because of the extent of the taxes CFTB 3 seeks to collect from them. 4 The Wilshire Partners’ argument that the state proceedings 5 were not “feasible” lacks merit in the context of determining the 6 subject matter jurisdiction of the bankruptcy court. First, by 7 reopening the bankruptcy case, the pending state administrative 8 proceedings in which the parties’ positions on the assessments and 9 issues were being considered were interrupted. Presumably, absent 10 the bankruptcy proceedings initiated by Wilshire, the state 11 administrative proceedings would have progressed toward 12 determining the Wilshire Partners’ tax liabilities. 13 Second, there is nothing in the bankruptcy code or case law 14 that provides that the “arising in” jurisdiction of a bankruptcy 15 court requires that the proceedings available in the alternative 16 forum be prompt or feasible. The requirement for bankruptcy court 17 jurisdiction is that an action have “no independent existence 18 outside of bankruptcy and could not be brought in another forum.” 19 In re Ray, 624 F.3d at 1131 (emphasis added). Moreover, the 20 suggestion by Wilshire and the Wilshire Partners that the delay 21 caused by the state tax procedures renders those proceedings 22 unfair is at odds with the Supreme Court’s conclusion in another 23 case that the CFTB’s procedures for settling tax disputes 24 constitute “a plain, speedy and efficient remedy.” Cal. Franchise 25 Tax Bd. v. Alcan Aluminium Ltd., 493 U.S. 331, 338 (1990). 26 Simply put, the issues raised by Wilshire and the Wilshire 27 Partners in this case did not “arise under” the bankruptcy code, 28 nor “arise in” a bankruptcy case.

-17- 1 2. “Related to” jurisdiction. 2 In response to CFTB’s challenge, the bankruptcy court 3 addressed the question of its subject matter jurisdiction in its 4 Opinion. Although the court did not employ the precise terms, we 5 construe its holding to be that it had “related to” jurisdiction 6 under 28 U.S.C. § 1334(b), ancillary jurisdiction to interpret the 7 plan and confirmation order, and supplemental jurisdiction over 8 the claims of the nondebtor Wilshire Partners. Under the 9 applicable case law, we respectfully disagree that jurisdiction 10 existed under any of those grounds. 11 Whether the bankruptcy court had related to jurisdiction is a 12 harder question than arising in or arising under, because this 13 jurisdictional component covers a much broader set of disputes, 14 actions and issues. Indeed, related to jurisdiction arguably 15 includes almost every matter or action that directly or indirectly 16 relates to a bankruptcy case. Sasson v. Sokoloff (In re Sasson), 17 424 F.3d 864, 868-69 (9th Cir. 2005). Here, Wilshire and the 18 Wilshire Partners contend that not only are terms of the Wilshire 19 confirmed plan called into question by CFTB’s position, but its 20 actions constitute, in substance, a collateral attack on the 21 bankruptcy court’s confirmation order. At first blush, these 22 arguments would seem to be “related to” Wilshire’s bankruptcy 23 case. 24 The bankruptcy court explained its view of its related to 25 jurisdiction in this case as follows: 26 [T]hough a bankruptcy court has more limited subject matter jurisdiction post-confirmation than 27 pre-confirmation, it retains post-confirmation subject matter jurisdiction over matters with a “close nexus” to 28 the bankruptcy case [citing In re Pegasus Gold Corp.,

-18- 1 394 F.3d at 1193-94]. Matters involving “the interpretation, implementation, consummation, execution 2 or administration of the confirmed plan will typically have the requisite close nexus.” Id. at 1194. In this 3 case, the determination whether [C]FTB's actions violate the confirmation order involves an interpretation of the 4 confirmed plan, and confers continuing subject matter jurisdiction on the court after plan confirmation. 5 6 In re Wilshire Courtyard, 437 B.R. at 384. The bankruptcy court’s 7 reasoning that the parties’ request that it “interpret” the plan 8 and confirmation order establishes the “close nexus” to the 9 bankruptcy case so as to confer related to subject matter 10 jurisdiction is, in our view, flawed. More precisely, as the case 11 law discussed below shows, in order to find the requisite close 12 bankruptcy nexus and establish post-confirmation jurisdiction in a 13 chapter 11 case, the outcome of the issues before the bankruptcy 14 court must potentially impact the debtor, the estate, or the 15 implementation of the plan of reorganization. Here, the outcome 16 of the Wilshire Partners’ tax dispute with CFTB will have no 17 impact whatsoever on the debtor, the estate, or the implementation 18 of the Wilshire plan of reorganization. 19 As the bankruptcy court acknowledged, in recent years various 20 courts of appeal have articulated the limits on bankruptcy court 21 related to jurisdiction over matters arising after confirmation of 22 a debtor’s reorganization plan. See, e.g., Binder v. Price 23 Waterhouse & Co. (In re Resorts Int’l, Inc.), 372 F.3d 154, 166-67 24 (3d Cir. 2004) (“the essential inquiry appears to be whether there 25 is a close nexus to the bankruptcy plan or proceeding sufficient 26 to uphold bankruptcy court jurisdiction over the matter”); Bank of 27 La. v. Craig’s Stores of Tex., Inc. (In re Craig’s Stores of Tex., 28 Inc.), 266 F.3d 388, 390-91 (5th Cir. 2001) (post-confirmation

-19- 1 bankruptcy jurisdiction limited to matters pertaining to 2 implementation or execution of the plan). 3 The Ninth Circuit has adopted the “close nexus” test of 4 Resorts Int’l for measuring post-confirmation related to 5 bankruptcy court jurisdiction. State of Montana v. Goldin (In re 6 Pegasus Gold Corp.), 394 F.3d 1189, 1194 (9th Cir. 2005) 7 (reasoning that while this test “recognizes the limited nature of 8 post-confirmation jurisdiction, [it] retains a certain 9 flexibility”). In Resorts Int’l, the Third Circuit considered 10 what it perceived to be problems in its existing precedent, Pacor, 11 Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984).12 In Pacor, the 12 court had held that “the test for determining whether a civil 13 proceeding is related to bankruptcy is whether the outcome of that 14 proceeding could conceivably have any effect on the estate being 15 administered in bankruptcy.” Id. at 994. The Pacor test, 16 however, proved less than useful in determining related to 17 jurisdiction after confirmation of a plan because the bankruptcy 18 estate no longer exists. In Resorts Int’l, the court shifted the 19 emphasis to whether “there is a close nexus to the bankruptcy plan 20 or proceeding sufficient to uphold bankruptcy court jurisdiction 21 over the matter.” 372 F.3d at 166-67. Although the Third Circuit 22 12 23 Pacor is among the most influential decisions in bankruptcy law, and forms the analytical framework for related to 24 jurisdiction in the Third, Fourth, Fifth, Eighth, Ninth and Eleventh Circuits. See, e.g., Fietz v. Great W. Sav. (In re 25 Fietz), 852 F.2d 455, 457 (9th Cir. 1988) (“We . . . adopt the Pacor definition [of related to jurisdiction]. . . . We reject 26 any limitation on this definition[.]”). Although Pacor is somewhat dated, it is still the “grandfather” of related to 27 analysis, and its caution that related to jurisdiction requires an effect on the bankruptcy estate [or, as its progeny interpreted 28 Pacor for postconfirmation purposes, the debtor or the plan] is instructive for our purposes.

-20- 1 never precisely defined what it meant by “close nexus,” it cited 2 numerous case examples of a nexus that would support 3 jurisdiction. In re Resorts Int’l, Inc., 372 F.3d at 167, citing 4 Donaldson v. Bernstein, 104 F.3d 547, 552 (3d Cir. 1997) (post- 5 confirmation proceeding concerning the reorganized debtor’s 6 failure to pay unsecured creditors according to terms in the 7 plan); U.S. Tr. v. Gryphon at the Stone Mansion, 216 B.R. 764 8 (W.D. Pa. 1997), aff’d 166 F.3d 552 (3d Cir. 1999) (dispute 9 regarding post-confirmation U.S. Trustee quarterly fees); 10 Bergstrom v. Dalkon Shield Claimants Trust (In re A.H. Robins 11 Co.), 86 F.3d 364, 372-73 (4th Cir. 1996) (dispute over 12 calculation of attorney fees that could affect treatment of 13 remaining claims under the plan). However, the import of the 14 Resorts Int’l analysis is even more revealing by its citation of 15 example cases where the facts did not establish a sufficiently 16 close nexus to support bankruptcy jurisdiction. In re Resorts 17 Int’l, Inc., 372 F.3d at 168 (giving example of dispute between a 18 plan liquidating trust and tobacco manufacturers that would have 19 “no impact on any integral aspect of the bankruptcy plan or 20 proceeding,” citing Falise v. Am. Tobacco Co., 241 B.R. 48, 52 21 (E.D.N.Y. 1999)); Grimes v. Graue (In re Haws), 158 B.R. 965, 971 22 (Bankr. S.D. Tex. 1993) (in an action by trustee against partner 23 of the debtor, trustee failed to prove how any damages received 24 from the defendant were “necessary to effectuate the terms of [the 25 plan]”). In short, under Resorts Int’l, as a condition for 26 bankruptcy court post-confirmation jurisdiction, the outcome of a 27 dispute must produce some effect on the reorganized debtor or a 28 confirmed plan. Indeed, immediately following its review of this

-21- 1 case law, the Third Circuit concluded “where there is a close 2 nexus to the bankruptcy plan or proceeding, as when a matter 3 affects the interpretation, implementation, consummation, 4 execution, or administration of a confirmed plan or incorporated 5 litigation trust agreement, retention of post-confirmation 6 bankruptcy court jurisdiction is normally appropriate.” Id. at 7 168-69. This statement is quoted by the bankruptcy court in this 8 case to justify that interpretation of a plan provision, standing 9 alone, provides a basis for subject matter jurisdiction over this 10 dispute.13 But fairly read, it is clear that the Resorts Int’l 11 court did not intend that a need for plan interpretation support 12 post-confirmation jurisdiction in all cases, but only in those 13 where the results of plan interpretation would have a demonstrable 14 impact on the debtor or confirmed plan of reorganization. 15 As noted, the Ninth Circuit adopted the close nexus test in 16 In re Pegasus Gold, a seminal decision exploring the limits of 17 post-confirmation bankruptcy jurisdiction. Pegasus Gold involved 18 a dispute between the debtor and the State of Montana over 19 financial responsibility for reclamation and water treatment 20 costs. The parties had reached a settlement agreement approved by 21 the bankruptcy court under which the debtor agreed to establish a 22 new entity, RSC, which would perform the reclamation work. The 23 debtor funded RSC, and a share of RSC became an asset of the 24 debtor’s liquidating trust established in the debtor’s chapter 11 25 plan. 26 After confirmation of the plan, disagreements arose between 27 13 28 The bankruptcy court cited to Pegasus Gold for this statement. Pegasus Gold in turn cited to Resorts Int’l.

-22- 1 the State and trust almost immediately, and the State terminated 2 RSC. The Liquidating Trustee then filed a complaint for breach of 3 contract against the State in the bankruptcy court. Although the 4 State objected, the bankruptcy court held it had jurisdiction, and 5 the State appealed. 6 When the appeal eventually reached the Ninth Circuit, it 7 affirmed the bankruptcy court’s decision in favor of its 8 jurisdiction. In re Pegasus Gold, 394 F.3d 1189. Applying the 9 Resorts Int’l close nexus test, the court noted that although the 10 trustee’s complaint alleged numerous state law contract and tort 11 claims against the State, at least three of those claims, and the 12 remedies sought by the trustee, could conceivably affect the 13 implementation and execution of the confirmed reorganization plan, 14 especially the funding of RSC, and the cash flow into the 15 liquidation trust from RSC income. Id. at 1194. As a result, the 16 court held that the bankruptcy court had related to jurisdiction 17 over those claims. Id. 18 Because the bankruptcy court had subject matter jurisdiction 19 over some of the trustee’s claims, the Ninth Circuit held that the 20 bankruptcy court could also properly adjudicate the remaining 21 trustee claims against the State by exercising supplemental 22 jurisdiction under 28 U.S.C. § 1367, because those additional 23 claims arose from a “‘common nucleus of operative facts’ and would 24 ordinarily be expected to be resolved in one judicial proceeding.” 25 Id. at 1195, citing United Mine Workers v. Gibbs, 383 U.S. 725, 26 725 (1966) and Sec. Farms v. Int’l Bhd. Of Teamsters, 124 F.3d 27 999, 1008 (9th Cir. 1997). 28 The Ninth Circuit further explained the meaning of the close

-23- 1 nexus test it first articulated in Pegasus Gold in Sea Hawk 2 Seafoods, Inc. v. State of Alaska (In re Valdez Fisheries Dev. 3 Ass’n, Inc.), 439 F.3d 545 (9th Cir. 2006). In Valdez Fisheries, 4 a creditor of a former chapter 11 debtor commenced an adversary 5 proceeding in the bankruptcy court in connection with a closed 6 bankruptcy case to determine the effect of its settlement 7 agreement with the debtor on its fraudulent conveyance claim 8 against another creditor. On appeal, the court held that, on the 9 facts of that case, the claims asserted in the adversary 10 proceeding failed the close nexus test, and therefore, the 11 bankruptcy court lacked subject matter jurisdiction to entertain 12 the creditor’s suit. The court noted there was no confirmed plan, 13 and there was no assertion that the outcome of the dispute between 14 two creditors, Sea Hawk and the State of Alaska, would have any 15 effect on the estate in the closed bankruptcy case. In the 16 court’s view, to show a close nexus, the outcome of a dispute must 17 “alter the debtor’s rights, liabilities, options, or freedom of 18 action or in any way impact upon the handling and administration 19 of the bankrupt estate.” Id. at 548 (quoting In re Fietz, 852 20 F.2d at 427). In Valdez Fisheries, the court distinguished its 21 holding from that in Pegasus Gold, observing that the post- 22 confirmation claims asserted by debtor that the State of Montana 23 had breached the terms of a confirmed reorganization plan and “the 24 outcome of those claims could affect the implementation and 25 execution of the plan.” Id. at 548. 26 The Ninth Circuit most recently visited related to 27 jurisdiction after confirmation in a chapter 11 case in In re Ray, 28 624 F.3d 1124. In Ray, the bankruptcy court had approved the sale

-24- 1 of a parcel of property owned by the debtor and his nondebtor co- 2 owner, free and clear of the first refusal rights previously 3 granted by them to Battle Ground Plaza, LLC (“BG Plaza”). After 4 the debtor’s plan was confirmed and the bankruptcy case was 5 closed, BG Plaza sued the reorganized debtor, the nondebtor co- 6 owner, the purchaser, and the purchaser’s successor in state court 7 for breach of its contractual right of first refusal. Because the 8 sale was originally authorized under a bankruptcy court order, the 9 state court, in its words, “remanded” the action to the bankruptcy 10 court, and stayed proceedings in state court pending the 11 bankruptcy court’s determination whether it retained jurisdiction 12 over the transaction and dispute. In re Ray, 624 F.3d at 1129. 13 The bankruptcy court assumed jurisdiction and proceeded to 14 construe the sale order and resolve the parties’ claims. 15 When the dispute finally reached the Ninth Circuit, the court 16 decided that the bankruptcy court lacked jurisdiction to decide a 17 dispute between two nondebtors over the meaning of the bankruptcy 18 court’s sale order entered in a since-closed chapter 11 bankruptcy 19 case. Applying Valdez Fisheries, the court concluded that, 20 because the claims were all based upon Washington law, could exist 21 entirely apart from the bankruptcy proceeding, and could not 22 impact the closed bankruptcy case, the state court, not the 23 bankruptcy court, should construe the sale order and adjudicate 24 the parties’ rights. Id. at 1134-35. 25 We distill several lessons from these decisions for 26 application of the close nexus test as developed in Resorts Int’l, 27 and as adopted and refined by the Ninth Circuit. Stated briefly, 28 to support jurisdiction, there must be a close nexus connecting a

-25- 1 proposed post-confirmation proceeding in the bankruptcy court with 2 some demonstrable effect on the debtor or the plan of 3 reorganization. 4 Applying the Ninth Circuit case law to the facts of this 5 appeal, while it is true Wilshire and the Wilshire Parties were 6 asking the bankruptcy court to interpret its own confirmation 7 order, it seems clear that the bankruptcy court lacked related to 8 jurisdiction to adjudicate the tax issues between the Wilshire 9 Partners and CFTB. All of the acts and transactions required to 10 consummate and implement the confirmed plan in this case had been 11 completed, and the bankruptcy case had long since been closed, by 12 the time the tax dispute between the Wilshire Partners and CFTB 13 arose. More importantly, the outcome of that tax dispute can have 14 no conceivable effect on the implementation of the confirmed plan 15 of reorganization, or on the reorganized debtor, Wilshire. 16 Instead, any consequences from CFTB’s actions will impact only the 17 Wilshire Partners. 18 Moreover, as in Ray, the central issues in the Wilshire 19 Partners-CFTB dispute concern application of California’s tax 20 laws, not bankruptcy law, to the transactions effected by the 21 confirmed plan. As was the case in Ray, even if the terms of 22 Wilshire’s confirmed plan and the confirmation order are 23 implicated in the resolution of this contest, the California 24 administrative agencies and courts can construe their meaning. 25 Under Ninth Circuit case law, a close nexus between this tax 26 dispute and the Wilshire bankruptcy case is missing. As a result, 27 the bankruptcy court erred in assuming related to jurisdiction 28 over this dispute.

-26- 1 3. Supplemental or ancillary jurisdiction. 2 By this conclusion, we also dispose of the Wilshire Partners’ 3 argument that the bankruptcy court could properly exercise 4 supplemental jurisdiction under 28 U.S.C. § 1367(a)14 because “the 5 common nucleus of operative facts was the interpretation of the 6 Plan, Confirmation Order and section 346 [of the bankruptcy code] 7 to determine whether the [C]FTB's issuances of Notices of Income 8 Tax Due collaterally attack the Confirmed Plan and violate section 9 346(a) and (j)(1).” Reply Br. at 10, citing In re Pegasus. 10 To support the exercise of supplemental jurisdiction, the 11 statute requires that there be another claim as to which the 12 bankruptcy court has original jurisdiction. Sasson v. Sokoloff 13 (In re Sasson), 424 F.3d 864, 869 (9th Cir. 2005) (holding that 14 the bankruptcy court may exercise supplemental jurisdiction under 15 28 U.S.C. § 1367(a) “over all other claims that are so related to 16 claims in the action within [the bankruptcy court’s] original 17 jurisdiction that they form part of the same case or 18 controversy”). However, as we explained above, the bankruptcy 19 court lacked jurisdiction over any of the claims under these 20 21 14 28 U.S.C. § 1367 provides: 22 Supplemental jurisdiction. 23 (a) Except as provided in subsections (b) and (c) or as 24 expressly provided otherwise by Federal statute, in any civil action of which the district courts have original 25 jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are 26 so related to claims in the action within such original jurisdiction that they form part of the same case or 27 controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall 28 include claims that involve the joinder or intervention of additional parties.

-27- 1 facts. Because of this, it also lacked supplemental jurisdiction 2 over any other claims. 3 The bankruptcy court also concluded it possessed ancillary 4 jurisdiction to interpret and enforce its orders: 5 Further, a bankruptcy court retains subject matter jurisdiction to interpret and enforce its own orders. 6 See Haw. Airlines, Inc. v. Mesa Air Group, Inc., 355 B.R. 214, 218 (D. Haw. 2006)(“The law is clear that ‘[a] 7 bankruptcy court retains post-confirmation jurisdiction to interpret and enforce its own orders, particularly 8 when disputes arise over a bankruptcy plan of reorganization’” (citing Luan Investment S.E. v. 9 Franklin 145 Corp. (In re Petrie Retail, Inc.), 304 F.3d 223, 230 (2d Cir. 2002))). Accordingly, this court 10 retains subject matter jurisdiction to interpret and enforce the chapter 11 plan and the confirmation order. 11 12 In re Wilshire Courtyard, 437 B.R. at 384. We also disagree with 13 the bankruptcy court on this point. 14 “Ancillary jurisdiction may rest on one of two bases: (1) to 15 permit disposition by a single court of factually interdependent 16 claims, and (2) to enable a court to vindicate its authority and 17 effectuate its decrees.” In re Valdez Fisheries, 439 F.3d at 549, 18 citing Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 19 379-80 (1994); In re Ray, 624 F.3d at 1135. The bankruptcy court 20 here relied on the second prong of ancillary jurisdiction — to 21 vindicate its authority and effectuate its decrees. 22 Significantly, the two cases cited by the bankruptcy court to 23 support its ancillary jurisdiction deal with interpretation and 24 enforcement of court orders that have an effect on the reorganized 25 debtor and the administration of a bankruptcy estate. In Hawaiian 26 Airlines, the debtor commenced a post-confirmation adversary 27 proceeding against an investor for return of property of the 28 bankruptcy estate. The adversary proceeding asked the bankruptcy

-28- 1 court to interpret and enforce its Plan Procedures Order, which 2 governed the relationships between the reorganized debtor and 3 potential investors. Specifically, the orders to be interpreted 4 related to contracts between the trustee and parties directly 5 affecting the administration and assets of the estate itself. 6 Haw. Airlines, 355 B.R. at 217. Likewise, in Petrie Retail, the 7 bankruptcy court was called upon to interpret and enforce orders 8 enjoining a creditor from commencing or continuing an action 9 contingent upon the interpretation of lease provisions that were 10 at issue in the administration of the debtors' estate. In re 11 Petrie Retail, 304 F.3d at 225. 12 In short, the two cases relied on by the bankruptcy court to 13 support ancillary jurisdiction both involve actions, the outcome 14 of which would directly affect the debtor and the operation or 15 implementation of its plan of reorganization. In the present 16 appeal, on the other hand, the results of the tax dispute between 17 the Wilshire Partners and CFTB will have no effect on either the 18 debtor (i.e., Wilshire), any estate, or the confirmed plan of 19 reorganization. 20 The Ninth Circuit’s most recent review of ancillary 21 jurisdiction is also found in In re Ray, 624 F.3d at 1135-36. The 22 Ray bankruptcy court had held that it had jurisdiction and this 23 Panel affirmed under both related to and ancillary jurisdiction. 24 Id. at 1129. As to the bankruptcy court’s purported need to 25 vindicate and effectuate its sale order, the court of appeals 26 observed that ancillary jurisdiction should only be used “when 27 necessary to resolve bankruptcy issues, not to adjudicate state 28 law claims that can be adjudicated in state court.” Id. at 1136.

-29- 1 Applying In re Ray to the present appeal, the claims in dispute 2 here are tax claims asserted solely by CFTB against the Wilshire 3 Partners, and thus most comparable to the state contract claim 4 rejected as a basis for ancillary jurisdiction in In re Ray. 5 The Wilshire Partners attempt to counter these holdings by 6 citing the Supreme Court’s recent holding in Travelers Indem. Co. 7 v. Bailey, 129 S. Ct. 2195 (2009) (“Travelers”). Travelers 8 involved an appeal of the bankruptcy court’s “Clarifying Order” 9 entered in 2004 that interpreted the scope of an injunction 10 contained in a prior order confirming a chapter 11 plan entered in 11 1986. Because of its distinctly different facts, we do not 12 believe Travelers controls here. 13 Travelers was the principal insurance company for Johns- 14 Manville (“Manville”), a supplier of raw asbestos. When studies 15 began to mount showing a link between asbestos exposure and 16 respiratory diseases, the prospect of overwhelming liability led 17 Manville to file for bankruptcy protection under chapter 11. 18 Travelers, 129 S. Ct. at 2199. The parties and the bankruptcy 19 court ultimately concluded that the solution to Manville’s 20 predicament was “a plan of reorganization for [Manville] which 21 would provide for payment to holders of present or known asbestos 22 health related claims . . . and [to] those persons who had not yet 23 manifested an injury but who would manifest symptoms of 24 asbestos-related illnesses at some future time.” In re 25 Johns-Manville Corp., 97 B.R. 174, 176 (Bankr. S.D.N.Y. 1989). 26 The bankruptcy court confirmed a plan of reorganization that 27 created the Manville Personal Injury Settlement Trust (the 28 “Trust”). Manville’s insurers agreed to provide most of the

-30- 1 initial corpus of the Trust, with $80 million contributed by 2 Travelers. Travelers, 129 S. Ct. at 2199. However, the insurance 3 companies refused to contribute the funds without the protection 4 of an injunction from the bankruptcy court limiting their exposure 5 to direct claims (i.e., claims not through the Trust). On 6 December 18, 1986, the bankruptcy court entered an Insurance 7 Settlement Order, providing that upon the insurers' payment of the 8 settlement funds to the Trust, “all Persons are permanently 9 restrained and enjoined from commencing and/or continuing any 10 suit, arbitration or other proceeding of any type or nature for 11 Policy Claims against any or all members of the Settling Insurer 12 Group [including Travelers].” Travelers, 129 S. Ct. at 2199 13 (quoting the December 18, 1986, bankruptcy court’s Settlement 14 Order). The Settlement Order was incorporated by reference in the 15 bankruptcy court’s December 22, 1986, order confirming Manville’s 16 chapter 11 plan. Id. The settlement order and plan confirmation 17 order were affirmed by the district court, and then by the Second 18 Circuit. Id. at 2200. 19 Over a decade later, claimants began filing direct actions 20 against Travelers, not based upon Manville’s wrongdoing, but 21 alleging that its insurers had violated state consumer protection 22 statutes or their common law duties. Travelers asked the 23 bankruptcy court to enjoin several of those direct actions. The 24 bankruptcy court entered its Clarifying Order, which provided that 25 the 1986 settlement order and reorganization plan barred the 26 direct actions. 129 S. Ct. at 2201. On appeal of the Clarifying 27 Order, the district court affirmed, but the Second Circuit 28 reversed, holding that the bankruptcy court had exceeded its

-31- 1 jurisdiction in entering the original 1986 settlement order and 2 injunction barring direct action against insurers, including 3 Travelers. The Supreme Court granted certiorari. 4 The Supreme Court’s Travelers decision principally concerns 5 whether the bankruptcy court correctly interpreted its 1986 6 orders. However, there were two jurisdictional issues resolved by 7 the Court. 8 First, the Court ruled that the Second Circuit had erred in 9 concluding that the bankruptcy court did not have jurisdiction to 10 enter the Settlement Order in 1986. Second, the Court ruled, 11 agreeing with the Second Circuit, that the “Bankruptcy Court 12 plainly had [subject-matter] jurisdiction to interpret and enforce 13 its own prior orders.” 129 S. Ct. at 2205. As authority for this 14 proposition, the Court cited Local Loan Co. v. Hunt, 292 U.S. 234 15 (1934), where the following statement appears: 16 The pleading by which respondent invoked the jurisdiction of the bankruptcy court in the present case 17 is in substance and effect a supplemental and ancillary bill in equity, in aid of and to effectuate the 18 adjudication and order made by the same court. That a federal court of equity has jurisdiction of a bill 19 ancillary to an original case or proceeding in the same court, whether at law or in equity, to secure or 20 preserve the fruits and advantages of a judgment or decree rendered therein, is well settled. 21 22 Id. at 239. 23 Viewing the Travelers decision in context, we observe the 24 following: (1) The underlying order that the bankruptcy court 25 interpreted and enforced was an injunction that was negotiated by 26 the parties to the original settlement agreement, and incorporated 27 in the plan of reorganization, and the record clearly indicates 28 that the essential parties (the debtor and the insurance

-32- 1 companies) would not have agreed to plan confirmation without the 2 settlement agreement and injunction; (2) the Court’s ruling that a 3 bankruptcy court “plainly” had subject matter jurisdiction to 4 interpret and enforce its own prior orders should be viewed in 5 this context, that the Clarifying Order related to an injunction 6 that had been negotiated and considered an essential part of the 7 plan of reorganization. The citation the Court provided as 8 authority for its general proposition reinforces the principle 9 that exercise of ancillary subject matter jurisdiction must in 10 some way relate to an order that “preserves the fruits and 11 advantages” of the previous order. 12 The Travelers decision was made in the context of a complex 13 history, where the order being interpreted related to an 14 injunction that was a sine qua non for the acceptance of the plan 15 of reorganization. After ruling that the bankruptcy court had 16 jurisdiction to approve the original settlement agreement and 17 enter the injunction, the Supreme Court considered the ancillary 18 subject matter question and ruled in light of its previous 19 decision in Hunt that the bankruptcy court had jurisdiction. The 20 presence of the Hunt citation shows that the Court had in mind 21 that, based on the facts of Travelers, ancillary subject matter 22 jurisdiction in that context related back to preserving a benefit 23 (a fruit or advantage) granted in the original order. In short, 24 we believe Travelers is not directly relevant to the current 25 appeal, because the bankruptcy court’s orders interpreting the 26 plan did not act to preserve a benefit negotiated in the plan of 27 reorganization or, indeed, have any effect on the plan of 28 reorganization.

-33- 1 The Wilshire Partners attempt to distinguish In re Ray by 2 noting that Ray dealt solely with a request that the bankruptcy 3 court enforce, not interpret, its earlier orders: “This act of 4 interpreting, not merely enforcing, an earlier order distinguishes 5 [Travelers and this case] from Ray because the Ray case merely 6 involves the act of enforcing the effect of the earlier sale 7 order. While enforcement can occur in any court, only the 8 Bankruptcy Court could interpret its own order.” The Wilshire 9 Partners’ Opening Br. at 7. 10 Of course, the Wilshire Partners’ argument is incorrect on 11 its face. It is a gross overstatement to say that the bankruptcy 12 court is the only court that could interpret its orders. Courts 13 daily interpret the decisions and orders made by other courts – 14 indeed, one basic task of any court is the interpretation of case 15 law, a process of understanding and applying the orders and 16 rulings of “other” courts. 17 We also disagree with the Wilshire Partners’ analysis of the 18 Ninth Circuit's holding in In re Ray. In that case, the state 19 court was called upon to interpret the meaning of the bankruptcy 20 court’s sale order in order to determine if a breach of contract 21 occurred. Though asked to do so by the state court, the Ninth 22 Circuit held that the bankruptcy court should not have interceded 23 in the breach contest, and that it lacked jurisdiction to 24 interpret the sale order where the plan had been implemented and 25 the bankruptcy case had long-since been closed. In re Ray, 624 26 F.3d at 1136. As we read the Ninth Circuit’s decision, both 27 interpretation and enforcement of the sale order were matters 28 properly submitted to the state court, not the bankruptcy court.

-34- 1 In sum, we conclude that the bankruptcy court in this case 2 lacked related to jurisdiction, or ancillary or supplemental 3 jurisdiction, to adjudicate the tax dispute between the Wilshire 4 Partners and CFTB. 5 CONCLUSION 6 As the Ninth Circuit observed in In re Ray, “[r]eopening of 7 the bankruptcy case is rare, and only used when necessary to 8 resolve bankruptcy issues, not to adjudicate state law claims that 9 can be adjudicated in state court.” 624 F.3d at 1136. Because 10 the bankruptcy court lacked subject matter jurisdiction to enter 11 the various orders in this contest, we VACATE those orders and 12 REMAND with instructions that the bankruptcy court dismiss this 13 matter. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

-35-