Buffets, LLC v. Cal. Franchise Tax Bd. (In re Buffets, LLC)

617 B.R. 880

IN RE: BUFFETS, LLC, et al., Debtors.

Buffets, LLC, et al., Appellants,

v.California Franchise Tax Board, Appellee.

Case No. SA-19-CV-0216-JKP

United States District Court, W.D. Texas, San Antonio Division.

Signed May 27, 2020

David W. Parham, John E. Mitchell, Akerman LLP, Scott D. Lawrence, Wick Phillips Gould & Martin LLP, Dallas, TX, Tiffany Cox Stacy Ogletree, Deakins, Nash, Smoak & Stewart, P.C. San Antonio, TX, for Appellants.

Andrea M. Schoor, Matthew C. Heyn, Pro Hac Vice, Office of The Attorney General, Los Angeles, CA, for Appellee.

MEMORANDUM OPINION AND ORDER

JASON PULLIAM, UNITED STATES DISTRICT JUDGE

Pursuant to 28 U.S.C. § 158(a)(1), Appellant Buffets, LLC, ("Buffets" or "Appellant") and its affiliated entities (collectively referred to as "Reorganized Debtors") appeal two orders of the Bankruptcy Court issued February 15, 2019. In the first order, the Bankruptcy Court granted a motion for summary judgment filed by Appellee, California Franchise Tax Board ("FTB" or "CFTB") and allowed its Claim 1632 "as a priority tax claim in the amount of $856,626.28." See ECF No. 3-13 (D. 23; Bankr. ECF No. 4223).¹ The second order merely denied the Reorganized Debtors' cross-motion for summary judgment. See id. (D. 24; Bankr. ECF No. 4224).

Having considered the issues raised in this appeal, the arguments of the parties, the relevant portions of the record, and the applicable principles of law, the Court finds no need for oral argument and, for the reasons that follow, it AFFIRMS the Bankruptcy Court's orders.

I. BACKGROUND

This appeal concerns treatment of a governmental entity's claim for overdue franchise taxes in a third Chapter 11 bankruptcy filed by Buffets and its affiliates ("Buffets III").² In Claim 1632, FTB asserts that Buffets owes more than $856,626.28 in back taxes, and that those taxes are entitled to payment priority. The tax liabilities that are the subject of Claim 1632 are for the tax years ending 2000, 2002, 2005, 2006.

These tax liabilities have a long and highly litigated history. On December 5, 2007, FTB issued a notice of proposed assessment regarding the 2006 taxes, which was not protested. ECF No. 3-8 at 6, ¶ 6. Buffets first filed for bankruptcy on January 22, 2008, in Delaware ("Buffets I"). That filing invoked an automatic stay precluding FTB from pursuing collection of pre-petition taxes. See 11 U.S.C. § 362(a). Shortly thereafter, the 2006 tax assessment became final by operation of California law. See Cal. Rev. & Tax Code § 19042 (providing for finality of tax assessment following expiration of a sixty-day period when no protest had been filed); accord ECF No. 11 at 17; ECF No. 12 at 15-16. In Buffets I, FTB claimed priority for tax years 1997 through 2006. On March 30, 2009, FTB issued a notice of proposed assessment regarding the 2005 taxes, which also was not protested, see ECF No. 3-8 at 6, ¶ 5, and thus became final by operation of California law sixty days later. See ECF No. 11 at 17; ECF No. 12 at 15.

Buffets contested the priority and initiated an adversary proceeding on April 13, 2009, challenging the claims. ECF No. 3-9 at 161-71. The Delaware Bankruptcy Court confirmed a reorganization plan (the "Buffets I Plan")³ on April 17, 2009. Id. at 48-96. The plan provided for allowed priority tax claims to be paid in full over five years. Id. at 121 (Article III.D). At the time, however, FTB's tax claims were not allowed and it was enjoined from collecting on the claims through the injunction within the confirmation order. That injunction enjoined prepetition creditors from collecting on their claims, "[e]xcept as otherwise expressly provided in the Plan, [the confirmation order], Plan Supplemental Documents, or a separate order of the Court." Id. at 69-70, ¶ 34. Following a bankruptcy ruling on August 15, 2011, Buffets appealed. Id. at 41.

While that appeal was pending, Buffets filed for bankruptcy on January 18, 2012, in Delaware ("Buffets II"). FTB again asserted its claims for priority, which include all claims it previously sought in Buffets I as well as all claims that it would ultimately seek in Buffets III. This second bankruptcy action again invoked an automatic stay under 11 U.S.C. § 362(a) that precluded FTB from collecting the tax debt. The Delaware Bankruptcy Court confirmed a plan of reorganization in Buffets II on June 27, 2012. ECF No. 3-9 at 193-245. Attached to that confirmation order, as Exhibit A, is the Debtor's Second Amended Joint Plan of Reorganization. See ECF No. 3-9 at 247-309. This confirmed reorganization plan includes the following provision addressing "Priority Tax Claims":

Except to the extent that a holder of an Allowed Priority Tax Claims agrees to a different treatment, each holder of an Allowed Priority Tax Claim shall receive, at the sole option of the Reorganized Debtors, (a) Cash in an amount equal to such Allowed Priority Tax Claim on the later of the Effective Date and the date such Priority Tax Claim becomes an Allowed Priority Tax Claim, or as soon thereafter as is practicable, but no later than thirty (30) days after the Effective Date, or (b) through equal annual installment payments in cash (i) of a total value, as of the Effective Date of the Plan, equal to the allowed amount of such Claim; (ii) over a period ending not later than 5 years after the Petition Date; and (iii) in a manner not less favorable than the most favored nonpriority unsecured claim provided for by the Plan.

ECF No. 3-9 at 270 (Article III. D, D. 14; Bankr. ECF No. 3934). The plan also includes a provision addressing "Objections to and Resolution of Claims" that gives the Reorganized Debtors "the exclusive right to make and to file objections" regarding certain claims. Id. at 283 (Article VII.G.2). That provision permits the debtors to settle objections with or without court approval. Id. These Buffets II Plan provisions essentially carry over similar provisions from the Buffets I Plan. Compare ECF No. 3-9 at 121 (Article III.D), 135 (Article VIII.F.2) with ECF No. 3-9 at 270 (Article III.D), 283 (Article VII.G.2).

The order confirming the Buffets II Plan provides that "[a]s of the [Buffets II] Effective Date, the stay imposed pursuant to section 362(a) of the Bankruptcy Code shall be dissolved and of no further force and effect, subject to the injunction set forth herein and/or sections 524 and 1141 of the Bankruptcy Code." ECF No. 3-9 at 213, ¶ 35. That paragraph also contains some exceptions not relevant here. See id. The referenced injunction provides in pertinent part that "[e]xcept as otherwise expressly provided in the Plan, [the Confirmation] Order, or a separate order of the Court, all entities who have held, hold or may hold Claims against the Debtors that arose before or were held as of the Effective Date, are permanently enjoined, on and after the Effective Date, from [various listed activities, including collecting the tax debt]." Id. at 212, ¶ 34. The confirmation order also states:

Payment of Allowed Other Secured Claims and Other Priority Tax Claims. Upon the failure of the Debtor to make any payment due on an Allowed Priority Tax Claim ... in accordance with the Plan that is not cured within fifteen days of mailing of a written notice of default by the creditor, such creditor may exercise all rights and remedies available under nonbankruptcy law for the collection of its entire claim and/or seek appropriate relief in this Court.

Id. 240, ¶ 83. Buffets contends that the confirmed plan for Buffets II became effective on July 18, 2012. See ECF No. 11 at 20, 28.

Following that reorganization confirmation, the parties negotiated and entered into a stipulation to resolve the Buffets I and II FTB claims with an allowed priority claim in Buffets II. See ECF No. 3-9 at 37-45 ("the Stipulation"). After "engag[ing] in extensive and good-faith negotiations regarding the Buffets I Claims, the Buffets II Claims, and the matters in the Adversary Proceeding," the parties "proposed a resolution of all such matters" as set forth in the Stipulation. Id. at 42. Based on provisions of Buffets I Plan (Article VIII.F.2) and the Buffets II Plan (Article VII.G.2), the parties were "authorized to enter into this Stipulation in their sole discretion and without the need to obtain Bankruptcy Court approval." Id. According to the Stipulation, FTB had one priority claim for various tax years, including the four at issue in Buffets III. See id. 40-43. The Stipulation sets a payment plan with various payments due on January 18 in each of the following years: 2014, 2015, 2016, and 2017. Id. at 43, ¶ 5. More particularly, ¶ 5 states that "FTB will receive" these "payments on or prior" to January 18 of the respective years. Id. Additionally, the Stipulation provides:

Should the Buffets II Debtors or their successors in interest default by failing to timely make any of the payments described in paragraph 5 hereof, the remaining obligations hereunder shall be accelerated, and California FTB shall be entitled to take any and all actions available under state law to collect any unpaid amounts from the Buffets II Debtors, their successors in interest or any or all of them without further relief from the Bankruptcy Court.

Id. at 44, ¶ 7. "The Stipulation contains the entire agreement among the Parties and supersedes all prior agreements or undertakings among the Parties, relating to the subject matter hereof." Id. ¶ 12.

The Delaware Bankruptcy Court that jointly administered Buffets I (Case No. 08-10441 (MFW)) and Buffets II (Case No. 12-10237 (MFW)) along with the adversary proceeding (Adversary No. 09-50894 (MFW)), approved the Stipulation and dismissed the adversary proceeding on August 1, 2013.⁴ Id. at 34-35. In doing so, it recognized that the parties had entered into the Stipulation "to resolve the Adversary Proceeding, the Buffets I Claims and Buffets II Claims." Id. at 35. At this point, FTB assessed the tax liabilities for 2000 and 2002. See ECF No. 11 at 17; ECF No. 12 at...