## Facts

- Majestic Star Casino, LLC and affiliates, including Majestic Star Casino II, Inc. (MSC II), filed Chapter 11 petitions in the District of Delaware.
- MSC II was wholly owned by Barden Development, Inc. (BDI), a nondebtor S-corporation whose sole shareholder was Don H. Barden (later represented by his estate).
- As BDI’s qualified subchapter S subsidiary (QSub), MSC II was disregarded for federal income tax purposes while BDI maintained its S-corporation election.
- After the bankruptcy filing, Barden caused BDI to revoke its S-corporation election with the IRS.
- Revocation of BDI’s S status automatically terminated MSC II’s QSub status, causing MSC II to be treated as a taxable C-corporation.
- The debtors alleged the revocation destroyed a valuable tax attribute and shifted tax liability to the bankruptcy estate.
- The debtors sued to treat the loss of QSub status as a post-petition transfer or prohibited act affecting “property of the estate,” invoking 11 U.S.C. §§ 362, 549, and 550.
- The bankruptcy court granted summary judgment to the debtors, held QSub status was estate property, and ordered reinstatement of BDI’s S status and MSC II’s QSub status.
- The IRS, BDI, and the Indiana Department of Revenue took a certified direct appeal to the Third Circuit.

## Issues

1. Whether MSC II’s QSub status, dependent on a nondebtor parent’s S-corporation election, is “property of the estate” under 11 U.S.C. § 541.
2. Whether the debtors had standing to challenge the nondebtor parent’s post-petition S-election revocation and whether the bankruptcy court had jurisdiction to order reinstatement of the nondebtor’s tax status and the subsidiary’s QSub status.

## Decision

- The Third Circuit vacated the bankruptcy court’s order and remanded with instructions to dismiss the complaint for lack of jurisdiction.
- The court held MSC II’s QSub status was not property of the bankruptcy estate under § 541.
- Because no estate property interest was implicated, the debtors lacked standing to challenge BDI’s revocation.
- The bankruptcy court lacked subject-matter jurisdiction to order relief that effectively altered the tax posture and obligations of nondebtors.

## Legal Principles

- “Property of the estate” under 11 U.S.C. § 541 requires a legal or equitable interest of the debtor; an expectation of continued favorable tax treatment, without debtor control, is insufficient.
- A tax classification that exists only by virtue of a nondebtor’s election and can be terminated by nondebtor action is not an estate asset when the debtor cannot control, transfer, assign, or alienate it independently.
- Cases treating certain tax attributes (e.g., net operating losses) as estate property do not extend to tax statuses that are not debtor-specific and are inseparable from a nondebtor’s rights under the Internal Revenue Code.
- A debtor in bankruptcy may not assert, as its own, tax-election rights belonging to a nondebtor entity or its shareholders; absent an estate property interest, prudential standing is lacking.
- Bankruptcy courts’ remedial authority does not permit compelling the IRS or nondebtors to maintain or reinstate nondebtor tax elections when the dispute does not concern estate property.

## Conclusion

The Third Circuit held that a debtor-subsidiary’s QSub status, contingent on a nondebtor parent’s S-corporation election, is not property of the estate; therefore, the debtors could not challenge the revocation, and the bankruptcy court lacked jurisdiction to order reinstatement of the tax statuses.


In re Majestic Star Casino, LLC, 716 F.3d 736 (3d Cir. 2013)