InIn re Majestic Star Casino LLC , U.S. Bankruptcy Court Judge Kevin Gross of the District of Delaware answered a question of first impression: whether a nondebtor parent’s revocation of its S corporation status, which, subsequently, by operation of the Internal Revenue Code revoked the debtor-subsidiary’s "qualified Subchapter S subsidiary" (QSub) status, is an avoidable transfer of estate property in violation of Bankruptcy Code §549. The court answered the question in the affirmative, voided the parent corporation’s revocation of its Subchapter S status and the termination of the subsidiary corporation’s QSub status, and directed the defendants to take all actions necessary to restore the subsidiary corporation’s QSub status and to return all sums paid by the subsidiary as a result of the termination of its QSub status.
The facts of the case set forth in the opinion are not complicated. The debtors owned casino properties in Indiana and other states. Barden Development Inc. (BDI) was the nondebtor parent of the debtor, the Majestic Star Casino II (MSC II). Prior to the petition date, BDI and its sole shareholder, Don Barden, elected to treat BDI as an S corporation, and BDI in turn had elected to treat its wholly owned subsidiary, MSC II, as a QSub.
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