A circuit split. State vs. estate. Textualism vs. pragmatism. Despite its promise, this year's Supreme Court Bankruptcy Code interpretation bout- Florida Dept. of Revenue v. Piccadilly Cafeterias Inc., 128 S.Ct. 2326 (2008)- was relatively dull. Pragmatism entered the ring disoriented and nervous, and was quickly k.o.'ed by textualism and the certainty of taxes.
The issue in Piccadilly was simple. Section 1146(a) of the Code (§1146(c) pre-BAPCPA) states that taxes may not be imposed on a "transfer under a plan confirmed under [§]1129" of the Code. Roughly speaking, the Supreme Court had to decide whether "under a plan confirmed" narrowly means "pursuant to plan already confirmed" or broadly implies "leading to a plan to be confirmed."
The narrow interpretation prevailed.
In Piccadilly, the court had entered an order approving the sale of nearly all of the debtor's assets pursuant to §363 of the Code. The sale order exempted the sale from Florida's stamp tax on real estate transfers pursuant to §1146. In the months following the sale, the debtor filed and the court confirmed a plan of reorganization that did not provide any transfer taxes for Florida, which doggedly pursued its $32,000 transfer tax claim. Florida objected to the sale, moved for reconsideration of the order approving the bid procedures for the sale, moved for reconsideration of the order approving the sale, objected to the disclosure statement, appealed the denial of its motion to reconsider the sale order, objected to plan confirmation, moved to dismiss the bankruptcy case, moved for reconsideration of the order confirming the plan and finally filed an adversary complaint against the debtor seeking a declaratory judgment that it was owed the transfer taxes from the sale. When Florida lost this adversary proceeding on summary judgment, it appealed that judgment all the way to the Supreme Court.
In siding with the debtor, the lower courts had basically held that a transfer could be exempted from transfer taxes so long as the transfer is necessary for the consummation of a plan of reorganization. The Eleventh Circuit supported its conclusion by noting the "practical realities" that supported its conclusion - "a debtor may need to close a sale as a condition precedent to the parties' willingness to proceed with confirmation of a plan." In re Piccadilly, 484 F.3d 1299, 1304 (11th Cir. 2007).
Seven of the nine justices of the Supreme Court voted to reverse the lower courts. Citing a dictionary and several canonical statutory interpretation cases, Justice Thomas explained that the "most natural reading" of §1146(a) leads to the conclusion that the exemption from stamp taxes applies "only to transfers made pursuant to a Chapter 11 plan that has been confirmed." 128 S.Ct. at 2339.
The dissent, written by Justice Breyer and joined by Justice Stevens, questioned why Congress would have written the Code in such a way: "[A]n immediate sale can often make more revenue available to creditors or for reorganization of the remaining assets. Stamp taxes on related transfers simply reduce the funds available for any such legitimate purposes." 128 S.Ct. at 2342.
Yet the flaws in the dissent's appeal to pragmatism are apparent: Aren't Florida's purposes legitimate? Don't states need to be able to collect taxes?
Moreover, transfer taxes will rarely be large enough to affect a party's behavior or seriously impair a debtor's reorganization. The parties in Piccadilly were not about to delay an $84 million sale to avoid $32,000 in taxes (although other states may have had similar claims). Bankruptcy is typically an ill-advised transfer tax reduction strategy, so limiting §1146(a)'s application to confirmed reorganizations will not prevent the nonexistent abuse of chapter 11 as a transfer tax shelter.
Creatively side-stepping Piccadilly and taxes on transfers consummated prior to the confirmation of a plan might be possible. Perhaps everything but the actual transfer or taxable event can be accomplished tax-free prior to confirmation. For example, maybe the sale could be conducted and approved prior to confirmation, with closing to occur after confirmation. Of course, the best-laid plans of bankruptcy lawyers often go awry. Indeed, Piccadilly echoes BAPCPA's demand for urgency. BAPCPA reduced the time during which the debtor retains the right to assume or reject certain leases. BAPCPA also reduced the time during which the debtor enjoys the exclusive right to propose a plan of reorganization. Piccadilly provides one more reason for a debtor-in-possession to move toward confirmation with all deliberate speed.