Last June, the Supreme Court decided the case of Florida Department of Revenue v. Piccadilly Cafeterias Inc., which dealt with a disputed tax exemption on an asset sale. Section 1146(a) of the Bankruptcy Code provides a stamp-tax exemption for any asset transferred under a plan confirmed under chapter 11.
Before Piccadilly's plan was submitted to the bankruptcy court, that court authorized Piccadilly to sell certain assets. The settlement agreement granted Piccadilly an exemption under 11 U.S.C. §1146(a), and the bankruptcy court had ruled that the transfer of assets was exempt from stamp taxes under §1146(a). After the sale was complete, Piccadilly filed its chapter 11 plan, but before it was confirmed the Florida Department of Revenue filed an objection, arguing that the stamp taxes it had assessed on certain transferred assets fell outside §1146(a)'s exemption because the transfer had not been under a confirmed plan. The district court and the Eleventh Circuit affirmed, with the latter holding that §1146(a)'s exemption applies to preconfirmation transfers necessary to the consummation of a confirmed chapter 11 plan, provided there is some nexus between such transfers and the plan; that §1146(a)'s text was ambiguous and should be interpreted consistent with the principal that a remedial statute should be construed liberally; and that this interpretation better accounted for the practicalities of chapter 11 cases because the debtor may need to transfer assets to induce relevant parties to endorse a proposed plan's confirmation.
The Eleventh Circuit's ruling conflicted with the approach taken by the appeals court for the third and fourth circuits, which have held that §1146(a) "does not apply to transactions that occur prior to the confirmation of a plan under chapter 11 of the Bankruptcy Code" (citing In re Hechinger Inv. Co. of Del., 335 F.3d 243, 246 (3d Cir. 2003); see also In re NVR, LP, 189 F.3d 442, 458 (4th Cir. 1999)). The Supreme Court reversed the decision of the Eleventh Circuit and held that §1146(a) affords a stamp-tax exemption only as to transfers made pursuant to a chapter 11 plan that was confirmed prior to the asset sale.
The Florida Department of Revenue argued that §1146(a)'s language of "plan confirmed" denotes a plan confirmed in the past. Piccadilly countered that had Congress intended "plan confirmed" to mean "confirmed plan," it would have used that language. The Supreme Court found that Piccadilly's construal was a stretch because §1146(a) specifies not only that a transfer be under a plan, but also that the plan be confirmed pursuant to §1129.
The Florida Department of Revenue further argued that §1146(a) applies only to post-confirmation sales; Piccadilly contended that it extends to preconfirmation transfers as long as they are made in accordance with a plan that is eventually confirmed. The Florida Department of Revenue reasoned that to be eligible for §1146(a)'s exemption, a transfer must be subject to a plan that has been confirmed subject to §1129. The Florida Department of Revenue cited the Fourth Circuit's reasoning in NVR, which stated that a transfer made prior to the date of plan confirmation cannot be subject to or under the authority of something that did not exist at the time of the transfer-a confirmed plan. The Supreme Court found that the asset transfer in this case can hardly be said to have been consummated in accordance with any confirmed plan because, as of the closing date, Piccadilly had not even submitted its plan to the bankruptcy court for confirmation. Piccadilly's asset sale thus was not conducted in accordance with any plan confirmed under chapter 11. Rather, it was conducted in accordance with the procedures set forth in chapter 3-specifically §363(b)(1). The Supreme Court stated that a transfer cannot be under a plan until the court confirms the plan in question; only at that point does the transfer become eligible for the stamp-tax exemption.
The Supreme Court also found dispositive the fact that §1146(a) is placed in a subchapter entitled and expressly limited to "POSTCONFIRMATION MATTERS." This reference undermines Piccadilly's argument that §1146(a) extends to preconfirmation transfers. Furthermore, the Supreme Court relied on the federalism canon, which provides that courts should proceed carefully when asked to recognize an exemption from state taxation that Congress has not clearly expressed. The Supreme Court cited the Fourth Circuit's reasoning in NVR as follows: "Congress struck a most reasonable balance. If a debtor is able to develop a chapter 11 reorganization and obtain confirmation, then the debtor is to be afforded relief from certain taxation to facilitate the implementation of the reorganization plan. Before a debtor reaches this point, however, the state and local tax systems may not be subjected to federal interference." Thus, the Supreme Court found that because Piccadilly transferred assets before its chapter 11 plan was confirmed by the bankruptcy court, it could not rely on §1146(a) to avoid Florida's stamp taxes.
This Supreme Court decision could impact the popularity and sustainability of early §363 sales. Now there is a definitive ruling that only sales consummated after a plan has been confirmed will be exempt from state transfer taxes. Since Piccadilly had to pay the stamp taxes, the funds available to pay other creditors' claims were diminished. This result may have a chilling effect on §363 sales in future cases.