June 24, 2008

In an important decision published last week, the United States Supreme Court held that an asset sale is eligible for the transfer-tax exemption under section 1146(a) of the Bankruptcy Code only if such sale occurs at or following the confirmation of a chapter 11 plan (and not in a pre-confirmation sale under section 363).

Fla. Dep't of Revenue v. Piccadilly Cafeterias, Inc., 2008 WL 2404077 (June 16, 2008).


Piccadilly requested Bankruptcy Court authorization to sell substantially all of its assets outside the ordinary course of business.  Additionally, Piccadilly requested that the sale be exempt from transfer taxes pursuant to section 1146(a)1 of the Bankruptcy Code.  Section 1146(a) provides an exemption from stamp and transfer taxes for transfers made "under a plan confirmed under section 1129" of the Bankruptcy Code.  Ten days after its asset sale closed, Piccadilly filed its initial chapter 11 plan.  The plan provided for distributions to creditors in a manner consistent with the sale and an accompanying settlement agreement. 

Prior to confirmation, Florida filed an objection to the plan, seeking a declaration that Piccadilly owed stamp taxes because the sale had not been accomplished "under a plan confirmed" and thus fell outside the statutory exemption.  The Bankruptcy Court granted summary judgment to Piccadilly, holding that the sale was a transfer "under" the confirmed plan because the sale was essential to the later-confirmed plan.  The 11th Circuit affirmed, holding that, while the statute was admittedly ambiguous, "§1146's tax exemption may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation transfer and the confirmed plan."

1. Prior to 2005, this exemption was codified at section 1146(c).

Supreme Court Decision

In a majority decision authored by Justice Thomas, the Supreme Court reversed, holding that the "most natural" reading of the statute limits the exemption only to transfers made after a chapter 11 plan has in fact been confirmed. 

The Court found persuasive Florida's argument, based in canons of interpretation, that any statutory ambiguity must be resolved in its favor.  In particular, the Court noted the interpretive canon that federal courts should narrowly construe any purported federal exemption from state taxation.   

The Court indicated that the statute is reasonably clear-and that only already-confirmed plans are eligible for the tax exemption-but noted that even if it accepted Piccadilly's contention that the statute was ambiguous, Florida's interpretation would prevail, given the federalist concern of avoiding federal interference with state taxation.  The Court thus avoided reaching a decision regarding whether the statute is clear on its face.

The Court addressed Piccadilly's contention that its result-that a transfer is subject to stamp taxes the minute before plan confirmation, but not the minute after-is "absurd" policy by noting that the Court cannot substitute its own legislative policy judgment for that of Congress: "it is incumbent upon the Legislature, and not the Judiciary, to determine whether §1146(a) is in need of revision."

In a dissent, Justice Breyer (joined by Justice Stevens) contended that the majority ignored the intention of Congress to facilitate reorganizations and noted that there was no rational basis to favor post-confirmation sales over pre-confirmation sales. 

The decision strips sales under section 363 of one benefit that had been afforded in many jurisdictions.