On June 16, 2008, Justice Clarence Thomas delivered the opinion of the court in Florida Department of Revenue v. Piccadilly Cafeterias, Inc. In a 7-2 decision, the Supreme Court reversed the decision of the U.S. Court of Appeals for the Eleventh Circuit and held that § 1146(a) provides an exemption to state stamp taxes only where a sale occurs pursuant to a plan that has been confirmed, and did not properly apply to a case where the plan was confirmed several months after the bankruptcy court approved the sale.
In bankruptcy cases, sales of assets outside of the ordinary course of business can proceed either under § 363 of the Bankruptcy Code or the provisions of a chapter 11 plan. Piccadilly Cafeterias filed for chapter 11 protection in October 2003 and shortly thereafter sold substantially all of its assets outside of a chapter 11 plan, with the bankruptcy court finding that the sale was exempt from taxes under § 1146. Several months following the sale of assets, a chapter 11 plan was confirmed. The Florida Department of Revenue (Florida) then commenced litigation by the filing of an adversary proceeding to determine whether the exemption from the transfer taxes was appropriate. The bankruptcy court, the district court and the Eleventh Circuit all found that the exemption from the transfer taxes applied to pre-confirmation sales when such sales were necessary to the consummation of a plan.
§ 1146(a) of the Bankruptcy Code provides:
The issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under § 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax. (Emphasis supplied).
The Eleventh Circuit had held that a sale of assets that occurred prior to the confirmation of a chapter 11 plan could nonetheless be exempted from stamp taxes because the sale was a nexus between the sale and the confirmation of the plan. This decision created a circuit split between the Eleventh Circuit and the Third and Fourth Circuits, which had held that only sales made pursuant to a confirmed plan were exempt. The Supreme Court granted certiorari to determine whether "§ 1146(c) of the Bankruptcy Code, which exempts from stamp or similar taxes any asset transfer 'under a plan confirmed under § 1129 of the Code,' applies to transfers of assets occurring prior to the actual confirmation of such a plan."
The Court first addressed whether the language of § 1146(a) was ambiguous. In doing so, the Court considered Florida's argument that the word "under" should be read to mean "with the authorization of" or "inferior or subordinate" to the plan, as well as the debtor's argument that the language does not unambiguously impose a temporal or time requirement, and that Congress could easily have imposed such a requirement had it wished to do so. The Court concluded that Florida's reading of the statute was superior, declined to decide whether the statute was unambiguous on its face, assumed that the statute was ambiguous, and then resolved the ambiguity in favor of Florida.
Specifically, the Court found that the debtor's reliance on other sections of the Bankruptcy Code to support its arguments were unfounded based upon the specific purpose and language of each such section. The Court also noted that § 1146 appeared in the subchapter entitled POSTCONFIRMATION MATTERS, which supported the finding of a temporal limitation. Moreover, the Court concluded that even if it were to adopt the debtor's broad definition of the term "under," the sale in the Piccadilly case could "hardly be said to have been consummated 'in accordance with' any plan because, as of the closing date, [the debtor] had not even submitted its plan to the Bankruptcy Court for confirmation." The Court followed by addressing a number of substantive canons of statutory interpretation, which favored Florida's interpretation of the statute. Finally, the Court noted that even if the "practical realities of chapter 11 reorganizations were increasingly rendering postconfirmation transfers a thing of the past," it was Congress, and not the courts, that should determine whether the statute should be revised.
In dissent, Justice Breyer concluded that the statute was ambiguous and analyzed the purpose of the bankruptcy remedy as a whole, arguing that allowing an exemption for transfer taxes for pre-plan confirmation sales would further the bankruptcy goals of maintaining a going concern and maximizing the value of a debtor's assets. The dissent believed that the Court's holding might delay sales and result in lower recoveries for creditors.
In most large bankruptcy cases, the amount of stamp and transfer taxes should not dramatically impact the timing of the case. However, in certain cases, where the debtor has substantial real property, the plan process might proceed more expeditiously, or sales of certain assets may be delayed in order to obtain the tax exemption. In addition, in cases where the value of the secured lender's collateral is less than the amount due on the indebtedness, the applicability of the tax exemption could affect things such as specified payments for professionals and other administrative claimants (so-called "carve-outs") or the amount of funds that will be dedicated to a litigation trust for post-confirmation litigation.