The U.S. Bankruptcy Court for the Southern District of New York issued a decision earlier this year that is likely to have a significant impact on bankruptcy sales of property. In In re New 118th, Inc., 398 B.R. 791 (Bankr. S.D.N.Y. 2009), the court held that certain tax exemptions available pursuant to section 1146(a) of the Bankruptcy Code in connection with transfers of property that occur "under a plan," apply to pre-confirmation sales that close after confirmation and are necessary to the consummation of the debtor's plan.

In New 118th, the trustee contracted to sell 21 apartment buildings in New York City owned by the debtors for $54 million (the "Sale"). The contract of sale provided that the Sale was "expressly conditioned upon the entry of an order pursuant to Section 363 of the Bankruptcy Code, or pursuant to a confirmed Chapter 11 plan ...." Subsequently, the trustee moved under section 363 of the Bankruptcy Code for court approval of the Sale and argued that, although he was seeking court approval prior to filing a plan and disclosure statement with the court, the Sale was integral to the consummation of the anticipated plan.

Therefore, the trustee argued that the property being sold should be exempt from stamp and similar taxes pursuant to section 1146(a), which provides that "[t]he issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 of this title, may not be taxed under any law imposing a stamp or similar tax." 11 U.S.C. § 1146(a).

The New York City Department of Finance (the "City") objected, arguing that section 1146(a) does not apply to pre-confirmation sales, and that the trustee agreed to escrow the disputed taxes until the issue of the exemption was resolved by the court.

The Plan

Thereafter, the trustee filed a plan of liquidation that proposed to pay administrative and priority claims in full on the effective date, and distribute any remaining amounts to general unsecured creditors. The plan reiterated that the Sale was an "integral part of implementation of the Plan" and that the Sale would be exempt "from the imposition of any New York state or local deed recording taxes and other similar taxes."

The City filed a limited objection to the plan again contending that section 1146(a) was inapplicable to the Sale, and that the City was entitled to more than $1.6 million in taxes. In support of its objection, the City relied on the decision in Fla. Dep't of Revenue v. Piccadilly Cafeterias, Inc. ("Piccadilly"), 128 S.Ct. 2326 (2008), in which the Supreme Court held that the Section 1146(a) exemption did not apply to a Section 363 pre-confirmation sale, even if the sale closed post-petition.

The court confirmed that plan and reserved decision on the applicability of the tax exemption. The Sale closed approximately one month later. At the closing, the trustee executed and delivered the deeds, and the purchaser recorded the deeds approximately two weeks later.

The court ultimately denied the City's objection and held that the Sale qualified for the section 1146(a) exemption. As the court held, the "§1146(a) exemption applies to a post-confirmation transfer that follows a pre-confirmation sale if the transfer facilitates the implementation of the plant, or ... is necessary to the consummation of the plan." Relying on New York law, which provides that the transfer of real property does not occur until the deed is delivered and accepted, the court found that the transfers occurred post-petition because the deeds were delivered post-confirmation.

While acknowledging the Supreme Court's holding in Piccadilly, that section 1146(a) "is inapplicable to pre-confirmation transfers," the New 118th court found that post-confirmation delivery of the deed in connection with a sale that occurred pre-confirmation – an issue not addressed by the court in Piccadilly – satisfies Piccadilly's "simple, bright line rule."