On April 18, 2007, in Fla. Dep’t. of Rev. v. Piccadilly Cafeterias, Inc. (In re Piccadilly Cafeterias, Inc.),1 the United States Court of Appeals for the Eleventh Circuit held that the stamp tax exemption of 11 USC § 1146(c)2 may apply to transfers of assets that were necessary to the consummation of a bankruptcy plan of reorganization and were made prior to confirmation of the plan. In reaching this decision, the Eleventh Circuit declined to follow decisions of the Third and Fourth Circuits to the contrary and thus created a split among the circuits on this issue.

On October 28, 2003, Piccadilly Cafeterias, Inc. (“Piccadilly”) executed an asset purchase agreement with Piccadilly Acquisition Corporation wherein the latter agreed to purchase substantially all of Piccadilly’s assets. The next day, Piccadilly filed a voluntary petition under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court”), in addition to a motion requesting authorization to sell substantially all of its assets pursuant to section 363(b)(1) of the Bankruptcy Code (the “Sale”). As part of the motion, Piccadilly also requested an exemption from stamp taxes on the Sale pursuant to section 1146(c) of the Bankruptcy Code (the “Exemption”). The Florida Department of Revenue (the “DOR”) objected to the Sale and the Exemption. On February 13, 2004, the Bankruptcy Court approved the Sale and granted the Exemption.

On February 13, 2004, the Bankruptcy Court approved the Sale and granted the Exemption. On March 15, 2004, the Bankruptcy Court entered an amended sale order (the “Sale Order”). Thereafter, the DOR filed a motion to reconsider, vacate and/or amend the Sale Order, which the Bankruptcy Court denied. The Sale closed on March 16, 2004.

On March 26, 2004, Piccadilly filed its initial Chapter 11 plan of liquidation and later filed an amended plan (the “Amended Plan”). In response, the DOR filed an objection to confirmation of the Amended Plan and a complaint against Piccadilly seeking a declaration that stamp taxes in the amount of $39,200 were not exempt from payment under section 1146(c) of the Bankruptcy Code. On October 21, 2004, the Bankruptcy Court confirmed the Amended Plan (the “Confirmation Order”). Thereafter, the DOR filed a motion to reconsider the Confirmation Order, which the Bankruptcy Court denied. The DOR then filed an amended complaint against Picadilly, and both Piccadilly and the DOR filed motions for summary judgment.

Ultimately, the Bankruptcy Court granted summary judgment in favor of Piccadilly, holding that the Sale was exempt from stamp taxes pursuant to section 1146(c). In doing so, the Bankruptcy Court reasoned that the Sale was a transfer “under” Piccadilly’s confirmed plan of reorganization, for purposes of section 1146(c), because the Sale was necessary to consummate the plan.3 The District Court agreed and affirmed the Bankruptcy Court. However, in its order, “the district court emphasized that the parties had not addressed the issue of whether the § 1146(c) tax exemption applied to the sale of Piccadilly’s assets, rather, the parties focused their arguments on whether the exemption may ever apply to asset transfers completed before a plan of reorganization has been confirmed by the bankruptcy court (that is, pre-confirmation transfers).”4 Therefore, “according to the district court, the issue of whether the § 1146(c) exemption applied to the sale of Piccadilly’s assets was not properly before it.”5 Nonetheless, “the district court expressly affirmed the bankruptcy court’s implicit conclusion that § 1146(c) may apply where a transfer is made pre-confirmation.”6

The DOR appealed the district court’s ruling to the Eleventh Circuit Court of Appeals. Upon review, the Eleventh Circuit affirmed. In reaching its decision, the Eleventh Circuit analyzed the decisions of other circuit courts, as well as its own, since the issue of whether the section 1146(c) stamp tax exemption may apply to pre-confirmation transfers was an issue of first impression in the Eleventh Circuit.7 First, the court looked to the Fourth Circuit.

In re NVR, LP,8 the Fourth Circuit noted that “the language of § 1146(c) is plain and requires no great manipulation to interpret its terms.”9 The Fourth Circuit then recognized the interpretative canon that courts should narrowly construe exemptions from state taxation.10 Relying thereon, the court looked to the dictionary definition of “under,” meaning “[w]ith the authorization of” or “subordinate.”11 The Fourth Circuit then reasoned that “[l]ogically reading these definitions in the context of § 1146(c), we cannot say that a transfer made prior to the date of plan confirmation could be subordinate to, or authorized by, something that did not exist at the date of transfer—a plan confirmed by the court.”12 Consequently, the Fourth Circuit held that the plain language of section 1146(c) precludes its application to pre-confirmation transfers.13

Second, the court looked to the Third Circuit. In In re Hechinger Inv. Co. of Del. Inc.,14 the Third Circuit reasoned that “the most natural reading of the phrase ‘under a plan confirmed’ in 11 USC § 1146(c) is ‘authorized’ by such a plan.”15 Thus, “if an instrument of transfer is made or delivered ‘under’ a plan, the plan must provide the authority for the transaction.”16 Relying on strict construction of tax exemptions, the Third Circuit opined that this “reading fits best with the remaining language of [s]ection 1146(c)” and also “gives the phrase ‘under a plan confirmed’ the same meaning as an identical phrase in another provision of the Bankruptcy Code, 11 USC § 365(g).”17

In light thereof, the Third Circuit held that the exemption of section 1146(c) does not apply to pre-confirmation transfers.18

Third, the court examined a prior Eleventh Circuit case, In re T.H. Orlando Ltd.,19 which focused on a different issue—whether a transaction between two non-debtors pursuant to a confirmed plan of reorganization was exempt from stamp taxes under Bankruptcy Code § 1146(c).20 In T.H. Orlando Ltd., the Court held that “[a] transfer ‘under a plan’ refers to a transfer authorized by a confirmed Chapter 11 plan. In turn, a plan authorizes any transfer that is necessary to the consummation of the plan.”21 Accordingly, the court held that “the phrase ‘under a plan’ refers to a transfer that is necessary to the consummation of a confirmed Chapter 11 plan.”22 Lastly, the court noted a Second Circuit case, In re Jacoby-Bender, Inc.,23 where the issue presented was whether a post-confirmation property transfer was exempt from stamp taxes under section 1146(c) even though the confirmed plan did not mention the transfer or authorize the debtor to enter into the transfer.24 Setting forth reasoning similar to that of T.H. Orlando Ltd., the Second Circuit held that a post-petition sale was a sale “under” a confirmed plan for purposes of section 1146(c) because confirmation could not occur without the sale.25

In examining the analyses set forth by the Second, Third and Fourth Circuits, as well as its opinion in In re T.H. Orlando Ltd., the Eleventh Circuit held that the better reasoned approach looks not to the timing of any transfers, “but to the necessity of the transfers to the consummation of a confirmed plan of reorganization.”26 First, the Piccadilly court declared that “the plain language of § 1146(c) is ambiguous, as the statute can plausibly be read either as describing eligible transfers to include transfers ‘under a plan confirmed’ regardless of when confirmation occurred, or...imposing a temporal restriction on when the confirmation of the plan must occur.”27 Second, the court

to, or authorized by, something that did not exist at the date of transfer—a plan confirmed by the court.”12 Consequently, the Fourth Circuit held that the plain language of section 1146(c) precludes its application to pre-confirmation transfers.13

Second, the court looked to the Third Circuit. In re Hechinger Inv. Co. of Del. Inc.,14 the Third Circuit reasoned that “the most natural reading of the phrase ‘under a plan confirmed’ in 11 USC § 1146(c) is ‘authorized’ by such a plan.”15 Thus, “if an instrument of transfer is made or delivered ‘under’ a plan, the plan must provide the authority for the transaction.”16 Relying on strict construction of tax exemptions, the Third Circuit opined that this “reading fits best with the remaining language of [s]ection 1146(c)” and also “gives the phrase ‘under a plan confirmed’ the same meaning as an identical phrase in another provision of the Bankruptcy Code, 11 USC § 365(g).”17 In light thereof, the Third Circuit held that the exemption of section 1146(c) does not apply to pre-confirmation transfers.18

Third, the court examined a prior Eleventh Circuit case, In re T.H. Orlando Ltd.,19 which focused on a different issue—whether a transaction between two non-debtors pursuant to a confirmed plan of reorganization was exempt from stamp taxes under Bankruptcy Code § 1146(c).20 In T.H. Orlando Ltd., the Court held that “[a] transfer ‘under a plan’ refers to a transfer authorized by a confirmed Chapter 11 plan. In turn, a plan authorizes any transfer that is necessary to the consummation of the plan.”21 Accordingly, the court held that “the phrase ‘under a plan’ refers to a transfer that is necessary to the consummation of a confirmed Chapter 11 plan.”22

Lastly, the court noted a Second Circuit case, In re Jacoby-Bender, Inc.,23 where the issue presented was whether a post-confirmation property transfer was exempt from stamp taxes under section 1146(c) even though the confirmed plan did not mention the transfer or authorize the debtor to enter into the transfer.24 Setting forth reasoning similar to that of T.H. Orlando Ltd., the Second Circuit held that a post-petition sale was a sale “under” a confirmed plan for purposes of section 1146(c) because confirmation could not occur without the sale.25

In examining the analyses set forth by the Second, Third and Fourth Circuits, as well as its opinion in In re T.H. Orlando Ltd., the Eleventh Circuit held that the better reasoned approach looks not to the timing of any transfers, “but to the necessity of the transfers to the consummation of a confirmed plan of reorganization.”26 First, the Piccadilly court declared that “the plain language of § 1146(c) is ambiguous, as the statute can plausibly be read either as describing eligible transfers to include transfers ‘under a plan confirmed’ regardless of when confirmation occurred, or...imposing a temporal restriction on when the confirmation of the plan must occur.”27 Second, the court noted that when Congress intended a temporal restriction in the Bankruptcy Code, it has expressly stated so.28 Third, the court recognized that, although the general rule is that tax exemptions should be narrowly construed, a Court must not unduly limit the purpose of tax exemptions, especially when confronted with a remedial statute such as the Bankruptcy Code.29 Finally, the Piccadilly court stated that “the strict temporal construction of § 1146(c) articulated by the Third and Fourth Circuits ignores the practical realities of Chapter 11 reorganization cases, as even transfers contemplated in a plan of reorganization will not qualify for the tax exemption unless they occur after the order confirming a plan is entered.”30

Comment

In holding that the stamp tax exemption of section 1146(c) of the Bankruptcy Code may apply to transfers of assets that were necessary to the consummation of a plan of reorganization and made prior to confirmation of the plan, the Piccadilly court seems to have disregarded the plain meaning of the word “under” as used in the phrase “under a plan confirmed” in section 1146(c) and has created a split of authority among the Third, Fourth and Eleventh Circuits.31 Courts faced with a similar issue in the future may question Piccadilly’s reasoning and disagree with its holding. Thus, Piccadilly is certainly one case to watch.