Last year, the United States Supreme Court resolved a circuit split and held in Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc.[1] that the transfer tax exemption in § 1146(a) of the Bankruptcy Code only applies to transfers that occur after a plan has been confirmed. This decision sent tremors through the bankruptcy bar. The ability to maximize benefit to the estate often requires a sale of all or substantially all of the assets before a plan is even proposed. If the transfer tax exemption is no longer available for these types of transactions, however, the increased transaction cost due to transfer taxes decreases the amount available to the estate for the benefit of creditors. Fortunately, the Supreme Court may have outlined how to gain the benefit of that exemption as part of a sale under §363(b) of the U.S. Bankruptcy Code, and at least one lower court has allowed such an exemption to occur.

The Piccadilly Decision

Piccadilly Cafeterias, Inc. filed a petition under Chapter 11 of the Bankruptcy Code on October 29, 2003, and sought authorization to sell substantially all its assets pursuant to §363(b)(1) of the Bankruptcy Code.[2] As part of that request, Piccadilly also sought an exemption from any transfer taxes pursuant to §1146(a) of the Bankruptcy Code, 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 tax or similar tax."[3]

After an auction, the winning bidder agreed to purchase Piccadilly's assets.[4] On February 13, 2004, the bankruptcy court approved the sale and ruled that the transfer was exempt from stamp taxes per §1146(a).[5] The sale closed on March 16, 2004.[6] Piccadilly then filed a plan of liquidation on March 26, 2004, and an amended plan on July 31, 2004.[7]

The Florida Department of Revenue objected to the plan and sought a declaration that the taxes it assessed on Piccadilly's sale of assets were not exempt under §1146(a) because the transfer did not occur "under a plan confirmed."[8] The bankruptcy court confirmed the plan and, on cross-motions for summary judgment, determined that the exemption applied because the asset sale was necessary to consummate the plan.[9] On appeal, both the district court and the U.S. Court of Appeals for the Eleventh Circuit affirmed.[10]

In previous decisions, both the U.S. Courts of Appeal for the Third Circuit and the Fourth Circuit reached a different result from the Eleventh Circuit. The U.S. Supreme Court granted certiorari to address this circuit split.[11] Through an in-depth textual analysis of §1146(a), the Supreme Court concluded that "[t]he most natural reading of § 1146(a)'s text, the provision's placement within the Code, and applicable substantive canons all lead to the same conclusion: Section 1146(a) affords a stamp-tax exemption only to transfers made pursuant to a Chapter 11 plan that has been confirmed. Because Piccadilly transferred its assets before its Chapter 11 plan was confirmed by the Bankruptcy Court, it may not rely on § 1146(a) to avoid Florida's stamp taxes. Accordingly, we reverse the judgment below and remand the case for further proceedings consistent with this opinion."[12]

Can a Debtor Still Obtain the Exemption in a Pre-Confirmation Asset Sale?

While focusing on the textual analysis of "under a plan confirmed" in its Piccadilly decision, the Supreme Court also recognized the practical nature of Chapter 11 reorganizations. Discussing its previous decision in Bildisco, which dealt with a debtor's ability to reject a collective bargaining agreement under § 365 of the Bankruptcy Code,[13] the Court noted that the decision to assume or reject an executory contract must be made before any plan is confirmed.[14] The effect of that decision, however, does not occur until after plan confirmation.[15] The Court then compared that analysis to decisions regarding the transfer of assets:

"In the context of §1146(a), the decision whether to transfer a given asset 'under a plan confirmed' must be made prior to submitting the Chapter 11 plan to the bankruptcy court, but the transfer itself cannot be 'under a plan confirmed' until the court confirms the plan in question. Only at that point does the transfer become eligible for the stamp-tax exemption."[16]

Applying that principle to asset sales pursuant to §363(b), the Court appears to recognize that the decision to sell the assets to a particular party can occur before a plan is confirmed. If the parties desire to utilize the exemption in §1146(a), however, the actual transfer cannot occur until after a plan is confirmed.

The United States Bankruptcy Court for the Southern District of New York reached this same conclusion, but for different reasons, in In re New 118th, Inc., 398 B.R. 791, 799 (S.D.N.Y. 2009). In New 118th, New 118th LLC and its affiliates ("New 118th") owned 21 apartment buildings in Upper Manhattan in New York City.[17] Certain of its creditors filed involuntary Chapter 11 petitions against New 118th.[18] The bankruptcy court appointed a Chapter 11 trustee, who contracted to sell the buildings to a stalking horse bidder, subject to higher and better offers.[19] No plan or disclosure statement was filed before the sale, but the trustee stated that the sale was "the linchpin of the liquidating plan that the Trustee intended to file as soon as practicable."[20]

As part of the sale, the trustee sought to exempt the transfer taxes pursuant to § 1146(a) of the Bankruptcy Code.[21] The City of New York objected to that provision.[22] At the sale hearing, no other bidders surfaced, and the buildings were sold.[23] The court signed the sale order on June 19, 2008, but ordered the trustee to pay or escrow the disputed taxes until a hearing could be held on that issue.[24]

On July 3, 2008, the Trustee filed a joint plan of liquidation and, on July 14, 2008, an amended plan of liquidation.[25] New York objected to the transfer tax exemption in the plan.[26] On August 8, 2008, the court confirmed the amended plan of liquidation, reserving decision on the exemption issue.[27] The amended plan became effective August 18, 2008.[28] The sale of the buildings then closed on September 8, 2008.[29]

The Piccadilly case was decided the day before the sale hearing.[30] The court stated that Piccadilly did not address whether the 1146(a) exemption applied to pre-confirmation sales that closed post-confirmation.[31] Because the deeds were delivered and the transfer occurred post-confirmation, however, the court determined that the transfer satisfied the bright line rule set forth in Piccadilly because the transfers were made "under a plan confirmed."[32] The court further noted that § 1146(a) never uses the word "sale," only "transfer."[33] Thus, the court concluded that nothing in either Piccadilly or the statute requires the sale to occur after a plan has been confirmed.[34]

New York also objected that the 1146(a) exemption only applied to plans of reorganization, not plans of liquidation.[35] The court rejected that argument, stating that reorganizing includes the ability to "confirm a liquidating plan that provides for the sale of all or substantially all of the assets and the distribution of the sales proceeds to the creditors."[36] Accordingly, the court held that the transfers were exempt from taxation pursuant to section 1146(a).[37]

Though not addressing the U.S. Supreme Court's comparison with the timing related to the assumption or rejection of executory contracts, the bankruptcy court reached the same conclusion based solely on the Supreme Court's delineation of a bright line test regarding when a transfer becomes eligible for the §1146(a) exemption. The real test will be whether this bright line rule provides a viable alternative for businesses that need to sell assets quickly to maximize value for the estate.


Despite all the public consternation, the U.S. Supreme Court's analysis in Piccadilly appears to provide an opportunity for debtors to utilize the §1146(a) exemption for pre-confirmation asset sales as long as the transfer occurs post-confirmation. The actual viability of selling assets and then waiting until plan confirmation to close on that sale, however, remains to be seen. A debtor seeking to sell all or substantially all of its assets at a sale held pursuant to § 363 of the Bankruptcy Code will need to determine, in conjunction with both creditors and potential purchasers, whether the exemption of transfer taxes warrants delaying the closing until a plan is confirmed. If so, all affected constituencies will need to work both cooperatively and concurrently to ensure that a plan can be proposed and confirmed quickly enough after the conduct of a sale to maximize value to the estate.  

*As seen on Bankruptcy Law360.