Tax-Stamp Exemption under 11 U.S.C. 1146(a): A Waiting Game in light of Fla. Dep't of Revenue v. Piccadilly Cafeterias, Inc., 2008 U.S. LEXIS 5025 (June 16, 2008)
In Fla. Dep't of Revenue v. Piccadilly Cafeterias, Inc., 2008 U.S. LEXIS 5025 (June 16, 2008), the Supreme Court held 7-2 that 11 U.S.C. § 1146(a)'s transfer tax exemption does not apply to sales or transfers made before a Chapter 11 plan is confirmed. This decision has created a kind-of “dead spot” in the Chapter 11 process, a place where inaction is preferred over action and flexibility succumbs to rigid temporality.
Piccadilly declared bankruptcy under Chapter 11, but before its plan was submitted to the bankruptcy court, the bankruptcy court authorized Piccadilly to sell its assets under § 1146(a). Section 1146(a) provides a tax-stamp exemption for any asset transfer under a plan confirmed under § 1129. The Florida Department of Revenue objected, arguing in favor of the stamp taxes because the transfer was not under a confirmed plan. The 11th Circuit sided with Piccadilly, applying the exemption to preconfirmation transfers necessary to the consummation of a confirmed Chapter 11 plan, provided there was some nexus between such transfers and the plan.
Before the Supreme Court, the Department argued that the text unambiguously limited stamp-tax exemptions to postconfirmation transfers made under the authority of a confirmed plan and that "plan confirmed" denoted a plan confirmed in the past. Conversely, Piccadilly argued that the provision did not unambiguously impose a temporal requirement and that had Congress intended "plan confirmed" to mean "confirmed plan," it would have used that language. The Supreme Court sided with the Department, and in reversing the 11th Circuit, held that Piccadilly's interpretation placed greater strain on the statutory text than the Department's simpler construction. Also, Piccadilly's emphasis on the distinction between "plan confirmed" and "confirmed plan" was unavailing because § 1146(a) specified not only that a transfer be "under a plan," but also that the plan be confirmed pursuant to § 1129.
Piccadilly seems to fly in the face of Supreme Court precedent, such as FCC v. NextWave Pers. Communs. Inc., 2003 U.S. LEXIS 1059 (2003) and Toibb v. Radloff, 1991 U.S. LEXIS 3484 (1991), both of which refused to implicitly limit bankruptcy relief when not expressly prescribed. Moreover, the majority, lacking clear statutory direction, appears to favor form over substance to the detriment of a bankruptcy debtor. In the dissent, Justice Breyer, with whom Justice Stevens joined, asked whether the time of transfer mattered. He deemed the statutory language ambiguous and questioned “Why would Congress have insisted upon temporal limits? What reasonable purpose might such limits serve?” In answering these questions, he said:
How would the majority's temporal limitation further these statutory objectives? It would not do so in any way. From the perspective of these purposes, it makes no difference whether a transfer takes place before or after the plan is confirmed. In both instances the exemption puts in the hands of the creditors or the estate money that would otherwise go to the State in the form of a stamp tax. In both instances the confirmation of the related plan assures the legitimacy (from bankruptcy law's perspective) of the plan that provides for the assets transfer.
Moreover, one major reason why a transfer may take place before rather than after a plan is confirmed is that the preconfirmation bankruptcy process takes time. And a firm (or its assets) may have more value (say, as a going concern) where sale takes place quickly. . . . Thus, an immediate sale can often make more revenue available to creditors or for reorganization of the remaining assets. Stamp taxes on related transfers simply reduce the funds available for any such legitimate purposes. And insofar as the Court's interpretation of the statute reduces the funds made available, that interpretation inhibits the statute's efforts to achieve its basic objectives.
Worse than that, if the potential loss of stamp tax revenue threatens delay in implementing any such decision to sell, then creditors (or the remaining reorganized enterprise) could suffer far more serious harm. They could lose the extra revenues that a speedy sale might otherwise produce. . . . In the present case, for example, Piccadilly, by selling assets quickly after strategic negotiation, realized $ 80 million, considerably more than the $ 54 million originally offered before Piccadilly filed for bankruptcy.
Justice Breyer went on to say:
What conceivable reason could Congress have had for silently writing into the statute's language a temporal distinction with such consequences? The majority can find none. . . . I agree that the majority's interpretation is not absurd and do not dispute the advantages of a clear rule. But I think the statute supplies a clear enough rule--transfers are exempt when there is confirmation and are not exempt when there is no confirmation. And I see no reason to adopt the majority's preferred construction (that only transfers completed after plan confirmation are exempt), where it conflicts with the statute's purpose.
Breyer’s comments notwithstanding, Piccadilly might have little effect on preconfirmation asset sales. Posting on the business bankruptcy blog In The (Red), Bob Eisenbach discusses Piccadilly’s impact, stating that:
the most immediate impact of the decision is that pre-confirmation Section 363 sales will no longer be exempt from stamp or transfer taxes in any circuit, and those taxes will have to be paid. What remains to be seen is whether sales will be delayed until plan confirmation in order to take advantage of the Section 1146(a) exemption. Given how many asset sales in Chapter 11 cases these days are conducted at the early stages of a case because of financing limitations and declining asset values, a move to delay those sales until plan confirmation seems unlikely. With an economic downturn upon us, the pressures that have led to the expanded use of Section 363 are not likely to abate, regardless of how attractive a stamp or transfer tax exemption may be.
Similarly, on the blog OverHedged, Ben Feder writes that:
This decision is unlikely to significantly deter the current trend of pre-confirmation Section 363 sales. However, while the ruling substantially benefits the tax collection efforts of state and local government authorities, it will impede the recovery efforts of unsecured creditors, who already generally receive significantly less than they bargained for when a company liquidates through Chapter 11.