By: Scott B. Riddle, Esq.
In In re Piccadilly Cafeterias, Inc., No. 06-13759 (pdf), 484F.3d 1299 (11th Cir. April 18, 2007), the debtor sold substantially all of its assets pursuant to §363, prior to a confirmation of a Chapter 11 plan. In its §363 motion, and again in its plan, the debtor requested an exemption from stamp taxes on the sale pursuant to §1146(c) (which has now been re-designated as §1146(a)). The Florida Department of Revenue objected, lost in both the Bankruptcy and District Courts, and appealed to the Eleventh Circuit.
The statute provides the following –
§ 1146. Special tax provisions
(a) The 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.
(emphasis added). Notwithstanding the fact that the §363 sale was not a sale "under a confirmed plan," the Court affirmed the District Court ruling and held that a §363 sale may be eligible for the §1146(a) tax exemption.
In our view, the better reasoned approach to § 1146(c) is found in Jacoby-Bender and T.H. Orlando, as the better reading of “under a plan confirmed” looks not to the timing of the transfers, but to the necessity of the transfers to the consummation of a confirmed plan of reorganization. See Hechinger, 335 F.3d at 261 (Nygaard, J., dissenting).
First, 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 the plan is confirmed, or, as the DOR argues, imposing a temporal restriction on when the confirmation of the plan must occur. Second, when Congress wanted to place a temporal restriction in the Bankruptcy Code it did so expressly. …. Next, although, as a general rule, grants of tax exemptions are narrowly construed, it is equally true that “we are not to abrogate the purpose of the exemption through too narrow an application.” Hechinger, 335 F.3d at 259 (Nygaard, J., dissenting). This is especially so in light of the principle that a remedial statute such as the Bankruptcy Code should be liberally construed. … Finally, 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. But it is just as probable that a debtor may need to close a sale as a condition precedent to the parties’ willingness to proceed with confirmation of a plan as it is for the parties to agree on the terms of a plan, obtain confirmation, and then determine what the sale will bring. See In re Beulah Church of God In Christ Jesus, Inc., 316 B.R. 41, 50 (Bankr.S.D.N.Y.2004). For these reasons, we decline to follow the strict temporal interpretation adopted by the Third and Fourth Circuits. Instead, we hold that § 1146(c)’s tax exemption may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation transfer and the confirmed plan.
In order to clarify the "ambiguous" phrase, "under a plan confirmed under section 1129 of this title," the United States Supreme Court granted the DOR’s cert. Petition. Steve Jakubowski describes the issues in the Bankruptcy Litigation Blog –
At first blush, the answer seems obvious given that Section 1146 on its face is limited to transfers "under a plan confirmed under section 1129 of this title." But just to show you how creative bankruptcy lawyers—and judges—can get, the Eleventh Circuit agreed with the argument that the Section 1146 exemption "may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation transfer and the confirmed plan." ….
One small problem for the respondents, and Bingham McCutcheon’s Eric Brunstad, who represents the respondent-debtor; that is, Hechinger was decided by none other than then-Judge, now-Justice Alito, the author of the two latest bankruptcy opinions decided by the Supreme Court (i.e., Travelers & Marrama). I think that it’s fair to say that reversal of the Eleventh Circuit’s decision is about as safe a bet as you’ll find