Deborah Crowder

By Deborah T. Crowder, November 5, 2008

Note: The following article is vendor-submitted content which Credit Today has not written or endorsed but which we feel may be of value to our Members.

In June of 2008, the Supreme Court of the United States decided the case of Florida Department of Revenue v. Piccadilly Cafeterias, Inc. This case deals with a disputed tax exemption on an asset sale. Section 1146(a) of the Bankruptcy Code provides a stamp-tax exemption for any asset transferred under a plan confirmed under Chapter 11 of the Bankruptcy Code.

Before Piccadilly's plan was submitted to the Bankruptcy Court, that court authorized Piccadilly to sell certain assets. The sale agreement granted Piccadilly an exemption under 11 U.S.C. § 1146(a), and the Bankruptcy Court ruled that the transfer of assets was exempt from stamp taxes. After the sale was completed, Piccadilly filed its Chapter 11 plan. Before the plan was confirmed, the Florida Department of Revenue filed an objection to the plan, arguing that the stamp taxes it had assessed on certain of the transferred assets fell outside of § 1146(a)'s exemption because the transfer had not been under a confirmed plan.

The District Court and the Eleventh Circuit affirmed the decision of the Bankruptcy Court. The Eleventh Circuit's ruling conflicted with the approach taken by the Court of Appeals for the Third and Fourth Circuits, which have held that the exemption provided under the Bankruptcy Code does not apply to transactions that occur prior to the confirmation of a plan under Chapter 11.

The Supreme Court reversed the decision of the Eleventh Circuit and agreed with the Florida Department of Revenue that § 1146(a) affords a stamp-tax exemption only as to transfers made pursuant to a Chapter 11 plan that was confirmed prior to the asset sale. Key to the Court's decision was the fact that § 1146(a) is placed in a subchapter entitled and expressly limited to "POSTCONFIRMATION MATTERS." Furthermore, the Supreme Court relied on the federalism canon, which provides that courts should proceed carefully when asked to recognize an exemption from state taxation that Congress has not clearly expressed. The Supreme Court cited the Fourth Circuit's reasoning as follows: "Congress struck a most reasonable balance. If a debtor is able to develop a Chapter 11 reorganization and obtain confirmation, then the debtor is to be afforded relief from certain taxation to facilitate the implementation of the reorganization plan. Before a debtor reaches this point, however, the state and local tax systems may not be subjected to federal interference."

This Supreme Court decision could impact the popularity and sustainability of early § 363 sales. Now there is a definitive ruling that only sales consummated after a plan has been confirmed will be exempt from state transfer taxes. Since Piccadilly had to pay the stamp taxes, the funds available to pay other creditors' claims were diminished. This result may have a chilling effect on § 363 sales in future cases, which will make it harder for debtors and creditors alike to survive a Chapter 11 bankruptcy successfully. Therefore, before supporting a debtor's motion to approve the sale of property, careful consideration must be given to tax issues that could diminish net sale proceeds and deplete the funds available to pay unsecured claims.

Deborah Crowder
Associate
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f: 704.342.5264

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