Supreme Court Holds the Stamp Tax Exemption Provided by §1146(a) of the Bankruptcy Code Does Not Apply to Pre-confirmation Transfers
Written by:
Leane Capps Medford
ELROD PLLC; Dallas
On June 16, 2008, the Supreme Court resolved the split in authority among appellate courts concerning whether §1146(a) exempts a transfer from the stamp tax when the transfer occurs prior to the confirmation of a plan under chapter 11. Florida Dept. of Revenue v. Piccadilly Cafeterias Inc., 2008 WL 2404077 (U.S. June 16, 2008), 76 USLW 4471. Section 1146(a) of the Bankruptcy Code states that 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." 11 U.S.C.A. §1146(a).
Piccadilly was granted a stamp tax exemption on the sale of substantially all of its assets outside the ordinary course of business shortly after it filed chapter 11. Before Piccadilly's plan was confirmed, Florida filed an objection to the plan, asserting that the transferred assets fell outside of §1146(a)'s stamp tax exemption because the transfer was not "under a plan confirmed" under chapter 11. The bankruptcy court confirmed the plan. On cross motions for summary judgment, the court ruled in favor of Piccadilly, finding the sale was under a confirmed plan because the sale was "necessary to consummate" the plan. In re Piccadilly Cafeterias Inc., 379 B.R. 215, 226 (S.D. Fla. 2006).
Florida appealed the ruling and the Eleventh Circuit affirmed, rejecting the strict interpretation of §1146(a) advanced by Florida. In doing so, the Eleventh Circuit also rejected the prior decisions of the Third and Fourth Circuits, which held that the exemption was not available unless the sale was authorized under a previously confirmed plan. The Eleventh Circuit held that the stamp tax exemption applied to pre-confirmation transfers when there is a "nexus" between the pre-confirmation transfer and the confirmed plan, such that the transfer was necessary to the consummation of a subsequently confirmed plan. Florida Dept. of Revenue v. Piccadilly Cafeterias Inc., 484 F.3d 1299, 1304 (11th Cir. 2007). In reaching its decision, the Eleventh Circuit found the text of §1146(a) to be ambiguous, and stated that its interpretation also accounted for "the practical realities of chapter 11 reorganization cases." Id.
The Supreme Court granted certiorari to resolve the split between the circuits. Florida argued that the word "under" means "subject to," so that the transfer must be made subject to a plan that has already been confirmed. Florida Dept. of Revenue, 2008 WL 2404077 at *4. Piccadilly argued that the text of §1146(a) did not require the transfer to proceed confirmation of the plan because a "plan confirmed" does not equate to a "confirmed plan." Id at *5. The Supreme Court considered the competing interpretations, and noted that Congress could have used more precise language, but found that Florida's interpretation was preferable, as Piccadilly's "nexus" requirement placed an "unnecessary strain" on the statutory text. Id. The Supreme Court also rejected Piccadilly's argument that the "practical realities" of the decrease in postconfirmation asset transfers in chapter 11 reorganizations supported its interpretation of §1146(a), noting that any revisions to the statutory text were best handled by the legislature, not the judiciary. Id at *13.