Skip to site navigation Skip to main content Skip to footer content Skip to Site Search page Skip to People Search page

Bylined Articles

Transfer Tax Exemption Only Applies to Post-Confirmation Asset Transfers

By Rudolph J. Di Massa, Jr. and Matthew E. Hoffman
August 1, 2008
The Legal Intelligencer

Transfer Tax Exemption Only Applies to Post-Confirmation Asset Transfers

By Rudolph J. Di Massa, Jr. and Matthew E. Hoffman
August 1, 2008
The Legal Intelligencer

Read below

In Florida Dept. of Revenue v. Piccadilly Cafeterias, the U.S. Supreme Court, on certiorari from the 11th U.S. Circuit Court of Appeals, resolved a split of authority among the circuits, holding that the tax exemption provided for under Section 1146(a) of Title 11 of the Bankruptcy Code applies only to post-confirmation asset transfers made pursuant to a confirmed plan of reorganization and does not apply to pre-confirmation transfers pursuant to Section 363 of the Bankruptcy Code.

Section 1146(a) of the Bankruptcy Code provides as follows: "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 or similar tax." While this short Bankruptcy Code provision appears to be straightforward, a split of authority had developed among the circuits as to whether the transfer tax exemption applies to pre-confirmation asset sales under Section 363 of the Bankruptcy Code.

Eleventh Circuit Decision in Piccadilly Bankruptcy Code

Before filing its petition for relief under Chapter 11 of the Bankruptcy Code, Piccadilly Cafeterias Inc. was one of the largest cafeteria chains in the nation, operating 145 stores in the southeastern United States. After filing its petition Oct. 29, 2003, Piccadilly sought authorization from the U.S. Bankruptcy Court for the Southern District of Florida to sell its assets pursuant to 11 U.S.C. Section 363(b)(1). The bankruptcy court approved the Section 363 sale and ruled that the transfer was exempt from stamp taxes under Section 1146(a). After obtaining court approval for the sale of its assets, Piccadilly filed its initial Chapter 11 plan of liquidation, which was later amended. The Florida Department of Revenue objected to confirmation, seeking a declaration that Piccadilly was not exempt from $39,200 in Florida stamp taxes under former Section 1146(c).

The bankruptcy court confirmed Piccadilly's amended plan and granted Piccadilly's motion for summary judgment, holding that the sale of assets was exempt from state stamp taxes under former Section 1146(c). The court reasoned that the sale of assets was a transfer "under a plan confirmed under section 1129" because the sale of assets was necessary to consummate the plan. The state of Florida appealed the decision to the U.S. District Court for the Southern District of Florida, which affirmed the bankruptcy court decision. The state then appealed the decision to the U.S. Court of Appeals for the 11th Circuit, which affirmed the district court decision, reasoning that the phrase "under a plan confirmed" does not refer to the timing of the transfers, but rather to the necessity of the transfers to the consummation of a confirmed plan of reorganization. The court found that "the former Section 1146(c) 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 sale and the confirmed plan."

Conflicting Decisions

In In re NVR LP, the 4th Circuit entered a decision diametrically opposed to the decision of the 11th Circuit in Piccadilly Cafeterias. The NVR court found that although former Section 1146(c) relies upon the interpretation of a plan to determine which transfers fall within the scope thereof, the statute itself determines the extent of its operation. The court reasoned that to hold otherwise - that every transfer essential to confirmation of a plan is, by definition, "under a plan confirmed," as used in former Section 1146(c) - would make a plan's terms the master of the statute. Instead, the court found that the provisions of the statute were clear, and that the statute must control the contents of a plan. The court consulted two dictionaries and concluded that "under" means "subordinate," "inferior" or "with the authorization of," and that a pre-confirmation transfer could not be subordinate to, or authorized by, a confirmed plan - something that came into existence after the Section 363 sale. The court also concluded that congressional intent was to relieve reorganized debtors from the burden of certain taxation in order to facilitate the implementation of a plan of reorganization, and that before implementation of a plan, state and local tax systems may not be disturbed.

In Hechinger Investment Co. of Delaware Inc., the 3rd Circuit, in a decision authored by Justice Samuel Alito when he was a judge of that court, was faced with the same issue and found the word "under," as used in former Section 1146(c), to be ambiguous. After considering several dictionary definitions, the court concluded that the most natural reading of the phrase "under a plan confirmed," as used in former Section 1146(c), is "authorized." Reasoning that an action taken "under" a provision of law or legal document is an action that is "authorized by" such provision or document, the court concluded that if a transfer is made "under" a bankruptcy plan, the plan must provide authority for the transaction. Because the transfers at issue were made under the authority of 11 U.S.C. Sections 363 and 365 (and not under a confirmed plan), and because the plan had not been confirmed at the time of such transfers, the court concluded that the plan could not provide the legal authority for such transfers.

The Case Before the High Court

In Piccadilly Cafeterias, the Supreme Court had to decide whether Section 1146(a) of the Bankruptcy Code applies to transfers of assets occurring before actual confirmation of such a plan. The state argued that principles of statutory construction and the plain language of the statute itself mandate a narrow reading. The state cited a risk of litigation and uncertainty surrounding Section 1146(a), should the 11th Circuit's decision stand, and claimed that, should the decision stand, it would deprive state governments of revenues in the future. Further, the state argued that in spite of the NVR and Hechinger decisions, Congress opted not to substantively amend Section 1146(a) through Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 (though it did renumber such section from Section 1146(c)), indicating agreement with such decisions.

In response, Piccadilly argued that the language of Section 1146(a) is ambiguous, that the phrase "under a plan confirmed" can be read to include a plan confirmed at the time of the transfer, or to impose a restriction as to when confirmation must occur. Due to such ambiguity, Piccadilly looked beyond the text of the statute to congressional intent, legislative history and public policy and argued further that a more liberal construction should be used in order to facilitate reorganization by granting tax relief.

In addition, 27 states and four cities filed an amicus curiae brief expressing concern that they would lose billions of dollars in tax revenue, should the court rule that pre-confirmation asset sales are entitled to protection under Section 1146(a), and that public interest would suffer as a result. The group argued that there was no evidence of congressional intent to exempt pre-confirmation sales to encourage reorganization of distressed companies. However, even had Congress intended this, the group argued that the 11th Circuit's decision would not further this goal because Chapter 11 debtors recently have tended to liquidate, rather than to reorganize, and that expanding the exemption would encourage this trend. And for those Chapter 11 debtors filing plans of reorganization, the group argued that financially beneficial transactions upon which reorganizations depend will continue to occur, even without a tax exemption.

In a 7-2 decision reversing the decision of the 11th Circuit, Justice Clarence Thomas wrote for the court and held that the Section 1146(a) tax exemption applies only to post-confirmation asset transfers made pursuant to a confirmed plan of reorganization. The court focused on, among other things, the placement of Section 1146(a) within the Bankruptcy Code and ultimately found the state's reading of the statute to be "clearly the more natural." The court based its decision on its conclusion that the asset transfer at issue was consummated in accordance with the procedures set forth in Chapter 3 of the Bankruptcy Code - specifically, Section 363(b)(1) - rather than in accordance with a confirmed plan because, as of the closing date, Piccadilly had not yet submitted its plan to the bankruptcy court for confirmation.

The court applied two canons of construction in reaching its decision. The court first adopted the canon that "Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it reenacts a statute without change," citing Lorillard v. Pons. Thus, Congress was presumed to be aware of both NVR and Hechinger when it revised the Bankruptcy Code in 2005 through the BAPCPA. In fact, as indicated above, Congress renumbered Section 1146(a) pursuant to BAPCPA in 2005 and opted not to make the tax exemption apply specifically to pre-confirmation transfers.

Second, the court adopted the canon that courts should "proceed carefully when asked to recognize an exemption from state taxation that Congress has not clearly expressed," citing California State Board of Equalization v. Sierra Summit Inc. The court found this canon to be decisive in the case, as Piccadilly itself posited that the statute was ambiguous. The court adopted this canon of construction and refused to recognize an exemption from state taxation that Congress did not clearly express. Further, the court opted not to apply certain other maxims advanced by Piccadilly, including the maxim that the Bankruptcy Code is a remedial statute to be liberally construed.

In his dissent, Justice Stephen Breyer, joined by Stevens, questioned the helpfulness of the canons of construction relied upon by the majority. The dissent found the statute to be ambiguous and looked to the congressional policy, reasoning that Congress would not have insisted upon temporal limits. The dissent criticized the majority for focusing on this temporal limitation at the expense of the basic objectives of Chapter 11: preserving going concerns and maximizing property available to satisfy creditors.


The Supreme Court decision in Piccadilly Cafeterias gives purchasers an incentive to delay asset sales until after confirmation of a plan, rather than to engage in such sales under Section 363. However, given that asset sales are typically conducted early in Chapter 11 cases in order to generate funds for use in reorganization, it is difficult to predict whether this incentive will affect the financial realities of many Chapter 11 debtors.

Rudolph J. Di Massa, Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors' rights. He is a member of the American Bankruptcy Institute, the American Bar Association and its business law section, the Commercial Law League of America, the Pennsylvania Bar Association and the business law section of the Philadelphia Bar Association.

Matthew E. Hoffman practices in the area of business reorganization and financial restructuring. Hoffman is admitted to practice in Pennsylvania and New Jersey.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.