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June 21, 2008

Supreme Court Rules on Stamp Tax: In re Piccadilly

Florida Dept of Revenue v. Piccadilly Cafeterias, Inc., --- U.S. ---, 2008 WL 2404077 (2008)

Issue:  Does a statutory exemption from a state stamp tax for a sale “under a plan confirmed under section 1129” apply to sales before the plan is confirmed where the sale was necessary and integral to the plan that was ultimately confirmed?

Held:  No, there is no ambiguity in the statute.      

Justice Clarence Thomas for 7-2 court, Breyer dissented with Stevens joining

The debtor filed chapter 11 in 2003 and subsequently moved the Bankruptcy Court for permission to sell substantially all of its assets.  “The Bankruptcy Court conducted an auction in which the winning bidder agreed to purchase [the debtor’s] assets for $80 million.”  Subsequently the Bankruptcy Court ruled “that the transfer of assets was exempt from stamp taxes under §1146(a).” 

Section 1146(a), entitled “Special tax provisions,” provides:
“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.”

The debtor contended that Section 1146(a) “extends to preconfirmation transfers as long as they are made in accordance with a plan that is eventually confirmed.”  About seven months after the sale the Bankruptcy Court confirmed the debtor’s chapter 11 Plan.  The Florida Department of Revenue objected to confirmation because the plan did not propose to pay the stamp tax of $39,200.  The Bankruptcy Court “reason[ed] that the sale of substantially all Piccadilly’s assets was a transfer “‘under’ ” its confirmed plan because the sale was necessary to consummate the plan.”  The District Court and the Court of Appeals affirmed.  The Court of Appeals said that “a remedial statute such as the Bankruptcy Code should be liberally construed.”

The Supreme Court reversed. 

“The asset transfer here can hardly be said to have been consummated ‘in accordance with’ any confirmed plan because, as of the closing date, Piccadilly had not even submitted its plan to the Bankruptcy Court for confirmation.  Piccadilly’s asset sale was thus not conducted ‘in accordance with’ any plan confirmed under Chapter 11.  Rather, it was conducted ‘in accordance with’ the procedures set forth in Chapter 3—specifically, §363(b)(1).  To read the statute as Piccadilly proposes would make §1146(a)’s exemption turn on whether a debtor-in-possession’s actions are consistent with a legal instrument that does not exist—and indeed may not even be conceived of—at the time of the sale.  Reading §1146(a) in context with other relevant Code provisions, we find nothing
justifying such a curious interpretation of what is a straightforward exemption.”

“If the statutory context suggests anything, it is that §1146(a) is inapplicable to preconfirmation transfers.  We find it informative that Congress placed §1146(a) in a subchapter entitled, ‘POSTCONFIRMATION MATTERS.’ To be sure, a subchapter heading cannot substitute for the operative text of the statute.  Nonetheless, statutory titles and section headings ‘are tools available for the resolution of a doubt about the meaning of a statute.’  The placement of §1146(a) within a subchapter expressly limited to postconfirmation matters undermines Piccadilly’s view that §1146(a) covers preconfirmation transfers.”

Even if the language were ambiguous, courts should “‘proceed carefully when asked to recognize an exemption from state taxation that Congress has not clearly expressed.’”  And Florida’s argument that if an exemption is allowed, the state would have to monitor the case to see if a plan is ever confirmed, is well taken. 

The debtor argued that it makes no sense to exclude a sale from taxation at a particular point in time while not excluding a transfer which takes place two months earlier.  “[W]e see no absurdity in reading §1146(a) as setting forth a simple, bright-line rule instead of the complex, after-the-fact inquiry Piccadilly envisions.”

In his dissent, Breyer says “Linguistically speaking, it is no more difficult to apply the words ‘plan confirmed’ to instances in which the ‘plan’ subsequently is ‘confirmed’ than to restrict their application to instances in which the ‘plan’ already has been ‘confirmed.’  “[I]f Congress thought the time of confirmation mattered, why did it not say so expressly as it has done elsewhere in the Code?”  “The statute’s purpose is apparent on its face.  It seeks to further Chapter 11’s basic objectives: (1) ‘preserving going concerns’ and (2) ‘maximizing property available to satisfy creditors.’”  “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.”

June 21, 2008 in Supreme Court | Permalink

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