The U.S. Court of Appeals for the Eleventh Circuit has determined that the pre-confirmation sale of substantially all of a debtor’s assets was exempt from state stamp tax, provided that the sale was necessary to consummate the subsequently confirmed chapter 11 plan. See State of Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc. (In re Piccadilly Cafeterias, Inc.), 2007 U.S. App. LEXIS 8810 (11th Cir. April 18, 2007).
Section 1146(a) of the Bankruptcy Code, formerly section 1146(c), exempts sales of debtors’ assets from state-imposed stamp taxes in sales that occur "under a plan confirmed under section 1129" of the Bankruptcy Code. On October 28, 2003, Piccadilly executed an asset purchase agreement with Piccadilly Acquisition Corporation ("PAC") for the purchase of substantially all of Piccadilly’s assets in exchange for $54 million. The next day, Piccadilly
filed its chapter 11 bankruptcy petition, seeking to sell substantially all of its assets outside the ordinary course of business, and requesting an exemption from the stamp taxes otherwise imposed on the sale under Florida state law.
Notwithstanding the already executed asset purchase agreement, Piccadilly requested and received authorization to conduct a public sale of its assets at a sale hearing. At the hearing, the winning bid of $80 million was received from Piccadilly Investments, LLC, and the bankruptcy court authorized the sale, granted the stamp tax exemption, and approved a global settlement agreement among the debtor, its senior secured noteholders, and the committee of unsecured creditors that "was in many ways ‘analogous to confirmation of a plan.’"
Six weeks later, Piccadilly filed its chapter 11 plan of liquidation providing for the sale of its assets to Piccadilly Investments and incorporating the terms of the global settlement. The bankruptcy court confirmed the chapter 11 plan, as amended, over the objection of the Florida State Department of Revenue. The latter argued that the amended chapter 11 plan violated the Bankruptcy Code by exempting the sale transaction from the stamp tax because a pre-confirmation sale can never be a transfer of assets "under a plan confirmed under section 1129."
In rejecting this proposition, the bankruptcy court held that any transfer necessary to consummate a chapter 11 plan is a transfer under a chapter 11 plan, regardless of timing. The district court and the Eleventh Circuit Court of Appeals agreed.
Acknowledging that both the Third and the Fourth Circuits restrict application of the federal exemption from state-imposed stamp taxes in transfers that occur on a pre-confirmation basis, the Eleventh Circuit adopted a broader application of the exemption. The Eleventh Circuit affirmed the lower courts’ holding that "under" a confirmed plan means "necessary" to the consummation of a confirmed chapter 11 plan. Because the sale of substantially all of Piccadilly’s assets could be necessary to consummate its confirmed chapter 11 plan of liquidation, the sale may be exempt from stamp tax pursuant to section 1146(a) of the Bankruptcy Code, and the court remanded the case for a factual determination on the necessity of the sale to the consummation of the confirmed plan.
In its ruling, the Eleventh Circuit found that the plain language of section 1146(a) is ambiguous in terms of whether it imposes a temporal restriction on when the transfer must occur to qualify for the exemption. Because several Bankruptcy Code sections expressly impose a temporal restriction for when an action must be taken prior to, or on or after, plan confirmation, the court reasoned that the absence of such an express temporal restriction in section 1146(a) denotes an intent by Congress not to impose such a restriction.
The court also determined that its holding was in line with the practical realities of chapter 11 proceedings, in which "a debtor may need to close a sale as a condition precedent to the parties’ willingness to proceed with confirmation of a plan."
This article is presented for informational purposes only and is not intended to constitute legal advice.