The United States Supreme Court Enters Ruling in Favor of State Tax Officials Regarding Transfer Taxes in Bankruptcy Case of Piccadilly Cafeterias, Inc.
Monday, June 16, 2008, the United States Supreme Court (the “Supreme Court”), in the case captioned Florida Department of Revenue v. Piccadilly Cafeterias Inc., entered a 7-2 ruling allowing Florida tax officials to tax a court-ordered asset transfer from the chapter 11 bankruptcy estate of Piccadilly Cafeterias, Inc. to a third party purchaser of the assets. In its ruling, the Supreme Court held that 11 U.S.C. § 1146(a), which provides a stamp-tax exemption for any asset transfer under a plan confirmed under chapter 11 of the Bankruptcy Code, does not apply to transfers made before a plan is actually confirmed by a court under chapter 11.
Piccadilly Cafeteria, Inc. (“Piccadilly”) declared bankruptcy under chapter 11 of the Bankruptcy Code on October 29, 2003 in the Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court”). On February 13, 2004 the Bankruptcy Court approved the sale of Piccadilly’s assets to a third party purchaser for $80 million. On March 26, 2004, Piccadilly filed its initial chapter 11 plan in the Bankruptcy Court. However, prior to the Bankruptcy Court confirming the plan, the state of Florida filed an objection, seeking $39,200 in stamp taxes. The Bankruptcy Court ruled in favor of Piccadilly on the issue of stamp taxes, holding that the sale of Piccadilly’s assets was a transfer under a confirmed plan, because the sale was necessary to consummate the plan. On appeal, the District Court upheld the Bankruptcy Court’s decision, holding that section 1146(a) of the Bankruptcy Code allows a stamp-tax exemption, in some circumstances, even when a transfer occurs prior to confirmation. The Court of Appeals for the Eleventh Circuit also affirmed the lower courts’ decisions, holding that the tax exemption afforded by section 1146(a) of the Bankruptcy Code may also apply to pre-confirmation transfers that are necessary to the consummation of a plan of reorganization.
However, the Supreme Court reversed the lower court’s decision, and Justice Clarence Thomas, writing for the majority, held that “[t]he most natural reading of § 1146(a)’s text, the provision’s placement within the Code, and applicable substantive canons all lead to the same conclusion: Section 1146(a) affords a stamp-tax exemption only to transfers made pursuant to a Chapter 11 plan that has been confirmed. Because Piccadilly transferred its assets before its Chapter 11 plan was confirmed by the Bankruptcy Court, it may not rely on § 1146(a) to avoid Florida’s stamp taxes.”
The Piccadilly Cafeterias decision is likely to have a significant impact upon section 363 sales in chapter 11 cases, with unsecured creditors ultimately being penalized with reduced purchase prices. In light of this recent Supreme Court decision, to avoid paying stamp taxes under 11 U.S.C. § 1146(a), buyers and sellers of assets in chapter 11 cases would be well served to structure sales as part of a chapter 11 plan of reorganization.