In a recent decision, the United States Supreme Court ruled that asset sales in bankruptcy that occur after plan confirmation will be exempt from certain and often potentially costly state taxes, whereas sales that occur before plan confirmation will not be so exempt. In so ruling, the Court resolved a circuit split regarding the meaning of the statutory phrase "under a plan confirmed under [Chapter 11] of the bankruptcy Code," as codified in 11 U.S.C. § 1146(a).

The case arose from the bankruptcy of Piccadilly Cafeterias, Inc.  At one time among the nation’s most successful cafeteria chains, Piccadilly had fallen on hard financial times.  In 2003, Piccadilly filed for Chapter 11 bankruptcy protection in the Southern District of Florida.  As the centerpiece of its reorganization efforts, Piccadilly sought court authorization to sell virtually all of its assets in a § 363(b)(1) sale pursuant to a settlement agreement reached with creditors.  The bankruptcy court granted this authority.  In authorizing the sale, the bankruptcy court further ruled Piccadilly’s transfer of assets would be "exempt from stamp taxes under § 1146(a)."  (Maj. Slip Op. at 2.)  Piccadilly closed its sale on March 16, 2004.

Months after the successful sale, Piccadilly filed a plan of reorganization.  On July 31, 2004, Piccadilly filed its second amended (and final) plan of reorganization.  The plan duly called for a transfer of assets "in a manner consistent with" the sale that had closed in March.

The Florida Department of Revenue objected to the plan.  Seeking payment of $39,200 in stamp taxes it had assessed against some of Piccadilly’s transferred assets, Florida argued the transfer had not been "under a plan confirmed."  11 U.S.C. § 1146(a).  Florida’s argument was simple.  The statutory term "confirmed," because it is a past participle, refers exclusively to something that has already happened.  But at the time of the transfer, plan confirmation had not yet occurred.  Therefore, the transfer had not been "under a plan confirmed" and thus fell outside the scope of the § 1146(a) tax exemption.  Piccadilly countered that "under a plan confirmed" imposed no such temporal requirement.  According to Piccadilly, the most natural reading of the statute extended the exemption to all transfers that complied with the terms of a plan, regardless of whether that plan’s confirmation happened before, or after, the transfer.

On cross-motions for summary judgment, the bankruptcy court ruled in favor of Piccadilly.  The District Court for the Southern District of Florida affirmed.  The Court of Appeals for the Eleventh Circuit also affirmed in a per curiam opinion.  Noting a circuit split, the Supreme Court granted certiorari.

In a vote of 7-2, with Thomas, J., speaking for the majority and Breyer, J., writing in dissent, the Court reversed and remanded:

The most natural reading of § 1146(a)’s text, the provision’s placement in the Code, and applicable substantive canons of 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.

(Maj. Slip Op. at 19.)  To reach its conclusion, the Court relied principally on the text.  Section 1146(a) provides, in its entirety:

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. § 1146(a).  Acknowledging the variability of the term "under," the Court nevertheless found the statute’s meaning was plain.  "Confirmed," the Court observed, is a past participle.  As such, it is most naturally interpreted as referring to something that has already occurred.  Therefore, the plain terms of § 1146(a) extends the stamp tax exemption only to transfers made under a plan that has already been confirmed.

The Court then continued on to hold that even if § 1146(a)’s text was ambiguous, nothing suggested the Court should resolve that ambiguity in favor of Piccadilly.  Indeed, the Court held that in the event of ambiguity, the interpretive "canon" of California State Bd. of Equalization v. Sierra Summit, Inc., 490 U.S. 844 (1989), required it to construe the provision narrowly in favor of state taxing authorities.

Writing in dissent, Breyer and Stevens, JJ., set forth a three-step critique.  First, the dissent argued, the notoriously variable term "under"—past participles notwithstanding—rendered the statute ambiguous.  Second, the dissent doubted the applicability of the Sierra Summit canon.  Specifically, the dissent wondered how this so-called canon could logically apply to a provision "the express point of which is to exempt some category of state taxation?"  (Dissent Slip Op. at 3.)  Third, the dissent concluded that because the statute was ambiguous, and because Sierra Summit should not apply, the Court should construe the statute in light of Chapter 11’s basic objectives: (1) preserving going concerns and (2) maximizing property available to satisfy creditors.

These objectives, the dissent urged, militate in favor of the exemption.  For one thing, the Chapter 11 plan confirmation process "takes time" (Dissent Slip Op. at 5), whereas asset sales are sometimes most successful when the debtor closes them relatively early.  Among other things, restricting the tax exemption to only those debtors who close a sale after confirmation would potentially reduce the incentive to engage in a timely sale process and may have a chilling effect on the ability of a debtor to market its assets and maximize their value, thus subverting the purposes of Chapter 11 to the detriment of the bankruptcy estate and creditors.