Opinion Recap: Florida Dept. of Revenue v. Piccadilly Cafeterias

Yale student Gabe Rosenberg wrote the following summary of yesterday’s decision in Florida Department of Revenue v. Piccadilly Cafeterias.

In a 7-2 opinion by Justice Thomas, the Supreme Court reversed the Eleventh Circuit yesterday, holding that the Bankruptcy Code’s stamp-tax exemption only applies to sales and transfers made after confirmation of a Chapter 11 plan.

In Florida Department of Revenue v. Piccadilly Cafeterias, Inc. the court construed 11 U.S.C. § 1146(a), which provides that “[t]he 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 [Chapter 11], may not be taxed under any law imposing a stamp tax or similar tax.” At issue was whether a sale made before a Chapter 11 plan is confirmed, but made in preparation for and anticipation of such a plan, qualifies for the exemption. Specifically, the case required a determination of whether the phrase “under a plan confirmed under section 1129” implicitly provides a temporal restriction on the sale.

A Chapter 11 bankruptcy case commences with the filing of a bankruptcy petition. The debtor then prepares a plan, which details the debtor’s reorganization efforts, proposed disposition of assets, and potential payments to creditors. The debtor does not receive a discharge until the plan is confirmed by the bankruptcy court. In the time between the initial filing and plan confirmation, the trustee (who is usually the debtor in possession) can sell assets outside of the ordinary course of business with permission of the court under 11 U.S.C. § 363(b)(1).

After filing for Chapter 11 relief, respondent Piccadilly Cafeterias sold virtually all of its assets for $80 million in such a § 363(b)(1) sale. The sale was effected as part of a “global settlement” with creditors and constituted the centerpiece of Piccadilly’s ultimate Chapter 11 plan. Part of the sale involved Florida real estate and, as a result, would normally have required payment of state taxes. In approving the sale and, eventually, the Chapter 11 plan, the bankruptcy court rejected Florida’s assertion that Piccadilly owed state taxes on the sales and instead granted summary judgment in Piccadilly’s favor. The district court and Eleventh Circuit affirmed. Underlying the Eleventh Circuit’s decision was the court’s view that § 1146(a)’s wording, “under a plan confirmed under section 1129,” was ambiguous, and that context and policy argued in favor of the exemption for “pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization.”

In cases decided before the Eleventh Circuit’s opinion in Piccadilly Cafeterias, the Third and Fourth Circuits each came to the opposite conclusion, determining that the tax exemption only applied to transfers made after confirmation of the Chapter 11 plan. As a result of this circuit split, the Supreme Court granted certiorari to decide whether the language “under a plan confirmed under Section 1129” contains a temporal restriction, exempting only those transfers made after confirmation.

The Supreme Court’s opinion began by analyzing whether the language of § 1146(a) is ambiguous. The majority parsed the grammatical construction of the statute, finding persuasive Florida’s argument that the word “under” should be read as “with the authorization of” or “inferior or subordinate.” According to the Court, such a reading, together with the inclusion of the modifier “under Section 1129,” makes the statute clear in requiring that a transfer occur after plan confirmation for it to be exempt. The Court thus declined to adopt Piccadilly’s position that the word “under” could be read in a number of different ways, including “in accordance with,” which would introduce ambiguity into the statute, and it similarly rejected Piccadilly’s argument that the lack of an express temporal requirement, which Congress had provided elsewhere in the Bankruptcy Code, meant that Congress did not intend for one to apply in § 1146(a). Although the Court acknowledged that Congress could have been more clear in drafting the statute, it ultimately found Florida’s interpretation to be convincing than Piccadilly’s.

Although the Court could have ended its analysis at this point, it instead turned to the additional arguments made by the parties on the assumption that the statute was facially ambiguous. Turning first to contextual arguments, the Court distinguished other sections of the Bankruptcy Code that contain explicit postconfirmation requirements and dismissed Piccadilly’s argument that the lack of such an explicit statement meant that no time requirement applied. The Court reasoned that, unlike other sections of the Code in which such explicit statements are necessary, Congress did not need to include postconfirmation wording in a clear statute like § 1146(a). Furthermore, the Court looked to the placement of the statute in a subchapter entitled “POSTCONFIRMATION MATTERS” as helpful in determining § 1146(a)’s meaning.

The Court continued by exploring the “dueling canons” advanced by the parties for interpretation of § 1146(a). Florida argued that Congress’s decision not to change the language of § 1146(a) after the Third and Fourth Circuit decisions denying exemption for preconfirmation transfers should be seen as implicit approval by Congress of this interpretation. Seemingly more important, in the eyes of the Court, was the canon that state tax exemptions should be construed narrowly to minimize federal interference with state tax regimes, provided in California State Board of Equalization v. Sierra Summit, Inc. The Court disagreed with Piccadilly’s argument that the Sierra Summit canon should not apply because the statutory provision at issue deals with a clearly expressed tax exemption. Florida also argued that determining which preconfirmation sales qualified for a tax exemption would be overly onerous under Piccadilly’s interpretation. The Court dismissed as “inapposite” Piccadilly’s assertions that allowing a state to tax such a transaction would result in a preference of one creditor over another and that the liberal construction afforded to the Bankruptcy Code generally should lead to a liberal construction in this case.

The opinion only briefly dealt with a major theme of the oral argument, Piccadilly’s assertion that distinguishing between transfers made right before plan confirmation and those made right after confirmation would lead to an “absurd” result. In responding to this point, the Court simply stated that the decision belongs to Congress and that a clear rule may well be preferable to a more ambiguous one. The Court noted that Congress would need to take the lead if the “practical realities” of bankruptcy dictated a change from the current law. In conclusion, the Court argued that the sum of the textual arguments, contextual arguments, and canons of construction weighed clearly in favor of Florida’s interpretation.

In dissent, Justice Breyer, joined by Justice Stevens, argued that § 1146(a) is ambiguous. The dissent found unconvincing the textual analysis, canons of construction, and practical difficulties employed by the majority. Rather than focusing on the canons of construction, the dissent explored the purpose of the statutory provision and the Bankruptcy Code as a whole, arguing that the Bankruptcy Code’s aims of maintaining a debtor’s business and maximizing the value of the debtor’s estate militate towards a liberal understanding of the protections afforded by § 1146(a). Such an expansive reading, according to the dissent, would encourage debtors to sell assets before confirmation when doing so would generate more money for the bankruptcy estate than delaying to obtain a tax exemption.

Time will tell whether this decision has a noticeable effect on the timing of asset sales by Chapter 11 debtors. The amount at issue in Piccadilly Cafeterias, $39,200, is modest compared to the liabilities most debtors face in Chapter 11. If the the applicable taxes are small enough, the decision may not have an impact on debtors’ decisions whether to sell assets prior to plan confirmation. However, if adding a tax “cost” to § 363(b)(1) sales prior to plan confirmation leads to a delay in making such sales and thereby hurts the value of the debtor’s assets, this decision might make it harder for the debtor to emerge from bankruptcy and thus decrease the number of Chapter 11 success stories.