"Location, Location, Location": US Supreme Court Holds The Stamp Tax Exemption Only Applies To Post-Confirmation Asset Transfers

The mantra of the real estate world is that the three most important factors in determining the value of a piece of property are "location, location, location." 

Justice Clarence Thomas (whose sense of humor is surely unappreciated, as my former suitemate and friend Mike Coffield proved one memorable night), writing for a 7-2 majority, today suggests that this mantra should not be forgotten in interpreting Bankruptcy Code provisions.  In Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc. 2008 WL 2404077 (pdf), which not surprisingly (see prior post) restricted the stamp tax exemption only to postconfirmation transfers, the Court based its decision in large measure on the particular subchapter of the Bankruptcy Code in which §1146(a) is located (i.e., "Subchapter III - Postconfirmation Matters").  (Op. at 13.)  The Court also agreed, after reviewing each side's competing grammatical and textual interpretations, that Florida's narrower reading was "clearly the more natural." (Op. at 7.)

The most interesting part of the case, however, is Justice Thomas's conclusion that the decision is further compelled by application of two "substantive canons":

  • First, that "Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it reenacts a statute without change.”  Lorillard v. Pons, 434 U. S. 575, 580-581 (1978) (Op. at 14);
  • Second, that "Courts should ‘proceed carefully when asked to recognize an exemption from state taxation that Congress has not clearly expressed'.”  California State Bd. of Equalization v. Sierra Summit, Inc., 490 U.S. 844, 851-852 (1989).  (Op. at 14).

The majority found the second canon (that a court should not recognize an exemption from state taxation that Congress has not clearly expressed) "decisive in this case."  (Op. at 17.)  Piccadilly contended that the statute was "ambiguous" in one breath, but in another that the exemption was "plainly established."  The inconsistency of this position proved dispositive, with the majority stating:

Piccadilly's effort to evade the canon falls well short of the mark because reading §1146(a) in the manner Piccadilly proposes would require us to do exactly what the canon counsels against.  If we recognized an exemption for preconfirmation transfers, we would in effect be "'recogniz[ing] an exemption from state taxation that Congress has not clearly expressed"--namely, an exemption for preconfirmation transfers.  Indeed, Piccadilly proves precisely this point by resting its entire case on the premise that Congress has expressed its stamp-tax exemption in ambiguous language.  Therefore, far from being inapposite, the canon is decisive in this case.

(Op. at 17) (citations omitted, emphasis in original).  In so ruling, Justice Thomas swept aside certain other "canons" and "maxims" argued by the debtor-respondent, including most significantly the "[Eleventh Circuit's] maxim that 'a remedial statute such as the Bankruptcy Code should be liberally construed.'"  In concluding that the Bankruptcy Code is not the kind of remedial statute to which the maxim applies, Justice Thomas wrote:

Nor are we persuaded that in this case we should construe § 1146(a) “liberally” to serve its ostensibly “remedial” purpose.  Based on the Eleventh Circuit's declaration that the Bankruptcy Code is a “remedial statute,” Piccadilly would stretch the disallowance well beyond what the statutory text can naturally bear.  Apart from the opinion below, however, the only authority Piccadilly offers is a 1952 decision of this Court interpreting the Shipping Commissioners Act of 1872.  (Citations omitted).  But unlike the statutory scheme in Isbrandtsen which was “‘designed to secure the comfort and health of seamen aboard ship, hospitalization at home and care abroad,’” the Bankruptcy Code–and Chapter 11 in particular–is not a remedial statute in that sense.  To the contrary, this Court has rejected the notion that “Congress had a single purpose in enacting Chapter 11.”  Toibb v. Radloff, 501 U.S. 157, 163 (1991)Rather, Chapter 11 strikes a balance between a debtor's interest in reorganizing and restructuring its debts and the creditors' interest in maximizing the value of the bankruptcy estate.  Ibid.  The Code also accommodates the interests of the States in regulating property transfers by "'generally [leaving] the determination of property rights in the assets of a bankrupt's estate to state law.'"  Travelers Casualty & Surety Co. of America v. Pacific Gas & Elec. Co., 549 U.S. ----, ---- (2007) (slip op., at 7 ).  Such interests often do not coincide, and in this case, they clearly do not.  We therefore decline to construe the exemption granted by § 1146(a) to the detriment of the State.
(Op. at 17-18) (emphasis added).

Justice Breyer, the only Justice openly hostile at oral argument to the State of Florida's position, was joined in his dissent by Justice Stevens.  To Justice Breyer, the statutory language was ambiguous, the majority's "methodically combing the textualist beaches ... sheds little light," and the canons of interpretation "offer little help."  So what does Justice Breyer recommend in "[t]he absence of a clear answer in text or canons"?  Not "judicial despair," he says, but "consideration of the statute's primary purpose."  (Dissent at p.4.)  He wrote:
The absence of a clear answer in text or canons, however, should not lead us to judicial despair.  Consistent with Court precedent, we can and should ask a further question: Why would Congress have insisted upon temporal limits?  What reasonable purpose might such limits serve?  See, e.g., Dolan v. Postal Service, 546 U.S. 481, 486, 126 S.Ct. 1252, 163 L.Ed.2d 1079 (2006) (“Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis” (emphasis added)); Robinson v. Shell Oil Co., 519 U.S. 337, 346, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997) (the Court's construction of a statute's meaning based in part on its consideration of the statute's “primary purpose” (emphasis added)).

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."  Bank of America Nat. Trust and Sav. Assn. v. 203 North LaSalle Street Partnership,  526 U.S. 434, 453 (1999). See also Toibb v. Radloff501 U.S. 157, 163 (1991) (Chapter 11 “embodies the general [Bankruptcy] Code policy of maximizing the value of the bankruptcy estate”)....

How would the majority's temporal limitation further these statutory objectives? It would not do so in any way....  Stamp taxes on related transfers simply reduce the funds available for any such legitimate purposes.  And insofar as the Court's interpretation of the statute reduces the funds made available, that interpretation inhibits the statute's efforts to achieve its basic objectives.
(Dissent at 4-6.)

Justice Breyer concluded his dissent by citing to his 2003 concurring opinion in which Justice O'Connor joined for the general proposition, the breadth of which the majority clearly rejected, that "Judges are free to consider statutory language in light of a statute's basic purposes."   (Emphasis added.)  He wrote:
But we certainly should consider Congress' view of the policy for the statute it created, and that view inheres in the statute's purpose. “Statutory interpretation is not a game of blind man's bluff. Judges are free to consider statutory language in light of a statute's basic purposes.”  Dole Food Co. v. Patrickson, 538 U.S. 468, 484 (2003) (Breyer, J., concurring in part and dissenting in part).  It is the majority's failure to work with this important tool of statutory interpretation that has led it to construe the present statute in a way that, in my view, runs contrary to what Congress would have hoped for and expected.
(Dissent at 7.)

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Bottom line, what's the impact on the states?  Scott Makar, Solicitor General of Florida who masterfully sheparded this case up the chain and argued the merits before the Court, tells me that anecdotal numbers on possible tax collections put the figure in the low millions annually for Florida (i.e., less than $10 million), but that the decision will have a decidedly greater impact in Florida today due to the real estate market conditions there and an anticipated wave of real estate developers expected to file for bankruptcy protection.  The relatively small sums thus involved make less compelling Justice Breyer's argument that principles of estate maximization should override the majority's reasoning or otherwise require the majority to adopt bad form and effectively overrule the appellate decision of a sitting Justice.

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Further background to the case and the oral arguments is provided in Bob Eisenbach's extensive follow-up post to the oral argument in the case.

Thanks for reading!

6/16/06 PM UpdateMore insights into today's decision are found in Bob Eisenbach's (In The Red) blog post here.  Be sure to read his commentary on (i) the Court's passing reference to Bildisco (a precept generally ignored by many large debtors who make the decision to reject executory contracts well after plan confirmation) and (ii) "Canon Fodder," where he comments on the significance to the Court of the first canon cited above (i.e., despite the existence of two circuit court cases interpreting the exemption as limited to post-confirmation transfers, Congress didn't change
§1146(a) when it adopted sweeping changes to the Code in 2005 through BAPCPA).
© Steve Jakubowski 2008
Written By:Daniel J. Artz On June 18, 2008 10:24 AM

Justice Breyer had me extremely skeptical of his reasoning in the very first paragraph of his dissent, where he states that "In this case, the debtor's reorganization 'plan' provides for the 'transfer' of assets." Anyone who examines the facts from the record (including the Court of Appeals opinion, at 484 F.3d 1299) can see that the chronology of events was as follows: (1) on October 28, 2003, Piccadilly Cafeterias enters into an Asset Purchase Agreement to sell substantially all its assets; (2) on October 29, 2003, Piccadilly files for relief under Chapter 11, and concurrently files its 363 Motion to authorize the sale; (3) on December 4, 2003, the Bankruptcy Court enters an order approving bidding procedures and scheduling the auction and a hearing to approve the sale; (4) the auction occurs, with a winning bid of $80 million; (5) on January 26, 2004, Piccadilly reaches a settlement with creditors regarding the distribution of sales proceeds; (6) on February 13, 2004, the Bankruptcy Court approves the sale and holds the Section 1146(c) exemption from taxes applies (note that no plan has even been filed yet), and approves the settlement between Piccadilly and the creditors; (7) on March 16, 2004, the sale is finally consummated; and (8) on March 26, 2004, Piccadilly files its first Plan of Liquidation, 10 days after the sales is final. By the time the plan was even filed, the sale was a fait accompli, an historical fact that the plan could not possibly "provide for" (unless of course, you use the term "provide for" to mean "describe a past event"). Note that in the Piccadilly case, there was nothing stopping the Debtor from filing a Motion to Convert to Chapter 7 after the sale was final and before the Plan was even filed (or even after the Plan was filed, but before confirmation). In that event, Piccadilly would have gotten the benefit of the 1146(c) [now 1146(a)] exemption without any plan at all. Breyer's dissent is entirely based upon a factual misrepresentation, and a Justice who wants to substitute his policy judgment for that of Congress.

Written By:Karen Cordry On June 18, 2008 11:37 AM

This is a point well worth noting. Once these sales take place and the assets have been turned into cash, it is far from clear why a debtor would bother with the time, expense, and difficulty of obtaining a confirmed plan -- especially when it will likely do nothing more than set up a liquidating trust to resolve claims and distribute assets. In other words, the plan will provide for the equivalent of a Chapter 7 trustee -- so why not just convert to Chapter 7 at that point and be done with it? Why? Well, maybe to try to grab the tax exemption.

But, will these deals get done anyway? Well, probably the easiest way to find out is to see how many of them have a proviso that the deal will be undone and the payment refunded if, in the end, the taxes can't be avoided? I'm willing to go out on a limb and bet that the number can be counted on one hand. The reality is (despite all of the hyperbole in the decisions and arguments) that this tax is way too small to drive the timing on any of these deals. It remains what it always was -- a small benefit to those who go to the time and effort of actually having creditors have a say in the case -- and nothing more.

Written By:Daniel J. Artz On June 18, 2008 12:42 PM

The tax exemption in 1146(a) does have a real effect in those cases where a transfer of assets (or the issuance of new securities, also tax exempt under 1146(a)) is integral to the reorganization. In the National Gypsum case, it would not have been realistic to leave the operating assets in the existing debtor, with the threat of future unknown asbestos claims hanging over them; the reorganization involved transfering all operating assets, gypsum mines, paper plants, manufacturing plants, distribution facilities, etc. to a "New National Gypsum", the equity in which was distributed among non-asbestos related unsecured creditors. The Section 1146 exemption was meaningful in terms of return to creditors. I'm willing to bet that it was meaningful in other cases as well, where reorganization required the creation of new operating entities or the issuance or distribution of new securities.