STAMP TAX EXCEPTION NOT APPLICABLE TO BANKRUPTCY ASSET SALES OCCURRING BEFORE CONFIRMATION OF A CHAPTER 11 PLAN
For secured lenders a quick “363” sale by a borrower/debtor in its bankruptcy free and clear of liens has become a very popular and effective way to liquidate troubled loans. In many instances, it had the advantage of allowing parties to avoid paying deed or transfer taxes in connection with the sale. A recent United States Supreme Court decision, however, has significantly limited the circumstances under which such taxes can be avoided.
Until recently, many bankruptcy courts have held that under § 1146(a) of the Bankruptcy Code a sale of a debtor’s assets pursuant to § 363 of the Bankruptcy Code is exempt from stamp taxes if done “under” a Chapter 11 plan of reorganization. Under these decisions, it did not matter if the plan had not been filed or confirmed at the time of the sale, as long as the 363 sale of assets was connected to the plan.
Other courts, however, took a different approach and interpreted § 1146(a) to require that the debtor’s Chapter 11 plan be confirmed before a 363 sale of assets is exempt from stamp tax. The issue came to a head when the Eleventh Circuit recently ruled on the issue in In re Piccadilly Cafeterias, Inc., 484 F.3d 1299 (11th Cir. 2007), determining that even though the sale of substantially all the debtor’s assets occurred before the Chapter 11 plan was confirmed, the sale was necessary to the plan that was eventually confirmed. The court of appeals ruled that the sale should be exempt from stamp tax. The case was then appealed to the U.S. Supreme Court.
On June 16, 2008, the United States Supreme Court reversed the Eleventh Circuit Court of Appeals in Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 128 S.Ct. 741, 2008 WL 2404077 (U.S. 2008) implementing a timing requirement for a 363 sale of the debtor’s assets in relation to the confirmation of a Chapter 11 plan. Writing for the majority, Justice Thomas stated that a transfer cannot be “under” or “subject to” a confirmed plan if the plan has not been confirmed. The majority opinion creates a bright-line rule which only makes sales of debtor’s assets under § 363 exempt from local stamp tax if the sale is part of the bankruptcy plan, and that plan has been confirmed at the time of sale.
What This Means for Lenders
Will lenders ultimately want to delay a 363 sale until after a plan is confirmed? In most instances, the answer is probably no. Many states only impose a transfer tax on real estate sales.Transfer taxes are not an issue when a lender’s collateral consists only of personal property. Additionally, many times the ability to retain the purchaser requires a prompt sale. Lenders may have to accept the additional cost of paying the stamp tax in order to ensure the prompt sale of the property. In those instances, the Supreme Court’s decision in In re Piccadilly Cafeterias has brought back a liquidation expense that many parties had previously been able to avoid.
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