Florida Dept. of Revenue v. Piccadilly Cafeterias (07-312)

Oral argument: March 26, 2008.

Appealed from: United States Court of Appeals for the Eleventh Circuit (April 18, 2007).

BANKRUPTCY, TAX, STAMP TAX, STATUTORY INTERPRETATION

Soon after Piccadilly Cafeterias, Inc. filed for bankruptcy under Chapter 11, it sought and received authorization from the Bankruptcy Court to sell its assets under Section 363(b)(1) of the Bankruptcy Code. Piccadilly also sought and received an exemption, pursuant to Section 1146(c) of the Bankruptcy Code, from Florida state tax on this sale. The Florida Department of Revenue objected to this exemption because the sale took place before the bankruptcy plan was confirmed. On appeal, the U.S. District Court for the Southern District of Florida and the U.S. Court of Appeals for the 11th Circuit affirmed the decision of the Bankruptcy Court to exempt asset sales prior to confirmation of a bankruptcy plan. The Florida Department of Revenue argues that the Eleventh Circuit's interpretation of the statute is not justified by the rules of statutory interpretation and claims that the lower court's decision will create much unnecessary litigation and ambiguity in the law. Piccadilly Cafeterias argues, however, that the text is ambiguous and therefore can be read to support both points of view. For this reason, Piccadilly suggests looking beyond the text to congressional intent and policy concerns. Whichever way the Court interprets this statute, this case will have a profound impact on state and local revenue collection.

Question presented

Whether section 1146(a) of the Bankruptcy Code, which exempts from stamp or similar taxes any asset transfer "under a plan confirmed under section 1129 of the Code," applies to transfers of assets occurring prior to the actual confirmation of such a plan?

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Issue

Do the words "under a plan confirmed" apply to transfers of assets occurring prior to a bankruptcy court's confirmation of a reorganization plan?

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Facts

Prior to its bankruptcy, Piccadilly Cafeterias, Inc. ("Piccadilly") operated 145 cafeterias in the southeastern United States and was one of the largest cafeteria chains in the nation. See In Re Piccadilly Cafeterias, Inc., 379 B.R. 215, 217 (S.D. Fla. 2006). On October 28, 2003, Piccadilly executed an Asset Purchase Agreement with Piccadilly Acquisition Corporation ("Piccadilly Acquisition"). In re Piccadilly's Cafeterias, Inc., 484 F.3d 1299, *2 (11th Cir. 2007). Under the terms of the agreement, Piccadilly Acquisition would purchase virtually all of Piccadilly's assets for $54 million. Id. On October 29, 2003, the day after the agreement was signed, Piccadilly filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Florida. Id.  Once bankruptcy proceedings began, Piccadilly sought authorization from the Bankruptcy Court to sell its assets under 11 U.S.C. § 363(b)(1). Id. Piccadilly also explicitly requested an exemption under federal law 11 U.S.C. § 1146(c) (now §1146(a)) from Florida state tax on its asset sale.Id.  The Florida Department of Revenue ("FDOR") objected to both requests. Id.at 2-3.

Although Piccadilly had already entered into an agreement with Piccadilly Acquisition, it nonetheless sought permission from the Court to conduct an auction of the assets to the highest bidder. Id. at 3. The Court granted permission on December 4, 2004. Id. Then, Piccadilly held an auction where Piccadilly Investments, LLC ("Piccadilly Investments") won with an $80 million bid. Id. On January 26, 2004, Piccadilly entered into a global settlement agreement with its creditors to resolve asset distribution among them. Id. Next, on February 13, 2004, the Court approved the sale to Piccadilly Investments and ruled that Piccadilly was exempt under Section 1146(c) from state stamp taxes. Id. The court also approved the Global Settlement. Id. The asset sale closed on March 16, 2004. Id. at 3-4.

On March 26, 2004, Piccadilly filed its initial Chapter 11 Plan of Liquidation, and it later filed an "Amended Plan." Id. at 4. Soon thereafter, FDOR objected to confirmation of the "Amended Plan" and sought a declaration that Piccadilly was not exempt under Section 1146(c) from $39,200 in Florida stamp taxes. Id.  On October 21, 2004, the Court confirmed the Amended Plan. Id. Then, both parties moved for summary judgment, and the court granted Piccadilly's motion, holding that the asset sale was exempt under Section 1146(c) from state stamp taxes. Id.  The court reasoned that Piccadilly's sale was a "transfer 'under' its confirmed plan of reorganization because the sale was necessary to consummate the plan." Id.

FDOR appealed to the U.S. District Court for the Southern District of Florida, which affirmed the decision of the bankruptcy court. Id. at 5. Following the decision, the FDOR appealed to the U.S. Court of Appeals for the 11th Circuit, arguing that the district court erred in holding that Section 1146 exemptions can apply to pre-confirmation asset sales. Id. The Court of Appeals affirmed the District Court, reasoning that the Section 1146(c) phrase "under a plan confirmed" does not refer "to the timing of the transfers, but rather to the necessity of the transfers to the consummation of a confirmed plan of reorganization." Id. at 9.

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Discussion

Legal Background

Although this case appears, on its surface, to be a complicated bankruptcy and tax amalgamation, it is really a simple case of statutory interpretation. Section 1146(c) (now section 1146(a)) of the U.S. Bankruptcy Code states 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 this title, may not be taxed under any law imposing a stamp tax or similar tax." More simply: if a bankruptcy court approves a transfer of an asset or assets pursuant to a reorganization plan, that sale or transfer is exempt from state taxes. This case centers on the words "under a plan confirmed"-specifically, whether the words refer to asset transfers that occur prior to the bankruptcy court's confirmation of the business' reorganization plan.

Both the Court of Appeals for the Third Circuit and the Court of Appeals for the Fourth Circuit have considered this issue, and both have held that the tax exemption does not apply to pre-confirmation asset transfers. The Third Circuit, in an opinion by current Supreme Court Justice Samuel Alito, stated in In re Hechinger Investment Co. of Delaware, Inc., 335 F.3d 243 (3d Cir 2003), that the "most natural reading" of "under a plan confirmed" led to the conclusion that pre-confirmation transfers were not tax-exempt. Id. at 14. The Fourth Circuit held in In re NVR, LP, 189 F.3d 442 (4th Cir. 1999), that the plain language of the statute excluded pre-confirmation asset transfers from coverage under the statute. Specifically, the Fourth Circuit stated that it could not find that "a transfer made prior to the date of plan confirmation could be subordinate to, or authorized by, something that did not exist at the date of transfer-a plan confirmed by the court." Id. at 25. However, the Court of Appeals for the Eleventh Circuit held the opposite: that pre-confirmation asset transfers are subject to the tax exemption like an asset transfer under a confirmed reorganization plan. See generally Piccadilly Cafeterias, 484 F.3d 1299.

Arguments

The Florida Department of Revenue argues that the Eleventh Circuit's decision is not justified by the language of the statute or the principles of statutory construction, "which require a narrow and limiting construction of tax statutes." Brief for Petitioner at 10. According to the Department, the broad definition guarantees that there will be a large amount of "litigation and uncertainty" surrounding the provision in the future. See id. at 11. Further, the Department claims, the broad definition will deprive state governments of revenues and force them to construe tax exemptions liberally going forward. See id. Finally, the Department argues, Congress had an opportunity to more explicitly define the language of the statute following the Third and Fourth Circuit opinions when it renumbered section 1146 in 2005, but has elected not to do so, likely meaning that Congress agreed with the courts' opinions. See id.

In response, Piccadilly Cafeterias argues that the Eleventh Circuit's interpretation was correct, stating that the text is ambiguous. See Brief for Respondent at 23. The statute's ambiguity, Piccadilly argues, becomes more pronounced when considered with other provisions of bankruptcy law. Id.at 27. In addition, Piccadilly argues that a more liberal construction should be used in order to facilitate reorganization by granting tax relief. Id.at 17.

Practical Significance

Chapter 11 bankruptcy is widely used by organizations both looking to reorganize and/or to liquidate assets in bulk, "allowing purchasers to obtain assets free and clear of liens, claims and encumbrances, including successor liability claims, and to obtain other protections without having to await plan confirmation." Amicus Brief by State of Illinois, et al in support of Petitioner at 9. Because of this, a clear and unambiguous answer to when asset transfers under a reorganization plan are subject to state taxes is important to state taxing authorities.

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Analysis

Fla. Dep't of Revenue: The Plain Language of the Statute Mandates Against Exemption

The Florida Department of Revenue argues that the plain language of 1146(c) mandates that tax exemptions are limited only to transfers made under the authority of a confirmed bankruptcy plan. See Brief for Petitioner at 12. More specifically, the Department argues, if the plain meaning of the word "under" in the phrase "under a plan confirmed" suggests that the plan must be confirmed in order to be eligible for a tax exemption, the court should find for the Department and disallow the tax exemption. See id. at 17-18. In addition, the Department argues that the court must "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, 851-52 (1989). As a result, says the Department, the language in 1146(c) must be construed "strictly and narrowly" in favor of the states. See Brief for Petitioner at 27.

Piccadilly Cafeterias: Statute is Ambiguous, So Look to Congressional Intent and Policy

Piccadilly Cafeterias interprets the text of Section 1146(c) to support its position. First, Piccadilly asserts that the language is ambiguous: the phrase "under a plan confirmed," can be read as including plans confirmed at the time of transfer, or read as imposing a temporal restriction on when confirmation must occur. See Brief for Respondent at 20. Second, because of this ambiguity, Piccadilly looks beyond the actual text. Id. at 27. Conceding that dictionary definitions of the word "under" are too numerous, and that the other Sections of the Bankruptcy Code provide little help, Piccadilly focuses its interpretation on Congressional intent. Id. at 41. Piccadilly argues that Congress intended Section 1146 to be a liberal remedial statute, facilitating reorganization by giving tax relief. Id. Although courts should narrowly construe tax exemptions, Piccadilly maintains that the legislative history and policy rationale behind Section 1146 supports its applicability to pre-confirmation asset sales. Id. at 48.

Fourth Circuit: Congress Did Not Intend to Offer Relief for Pre-Confirmation Transfers

In In re NVR, LP, 189 F.3d 442 (4th Cir. 1999), the Fourth Circuit rejected the argument that every transfer necessary to a plan's confirmation is by definition "under a plan confirmed" because that argument makes the terms of the plan "the master of" section 1146(c), instead of "deferring to the statute itself." Id. at 23-24. Further, the court held that the language of the statute is clear and therefore does not require strenuous interpretation. See id. at 24. After consulting the dictionary, the court found that "under" either means "subordinate to" or "with the authorization of." Therefore, said the court, "a transfer made prior to the date of plan confirmation could [not] be subordinate to, or authorized by, something that did not exist at the date of transfer." Id. at 25.

In addition, the Fourth Circuit commented on what it believed to be Congress's intent when it enacted the statute. According to the court, Congress intended that if a debtor obtains Chapter 11 reorganization and obtains confirmation, the debtor should be given relief from state taxation in order to help the progress of the reorganization. See id. at 26. Prior to this time, however, Congress did not appear to intend to affect state or local tax schemes. See id.

Third Circuit: The 'Most Natural Meaning of "Under" is "Authorized"

The Third Circuit also confronted this issue in In re Hechinger Investment Co. of Delaware, Inc., 335 F.3d 243 (3d Cir 2003), and issued an opinion authored by current Supreme Court Justice Samuel Alito. In Hechinger, the court determined the word "under" to be ambiguous. Id. at 14. After consulting a dictionary, the court found that the "most natural reading" of the word was "authorized." Id. According to the court, an action taken 'under' a provision of law generally means that the action is authorized by law. Id. Based on this interpretation, the court decided that if a transfer is made under a specific plan, the plan must give the authority for the transfer. See id.at 15. However, the court also determined that the word "under" could have other meanings. For example, the court said that the term could mean "in accordance with," which the court stated meant "agreement." Id. Thus, Section 1146(c)'s language rules out the possibility that "under a plan confirmed" means "in agreement with a plan confirmed." Id.

Ultimately, however, the Third Circuit found reasons for settling on its original interpretation. First, it found that the definition of "under" meaning "authorized" best fit with the rest of Section 1146(c). Id. at 16. Additionally, the court determined this interpretation best matched the meaning of an identical Bankruptcy Code provision. See id. at 17. The court then pointed out that in statutory construction it is the norm that when the same words are used in different parts of the same act, they are to be interpreted as having the same meaning. Id. (quoting Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 87 (1934)). Further, the court pointed out two canons of statutory construction supporting its view: "tax exemption provisions are to be strictly construed," and "federal laws that interfere with a state's taxation scheme must be narrowly construed in favor of the state." Id.

27 States & 4 Cities: This Case Will Significantly Impact Tax Revenues

Twenty-seven states--including Michigan, New York, and Wyoming--and four cities--Chicago, New York, Philadelphia, & San Francisco-- view this case as critically important to state and local taxing authorities. Amicus Brief by State of Illinois, et al. in Support of Petitioner at 1. As such, the group of state and city governments filed an amicus brief. Id. Specifically, the group is concerned that billions of dollars in tax revenue, largely from real-estate transfer taxes, will be lost if the Court rules that pre-confirmation sales are entitled to the Section 1146(c) exemption. See id. at 1. As a result, the group argues, the exemption would decrease tax revenue to state and local governments, depriving them of their ability to provide valuable services to residents. See id. at 2.

One of the group's main arguments, which stands in contrast to the reasoning of the Eighth Circuit, is that no evidence exists to show that Congress intended to exempt pre-confirmation sales to encourage reorganization of distressed companies. See id. at 15. This is especially true because the exemption applies equally to liquidations and conformations under the confirmed plan. See id. at 5. But even if Congress did intend this result, the group argues, expanding the Section 1146(c) exemption to pre-confirmation sales will not further this goal because debtors recently have tended to use Chapter 11 to liquidate, rather than to reorganize. See id. Allowing the exemption would only encourage this trend. See id. To the extent that debtors use Chapter 11 for reorganization, the Group counters that financially beneficial transactions that reorganizations depend upon may still occur in the absence of any Section 1146(c) exemption. See id. at 6.

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Conclusion

Notwithstanding the complicated tax and bankruptcy issues, this case is really about statutory interpretation. The issue is whether the tax exemption that Congress provided for in Section 1146(c) of the Bankruptcy Code applies to asset sales prior to their confirmation by the Bankruptcy Court. Florida says it does not. Piccadilly says it does. The lower courts have considered Congressional intent and simple statutory construction to resolve this issue. The Third and Fourth Circuits have done the same, although their results stand in contrast to this case. Whatever the result, the implications are clear: this case will affect billions of dollars in tax revenue that state and local taxing authorities currently collect.

Authors

Prepared by: Eric Finkelstein and Michael Zuckerman

Edited by: Tim Birnbaum

Additional Sources

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