The Supreme Court Rules in Piccadilly
No Transfer-Tax Exemption for Pre-Confirmation Transfers of Assets in Chapter 11 Bankruptcies – The Supreme Court Rules in Piccadilly
John C. Murray*
II. SCOPE OF THE § 1146(A) EXEMPTION
A. Definition of “Stamp or Similar Tax”
B. Eligible Transfers
1. Transfers Involving Non-Debtor Parties
2. Mortgages and Deeds of Trust
3. Transfer of a “Security”
4. Taxes Held not to be “Stamp or Similar Tax”
III. PRE-CONFIRMATION V. POST-CONFIRMATION TRANSFERS – CASE LAW PRIOR TO PICCADILLY
A. Federal Circuit Court Cases Limiting Exemption to Post-Confirmation Transfers
1. In re NVR, Ltd.
2. In re Hechinger Co. of Delaware, Inc.
B. Federal Circuit Court Cases Permitting Exemption for Pre-Confirmation Transfers
1. City of New York v. Jacoby-Bender, Inc.
2. State of Florida v. T.H. Orlando, Inc.
3. In re Piccadilly Cafeterias, Inc.
IV. THE U.S. SUPREME COURT’S DECISION IN PICCADILLY
V. PRACTICAL CONSIDERATIONS
APPENDIX A: SAMPLE PROVISIONS FOR INSERTION IN BANKRUPTCY PLANS AND SALE ORDERS
APPENDIX A-1: AFFIDAVIT RE EXEMPTION FROM MORTGAGE RECORDING TAX
APPENDIX B: SAMPLE FORM OF PRE-TRANSFER LETTER TO BE DELIVERED TO TAXING AUTHORITY
Section 1146(a) of the Bankruptcy Code exempts from state or local transfer or stamp taxes the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer pursuant to a plan confirmed under Chapter 11 of the Bankruptcy Code. The exemption from transfer taxes, which is clearly established by the plain language of § 1146(a), applies to corporations, partnerships and other forms of business entities (including, presumably, limited liability companies), as well as to individuals. The § 1146(a) exemption also extends to solvent debtors who file Chapter 11 plans in good faith, and to liquidations under Chapter 11 – a benefit not available in Chapter 7 liquidations. Although the statutory exemption is not, by its language, limited to state and local transfer and stamp taxes, this is its practical effect because the federal government does not (at the present time) impose such taxes. However, under § 1129(d) of the Bankruptcy Code, upon request by a governmental unit, the court will not confirm a plan “if the principal purpose of the plan is the avoidance of taxes." Section 1129(d) provides that the governmental unit has the burden of proof on this issue.
Congress enacted § 1146(c) [now § 1146(a)] to facilitate reorganization by giving debtors tax relief from stamp or similar tax, such as transfer taxes, for transfers of property pursuant to an instrument of transfer under a confirmed plan. As stated by the New York bankruptcy court in In re Kerner Printing Company, Inc.:
By exempting the transaction from tax, § 1146(c) reduces the obligations encumbering the property, thereby making a greater portion of the sale proceeds available to creditors and affords the debtor a quick and efficient means of distributing and discharging its obligations under the plan.
Relief under § 1146(a) may be requested by motion filed by any party to the transaction; commencing a contested matter; filing an adversary proceeding complaint to declare a transaction exempt from tax; a creditor’s objection to a Chapter 11 reorganization plan; an adversary proceeding complaint to retrieve tax paid under protest; a motion for reargument of a court’s dismissal of a case; and by Mandamus.
The availability of the § 1146(a) exemption is of great concern to secured lenders and to borrowers in connection with mortgage loan workouts and restructuring, especially in these troubled economic times. Many states (as well as counties and municipalities) impose significant transfer taxes in connection with conveyances of real property, whether made voluntarily or (in some states and municipalities) as the result of foreclosures, deeds in lieu of foreclosure, or other enforcement actions. Such taxes and impositions often add “insult to injury” to secured lenders (or third-party purchasers) who take title (voluntarily or involuntarily) to real property collateral from delinquent borrowers. This is especially so if the value of the property transferred is significant or multiple properties are to be conveyed. These expenses often can be eliminated if the transfer occurs as part of a consensual or “pre-packaged” Chapter 11 bankruptcy reorganization plan. Such cost considerations, therefore, could well play a part in determining the “exit strategy” of both lenders and borrowers.
II. Scope of the § 1146(a) Exemption
A. Definition of “Stamp or Similar Tax”
The Bankruptcy Code does not define “stamp tax” or “similar tax.” Section 1146(c) (now § 1146(a)), which was enacted as part of the general revision of the federal bankruptcy laws in 1978, broadened the scope of the exemption to include taxes “similar” to stamp taxes. The legislative history provides little guidance and does not indicate what Congress intended by adding the words “or similar tax.” Black’s Law Dictionary defines “stamp tax” as “[a] tax imposed by requiring the purchase of a revenue stamp that must be affixed to a legal document (such as a deed or note) before the document can be recorded.” The Black’s definition further provides that a “stamp tax” is “[a]lso termed documentary-stamp tax.” As the Second Circuit stated in 995 Fifth Avenue Associates, L.P. v. New York State Department of Taxation and Finance, “[t]his definition indicates that there are at least two attributes to a stamp tax, as that term is commonly understood: the tax must be paid prior to recordation and the amount due is generally governed by the consideration provided in the instrument.” The court set forth the following “common elements” shared by all “stamp or similar taxes” under § 1146(a):
(1) they are imposed only at the time of transfer or sale of the item at issue; (2) the amount due is determined by the consideration for, par value of, or value of the item being transferred; (3) the tax rate is a relatively small percentage of the consideration, par value or value of the property; (4) the tax is imposed irrespective of whether the transferor enjoyed a gain or suffered a loss on the underlying sale or transfer; and (5) in the case of state documentary taxes, the tax must be paid as a prerequisite to recording.”
B. Eligible Transfers
1. Transfers Involving Non-Debtor Parties
The § 1146(a) exemption generally has been deemed to limit eligible transfers to those over which the bankruptcy court has jurisdiction; i.e., those which affect the debtor and property of the debtor’s estate, and not to transfers between third parties. For example, in In re Kerner Printing Co., Inc., the New York bankruptcy court held that subsequent sales and purchases of condominium units by non-debtor parties were not exempt under § 1146(a) from New York City’s Real Property Transfer Tax. The confirmed bankruptcy plan provided for the transfer of the bankruptcy estate’s property interests in the condominiums to a non-debtor entity, which subsequently resold the units to third-party purchasers. The court found that the exemption did not apply because no agency relationship existed between the debtor and the newly created party to whom the debtor’s fee interest in the condominium units was transferred. The court stated that, “[c]ases in which § 1146(c) has been found applicable uniformly involve transfers of estate assets by debtors in possession.”
But in State of Florida v. T.H. Orlando, Ltd., the Eleventh Circuit Court of Appeals held that where a transfer transaction is necessary for the consummation of a confirmed Ch. 11 plan, the exemption from stamp or similar taxes contained in § 1146(c) of the Bankruptcy Code applies, even as to third-party transactions involving non-estate property.
Because § 1146(a) focuses on the transaction itself, and not the individual parties involved, the exemption generally applies regardless of whether the debtor or the grantee is obligated to pay the tax under applicable state law.
2. Mortgages and Deeds of Trust
Bankruptcy courts consistently have held that the giving of a mortgage or deed of trust is a “transfer” under § 1146(a). Furthermore, the § 1146(a) exemption applies to taxes imposed at the time of recording the mortgage, at least in those situations where the debtor obtains the mortgage or deed of trust as a means to fund the plan. For example, in New York City v. Baldwin League of Independent Schools, the District Court ruled that the § 1146(a) exemption applied to a recording tax on a pre-confirmation convertible mortgage that the debtor obtained to fund its Chapter 11 reorganization plan. The court reasoned that the exemption applied because the debtor was the borrower, and recording the mortgage was a practical necessity to the consummation and effectiveness of the plan. The court also noted that the mortgage was the only source of funding for the plan.
3. Transfer of a “Security”
Section 1146(a) also applies to “the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan.” The Bankruptcy Code defines “transfer” as (among other things) “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property or (ii) an interest in property.” The Bankruptcy Code also includes the following within the definition of security: note, stock, treasury stock, bond, debenture, collateral trust certificate, pre-organization certificate or subscription, transferable share, voting-trust certificate, certificate of deposit, certificate of deposit for security, investment contract, certificate of interest, or participation in a profit-sharing agreement in an oil, gas, or mineral royalty or lease, any other claim or interest commonly known as security, and certificate of interest or participation in temporary or interim certificate for receipt for, or warrant or right to subscribe to or purchase or sell, a security. If the language in the bankruptcy court’s order approving a Chapter 11 plan (or in its sale order with respect to a confirmed plan) is carefully drafted to state that the transfer of a debtor’s partnership interest(s) or limited liability company interest(s) constitutes the transfer of securities in connection with the implementation of the plan, the section 1146(a) exemption should apply.
4. Taxes Held not to be “Stamp or Similar Tax”
The § 1146(a) exemption has been held not to apply to the New York State “gains tax,” because that tax, unlike a “stamp or similar tax,” is solely contingent on the profitability of the underlying transaction. For example, in In re 995 Fifth Avenue Associates, L.P., the court held that the New York State gains tax was not a “stamp or similar tax” because it was paid at a rate of ten percent of the gain, rather than one percent or less, which the court considered the “norm” for true transfer taxes. Furthermore, the court noted, the tax was imposed only on the gain (i.e., the profit) on the transaction as opposed to a transfer tax, which is imposed regardless of gain or profit. The court reasoned that, unlike a stamp or similar tax, “under the gains tax, the consideration for the sale . . . is not determinative of the amount due under the gains tax.”
Courts also have held that the § 1146(a) exemption does not apply to a state’s sales or use tax. Also, courts have ruled that it is not unconstitutional for a state to impose a sales or use tax on a bankrupt estate.
III. Pre-Confirmation v. Post-Confirmation Transfers
Numerous bankruptcy courts (and several federal courts of appeal) have examined the language in § 1146(a) that states only transfers occurring “under a plan confirmed” are exempt from taxation. The issue that has been raised is whether this specific language applies only to a transfer that occurs subsequent to court approval and confirmation of the plan, or whether it can also be construed to apply to a transfer that is part of a bankruptcy plan that has been submitted and is an essential component of the plan confirmation but is not approved and confirmed by the court until after the transfer of the property. The resolution of this issue is of utmost importance to bankruptcy trustees and debtors in possession because it is often necessary, in order to pay current debts and to fund the debtor’s Chapter 11 reorganization plan, that the debtor be able to sell assets as quickly as possible during the course of the bankruptcy proceeding before they begin to lose value. But Governmental tax authorities have, in some cases, argued (successfully) that the property transfer occurred prior to confirmation of the plan and should not be entitled to the § 1146(a) exemption. The court decisions in this area have not been consistent, and the issue of whether the § 1146(a) exemption from transfer taxes applies to pre-confirmation transfers has split federal circuit courts and bankruptcy courts alike over the years. The meaning of “under a plan confirmed” has especially generated disagreement among the courts. Fortunately (or unfortunately, depending on one’s viewpoint and perspective), on June 16, 2008 the U.S. Supreme Court resolved this issue in Fla. Dept. of Revenue v. Piccadilly Cafeterias, Inc., holding that the § 1146(a) transfer-tax exemption applies only to post-confirmation transfers of the debtor’s assets. The following discussion analyzes the conflicting holdings in the federal circuit courts that led to the Supreme Court’s ruling.
A. Federal Circuit Court Cases Limiting Exemption to Post-Confirmation Transfers
1. In re NVR, Ltd.
In this case the debtor, a residential builder, sought a declaration that § 1146(c) exempted it from transfer and recordation taxes that it had paid in connection with the transfer of real property during the pre-confirmation bankruptcy period. The debtor also sought a refund of those taxes from the state and local taxing authorities. The Fourth Circuit Court of Appeals, reversing the holdings of the bankruptcy and district courts, held that only transfers occurring after the consummation of the plan are entitled to protection. The court referred to the dictionary meaning of “under” and concluded that a transfer made before the confirmation date of the plan could not be under (i.e., subordinate to or authorized by) a plan that had not yet been confirmed by the court. The court stated that, “We must conclude that Congress, by its plain language [‘under a plan confirmed’], intended to provide exemptions only to those transfers reviewed and confirmed by the court.” The taxing authorities did not argue that transfers of real property occurring after the date of confirmation and during the remainder of the bankruptcy proceedings were not exempt under § 1146(c).
2. In re Hechinger Investment Co. of Delaware, Inc.
In this case, the Third Circuit agreed with the Fourth Circuit’s holding in In re NVR, Ltd., supra, and held that § 1146(c) does not apply to real estate transactions that occur prior to confirmation of a Chapter 11 bankruptcy plan. The court reversed the holding of the district court, which had upheld the bankruptcy court’s decision granting the debtor’s motion to enter a declaration that certain real property transfers were exempt from state transfer and recording taxes pursuant to § 1146(c), conditional upon the bankruptcy court’s eventual confirmation of a Chapter 11 plan. The Fourth Circuit construed “under a plan confirmed” in the language of § 1146(c) as meaning that the action is “authorized” under such a plan. Therefore, the court ruled, since the transfers in the instant case were not made under the authority of a confirmed plan (because they occurred prior to confirmation of the plan), but rather under the authority of § 363 and § 365 of the Bankruptcy Code, they were not entitled to the § 1146(c) exemption. The court also reasoned that under existing law “tax exemption provisions are to be strictly construed” and that “federal laws that interfere with a state’s taxation scheme must be narrowly construed in favor of the state.” Finally, the Third Circuit rejected the debtor’s assertion that limiting the exemption to post-confirmation transfers would frustrate the purpose of § 1146(c), which is to facilitate Chapter 11 plans by permitting debtors to sell assets when “business realities” compel them to do so before court confirmation of the plan of reorganization. The court stated that “it is not for us to substitute our view of . . . policy for the legislation which has been passed by Congress.” The court reasoned that there existed a countervailing rationale to the debtor’s position, i.e., limiting federal interference with state revenue collection. In a vigorous dissent, Judge Nygarrd argued that § 1146(c) is ambiguous and that the word “under” should not be narrowly construed to mean only “authorized,” and instead could be read to mean “in accordance with” in order to apply to both pre-confirmation and post-confirmation transfers. Judge Nygarrd further argued that the Bankruptcy Code, as a remedial statute, should be liberally construed so as not to impede reorganization and to provide relief to debtors when compelled by business circumstances to sell assets under a plan ultimately approved by the bankruptcy court.
B. Federal Circuit Court Cases Permitting Exemption for Pre-Confirmation Transfers
The majority of federal court decisions has rejected the holding of NVR and Hechinger, supra, and the trend of recent bankruptcy (and federal circuit court) decisions has been to extend the benefit of the § 1146(a) exemption to sales of real property that occur prior to, but in accordance with, a subsequently confirmed Chapter 11 bankruptcy plan.
1. City of New York v. Jacoby-Bender, Inc.
In this case, the Second Circuit faced the issue of whether § 1146(c) exempted the debtor from paying transfer taxes on a Chapter 11 property sale that was not specifically authorized in the debtor’s bankruptcy reorganization plan. The bankruptcy court had already confirmed the plan, and the precise question to be decided was whether the terms of the confirmed plan encompassed the property sale, thereby making it a part of a “plan confirmed” under § 1146(c). The Second Circuit ruled that the § 1146(c) exemption applied to the property sale, reasoning it was irrelevant whether the plan “empowered the debtor to make a specific sale or deliver a specific deed.” The court found that is was not necessary to identify each and every transfer that might occur under the plan; i.e., it was sufficient to include much broader language that generally outlined the activities that must occur to implement and consummate the plan.
- State of Florida v. T.H. Orlando, Ltd.,
In this case, the Eleventh Circuit Court of Appeals held that where a transfer of assets is necessary for the consummation of a confirmed Chapter 11 plan, the exemption from stamp or similar taxes contained in § 1146(c) of the Bankruptcy Code applies. In this case the two debtors owned three hotels in the Orlando, Florida area. Facing foreclosure of the $70 million mortgage loan on the hotels, the debtors filed a Chapter 11 bankruptcy proceeding. The mortgage lender agreed to accept a discounted payoff in full of $23.5 million, contingent on receipt of this amount not later than August 31, 1997. The debtors obtained a loan commitment from another lender to advance the $23 million payoff amount, subject to the additional requirement that the non-debtor owner of a hotel adjacent to one of the debtor’s hotels also refinance its hotel with the new lender as part of the same transaction. The adjacent owner agreed to this arrangement, solely as an accommodation to the debtors, even though it was under no obligation to do so.
The Chapter 11 reorganization plan filed by the debtors contained an express provision stating that the new lender would not have provided the refinancing unless the adjacent landowner also refinanced its hotel with the lender, and that such additional refinancing “therefore is incident to and a condition precedent to the reorganization of the [debtors]” and thus exempt from the imposition of Florida documentary stamp taxes pursuant to § 1146(c).
The Florida Department of Revenue (“FDOR”) filed an objection, claiming that the § 1146(c) exemption did not apply, as a matter of law, to sales of non-estate property to non-debtor parties. The bankruptcy court confirmed the debtors’ plan, but ruled that the amount of the mortgage transaction would not, until further order of the court, be deemed exempt under § 1146(c). The debtors paid the disputed tax amount ($161,425) under protest, and then filed an action for declaratory relief in the Osceola County Circuit Court, seeking a refund of this payment. The FDOR removed this proceeding to the bankruptcy court, which then ruled that because the adjacent landowner’s agreement to refinance was done pursuant to the approved plan and was necessary in order to consummate and implement the plan, it was “under a plan” as required by § 1146(c), and the debtors were entitled to a refund of the disputed amount. The district court reversed, holding that the § 1146(c) exemption did not apply to transfers involving non-debtors.
The Eleventh Circuit began by analyzing the language “under the plan.” The court reviewed the applicable decisions on this issue by other federal circuit courts, i.e., In re Hechinger, In re NVR LP, and City of New York v. Jacoby Bender, and concluded that a transfer “under a plan” refers to a transfer authorized by a confirmed Chapter 11 plan. The Eleventh Circuit reasoned that a plan authorizes any transfer that is necessary to the consummation of the plan, irrespective of whether the transfer involves the debtor or estate property. The court noted that even though in this case the transaction involved two non-debtor parties (the adjacent landowner and the new lender), without the participation of these parties the plan would not have been consummated, the first lender would have foreclosed its mortgage, and the unsecured creditors would have received nothing. The court distinguished this factual situation from that of cases (cited by the FDOR) where the transaction could be completed either by outright purchase or financing of the purchase and no mention of the necessity of obtaining any particular form of financing (or any financing at all) was made in the plan, i.e., the transfer in this case was not “irrelevant” and was essential to the consummation of the plan “because the plan could not have been consummated absent that transfer.”
The Eleventh Circuit also found that the determination of whether the exemption applied was a matter within the “core jurisdiction” of the bankruptcy court, and noted that Florida’s own regulatory interpretation of § 1146(c), contained in the Florida Administrative Code, “implicitly recognizes that an exemption may extend to third parties,” and does not restrict the exemption solely to transfer taxes imposed on debtors (although it restricts the exemption to transactions in which the debtor is a party).
The Eleventh Circuit declined to rule on the “policy” arguments raised by the debtors (i.e., that applying the exemption would further the Congressional policy of encouraging financing of debtors to enable the debtors to continue in business and provide funds for unsecured creditors) and by the FDOR (i.e., that U.S. Supreme Court decisions have articulated a policy of construing tax exemptions narrowly), because the court could find no ambiguity in the language of § 1146(c).
- In re Piccadilly Cafeterias, Inc.
In the most recent federal circuit court of appeals ruling on this issue, the Eleventh Circuit (noting that “[a] remedial statute such as the Bankruptcy Code should be “liberally construed”) affirmed the holdings of the bankruptcy court (in a case originally decided before the enactment of BAPCA) and the federal district court, which held that the § 1146(c) stamp-tax exemption applied to pre-confirmation transfers of the debtors’ assets, which the court found were necessary to the consummation of the debtor’s confirmed plan of reorganization. The debtor in this case, Piccadilly Cafeterias (“Piccadilly,” one of the largest and most successful cafeteria restaurant chains in the nation, with more than 130 restaurants in 15 Southern states), executed an asset-purchase agreement for the sale of substantially all of its assets for the sales price of $54 million. The next day, Piccadilly filed a Chapter 11 bankruptcy proceeding and sought permission from the bankruptcy court to proceed with an auction of its assets notwithstanding the prior sale agreement. The bankruptcy court agreed, and conducted an auction at which the assets were sold, with the court’s approval, for $80 million to a third party. The court also granted Piccadilly’s request that the sale be deemed exempt from stamp taxes pursuant to § 1146(c). The FDOR objected, arguing that the exemption should not apply to pre-confirmation transfers. The bankruptcy court granted summary judgment in favor of Piccadilly and the federal district court affirmed the bankruptcy court’s ruling.
On appeal, the Eleventh Circuit first noted that “[t]he dispute in this case turns on whether pre-confirmation transfers may constitute transfers ‘under a plan confirmed,” and noted further that this case involved a transaction between two non-debtors that was specifically contemplated by the debtor’s confirmed plan of reorganization. After examining the existing (and conflicting) federal circuit court decisions on this issue, the Eleventh Circuit reasoned that the plain language of § 1146(c) was ambiguous and “when Congress wanted to place a temporal restriction in the Bankruptcy Code it did so expressly.” The court, agreeing with the decisions in Jacoby-Bender and T.H. Orlando, and rejecting the “strict temporal construction of § 1146(c) articulated by the Third and Fourth Circuits,” noted that a strict construction would ignore the “practical realities” of reorganization cases because of the frequent need of the debtor to conduct and close a sale of all or a portion of its assets as a condition precedent for the parties to proceed with confirmation of the plan. The court therefore ruled that “§ 1146(c)’s tax exemption may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation transfer and the confirmed plan.”
One commentator has suggested that applying the § 1146(a) exemption to pre-confirmation sales of real estate results in the imposition of an “extra-statutory limitation” that is not contained in § 1146(a), and raises the following questions, none of which are answered by reference to the Bankruptcy Code or existing case law:
Should the standard be whether the transfer is necessary for confirmation? Or merely helpful? . . . What level of proof is necessary? Who bears the burden of proof? And what evidence is relevant?
A potential problem also could arise (prior to the U.S. Supreme Court’s ruling in Piccadilly, as discussed below) when a pre-confirmation sale occurred and no transfer tax had been paid because the plan-confirmation order or sale order provided that the transfer was subject to the § 1146(a) exemption. If the reorganization plan was ultimately withdrawn, dismissed or otherwise not confirmed by the bankruptcy court (or the case was converted to a Chapter 7 liquidation proceeding), the only remedy for the taxing authority would appear to be to bring an action to attempt to recoup the unpaid transfer tax (together with applicable interest and penalties). But the bringing of such an action could be impractical, expensive and time-consuming.
IV. The U.S. Supreme Court’s Decision in Piccadilly
Because of the split of authority among the federal circuit courts as to whether the § 1146(a) transfer-tax exemption applies to pre-confirmation asset sales under § 363 of the Bankruptcy Code, the U.S. Supreme Court granted certiorari, on appeal from the Eleventh Circuit’s decision in In re Piccadilly Cafeterias, Inc., supra, to decide this issue. The issue has taken on added importance in recent years because so many asset sales in Chapter 11 cases – including the one in the Piccadilly case – are made through § 363, well before any reorganization plan has been approved and confirmed by the bankruptcy court.
The interest in -- and importance of -- this case is evidenced by the amicus curiae briefs that were filed with the U.S. Supreme Court. Twenty-seven states and four cities filed an amicus curiae brief on behalf of the FDOR, expressing concern that the public interest would suffer because they would lose billions of dollars in tax revenue if the Supreme Court should rule that pre-confirmation asset sales are entitled to the § 1146(a) transfer-tax exemption. They also argued that there was no evidence of any congressional intent to exempt pre-confirmation transfers in order to encourage Chapter 11 reorganizations; and that providing the exemption for pre-confirmation transfers would encourage Chapter 11 liquidations (which in fact have increased) rather than reorganizations, which reorganizations would most likely occur whether or not the exemption for pre-confirmation transfers was available. The taxing authorities were also concerned about the administrative burden on states if pre-confirmation transfers (which they argued generate millions of dollars in revenue) were initially exempt but subsequently could be taxed if no plan was ever confirmed, i.e., without a “bright-line” rule they would not know, at the time a pre-confirmation transfer of assets was recorded, whether a Chapter 11 plan would in fact later be confirmed to validate the exemption claimed on the earlier asset transfers.
In addition to the amicus curiae brief filed on behalf of the FDOR, Richard Lieb, a professor at St. John’s Law School and a former bankruptcy attorney and professor in the law school’s master of laws bankruptcy program, filed an amicus curiae brief with the U.S. Supreme Court on behalf of a group of bankruptcy law professors, which brief supported Piccadilly’s position on the issue of the applicability of the § 1146(a) transfer-tax exemption. The professors argued that the limitation of the § 1146(a) exemption to post-confirmation transfers could have a negative impact on Chapter 11 bankruptcy cases with significant transfer taxes.
As noted earlier, the U.S. Supreme Court issued its decision on June 16, 2008, in Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., holding that the Bankruptcy Code’s § 1146(a) transfer-tax exemption does not apply to transfers made before a plan is confirmed under Chapter 11. The Supreme Court noted that while “both sides present credible interpretations of § 1146(a), Florida has the better one.” The court acknowledged that there was some ambiguity in the language of § 1146(a), but ruled that the interpretation posited by Florida was more plausible and “clearly the more natural,” and that Piccadilly’s interpretation placed “greater strain on the statutory text than the simpler construction advanced by Florida and adopted by the Third and Fourth Circuits.” The Supreme Court noted that it was irrelevant whether or not the statute was ambiguous on its face because “the ambiguity must be resolved in Florida’s favor,” reasoning that the distinction between “plan confirmed” and “confirmed plan” was irrelevant because § 1146(a) specifies not only that the tax-exempt transfer must be “under a plan,” but that it must also be confirmed pursuant to § 1129 of the Bankruptcy Code.
The court then dealt with each of the parties’ specific arguments. First, although not dispositive of the issue, the court noted that the subchapter of the Bankruptcy Code in which § 1146(a) appears is entitled “POSTCONFIRMATION MATTERS.” The court acknowledged that “a subchapter heading cannot substitute for the operative text of the statute,” but reasoned that it was “informative that Congress placed § 1146(a) in [that subchapter]. The court then ruled that the most natural reading of the language “under a plan confirmed” was to require that there be a confirmed plan at the time of the transfer. The court noted that Piccadilly had not even submitted a plan at the time of the asset sale, and therefore the sale could not possibly have been conducted “in accordance with” any plan confirmed under Chapter 11. The court also noted that, although the sale was conducted in accordance with the procedures set forth in § 363(b)(1) of the Bankruptcy Code, “[t]o read the statute as Piccadilly proposes would make § 1146(a)’s exemption turn on whether a debtor-in-possession’s actions are consistent with a legal instrument that does not exist – and indeed may not even be conceived of – at the time of the sale.” The court further noted that the provisions of § 365(d)(1) were not analogous to the requirements of § 1146(a), because even though the decision to assume or reject the contract or lease under § 365(d)(1) must be made before confirmation of the plan, the fact remains that the rejection takes effect only upon or after confirmation of the Chapter 11 plan. The court ruled that in this case, only at the point that the court confirms the plan in question does the transfer become eligible for the § 1146(a) transfer-tax exemption. Next, the court agreed with Florida’s assertion that it should recognize the “federalism canon” that § 1146(a)’s exemption should be construed narrowly, since Congress had not clearly expressed an exemption for pre-confirmation transfers. Piccadilly had argued at one point that § 1146(a) was ambiguous, yet it also argued that the exemption was plainly established. The court dealt with this inconsistency by ruling that:
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 (emphasis in original, citations and internal quotations omitted). 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.
The court also rejected Piccadilly’s assertion that § 1146(a) was a preference-granting provision, noting that the applicable statutory text made no mention of “preferences.” The court then rejected Piccadilly’s claim that § 1146(a) should be construed liberally to serve its supposedly remedial purpose. The court reasoned that the aim of the Bankruptcy Code was to strike a reasonable balance between debtors and creditors, and that generally the rights of states with respect to property rights should not be disturbed. The court noted that it was up to Congress, and not the Judiciary, to determine if changes were needed in the language in § 1146(a), and stated pointedly that “we see no absurdity in reading § 1146(a) as setting forth a simple, bright-line rule instead of the complex, after-the-fact inquiry Piccadilly envisions.” The court concluded its analysis by stating that:
The most natural reading of § 1146(a)’s text, the provision’s placement within the Code, and applicable substantive canons 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 was confirmed by the Bankruptcy Court, it may not rely on § 1146(a) to avoid Florida’s stamp taxes.
In his dissent from the majority’s opinion, Justice Breyer (with whom Justice Stevens joined) argued that “the statutory language itself [in § 1146(a)] is “perfectly ambiguous” as to whether a transfer takes place “under a plan” that has already been confirmed or under a plan that is subsequently confirmed. Justice Breyer also argued that he could not “find any text-based argument that points clearly in one direction or the other.” He further argued that the canons of interpretation do not provide clarity on this issue and stated that in fact “the majority’s reading of temporal limits in § 1146(a) serves no reasonable congressional purpose at all,” in light of Chapter 11’s purpose of preserving going concerns and maximizing property available to apply to creditors’ claims. Justice Breyer noted that the pre-confirmation process can take a great deal of time, even years in some cases, and that the value of the debtor’s assets could decline precipitously during this period, reducing the funds that would otherwise be available to creditors or for reorganization of the debtor under Chapter 11. Justice Breyer noted that in this case, Piccadilly realized $80 million by selling the assets quickly after the negotiation of a pre-confirmation settlement agreement with its creditors, which was considerably more than the $54 million originally offered to Piccadilly before it filed its Chapter 11 bankruptcy proceeding. Justice Breyer conceded that the majority’s ruling provided the advantage of a clear “bright-line” rule, but argued that “the statute supplies a clear enough rule – transfers are exempt when there is confirmation and are not exempt when there is no confirmation.”
V. PRACTICAL CONSIDERATIONS
Notwithstanding the U.S. Supreme Court’s ruling in Piccadilly, supra, parties wishing to record conveyances of real property in connection with confirmed plans or confirmation orders may have limited options if recorders’ offices balk at recording the transfer documents without payment of the transfer taxes determined to be owing by the applicable taxing authorities.
Payment of the taxes (even if noted as being “under protest”) at the time of recording the transfer documents may present a dilemma if the debtor or trustee subsequently brings an action against the taxing authority seeking a refund of the tax paid. The problem is that this action may be deemed to constitute a “suit” against the taxing authority that would enable the taxing authority to argue that the action should be dismissed for violating its Article 11 sovereign immunity.
In order to minimize the chance that a recorder’s office will not record a transfer instrument claiming the § 1146(a) exemption without payment of the stamp or transfer tax, the confirmed plan (and the order confirming the plan and the sale) should contain specific language that the § 1146(a) exemption applies to the subject transfer or transfers (which document itself may need to be recorded). The final plan or order also should fully describe, to the extent possible, the documents and transfers to be covered by the exemption (including the applicability of the § 1146(a) exemption to related mortgages and mortgage modification agreements, assignments of leases, or other transfer documents described or contemplated in the plan). Sample provisions for insertion in bankruptcy plans and sale orders are set forth in Appendix A to this article. A sample form of Affidavit requesting an exemption from recording taxes, to be delivered to the taxing authority at or prior to recording mortgage-modification documents (in those states that impose transfer taxes on such transactions), is attached as Appendix A-1 to this Article.
Where feasible, it may be desirable for the debtor or trustee (or the title insurance company or the debtor’s attorneys) to seek, in advance of the sale or transfer, a confirmation or “comfort letter” from the applicable taxing authority. The confirmation or comfort letter would acknowledge the taxing authority’s agreement not to prevent or contest the recording of certain specified transfer documents as the result of the assertion that such transfers are exempt from taxation under § 1146(a) of the Bankruptcy Code. The letter also would confirm the taxing authorities’ agreement that no transfer or stamp tax would be due upon recordation of the transfer documents pursuant to the confirmed plan. A sample form of pre-transfer letter to be delivered to the taxing authority requesting this confirmation is attached as Appendix B to this article.
Commercial bankruptcy filings continue to rise to all-time record levels. U.S. bankruptcies increased 46% in May 2008, compared to a year ago, and many more are expected because of the slowing economy. As many as 1.1 million bankruptcy cases, including personal as well business filings, are expected by the end of 2008, up from 800,000 in 2007. Commercial bankruptcies are now being filed at the highest monthly rate since BAPCPA took effect in 2005. Total bankruptcy filings for the first quarter of 2008 increased nearly 27 percent over the first quarter of 2007. Business filings for the first quarter of 2008 increased almost 30 percent over 2007 first-quarter total. As noted by one commentator, “each year millions of dollars are being collected or forgiven in stamp taxes as a result of the impact of § 1146(c) on Chapter 11 plans.” Having to pay transfer and recording taxes, which can be quite significant in certain jurisdictions (especially in connection with large commercial properties), often adds significant additional costs to purchasers of real estate from bankruptcy estates (including secured lenders who take title to their secured real property collateral in Chapter 11 proceedings). However, under § 1146(a), and pursuant to the U.S. Supreme Court’s ruling in Piccadilly, supra, relief from these impositions is available if the transfer is structured as part of the confirmed bankruptcy plan of reorganization and the actual transfer occurs post-confirmation. In a loan workout situation in the current real-estate market, significant transfer-tax costs may have a high level of economic impact and be a critical consideration. When property owned by the bankrupt debtor is transferred subject to the § 1146(a) exemption (especially in large single-asset or multi-property real estate bankruptcy cases), the lender may be able to recover its real property collateral at a lower cost, free and clear of liens and encumbrances and without the payment of (often significant) transfer or stamp taxes. This, in turn, may encourage the lender -- at least in certain factual situations -- to agree to a consensual plan that reduces bankruptcy expenses and delays and perhaps even frees up additional funds for unsecured creditors. But the plan must be structured, as clearly set forth in the U.S. Supreme Court’s ruling in Piccadilly, supra, so that the sale of assets occurs after confirmation of the bankruptcy reorganization plan providing for the sale of such assets, and so that it does not run afoul of § 1129(d) of the Bankruptcy Code, which prohibits confirmation of a plan that has as its principal purpose the avoidance of taxes.
The ultimate impact of the U.S. Supreme Court’s ruling in Piccadilly on taxing authorities that impose transfer taxes upon bankruptcy sales of assets is uncertain, but based on the aggregate amounts at stake it may not have that great an impact (at least in small bankruptcies). According to one commentator:
Bottom line, what’s the impact on the states? Scott Makar, Solicitor General of Florida, who masterfully shepherded this case up the chain and argued the merits of [the Piccadilly case] before the [U.S. Supreme] 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 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 [Alioto].
It also appears likely that, given the current severe economic downturn (especially in real estate values), pre-confirmation sales of assets nonetheless are likely to continue regardless of the loss of the 1146(a) exemption, especially in those cases where the best possible price for the assets can be obtained only through an expeditious sale. According to another commentator:
Of course, the most immediate impact of the decision is that pre-confirmation Section 363 sales will no longer be exempt from stamp or transfer taxes in any circuit, and those taxes will have to be paid. What remains to be seen is whether sales will be delayed until plan confirmation in order to take advantage of the Section 1146(a) exemption. Given how many asset sales in Chapter 11 cases these days are conducted at the early stages of a case because of financing limitations and declining asset values, a move to delay those sales until plan confirmation seems unlikely. With an economic downturn upon us, the pressures that have led to the expanded use of Section 363 are not likely to abate, regardless of how attractive a stamp or transfer tax exemption may be.
The U.S. Supreme Court’s ruling in Piccadilly has received, at least initially, a generally positive response from commentators and the bankruptcy bar and has not generated a great deal of surprise. As some commentators have pointed out, if, as was the case in Piccadilly, supra, the debtor had not even filed its reorganization plan at the time that the sale of the property occurred the debtor could have, under the Eleventh Circuit’s ruling (and other rulings prior to the U.S. Supreme Court’s ruling in Piccadilly) filed a motion to convert the case to a Chapter 7 proceeding and yet already have received the benefit of the § 1146(a) exemption from transfer taxes, which applies only to Chapter 11 bankruptcy proceedings. (Many asset transfers take place through § 363 asset sales, which often take place months before confirmation of a Chapter 11 reorganization plan; therefore having a significant impact on the extent to which debtors end up paying stamp and other transfer taxes as a practical matter.) In other words, once the sale takes place and the assets have been converted to cash, there would be very little incentive for the debtor to file any Chapter 11 reorganization plan at all, given the time, expense and difficulty of doing so, and very little incentive for the taxing authorities to attempt to collect the taxes that otherwise would have been owing. On the other hand, there is an argument that the § 1146(a) exemption does have a real effect in some cases where a transfer of certain types of assets, such as the issuance of new securities, is integral to the reorganization of the debtor and provides a meaningful return to creditors.  Small Chapter 11 bankruptcies are not likely to be affected, but some larger bankruptcy debtors may be encouraged by the U.S. Supreme Court’s ruling in Piccadilly, supra, to compress the timeline for disclosure statements and plan confirmation when significant sales of property (or properties) -- and substantial transfer taxes -- are involved. Because the Supreme Court, in its Piccadilly ruling, supra, acknowledged that “Congress could have used more precise language [in the § 1146(a) exemption] and thus removed all ambiguity,” it will be interesting to see if there is any effort to propose a legislative “solution” by amending § 1146(a) to provide that the language “under a plan confirmed” refers to both (1) a transfer that occurs subsequent to court approval and confirmation of the plan, and (2) a transfer that is part of a bankruptcy plan that has been submitted and is an essential component of the plan confirmation but is not approved and confirmed by the court until after the transfer date of the property.
Sample provisions for insertion in bankruptcy plans and sale orders
Definition of Transfer Taxes; Applicability of Exemption (Plan)
_____. Transfer Taxes. Transfer Taxes are defined in the Plan as any and all stamp taxes or similar taxes including any interest, penalties and additions to the tax which may be applicable in connection with a Transfer or in connection with the modification of the _______________ Mortgage Obligations pursuant to Article _____ of the Plan, including, without limitation, any applicable mortgage recording taxes, _______________ State Real Property Transfer Tax imposed under _______________ and _______________ City Transfer Tax imposed under _______________ of the _______________ of the _______________ City [Administrative Code], including any penalty, interest and additions to the tax in connection with the foregoing.
_____. Section 1146 (a) Exemption. Pursuant to Section 1146(a) of the Bankruptcy Code, the issuance, transfer or exchange of any security under the Plan, or the making or delivery of an instrument of transfer under the Plan, may not be taxed under any law imposing a stamp tax or similar tax.
Sample Transfer Tax Provisions in Plan Confirmation Order Providing for Sale of Real Property (or for Mortgage or Transfer of Lease of Real Property)
_____. Section 1146(a) Exemption. In accordance with Section 1146(a) of the Bankruptcy Code, the issuance, transfer or exchange or the revesting, transfer, sale and conveyance of any real or personal property of Debtor or the Trustee in accordance with the confirmed Plan, including without limitation the sale and conveyance of the Property, is hereby exempt from, and is not to be taxed under, any state or local law imposing a stamp tax, transfer tax or similar tax.
_____. Direction to Tax Authorities. Each and every federal, state and local government agency or department is hereby directed to accept any and all documents and instruments necessary or appropriate to consummate the sale/assignment of the Properties, all without imposition and payment of any stamp tax, transfer tax or similar tax, pursuant to Section 1146(a) of the Bankruptcy Code. The register or recorder of deeds (or other similar recording agency) is hereby directed to accept and include a certified copy of this Order along with any other appropriate conveyance documents used to record and index the transfer of the Properties in the appropriate public records.
Injunction Against Taxing Authorities (Plan, Plan Confirmation Order. or Sale Order)
______ . Injunction Against Taxing Authorities. The _______________ [Department of Revenue] and all other _______________ state and local taxing authorities will be enjoined from the commencement or continuation of any action to collect from the Debtor, the General Partners, the Equity Interest Holders, ____________________________________’’s nominee, assignee or designee, the _______________ Entities, the _______________ Entities or any creditor of the Debtor, or to charge against the Property any Transfer Taxes, which shall in all events be exempt from payment as provided under Section 1146(a) of the Bankruptcy Code.
Confirmed Plan (Sale Plus Modification of Loan Documents)
_____. Request for Order Approving Transfer. _______________ may elect, which election shall be made by _______________ in the exercise of its sole and absolute discretion, to file a motion with the Court for entry of an order (separate from and in addition to the Confirmation Order) specifically approving any Transfer or the modification of the _______________ Loan Documents as contemplated by Article _____ hereof, or both, and (i) finding and providing that the Transfer and related delivery of the Deed or instruments of transfer were effected under the confirmed Plan within the meaning of Section 1146(a) of the Bankruptcy Code, and (ii) directing the Recorder’s Office of _______________ County, _______________ to record the deed reflecting the Transfer and/or the agreement embodying the modification to the terms and provisions of the _______________ Loan Documents, which agreement is described more particularly in Article _____ hereof, and/or in addition to or in the alternative, to record the Final Confirmation Order (including this Plan, as confirmed, attached as an Exhibit thereto), unconditionally and without reservation notwithstanding the nonpayment of any alleged Transfer Taxes.
AFFIDAVIT RE: EXEMPTION FROM MORTGAGE RECORDING TAX
STATE OF ____________)
COUNTY OF _________ )
I, _________________________, being duly sworn, do hereby depose and say as follows:
1. 1 am an attorney at the law firm ________________________,
attorneys for ______________________________________ (“Lender”). Lender holds a
mortgage encumbering the property known as _________________________ (the “Property”) and is a secured claimant in the Chapter 11 bankruptcy case, Index No. __________ (“_____”), in the United States Bankruptcy Court, __________ District of __________, regarding _________________________ (“Borrower”), the owner of the Property and a “Debtor” and “Reorganized Debtor” in such case.
2. Attached hereto is a true and correct copy of the Order Confirming Plan of Reorganization and Fixing Deadlines in such Chapter 11 case, of which Paragraph ___ provides:
Pursuant to 11 U.S.C. § 1146(a), the issuance, transfer, mortgage or other exchange of a security under or in furtherance of the Plan or the revesting, transfer sale, or mortgage of any real or personal property of any Debtor, any estate, or any Reorganized Debtor in accordance with or in furtherance of the Plan shall not be taxed under any state or local law imposing a stamp tax, mortgage recording tax, transfer tax or similar tax (collectively, ‘Recording Tax’).
3. Pursuant to the Plan of Reorganization confirmed by said Order, Borrower has executed and delivered to Lender the mortgage modification documents affecting the Property listed on Schedule 1 attached hereto, each of which is hereby presented for recording in the Office of the Register of ____________________, _____________, __________County, exempt from payment of mortgage recording tax as a “mortgage or other exchange security under or in furtherance of the Plan” pursuant to said Paragraph _____ of said Order.
WHEREOF, deponent respectfully requests that each of the said mortgage modification documents be accepted for recording exempt from taxation pursuant to said Order and Section 1146(a) of the U.S. Bankruptcy Code (11 U.S.C. Section 1146(a)).
Sworn to before me this _____ day
of _______________, 200__
Mortgage Modification Documents Presented for Recording
1. Note And Mortgage Modification Agreement.
2. Substitute Mortgage A.
3. Assignment of Leases and Rents.
4. Substitute Mortgage B.
5. Second Assignment of Leases and Rents.
Sample form of pre-transfer letter to be delivered to taxing authority
[LETTERHEAD OF LAW FIRM OR TITLE INSURANCE COMPANY]
________ , 200__
To County Recording Officers:
____________________ “Debtor”) is a corporation emerging from Chapter 11 bankruptcy. In connection with its confirmed Chapter 11 reorganization plan (“Plan”), Debtor will be granting first and second mortgages and assignments of rents and leases (collectively, the “Mortgages”) on approximately ____ properties in ____ states to ____________________ Company or another commercial bank acting as collateral agent. The first mortgages will secure Debtor indebtedness in the amount of approximately $____ million and the second mortgages will secure Debtor indebtedness in the amount of approximately $____million. Debtor is issuing all such indebtedness (the “Indebtedness”) in connection with the Plan.
Pursuant to section 1146(a) of the U.S. Bankruptcy Code, it is our understanding that (1) the issuance, distribution, transfer or exchange of the credit agreements evidencing the Indebtedness and (2) the making, delivery or recording of any instrument of transfer under, in furtherance of, or in connection with the Plan, including any mortgages, assignments or other instruments of transfer executed in connection with any transactions arising out of, contemplated by or in any way related to the Plan are not subject to any document recording tax, stamp tax, conveyance fee, intangibles tax, mortgage tax, real estate transfer tax, mortgage recording tax or other similar tax or governmental assessment.
As the Mortgages will be executed pursuant to the Plan, Debtor should be exempt under section 1146(a) from any mortgage recording tax, intangibles tax or similar tax ordinarily assessed in your jurisdiction in connection with the recording of a mortgage, deed of trust or deed to secure debt. Please confirm your understanding that no such tax will be due upon recording of the Mortgages in your office. We would also appreciate knowing of any additional information or evidence you may require in connection with such recordation in order to confirm the availability of the exemption. Please respond to the undersigned. Thank you very much for your consideration.
[TITLE INSURANCE COMPANY]
* Vice President-Special Counsel, First American Title Insurance Company, Chicago, Illinois; B.B.A. 1967, University of Michigan; J.D. 1969 University of Michigan. Nothing contained in this Article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This Article is intended for educational and informational purposes only. The views and opinions expressed in this Article are solely those of the Author, and do not necessarily reflect the views, opinions, or policies of the Author’s employer, First American Title Insurance Company.
 Section 1146 (a) states:
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.
In April of 2005, § 1146 was amended by, inter alia, repealing subsections (a) and (b) and re-designating what was formerly subsection (c) as subsection (a) (i.e., what was § 1146(c) prior to 2005 is now § 1146(a); the language was not changed). Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), § 719(b)(3)(B), 119 Stat. 133 (2005) (amending 11 U.S.C. § 1146). For simplicity, references in this article will be to the statute as it is currently codified (§ 1146(a)), unless stated otherwise (as § 1146(c)) in cases and commentary prior to the enactment of BAPCPA. BAPCPA was enacted into law on April 20, 2005 and applies to all bankruptcy cases filed on or after October 17, 2005 (with limited exceptions as to certain provisions). BAPCPA constitutes the most extensive revision of the Bankruptcy Code since 1978. The goal of BAPCPA is to streamline the Bankruptcy Code, speed up proceedings, limit abuses, and “level the playing field.” Approximately half of BAPCPA’s provisions deal with business, not consumers, and at least 21 provisions relate in some manner to real estate.
Section 1146 provides special tax rules applicable only to Chapter 11 reorganizations. See In re Hechinger Inv. Co. of Del., Inc.
, 254 B.R. 306, 316 (Bankr. D.Del. 2000) (“The statute [§ 1146] makes clear that transfers by Chapter 7, 9, 12 and 13 debtors do not qualify for exemption”); aff’d
, 276 B.R. 43 (Bankr. D. Del. 2002), rev’d on other grounds
, 335 F.3d 243 (3rd Cir.(Del.) 2003); In re Shank
, 240 B.R. 216, 224 (Bankr. D. Md. 1999) (“The only taxes for which the Bankruptcy Code provides forgiveness post-confirmation are transfer taxes for real property transferred pursuant to a confirmed plan of reorganization”); In re Hagerstown Fiber Ltd. Partnership
, 226 B.R. 353, 359 (Bankr. S.D.N.Y. 1998) (“in Chapter 7 [as opposed to Chapter 11] the estate will lose the benefit of 11 U.S.C. § 1146(c)”). Until the enactment of BAPCPA in 2005, Section 728 of Chapter 7 of the Bankruptcy Code, although entitled “Special Tax Provisions” (the same title as § 1146), did not contain an exemption provision from transfer taxes similar to § 1146(a). See
11 U.S.C. § 728 (2005). (BAPCPA, effective in bankruptcy cases commenced on or after October 17, 2005, repealed § 728.) Chapter 12 of the Bankruptcy Code, which applies to family farmers with regular income, contains an exemption provision that is virtually identical to § 1146(a) with respect to a confirmed plan. See
11 U.S.C. § 1231(a) (2008).
 See In re Amsterdam Ave. Dev. Associates
, 103 B.R. 454, 459 (Bankr. S.D.N.Y. 1989) (“The plain language of section 1146(c), in referring to all plans, makes no differentiation between solvent and insolvent debtors”).
 See, e.g., In re Smoss Enters. Corp.
, 54 B.R. 950, 951-52 (E.D.N.Y. 1985), aff’d without opinion
, 1986 U.S. App. LEXIS 28677 (2nd
Cir. N.Y. Mar. 31, 1986), cert. denied
, 479 U.S. 828 (1986) (“the claim that § 1146(c) applies to plans only of ‘reorganization’ and not of ‘liquidation’ is plainly meritless” (citation omitted)); In re Permar Provisions, Inc.
, 79 B.R. 530, 534 n.10 (Bankr. E.D. N.Y. 1987) (finding that legislative history of § 1146(c) supports “conclusion that a tax exemption is available under a liquidating plan”); Sandy Ridge Dev. Corp. v. Louisiana Nat'l Bank (In re Sandy Ridge Dev. Corp.), 881 F.2d 1346, 1352 (5th Cir.1989)
("It is clear ... that although Chapter 11 is titled 'Reorganization,' a plan may result in the liquidation of the debtor."); In re StatePark Building Group, Ltd.
, 316 B.R. 466, 474 (Bankr. N.D. Tex. 2004) (“a liquidation through a Chapter 11 is appropriate”). Cf. In re Woodland Builders
, 87 B.R. 774, 779 (Bankr. D. Conn. 1988) (holding that sales of real property by Chapter 7 trustee in connection with liquidation of debtor’s estate were subject to state’s real estate conveyance taxes).
 Section 1129(d) states:
Notwithstanding any other provision of this section, on request of a party in interest that is a governmental unit, the court may not confirm a plan if the principal purpose of the plan is the avoidance of taxes or the avoidance of the application of section 5 of the Securities Act of 1933. In any hearing under this subsection, the governmental unit has the burden of proof on the issue of avoidance.
11 U.S.C. § 1129(d) (2008).
188 B.R. 121 (Bankr. S.D.N.Y. 1995).
at 124. See also CCA Partnership v. Director of Revenue, State of Delaware (In re CCA Partnership)
, 70 B.R. 696, 698 (Bankr. D. Del. 1987), aff’d
72 B.R. 765 (D. Del. 1987), aff’d without opinion
, 833 F.2d 304 (3d Cir. Del. 1987) (“it [§ 1146(c)] provides the debtor with the speediest and most efficient means possible to distribute and discharge its obligations. To place additional obligations on the property may defeat these purposes and circumvent the intent of the Code”); In re Cantrup
, 53 B.R. 104, 106 (Bankr. D. Colo. 1985) (stating that imposition of real estate transfer tax “certainly will affect the price gotten by the estate”).
Richard H. W. Maloy, The Stamp Tax Exemption in Chapter 11 Cases
, 1 rutgers bankr. l.j. 1, 2 (2002). For a thorough explanation and analysis of § 1146(a) (formerly § 1146(c)) of the Bankruptcy Code, including the definition of “stamp or similar tax,” various types of eligible transfers, the split in case law regarding whether the exemption applies to pre-confirmation transfers of real property or only to post-confirmation transfers, and the utilization of the exemption based on the doctrine of sovereign immunity under the Eleventh Amendment, see
John C. Murray, Transfer-Tax Considerations in Real Estate Bankruptcy Proceedings
, 38 real prop. prob. & tr. j. 377 (2003). See also
Robert a. Morse, Exemption, Under 11 U.S.C.A. § 1146(c)
, From Payment of Tax Under Any Law Imposing Stamp Tax or Similar Tax
, 108 A.L.R. Fed. 701 (Originally published in 1992).
 A pre-packaged bankruptcy plan has been described as follows:
A pre-packaged bankruptcy plan is a relatively risk-free way to avoid the hazards and expenses of litigation that could result from an unsuccessful workout attempt. It also provides protection down the road for the lender if the borrower fails to perform and title is transferred to the lender. A pre-packaged bankruptcy plan is negotiated by the lender with the borrower and key creditors before, and submitted to the bankruptcy court simultaneously with, a voluntary Chapter 11 filing by the debtor. It is often used in large workouts when there are few significant creditors other than the lender, for example, when only current trade debt exists, and the claims of the other creditors are to be paid substantially or in full as part of the plan. A pre-packaged plan eliminates the risks, costs, and delays of contested bankruptcy proceedings and assures a court-approved and court-supervised plan as well as an orderly transfer of title.
John C. Murray, The Lender’s Guide to Single-Asset Real Estate Bankruptcies, 31 real prop. prob. & tr. j. 393, 478 (1996).
The bankruptcy court, however, cannot confirm a consensual pre-packaged Chapter 11 bankruptcy plan if its primary purpose is the avoidance of taxes. See
11 U.S.C. § 1129(d) (2008); supra
note 5 and accompanying text.
11 U.S.C. § 1146(c) (1979) (amending U.S.C. § 267 (1938)).
H.R. Rep. No. 95-595, 95th
Sess. 421 (1977) (“Subsection (c) exempts from stamp taxes the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan. The subsection is derived from section 267 of the Bankruptcy Act”). Section 267 of the Bankruptcy Act of 1898 applied only to corporate reorganizations under former Chapter X. Section 1146(c) expanded the exemption to apply to all individuals and entities eligible to file for reorganization under Chapter 11.
black’s law dictionary 1471 (7th ed. 1999).
(emphasis in text).
Black’s defines “documentary tax” as “A stamp required to be affixed to a deed or other instrument before it is recorded.” Id.
(In re 995 Fifth Avenue Associates, L.P.)
, 963 F.2d 503 (2nd
at 512. Based on its application of these criteria to the instant case, the court held that the New York gains tax was not a “stamp or similar tax.” See also
note 8, 108 a.l.r. fed. 701 at secs. 2-4; discussion infra
and accompanying text.
note 6, 188 B.R. 121 (Bankr. S.D.N.Y. 1995).
at 124. See also In the Case of Eastmet Corp.
, 907 F.2d 1487, 1489 (4th
Cir. 1990) (holding that while non-debtor purchase-money deed of trust can be described as “part of the same transaction by which the buyer acquired debtor’s real property, that does not elevate the deed of trust to the status of something ‘under a plan confirmed’”); In re Bel-Aire Invs., Inc.
, 142 B.R. 992, 995 (Bankr. M.D. Fla. 1992) (holding that § 1146(c) exemption does not apply to non-debtor transactions); California State Bd. of Equalization v. Sierra Summit, Inc.
490 U.S. 844, 851-52 (1989) (“Although Congress can confer an immunity from state taxation . . . ‘[a] court must proceed carefully when asked to recognize an exemption from state taxation that Congress has not clearly expressed ‘ . . .“) (citations omitted). Cf. Maryland v. Antonelli Creditors’ Liquidating Trust
, 123 F.3d 777, 785 (4th
Cir. 1997) (ruling that transfers at issue fell within literal terms of § 1146(c) exemption because liquidating trust established by debtor to take title to properties and subsequently sell them to third parties was an “adequate means” for liquidating substantially all of debtor’s property; it was not a “patently invalid” means of disposition; and it was “entirely appropriate to use a liquidating trust to sell and distribute an extremely large estate . . . which would otherwise consume a large amount of judicial resources and dissipate much of the estate in legal costs”; and stating that bankruptcy court had correctly distinguished In re Kerner Printing Co., Inc., supra
note 6, on the basis that “in that case the so-called new entity was actually the single creditor (or its assignee) most likely to be benefited by the transfers over time”). See generally
note 8, at sec 8.
 (In re T.H. Orlando, Ltd.),
391 F.3d 1287 (11th
note 46, infra
, and accompanying text for further discussion of the holding in this case with respect to the applicability of the § 1146(a) exemption with respect to a pre-confirmation reorganization plan.
 See In re CCA Partnership
note 7, 72 B.R. at 766 (upholding ruling of bankruptcy court that precluded State Director of Revenue from dividing liability for stamp or similar tax between debtor-grantor and solvent grantee when transfer was pursuant to confirmed plan, and stating that “a stamp tax is, by definition, a tax on the instrument of transfer, not on the parties to the transfer or the act of recording the transfer”); In re Cantrup
note 7, 53 B.R. at 106 (ruling that because city’s real estate transfer tax was stamp tax or similar tax, grantee of deed from trustee was entitled to § 1146(c) exemption, whether presented for recording by grantor or grantee). Cf. Lake v. Gleeson
, 11 Pa. D & C 2d 584, 586 (Pa. 1956) (holding that, under § 267 of Bankruptcy Act, while trustee could not be made liable for transfer tax for “making or delivering of instruments of transfer,” nothing in Bankruptcy Act relieved grantee who “accepted
the deed and presented
it for recording” (emphasis in text)); In re Amsterdam Ave. Dev. Associates
note 3, 103 B.R. at 460-61 (finding argument that proper focus is not on parties to tax but on instrument itself “misplaced”; while acknowledging that § 1146(c) exemption may apply to non-debtor grantee required to pay transfer tax, court held that issue – and not answer – was whether mortgage executed by nondebtors was an “instrument under a plan” for purposes of § 1146(c) exemption).
 See In re Amsterdam Ave. Dev. Associates, supra note 3, 103 B.R. at 458 (“like a stamp tax, the mortgage recording tax is on a written instrument recognized in law as evidence of the enforcement of legal rights (citation omitted”); In the Case of Eastmet Corp. supra note 19 , 907 F.2d at 1489 (“there can be no doubt that the deed of trust transaction involved the making or delivery of an instrument of transfer”); Hughes v. Lawson (In re Lawson), 122 F.3d 1237, 1240 (9th Cir. 1997) (“Granting of security for a debt is a transfer under the Bankruptcy Code”); In re Jacoby-Bender, 785 F.2d 840, 842 (2nd Cir. 1985) (reflecting “Congress’ understanding that ‘transfer’ is a word of broad meaning” under Bankruptcy Code”); First Fidelity Savs. & Loan v. Hulm, 738 F.2d 323, 27 (8th Cir. 1984) (broad definition of “transfer” includes grant of mortgage). “Transfer” is defined in § 101(54) of the Bankruptcy Code (as amended by BAPCPA in 2005) as follows:
The term “transfer” means –
- the creation of a lien;
- the retention of title as a security interest;
- the foreclosure of a debtor’s equity of redemption; or
- each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with --
(i) property, or
(ii) an interest in property.
11 U.S.C. § 101(54)(D) (2008). The major change is the new language stating that, for bankruptcy purposes, the creation of a lien is a “transfer.” This is generally in accordance with existing state law. See, e.g., Bank Midwest v. Lipetzky, 674 N.W. 2d 176, 181 (Minn. 2004) (“the plain and ordinary meaning of ‘transfer’ includes the grant of a mortgage’”). The recording of a mortgage modification agreement pursuant to a Chapter 11 plan presumably also would be a “transfer” entitled to the § 1146(a) exemption.
(In re The Baldwin League of Independent Schools)
, 110 B.R. 125, 127-28 (Bankr. S.D.N.Y. 1989). See also
City of New York Department of Finance, Various Transfers and Recording of Mortgage Pursuant to a Chapter 11 Bankruptcy Order Are Not Subject to Real Property Transfer Tax or Mortgage Recording Tax
, FLR-4708, Sept. 4, 1997, at p.2 (“the [New York City Recording Tax] has been held to be a stamp tax within the meaning of 11 U.S.C. section 1146(c)” (citing In re The Baldwin League of Independent Schools, supra
at 127. The court stated that “[the lender] cannot seriously contend that [the debtor’s] $7 million mortgage of its sole asset . . . is not ‘reasonably necessary’ to the reorganization plan.” Id.
The court also noted that “the mortgage recording tax is in fact a ‘stamp tax or similar tax,’ because the amount is determined by the consideration cited in the document, because payment is a prerequisite to recordation, and because the tax is imposed on a written instrument” (citations omitted)). Id.
at 126. See also In the Case of Eastmet Corp.
note 18, 907 F.2d at 1489 (ruling that purchase-money deed of trust was an “instrument of transfer” under § 1146(c)). Cf. In re Amsterdam Ave. Dev. Associates, supra
103 B.R. at 459-60 (holding that while giving of mortgage is “transfer” of property pursuant to approved plan and § 1146(c) exemption applies to mortgage tax, exemption does not apply to mortgage tax imposed on mortgage given by non-debtor borrower-buyer to conclude purchase). Presumably, transfers of the debtor’s leasehold interest (or interests) under a confirmed Chapter 11 bankruptcy plan would also benefit from the § 1146(a) exemption.
11 U.S.C. § 1146(a) (2008) (emphasis added).
11 U.S.C. § 101(54)(D) (2008).
11 U.S.C. § 101(49)(A)(i)-(xv) (2008).
11 U.S.C. § 101(49)(xiv) (2008), which provides that the definition of security includes any “other claim or interest commonly known as ‘security.’” See also In re Integrated Health Services, Inc
. 2006 WL 543876, at *6 (D.Del., March 6, 2006) (“If the facts are as the Liquidating LLC represents them to be, then the title transfer is tax exempt”). See generally
R.D. Hursh, Annotation: What Constitutes Corporate Securities, Bonds, Debentures, and the Like Subject to Federal Stamp Tax
, 36 A.L.R.2d 975 (originally published in 1954); Murray, supra
note 8, 38 real prop. prob. & tr. j. at 386-89.
963 F.2d 503 (2nd
at 513. See also In re Jacoby Bender, Inc.)
note 23, 758 F.2d at 841-42 (holding that New York gains tax is not stamp or similar tax within meaning of § 1146(c)); Scheffel v. New York Dep’t of Taxation and Finance (In re Lehal Realty Assocs.)
, 133 B.R. 9, 12-13 (Bankr. S.D.N.Y. 1991), vacated
, 184 B.R. 205 (Bankr. S.D.N.Y. 1993) (dismissing trustee’s action against State seeking refund of gains tax assessed against sale of debtor’s property); Heller v. State of New York
, 81 N.Y.2d 60, 61 (1993) (holding that New York gains tax does not represent incidental expense such as recording fee, transfer tax, or similar expense in connection with transfer of property). New York’s gains tax, CLS Tax Act Art. 31-B, was repealed in 1996. See
L. 1996, ch. 309, § 171 (eff. July 13, 1996).
 See, e.g.
, In re GST Telecom, Inc.
, 2002 WL 1737445 (D.Del. 2002) at *4-5 (ruling that California sales tax on “all retailers” for “the privilege of selling personal property” is not “stamp or similar tax” and does not qualify for exemption under § 1146(c), because tax rate is not “a relatively small percentage of the consideration for, par value of, or value of the item being transferred” (quoting from In re 995 Fifth Avenue Associates, L.P., supra
note 15, 963 F.2d at 511-12)); and stating that “California’s sales tax [in contrast to a stamp or similar tax] does not tax instruments of transfer” and “California’s 4.75% tax rate far exceeds the generally accepted one percent stamp tax rate”). In a related case, In re GST Telecom, Inc.
, 2002 WL 442233 (D.Del., March 20, 2002), at *4, the District Court held that Washington’s use tax, imposed at the rate of 6.5 %, “is too large to qualify as a stamp or similar tax under section 1146(c).” See also California State Board of Equalization v. Sierra Summit, Inc.
note 19, 785 F.2d at 853-54 (1989) (holding that 28 U.S.C. § 960 permitted imposition of California sales and use tax on bankruptcy trustee’s liquidation sale); Henry v. State of Vermont (In re Henry)
, 135 B.R. 6, 10-11 (Bankr. D. Vt. 1991) (requiring debtor to pay appropriate state land gains tax on property sold during liquidation of estate). Cf. In re Columbia River Broadcasting, Inc.
, 106 B.R. 666, 668-69 (Bankr. D.Or. 1989) (holding that bankruptcy trustee was entitled to exemption from state taxation where tax was personal property tax on sales of inventory assets in ordinary course of business and not transfer tax). See generally
Melanie Rovner Cohen and Donna M Zak, The Still Unresolved Issues of the Applicability of State Transfer Taxes to Bankruptcy Sales
, 95 com. l. j. 46, 49-50, 52-53 (1990) (discussing California State Board of Equalization v. Sierra Summit, Inc., supra
and application of § 1146(c) exemption to sales and use taxes).
 See California State Board of Equalization v. Sierra Summit, Inc
note 19, 490 U.S. at 849 (“there is now no constitutional impediment to the imposition of a sales tax or a use tax on a liquidation sale”); In re GST Telecom, supra
note 32, 2002 WL 442233 at *3 n. 7 (finding such taxes constitutional).
 See In re GST Telecom, Inc.
note 32, 2002 WL 442233 (D.Del., March 20, 2002), at *2 (“Given the reality of business and bankruptcy practice, adopting a rule that requires all bankruptcy transfers to occur post-confirmation would seem to frustrate section 1146(c)’s stated purpose of facilitating reorganization in a large number of cases.”)
128 S.Ct. 2326 (2008).
189 F.3d 442 (4th
Cir. 1999), cert. denied
528 U.S. 1117 (2000).
note 2, 335 F.3d 243 (3d Cir. 2003).
 Cf. In re 310 Associates, L.P.
, 282 B.R. 295 (S.D.N.Y. 2002). In this case, the federal district court reversed the bankruptcy court’s order granting an exemption to the debtor under § 1146(c) from payment of municipal real estate transfer taxes. The issue on appeal was whether the transfer of the debtor’s property (commercial buildings that were the debtor’s principal asset) was “under a plan confirmed” within the meaning of § 1146(c). The debtor admitted that no plan of reorganization had even been drafted at the time of the transfer. The court ruled that under this factual situation the transfer was not an “essential” or “important” component of any plan at the time of the conveyance, and that the court need not make a determination of whether the transfer was “under a plan confirmed.” According to the court, “the City should not be required to wait until some indeterminate time when there may be a plan before collecting the taxes which it was entitled to collect at the time of the transfer.” Id.
at 299. The court cautioned that its holding was “a narrow one” and that “[t]he clear language of section 1146(c) states that only transfers occurring ‘under a plan confirmed’ are exempt from taxation. A transfer cannot be ‘under a plan confirmed’ if, at the time of the transfer, no plan has been drafted. It is therefore not necessary to decide whether section 1146(c) exempts from taxation a transfer that occurs after a plan has been introduced but not yet confirmed.” Id.
The court reasoned that Jacoby-Bender
was inapposite because it involved a post-confirmation transfer and did not address the timing issue raised in the present case. The court also distinguished In re 995 Fifth Avenue Associates, L.P.
on the basis that in that case the Second Circuit did not address the issue of whether § 1146(c) applies to a transfer occurring before the drafting of a plan, and on the further basis that the parties never litigated this issue. The court in 310 Associates
stated that “’[a] transfer cannot take place with the authorization of a plan that has not been drafted. Nor can a transfer be inferior or subordinate to a plan that has not been drafted. To determine otherwise would render both the words ‘plan’ and ‘confirmed’ in section 1146 (c) meaningless.” Id. See also In re Complete Retreats, LLC
358 B.R. 822 (Bankr. D.Conn. 2006) (sale of Chapter 11 debtor's assets was not "under a plan confirmed," and thus was not exempt from state transfer taxes, where no plan of reorganization had been filed as of time of sale transaction).
For examples of bankruptcy court decisions applying the § 1146(a) exemption to sales of real property that occur prior to, but in accordance with, a subsequently confirmed Chapter 11 bankruptcy plan, see In re Beulah Church of God in Christ Jesus, Inc
., 316 B.R. 41 (Bankr. S.D. N.Y. 2004) (holding that sale of real estate assets from bankruptcy estate prior to plan confirmation qualifies for exemption from transfer taxes under § 1146(c) of Bankruptcy Code where sale is integral to Chapter 11 reorganization plan that is subsequently confirmed); In re Lopez Dev., Inc.
154 B.R. 607, 609 n.3 (Bankr. S.D. Fla. 1993) (upholding debtor’s claim, after plan confirmation, for refund of transfer taxes paid at time of recording of deeds to two properties notwithstanding subsequent dismissal of case, and rejecting argument that § 1146(c) is applicable only to post-confirmation transfers because such an interpretation would not facilitate Chapter 11 plans); In re Smoss Enters. Corp.
54 B.R. at 951 (finding that sale was under plan because “the transfer of property was essential to the confirmation of the plan”); In re Permar Provisions, Inc.
note 4, 79 B.R. at 533-534 (holding that § 1146(c) exempted from taxation a transfer of real property that occurred more than one year before confirmation of Chapter 11 plan, where sale facilitated confirmation of plan); In re GST Telecom, Inc, supra
note 32, 2002 WL 442233 at *1 (“[t]he court agrees that property transfers made prior to confirmation may be protected under section 1146(c)”); In re Linc Capital, Inc.,
280 B.R. 640, 647 (Bankr. N.D. Ill. 2000) (ruling that sale was “under” confirmed plan where plan provided for sale and sale was approved 25 days before confirmation and consummated just prior to plan confirmation). Cf. In re Webster Classic Auctions
, Inc., 318 B.R. 216, 219 (Bankr. M.D. Fla. 2004) (rejecting pre-confirmation sale of debtor’s assets because it did not meet the following criteria for determining the applicability of § 1146(c)
: 1) There must be a plan of reorganization specifically contemplating a sale of property,
and the plan must ultimately be confirmed; 2) Any sale of property contemplated in the plan that is to occur prior to confirmation must set out the requirements of § 1146(c)
, and 3) must be served on all taxing authorities (which notice to taxing authorities must be included in the required § 363(b)
In Chapter 11 cases, authority to sell real estate or other significant assets before confirmation of a reorganization plan has sometimes depended upon the articulation of a sound business purpose. See Committee of Equity Security Holders v. Lionel Corp. (In re Lionel Corp.)
, 722 F.2d 1063, 1070-71 (2nd
Cir. 1983) (listing the following factors to consider in determining whether business justification exists: “the proportionate value of the asset to the estate as a whole, the amount of elapsed time since the filing, the likelihood that a plan of reorganization will be proposed and confirmed in the near future, the effect of the proposed disposition on future plans of reorganization, the proceeds to be obtained from the disposition vis-à-vis any appraisals of the property, which of the alternatives of use, sale or lease the proposal envisions, and perhaps most importantly, whether the asset is increasing or decreasing in value”). See also Stephens Indus., Inc. v. McClung
, 789 F.2d 386, 389-90 (6th
Cir. 1986); In re Delaware & Hudson Ry. Co.
, 124 B.R. 169, 176 (D. Del. 1991); In re Engineering Prod. Co.
, 121 B.R. 246, 248 (Bankr. E.D. Mo. 1990); In re Channel One Communications, Inc.
, 117 B.R. 493, 496 (Bankr. E.D. Mo. 1990); In re Brethren Care
, 98 B.R. 927, 933 (Bankr. N.D. Ind. 1989); In re Crowthers McCall Pattern, Inc.
, 114 B.R. 877, 883-86 (Bankr. S.D.N.Y. 1990).
 (In re Jacoby-Bender, Inc.)
note 23, 785 F.2d 840 (2nd
The Fourth Circuit, in In re NVR, Ltd.
note 36, 189 F.3d 442 (4th
Cir. 1999), cert. denied
528 U.S. 1117 (2000), criticized the lower courts, noting that they had reasoned that the property transfers occurring during the bankruptcy period were necessary for the debtor to reorganize and emerge from bankruptcy and were therefore “all in furtherance of, or in connection with the Plan,” and were “under a plan confirmed.” Id.
at 455. The Fourth Circuit stated that, “[t]his logic has enjoyed some acceptance by other courts, primarily by courts claiming to adhere to the Second Circuit’s decision in [Jacoby-Bender
According to the Fourth Circuit, lower courts have altered and extended the holding of Jacoby-Bender
note 22, “changing the test from ‘necessary to the consummation of a plan,’ to ‘necessary to the confirmation of a plan.’” Id.
The Fourth Circuit further stated, in dicta
, that the conclusion that every transfer “essential” to a plan’s confirmation is by definition “under a plan confirmed” is “fundamentally flawed” and without basis in § 1146(c). Id
. at 456. The Fourth Circuit sought to distinguish Jacoby-Bender
by stating that the earlier opinion did not deal with a pre-confirmation transfer, but with whether § 1146(c) applied to a transaction that was not mentioned in a confirmed plan. But see In re Linc Capital, Inc.
note 42, 280 B.R. at 647 (“However, the bankruptcy court opinion showed that the transfer in Jacoby-Bender
was a pre-confirmation transfer, though the court’s approval of the sale came after confirmation”).
 See supra
391 F.3d 1287 (11th
Florida is one of the relatively few states that taxes mortgage transactions.
note 2, 335 F.3d 243 (3d Cir. 2003).
189 F.3d 442 (4th
Cir. 1999), cert. denied
, 528 U.S. 1117 (2000).
 (In re Jacoby-Bender, Inc.)
note 23, 785 F.2d 840 (2nd
 In re T.H. Orlando, Ltd.
note 20, 391 F.3d
484 F.3d 1299 (11th
The court noted that this was a matter of first impression for the Eleventh Circuit.
 In re Piccadilly Cafeterias, Inc.
note 53, 484 F.3d at 1304.
785 F.2d 840 (2nd
note 20, 391 F.3d 1287 (11th
 In re Piccadilly Cafeterias, Inc.
note 53, 484 F.3d at 1304 (referring to In re N.V.R., Ltd., supra
note 36, and In re Hechinger Investment Co. of Delaware, Inc., supra
Karen Cordry, The Incredible Expanding
§ 1146(c), 21 abi j. 10, 48 (2003).
 See Id. See also supra
note 93 and accompanying text.
128 S.Ct. 741 (U.S. Dec 07, 2007).
note 35, 128 S.Ct. 2326 (2008). For a short commentary on this decision, see High Court: Stamp Tax Due For Transfers Made Before Plan Confirmed
, 5 No. 4 andrews bankr. litig. rep. 4 (2008). Interestingly, the Hechinger
note 2, was decided by then-Judge, now-U.S. Supreme Court Justice Alioto, who sided with the majority it the U.S. Supreme Court’s decision in Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc.
at 2333. The court acknowledged that “Chapter 11 expressly contemplates liquidations.” Id. at 2331, n.2. See also supra
note 4 and accompanying text.
Section 363(b)(1) provides for the trustee’s use, sale, or lease of the property other than in the ordinary course of business.
 Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., supra
note 35, 128 S.Ct. at 2335.
Section 365(d)(1) provides the trustee’s time period for the assumption or rejection of an executory contract or unexpired lease.
The U.S. Supreme Court was referring to the “substantive canon” relied on by the Third Circuit in In re Hechinger Inv. Co. of Del., Inc.
note 2, that courts should “proceed carefully when asked to recognize an exemption from state taxation that Congress has not clearly expressed.” In re Hechinger Inv. Co. of Del., Inc.,
335 F.3d at 254 (quoting California State Bd. Of Equalization v. Sierra Summit, Inc.
note 19, 490 U.S. at 851-52). The U.S. Supreme Court also noted, in Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc.
note 35, 128 S.Ct. at 2336-37, that changes were made to § 1146 as recently as the enactment of BAPCPA in 2005, and Congress is generally presumed to be aware of judicial interpretations of a statute and to adopt those interpretations when it reenacts a statute without change; the Supreme Court further noted that BAPCPA was enacted after decisions from the Third Circuit (In re Hechinger Investment Co. of Delaware, Inc., supra
note 2) and Fourth Circuit (In re NVR. Ltd.
note 36), respectively, refused to apply the § 1146 exemption to pre-confirmation transfers but before the 11th
Circuit’s ruling, in In re Piccadilly Cafeterias, Inc., supra
note 53, that pre-confirmation transfers were entitled to the § 1146 exemption.
 Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc.
note 35,128 S.Ct. at 2339.
According to Justice Breyer, “Judges are free to consider statutory language in light of a statute’s basic purpose.” Id.
 The Eleventh Amendment applies only to a “suit” against a state. There is no statutory definition of this term, and bankruptcy courts have struggled with this issue. According to one court, “[t]he only well-established rule is that an action by a private party against a state, which seeks entry of a monetary judgment against the state, is a suit for purposes of the Eleventh Amendment. The majority view in bankruptcy is that an adversary proceeding against a state is a suit under the Eleventh Amendment.” See In re Hechinger Inv. Co. of Del., Inc., supra note 2, 254 B.R. at 311 (internal citation omitted). State and local taxing authorities have argued -- mostly without success -- that the Eleventh Amendment to the U.S. Constitution prohibits a bankruptcy court from exercising jurisdiction to determine that property transfers are exempt from transfer and recording taxes under the § 1146(a) exemption. The Eleventh Amendment provides:
The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or subjects of any Foreign State.
For a thorough discussion of this issue, which is beyond the scope of this Article, see Murray, supra note 8, 38 real prop. prob. & tr. j. at 394-98.
However, the applicable taxing authorities may be unable or unwilling to acknowledge in advance, in writing, that the § 1146(a) exemption will apply to the transfer and that payment of the tax will not be required as a condition to recordation.
Chelsea Emery, U.S. Commercial Bankruptcies Rise to Record
, Reuters, June 2, 2008 (citing statistics provided by AACER, a database of U.S. bankruptcy statistics). Commercial bankruptcy cases include bankruptcy filings by companies, as well as individuals who claim they are operating a business.
 See Total Bankruptcy Filings Increase Nearly 27 Percent Over First Quarter 2007
american bankruptcy institute update, June 3, 2008, at p.1.
note 8, at 19.
Transfer and stamp taxes generally are in the range of one percent of the sale price (or value) of the property being transferred. However, the aggregate amount of city, county, and state transfer and stamp taxes imposed may be hundreds of thousands – and even millions – of dollars in connection with the conveyance of a unique commercial property in a major urban location (such as New York, Chicago or Los Angeles) or in connection with the transfer of several commercial properties by the debtor or trustee in accordance with (or in anticipation of) the confirmed Chapter 11 reorganization plan.
 The establishment of a “bright-line” test by the U.S. Supreme Court (i.e., that only post-confirmation transfers of a debtor’s assets will be eligible for the § 1146(a) exemption) , though perhaps not to the liking of most debtors and trustees in Chapter 11 cases, at least promotes certainty and stability in this area, much to the relief (and delight) of state and local taxing authorities (and title insurers, who have had to devise strategies, such as escrowing transfer taxes, in an attempt to insure title to real property conveyed pursuant to pre-confirmation transfers by the bankruptcy debtor or trustee). See Walter E. Little, Bankruptcy: In re Webster Classic Auctions: Is the Door Finally Open for a Practical Application of § 1146(c)? 79-dec fla. b. j. 28 (2005) (discussing the court’s holding in In re Webster Classic Auctions, Inc., 318 B.R. 216, supra note 42, which decision was issued before the enactment of BAPCPA and the issuance of the U.S. Supreme Court’s holding in Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., supra note 35):
How do you exempt a transaction that would occur before confirmation? One of the requirements of the court's holding is that the transaction must ultimately be approved by the bankruptcy court. If bankruptcy courts allow the exemption contemporaneously with a preconfirmation transaction, how are debtors and their counsel to address situations involving the transactions when the submitted plan is never confirmed? Does the debtor have the immediate obligation to pay the tax upon the failure of confirmation? Is the Department of Revenue compelled to initiate action as a prelude to payment? Even more puzzling: What if the debtor no longer has sufficient funds to pay the tax or has entered into a separate obligation to apply the funds saved by the tax for its benefit or to the benefit of its creditors? The answer may very well be the placement of the funds in controversy into escrow. To ensure proper application, the funds could either be placed with the court or with a third party escrow agent, such as a financial institution or a title insurance company. By placing the funds in escrow, both the debtor and the taxing authority can be assured that the funds will be available simply upon the confirmation or denial of confirmation of the reorganization plan (footnote omitted). Moreover, the use of escrows would bring structure to the process of determining entitlement and would promote judicial economy; a court's deliberation as to whether disbursement was warranted would be limited to establishing whether preordained conditions had been satisfied (footnote omitted). The use of escrows also ensures that the debtor will endeavor to work through the planning process in a reasonable and timely manner in order to collect the benefits of the exemption.
Id. at 31. Of course, now that the U.S. Supreme Court has ruled, in Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., supra note 35, that only post-confirmation transfers of assets are eligible for the §1146(a) exemption from transfer taxes, the escrow of taxes may no longer be necessary, except in those situations where the taxing authorities refuse to record the transfer documents for other reasons. See Murray, supra note 8, 38 real prop. prob. & tr. j. at 408-414.
 See supra note 5, and accompanying text. The reorganization plan should not be deemed a violation of § 1129(d) if the achievement of transfer-tax savings is a principal purpose of an otherwise valid plan, as opposed to the principal purpose. The reorganization plan, or the order confirming the sale of real property of the estate, should contain specific language similar to the following:
The principal purpose of the Plan is not the avoidance of taxes or the avoidance of the requirements of Section 5 of the Securities Act of 1933.
Robert Eisenbach, Supreme Court Decision Settles the Section 1146 Transfer Tax Exemption Issue
, in the (red) – The business bankruptcy blog (June 16, 2008), http://bankruptcy.cooley.com/
 See Id.; responses posted by Daniel J. Artz, June 18, 2008 (10:24 AM), and Karen Cordry, June 18, 2008 (11:37 AM). According to Ms. Cordry:
[W]ill 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 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.
See also Cordry, supra notes 63-64, and accompanying text.
 See Id., response posted by Daniel J. Artz, June 18, 2008 (12:42 PM):
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 transferring 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.
The § 363 sale guidelines adopted by the Bankruptcy Court for the Northern District of California contain the following provision that the Bankruptcy Court generally will not approve in a sale order:
Any provision that purports to exempt the transaction from transfer taxes under section 1146(c) [now 1146(a)].
By its own terms, that section applies only to a sale pursuant to a plan of reorganization, not a sale outside of a plan under § 363(b).
 Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc.
note 35, 128 S.Ct. at 2328.