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Normally, this column focuses on recently decided cases and, in addition, does not generally report on cases that are inconsistent with 3rd U.S. Circuit Court of Appeals jurisprudence. However, when a case is the subject of a granted petition for certiorari, the issues raised are worth reviewing, especially if well-settled 3rd Circuit jurisprudence implicated. In 2003, the 3rd Circuit issued its opinion in In re Hechinger Investment Co. of Delaware. In that case, the court was asked to decide whether a transfer of real property is exempt from real estate transfer tax under Section 1146(c) of the Bankruptcy Code (now restyled as Section 1146(a)), when that transfer was not authorized “under a plan confirmed under section 1129,” but rather authorized pursuant to Section 363 of the code. Circuit Judge Samuel Alito, writing for the court, said, quite simply, no. The Hechinger court concluded that the most natural reading of the phrase “under a plan confirmed” means that the transfer is “authorized” by such a plan, and thus the Section 1146(c) exemption does not apply to pre-confirmation transfers of real property. The court’s “literal reading” holding was further grounded in two related interpretive canons � first, that tax exemptions are to be strictly construed; and second, that federal laws that interfere with a state’s taxation scheme must be narrowly construed in favor of the state. The 3rd Circuit was not the first circuit court of appeals to tackle this question. Several years earlier, in 1999, the 4th Circuit was faced with the same question, and reached the same conclusion as the 3rd Circuit. In In re NVR LP, the court held that the plain language of Section 1146 foreclosed application of a tax emption to pre-confirmation transfers. In reaching that conclusion, the court looked to standard dictionary definitions of “under” and concluded that under no definition could a pre-confirmation sale be a sale “under a plan confirmed.” The 4th Circuit, like the 3rd, relied on the interpretive canon that courts must narrowly construe exemptions from state taxation. The 2nd Circuit faced a similar, but not identical, issue in 1985. In In re Jacoby-Bender Inc., the question presented was whether the tax exemption of Section 1146 applied to a post-confirmation transfer of real property when the plan of reorganization did not expressly give the debtor the authority to make the transfer. The 2nd Circuit took a much more expansive view of Section 1146, stating that it was Congress’ “apparent purpose … to facilitate reorganizations through giving tax relief,” and holding that the section should apply in all cases “where the transfer is necessary to the consummation of a plan.” Fast-forward to 2007. In April, the 11th Circuit issued its decision in In re Picadilly Cafeterias Inc. This case presented its own unique set of facts. In October 2003, Picadilly entered into an asset purchase agreement under which a third party would acquire all of Picadilly’s assets, most of which was real property. The day after signing the agreement, Picadilly filed a Chapter 11 petition, together with a motion to sell substantially all of its assets outside the ordinary course of business pursuant to Section 363(b)(1) of the code. Included in the motion was a request that the court find the real estate transfer to be exempt from transfer tax pursuant to Section 1146. The Florida Department of Revenue objected to the request for application of Section 1146 to the sale. Before the time the bankruptcy court heard the 363 motion, Picadilly and almost all of its creditors entered into a global settlement, providing the roadmap for a confirmable plan. Thereafter, the court held an omnibus hearing at which it approved the 363 sale, approved the global settlement and held that the real estate transfers were not subject to real estate transfer tax, applying Section 1146 of the code. The department filed a motion to reconsider, which was denied. One month later Picadilly filed its Chapter 11 plan, which tracked the provisions of the global settlement. The Florida Department of Revenue objected to that provision of the plan that ratified the application of Section 1146 to the real estate transfers; it also filed an adversary proceeding, seeking a declaration that transfer taxes were due on the real estate transfers being made under the plan. Over the department’s objections, the plan was confirmed, and its adversary proceeding was dismissed. The Department of Revenue did not concede defeat and filed an amended complaint in the adversary proceeding. On cross motions for summary judgment, the bankruptcy court again sided with Picadilly, stating that the real estate transfers were transfers “under” a confirmed plan because the transfers were necessary to consummate the plan. The district court affirmed and in doing so, it expressly affirmed the bankruptcy court’s implicit conclusion that Section 1146 may apply even where a transfer is made pre-confirmation. The Department of Revenue appealed to the 11th Circuit. The 11th circuit acknowledged that both the 3rd and 4th Circuits had ruled on this issue. It also recognized that in an earlier case of its own, In re T.H. Orlando Ltd., it had addressed a “somewhat similar issue” but concluded it had never explicitly or implicitly approved of a conclusion that Section 1146 may not extend to pre-confirmation transfers. It thus launched into its own statutory analysis, review of the case law and consideration of the purpose of the section. Its conclusion was that the “better reading” of “under a plan confirmed” looks not to the timing of the transfer, but to the necessity of the transfer to the consummation of a confirmed plan of reorganization. Four reasons were advanced. First, the court viewed the section as ambiguous, as it could be read either to include transfers under a plan regardless of when the plan is confirmed, or to restrict application to only those transfers that occur after confirmation. Second, the court stated that when Congress intended to impose a temporal restriction in the code, it did so expressly (citing to a number of examples, e.g., 1104(a), 1105 and 1114(e)(2), among others). Section 1146 has no such restriction. Third, notwithstanding the canons of narrow construction applied by other courts, it is equally true that the Bankruptcy Code is a remedial statute and should be liberally construed. Finally, imposing a strict temporal construction as articulated by the 3rd and 4th circuits ignores the realities of the Chapter 11 process � “it is just as probable that a debtor may need to close a sale as a condition precedent to the parties’ willingness to proceed with confirmation of a plan as it is for the parties to agree on the terms of a plan, obtain confirmation, and then determine what the sale may bring.” Accordingly, the 11th Circuit declined to follow the “temporal restriction” reading of Section 1146, and instead ruled that the exemption may apply to pre-confirmation transfers that are necessary to the consummation of a confirmed plan, provided “that there be some nexus between the pre-confirmation transfer and the confirmed plan.” With that, a conflict in the circuits was created, and the Florida Department of Revenue filed a petition for a writ of certiorari. In addition to urging that the Supreme Court resolve this newly created conflict among the circuits, the department argued that the 11th Circuit’s decision contravened the plain language of Section 1146. It also argued that the 11th Circuit’s ruling has endorsed and will continue to be used to avoid taxes even in situations in which a Chapter 11 plan has not even been formulated, much less filed. And finally, the department stated that had Congress believed that the decisions of the 3rd and 4th circuits were incorrect, it could have righted the wrong in the 2005 amendments to the code, but did not do so. The petition was presented for consideration on Dec. 7. And it was, as noted above, granted. So what was thought for years, especially in the 3rd Circuit, to have been settled law will now be freshly reviewed. And what many thought was well settled law may not have been correct after all. Stay tuned. Myron A. Bloom is a shareholder with the firm of Hangley Aronchick Segal & Pudlin. His practice is concentrated in the areas of corporate organization, bankruptcy, commercial workouts and creditors’ rights.

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