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On Dec. 7, 2007, the U.S. Supreme Court granted certiorari to review a recent decision of the 11th U.S. Circuit Court of Appeals in State of Florida Department of Revenue v. Piccadilly Cafeterias Inc. (In re Piccadilly Cafeterias Inc.), 484 F.3d 1299 (11th Cir. 2007), cert. granted, 128 S. Ct. 741 (2007). At issue in Piccadilly is whether the exemption from stamp and other transfer taxes of asset sales by a debtor “under a plan confirmed” in a Chapter 11 case, then codified at � 1146(c) of the Bankruptcy Code (now 11 U.S.C. 1146(a)), may apply to asset sales consummated by a debtor prior to confirmation of the debtor’s Chapter 11 plan. The 11th Circuit held that the � 1146(c) tax exemption may apply to preconfirmation 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 confirmed plan.” Id. at 1304. The 11th Circuit’s interpretation of the statutory phrase “under a plan confirmed” found in � 1146(c) of the Bankruptcy Code places its decision in Piccadilly at odds with prior rulings of the 3d and 4th circuits in Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Delaware Inc.), 335 F.3d 243 (3d Cir. 2003), and NVR Homes Inc. v. Clerks of Circuit Courts (In re NVR L.P.), 189 F.3d 442 (4th Cir. 1999). The Supreme Court now has an opportunity to resolve a split in the circuits on a matter of importance to Chapter 11 debtors and the states, alike. The Supreme Court’s task does not appear to be either straightforward or easy, as rather complex issues of statutory construction, bankruptcy policy and federalism may inform the Supreme Court’s analysis and resolution of the question presented in Piccadilly. In City of New York v. Jacoby-Bender Inc. (In re Jacoby-Bender Inc.), 758 F.2d 840, 841 (2d Cir. 1985), the 2d Circuit was called upon to determine whether a certain asset sale consummated by the debtor following confirmation of the debtor’s Chapter 11 plan qualified for the tax exemption under � 1146(c) of the Bankruptcy Code. In Jacoby-Bender, the city of New York objected to the debtor’s claimed exemption because the debtor’s post-confirmation asset transfer was not specifically set forth in the debtor’s Chapter 11 plan, prompting the city to argue that the transfer was not made under the confirmed plan. In rejecting the city’s arguments, the 2d Circuit reasoned that the post-confirmation transfer before the court was “necessary to the consummation of the plan” and, thus, entitled to the statutory exemption. Id. at 842. Fourteen years passed between the 2d Circuit’s decision in Jacoby-Bender and the 4th Circuit’s decision in In re NVR L.P. In those intervening 14 years, as the 4th Circuit noted, lower federal courts had transformed the 2d Circuit’s statement in Jacoby-Bender regarding transfers that are necessary to consummation of a Chapter 11 plan to include transfers that are necessary for confirmation of such plans. In re NVR, L.P., 189 F.3d at 456. The 4th Circuit would ultimately decline the invitation to extend the tax exemption under � 1146(c) of the Bankruptcy Code to include preconfirmation transfers. 4th Circuit took a narrow view At issue in NVR L.P. was whether a Chapter 11 debtor could initiate a contested matter under Federal Rule of Bankruptcy Procedure 9014 against various state and local governments to disgorge payments of stamp and other transfer taxes made by the debtor during the pendency of its Chapter 11 case and prior to confirmation of its Chapter 11 plan. The 4th Circuit held that the relief requested by the debtor was barred, as to the states, by the doctrine of sovereign immunity. With respect to the local governments � entities that have not been recognized to benefit from the doctrine of sovereign immunity � the 4th Circuit refused to read Jacoby-Bender and � 1146(c) expansively to include preconfirmation transfers. Id. at 455-458. Such an expansive construction, the 4th Circuit reasoned, would amount to allowing the terms of a Chapter 11 plan to control the reach of the statutory exemption, rather than allowing the statute to determine “the ultimate extent of its operation.” Id. at 456. The 4th Circuit further reasoned that the statutory phrase “under a plan confirmed” found in � 1146(c) required a confirmed Chapter 11 plan to already be in place in order for a given transfer to qualify for the exemption. Id. at 457. Central to the 4th Circuit’s analysis was the application of a limiting principle, animated by federalism concerns, “that tax exemptions should be construed narrowly in favor of the state.” Id. This limiting principle played a significant role in Judge J. Harvie Wilkinson III’s decision concurring in part and concurring in the judgment of the court. 3d Circuit ruled similarly Approximately four years after the 4th Circuit’s decision in NVR L.P., a divided panel of the 3d Circuit construed � 1146(c) of the Bankruptcy Code in similarly restrictive fashion. In In re Hechinger, 335 F.3d at 257, the 3d Circuit declined to decide a thorny sovereign immunity issue, choosing instead to rest its decision on statutory construction grounds. In addition to resorting to various methods to determine the plain meaning of � 1146(c) of the Bankruptcy Code, including dictionary definitions deemed persuasive by the panel majority, the 3d Circuit hedged its bets on its reading that the statute, by its terms, barred the claimed exemption by noting that even if � 1146(c) were deemed to be ambiguous, two canons of statutory interpretation required the result reached by the panel majority: the doctrine that tax exemptions are to be strictly construed and the limiting principle recognized in NVR L.P. The 3d Circuit ultimately held that the stamp-tax exemption of � 1146(c) of the Bankruptcy Code applies only to transfers made pursuant to a confirmed Chapter 11 plan, and not to preconfirmation transfers. Judge Richard L. Nygaard published a dissenting opinion, finding the provisions of � 1146(c) of the Bankruptcy Code ambiguous and reasoning that the structure and remedial purpose of the Bankruptcy Code made the � 1146(c) tax exemption applicable to the challenged preconfirmation transfers. 11th Circuit went the other way Continuing the four-year cycle of circuit court review of � 1146(c), the 11th Circuit recently declined to rule in line with the 3d and 4th circuit decisions discussed above. For its part, the 11th Circuit held that the statutory tax exemption applies to those preconfirmation transfers for which a nexus with a confirmed Chapter 11 plan exists. In re Piccadilly Cafeterias Inc., 484 F.3d at 1304. Prior to filing for bankruptcy, Piccadilly entered into an agreement to sell substantially all of its assets. On the first day of its Chapter 11 bankruptcy case, Piccadilly filed a motion seeking authorization to sell substantially all of its assets and a court order exempting the sale from any otherwise applicable stamp and other transfer taxes. The 11th Circuit rejected the prior decisions of the 3d and 4th circuits as relying on a “strict temporal construction of � 1146(c)” and stated that such a construction ignored the practical realities of Chapter 11 practice. Id. at 1304. The 11th Circuit looked instead to “the necessity of transfers to the consummation of a confirmed plan of reorganization.” Id. Thus, the tax exemption of � 1146(c) may apply to preconfirmation transfers. Potential Impact of ‘Katz’ If one were to lay the decisions of the 3d, 4th and 11th circuits down next to one another, one may notice that the first two opinions, NVR L.P. and Hechinger, rely, at least in part, on the limiting principle, while Piccadilly does not. For their part, the state of Florida and certain of its amici make much of the lack of any treatment, positive or negative, of the limiting principle in the 11th Circuit’s decision in Piccadilly. This raises the following questions: Did the limiting principle require the 11th Circuit to read � 1146(c) narrowly? If not, what changed between the time of the 3d Circuit’s decision in Hechinger and the 11th Circuit’s decision in Piccadilly that justified ignoring a canon of construction deemed important by the 3d and 4th circuits? One possible explanation may be found in the Supreme Court’s recent decision in Central Virginia Community College v. Katz, 546 U.S. 356 (2006). At issue in Katz was whether certain agencies of the state of Virginia could successfully raise the defense of sovereign immunity in an action initiated by a bankruptcy trustee to avoid and recover preferential transfers from those state agencies. The Supreme Court held that the doctrine of sovereign immunity posed no bar to the bankruptcy trustee’s suit, as the several states were determined to have ceded their sovereign immunity from such suits as part of “the plan of the Convention.” Id. at 379. The Supreme Court then stated, “Congress may, at its option, either treat States in the same way as other creditors insofar as concerns ‘Laws on the subject of Bankruptcies’ or exempt them from operation of such laws.” Id. Some may say that the statement quoted above is nothing more than dicta and irrelevant to Piccadilly. Perhaps. Perhaps not. Central to the operation of the doctrine of sovereign immunity is the protection of a state’s treasury. See Hess v. Port Authority Trans-Hudson Corp., 513 U.S. 30, 48-49 (1994). If Congress may, pursuant to its enumerated power in art. I, � 8, cl. 4 of the Constitution (the bankruptcy clause) authorize the depletion of a state’s treasury by avoidance and recovery of preferential transfers, by what rationale is Congress’ authority under the bankruptcy clause more circumscribed in limiting the extent to which transfers of property forming the res of the bankruptcy estate may be taxed by the states? If this type of “greater includes the lesser” reasoning holds, inclusion of � 1146 in the Bankruptcy Code’s waiver of sovereign immunity (11 U.S.C. 106) provides a sufficiently clear statement to place the states on notice of the effect(s) of � 1146(c), including those in Piccadilly. The 11th Circuit, therefore, may have had good reason not to address the limiting principle. Impact of no limiting principle If the Supreme Court refuses to recognize and/or adhere to the limiting principle, resolving the issue presented in Piccadilly may become a much more difficult endeavor � that is, if the opinions by the 3d, 4th and 11th circuits give any indication on how the issue in Piccadilly could be resolved solely on statutory grounds. Three three-judge panels have addressed the issue in Piccadilly. The three judges who decided the issue in the 11th Circuit and Nygaard of the 3d Circuit believe � 1146(c) may be read to include preconfirmation transfers. The panel majorities in both NVR L.P. and Hechinger believe the statutory tax exemption applies only to transfers following confirmation of a Chapter 11 plan. And Wilkinson, concurring in part and concurring in the judgment of the 4th Circuit, stated, “It is not plain to me that section 1146(c) contains a temporal element. It is also not clear that one must read the section to say anything about the relationship between plan confirmation and the timing of the transfer.” In re NVR L.P., 189 F.3d at 458. Wilkinson eventually agreed that the 4th Circuit majority’s reading of � 1146(c) in NVR L.P. was reasonable and supported by the limiting principle. The issue that is before the Supreme Court in Piccadilly, therefore, may be as clear as mud. John W. Mills III is a partner at Atlanta’s Kilpatrick Stockton, and Athanasios E. Agelakopoulos is an associate in the firm’s Charlotte, N.C., office. Both practice in the firm’s bankruptcy and financial restructuring team. They can be reached, respectively, at [email protected] and [email protected].

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