These two bond insurers have had a rough time and now are in the aftermath of being downgraded by the large credit agencies. Specifically, Moody's downgraded MBIA in mid June from AAA to A2. Other agencies had also taken similar action. However, what is interesting is that investors had already "voiced" their opinion by the time of the downgrade such that the company's share prices had fallen significantly prior to the downgrade. The company's stock has a 52 week high of $68.89 and it currently trades for $3.90!

The downgrade of these companies also causes a ripple effect on the debt insured by these companies. Certainly their failure would have an incalculable impact on the US company.

Michael

In the past, Bankruptcy courts have allowed real estate sales certain state stamp or transfer taxes exemptions even if the sale took place prior to confirmation of a reorganization plan. This is based on a broad interpretation of 11 U.S.C. §1146(a) of the Bankruptcy Code, and is usually done to expedite bankruptcy cases. This practice will no longer be acceptable due to a recent case.

On June 16, 2008, in Florida Department of Revenue v. Piccadilly Cafeterias Inc., the Supreme Court ruled that §1146(a) does not allow for real estate transactions that take place prior to confirmation of a reorganization plan to be exempt from state stamp taxes.

Justice Thomas wrote the opinion for the Court. He based his decision upon on two attributes of §1146(a), its ambiguous language, and the subchapter heading (“Postconfirmation Matters”) under which §1146(a) appears.

Justice Thomas noted that §1146(a) provides that the exemption applied to “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…”

Starting with the issue of ambiguity, both sides disagreed upon the meaning of the phrase “under a plan confirmed under”. The Court agreed, that “under a plan confirmed” should be read to mean “with the authorization of.” In following with this, the Court said that a transfer, which takes place before confirmation plan, cannot be said to have the “authority” of the plan.

Piccadilly had argued that the language actually meant “in accordance with.” But Justice Thomas added that “if the Court were to rule in favor of Piccadilly that it would result in an unfair burden on the states and courts because by obligating states to exempt such sales from taxation, the states and the courts would be saddled with the unnecessary burden of ensuring that a plan of reorganization is confirmed at some point.”

Florida also argued that the timing of the exemption was governed by the title of the subchapter “Postconfirmation Matters” under which §1146(a) appears.

Justice Thomas wrote that based on the placement of the statute within the Bankruptcy Code, “the most natural reading of §1146(a)’s text…affords a stamp-tax exemption only to a Chapter 11 plan that has been confirmed.” The Court concluded that because it is found under the subchapter “Postconfirmation Matters,” §1146(a) should be applicable after plan confirmation, and there should be no pre-confirmation exemption from tax.

Here is a link to the article:
http://www.abiworld.org/e-news/PiccadillyOpinions.pdf

Yameena