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

The 7th Circuit Court of Appeals recently rendered a decision which held that an accounting firm would not be held liable for giving an auditing opinion involving a purchaser company shortly before it acquired a dot.com-based business.

Before reviewing the decision itself it is quite interesting to read what the 7th Circuit stated about Trustee suits in general. First, the Court notes that unlike an ongoing business, a Trustee does not have to concern himself about “future relations with suppliers, customers, creditors, and other persons with whom the firm deals ... and by the cost of litigation. [W]hile the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims.” The Court of Appeals goes on to conclude that Bankruptcy Courts must be diligent to assure that Trustees do not bring frivolous claims and then reminds the Court of their power to sanction Plaintiff Trustees who bring frivolous suits!

The Court also noted that the damages claimed by the Trustee in his suit was greatly in excess of the amount owed the debtor’s creditors. Thus, the result of a successful suit would be to enrich the debtor’s stockholders. “US web cannot be at once the cause of the bankrutpcy and its principal beneficiary.”

As to the decision to find KPMG not liable for its auditing on the eve of the dot.com stock market debacle, the Court held that the cause of the decline in the value of stock (which was the basis for the damage claim) was market wide and had nothing to do with the audit. The Court also noted that it was not the duty of the auditor to advise on whether the company’s corporate acquisition was a good or bad risk (it turned out badly because of the stock market decline in 2000).

Here is a link to the case:
http://www.ca7.uscourts.gov/tmp/D40ND5S1.pdf

Michael