Florida Dep't of Revenue v. Piccadilly Cafeterias

The State of Florida will press the case this Term that it and other states are entitled to tax the sale of bankrupt companies' property if the companies have not finalized their Chapter 11 reorganization plans.

At stake in the case, Florida v. Piccadilly Cafeterias, Inc., No. 07-312, is a $32,000 tax bill that Florida imposed against Piccadilly, one of the largest cafeteria chains in the country.

In late 2003, as Piccadilly's business was foundering, it concluded that it had to take radical steps. The company filed a Chapter 11 bankruptcy petition in October 2003, asking the bankruptcy court for permission to auction all of its assets in order to fund a reorganization. Piccadilly explained from the outset that it sought a tax exemption for the sale, under 11 U.S.C Sec. 1146(c). Florida immediately opposed the tax exemption.

The bankruptcy court gave the go-ahead for the auction, and Piccadilly fetched $80 million for its assets on the open market. It then reached a payment plan with all of its creditors. In February 2004, the bankruptcy court approved the sale to the high bidder, and the transaction closed on March 16, 2004. About a week later, Picadilly filed its initial chapter 11 reorganization plan, and seven months later the bankruptcy court confirmed the plan. Throughout the proceedings, Florida persisted in seeking its $32,000 tax on the asset sale.

Ultimately, Florida asked the bankruptcy court to resolve the issue. That court held that Piccadilly was exempt from taxes on its asset sale.

The Bankruptcy Code provides that certain asset transfers, "under a [confirmed Chapter 11 plan] may not be taxed under any law imposing a stamp tax or similar tax." 11 U.S.C. Sec. 1146(c). The bankruptcy court, district court and the Eleventh Circuit Court of Appeals all agreed that the provision allowed courts to exempt from taxes pre-confirmation asset sales that were essential to the completion of a reorganization plan.

In seeking Supreme Court review, Florida argued that both the Third and Fourth Circuits had concluded that pre-confirmation asset sales were subject to state taxation. Not only did the Eleventh Circuit decision create a split among the appellate courts, it was also wrong on the merits, Florida argued. The state maintained that the plain language of the statute permits tax exemptions only when reorganization plans have already been confirmed, and does not permit retroactive tax exemptions.

Piccadilly demurred. First, it explained that the circuit split was rather shallow, involving just three opinions, each relying on very different reasoning. Further appellate court consideration of the question could well resolve the question, it urged. Second, it argued that no matter how section 1146(c) was interpreted, Piccadilly was tax exempt under the longstanding concept that states cannot tax property in court custody. In short, when the bankruptcy court took jurisdiction over the case, the Piccadilly assets became tax exempt, it argued.

At least one state has already joined Florida in its cause, and others may do so as the case is in the briefing stage.Chapter 11, bankruptcy code, taxation, federalism, statutory interpretation

The State of Florida successfully pressed the case that it and other states are entitled to tax the sale of bankrupt companies' property if the companies have not finalized their Chapter 11 reorganization plans.

At stake in the case, Florida v. Piccadilly Cafeterias, Inc., No. 07-312, was a $32,000 tax bill that Florida imposed against Piccadilly, one of the largest cafeteria chains in the country.

In late 2003, as Piccadilly's business was foundering, it concluded that it had to take radical steps. The company filed a Chapter 11 bankruptcy petition in October 2003, asking the bankruptcy court for permission to auction all of its assets in order to fund a reorganization. Piccadilly explained from the outset that it sought a tax exemption for the sale, under 11 U.S.C Sec. 1146(c). Florida immediately opposed the tax exemption.

The bankruptcy court gave the go-ahead for the auction, and Piccadilly fetched $80 million for its assets on the open market. It then reached a payment plan with all of its creditors. In February 2004, the bankruptcy court approved the sale to the high bidder, and the transaction closed on March 16, 2004. About a week later, Picadilly filed its initial chapter 11 reorganization plan, and seven months later the bankruptcy court confirmed the plan. Throughout the proceedings, Florida persisted in seeking its $32,000 tax on the asset sale.

Ultimately, Florida asked the bankruptcy court to resolve the issue. That court held that Piccadilly was exempt from taxes on its asset sale.

The Bankruptcy Code provides that certain asset transfers, "under a [confirmed Chapter 11 plan] may not be taxed under any law imposing a stamp tax or similar tax." 11 U.S.C. Sec. 1146(c). The bankruptcy court, district court and the Eleventh Circuit Court of Appeals all agreed that the provision allowed courts to exempt from taxes pre-confirmation asset sales that were essential to the completion of a reorganization plan.

In seeking Supreme Court review, Florida argued that both the Third and Fourth Circuits had concluded that pre-confirmation asset sales were subject to state taxation. Not only did the Eleventh Circuit decision create a split among the appellate courts, it was also wrong on the merits, Florida argued. The state maintained that the plain language of the statute permits tax exemptions only when reorganization plans have already been confirmed, and does not permit retroactive tax exemptions.

Piccadilly demurred. First, it explained that the circuit split was rather shallow, involving just three opinions, each relying on very different reasoning. Further appellate court consideration of the question could well resolve the question, it urged. Second, it argued that no matter how section 1146(c) was interpreted, Piccadilly was tax exempt under the longstanding concept that states cannot tax property in court custody. In short, when the bankruptcy court took jurisdiction over the case, the Piccadilly assets became tax exempt, it argued.

On June 16, a 7-2 Supreme Court reversed the lower court decision, finding in favor of the state of Florida.

"We agree with Florida that the federalism canon...obliges us to construe §1146(a)’s exemption narrowly," Justice Clarence Thomas wrote for the majority. "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."

Writing for the dissent, Justice Stephen G. Breyer, joined by Justice John Paul Stevens, warned that creditors "could suffer far more serious harm" by restricting the tax exemption.