Delayed Closing Exempts Sale from Stamp Taxes pursuant to Section 1146(a)

By: Yana Knutson
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
The question of whether a debtor can obtain an exemption under 11 U.S.C. § 1146(a) from having to pay stamp or similar tax in a pre-confirmation asset transfer was decisively answered in the negative by the United States Supreme Court last year.[1] However, whether the exemption applies to a pre-confirmation sale that closed post-confirmation remains an issue with which courts must continue to struggle. 
 
Recently, in In re New 118th, Inc.,[2] the United States Bankruptcy Court for the Southern District of New York weighed in on this issue and held that a transfer of rental properties pursuant to a pre-petition sale, which closed post-confirmation, was exempt from stamp and similar taxes, where the sale was found necessary to the consummation of the plan. In the case, the debtors, New 118th LLC and its affiliates, owned a number of apartment buildings in Manhattan. Certain of its creditors filed involuntary chapter 11 petitions against New 118th LLC and its affiliates. The bankruptcy court ordered relief and approved the appointment of a trustee who contracted to sell the rental properties prior to the confirmation of the plan, subject to higher and better offers.[3] The trustee explained that he was unable to file a plan prior to the sale because of the urgency of disposing of the properties, in order to consummate a plan, and the difficulties in gathering information under the circumstances of this case.[4] The closing of the sale occurred post-confirmation. When New York City asserted that it was entitled to $1,633,502 in taxes from the sale of the properties, the trustee argued that the recording of the deed should be exempt from taxes pursuant to 11 U.S.C. § 1146(a), which states in relevant part that “the making or delivery of an instrument . . . under a plan confirmed . . . may not be taxed under any law imposing a stamp tax or similar tax.” [5] The City of New York objected to the proposed exemption arguing that under the Supreme Court’s recent decision in Florida Dep’t of Revenue v. Piccadilly Cafeterias, Inc. (“Piccadilly”),[6] section 1146(a) does not apply to a pre-confirmation sale, and, therefore, the trustee’s pre-petition sale of property was not exempt from being taxed.[7] Distinguishing the case from Piccadilly on the basis that it did not address the applicability of the exemption to a pre-confirmation sale that closed post-confirmation, the court rejected the City’s argument and directed the City to refund the amount paid by the trustee under an interim agreement entered into by the parties.[8]
 
Courts struggle with the meaning of the phrase “under a plan confirmed” in section 1146(a),[9] according to which an asset sale may only be exempt from stamp or similar taxes if the asset transfer occurs “under a plan confirmed.”[10] The Supreme Court’s decision in Piccadilly seemed to establish a bright-line rule that an asset transfer will only be deemed to be “under a plan confirmed” when it occurs after confirmation.[11]
 
The court in In re New 118th interpreted the opinion in Piccadilly as adopting the standard from NVR Homes, Inc. v. Clerks of the Circuit Courts (In re NVR, LP)[12] and the reasoning of City of New York v. Jacoby-Bender, Inc. (In re Jacoby-Bender, Inc.)[13] where the Fourth and the Second Circuits, respectively, focused on whether the transfer was necessary to the consummation of the plan in determining if the transfer occurred “under a plan confirmed” and, therefore, is exempt from taxes. Thus, the court in In re New 118th concluded that section 1146(a) applies to “a post-confirmation transfer that follows a pre-confirmation sale if the transfer facilitates the implementation of the plan.”[14] Moreover, the court noted that section 1146(a) addresses a “transfer,” not a “sale.”[15] Under New York law, the transfer of real estate occurs when the deed is delivered and accepted.[16] Therefore, at least in New York, if it is feasible for a debtor to wait until the plan is confirmed to deliver the deed and it can be shown that the transfer was necessary to the consummation of the plan, there is an opportunity for debtors to sell the assets without paying stamp or similar tax.
 
Notably, the court emphasized that without the sale proceeds the trustee could not have paid professional fees, expenses and administrative claims, which would preclude confirmation of the plan. Therefore, since the transfer of the properties was essential to the consummation of the plan, the transfers were made "under a plan confirmed" and were exempt from the payment of transfer taxes under section 1146(a).[17]


[1] See Florida Dep’t of Revenue v. Piccadilly Cafeterias, Inc., 128 S. Ct. 2326 (2008) (holding exemption under 11 U.S.C. § 1146(a) does not apply to transfers made before plan is confirmed under chapter 11).
[2]In re New 118th, Inc., 398 B.R. 791 (Bankr. S.D.N.Y. 2009).
[3] Id. at 792.
[4] Id.
[5] Id. at 793.
[6] 128 S. Ct. 2326 (2008).
[7] In re New 118th, Inc., 398 B.R. at 793–94.
[8] Id. at 795–99.
[9] See, e.g., Florida v. T.H. Orlando, Ltd. (In re T.H. Orlando, Ltd.), 391 F.3d 1287, 1295 (11th Cir. 2004) (concluding transfer is exempt from taxes when it is “necessary to the consummation of a chapter 11 plan); Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Delaware, Inc.), 335 F.3d 243, 252 (3d Cir. 2003) (holding transfer was not made “under a plan confirmed” because plan did not provide authority for transaction); NVR Homes, Inc. v. Clerks of the Circuit Courts (In re NVR, LP), 189 F.3d 442, 458 (4th Cir. 1999) (holding transfer may only be exempt from taxes when it occurs after confirmation of plan); City of New York v. Jacoby-Bender, Inc. (In re Jacoby-Bender, Inc.), 758 F.2d 840, 841 (2d Cir. 1985) (holding deed was transferred “under a plan confirmed” because “the plan’s consummation depended almost entirely upon the sale of the building,” the sale in turn depending upon the delivery of the deed” notwithstanding the fact that the plan “did not mention any instrument of transfer and did not give the debtor the authority to make the specific sale”).
[10] See 11 U.S.C. § 1146(a) (2006).
[11] Florida Dep’t of Revenue v. Piccadilly Cafeterias, Inc., 128 S. Ct. 2326 (2008).
[12] 189 F.3d 442 (4th Cir. 1999).
[13] 758 F.2d 840 (2d Cir. 1985).
[14] In re New 118th, Inc., 398 B.R. at 797.
[15] Id.at 799.
[16] Id. at 794.
[17] Id.at 798.