In Re: Hechinger

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
7-18-2003
In Re: Hechinger
Precedential or Non-Precedential: Precedential
Docket No. 02-1917
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PRECEDENTIAL
Filed July 18, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 02-1917
IN RE: HECHINGER INVESTMENT
COMPANY OF DELAWARE, INC.,
Debtor
BALTIMORE COUNTY, MARYLAND;
MONTGOMERY COUNTY, MARYLAND;
PRINCE GEORGE’S COUNTY, MARYLAND;
STATE OF MARYLAND
v.
*HECHINGER LIQUIDATION TRUST
PATRICIA A. STAIANO,
Trustee
State of Maryland, Baltimore County, Maryland,
Montgomery County, Maryland, and
Prince George’s County, Maryland,
Appellants
*(Amended Pursuant to Clerk’s 6/10/02 Order)
ON APPEAL FROM THE UNITED STATES
DISTRICT COURT FOR THE
DISTRICT OF DELAWARE
(Dist. Court No. 01-cv-121)
District Court Judge: Gregory M. Sleet
2
Argued on December 16, 2002
Before: NYGAARD, ALITO, and McKEE, Circuit Judges.
(Opinion Filed: July 18, 2003)
EDWARD GILLISS
JOHN E. BEVERUNGEN
Courthouse, Second Floor
400 Washington Avenue
Towson, MD 21204
MARC HANSEN
CHARLES W. THOMPSON
JOANN ROBERTSON
County Office of Law
101 Monroe Street, 3rd Floor
Rockville, MD 20850
J. JOSEPH CURRAN, JR.
JULIA M. ANDREW (argued)
200 St. Paul Place
Baltimore, MD 21202
LEONARD L. LUCCHI
J. MICHAEL DOUGHERTY
County Administration Bldg.,
Rm. 5121
14741 Governor Oden Bowie Dr.
Upper Marlboro, MD 20772
Counsel for Appellants
PHILIP J. KATAUSKAS (argued)
DAVID B. STRATTON
ANNE MARIE SCHWAB
Pepper Hamilton LLP
3000 Two Logan Square
18th & Arch Streets
Philadelphia, PA 19103-2799
Counsel for Appellees
3
JAMES E. RYAN
JOEL D. BERTOCCHI
JAMES D. NEWBOLD
Office of the Attorney General
100 West Randolph St., 13th Fl.
Chicago, IL 60601
Attorneys for Amicus Curiae
State of Illinois
D. MICHAEL FISHER
CALVIN R. KOONS
JOHN G. KNORR, III
Office of the Attorney General
Appellate Litigation Section
15th Floor, Strawberry Square
Harrisburg, PA 17120
Attorneys for Amicus Curiae
Commonwealth of Pennsylvania
CHRISTINE GREGOIRE
ZACHARY MOSNER
Office of the Attorney General
900 Fourth Street, Suite 2000
Seattle, WA 98164
Attorneys for Amicus Curiae
State of Washington
OPINION OF THE COURT
ALITO, Circuit Judge:
The State of Maryland and three Maryland counties
(Baltimore, Montgomery, and Prince George’s) (collectively
the “Taxing Authorities”) appeal from an order of the United
States District Court for the District of Delaware affirming
two orders of the United States Bankruptcy Court for the
District of Delaware. The first of these Bankruptcy Court
orders declared that certain sales of real estate interests
proposed by Hechinger Investment Company of Delaware,
Inc. (“Hechinger”) would be exempt under 11 U.S.C.
§ 1146(c) from transfer and recording taxes imposed by the
4
Taxing Authorities. The second order directed the Taxing
Authorities to refund any transfer and recording taxes
previously paid by purchasers of the real estate interests
once the Bankruptcy Court confirmed Hechinger’s
reorganization plan.
Agreeing with the only other court of appeals that has
decided the issue, NVR Homes, Inc. v. Clerks of the Circuit
Courts, 189 F.3d 442 (4th Cir. 1999), we hold that 11
U.S.C. § 1146(c) does not apply to real estate transactions
that occur prior to the confirmation of a plan under
Chapter 11 of the Bankruptcy Code. We therefore reverse
the order of the District Court and remand for further
proceedings consistent with this opinion.
I.
A.
The relevant facts are undisputed. Prior to its bankruptcy
and cessation of operations, Hechinger was a “retailer[ ] of
home and garden care products and services.” App. at 17.
In June 1999, Hechinger filed a voluntary petition for relief
pursuant to Chapter 11 of the Bankruptcy Code, and in
September of the same year, Hechinger announced its plan
to liquidate its assets and cease operations.
In October 1999, Hechinger filed a motion in the
Bankruptcy Court requesting permission to sell its interests
in certain real estate pursuant to 11 U.S.C. §§ 363 and
365. Hechinger proposed to make these sales prior to the
confirmation of a plan of reorganization by the Bankruptcy
Court under 11 U.S.C. § 1129. The real estate interests at
issue were all located within the Taxing Authorities’
borders. Consequently, the Taxing Authorities — under
normal circumstances — would have been able to collect
transfer and recording taxes from the purchasers of those
interests. Hechinger’s motion sought a declaration by the
Bankruptcy Court that the proposed sales would be exempt
from these taxes on the ground that the sales constituted
“the making or delivery of . . . instrument[s] of transfer
under a plan confirmed under section 1129” of the
Bankruptcy Code and thus could “not be taxed under any
5
law imposing a stamp tax or similar tax.” 11 U.S.C.
§ 1146(c).
In November 1999, Hechinger filed another motion
seeking the authority to sell its leasehold interest in real
estate located in Montgomery County, Maryland. As in its
October motion, Hechinger proposed to make this sale prior
to the confirmation of a reorganization plan, and Hechinger
again sought a declaration by the Bankruptcy Court that
the sale would not be subject to state and county transfer
and recording taxes. Both the October and November
motions were filed pursuant to Federal Rule of Bankruptcy
Procedure 9014. As required by Rule 9014, the Taxing
Authorities were served with the motions and informed of
their opportunity to enter objections in the Bankruptcy
Court. See Fed. R. Bankr. P. 9014(a)-(b).
The Taxing Authorities subsequently filed such
objections. First, the Taxing Authorities claimed that the
Bankruptcy Court proceedings concerning the declarations
sought by Hechinger constituted a suit against the State of
Maryland under the Eleventh Amendment and were
therefore barred. Second, the Taxing Authorities maintained
that the proposed declarations would effectively enjoin the
collection of a tax imposed by state law in violation of the
Tax Injunction Act, 28 U.S.C. § 1341.1 Finally, the Taxing
1. The Taxing Authorities do not continue their argument concerning the
Tax Injunction Act on appeal. We are nonetheless required to raise the
issue on our own motion, as a determination that the Tax Injunction Act
precludes a suit deprives the federal courts of subject matter jurisdiction
over that action, and a state cannot waive the Tax Injunction Act’s
protection. See Behe v. Chester Cty. Bd. of Assessment Appeals, 952
F.2d 66, 68 (3d Cir. 1995); Hardwick v. Cuomo, 891 F.2d 1097, 1103-04
(3d Cir. 1989). It is well established, however, that the Tax Injunction
Act does not prevent a Bankruptcy Court from enforcing the provisions
of the Bankruptcy Code that affect the collection of state taxes. See, e.g.,
Adams v. Indiana, 795 F.2d 27, 29 (7th Cir. 1986) (stating that 11
U.S.C. § 362(a)(6)’s statement that a petition in bankruptcy operates as
a stay of “any act to collect, assess, or recover a claim against the debtor
that arose before the commencement of the case” bars a “state claiming
that a bankrupt owes pre-filing taxes . . . from [engaging in] efforts to
collect” during the pendency of the bankruptcy proceeding); Cal. State
Bd. of Equalization v. Goggin, 191 F.2d 726, 728 (9th Cir. 1951) (stating
6
Authorities argued that the proposed sales did not
constitute “deliver[ies] . . . of . . . instrument[s] of transfer
under a plan confirmed under section 1129” of the
Bankruptcy Code, as required by 11 U.S.C. § 1146(c), and
that the proposed sales were thus ineligible for the tax
exemption created by Section 1146(c). The Taxing
Authorities contended that a property interest that is sold
prior to the confirmation of a reorganization plan is not
transferred “under a plan confirmed under section 1129”
within the meaning of Section 1146(c) because a Chapter
11 plan must be confirmed before a property interest may
be said to be sold “under” such a plan.
The Bankruptcy Court rejected the Taxing Authorities’
contentions and issued the requested declarations. Two
aspects of the Bankruptcy Court’s opinion are pertinent to
this appeal. First, the Bankruptcy Court held that
Hechinger’s motions seeking the declarations were not
“suits” within the meaning of the Eleventh Amendment.
Because the motions did not request “the turnover of
property already in possession of a state,” the Court
reasoned, “adjudication of the motions [did] not require the
Court to exercise jurisdiction over Maryland.” App. at 27,
47. Second, the Bankruptcy Court held that Hechinger’s
proposed sales were “under a plan confirmed under section
1129” within the meaning of 11 U.S.C. § 1146(c), since “a
transfer . . . that is essential to or an important component
of the plan process, even if it occurs prior to plan
confirmation, is ‘under a plan’ within the meaning of
§ 1146(c).” Id. at 47. Hence, the Bankruptcy Court
concluded, the proposed sales were exempt from the Taxing
Authorities’ transfer and recording taxes.
The Bankruptcy Court’s order made the operation of the
tax exemption in Section 1146(c) conditional upon that
that the Tax Injunction Act “did not abridge the power specifically
granted to the bankruptcy court[s] to make such judgments as may be
necessary for the enforcement of the provisions of the Bankruptcy Act”).
Accordingly, the Tax Injunction Act did not bar the Bankruptcy Court
from declaring the real estate transactions at issue here to be exempt
from state transfer and recording taxes and requiring refunds of such
taxes where appropriate.
7
court’s eventual confirmation of a Chapter 11 plan. The
Bankruptcy Court accordingly ordered Hechinger to escrow
proceeds from the sales sufficient to pay the transfer and
recording taxes that the purchasers would have been
required to pay absent the Section 1146(c) exemption.
Hechinger subsequently sold an unknown number of real
estate interests pursuant to the authorization granted by
the Bankruptcy Court, and the purchasers of those
interests paid transfer and recording taxes to the Taxing
Authorities. In October 2000, Hechinger filed a motion
requesting that the Bankruptcy Court clarify its prior order.
Hechinger asked the Bankruptcy Court to instruct the
Taxing Authorities to refund the taxes paid by the
purchasers as soon as the Bankruptcy Court confirmed
Hechinger’s proposed plan. The Bankruptcy Court granted
Hechinger’s motion in January 2001, and directed the
Taxing Authorities to refund any transfer and recording
taxes paid by the purchasers once the Bankruptcy Court
confirmed Hechinger’s reorganization plan. The Taxing
Authorities took an appeal to the District Court. While the
Taxing Authorities’ appeal to the District Court was still
pending, the Bankruptcy Court confirmed a plan of
reorganization. In pertinent part, the plan required
Hechinger to transfer all of its assets to the Hechinger
Liquidation Trust (the “Trust”).
B.
In March 2002, the District Court affirmed the
Bankruptcy Court’s orders for the reasons stated by the
Bankruptcy Court. On the issue of the Taxing Authorities’
sovereign immunity, the District Court held that the
Eleventh Amendment did not preclude the issuance of the
declarations because they did not mandate a “direct
recovery from [a] state’s treasury” and thus did not require
the Bankruptcy Court to “exercise jurisdiction over the
State” of Maryland. Id. at 10. On the question whether 11
U.S.C. § 1146(c) applied to the real estate sales at issue, the
District Court held that “it is the fact of plan confirmation,
rather than its timing, that is critical” to a determination of
whether a sale is “under a plan confirmed under section
1129” of the Bankruptcy Code. Id. at 13. So long as a plan
8
authorizing a sale is eventually confirmed, the District
Court reasoned, the proceeds of the sale are not subject to
transfer and recording taxes. Thus, the District Court held,
it was proper for the Bankruptcy Court to order Hechinger
to escrow the sale proceeds until such time as the
Bankruptcy Court made a final decision concerning
Hechinger’s proposed plan. The Taxing Authorities appealed
the District Court’s decision to this court. In June 2002, we
granted Hechinger’s motion to substitute the Trust for
Hechinger as the appellee in this appeal.
C.
On appeal, the Taxing Authorities make two contentions.
First, they claim that the Rule 9014 proceedings concerning
the propriety of the declarations violated the Eleventh
Amendment. Second, they maintain that Section 1146(c)
does not exempt sales of real estate interests from state
transfer and recording taxes where those sales are made
prior to the confirmation of a plan.
As we detail further below, we believe that the
Bankruptcy Court and the District Court erred in holding
that 11 U.S.C. § 1146(c) exempts the real estate sales at
issue here from the Taxing Authorities’ transfer and
recording taxes. In view of this holding, we find it
unnecessary to reach the question whether the Bankruptcy
Court’s orders declaring the transactions to be tax-exempt
violated the Eleventh Amendment. We will first explain why
we are not required to reach the Eleventh Amendment
question, and we will then show why Section 1146(c) does
not exempt Hechinger’s proposed transactions from the
taxes at issue.
II.
As noted above, the Taxing Authorities claim that the
Trust’s motions seeking the declarations issued by the
Bankruptcy Court were “suits . . . commenced or
prosecuted against one of the United States” within the
meaning of the Eleventh Amendment. The Supreme Court
has stated that where a defendant successfully
demonstrates that the Eleventh Amendment precludes a
9
suit, the court in which the plaintiff filed the action lacks
subject matter jurisdiction over that action. See Seminole
Tribe v. Florida, 517 U.S. 44, 64 (1996) (stating that the
Eleventh Amendment stands “for the constitutional
principle that state sovereign immunity limit[s] the federal
courts’ jurisdiction under Article III”); Blake v. Kline, 612
F.2d 718, 721 (3d Cir. 1979) (“The eleventh amendment
has been interpreted to bar jurisdictionally the federal
courts from entertaining suits for damages when a state is
the real party in interest.”). When subject matter
jurisdiction is at issue, a federal court is generally required
to reach the jurisdictional question before turning to the
merits. See Steel Co. v. Citizens for a Better Env’t., 523 U.S.
83, 93-95 (1998) (rejecting the position previously taken by
several courts of appeals that found it “proper to proceed
immediately to the merits question” in a case “despite
jurisdictional objections”); Larsen v. Senate of the Commw.,
152 F.3d 240, 245 (3d Cir. 1998) (“A court that is without
proper jurisdiction cannot proceed at all, and must merely
note the jurisdictional defect and dismiss the suit.”).
Eleventh Amendment immunity, however, has features
that are atypical of doctrines that divest federal courts of
subject matter jurisdiction. While “no action of the parties
can confer subject-matter jurisdiction upon a federal
court,” Insurance Corp. of Ireland, Ltd. v. Compagnie des
Bauxites de Guinee, 456 U.S. 694, 702 (1982), a state may
waive its Eleventh Amendment immunity. See Atascadero
State Hosp. v. Scanlon, 473 U.S. 234, 238 (1985) (“[I]f a
State waives its immunity and consents to suit in federal
court, the Eleventh Amendment does not bar the action.”).
Similarly, while a federal court is obligated to consider
whether it possesses subject-matter jurisdiction even if the
issue is not raised by the parties, see Insurance Corp., 456
U.S. at 702, a federal court need not address the issue of
sovereign immunity if neither party brings it to the
attention of the court. See Wisconsin Dep’t. of Corrections v.
Schacht, 524 U.S. 381, 389 (1998) (“[T]he Eleventh
Amendment grants the State a legal power to assert a
sovereign immunity defense should it choose to do so. The
state can waive the defense. Nor need a court raise the
defect on its own. Unless the State raises the matter, a
court can ignore it.”) (internal citations omitted).
10
These distinctions between Eleventh Amendment
immunity and other doctrines that divest federal courts of
subject matter jurisdiction have led at least two other
courts of appeals to conclude that where a defendant
argues that an action is barred by sovereign immunity, a
federal court is not required to resolve that issue before
adjudicating the merits of the action. See United States v.
SC Bus. & Tech. Inst., Inc., 173 F.3d 890, 891 (D.C. Cir.
1999); Parella v. Ret. Bd. of the R.I. Employees’ Ret. Sys.,
173 F.3d 46, 53-57 (1st Cir. 1999). In addition, two other
courts of appeals have bypassed Eleventh Amendment
questions and decided appeals on other grounds pursuant
to the doctrine that courts should avoid deciding
constitutional questions whenever possible. See Tyler v.
Douglas, 280 F.3d 116, 121 (2d Cir. 2001); Floyd v.
Thompson, 227 F.3d 1029, 1034-35 (7th Cir. 2000). Other
courts of appeals, however, have held that questions of
sovereign immunity must be decided before reaching the
merits of an appeal. See United States v. Texas Tech Univ.,
171 F.3d 279, 287 (5th Cir. 1999); Seaborn v. Dept. of
Corrections, 143 F.3d 1405, 1407 (11th Cir. 1998).
Although there are reasonable arguments on both sides
of the issue, we agree with the decisions of the District of
Columbia and First Circuits noted above, and we therefore
hold, for two reasons, that we are not required in this case
to address the Eleventh Amendment issue before
proceeding to the merits.
First, the premise of the holding in Steel Co. — that a
federal court has no power to entertain an action if Article
III jurisdiction is lacking — simply does not apply when the
jurisdictional defect is the bar erected by the Eleventh
Amendment. As noted, a federal court is not necessarily
devoid of jurisdiction to entertain a claim to which the
Eleventh Amendment applies. See Schact, 524 U.S. at 389.
“Rather, the Eleventh Amendment grants [the] State a legal
power to assert a sovereign immunity defense should it
choose to do so.” Id. Since a federal court possesses the
power to entertain such a claim if the state opts to waive or
merely neglects to assert its Eleventh Amendment defense,
it does not follow from the reasoning of Steel Co. that a
federal court must address an asserted Eleventh
11
Amendment defense before considering the merits of a case.
See SC Bus. & Tech., 173 F.3d at 893 (“Steel Co.’s rule is
premised on a court’s lack of power to reach the merits
without establishing its jurisdiction. In the Eleventh
Amendment context, where a court lacks power only if a
state claims that it does, it is arguable that we have no
obligation to decide the Eleventh Amendment issue first if
the state does not demand that we do so.”); Spicer v. Hilton,
618 F.2d 232, 241 n.7 (3d Cir. 1980) (noting the paradox
inherent in the fact that “it is clearly established that the
state’s [sovereign] immunity can be waived by the state,
despite the principle that a waiver cannot confer
jurisdiction on a court which lacks subject matter
jurisdiction”).
Second, we believe that the Supreme Court’s reasoning in
Calderon v. Ashmus, 523 U.S. 740 (1998), supports the
position we take here. The plaintiff in Ashmus filed a class
action challenging the application of certain time limits on
the filing of habeas corpus petitions in capital cases. The
District Court granted declaratory and injunctive relief, the
court of appeals affirmed, and the Supreme Court granted
certiorari on the issues of whether the suit was barred by
the Eleventh Amendment and whether the injunction
issued by the District Court violated the First Amendment.
After granting review, the Supreme Court on its own
motion raised the question whether the named plaintiff had
standing under Article III to request a declaratory
judgment, and the Court stated that it was required to
decide this standing question before reaching the Eleventh
Amendment and First Amendment issues. See Ashmus, 523
U.S. at 745 (“We granted certiorari on both the Eleventh
Amendment and First Amendment issues, . . . but in
keeping with our precedents, have decided that we must
first address whether this action for a declaratory judgment
is the sort of ‘Article III’ ‘case or controversy’ to which
federal courts are limited.”) (citing FW/PBS, Inc. v. Dallas,
493 U.S. 215, 230-31 (1990)).
The Supreme Court’s treatment of the Article III standing
issue in Ashmus is important for present purposes because
in Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574 (1999),
the Court held that federal courts are not generally
12
obligated to address “jurisdictional issues” in any particular
order. See Ruhrgas, 526 U.S. at 584 (“While Steel Co.
reasoned that subject-matter jurisdiction necessarily
precedes a ruling on the merits, the same principle does
not dictate a sequencing of jurisdictional issues.”). The
language of the Court in Ruhrgas makes it clear that, by
“jurisdictional issues,” the Court meant those issues that a
federal court must address before it possesses the power to
reach the merits of an action. See id. at 583 (observing that
“Steel Co. reasoned that subject-matter jurisdiction
necessarily precedes a ruling on the merits”). If the
Eleventh Amendment issue in Ashmus had been one of the
“jurisdictional issues” that must be decided before moving
on to the merits, the Ashmus Court would not have been
obligated to reach the Article III standing question before
turning to the Eleventh Amendment question. The Ashmus
Court’s statement that it was required to reach the
standing issue first, however, suggests that Steel Co. does
not require a federal court to consider an asserted Eleventh
Amendment defense before reaching the merits.
This conclusion does not obscure the distinction between
a defense based on sovereign immunity and a defense
relating to the merits of an action. A sovereign immunity
defense differs from a defense on the merits in the key
respect that a defendant may raise the defense of sovereign
immunity at any time in the absence of an explicit waiver.
See Edelman v. Jordan, 415 U.S. 651, 678 (1974) (stating
that the “Eleventh Amendment defense sufficiently partakes
of the nature of a jurisdictional bar so that it need not be
raised in the trial court”); Ford Motor Co. v. Dept. of
Treasury, 323 U.S. 459, 467 (1945) (“The Eleventh
Amendment declares a policy and sets forth an explicit
limitation on federal judicial power of such compelling force
that this Court will consider the issue arising under this
Amendment in this case even though urged for the first
time in this Court.”). Hence, the notion that the doctrine of
sovereign immunity is in some sense a “jurisdictional bar”
retains significance.
For these reasons, we hold that we are not required to
determine whether the Eleventh Amendment bars the
Trust’s action against the Taxing Authorities prior to
13
reaching the question whether the real estate sales at issue
here are protected by the 11 U.S.C. § 1146(c) tax
exemption. We therefore turn to the primary issue in this
appeal, the proper interpretation of Section 1146(c).
III.
A.
Title 11 United States Code, § 1146(c), provides as
follows:
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 of this
title, may not be taxed under any law imposing a
stamp tax or similar tax.
11 U.S.C. § 1146(c). There is no dispute that the property
sales at issue here involved “the making or delivery of . . .
instrument[s] of transfer” or that the Taxing Authorities’
transfer and recording taxes are “stamp” taxes or “similar”
taxes. Nor is there any dispute that approval of the sales
was sought under the authority of 11 U.S.C. §§ 363 and
365, not 11 U.S.C. § 1129, and that the Bankruptcy Court
had not confirmed a “plan” under Section 1129 at the time
of the sales, although it later did so. The disputed question
is whether the sales were carried out “under” the eventually
confirmed plan.
The Trust argues that the sales in question here occurred
“under” the plan even though the plan had not been
confirmed at the time of the sales. According to the Trust,
a transfer occurs “under a plan confirmed” if two criteria
are met. First, the transfer must be “necessary to effect the
confirmation of a plan.” Brief for Appellee at 18.2 Second,
2. The Trust does not provide an explicit definition of the phrase
“necessary to effect the confirmation of a plan,” but the Trust’s citations
to the Bankruptcy Court’s opinion suggest that a “transfer that is
necessary to effect the confirmation of a plan” is a transfer without
which it would be impossible or at least difficult to pay a debtor’s
creditors and thus difficult to gain the creditors’ approval of a proposed
14
the Bankruptcy Court must eventually confirm a Chapter
11 plan that retroactively authorizes the transfer at issue.
See Brief for Appellee at 19. Thus, under the Trust’s
reading of Section 1146(c), a debtor who sells real estate
interests before the confirmation of a plan may still benefit
from the Section 1146(c) tax exemption so long as the
Bankruptcy Court eventually confirms a plan that covers
the sale of those interests.
B.
In interpreting Section 1146(c), we look first to the
language of the provision. See Health Maintenance Org. v.
Whitman, 72 F.3d 1123, 1128 (3d Cir. 1995); In re Segal,
57 F.3d 342, 345 (3d Cir. 1995). As noted above, Section
1146(c) speaks of the making or delivery of an instrument
of transfer “under a plan confirmed under [11 U.S.C.
§ 1129].” The preposition “under” is of course very common,
and it can have many different meanings in different
contexts. See Webster’s Third New International Dictionary
of the English Language, Unabridged 2487 (1993) (listing 13
different definitions); Random House Dictionary of the
English Language 1543 (unabridged ed. 1967) (listing 27
definitions). After considering all of these definitions, we
believe that the most natural reading of the phrase “under
a plan confirmed” in 11 U.S.C. § 1146(c) is “authorized” by
such a plan. See Random House Dictionary at 1543. When
an action is said to be taken “under” a provision of law or
a document having legal effect, what is generally meant is
that the action is “authorized” by the provision of law or
legal document. Thus, if a claim is asserted “under” 42
U.S.C. § 1983, Section 1983 provides the authority for the
claim. If a motion is made “under” Fed. R. Civ. P. 12(b)(6),
that rule provides the authority for the motion. If benefits
are paid “under” a pension or welfare plan, the payments
are authorized by the plan.
plan. See id. at 27 (stating that the real estate transfers as to which the
Trust claimed a Section 1146(c) tax exemption were “necessary to reduce
[Hechinger’s] indebtedness, improve liquidity, and to facilitate the
formulation and ultimate confirmation of a chapter 11 plan”) (quoting
App. at 18).
15
On this reading, if an instrument of transfer is made or
delivered “under” a plan, the plan must provide the
authority for the transaction. But the transfers at issue in
this case were not made under the authority of the plan
that was eventually confirmed. Rather, they were made
under the authority of 11 U.S.C. §§ 363 and 365. Since the
plan had not been confirmed at the time of the transfers,
the plan could not provide the legal authority for the
transfers, and the legality of those transfers was not
dependent upon eventual confirmation.
Although we believe that “authorized by” is the most
natural reading of the term “under” in the phrase “under a
plan confirmed,” we do not go so far as to say that this is
the only plausible interpretation of that term. For example,
an accepted definition of the preposition “under” is “in
accordance with,” and “accordance” may mean “agreement.”
Random House Dictionary at 9, 1543. Thus, we cannot say
that the language of Section 1146(c) rules out the
possibility that “under a plan confirmed” means “in
agreement with a plan confirmed.” On this reading, a sale
of real estate could be said to be “in accordance” with a
plan if the sale, although actually carried out under the
authority of some other provision of law (such as 11 U.S.C.
§§ 363 or 365), is later listed as part of a plan that is
confirmed. Nevertheless, we find at least two other reasons
for interpreting the phrase “under a plan confirmed” to
mean “authorized by” such a plan.3
3. The dissent points to provisions of the Bankruptcy Code in which the
term “authorized” is used and argues that if Congress had meant “under
a plan” to mean “authorized by a plan,” it would have used the latter
phrase. Dissent at 25. We reject this argument. There can be no doubt
that “under” may mean “authorized by.” In some contexts, the mere word
“under” may be sufficient to convey this meaning, whereas in others an
explicit reference to the concept of legal authority may be necessary.
Recasting 11 U.S.C. § 1146(c) to refer specifically to the concept of legal
authority results in cumbersome phraseology:
The issuance, transfer, or exchange of a security, or the making or
delivery of an instrument of transfer under the authority of a plan
confirmed under the authority of section 1129 of this title, may not
be taxed under the authority of any law imposing a stamp tax or
similar tax.
16
First, that reading fits best with the remaining language
of Section 1146(c). It is a “normal rule of statutory
construction that ‘identical words used in different parts of
the same act are intended to have the same meaning.’ ”
Sorenson v. Sec. of the Treasury, 475 U.S. 851, 860 (1986)
(quoting Helvering v. Stockholms Enskilda Bank, 293 U.S.
84, 87 (1934)). This canon logically has added force where
identical words appear more than once in the same
provision. Section 1146(c) uses the word “under” three
times in the same sentence. As noted above, Section 1146(c)
provides that “the making or delivery of an instrument of
transfer under a plan confirmed under section 1129 of this
title, may not be taxed under any law imposing a stamp tax
or similar tax.” 11 U.S.C. § 1146(c) (emphasis added). It is
apparent that the term “under” in “confirmed under section
1129” means “confirmed pursuant to the authority granted
by Section 1129.” It is similarly clear that the term “under”
in “may not be taxed under any law . . .” means “may not
be taxed pursuant to the authority of ” any such law.
Consequently, reading the first “under” in this sentence —
in “under a plan confirmed” — to mean “pursuant to the
authority conferred by such a plan” gives the term “under”
a single, consistent meaning throughout Section 1146(c).4
By contrast, if the term “authorized” were omitted from some of the
provisions to which the dissent points, the statutory language would
make no sense. For example, the dissent relies on 11 U.S.C. § 101(1),
which defines the term “accountant” to mean an “accountant authorized
under applicable law to practice public accounting.” In this context, it
would have been awkward, to say the least, if an “accountant” were
defined as an “accountant . . . under applicable law to practice public
accounting.”
4. The dissent argues that the term “under” in 11 U.S.C. § 1146(c) may
be consistently read to mean “in agreement with,” but not “pursuant to
the authority of.” Dissent at 26. We cannot agree. For example, on the
dissent’s reading, the reference to transfers that are “taxed under any
law imposing a stamp tax or similar tax” would mean that the law in
question would not actually provide the legal authority for the tax but
that the tax would be “in agreement” with the law. That reading would
make no sense and is clearly incorrect. “[T]axed under [a] law” plainly
means taxed pursuant to the authority of that law.
17
Second, this interpretation gives the phrase “under a
plan confirmed” the same meaning as an identical phrase
in another provision of the Bankruptcy Code, 11 U.S.C.
§ 365(g). This provision speaks of the assumption of an
executory contract or unexpired lease “under a plan
confirmed under chapter 9, 11, 12, or 13 of this title.” 11
U.S.C. § 365(g). It seems clear that this language means a
plan that is confirmed pursuant to the authority conferred
by those chapters. For these reasons, we believe that the
phrase “under a plan confirmed” in 11 U.S.C. § 1146(c) was
most likely intended to mean “authorized by a plan
confirmed.”
Even if the language of Section 1146(c) is ambiguous,
however, two important canons of construction support our
interpretation. First, tax exemption provisions are to be
strictly construed. See United States v. Centennial Savings
Bank FSB, 499 U.S. 573, 583 (1991) (“[T]ax-exemption and
. . . deferral provisions are to be construed narrowly.”);
United States v. Wells Fargo Bank, 485 U.S. 351, 354
(1988) (“[E]xemptions from taxation . . . must be
unambiguously proved.”); United States Trust Co. v.
Helvering, 307 U.S. 57, 60 (1939) (“Exemptions from
taxation do not rest upon implication.”). Second, federal
laws that interfere with a state’s taxation scheme must be
narrowly construed in favor of the state. See Nat’l. Private
Truck Council v. Oklahoma Tax Comm’n., 515 U.S. 582, 590
(1995) (noting the “strong background presumption against
[federal] interference with state taxation”); California State
Bd. of Equalization v. Sierra Summit, Inc., 490 U.S. 844,
851-52 (1989) (“[A] court must proceed carefully when
asked to recognize an exemption from state taxation that
Congress has not clearly expressed.”); NVR Homes, Inc. v.
Clerks of the Circuit Courts, 189 F.3d 442, 459 (4th Cir.
1999) (Wilkinson, J., concurring) (“If Congress wished to
exempt a bankrupt from state and municipal taxation, ‘the
intention would be clearly expressed, not left to be collected
or inferred from disputable considerations of convenience in
administering the estate of the bankrupt.’ ”) (quoting Swarts
v. Hammer, 194 U.S. 441, 444 (1904)). Since Section
1146(c) both constitutes a tax exemption and interferes
with the State of Maryland’s scheme of property taxation,
we must construe Section 1146(c) in the Taxing Authorities’
18
favor.5 All of these reasons weigh in favor of interpreting the
phrase “under a plan confirmed” in 11 U.S.C. § 1146(c) to
mean “made pursuant to the authority conferred by such a
plan,” and since an unconfirmed plan cannot confer such
authority, this interpretation means that a transfer made
prior to plan confirmation cannot qualify for tax exemption
under 11 U.S.C. § 1146(c).
C.
We have considered the alternative interpretation
advanced by the Trust, but we reject that construction. As
noted above, the Trust argues that “made under a plan
confirmed” means “necessary for the confirmation of a plan”
that is eventually confirmed. Although the preposition
“under” can have many different meanings, no accepted
definition of that term corresponds to the meaning that the
Trust advocates.
Of the many possible definitions of the preposition
“under,” the Trust points to the following as supporting its
position:
“covered by”, “beneath the heading or within the
category of ”, “subject to the authority, direction, or
supervision of ”, “protected, controlled, or watched by”,
“authorized, warranted, or attested by”, or “in
accordance with”.
Brief for Appellee at 25 n.8 (quoting Random House
Unabridged Dictionary 2059 (2d ed. 1993)). But not one of
these definitions corresponds to the Trust’s definition, i.e.,
“necessary for.” For example, the statement that a sale is
“covered by” a plan that is later confirmed would
5. The dissent’s principal response to these canons is that they do not
apply because the interpretation they yield is inconsistent with
Congress’s intent. Dissent at 26-28. However, the dissent does not
provide a scintilla of evidence from the legislative history that supports
this reading. Instead, the dissent merely quotes the view of a Bankruptcy
Court that our interpretation would frustrate reorganization in a large
number of cases. However, our interpretation was adopted in 1999 by
the Fourth Circuit, and we see no indication that the Fourth Circuit’s
decision has had dire effects.
19
presumably mean that the sale is required or permitted by
the terms of the plan. Thus, the statement that the sale is
“covered by” the plan would not in any way suggest that
the sale was “necessary for” confirmation of the plan.
Similarly, the statement that a sale is “in accordance with”
a plan would not suggest that the sale was necessary for
confirmation. The interpretation advanced by the Trust and
adopted by the Bankruptcy and District Courts simply
cannot be squared with the statutory language.
In support of its interpretation, the Trust cites the
Second Circuit’s decision in In re Jacoby-Bender, 758 F.2d
840 (2d Cir. 1985), and numerous District Court and
Bankruptcy Court decisions relying on Jacoby-Bender. See
Brief for Appellee at 26 (citing In re Baldwin League of
Indep. Sch., 110 B.R. 125, 127 (S.D.N.Y. 1990); In re Smoss
Enters. Corp., 54 B.R. 950, 951 (E.D.N.Y. 1985); In re Lopez
Dev., Inc., 154 B.R. 607, 609 n.13 (Bankr. S.D. Fla. 1993);
In re Permar Provisions, Inc., 79 B.R. 530, 534 (Bankr.
E.D.N.Y. 1987)). The Trust characterizes the decision in
Jacoby-Bender as holding that “a sale [is] exempt from
taxes under § 1146(c) so long as the sale [is] ‘necessary to
the consummation of a plan.’ ” Id. at 26 (quoting Jacoby-
Bender, 758 F.2d at 842).
The Trust’s quotation of the Second Circuit’s language is
correct, but the conclusion that the Trust draws from the
quoted language is not. In Jacoby-Bender, a Bankruptcy
Court confirmed a debtor’s proposed reorganization plan
pursuant to 11 U.S.C. § 1129. The debtor subsequently
sold real property located in New York State and claimed
that the Section 1146(c) tax exemption protected the sale
from state real property transfer taxes because the sale was
authorized by the confirmed plan. The state argued that the
confirmed plan did not authorize the sale “because the plan
did not mention any instrument of transfer and did not give
the debtor the authority to make the specific sale.” Jacoby-
Bender, 758 F.2d at 841. The Second Circuit disagreed with
the state, holding that since Section 1146(c) “does not
require that the reorganization plan include specifics” and
the sale at issue was “necessary to the consummation of
[the] plan,” the confirmed plan authorized the sale. Id. The
Jacoby-Bender decision thus resolved the issue of whether
20
the sale was authorized by the terms of the previously
confirmed plan, not whether the sale was necessary to
achieving the plan’s confirmation. The Second Circuit’s
statement that the debtor’s sale of real property was
“necessary to the consummation of the plan” simply meant
that the language of the plan, or the implications thereof,
required the sale to occur. Accordingly, Jacoby-Bender does
not support the proposition that Section 1146(c) protects
pre-confirmation transfers that are necessary or essential to
the subsequent confirmation of a plan. See also NVR
Homes, 189 F.3d at 456 (disapproving the practice of
“extend[ing] the Second Circuit’s language and alter[ing]
Jacoby-Bender’s holding, changing the test from ‘necessary
to the consummation of a plan,’ to ‘necessary to the
confirmation of a plan’ ”). Since we disagree with the Trust’s
reading of the Jacoby-Bender decision, we also disagree
with the District Court and Bankruptcy Court decisions
that have adopted the Trust’s reading.
The Trust argues that the language of other sections of
the Bankruptcy Code supports its interpretation of Section
1146(c). The Trust approvingly quotes the Bankruptcy
Court’s statement that “[w]hen Congress wants to impose a
temporal condition on a bankruptcy transaction, it does so
expressly.” App. at 42 (citing 11 U.S.C. § 1104(a)
(authorizing a Bankruptcy Court to appoint a trustee “[a]t
any time after the commencement of the case but before
confirmation of a plan”); 11 U.S.C. § 1121(b) (“[O]nly the
debtor may file a plan until after 120 days after the date of
the order for relief under this chapter.”)). We are not
impressed with this argument. If, as we conclude, the
phrase “under a plan confirmed” means “authorized by a
plan confirmed,” no “temporal” issue is raised, because it is
beyond dispute that the transfers at issue were not made
on the authority of a plan but on the authority of other
provisions of the Bankruptcy Code. Even if no plan had
ever been confirmed, that would not have called into
question the validity of the transfers.
The Trust finally maintains that permitting pre-
confirmation transfers to benefit from the Section 1146(c)
tax exemption would best implement the policies underlying
Chapter 11 of the Bankruptcy Code. The Trust contends
21
that Congress “enacted § 1146(c) to encourage chapter 11
plans by providing chapter 11 debtors with tax relief when
they are compelled by business realities to sell certain
assets.” Brief for Appellee at 21. Limiting the Section
1146(c) tax exemption to “post-confirmation transfers,” the
Trust contends, would not serve Congress’s purposes,
because such an approach would not adequately assist
debtors in obtaining creditors’ approval of proposed
reorganization plans.
We are not persuaded by this argument. Needless to say,
“it is not for us to substitute our view of . . . policy for the
legislation which has been passed by Congress.” United
Parcel Serv., Inc. v. United States Postal Serv., Inc., 604 F.2d
1370, 1381 n.16 (3d Cir. 1979). Moreover, as is often the
case in disputes about the interpretation of legislation that
affects the economic interests of different groups, the
opposing sides both cite policies that Congress might have
wished to further when it enacted the law at issue. In
opposition to the Trust’s policy arguments, the amici curiae
note that “limiting the [Section 1146(c)] exemption to
transfers under a confirmed plan . . . create[s] an incentive
for early confirmation.” Brief for Amici Curiae at 11. In
addition, the Taxing Authorities’ preferred interpretation
limits the Bankruptcy Code’s interference with state
revenue collection. See In re 310 Assocs., 282 B.R. 295,
299 (S.D.N.Y. 2002) (stating that a taxing authority “should
not be required to wait until some indeterminate time when
there may be a plan before collecting the taxes which it was
entitled to collect at the time of the transfer”); see also
Nat’l. Private Truck Council v. Oklahoma Tax Comm’n., 515
U.S. 582, 590 (1995) (noting the “strong background
presumption against [federal] interference with state
taxation”).
D.
For all these reasons, we hold that a real estate
transaction is made “under a plan confirmed under section
1129” only where the sale is authorized by the terms of a
previously confirmed Chapter 11 plan. Since the real estate
transactions at issue here were made pursuant to the
authority conferred by other Bankruptcy Code provisions
22
and occurred before the confirmation of a plan, those
transactions were not entitled to the Section 1146(c)
exemption from stamp taxes and similar taxes.
IV.
For the reasons explained above, we reverse the
judgment of the District Court, and remand the case for
further proceedings consistent with this opinion.
23
NYGAARD, Circuit Judge, Dissenting:
Although this all may at first appear to be a “splitting of
grammatical hairs,” I believe that the majority’s
misinterpretation of 11 U.S.C. § 1146(c) “under a plan
confirmed,” of sufficient significance to warrant separately
expressing my views. Hence, I dissent. I do not think this
phrase places a temporal restriction on the qualifying
transactions. Instead, I read the phrase to be a description
of eligible transfers—those under a plan confirmed—
whether the transfer occurred before or after confirmation.
As the Bankruptcy Court and District Court did in this
case, I look to the structure and purpose of the bankruptcy
code, and conclude that the transfers here should be
excluded from taxation under § 1146(c).
I. § 1146(c) is Ambiguous
“We begin every statutory interpretation by looking to the
plain language of the statute. When the language is clear,
no further inquiry is necessary unless applying the plain
language leads to an absurd result.” In Re: Resorts Int’l,
Inc., 181 F.3d 505, 515 (3d Cir. 1999) (citations omitted).
However, even where the statutory language initially
appears plain, application of the statute may reveal its
ambiguity. See e.g., United States v. Doe, 980 F.2d 876,
877 (3d Cir. 1992). This is such a case. Although the
statute might be read to apply only to those transactions
that take place following confirmation, this case illustrates
the ambiguity of § 1146(c). At oral argument the parties
averred that there was a proposed plan at the time the
Bankruptcy Court approved these transactions. The Court
subsequently confirmed the plan. Therefore, the
transactions, though pre-confirmation, took place “under a
plan confirmed.”
Reduced to its most basic elements, § 1146(c) states that,
“the making or delivery of an instrument of transfer . . .
may not be taxed under any law imposing a stamp tax or
similar tax.” But not every “instrument of transfer” is
excluded from taxation. Section 1146(c) only excludes those
“under a plan confirmed under section 1129.” Although the
statute uses the past tense of “confirm,” the statute need
24
not be read to place a temporal restriction on when the
confirmation of the plan must take place, just that the plan
must at some point be confirmed for the transfer to be
exempt. To be unambiguous, the statute would need to
contain an auxiliary verb stating the temporal restriction.
For example, “under a plan that was confirmed under
§ 1129,” or “under a plan that will be confirmed under
§ 1129.” Without such a clarification the statute can just as
plausibly be read as a description of eligible transfers, those
“under a plan confirmed” regardless of when the plan is
confirmed.
II. Statutory Interpretation
A. “Under a plan confirmed”
Lacking an auxiliary verb to place a temporal restriction
on the exemption, the parties struggle to define the word
“under” in the statute. I start with what “under” in “under
a plan” in § 1146(c) does not mean. The Appellants define
“under” to create a temporal restriction. They argue “under”
means “authorized by.” Here, the Bankruptcy Court
approved the transactions under § 363. Therefore, since the
transactions here were not “authorized by” the confirmed
plan, they are not “under a plan confirmed.” The majority
agrees that, among the many definitions of “under,”
“authorized” is the meaning of “under” in § 1146(c). See
Majority, supra at III.B.
While “authorized by” is undoubtably one of the
meanings of “under,” it is not unambiguously the meaning
of “under” throughout § 1146(c). When Congress clearly
meant “authorized” in the code, it used “authorized.” In at
least nineteen sections of the code, Congress used
“authorized,” and in several sections it even used
“authorized under.” See e.g., 11 U.S.C. § 101(1)
(“ ‘accountant’ means accountant authorized under
applicable law”); 11 U.S.C. § 362(b)(16) (“participate in
programs authorized under such Act”); 11 U.S.C. § 363(c)(2)
(“if the business of the debtor is authorized to be operated
under [various] section[s]”; 11 U.S.C. § 541(b) (“participate
in programs authorized under the Higher Education Act”).
This illustrates that “under” cannot be read in isolation. For
25
example, “under” in “under a plan” may have a different
meaning than “under” in “authorized under.”
More important, the majority’s reading of “under a plan”
cannot be consistently applied throughout the bankruptcy
code, particularly in reference to confirmation. The code
accepts that some transactions may take place prior to
confirmation and still be “under a plan.” Section 1129 sets
out the requirements for confirmation, including: “(a) The
court shall confirm a plan only if . . . (4) Any payment made
or to be made by the proponent, by the debtor, or by a
person issuing securities or acquiring property under the
plan . . . In connection with the plan and incident to the
case, has been approved by, or is subject to the approval of,
the court as reasonable.” § 1129(a)(4) (emphasis added). If
“under the plan” means “authorized by” an already
confirmed plan, then there could never be a payment made
under a plan prior to confirmation. Such a reading would
read out the past tense “made” in the above phrase.
Instead, a more consistent reading of the code suggests
that a purchase or sale “under the plan” does not require
prior confirmation of the plan. As the majority notes, “in
accordance with” is an acceptable definition of “under” and
“a sale of real estate could be said to be ‘in accordance
with’ with a plan . . . that is confirmed [after the sale
occurs].” Majority, supra at III.B.
The majority looks to the repeated use of “under”
§ 1146(c) and concludes that “authorized by” makes the
most sense in each instance. Typically words should have
the same meaning as they are used throughout the code.
See Sorenson v. Sec. of the Treasury, 475 U.S. 851, 860
(1986). However, “under” is used in nearly two hundred
different sections of the bankruptcy code. When “under”
can be a preposition, adverb, adjective, noun, or verb, see
Webster’s New International Dictionary of the English
Language, Unabridged, (2d ed. 1934), and it is used so
frequently, this may be a case where this canon of statutory
interpretation is of little value. See e.g., Kapral v. United
States, 166 F.3d 565, 575 n.7 (3d Cir. 1999) (“Of course,
canons of construction are not absolute and must yield
when other indicia of congressional intent suggest a
different result.”). Again, the key is that “under” cannot be
26
read in isolation, it must be read as part of the phrase
“under a plan.”1
Only by reading “under” as “authorized by” does the
statute place a temporal restriction on the transfers.
However, when Congress wanted to apply a temporal
restriction in the code, it knew how to do so, and did do
expressly. See, e.g., § 1104(a) (“At any time after the
commencement of the case but before confirmation of a
plan . . .”); § 1105 (“At any time before confirmation of a
plan . . .”); § 1121(b) (“. . . only the debtor may file a plan
until after 120 days after the date of the order for relief ”).
Nonetheless, if the statute is unambiguous, it
unambiguously does not place a temporal restriction on
qualifying transfers. A definition of “under” that does not
unduly limit the qualifying transfers is supported by the
statutory intent, consistent reading of the code, and
bankruptcy reality.
B. Reading tax exemptions narrowly vs. the remedial
purpose of the bankruptcy code
The Appellants encourage us to apply the canon of
interpretation to read tax exemptions narrowly. See e.g., BA
Props. v. Gov’t of the United States V.I., 299 F.3d 207, 215
(3d Cir. 2002). But we are not to abrogate the purpose of
the exemption through too narrow an application. See id.(“A reflexive adherence to this canon without careful
examination of the exemption in question may result in an
abdication of the judiciary’s responsibility to interpret
1. If “under” must be read in isolation to have the same meaning
throughout § 1146(c), “in accordance with” could be used in each
instance in § 1146(c). As discussed above, the first instance of “under” in
“under a plan” can logically be read as “in accordance with a plan.”
Reading the third instance of “under” as “taxed in accordance with any
law imposing a stamp tax or similar tax,” is no less correct than “taxed
pursuant to the authority of any such law.” Finally, “Under” in
“confirmed under section 1129” makes the most sense when read as
“confirmed in accordance with section 1129.” Section 1129 sets out the
requirements that must be met for a plan to be confirmed. 11 U.S.C.
§ 1129(a). Section 1129 is not a grant of authority, it is a statement of
requirements that must be met for confirmation. As noted above, it even
uses the phrase “under a plan” when referring to both pre- and post-
confirmation payments.
27
statutes in ways that are faithful to legislative intent.”).
“[A]s a general rule grants of tax exemptions are given a
strict interpretation against the assertions of the taxpayer
and in favor of the taxing power but it is equally true that
such interpretation may not be so literal and narrow as to
defeat the exemption’s purpose. Moreover, . . . a remedial
statute such as the bankruptcy law should be liberally
construed.” In re CCA Partnership, 70 B.R. 696, 698
(Bankr. D. Del 1987) (citing 3 Sutherland, Statutory
Construction, §§ 60.01, 60.02, 66.09 (4th ed. 1974)). Section
§ 1146(c), which applies only to Chapter 11 cases, was
clearly intended to provide relief to debtors when they were
compelled to sell assets under the plan. Our reading of the
statute should comport with this intent.2
In its opinion, the Bankruptcy Court described at length
the reality of plan proposal and confirmation. The
Bankruptcy Court lists four basic scenarios leading to plan
confirmation. The debtor may (A) transfer all of its
2. Little has been written concerning the legislative history of § 1146(c).
The best description comes from In re Permar, 79 B.R. 530, 533
(E.D.N.Y. 1987):
The legislative history to section 1146(c) is scant. The Senate and
House Reports to the Bankruptcy Code state “subsection [c] is
derived from section 267 of the Bankruptcy Act.” S.R. No. 989, 95th
Cong., 2d Sess. 132 (1978); H.R. No. 595, 95th Cong., 1st Sess. 421
(1977). Section 267 had similar “under the plan” language as
section 1146(c). The direct predecessor of section 267, section
77B(f), however, had a different nexus: “to make effective any plan.”
Several parallel tax statutes to section 267 had the same “to make
effective any plan” language. See 6A Collier on Bankruptcy Para.
15.08 at 837-40 (14th ed. 1977). Collier concluded “the provisions
of [section] 267 and those of the Internal Revenue Code with its
amendments make it clear that the exemption conferred relates only
to transactions otherwise taxable which serve to execute or make
effective a plan confirmed under Chapter X.” 6A Collier on
Bankruptcy Para. 15.08 at 840 (14th ed. 1977).
Id. As the Second Circuit in Jacoby Bender noted, “Congress’s apparent
purpose in enacting section 1146 was to facilitate reorganizations
through giving tax relief.” In re Jacoby-Bender, 758 F.2d 840, 841 (2d
Cir. 1985). We should read 1146(c) to facilitate reorganization, not
impede reorganization.
28
properties via a going concern sale authorized by a
confirmed plan—a liquidating plan. In the alternative, the
debtor may (B) transfer property prior to confirmation of the
plan. “This typically occurs because the debtor has no
reasonable prospects for reorganization, is in a severe
negative cash flow situation and cannot await the plan
confirmation process if the estate is to realize going concern
value in the disposition of the business.” In re Hechinger,
254 B.R. 306, 320 (Bankr. D. Del. 2000). This would still
result in a liquidating plan. Instead of a liquidating plan,
the debtor may restructure. Here, the debtor may (C)
transfer some of its business/property via a restructuring
or downsizing, as authorized by a confirmed plan. Again, in
the alternative, the debtor may (D) transfer some property
“done as a part of a formulated business plan to emerge
from Chapter 11 with the transfer taking place prior to the
filing of, or confirmation of, a plan. The pre-plan disposition
may be prompted by the need to obtain going concern value
for underperforming parts of the business and/or the need
to position the debtor in its new business mode in order to
formulate and negotiate a plan of reorganization.” Id.The Bankruptcy Court noted that many Chapter 11 cases
run for more than a year, and may require dispositions of
property throughout the negotiation and filing of the plan.
“[A] very distinct minority of cases fall into scenarios” (A)
and (C), where transfers occur post confirmation. Id. at
320. Under the majority’s reading of § 1146(c), very few
transfers will qualify for the exemption. I agree with the
statement of the Bankruptcy Court: “I find it difficult to
believe that Congress intended such a limited application of
the exemption, particularly given the absence of a rational
basis for preferring some plan scenarios over others.” Id.
“Given the reality of business and bankruptcy practice,
adopting a rule that requires all bankruptcy transfers to
occur post-confirmation would seem to frustrate section
1146(c)’s stated purpose of facilitating reorganization in a
large number of cases.” In re: GST Telecom, Inc, 2002 U.S.
Dist. LEXIS 4662, *6 (D. Del. 2002).
C. Essential to or an important component of the plan
process
The majority frames the Trust’s reading of “made under
a plan confirmed” as “necessary for the confirmation of a
29
plan that is eventually confirmed,” then proceeds to
undercut the Trust’s argument by again focusing on the
meaning of “under” in isolation. Majority supra at III.D. To
begin, there can be no question that § 1146(c) only applies
if there is eventually a confirmed plan, we can agree that
the plain language of the statute requires this much. The
issue therefore becomes whether the District Court and
Bankruptcy Court’s reading of the statute to apply only
where the transfer is “essential to or an important
component of the plan process” is improper. Whatever the
meaning of “under” in § 1146(c), there clearly must be a
nexus between the plan confirmed and the transfer for the
exemption to apply.
The Appellants here attempt to undercut the Bankruptcy
and District Court’s reliance on In re Jacoby-Bender, 758
F.2d 840 (2d Cir. 1985). The facts of Jacoby-Bender are
distinguishable, in that the sales there came after
confirmation, but nothing in Jacoby-Bender indicates that
its holding was predicated on the timing of the
transactions. Lower courts purporting to follow Jacoby-
Bender have consistently applied its reasoning to pre-
confirmation transfers. See e.g., New York City v. Baldwin
League of Indep. Schs., 110 B.R. 125, 127 (S.D.N.Y. 1990);
In re Smoss Enters. Corp., 54 B.R. 950, 951 (E.D.N.Y.
1985); cf. In re 995 Fifth Ave. Assoc., L.P., 127 B.R. 533,
540 (S.D.N.Y. 1991) (describing Jacoby-Bender as
addressing the meaning of “under a plan”). In Jacoby-
Bender, the debtor sought and received approval for the
sale under § 363(b), just as the debtor in this case did. 758
F.2d at 841. Even though the sale was authorized by
§ 363(b), the Court of Appeals for the Second Circuit still
found that the transaction was “under” the plan confirmed
because it was necessary for the consummation of the plan.
Id. The District Court here found that “[t]he transfers at
issue here are clearly necessary to the plan because the
proceeds of those transfers are to be used for funding
Hechinger’s plan.” 276 B.R. 43, 48 (D. Del. 2002). If
“under” is not read to impose a temporal restriction on the
qualifying transfers, there is no inconsistency with these
decisions. I would follow the logic of Jacoby-Bender and
affirm the District Court’s decision. These transfers were
necessary to the plan, which was later confirmed, and
30
therefore qualify for the exemption as being “under a plan
confirmed.” Congress seeks to encourage plan confirmation
through § 1146(c). If the exemption is limited to only those
transactions occurring post confirmation, it is for Congress
to make that determination.
III. Eleventh Amendment
Were my colleagues to agree with my analysis, we would
need to reach the Eleventh Amendment issue. Although I
agree with the analysis of the Bankruptcy Court and
District Court and would affirm their decision, I limit my
analysis in this dissent to issues reached in the majority’s
opinion.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit