Third Circuit Nixes Section 1146(c) Relief
for Pre-confirmation Sales
Written by Bob Keach

In what could be a fatal blow for transfer-tax-free sales under §363, the Third Circuit Court of Appeals has held that §1146(c) of the Bankruptcy Code does not apply to real estate transactions that occur prior to the confirmation of a plan under chapter 11 of the Code, even if (as was true in the Third Circuit case) a plan was filed when the sales occurred, the amount of possible tax was escrowed pending confirmation of the plan, and the plan was eventually confirmed. Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Investment Co. of Delaware Inc.), No. 02-1917 (3rd Cir., 7/18/03). Section 1146(c) provides, in pertinent part, that “…delivery of an instrument of transfer under a plan confirmed under §1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax.” Most §363 sale orders in chapter 11 cases include a provision that the sale is in contemplation of a plan and is necessary for a plan and exempt the transaction under §1146(c), conditioned upon the set aside of amounts necessary to pay the tax (if no plan is confirmed) and subsequent confirmation of a plan. If Hechinger becomes the “law of the land,” this practice is no longer permissible and such pre-confirmation transactions will be subject to tax.

The Third Circuit, acknowledging that “under a plan confirmed” was subject to alternative meanings, stated that the most “natural” reading of “under” in this provision was “authorized by.” Since an unconfirmed plan cannot authorize anything, pre-confirmation sales could not be authorized by, or “under” a plan confirmed. According to the Third Circuit, reading “under” to mean “authorized by” fit best with the remaining language of §1146(c), and was consistent with the use of “under” in other sections of the Code. Moreover, the panel reasoned, reading §1146(c) in this fashion was supported by two canons of construction: (1) that tax exemption provisions are to be narrowly construed; and (2) that federal laws that interfere with a state’s taxation scheme must be narrowly construed. The Third Circuit “distinguished” the Second Circuit’s decision in In re Jacoby-Bender, 758 F.2d 840 (2d Cir. 1985) and rejected numerous lower court decisions authorizing exemption under §1146(c) of sales in contemplation of plans.

A vigorous dissent by Circuit Judge Nygaard argued that §1146(c) contained no temporal restriction and that pre-confirmation sales with a nexus to a subsequently confirmed plan should be exempt. He also reasoned—as have several courts—that a broader reading of the section was necessary to effectuate congressional intent, since, under the majority reading, few sales will be exempt (as most sales, in fact, occur pre-confirmation).

The Hechinger decision continues a recent string of reorganization-unfriendly decisions from Third Circuit panels. At this rate, changing the venue provisions to stem the flow of large cases to Delaware may not be necessary.

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