With US Circuit Courts split on the issue of whether bankruptcy courts have the power to release third parties from creditors’ claims without the creditors’ consent, a move known as non-consensual third-party release, the Seventh Circuit recently weighed in the affirmative in In re Airadigm Communications, Inc.1 With the split widening between the circuits on this matter, it seems more likely than ever that the Supreme Court could weigh in on and decide this critical issue to lenders and others.2

On March 26, 2008, the United States Supreme Court heard oral argument in the case of State of Florida Department of Revenue v. Piccadilly Cafeterias, Inc. to consider the United States Court of Appeals for the Eleventh Circuit's ruling that a bankruptcy court may exempt certain state and local taxes in a sale approved prior to confirmation of a chapter 11 plan under § 1146(c) of the Bankruptcy Code.

Introduction

Section 1146(a) (formerly, and for the purposes of this case § 1146(c)) of the Bankruptcy Code provides:

The United States Supreme Court has denied a petition for certiorari in a case in which the U.S. Court of Appeals for the Ninth Circuit had articulated when a bankruptcy court should stay arbitration proceedings between non-debtor parties. In re Excel Innovations, Inc., 502 F.3d 1086, (9th Cir. 2007), cert. den., __ U.S. __ (Dkt. No. 07-963, April 28, 2008).

In March 2008, the Court of Appeals for the Seventh Circuit decided In re Airadigm Communications, Inc. (Airadigm Communications, Inc. v. FCC),1 a case that built upon the Supreme Court’s decision in FCC v. NextWave Personal Communications, Inc (“NextWave”).2 In NextWave, the Supreme Court held that the FCC’s participation in a bankruptcy proceeding is subject to the provisions of the Bankruptcy Code.

On June 16, 2008, Justice Clarence Thomas delivered the opinion of the court in Florida Department of Revenue v. Piccadilly Cafeterias, Inc. In a 7-2 decision, the Supreme Court reversed the decision of the U.S. Court of Appeals for the Eleventh Circuit and held that § 1146(a) provides an exemption to state stamp taxes only where a sale occurs pursuant to a plan that has been confirmed, and did not properly apply to a case where the plan was confirmed several months after the bankruptcy court approved the sale.

On May 16, 2008, the United States Supreme Court decided Florida Department of Revenue v. Piccadilly Cafeterias, Inc. and ruled that debtors who sell property during the course of a Chapter 11 case prior to the confirmation of a plan cannot use Section 1146(a) of the Bankruptcy Code to exempt those sales from applicable state transfer and stamp taxes.

In Monday’s 7-2 decision in Florida Department of Revenue v. Piccadilly Cafeterias, Inc., the Supreme Court of the United States held that the exemption from state transfer and stamp taxes in Section 1146(a) of the Bankruptcy Code does not apply to transfers that take place prior to the time the Bankruptcy Court confirms a reorganization plan. Section 1146(a) had been cited by bankruptcy debtors and their asset purchasers in seeking tax exemptions for Section 363 sales and other pre-confirmation transfers.

In a recent decision, the United States Supreme Court resolved a circuit split regarding the meaning of the statutory phrase "under a plan confirmed under [Chapter 11] of the bankruptcy Code," as codified in 11 U.S.C. § 1146(a). The case arose from the bankruptcy of Piccadilly Cafeterias, Inc. At one time among the nation's most successful cafeteria chains, Piccadilly had fallen on hard financial times. In 2003, Piccadilly filed for Chapter 11 bankruptcy protection in the Southern District of Florida.

On June 16th, the Supreme Court of the United States issued a decision that is likely to have a significant impact on how debtors will sell assets in bankruptcy. InFlorida Department of Revenue v.

Resolving a split among various circuits, the United States Supreme Court has ruled that the exemption from state stamp taxes under section 1146(a) of the Bankruptcy Code does not apply to asset sales under section 363 of the Bankruptcy Code that took place before confirmation of a debtor’s chapter 11 plan—an event that may take months or years to accomplish.1