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.

Intellectual property rights, such as copyrights, trademarks, and patents, are critical to the operation of many businesses. Often the rights to use intellectual property are dependent upon licenses granting a contractual right to the use of the intellectual property. The bankruptcy of an intellectual property licensor can substantially impact the business of the licensee and the continued right to the use of the licensed intellectual property. Similarly, a bankruptcy filing by a licensee may jeopardize important revenue streams, which a licensor of the intellectual property relies upon.

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.

The New York Insurance Department, as Liquidator of Nassau Insurance Company, pursued Jeanne Diloreto for 20 years to recover what it contended were assets diverted from Nassau, recovering a judgment in state court that it attempt to execute upon. Superintendent DiNallo ended up filing an involuntary bankruptcy petition against Ms. Diloreto, which was dismissed, in part based upon procedural infirmities.

The U.S. Court of Appeals for the Fifth Circuit reversed a bankruptcy court’s equitable subordination order on June 20, 2008. Wooley v. Faulkner (In re SI Restructuring, Inc.), ____ F.3d __, 2008 WL2469406 (5th Cir. 2008). According to the court, subordination of the insiders’ secured claims was “inappropriate” because the bankruptcy trustee had failed to show that the defendant insiders’ “loans to the debtor harmed either the debtor or the general creditors.” Id., at *1. The court also rejected the trustee’s “deepening insolvency” argument on the facts and as a matter of law.

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

Given the state of the economy, it will not be a rare occurrence in the short term for a supplier to receive a request to sell and deliver further goods to a purchaser who has filed proceedings under the Companies Creditors Arrangement Act (CCAA) or Chapter 11 of the United States Bankruptcy Code — and who is already indebted for unpaid pre-filing sales.