• Eleventh Circuit Extends Exemption from Stamp Tax to Nondebtor Third Parties
  • March 1, 2005
  • Law Firm: Weil, Gotshal & Manges LLP - New York Office
  • The Bankruptcy Code exempts from the imposition of a stamp tax or similar tax any transfer of property that is made "under a plan confirmed." In Florida v. T.H. Orlando Ltd. (In re T.H. Orlando Ltd.), the United States Court of Appeals for the Eleventh Circuit held that this exemption applies to any transaction that is necessary and integral to the consummation of a plan of reorganization, even if the transfer of property is between two nondebtor parties.

    Section 1146(c) of the Bankruptcy Code

    Section 1146(c) of the Bankruptcy Code provides that the transfer of property "under a plan confirmed" may not be "taxed under any law imposing a stamp tax or similar tax." The meaning of "under a plan confirmed" has generated disagreement among the courts. Congress enacted this provision of the Bankruptcy Code to encourage reorganization through the chapter 11 plan process by providing a measure of tax relief to debtors who, in the exercise of their business judgment, decide to sell assets during the pendency of their chapter 11 proceedings. The reduction in tax obligations assists in producing successful chapter 11 plans by encouraging debtors to dispose of unnecessary assets that are no longer consistent with the debtor's business model and by enhancing the consideration ultimately available for distribution under a chapter 11 plan.


    T.H. Orlando Ltd. and T.H. Resorts Associates, Ltd. (collectively, the "Debtors") owned three hotels in the Orlando area, with an outstanding mortgage, secured by the hotels in excess of $70 million. After defaulting on the mortgage and filing for bankruptcy protection, the Debtors reached a settlement with their mortgage lender for $23.5 million in satisfaction of the balance on the mortgage.

    To finance the settlement, the Debtors negotiated a mortgage with Berkshire Mortgage Finance Corporation ("Berkshire"), the only lender willing to make the loan within the necessary timeframe. Among the terms of the mortgage with Berkshire was a clause that conditioned the mortgage to the Debtors on the agreement of Kissimmee Lodge, Ltd. ("Kissimmee"), an unaffiliated, nondebtor third party to refinance an adjacent hotel owned by Kissimmee with Berkshire.

    Upon the agreement of Kissimmee (who was under no obligation to refinance) to refinance its hotel, Berkshire provided the Debtors with the necessary financing. The Debtors then filed a plan of reorganization which provided that Berkshire's willingness to make the loan was contingent upon Kissimmee's agreement to refinance through Berkshire. Berkshire would not make the loan absent the refinancing. The plan provided the refinancing was incident to and a condition precedent to the reorganization of the debtors and exempt from Florida documentary stamp taxes, intangible and similar taxes pursuant to section 1146(c).

    The Florida Department of Revenue ("FDOR") filed an objection to the confirmation of the plan of reorganization claiming that the 1146(c) exemption does not include transactions between nondebtor third parties. The bankruptcy court sustained the objection and confirmed the plan, as modified, to reflect the obligation of Kissimmee to pay the stamp tax. Kissimmee paid $161,425 in Florida documentary stamp taxes and intangible taxes under protest. Kissimmee then sued the FDOR in state court seeking declaratory relief and a refund of the taxes paid. The suit was removed to federal bankruptcy court where the bankruptcy court found in favor of Kissimmee.

    The bankruptcy court concluded that, because Kissimmee's refinancing was essential to confirmation and necessary for the consummation and implementation of the plan, its mortgage qualified under section 1146(c) as "under a plan" and was, therefore, exempt from stamp taxes. The FDOR appealed to the district court who reversed the bankruptcy court's decision and held section 1146(c) to be inapplicable because the transaction involved two nondebtors. The Debtors and Kissimmee then appealed to the Eleventh Circuit.

    The Eleventh Circuit's Decision

    The Eleventh Circuit examined the three components of section 1146(c) to determine whether the tax at issue was: (a) a stamp tax or similar tax, (b) the tax was imposed upon the making or delivery of an instrument or transfer; and (c) the making or delivery was "under" a confirmed chapter 11 plan. The Eleventh Circuit found no dispute with respect to the first two conditions and focused on whether the third was satisfied in this case "where neither estate property nor the debtor was involved in the transaction."

    In analyzing the plain language of section 1146(c), the court concluded "nothing in the plain language of ยง 1146(c) restricts its application to transactions involving the debtor or estate property." Accordingly, the court observed that a transfer necessary to consummation of a plan may be deemed to be "under a plan," irrespective of whether the transfer was between two nondebtors.

    The FDOR objected to extending the section 1146(c) exemption to the Kissimmee refinancing because to do so would extend the bankruptcy court's jurisdiction. In furtherance of its objection, the FDOR relied on two prior decisions. In the first decision cited by the FDOR, United States v. Huckabee Auto Co., the Eleventh Circuit held that a bankruptcy court lacked jurisdiction to enjoin the Internal Revenue Service from assessing a penalty against corporate officers of the debtor, irrespective of the effect that such penalty may have on the debtor's ability to reorganize. The FDOR, relying on Huckabee, argued that exempting the Kissimmee mortgage from the stamp tax would be in violation of "Huckabee's holding that bankruptcy courts lack jurisdiction to adjudicate the tax liabilities of third parties." The second case relied on by the FDOR was a New York bankruptcy court decision, In re Amsterdam Avenue Development Ass'n, in which the court held that a third party purchaser's grant of a mortgage to finance a purchase of estate property did not qualify for an 1146(c) exemption.

    The Eleventh Circuit distinguished the Kissimmee transaction from Huckabee and Amsterdam. In Huckabee, the Eleventh Circuit held that adjudication of penalties arising under the tax code were properly determined to be the province of the taxing authorities, rather than the bankruptcy court, notwithstanding the effect that such determinations might have upon confirmation of a plan of reorganization. However, the issue in T.H. Orlando was whether a transaction qualified for a tax exemption under federal bankruptcy law, a determination that was certainly within the core jurisdiction of the bankruptcy court. The court recognized that if bankruptcy courts were divested of this jurisdiction, states might be able to circumvent the section 1146(c) exemption.

    In distinguishing the present case from the holding in Amsterdam, the Eleventh Circuit rejected the FDOR's argument that because Kissimmee was not required to refinance, the transfer was not "under" the plan. The Eleventh Circuit focused on whether the refinancing by Kissimmee was necessary and not on whether Kissimmee had to consent to the refinancing. While in Amsterdam, the purchasing party mortgaged its existing property to finance its purchase of estate property and facilitate the plan of reorganization, the mortgage itself was not part of the plan of reorganization and the plan in Amsterdam could have been consummated without the mortgage. How the asset was sold was irrelevant in Amsterdam. In contrast, the Kissimmee transaction was part and parcel of the contemplated plan. Berkshire's loan to the Debtors represented the sole source of financing for the Debtors' plan of reorganization, and such financing was conditioned entirely upon Kissimmee's refinancing. Without Kissimmee's consent, the plan would not have been consummated. Accordingly, the court concluded that the transaction was necessary to the reorganization and, therefore, "under a plan."

    The court further rejected any policy arguments against application of the exemption to transactions involving two nondebtors. The court held that the plain language of 1146(c) created no such restriction, but rather exempted certain transactions to facilitate the consummation of plans of reorganization.


    The Eleventh Circuit's decision in T.H. Orlando extends the Bankruptcy Code section 1146(c) exemption from stamp and similar taxes, to include certain transactions between two nondebtor third parties. Specifically, the court held that the qualification of "under a plan" is not limited to transactions involving property of the estate. Rather, at least in the Eleventh Circuit, where the transacting parties can demonstrate that the transaction in question was an integral part of the plan of reorganization, and the consummation of the plan would not have occurred, but for the transaction, the transaction will be exempt. It remains to be seen whether other circuits will follow the reasoning of this decision.

    Florida v. T. H. Orlando Ltd. (In re T.H. Orlando Ltd.), 391 F. 3d 1287 (11th Cir. 2004).
    United States v. Huckabee Auto Co., 783 F.2d 1546 (11th Cir. 1986).
    In re Amsterdam Ave. Dev. Ass'n, 103 B.R. 454 (Bankr. S.D.N.Y. 1989).