Since I have written occasionally about the Supreme Court’s treatment of bankruptcy and related laws, the authors of Credit Slips asked that I use my final post to say a few words about Monday’s decision in Florida Department of Revenue v. Piccadilly Cafeterias.

As most bankruptcy observers know, this was the case that was meant to resolve questions about the timing of Bankruptcy Code § 1146(a) (f/k/a 1146(c)): Are Chapter 11 bankruptcy sales tax-exempt no matter when they occur, or must they occur after plan confirmation?

The short answer: On a heavily textualist analysis, Justice Thomas, writing for the majority (Breyer and Stevens dissenting), holds that the tax exemption is available only for sales after plan confirmation.

The decisions itself is, i/m/h/o, probably right. But for the wrong reasons.

The Statute–Literally Applied

Bankruptcy Code section 1146(a) says that asset sales “under a plan confirmed under [Chapter 11]” are exempt from state transfer taxes that would otherwise apply. Several appellate courts, including the Third and Fourth Circuits, have held that it applied only to sales made literally under the plan that was confirmed. In re Hechinger Inv. Co. of Del., 335 F. 3d 243, 246 (CA3 2003); see also In re NVR, LP, 189 F. 3d 442, 458 (CA4 1999) (holding that §1146(a) “appl[ies] only to transfers under the Plan occurring after the date of confirmation”).

Other courts—in particular, the Eleventh Circuit in Piccadilly—held that the “ambiguous” language of the statute, and the “practical realities” of Chapter 11, required a broader reading, to exempt transfers from state sales tax so long as there was “some nexus” between the pre-confirmation transfer and the confirmed plan. In re Piccadilly Cafeterias, Inc., 484 F. 3d 1299, 1304 (2007) (per curiam). Here, the Supreme Court reversed the Eleventh Circuit, holding that the sale will be tax exempt under 1146(a) only if it occurs after plan confirmation.

Justice Thomas treated the case chiefly as a question of statutory interpretation. He had little trouble concluding that the “more natural” reading of 1146(a) was that a tax-exempt sale must be made pursuant to the plan as confirmed:

While both sides present credible interpretations of § 1146(a), Florida has the better one. To be sure, Congress could have used more precise language—i.e., “under a plan that has been confirmed”—and thus removed all ambiguity. But the two readings of the language that Congress chose are not equally plausible: Of the two, Florida’s is clearly the more natural.
Slip op. At 6-7

But What’s the Policy?

My principal problem with the decision is not the result, but the method. If Justice Thomas is correct, and the statute is unclear, then textualists (like Thomas) should look to policy and practice to determine Congress’ intent. But that’s not what he does. Had he looked more carefully at the policy and practical considerations, he might have come to the same result, but in a more persuasive and (frankly) intellectually honest way.

Consider first the arguments for the debtor that Justice Thomas would have had to reject. The debtor’s principal policy argument would have been that a narrow reading of 1146(a) undermines Congress’ goal of promoting reorganization, by precluding (or at least deterring) some pre-plan sales that might make a plan more likely. The debtor’s main practical argument would have been that by (potentially) deferring asset sales to plan confirmation, there is a risk that asset values will decline, and perhaps prevent a plan from being confirmed at all.

I have to say that I am not terribly moved by these policy and practical concerns. My hunch is that in most cases, if the taxes are significant, that will be because the asset values are high—and will remain so long enough to confirm a plan. Indeed, it might speed up the plan process a bit, although the virtues of that can be debated (sooner to plan, sooner to Chapter 22).

Rather, my concern is that the majority fails to address these issues at all. In fact, there are pretty good policy arguments in favor of the result. If Piccadilly forces more sales to occur through plans, I tend to think that’s a good thing. Plans must come with disclosure statements, and can be confirmed only with at least some stakeholder support. By contrast, stand-alone asset sales under Bankruptcy Code section 363 (which is what happened in Piccadilly) may occur with neither. Courts like those in Lionel were understandably troubled by attempts to use 363 as an end-run around the plan process. In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983). I don’t think that’s what was intended by the debtor in Piccadilly. But an unintended (positive) consequence of the Supreme Court’s majority opinion may be that it produces more transparent, and broadly supported, sales.

The Bankruptcy Code and Textualism

I can certainly see why some might disagree with the Piccadilly majority’s reading of 1146(a). The use of the term “plan confirmed” is temporally ambiguous: Confirmed when in relation to the sale? I agree that the language could have been interpreted either way, which is why textualism was a pretty bad basis for the decision. The majority should have looked instead to policy and practice.

The Bankruptcy Code has often been treated by the Supreme Court as a laboratory for textualist experiments. See, e.g., Bruce A. Markell, Conspiracy, Literalism and Ennui at the Supreme Court, 41 Fed. B. News & J. 174 (1994). Charles Jordan Tabb & Robert M. Lawless, Of Commas, Gerunds and Conjunctions: The Bankruptcy Jurisprudence of the Rehnquist Court, 42 Syracuse L. Rev. 823 (1991).

I tend to be suspicious of purported “natural” readings of statutory text. There is, as Justice Scalia said in Dewsnupp v. Timm, nothing “natural” about bankruptcy law. See Dewsnup v. Timm, 502 U.S. 410, 435 (1992) “[B]ankruptcy law has little to do with natural justice.”). It seems to me axiomatic that in most cases where there are credible fights over whether a statute is ambiguous, it probably is—otherwise, reasonable minds wouldn’t differ on its meaning.

Does Piccadilly Matter?

Which leaves a final question: If the result in Piccadilly is acceptable, do methodological impurities matter?

Answer: It may be that, as is often the case, the Supreme Court here had in mind goals other than merely clarifying 1146(a). To the extent you care about those other goals, you might then care about how Piccadilly works.

First, the majority may have wanted to send a conciliatory message to states after Katz, where the Court held that states can be sued in bankruptcy to recover voidable preferences. Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 373–78 (2006). Katz has been viewed as a fairly “anti-states’ rights” decision. Stevens wrote the majority opinion in Katz, where Thomas (among others) dissented. In Piccadilly, by contrast, Thomas wrote the majority opinion and Stevens (joining Breyer’s opinion) dissented. Perhaps this is the conservatives’ way of telling states that, Katz notwithstanding, statutory ambiguities will be construed in their favor.

Second, this tends to play to the current intellectual fashion among some constitutional commentators to search for—and “restore”—what they call the “lost Constitution.” See Randy E. Barnett, Restoring the Lost Constitution 355 (2004); Douglas H. Ginsburg, On Constitutionalism, 2003 CATO SUP. CT. REV 7, 16–17. The “true” Constitution was, on this theory, “lost” by the “liberal” interpretations given to it beginning with decisions in the late 1930’s upholding New Deal legislation. This fashion bodes ill for those who prefer a Constitution that supports things like the modern banking, bankruptcy and securities regulatory systems, most of which were created by the ostensibly illegitimate New Deal Constitution, and none of which would exist comfortably under the “lost” version.

But questions of what is really “lost” are likely to remain the stuff of network television, not Supreme Court decisions. In the meantime, we now know that transfer-tax-free sales in bankruptcy will not be final unless and until conducted after a confirmed plan because that’s the “natural” reading of the statute. While not an earth-shaking decision, it tells us that the Supreme Court may care more about what the Bankruptcy Code says than what Congress actually intends. If so, bear that in mind as BAPCPA’s many technical impurities work their way up the judicial food chain.