Chapter 11 Bankruptcy and Transfer or Mortgage Tax Exemptions

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How to Determine Whether a Chapter 11 Bankruptcy Sale or Financing Transaction is Exempt from Transfer Tax and/or Mortgage Tax

In recent months, there has been a recognizable increase in title insurance applications involving properties in bankruptcy. In most instances, these transactions include commercial properties being administered under Chapter 11 wherein a debtor-in-possession or trustee is either moving to reorganize debt or sell off assets to improve the financial position of a debtor.

The question that we receive most often is whether the transaction is subject to state and local transfer tax and/or mortgage tax?

Confirmed Chapter 11 Plan Exemptions versus Court Orders permitting Sale or Refinance Pre-Plan Confirmation pursuant to 11. U.S.C. Section 363

When insuring a Chapter 11 bankruptcy sale or financing, Section 1146(a) of the Bankruptcy Code provides for transfer and mortgage tax exemptions in only those instances where the sale or financing is made pursuant to a confirmed Chapter 11 plan. See 11 U.S.C. § 1123(a)(5)(D), 1123(b)(4). Consequently, if at the time of closing, the transaction does not have a signed and entered confirmed plan in place, the exemptions afforded by Section 1146(a) are not generally available. See, Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33 (2008); see also, 995 Fifth Avenue Associates, L.P., Debtor v. New York State Department of Taxation and Finance, 963 F.2d 503(2d Cir 1992) holding that “[t]he issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 of this title, may not be taxed under any law imposing a stamp or similar tax;” see also, In re Jacoby-Bender, Inc, 758 F.2d 840 (2dCir. 1985) exempting debtor from payment of NYC RPT Tax, NY Admin. Code, Section 1146-2.0 (1984).

What happens, however, if the sale or financing occurs pre-plan yet pursuant to a court order under Bankruptcy Code Section 363. In preparing this post, it became evident very quickly that the facts of each Chapter 11 case will bear heavily on whether tax exemptions may apply to pre-confirmation transactions. The facts to look for are whether a pre-confirmed plan court order specifically mentions the exact transaction at issue and whether the court goes on to specifically exempt transfer and mortgage tax. In addition, if the sale occurs pre-confirmed plan, but the deeds are not recorded until after the plan is confirmed, there may be room to claim the relevant tax exemptions.

For example, In re New 118th , Inc., Index No. 07-12333, United States Bankruptcy Court, S.D.N.Y (2009), affirmed by the Second Circuit Court of Appeals overruled an objection filed by the City of New York Department of Finance to a Chapter 11 trustees plan wherein the trustee sought exemption from NYC Real Property Transfer tax for the sale of multiple rental properties pre-plan confirmation, however, the deeds to said properties were delivered post-plan confirmation. The Court rejected the City’s argument that 1146(a) can never apply to a pre-confirmation sale holding that if the sale or transfer is integral to implementation of a confirmed plan, a sale prior to confirmation of said plan, may be exempt from transfer tax. In re New 118th, Inc., 398 B.R. 791 (S.D.N.Y. 2009).

As such, when representing a Chapter 11 debtor, it is important to consider timing of any sale or refinance as pre-approved plan actions can result in significant transfer tax or mortgage tax assessments, which may be avoidable once a confirmed plan is had. Likewise, familiarity with local taxing authorities, such as the City of New York, or other local taxing authorities is important as noted above.

Hence, when it comes to Chapter 11 mortgage and/or transfer tax exemptions, a real understanding of the underlying transaction is necessary. Additionally, unlike transfer tax exemptions, which are largely dictated by the exemptions listed on a New York State TP-584 form, and local transfer forms such as the NYC-RPT form, mortgage tax exemptions do not come with a pre-printed check the box form. As such, every exemption claimed for mortgage tax must be accompanied by an Affidavit under Tax Law section 252, which must be submitted at the time of the mortgage recording.

If you are faced with a sale or financing for a property being administered under Chapter 11 of the Bankruptcy Code, please feel free to contact Erin A. Sidaras, Esq. or any of our Stewart, NY Metro Underwriters for assistance.