Franchise Tax discharged during chapter 7 Bankruptcy in Texas

[JordanDH]

texas

 

[quincy]

More information would be helpful. Thanks.

 

[JordanDH]

Sorry about that, not sure what happened. See details below and thank you for your time.

In 2015 I formed a Holdings company in Texas. We purchased an operating Company from the bankruptcy estate that in 2014 had many debts discharged, including a franchise tax (state comptroller) in the amount of $132k with interest and fees.... however, about a year into the operations of my New company I was asked/forced to pay the old companies franchise tax debts in order to show active status with the Secretary of State. At the time I was unaware that the franchise taxes were previously discharged during bankruptcy and figured I had no option but to pay this, otherwise our company would show unable to operate in the state of Texas. (And our customers would not use us and therefore put us out of business.) our lawyers and the comptrollers office did not come across the fact of the previously discharged debts and eventually my personal account was seized and liens were placed due to non re-payment... to sum it up.. if a franchise tax debt is discharged in the court of law, can this be passed (potentially by coercion) to the newco after prior bankruptcy?

 

[despritfreya]

It appears that you did not seek the assistance of a bankruptcy attorney prior to purchasing the company out of the Chapter 7 or Chapter 11.

First and foremost, only people (you and me) get an Order from a bankruptcy court discharging debts in a Chapter 7. In the context of Chapter 11, a corporation can get a discharge unless, in general, the Plan calls for a liquidation of the corporation's assets. See 11 U.S.C. § 727(a)(1) if it was a Chapter 7. See 11 U.S.C. § 1141(d)(3) if the purchase was part of a liquidating Chapter 11 Plan.

Second, in the very unlikely event that this was a purchase out of a Chapter 11 estate, through a Confirmed Chapter 11 Plan that was not subject to 1141(d)(3). . . Even if there was a “discharge”, only certain taxes are dischargeable in bankruptcy. The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas. A “privilege tax” may or may not be subject to a discharge.

Third, I will presume that the “purchase” was done under 11 U.S.C. § 363(f). If so, you need to review the Order that was entered approving the sale. What exactly did the Holding Company purchase? Was it the hard assets of the business? Was it the name, good will, phone number, advertising, intellectual property and the hard assets of the business? Was the purchase “as is - where is - without any representation or warranty”?

In all likelihood the Holding Company purchased the name, good will, phone number, etc. subject to all liens and encumbrances since the purchase price was not sufficient to clear the liens. My guess is that the franchise tax owed to Texas was secured and needed to be paid in full or the purchase was done subject to the lien. But. . . this is only a guess.

So, what exactly does the Order approving the 363 sale state? If this transaction was done on a less formal basis please give the details.

Des.

 

[JordanDH]

It appears that you did not seek the assistance of a bankruptcy attorney prior to purchasing the company out of the Chapter 7 or Chapter 11.

First and foremost, only people (you and me) get an Order from a bankruptcy court discharging debts in a Chapter 7. In the context of Chapter 11, a corporation can get a discharge unless, in general, the Plan calls for a liquidation of the corporation's assets. See 11 U.S.C. § 727(a)(1) if it was a Chapter 7. See 11 U.S.C. § 1141(d)(3) if the purchase was part of a liquidating Chapter 11 Plan.

Second, in the very unlikely event that this was a purchase out of a Chapter 11 estate, through a Confirmed Chapter 11 Plan that was not subject to 1141(d)(3). . . Even if there was a “discharge”, only certain taxes are dischargeable in bankruptcy. The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas. A “privilege tax” may or may not be subject to a discharge.

Third, I will presume that the “purchase” was done under 11 U.S.C. § 363(f). If so, you need to review the Order that was entered approving the sale. What exactly did the Holding Company purchase? Was it the hard assets of the business? Was it the name, good will, phone number, advertising, intellectual property and the hard assets of the business? Was the purchase “as is - where is - without any representation or warranty”?

In all likelihood the Holding Company purchased the name, good will, phone number, etc. subject to all liens and encumbrances since the purchase price was not sufficient to clear the liens. My guess is that the franchise tax owed to Texas was secured and needed to be paid in full or the purchase was done subject to the lien. But. . . this is only a guess.

So, what exactly does the Order approving the 363 sale state? If this transaction was done on a less formal basis please give the details.

Des.

It appears that you did not seek the assistance of a bankruptcy attorney prior to purchasing the company out of the Chapter 7 or Chapter 11.

First and foremost, only people (you and me) get an Order from a bankruptcy court discharging debts in a Chapter 7. In the context of Chapter 11, a corporation can get a discharge unless, in general, the Plan calls for a liquidation of the corporation's assets. See 11 U.S.C. § 727(a)(1) if it was a Chapter 7. See 11 U.S.C. § 1141(d)(3) if the purchase was part of a liquidating Chapter 11 Plan.

Second, in the very unlikely event that this was a purchase out of a Chapter 11 estate, through a Confirmed Chapter 11 Plan that was not subject to 1141(d)(3). . . Even if there was a “discharge”, only certain taxes are dischargeable in bankruptcy. The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas. A “privilege tax” may or may not be subject to a discharge.

Third, I will presume that the “purchase” was done under 11 U.S.C. § 363(f). If so, you need to review the Order that was entered approving the sale. What exactly did the Holding Company purchase? Was it the hard assets of the business? Was it the name, good will, phone number, advertising, intellectual property and the hard assets of the business? Was the purchase “as is - where is - without any representation or warranty”?

In all likelihood the Holding Company purchased the name, good will, phone number, etc. subject to all liens and encumbrances since the purchase price was not sufficient to clear the liens. My guess is that the franchise tax owed to Texas was secured and needed to be paid in full or the purchase was done subject to the lien. But. . . this is only a guess.

So, what exactly does the Order approving the 363 sale state? If this transaction was done on a less formal basis please give the details.

Des.

Thank you very much for your response.
I will attempt to explain the complex situation with my limited understanding of my situation. Your response was Helpful as I Went back to the court filings and documents with a better idea of what to look for.

In 2014 I was an employee of 1operating entity that along with about 7 other operating entities underneath a Holdings co.
The sudden oil crisis led to chapter 11. But our business sector continually got worse at which time I worked with other critical management and received court approval to purchase (1) operating company (underneath Newly formed Holdings co). Approval was based on the sale being in the best interest of the creditors and planned to transfer finance payments and equipment to NewCo. (Pending finance credit checks, etc)

A few thoughts With new information....
The unpaid franchise tax imposed against original chapter 11 filer “priority unsecured claim”
$85k unpaid- this was total balance of tax due by all 9 former operating companies (presumably because of the way it was filed with the state)
Am I responsible for entire balance? Or can this be fought to pay 1/9th based on my holding co’s stock purchase of only 1 of the 9 operating entities whose revenue made up this tax.
Should the purchased operating company be apart of the lien imposed to the old holdings company in the first place?
Could the newco holdings company’s good standing with SOS in any way effect operating company’s standing?

Really just tossing ideas out there... any guidance or help is appreciated.

 

[despritfreya]

Unfortunately I cannot answer your questions or even guess. You were involved in a complex transaction relating to a major Chapter 11 proceeding which apparently included numerous administratively consolidated cases. As this was "complex" I will assume you had legal representation. Your best course of action is to discuss this with the attny who assisted you in the purchase. If you were not represented, you might want to consult with the attny who represented the debtor.

Please understand that attempting to seek insight off of the Internet when dealing with something that is out of the ordinary is not likely to result in any useful information. Your best course of action is to find a professional who can assist in reviewing the bankruptcy filings and the transaction you participated in. Whether or not you, on a personal level, or the new company must pay all or a portion of the franchise tax is something one versed in bankruptcy and the Texas tax law should be able to address.

Des.

 

[JordanDH]

Unfortunately I cannot answer your questions or even guess. You were involved in a complex transaction relating to a major Chapter 11 proceeding which apparently included numerous administratively consolidated cases. As this was "complex" I will assume you had legal representation. Your best course of action is to discuss this with the attny who assisted you in the purchase. If you were not represented, you might want to consult with the attny who represented the debtor.

Please understand that attempting to seek insight off of the Internet when dealing with something that is out of the ordinary is not likely to result in any useful information. Your best course of action is to find a professional who can assist in reviewing the bankruptcy filings and the transaction you participated in. Whether or not you, on a personal level, or the new company must pay all or a portion of the franchise tax is something one versed in bankruptcy and the Texas tax law should be able to address.

Des.

Thank you for responding and for the advice.

It was supposed to be a generally easy purchase and transition, but the limited communication with former retained lawyers and from me trying to research everything I can, (Tight Funds and numerous legal battles doesn’t allow too much professional advice.) I have found that this situation is Far beyond the scope of normal transactions.

But thanks again for listening.