DRAFT — PREPARED ON STANDBY; NEVER FILED
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION
• - -
• - -
DEBTOR'S MOTION FOR ENTRY OF AN ORDER AUTHORIZING, BUT NOT DIRECTING, THE DEBTOR TO PAY CERTAIN PREPETITION TAXES, FEES, AND ASSESSMENTS IN THE ORDINARY COURSE OF BUSINESS
• - -
Date Prepared: January 16, 2023
Thalassa Americas Inc. ("TAI" or the "Debtor"), the above-captioned debtor and debtor-in-possession, by and through its proposed counsel, Calderwood & Harkness LLP, respectfully represents as follows in support of this Motion (the "Motion"):
I. PRELIMINARY STATEMENT
1. TAI is a Delaware C-Corporation with its principal office located at 1400 McKinney Street, Suite 2200, Houston, Texas 77010. TAI's registered agent for service of process in Delaware is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, Delaware 19801. TAI's Employer Identification Number is 84-3291057.
2. TAI is a wholly-owned subsidiary of Thalassa Shipping & Logistics Société Anonyme ("TSL"), a Greek société anonyme organized under the laws of the Hellenic Republic, with its principal offices at 42 Akti Miaouli, Piraeus 18538, Greece. TSL was founded in 1987 by the Kostandinos family and remains one of the leading independent shipping and integrated logistics enterprises in the Eastern Mediterranean and transatlantic trade lanes.
3. TAI conducts the U.S.-side operations of the TSL enterprise, including (a) Houston terminal operations at the Port of Houston, (b) Jones Act–exempt foreign-flag vessel scheduling for TSL's fleet, and (c) domestic freight brokerage services. TAI employs approximately 680 individuals in the United States across its various business segments, substantially all of whom are based in the Houston, Texas metropolitan area.
4. TAI generated total revenue of approximately $312 million for the fiscal year ended December 31, 2021 ("FY2021"). Due to a sharp decline in global dry-bulk charter rates and the broader deterioration of conditions in the international shipping market, TAI's estimated revenue for the fiscal year ended December 31, 2022 ("FY2022") declined to approximately $198 million, representing a year-over-year decrease of approximately 36.5%.
5. The Debtor commenced this Chapter 11 case on [DATE] (the "Petition Date") by filing a voluntary petition for relief under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101–1532 (the "Bankruptcy Code"). The Debtor continues to operate its business and manage its properties as debtor-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
6. By this Motion, the Debtor seeks entry of an order authorizing, but not directing, the Debtor to pay certain prepetition taxes, fees, and assessments (collectively, the "Prepetition Tax Obligations") owed to various federal, state, and local governmental authorities (the "Taxing Authorities"), in an aggregate amount not to exceed $[●] million. The Debtor submits that timely payment of the Prepetition Tax Obligations is critical to avoid the imposition of penalties and the accrual of additional interest, to prevent the creation or perfection of tax liens on property of the estate, to protect the Debtor's officers and directors from personal liability exposure (particularly with respect to trust-fund taxes), to avoid disruption of the Debtor's business operations, and to preserve the Debtor's ability to operate in the ordinary course during these Chapter 11 proceedings.
7. The factual background concerning the Debtor's business, the nature and causes of the liquidity crisis that precipitated the commencement of this Chapter 11 case, and the Debtor's restructuring objectives are set forth in greater detail in the Declaration of Marcus Hale in Support of First-Day Motions (the "Hale Declaration"), filed contemporaneously herewith and incorporated herein by reference.
II. JURISDICTION AND VENUE
8. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). The Debtor confirms that it consents to entry of a final order by this Court in the event that it is determined that this Court, absent consent of the parties, cannot enter final orders or judgments in connection herewith consistent with Article III of the United States Constitution. See 28 U.S.C. § 157.
9. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. TAI's principal office is located at 1400 McKinney Street, Suite 2200, Houston, Texas 77010, which is within the Southern District of Texas (Houston Division). TAI's principal assets in the United States, including the Houston terminal facility and related equipment, are situated within this District.
10. The statutory predicates for the relief requested herein are sections 105(a), 363(b), 507(a)(8), and 541 of the Bankruptcy Code, as well as Bankruptcy Rules 6003, 6004, and 9014, and the Local Rules of the United States Bankruptcy Court for the Southern District of Texas.
III. BACKGROUND
A. The Debtor and Its Business
11. TAI is a Delaware C-Corporation (EIN 84-3291057), wholly-owned by TSL (Greek société anonyme, AFM 998214763). As set forth more fully in the Hale Declaration, TSL owns and operates a fleet of approximately fifty (50) vessels, consisting of thirty-eight (38) dry-bulk carriers and twelve (12) container vessels. TSL provides integrated port-to-door logistics services across the Mediterranean Sea, the Black Sea, and transatlantic trade lanes, maintaining terminal facilities at the Port of Piraeus, the Port of Thessaloniki, and the Port of Houston.
12. TSL's approximate global workforce numbers approximately 4,200 employees, of whom approximately 680 are employed by TAI in the United States. TAI's U.S.-based operations encompass three principal business lines: (a) Houston terminal operations, through which TAI manages cargo handling, storage, and distribution activities at the Port of Houston; (b) foreign-flag vessel scheduling services for TSL's fleet of vessels, which are exempt from the cabotage restrictions of the Jones Act (46 U.S.C. § 55102) because such vessels do not engage in the coastwise trade of merchandise between points in the United States; and (c) domestic freight brokerage services, through which TAI arranges the inland transportation of cargo via third-party motor carriers and rail services across the continental United States.
13. TAI's key officers are: Marcus Hale (President, age 48), who has served as President of TAI since 2018 and has over twenty years of experience in the shipping and logistics industry; Diana Restrepo (Vice President, Finance, age 41), who oversees all financial reporting, treasury, and tax compliance functions for TAI; and Jonathan Kurtz (Vice President, Operations, age 45), who is responsible for the day-to-day management of the Houston terminal and freight brokerage operations.
B. The Capital Structure
14. The Debtor's prepetition capital structure is complex and multi-layered. The following summary is based on information available as of September 30, 2022, and is described in greater detail in the Hale Declaration.
15. Senior Secured Credit Facility. On June 15, 2019, TSL and TAI (as co-borrowers) entered into a Senior Secured Credit Facility (the "Senior Secured Facility") with Nordbank International AG, as Administrative Agent and Collateral Agent, and a syndicate of eight additional lending institutions. The Senior Secured Facility provides for a total commitment of $685 million, structured in three tranches: (a) Term Loan A ("TLA"), (b) a Revolving Credit Facility (the "Revolver"), and (c) Term Loan B ("TLB"), which constitutes the U.S. Tranche for which TAI serves as co-borrower. The TLB is an $85 million non-amortizing bullet maturity facility. The interest rate on the Senior Secured Facility is the Secured Overnight Financing Rate ("SOFR") plus 375 basis points, with an additional 200 basis points applicable during the continuance of an event of default.
16. As of September 30, 2022, the total amount outstanding under the Senior Secured Facility was approximately $540 million, comprised of approximately $270 million under the TLA, approximately $185 million under the Revolver, and approximately $85 million under the TLB. The Senior Secured Facility is secured by substantially all of the assets of TSL and TAI, including vessel mortgages, assignment of earnings, and a pledge of TAI's equity interests.
17. Mezzanine Notes. TAI is the issuer of certain second-lien mezzanine notes (the "Mezzanine Notes") held by Dralvecen Mezzanine Capital LLC ("Dralvecen"). The Mezzanine Notes were originally issued in the principal amount of $100 million and bear interest at a rate of 11.5% per annum on a PIK toggle basis. As of September 30, 2022, the outstanding principal amount of the Mezzanine Notes, inclusive of $12.3 million in capitalized PIK interest, was approximately $112.3 million. The Mezzanine Notes are secured by a second-priority lien on substantially all of TAI's assets, subject to the terms of an intercreditor agreement with Nordbank International AG.
18. Senior Unsecured Notes. TAI is also the issuer of $50 million in aggregate principal amount of 8.25% Senior Unsecured Notes (the "Unsecured Notes"), with semi-annual cash-pay interest and a maturity date of March 1, 2025. Garrison Trust Company serves as indenture trustee under the indenture governing the Unsecured Notes.
19. Intercompany Note. TAI is the obligor under an intercompany promissory note payable to TSL in the principal amount of approximately $76.4 million (the "Intercompany Note"). The Intercompany Note is subordinated to all external indebtedness of TAI.
20. In the aggregate, TAI's total indebtedness as of September 30, 2022, including trade payables of approximately $38.7 million and other accrued liabilities, was approximately $847.3 million.
C. Events Leading to the Filing
21. The liquidity crisis that precipitated the commencement of this Chapter 11 case was driven primarily by the precipitous decline in global dry-bulk charter rates during 2022. The Baltic Dry Index, a widely followed benchmark for the cost of shipping raw materials by sea, declined approximately 58% between January 2022 and September 2022. As a consequence, TSL's average daily Time Charter Equivalent ("TCE") revenue fell from approximately $24,800 per day in FY2021 to approximately $11,200 per day during the third quarter of 2022, a decline of approximately 54.8%.
22. The deterioration in charter rates directly and severely impacted TAI's revenue, operating cash flow, and ability to service its considerable debt obligations. The following key milestones illustrate the progression of TAI's financial distress:
(a) September 15, 2022: TAI breached the Minimum Liquidity Covenant under the Senior Secured Facility, reporting cash and cash equivalents of approximately $27.3 million as against a minimum liquidity requirement of $40 million, representing a shortfall of approximately $12.7 million.
(b) September 30, 2022: TAI breached two additional financial maintenance covenants under the Senior Secured Facility as of the end of the third fiscal quarter of 2022. The Leverage Ratio stood at approximately 7.82x (calculated as approximately $770.9 million in net debt divided by approximately $98.6 million in last-twelve-months ("LTM") EBITDA), as against a maximum permitted ratio of 5.50x. The Interest Coverage Ratio stood at approximately 1.74x (calculated as approximately $98.6 million in LTM EBITDA divided by approximately $56.7 million in LTM interest expense), as against a minimum required ratio of 2.50x.
(c) October 10, 2022: TAI, TSL, and the lender syndicate under the Senior Secured Facility executed a Forbearance Agreement, pursuant to which the lenders agreed to a ninety (90)-day standstill period through January 8, 2023, during which the lenders would forbear from exercising remedies arising from the covenant defaults, conditioned upon, inter alia, TAI's engagement of financial and legal restructuring advisors and the pursuit of a consensual restructuring.
(d) November 1, 2022: The TSL fleet was appraised by Drakos Maritime Valuations Ltd. at an aggregate fair market value of approximately $623 million, reflecting a decline of approximately $268 million, or 30.1%, from an appraised value of approximately $891 million in January 2022. This appraisal confirmed the significant erosion of collateral values underlying the Senior Secured Facility.
(e) December 1, 2022: TAI failed to make a scheduled semi-annual interest payment in the amount of $2,062,500 on the Unsecured Notes, constituting an event of default under the applicable indenture.
23. The foregoing events, together with additional facts and circumstances described in the Hale Declaration, necessitated the commencement of this Chapter 11 case. The Debtor respectfully refers the Court to the Hale Declaration for a complete recitation of the prepetition events and the Debtor's restructuring objectives.
IV. THE PREPETITION TAX OBLIGATIONS
A. Overview of Tax Categories
24. In the ordinary course of its business operations, the Debtor incurs and/or collects various taxes, fees, and assessments payable to federal, state, and local Taxing Authorities. These obligations arise from TAI's status as a corporate taxpayer, an employer of approximately 680 individuals, an operator of port terminal facilities, a participant in international trade subject to customs regulation, and a provider of logistics services subject to state and local sales and use taxes.
25. As of the Petition Date, the Debtor estimates that it owes approximately $[●] million in aggregate Prepetition Tax Obligations. These obligations fall into the following principal categories, each of which is described in greater detail below: (a) federal income taxes; (b) state income and franchise taxes; (c) employment and payroll taxes; (d) sales and use taxes; (e) property taxes; (f) customs duties, port fees, and regulatory assessments; and (g) other taxes, fees, and assessments.
B. Federal Income Taxes
26. TAI files federal income tax returns as a C-Corporation (EIN 84-3291057) and is subject to the corporate income tax imposed by Subchapter C of the Internal Revenue Code of 1986, as amended (the "IRC"). In the ordinary course, TAI makes estimated quarterly federal income tax payments in accordance with 26 U.S.C. § 6655, based upon its estimated annual taxable income.
27. As of the Petition Date, the Debtor estimates that it has accrued and unpaid federal income tax obligations relating to both the current fiscal year and the immediately preceding fiscal year. The Debtor notes that TAI has experienced a significant decline in revenue during FY2022 (estimated $198 million, down from $312 million in FY2021), which has had a corresponding impact on TAI's taxable income and the amount of its estimated quarterly tax payments. Nevertheless, certain estimated tax installments may have become due prior to the Petition Date and remain unpaid.
C. State Income and Franchise Taxes
28. Texas. Although Texas does not impose a traditional state income tax, TAI is subject to the Texas franchise tax (commonly referred to as the "margin tax"), which is imposed on entities doing business in the State of Texas based on a taxable margin calculation. TAI maintains its principal office in Houston, Texas, operates the Houston terminal, and generates substantial revenues attributable to Texas, giving rise to significant Texas franchise tax obligations. The Debtor estimates that it has accrued and unpaid Texas franchise tax obligations as of the Petition Date.
29. Delaware. As a corporation organized under the laws of the State of Delaware, TAI is obligated to pay the Delaware annual franchise tax and annual report fee to the Delaware Division of Corporations. TAI's registered agent is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, Delaware 19801. The Debtor estimates that annual franchise tax and registered agent fees may be accrued and unpaid as of the Petition Date.
30. Other States. TAI may have established nexus and may be subject to state income or franchise tax obligations in other jurisdictions arising from its freight brokerage and logistics operations, which involve the arrangement of transportation services across multiple states. The Debtor is in the process of reviewing its multi-state tax compliance obligations and reserves the right to supplement the record in this regard.
D. Employment and Payroll Taxes
31. TAI employs approximately 680 individuals in the United States, substantially all of whom work at or from TAI's Houston, Texas offices and terminal facilities. As an employer, TAI is responsible for range federal and state employment and payroll tax obligations, including:
(a) Federal Payroll Taxes. TAI is obligated to pay the employer's share of Federal Insurance Contributions Act ("FICA") taxes, consisting of Social Security taxes and Medicare taxes, as imposed by 26 U.S.C. § 3111. TAI is also required to withhold the employee's share of FICA taxes and federal income taxes from employee wages pursuant to 26 U.S.C. § 3402. In addition, TAI is subject to Federal Unemployment Tax Act ("FUTA") taxes pursuant to 26 U.S.C. § 3301.
(b) State Payroll Taxes. TAI is required to make state unemployment insurance ("SUI") contributions, principally to the Texas Workforce Commission, based on TAI's taxable payroll and assigned contribution rate.
(c) Trust-Fund Taxes. Of critical importance, certain of TAI's payroll tax obligations constitute "trust-fund" taxes — specifically, the amounts withheld from employee wages for federal income taxes and the employee's share of FICA taxes. These amounts are held in trust by the Debtor for the benefit of the United States and are not, in substance, property of the Debtor or of the estate. See 26 U.S.C. § 7501; Begier v. IRS, 496 U.S. 53 (1990). The trust-fund character of these obligations is discussed further in Section VI.D below.
32. The Debtor wishes to emphasize the critical importance of timely remittance of trust-fund taxes. Failure to collect, account for, and pay over trust-fund taxes exposes the Debtor's officers and directors who qualify as "responsible persons" — including, without limitation, Marcus Hale (President) and Diana Restrepo (Vice President, Finance) — to the personal "trust fund recovery penalty" imposed by 26 U.S.C. § 6672. Under that provision, any person required to collect, truthfully account for, and pay over any tax who willfully fails to do so is liable for a penalty equal to 100% of the unpaid trust-fund taxes. The risk of such personal liability assessments is real and imminent, and the avoidance of such liability is essential to retaining the experienced management team that TAI requires during this restructuring.
E. Sales and Use Taxes
33. In connection with its logistics and freight brokerage operations, TAI collects sales and use taxes on certain taxable transactions. These collected amounts are held in trust by the Debtor for the benefit of the applicable state and local taxing authorities and, like employee payroll withholdings, are not in substance property of the estate.
34. TAI's primary sales tax obligations arise under the Texas sales tax, which TAI collects on applicable taxable transactions and remits to the Texas Comptroller of Public Accounts. TAI may also have sales or use tax collection and remittance obligations in other states where it conducts taxable activities in connection with its multi-state freight brokerage and logistics operations.
35. The trust-fund character of collected sales taxes is analogous to that of employee payroll withholdings, and the Debtor submits that similar considerations support the authorization of payment of prepetition sales tax obligations. See Section VI.D, infra.
F. Property Taxes
36. TAI is subject to real and personal property tax assessments levied by Harris County, Texas, and applicable taxing districts within Harris County, on TAI's Houston terminal facility and the office lease improvements at 1400 McKinney Street, Suite 2200, Houston, Texas 77010.
37. In addition, TAI is subject to tangible personal property taxes assessed by Harris County and applicable local taxing jurisdictions on equipment, fixtures, and improvements located at the Houston terminal. The Debtor estimates that certain property tax installments may have accrued and remain unpaid as of the Petition Date.
38. Under Texas law, unpaid property taxes give rise to a statutory lien on the subject property, and taxing authorities have broad enforcement powers, including the ability to foreclose on the tax lien. Payment of prepetition property tax obligations is therefore essential to protect the estate's interest in the Debtor's real and personal property assets located in Harris County.
G. Customs Duties, Port Fees, and Regulatory Assessments
39. As a participant in international trade and the operator of a port terminal facility, TAI incurs range customs duties, port fees, and regulatory assessments in the ordinary course of its business, including:
(a) U.S. Customs and Border Protection ("CBP") Duties and Fees. TAI is subject to customs duties and user fees assessed by CBP in connection with TAI's freight brokerage and vessel scheduling operations, including merchandise processing fees, harbor maintenance fees, and any applicable anti-dumping or countervailing duties on cargo processed through TAI's operations.
(b) Port of Houston Authority Fees and Assessments. TAI pays various fees and assessments to the Port of Houston Authority in connection with its terminal operations, including dockage fees, wharfage charges, and terminal use charges.
(c) U.S. Coast Guard User Fees and Inspection Charges. TAI is assessed user fees by the U.S. Coast Guard for vessel inspections and related regulatory services associated with the vessels scheduled by TAI for TSL's fleet.
(d) Federal Maritime Commission Fees. To the extent applicable, TAI may be subject to fees assessed by the Federal Maritime Commission in connection with its freight brokerage operations and ocean transportation intermediary license.
(e) Environmental and Regulatory Fees. TAI incurs various environmental and regulatory fees assessed by federal, state, and local authorities in connection with terminal operations, including fees related to environmental permits, storm water discharge permits, air quality permits, and similar regulatory requirements.
40. Non-payment of customs duties and port fees could result in CBP enforcement actions, detention of cargo, and disruption of TAI's terminal and vessel scheduling operations. Non-payment of Coast Guard and environmental fees could jeopardize TAI's ability to operate the Houston terminal. The Debtor therefore requests authority to pay all such prepetition obligations as part of the Prepetition Tax Obligations.
H. Other Taxes, Fees, and Assessments
41. In addition to the foregoing categories, TAI incurs in the ordinary course various other taxes, fees, and assessments payable to governmental authorities, including:
(a) Business license and permit fees payable to the City of Houston, Harris County, and the State of Texas, which are necessary for TAI to maintain its authority to conduct business at the Houston terminal and elsewhere in the State of Texas.
(b) Miscellaneous governmental fees and assessments incurred in the ordinary course, including filing fees, regulatory compliance charges, and similar obligations.
(c) Any penalties or interest that may have accrued on any of the foregoing Prepetition Tax Obligations as of the Petition Date.
42. The Debtor seeks authority to pay all such obligations as part of the relief requested herein, to the extent such obligations are accrued and unpaid as of the Petition Date.
V. RELIEF REQUESTED
43. By this Motion, the Debtor seeks entry of an order, substantially in the form attached hereto as Exhibit A (Proposed Interim Order) and Exhibit B (Proposed Final Order), authorizing, but not directing, the Debtor to pay the Prepetition Tax Obligations in an aggregate amount not to exceed $[●] million (inclusive of all categories described in Section IV above).
44. The Debtor requests that the authorization to pay Prepetition Tax Obligations be exercised in the Debtor's business judgment, in consultation with the Debtor's financial advisor, Kensington Veltrian Partners LLC (James Calloway, Managing Director), and the Debtor's proposed counsel, Calderwood & Harkness LLP. The Debtor's management, in coordination with these advisors, will evaluate each Prepetition Tax Obligation and determine the timing, amount, and priority of payment, taking into account the Debtor's available liquidity, the DIP budget, and the potential consequences of non-payment.
45. In addition, the Debtor requests authorization to pay both currently due Prepetition Tax Obligations and to satisfy any arrearages, penalties, and interest on such obligations as may be necessary to maintain good standing with the applicable Taxing Authorities, avoid the imposition or perfection of tax liens, and prevent enforcement actions including levies, seizures, and revocation of licenses and permits.
46. The Debtor further requests that the Court authorize all applicable banks and financial institutions to honor and process the Debtor's checks and electronic fund transfers in furtherance of the payments authorized by the relief requested herein, without regard to whether such checks or transfers were drawn, initiated, or presented prior to or after the Petition Date, provided that sufficient funds are available in the applicable accounts.
VI. BASIS FOR RELIEF
A. Section 363(b) — Sound Business Judgment
47. Section 363(b)(1) of the Bankruptcy Code provides that "[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." 11 U.S.C. § 363(b)(1). Courts in the Fifth Circuit and the Southern District of Texas have consistently held that a debtor-in-possession may be authorized to pay prepetition obligations outside the ordinary course of business where such payments are supported by sound business judgment. See, e.g., In re Continental Air Lines, Inc., 780 F.2d 1223, 1226 (5th Cir. 1986) (holding that the business judgment standard governs a debtor's use of estate property under § 363); see also In re Mirant Corp., 296 B.R. 427 (Bankr. N.D. Tex. 2003).
48. The "business judgment" standard requires a showing that the proposed payment (i) is necessary to avoid disruption to the debtor's ongoing operations, (ii) is beneficial to the estate and its stakeholders, and (iii) is supported by adequate consideration. See In re Dynegy, Inc., No. 11-38111 (Bankr. S.D. Tex. 2011); In re Southmark Corp., 49 F.3d 1111 (5th Cir. 1995). The Debtor submits that payment of the Prepetition Tax Obligations amply satisfies each of these elements.
49. First, payment is necessary to avoid disruption to TAI's ongoing operations. Failure to pay prepetition taxes could result in the imposition of tax liens, the commencement of governmental enforcement actions, the revocation of business licenses and permits, and the personal liability of TAI's officers — any one of which would materially impair the Debtor's ability to continue operating its business during this Chapter 11 case.
50. Second, payment is beneficial to the estate and its stakeholders. As discussed below, the vast majority of the Prepetition Tax Obligations constitute priority claims under § 507(a)(8) of the Bankruptcy Code, which would be required to be paid in full under any confirmable plan of reorganization. Early payment of these obligations does not prejudice the estate but rather avoids the accrual of additional penalties and interest that would increase the total amount payable by the estate.
51. Third, the payment is supported by adequate consideration, as the Debtor receives the direct benefit of compliance with applicable tax laws, the avoidance of penalties and enforcement actions, and the preservation of its ability to operate in the ordinary course.
B. Section 507(a)(8) — Priority Status of Tax Claims
52. Many of the Prepetition Tax Obligations constitute priority claims under section 507(a)(8) of the Bankruptcy Code. Section 507(a)(8) grants priority status to the following categories of tax claims, among others:
(a) Income or Gross Receipts Taxes. Under § 507(a)(8)(A), a tax on or measured by income or gross receipts is entitled to priority status if it relates to a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due (including extensions) after three years before the date of the filing of the petition. TAI's federal and state income and franchise tax obligations for the most recent taxable years fall squarely within this provision.
(b) Property Taxes. Under § 507(a)(8)(B), a property tax assessed before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition is entitled to priority status. TAI's Harris County property tax assessments are expected to qualify for priority treatment under this provision.
(c) Employment and Withholding Taxes. Under § 507(a)(8)(C), a tax required to be collected or withheld and for which the debtor is liable in whatever capacity is entitled to priority status. This provision encompasses TAI's obligations for employee income tax withholdings and the employees' share of FICA taxes. Under § 507(a)(8)(D), an employment tax on a wage, salary, or commission of a kind specified in § 507(a)(4) that is earned from the debtor before the date of filing is likewise entitled to priority status.
(d) Excise Taxes. Under § 507(a)(8)(E), an excise tax on a transaction occurring before the date of the filing of the petition for which a return, if required, is last due (under applicable law or any extension) within three years before the date of the filing is entitled to priority status. To the extent any of TAI's customs duties or regulatory assessments are characterized as excise taxes, they would qualify for priority treatment under this provision.
53. Because priority tax claims must be paid in full under any confirmable Chapter 11 plan of reorganization pursuant to section 1129(a)(9)(C) of the Bankruptcy Code, the early payment of these obligations merely accelerates the timing of payments that creditors would ultimately receive in any event. Accordingly, payment of the Prepetition Tax Obligations at this time does not prejudice the rights or recoveries of any class of creditors.
C. Section 105(a) — Equitable Powers
54. Section 105(a) of the Bankruptcy Code provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a). Courts in this District have routinely invoked the equitable powers conferred by § 105(a) to authorize the payment of prepetition tax obligations in first-day motions where such payment is necessary to prevent harm to the estate and facilitate the debtor's reorganization. See, e.g., In re Chesapeake Energy Corp., No. 20-33233 (Bankr. S.D. Tex. 2020); In re McDermott International, Inc., No. 20-30336 (Bankr. S.D. Tex. 2020).
55. In this case, equitable considerations strongly favor the payment of the Prepetition Tax Obligations. Non-payment could result in governmental enforcement actions that would disrupt the Debtor's operations, the imposition of tax liens that could prime or complicate the existing lien structure (including the DIP lender's superpriority liens), the accrual of penalties and interest that would increase the estate's administrative burden, and the exposure of the Debtor's officers and directors to personal liability. The Court's equitable powers under § 105(a) are properly exercised to prevent these harms.
D. Trust-Fund Tax Doctrine
56. Certain of the Prepetition Tax Obligations — specifically, amounts withheld from employee wages for federal income taxes and the employees' share of FICA taxes, as well as sales taxes collected from customers — are held in trust by the Debtor for the benefit of the applicable Taxing Authorities. These trust-fund taxes are not, and have never been, property of the Debtor; rather, they are held in a fiduciary capacity. See 26 U.S.C. § 7501(a) ("Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States.").
57. The United States Supreme Court has held that trust-fund taxes are not property of the bankruptcy estate. See Begier v. IRS, 496 U.S. 53, 58–59 (1990) (holding that withholding taxes held in trust for the government do not constitute property of the estate under § 541 and that the debtor's transfer of such taxes to the IRS is not a preference under § 547). Because trust-fund taxes are not property of the estate, their payment does not diminish the estate or prejudice the interests of any creditor.
58. Moreover, the Debtor has a fiduciary obligation to remit trust-fund taxes to the applicable Taxing Authorities. The Debtor's failure to do so would constitute a breach of that fiduciary obligation and would expose the Debtor's officers and directors who qualify as "responsible persons" to the trust fund recovery penalty imposed by 26 U.S.C. § 6672. As discussed below, this personal liability exposure is of particular concern and supports the immediate authorization of payment.
E. Avoidance of Tax Liens and Enforcement Actions
59. Non-payment of prepetition taxes may give rise to statutory tax liens that could attach to property of the estate. Under 26 U.S.C. § 6321, a federal tax lien arises by operation of law upon all property and rights to property of the taxpayer upon assessment of the tax and the failure of the taxpayer to pay after notice and demand. Similarly, state and local taxing authorities possess the power to impose liens on the taxpayer's property for unpaid taxes. In Texas, for example, unpaid property taxes are secured by a statutory lien that attaches on January 1 of the tax year and may be enforced through judicial foreclosure.
60. The imposition of tax liens on property of the estate could have severe consequences for the Debtor's restructuring. The Debtor's assets currently secure the $540 million outstanding under the Senior Secured Facility. In addition, the proposed $75 million DIP credit facility from Nordbank International AG and Triton Credit Partners LP, described in the DIP Motion filed contemporaneously herewith, would be secured by superpriority liens on substantially all of the Debtor's assets. Tax liens, depending on their timing and perfection, could potentially prime or complicate the existing first-priority and second-priority lien structure, creating uncertainty for the Debtor's secured creditors and jeopardizing the DIP financing.
61. Non-payment of taxes could also result in state or local enforcement actions, including the seizure of the Debtor's bank accounts, the revocation of business licenses and permits necessary for the Debtor's Houston terminal operations, and other disruptive governmental actions. The Debtor notes that the automatic stay under section 362(a) of the Bankruptcy Code does not stay the exercise by governmental units of their police and regulatory powers under section 362(b)(4), and that certain tax collection actions may proceed notwithstanding the automatic stay. See 11 U.S.C. § 362(b)(4) and (b)(9).
F. Protection of Officers from Personal Liability
62. As discussed in Section IV.D above, 26 U.S.C. § 6672 imposes a penalty equal to 100% of the unpaid trust-fund taxes on any "responsible person" who willfully fails to collect, truthfully account for, or pay over such taxes to the United States. The term "responsible person" is broadly construed and encompasses any person having authority to direct the payment of the debtor's funds, including officers, directors, and employees exercising financial control. See Calderone v. United States, 799 F.2d 254 (6th Cir. 1986); Mazo v. United States, 591 F.2d 1151 (5th Cir. 1979).
63. Marcus Hale, as President of TAI, and Diana Restrepo, as Vice President of Finance, are almost certainly "responsible persons" within the meaning of § 6672. Their failure to cause TAI to remit trust-fund taxes could result in the assessment of personal liability in an amount equal to 100% of the unpaid trust-fund taxes. Such personal liability would not be dischargeable in a personal bankruptcy proceeding. See 11 U.S.C. § 523(a)(1).
64. The Debtor's directors and officers liability insurance policy with Promontory Indemnity Insurance Co. (Policy No. PII-DO-2022-08847, with an aggregate limit of $25 million) may not cover personal tax liabilities arising under 26 U.S.C. § 6672, as such liabilities typically fall outside the scope of D&O insurance coverage. Accordingly, the Debtor's officers face the prospect of significant uninsured personal liability exposure in the event that prepetition trust-fund taxes are not timely remitted.
65. Protecting TAI's officers from personal liability is not merely a matter of equity to those individuals; it is a matter of strategic importance to the estate. The willingness and ability of Marcus Hale, Diana Restrepo, Jonathan Kurtz, and other members of TAI's management team to continue managing the Debtor's operations through the Chapter 11 process is critical to the success of the Debtor's restructuring efforts. The loss of key management personnel — whether through resignation, distraction, or personal financial distress arising from trust-fund penalty assessments — would materially and adversely affect the Debtor's ability to reorganize and could result in a significant diminution of estate value.
G. Preservation of Going-Concern Value
66. TAI employs approximately 680 people in the United States and generates annual revenue estimated at $198 million (FY2022). The Debtor's Houston terminal operations, foreign-flag vessel scheduling services, and domestic freight brokerage business collectively represent a substantial going-concern enterprise.
67. Failure to pay the Prepetition Tax Obligations could trigger a cascade of adverse consequences that would diminish the Debtor's going-concern value, including: (a) the loss of business licenses and permits necessary to operate the Houston terminal; (b) the inability to schedule vessels or clear cargo through U.S. Customs and Border Protection; (c) the disruption of payroll and consequent employee attrition, particularly among TAI's experienced logistics and operations personnel; and (d) reputational harm in the shipping and logistics industry, where reliability and regulatory compliance are essential to maintaining customer and vendor relationships.
68. Kensington Veltrian Partners LLC, the Debtor's financial advisor, has estimated the enterprise value of the consolidated TSL group at approximately $580 million to $640 million, with a midpoint of approximately $610 million. Maintaining compliance with all tax obligations is essential to preserving this enterprise value and maximizing recoveries for all stakeholders in this Chapter 11 case. The relatively modest cost of paying the Prepetition Tax Obligations is far outweighed by the risk of enterprise value destruction that would result from non-payment.
VII. ADEQUATE ASSURANCE OF PAYMENT AND NO PREJUDICE TO CREDITORS
69. The Debtor submits that the payment of the Prepetition Tax Obligations will not prejudice the interests of the Debtor's creditors for the following reasons:
(a) Priority Claims. The Prepetition Tax Obligations are, in large part, priority claims under § 507(a)(8) of the Bankruptcy Code. As priority claims, these obligations would be required to be paid in full under any confirmable Chapter 11 plan of reorganization. See 11 U.S.C. § 1129(a)(9)(C). The early payment of priority tax claims does not diminish the estate or reduce recoveries available to lower-priority or general unsecured creditors; it merely accelerates the timing of payments that would be made in any event.
(b) Trust-Fund Taxes. Trust-fund taxes — including employee withholdings and collected sales taxes — are not property of the estate at all. See Begier v. IRS, 496 U.S. 53 (1990). Their payment, by definition, does not diminish the value of the estate or reduce recoveries available to any creditor class.
(c) Avoidance of Penalties and Interest. Payment now, rather than later, avoids the continued accrual of penalties and interest on unpaid tax obligations. To the extent such penalties and interest would constitute additional priority or administrative claims, their avoidance directly benefits the estate by reducing the total quantum of claims.
(d) Available Liquidity. The Debtor has adequate liquidity to fund the requested payments, taking into account the proposed $75 million superpriority DIP credit facility from Nordbank International AG and Triton Credit Partners LP (bearing interest at SOFR plus 600 basis points, with a 0.50% commitment fee, and a twelve-month maturity), as described in the DIP Motion filed contemporaneously herewith. Payment of the Prepetition Tax Obligations is expressly contemplated in the DIP budget and thirteen-week cash flow projections prepared by Kensington Veltrian Partners LLC in connection with the DIP financing.
70. Accordingly, the Debtor respectfully submits that the payment of the Prepetition Tax Obligations is in the best interests of the estate and all of its stakeholders, and that no creditor will be prejudiced by the relief requested herein.
VIII. REQUEST FOR INTERIM AND FINAL RELIEF
71. The Debtor requests that this Motion be heard on an interim basis on the first day of these Chapter 11 proceedings, or as soon as practicable thereafter, to authorize the Debtor to pay Prepetition Tax Obligations that become due during the gap period between the Petition Date and the date of the final hearing on this Motion. The Debtor believes that interim relief is necessary and appropriate to prevent immediate and irreparable harm to the Debtor's estate, including the imposition of penalties, the creation of tax liens, and the exposure of the Debtor's officers to personal liability.
72. The Debtor proposes an interim cap of $[●] million, representing the Debtor's good-faith estimate of the Prepetition Tax Obligations that will become due within twenty-one (21) days of the Petition Date. The Debtor submits that interim relief in this amount is necessary and appropriate under Bankruptcy Rule 6003, which permits the Court to grant relief within the first twenty-one days of a case to the extent necessary to avoid immediate and irreparable harm.
73. The Debtor requests that the final hearing on this Motion be set on at least twenty-one (21) days' notice in accordance with Bankruptcy Rules 2002 and 9014 and the Local Rules of the United States Bankruptcy Court for the Southern District of Texas. At the final hearing, the Debtor will seek entry of a final order authorizing the Debtor to pay all Prepetition Tax Obligations in an aggregate amount not to exceed $[●] million.
IX. WAIVER OF STAY UNDER BANKRUPTCY RULE 6004(h)
74. Bankruptcy Rule 6004(h) provides that an order authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of fourteen (14) days after entry of the order, unless the court orders otherwise. The Debtor respectfully requests that the Court waive the fourteen-day stay period under Bankruptcy Rule 6004(h) to the extent applicable to the order entered on this Motion, so that the Debtor may make payments of Prepetition Tax Obligations immediately upon entry of the order.
75. Cause exists for such waiver. Certain of the Prepetition Tax Obligations carry near-term payment deadlines, and any delay in the Debtor's ability to make payments could result in the imposition of penalties, the commencement of enforcement actions, and the personal liability of the Debtor's officers for trust-fund taxes. The imposition of a fourteen-day delay would defeat the purpose of the relief sought and could result in harm to the estate that the Motion is specifically designed to prevent.
X. NOTICE
76. Notice of this Motion has been provided to, or will be provided promptly to, the following parties or their counsel:
(a) The United States Trustee for the Southern District of Texas;
(b) Nordbank International AG, as Administrative Agent and Collateral Agent under the Senior Secured Facility, Bahnhofstrasse 78, 8001 Zürich, Switzerland, Attn: Henrik Lüdemann;
(c) Whitfield, Crane & Burgess LLP, as counsel to the Ad Hoc Group of Senior Secured Lenders, 51 West 52nd Street, 38th Floor, New York, New York 10019, Attn: Graham Whitfield III;
(d) Kellner & Foss LLP, as counsel to Dralvecen Mezzanine Capital LLC (holder of the Mezzanine Notes), 1185 Avenue of the Americas, 30th Floor, New York, New York 10036, Attn: Theodore Kellner;
(e) Ashford, Brightmoor Group & McKay PC, as counsel to the informal group of unsecured noteholders, 299 Park Avenue, 18th Floor, New York, New York 10171, Attn: Carolyn Brightmoor Group;
(f) The Internal Revenue Service;
(g) The Texas Comptroller of Public Accounts;
(h) The Delaware Secretary of State, Division of Corporations;
(i) All other parties entitled to notice under Bankruptcy Rule 2002 and the Court's first-day notice procedures.
77. The Debtor submits that no other or further notice of this Motion is necessary or required.
XI. NO PRIOR REQUEST
78. No prior motion for the relief requested herein has been made to this or any other court.
XII. CONCLUSION AND PRAYER FOR RELIEF
WHEREFORE, the Debtor respectfully requests that this Court:
1. Enter the proposed Interim Order, substantially in the form attached hereto as Exhibit A, authorizing the Debtor to pay Prepetition Tax Obligations up to the interim cap of $[●] million pending the final hearing;
2. Schedule a final hearing on this Motion on at least twenty-one (21) days' notice;
3. Enter the proposed Final Order, substantially in the form attached hereto as Exhibit B, authorizing the Debtor to pay all Prepetition Tax Obligations in an aggregate amount not to exceed $[●] million (inclusive of amounts previously paid under the Interim Order);
4. Waive the fourteen-day stay imposed by Bankruptcy Rule 6004(h) to the extent applicable;
5. Grant such other and further relief as this Court deems just and proper.
• - -
Dated: January 16, 2023 Houston, Texas
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Nathaniel Bower Responsible Partner, Bankruptcy & Restructuring
Amy Chesterton Lead Associate
Nathan Ikeda Working Associate
780 Third Avenue New York, New York 10017 Telephone: (212) 555-0100
Proposed Counsel to the Debtor, Thalassa Americas Inc.
EXHIBIT A PROPOSED INTERIM ORDER
• - -
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION
• - -
• - -
INTERIM ORDER AUTHORIZING, BUT NOT DIRECTING, THE DEBTOR TO PAY CERTAIN PREPETITION TAXES, FEES, AND ASSESSMENTS IN THE ORDINARY COURSE OF BUSINESS
• - -
Upon the Motion (the "Motion")^1 of the above-captioned debtor and debtor-in-possession, Thalassa Americas Inc. (the "Debtor"), for entry of an interim order authorizing, but not directing, the Debtor to pay certain prepetition taxes, fees, and assessments in the ordinary course of business; and this Court having reviewed the Motion and the Declaration of Marcus Hale in Support of First-Day Motions (the "Hale Declaration"); and this Court having considered the statements and representations of counsel at the hearing held on [DATE] (the "Interim Hearing"); and it appearing that the relief requested in the Motion is necessary to avoid immediate and irreparable harm to the Debtor's estate pending the final hearing on the Motion; and it further appearing that adequate notice of the Motion and the Interim Hearing has been given under the circumstances; and after due deliberation and upon sufficient cause appearing therefor,
^1 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Motion.
IT IS HEREBY ORDERED THAT:
1. The Motion is GRANTED on an interim basis, as set forth herein.
2. The Debtor is authorized, but not directed, to pay Prepetition Tax Obligations (as defined in the Motion) in an aggregate amount not to exceed $[●] million pending the final hearing on the Motion, in the Debtor's business judgment and in consultation with the Debtor's financial advisor, Kensington Veltrian Partners LLC, and the Debtor's proposed counsel, Calderwood & Harkness LLP.
3. Notwithstanding the interim cap set forth in paragraph 2, the Debtor is authorized, but not directed, to pay trust-fund taxes — including, without limitation, employee withholdings for federal income taxes and the employees' share of FICA taxes, as well as sales taxes collected from customers and held in trust — without regard to the interim dollar limitation, as such amounts are not property of the estate under section 541 of the Bankruptcy Code and the trust-fund tax doctrine. See Begier v. IRS, 496 U.S. 53 (1990).
4. All applicable banks and financial institutions are authorized and directed to receive, process, honor, and pay any and all checks, drafts, wire transfers, automated clearinghouse payments, and other forms of payment drawn on or initiated from the Debtor's accounts in furtherance of the payments authorized by this Order, whether such checks or transfers were drawn, initiated, or presented prior to or after the Petition Date, provided that sufficient funds are available in the applicable accounts.
5. The Debtor shall maintain records of all payments made pursuant to this Order and shall provide an accounting of such payments upon request of the United States Trustee or any party in interest.
6. The final hearing on the Motion (the "Final Hearing") is scheduled for [DATE] at [TIME] before the undersigned in Courtroom __, United States Bankruptcy Court, 515 Rusk Street, Houston, Texas 77002. The Debtor shall serve notice of the Final Hearing in accordance with the Bankruptcy Rules and the Local Rules of this Court. Any objections or responses to the Motion shall be filed and served no later than [DATE] at 4:00 p.m. (Central Time).
7. The fourteen (14)-day stay imposed by Bankruptcy Rule 6004(h), to the extent applicable, is hereby waived, and this Order shall be effective immediately upon its entry.
8. This Court retains jurisdiction to hear and determine all matters arising from or related to the implementation, interpretation, and enforcement of this Order.
• - -
________________________________________
UNITED STATES BANKRUPTCY JUDGE
Dated: ____ Houston, Texas
EXHIBIT B PROPOSED FINAL ORDER
• - -
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION
• - -
• - -
FINAL ORDER AUTHORIZING, BUT NOT DIRECTING, THE DEBTOR TO PAY CERTAIN PREPETITION TAXES, FEES, AND ASSESSMENTS IN THE ORDINARY COURSE OF BUSINESS
• - -
Upon the Motion (the "Motion")^2 of the above-captioned debtor and debtor-in-possession, Thalassa Americas Inc. (the "Debtor"), for entry of a final order authorizing, but not directing, the Debtor to pay certain prepetition taxes, fees, and assessments in the ordinary course of business; and this Court having previously entered the Interim Order Authorizing, But Not Directing, the Debtor to Pay Certain Prepetition Taxes, Fees, and Assessments in the Ordinary Course of Business, dated [DATE] (the "Interim Order"); and this Court having reviewed the Motion, the Declaration of Marcus Hale in Support of First-Day Motions (the "Hale Declaration"), and the record in this case; and this Court having considered the statements and representations of counsel at the final hearing held on [DATE] (the "Final Hearing"); and it appearing that adequate notice of the Motion and the Final Hearing has been given in accordance with the Bankruptcy Rules and the Local Rules of this Court; and no objections to the Motion having been filed [or all objections having been overruled]; and after due deliberation and upon sufficient cause appearing therefor,
^2 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Motion.
IT IS HEREBY ORDERED THAT:
1. The Motion is GRANTED on a final basis.
2. The Debtor is authorized, but not directed, to pay all Prepetition Tax Obligations (as defined in the Motion) in an aggregate amount not to exceed $[●] million (inclusive of all amounts previously paid pursuant to the Interim Order), in the Debtor's business judgment and in consultation with the Debtor's financial advisor, Kensington Veltrian Partners LLC, and the Debtor's counsel, Calderwood & Harkness LLP.
3. Consistent with the trust-fund tax doctrine and the Interim Order, the Debtor is authorized, but not directed, to pay trust-fund taxes — including, without limitation, employee withholdings for federal income taxes and the employees' share of FICA taxes, as well as sales taxes collected from customers and held in trust — without regard to the dollar limitation set forth in paragraph 2, as such amounts are not property of the estate.