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Tennessee's Withdrawal of Claims - Updated
Saturday, November 01 2008 @ 06:17 AM EDT

There are more bankruptcy filings in the SCO bankruptcy, including two that sent me on a deep search for what they mean. Tennessee's Department of Revenue has filed two Withdrawals of Claims, for claims 110 and 111. Why would Tennessee do that, I wondered? Are they giving up on getting paid? The amounts of the claims are a little over a thousand on one and a little over five thousand on the other. Had they decided it wasn't worth fighting for? Or was there a plan to go after SCO in some other way?

After hours and hours of research, I confess I am not sure what it means, bankruptcy not being my field. But if someone put a gun to my head and told me to tell what I think after all the research or else, I'd say my best guess is that Tennessee realized that SCO doesn't owe them those sums after all.

I learned some interesting things about withdrawing claims, though, which I'll share with you.

First, here are all the filings:

587 Filed & Entered: 10/29/2008
Certificate of No Objection
Docket Text: Certificate of No Objection (No Order Required) Regarding Twelfth Interim Application of Tanner LC for Compensation for Services and Reimbursement of Expenses as Accountants to the Debtors for the Period from September 1, 2008 through September 30, 2008 (related document(s)[575]) Filed by The SCO Group, Inc.. (Attachments: # (1) Certificate of Service and Service List) (Makowski, Kathleen)

588 - Filed & Entered: 10/29/2008
Application for Compensation
Docket Text: Quarterly Application for Compensation [Fourth] for Services and Reimbursement of Expenses, as Accountants to the Debtors in Possession for the Period from July 1, 2008 through September 30, 2008 Filed by Tanner LC. Objections due by 11/18/2008. (Attachments: # (1) Notice # (2) Exhibit A # (3) Exhibit B # (4) Exhibit C # (5) Certificate of Service and Service List for Fee App# (6) Certificate of Service and Service List for Notice only) (Makowski, Kathleen)

589 - Filed & Entered: 10/31/2008
Withdrawal of Claim
Docket Text: Withdrawal of Claim number 110 in the amount of $1,360.16. Filed by Tennessee Department of Revenue. (McCloud, Laura)

590 - Filed & Entered: 10/31/2008
Withdrawal of Claim
Docket Text: Withdrawal of Claim 111 in the amount of $5,130.89. Filed by Tennessee Department of Revenue. (McCloud, Laura)

591 - Filed & Entered: 10/31/2008
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service of Kimberly A. Beck re: Docket No. [586] - Motion to Approve Order Confirming Constructive Trust and Directing the Debtors to Pay Funds to Novell (related document(s)[586]) Filed by Novell, Inc.. (Nestor, Michael)

Here is Federal Rule of Bankruptcy Procedure 3006, which is the rule referenced by Tennessee in its Withdrawal of Claims. It says the following:
Rule 3006. Withdrawal of Claim; Effect on Acceptance or Rejection of Plan

A creditor may withdraw a claim as of right by filing a notice of withdrawal, except as provided in this rule. If after a creditor has filed a proof of claim an objection is filed thereto or a complaint is filed against that creditor in an adversary proceeding, or the creditor has accepted or rejected the plan or otherwise has participated significantly in the case, the creditor may not withdraw the claim except on order of the court after a hearing on notice to the trustee or debtor in possession, and any creditors' committee elected pursuant to 705(a) or appointed pursuant to 1102 of the Code. The order of the court shall contain such terms and conditions as the court deems proper. Unless the court orders otherwise, an authorized withdrawal of a claim shall constitute withdrawal of any related acceptance or rejection of a plan

Where, I wondered, does Tennessee fit in this rule? Why do people want to withdraw a claim?

On the where do they fit question, I checked to see if Tennessee was listed on SCO's Schedule E, which is where you find prepetition taxes. Indeed, you will find it on SCO Operations' Schedule E [PDF] on page 3 and Tennessee's Dept. of Revenue is listed on SCO's Operations' creditors list. Was it on the list of debts SCO recently filed objections to? Might that be the explanation? I didn't think so, since then it looked like Tennessee would need to get permission from the court to withdraw, and they didn't seem to be doing that. I don't see it on the list [PDF] of claims objected to, so Tennessee isn't reacting to an objection, evidently, from what I see. I think, then, they can withdraw as of right. That means they don't need the court's permission. They just tell the court they're doing it.

But why would they? There is no adversary proceeding in this picture, such as if, for example, another creditor thought Tennessee got paid preferentially and wanted to litigate over it. Sometimes creditors want to withdraw for such reasons, but we can rule that out for Tennessee, from what facts we have. Here's a case about stuff like that [PDF], if you are curious.

And there is no reorganization plan, heaven knows, to accept or reject. Nor has Tennessee "participated significantly" in the bankruptcy. If you are a regular creditor, you can still sometimes get out from under the jurisdiction of the bankruptcy court, if you want to try the state courts instead, but then you need permission to withdraw, such as happened here and here. Tennessee hasn't fought against a plan or anything like that. I saw a case like that, but there is absolutely nothing like it here.

I don't think it is likely that Tennessee would just write off $6,000 owed, so I rule that out, since if it didn't care, it could just do nothing and see what happens. And even if it thought that Chapter 7 was likely, it would wait and see what was left to distribute, I think. I doubt a state can just get tired of it all and walk away, the way a human being might.

So at that point in my research, I thought that left two possibilities -- 1) either Tennessee realized it isn't owed anything by SCO after all, or 2) it planned to take action outside of bankruptcy court.

But that supposes that Tennessee were a human creditor. Can Tennessee opt out like that? It isn't a human, after all, and this is about taxes, and there are particular rules about taxes. What I found out is that whether or not a state files a claim for unpaid taxes, the bankruptcy court can discharge certain state tax liabilities (see this Supreme Court case and this one). The rules are elaborate, but some older state taxes can be wiped out. That's not the answer though, because in the column of the many facts we don't know is how old these sales taxes are. But the point is that from what I see, bankruptcy courts are federal courts, so they trump the states. So a state owed taxes can't hold back from filing a claim just so it can go after a bankrupt later after the stay is lifted, I gather. Whether or not a state files a claim, a bankruptcy court has jurisdiction to do whatever it decides to do in areas where it can. So that seemed to be a dead end, unless there is some way I don't yet see.

Plus this is a Chapter 11 situation, not Chapter 7, so the idea isn't to wipe away the debts so much as to pay off at least part of them, even if it takes forever and a day. Most taxes, that's what happens. You just have to pay, in installments or making an offer to pay whatever is reasonable in the circumstances, and if your offer is accepted, that's what you pay.

So, after all the hours of looking at it from every angle I had in my theory book, I can't see any benefit to Tennessee from withdrawing the two claims, which doesn't mean there isn't one I don't see, and that leaves me with the most plausible surviving theory so far being that Tennessee realized it isn't owed that money after all.

Whew. How elaborate bankruptcy is. And what a sinkhole of unpleasant options. I get the same feeling from it as a family budget that never quite stretches to make it through the month. Do you buy milk? Or pay the phone bill? It's depressing to even report on it, so imagine how horrible it must be to be SCOfolk in the midst of it. My guess from the hours of research I've done is that I'd learn much more the longer I looked. But I've done enough to know that there is no reasonable expectation that I can figure it out with any certainty. If any bankruptcy lawyers see another explanation, sing out, by all means, but this is my gun-to-the-head best guess.

Update: I have heard from a reader who is an attorney. Here's his best guess, and it is better than mine:

You are over thinking this since you have not been the officer or director of a major corporation. Most if not all taxes are a trust situation, due the moment you collect them. Since they are a trust situation the officers and directors are personally responsible for their payment if the company has not paid them. Tenn. issued the company a final notice the second they were informed of the filing and then waited a year and a day. They are now free to pursue the officers and directors for non-payment but in order to do so they must first declare their attempt at collecting from the company has failed by abandoning their claim. They will now move for summary judgement in Tenn. against all of the officers and directors and seize what they can find. It is then up to the officers and directors to sue each other and the company to recover the cash that was seized.
See? Isn't this fun? That is why I spent so much time trying to figure out how Tennessee might go after them. It made sense to me that they would definitely want their money, but I couldn't see how they could get it. As he says, I've never been an officer or director of a company, so I didn't know about this neat workaround.

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