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UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re ELECTROGLAS, INC., et al., 1 Debtors.

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Chapter 11 Case No. 09-__ (_) (Joint Administration Pending)

MOTION OF THE DEBTORS FOR AN ORDER (I) AUTHORIZING THE DEBTORS TO PAY PREPETITION SALES AND USE TAXES AND (II) AUTHORIZING AND DIRECTING BANKS AND FINANCIAL INSTITUTIONS TO HONOR AND PROCESS RELATED CHECKS AND TRANSFERS

The above-captioned debtors and debtors-in-possession (the "Debtors") hereby respectfully move the Bankruptcy Court (the "Motion") for entry of an order, the proposed form of which is attached to this Motion as Exhibit A, pursuant to sections 105(a), 363(b), 507(a), 11 07 and 1108 of Title 11 of the United States Code (as amended, the "Bankruptcy Code") (a) authorizing the Debtors to pay prepetition sales and use and similar taxes in the ordinary course of business; and (b) authorizing and directing banks and financial institutions (collectively, the "Banks") to honor and process related checks and transfers. In support of the Motion, the Debtors respectfully represent as follows:
Jurisdiction, Venue & Statutory Predicates

1.

The Bankruptcy Court has jurisdiction over this matter pursuant to 28 U.S.C.

1334(b). Venue is proper pursuant to 28 U.S.C. 1408 and 1409. This matter is a core proceeding within the meaning of28 U.S.C. 157(b)(2). 2. The statutory predicates for the relief requested in this Motion are sections 105(a),

363(b), 507(a), 1107 and 1108 ofthe Bankruptcy Code.


The Debtors are Electroglas, Inc. (EIN 77-0336101) and Electroglas International, Inc. (EIN 77-0345011).

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Background 3. On the date hereof (the "Petition Date"), the Debtors each filed a voluntary

petition for relief under Chapter 11 of the Bankruptcy Code. The Debtors continue to operate their businesses and manage their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 ofthe Bankruptcy Code. 4. No creditors' committee has yet been appointed in these cases. No trustee or

examiner has been appointed. 5. The Debtors supply semiconductor manufacturing test equipment and software to

the global semiconductor industry, and have been in the semiconductor equipment business for more than 40 years. The Debtors' installed customer base is one of the largest in the industry, as the Debtors have sold to date more than 16,500 units of one of their core products, the "wafer prober" (and its related operating system). The Debtors' other major source of revenue comes from their business of designing, manufacturing, selling and supporting motion control systems for advanced technologies. 6. A full description of the Debtors' business operations, corporate structures, capital

structures, and reasons for commencing these cases is set forth in detail in the Affidavit of Thomas Brunton in Support of Chapter 11 Petitions and First Day Relief (the "Brunton Affidavit"), which was filed contemporaneously herewith and which is respectfully incorporated in this Motion by reference. Additional facts in support of the specific relief sought in this Motion are set forth below. Relief Requested 7. In the ordinary course of business, the Debtors pay an assortment of sales and use,

business and occupation, VAT and similar taxes (collectively, the "Sales Taxes") to federal, state, and local taxing authorities in the U.S., as well as taxing authorities in France and

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Taiwan (collectively, the "Taxing Authorities"), including, but not limited to, those Taxing Authorities listed on Exhibit B to this Motion? The Debtors request authority to pay, in the Debtors' sole discretion, prepetition Sales Taxes owed to the Taxing Authorities, including Sales Taxes subsequently determined upon audit to be owed for periods before the Petition Date. The Debtors estimate that, in the aggregate, taxes that will be owing for pre-petition accrual periods will be no more than $30,000 (net of a $22,000 state tax refund). 8. To the extent any check issued or electronic transfer initiated before the

Petition Date to satisfy any prepetition obligation on account of Sales Taxes has not cleared the Banks as of the Petition Date, the Debtors request that the Bankruptcy Court authorize the Banks, when requested by the Debtors in their sole discretion, to receive, process, honor, and pay those checks or electronic transfers, provided that there are sufficient funds available in the applicable accounts to make those payments. 9. The Debtors seek authorization to issue replacement checks, or to provide for

another means of payment to the Taxing Authorities, to the extent necessary to pay the Sales Taxes outstanding and owing for periods before the Petition Date. 3 10. The Debtors pay Sales Taxes in one of two ways. First, in connection with sales

of goods to customers, the Debtors collect and remit the Sales Taxes to the Taxing Authorities. Accordingly, the Debtors collect the Sales Taxes from their customers and then hold them in trust for the Taxing Authorities until remitted.

Inclusion of a Taxing Authority on Exhibit B does not constitute an acknowledgement by the Debtors that the Debtors owe any obligation to any authority or that any authority will be paid pursuant to an order entered on this Motion. Because each of the checks or electronic transfers is readily identified as relating directly to an authorized payment of Taxes, the Debtors believe that checks and electronic transfers for payments that are not authorized will not be honored inadvertently.
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11.

Second, the Debtors incur sales tax obligations when they purchase items that

may not be subject to sales tax in the state of origin, but are subject to sales tax in the state where the item is shipped. For example, if the Debtors place an order for office supplies with a vendor in State A and ask that the vendor deliver the supplies to the Debtors in California, the supplies may not be subject to sales tax in State A, the vendor's horne state, but could be subject to sales tax in California, the Debtors' state. The vendor in that instance does not collect the sales tax but the Debtors are required to pay sales tax and the Debtors remit the sales tax to California. 12. Sales Taxes are paid in the ordinary course of the Debtors' businesses and are

calculated based upon statutorily mandated percentages. Typically, the Debtors remit the Sales Taxes quarterly to the applicable Taxing Authority. The Sales Taxes subject to the relief requested in this Motion could include prepetition amounts due but not yet paid and prepetition amounts paid by checks that did not clear the Debtors' bank accounts before the Petition Date (although the Debtors are not aware of any checks that have not yet cleared). The Debtors estimate that the amount of the unpaid prepetition Sales Taxes due in the ordinary course of the Debtors' businesses are approximately $30,000. The Debtors seek authority, in their sole discretion, to pay any unpaid Sales Taxes. Basis For Requested Relief A. Sales Taxes Are not Property of the Debtors' Estates 13. Sales Taxes from third parties, to the extent collected by the Debtors, are not

property ofthe estates under section 541(a) of the Bankruptcy Code. Such amounts constitute "trust fund" taxes that are held for the benefit of the Taxing Authorities. See Begier v. Internal Revenue Serv., 496 U.S. 53 (1990) (taxes such as excise taxes, FICA taxes and withholding taxes are property held by a debtor in trust for another, and as such, do not constitute property of the estate); Al Copeland Enters., Inc. v. Tex. (In re AI Copeland

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Enters., Inc.), 991 F.2d 233 (5th Cir. 1993) (debtor's prepetition collection of sales taxes and
interest on the tax were held subject to trust for the state and were not property of the estate);

Shank v. Wash. State Dep 't. of Revenue (In re Shank), 792 F.2d 829, 830 (9th Cir. 1986)
(sales tax required by state law to be collected by sellers from their customers is a "trust fund" tax); DeChiaro v. NY State Tax Comm 'n., 760 F.2d 432, 433-34 (2d Cir. 1985) (same). 14. Accordingly, because payment of the Sales Taxes contemplated in this Motion

does not implicate property of the estate, such payments will not otherwise be available to the Debtors' estates or their creditors. 15. Further, many states, including some states in which the Debtors do business,

hold officers and directors of collecting entities personally liable for sales and use taxes owed by those entities. To the extent that any Sales Taxes remain unpaid by the Debtors, the officers and directors ofthe Debtors may be subject to lawsuits or criminal prosecution. See, e.g., John F.

Olson, et al., Director & Officer Liability: Indemnification and Insurance 3.21, at 3-20.27
(2008) ("some states hold corporate officers personally liable for any sales tax and penalty owed and not paid by the corporation, regardless of cause"). A lawsuit brought against directors and officers of the Debtors would distract the Debtors from their goal of reorganizing their businesses, conducting a sale, or effectuating an orderly wind down of their operations, whether through a sale of the Debtors' assets or otherwise. This would be to the detriment of all parties in interest in these cases and could result in indemnification claims against the estates. Thus, the Bankruptcy Court should authorize, but not direct, the Debtors to pay any Sales Taxes owed on account of the Debtors' purchases.

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B.

Payment of the Sales Taxes Is Authorized Under Sections 105,363, 1107 and 1108 of the Bankruptcy Code 16. The relief requested in this Motion is supported by several provisions of the

Bankruptcy Code that authorize a debtor to honor prepetition obligations in certain circumstances. For instance, courts have found a basis for allowing debtors to make payments to creditors under section 363(b) ofthe Bankruptcy Code. Pursuant to section 363, a bankruptcy court may authorize a debtor to expend funds outside the ordinary course of business. See In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D.N.Y. 1989) (affirming lower court order authorizing payment of prepetition wages pursuant to section 363(b) of the Bankruptcy Code). 17. In addition, sections 11 07(a) and 1108 of the Bankruptcy Code vest debtors in

possession with authority to continue operating their businesses and thus authorize the relief requested in this Motion. Courts have recognized that sometimes debtors in possession can only maximize the value of the estate by paying certain unsecured claims before confirmation of a bankruptcy plan. See. e.g., In re Mirant Corp., 296 B.R. 427 (Bankr. N.D. Tex. 2003); In re CoServ, L.L.C., 273 B.R. 487,498 (Bankr. N.D. Tex. 2002). 18. Prepetition obligations have also been paid pursuant to section 105(a) of the

Bankruptcy Code, which allows a bankruptcy court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." See 11 U.S.C. 105(a). The "necessity of payment" doctrine was articulated by the United States Supreme Court in Miltenberger v. Logansport, Ry. Co., 106 U.S. 286, 311-312 (1882) and it recognizes the existence of judicial power to authorize a debtor to pay prepetition claims where such payment is essential to the continued operation ofthe debtor. 19. The Bankruptcy Court has authorized debtors in other cases to pay a variety of

prepetition claims of creditors, including claims similar to the taxes described in this Motion.

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See e.g., In re Pacific Ethanol Holding Co., LLC, Case No. 09-11713 (May 19, 2009); In re Nanogen, Inc., Case. No. 09-11696 (Bankr. D. Del. May 15, 2009); In re Filene 's Basement, Inc., Case No. 09-11525 (Bankr. D. Del. May 5, 2009).
20. The Debtors wish to carry out the orderly reorganization or wind down of their

businesses, whether through a sale of the Debtors' assets or otherwise. If prepetition Sales Taxes remain unpaid, the Debtors could be required to spend limited and valuable estate resources on addressing payment requests by the Taxing Authorities rather than focusing on maximizing the value of the estates for the benefit of all creditors. Therefore, the Bankruptcy Court should grant the relief requested in the Motion.

C.

Sales Taxes Are Entitled to Priority Status under the Bankruptcy Code
21. Some, if not all, of the Sales Taxes will be entitled to priority status under the

Bankruptcy Code in the event the Debtors file a chapter 11 plan, which means that the current payment of Sales Taxes will not prejudice the rights of other unsecured creditors. See e.g., 11 U.S.C. 507(a)(8)(A) (taxes measured on gross income); 11 U.S.C. 507(a)(8)(C) ("trust fund" taxes); 11 U.S.C. 507(a)(8)(E) (excise taxes). Under any bankruptcy plan, these priority Sales Taxes must be paid in full and in regular cash installments over a five-year period from the date of the order for relief. See 11 U.S.C. 1129(a)(9)(C)(i)-(ii). Further, unsecured claims for Sales Taxes must be paid in the order of priority no less favorable than the treatment given to the most favored general unsecured claims, which means that unsecured claims for Sales Taxes may receive a priority unsecured status. See 11 U.S.C. 1129(a)(9)(C)(iii). Secured claims for Sales Taxes must receive cash payments in the same manner and over the same period as the unsecured claims for Sales Taxes, which means they may also receive a priority status. See 11 U.S.C. 1129(a)(9)(D).

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22.

If the Debtors file a chapter 11 plan, the current payment of the Sales Taxes that

are entitled to priority in the ordinary course of the Debtors' businesses will only affect the timing of the payment and will not prejudice the rights of other unsecured creditors of the Debtors. Accordingly, the relief requested in the Motion is appropriate and should be granted by the Bankruptcy Court. 23.
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Pursuant to new Bankruptcy Rule 6003(b) of the Federal Rules of Bankruptcy

Procedure, which became effective December 1, 2007, "a motion to pay all or part of a claim that arose before the filing of the petition" shall not be granted by the Court within 20 days of the Petition Date "[ e ]xcept to the extent that relief is necessary to avoid immediate and irreparable hann ... ". Fed. R. Bankr. P. 6003(b). For the reasons described herein and as supported by the Brunton Affidavit, the Debtors submit that the requirements of Rule 6003 have been met and that the relief requested in this Motion is necessary to avoid immediate and irreparable hann to the Debtors and their estates. Notice 21. Notice of this Motion has been provided to: (a) the Office of the United States

Trustee for the District of Delaware; (b) the creditors holding the 20 largest unsecured claims against the Debtors, as identified in the Debtors' respective chapter 11 petitions; (c) Lovells, 590 Madison Avenue, New York, NY 10022 (Attn: Christopher R. Donoho III, Esq.), counsel to bondholder group for the 6.25% Convertible Senior Subordinated Secured Notes due 2027; (d) the Internal Revenue Service; and (e) the Taxing Authorities. As this Motion is seeking first day relief, notice of this Motion and any related order will be served as required by Local Rule

Nothing in this Motion should be construed as impairing the Debtors' right to contest the amount or priority of any Sales Taxes that may be owed to any Taxing Authority, and the Debtors expressly reserve all of their rights.

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9013-l(m). In light ofthe relief requested in this Motion, no other or further notice is necessary or required. 22. This Motion does not contain any novel issues of law requiring briefing.

Therefore, pursuant to Rule 7 .1.2 of the Local Rules of Civil Practice of the United States District Court for the District of Delaware, as amended from time to time (the "Local District Court Rules"), as incorporated by reference into Local Rule 1001-1 (b), the Debtors respectfully request that the Bankruptcy Court set aside the briefing schedule set forth in Rule 7.1.2(a) of the Local District Court Rules.
No Prior Request

23.

No prior motion for the relief requested in this Motion has been made to this or

any other court.

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WHEREFORE, the Debtors respectfully request that the Bankruptcy Court: (a) enter an order substantially in the form annexed to this Motion as Exhibit A, granting the relief requested in this Motion; and (b) grant such other and further relief in favor of the Debtors as the Bankruptcy Court may deem just and proper. Dated: July 9, 2009 Wilmington, Delaware Respectfully submitted,

Proposed Attorneys for the Debtors

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EXHIBIT A

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UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re ELECTROGLAS, INC., et al.,


1

Debtors.

) ) ) ) )

Chapter 11 Case No. 09-__ (_) (Joint Administration Pending)

ORDER AUTHORIZING (I) THE DEBTORS TO PAY PREPETITION SALES AND USE TAXES AND (II) BANKS AND FINANCIAL INSTITUTIONS TO HONOR AND PROCESS RELATED CHECKS AND TRANSFERS
THIS MATTER having come before the Bankruptcy Court upon the motion (the "Motion") 2 of the Debtors for entry of an order authorizing: (a) the Debtors to pay prepetition sales and use and similar taxes in the ordinary course of business; and (b) banks and financial institutions to honor and process related checks and transfers; and the Bankruptcy Court having found that: (a) it has jurisdiction over the matters raised in the Motion pursuant to 28 U.S.C. 157 and 1334(b); (b) this is a core proceeding pursuant to 28 U.S.C. 157(b)(2); (c) the relief requested in the Motion is in the best interest of the Debtors, their estates and their creditors; (d) proper and adequate notice of the Motion and the hearing on the Motion has been given and that no other or further notice is necessary or required; (e) it appearing that the requirements of Bankruptcy Rule 6003 have been satisfied; and (f) upon the record and after due deliberation, good and sufficient cause exists for the granting of the relief as set forth in this Order; it is hereby

The Debtors are Electroglas, Inc. (EIN 77-0336101) and Electroglas International, Inc. (EIN 77-0345011).
2

Capitalized terms used but not otherwise defined in this Order shall have the meanings ascribed to them in the Motion.

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ORDERED, that the Motion is granted in its entirety; and it is further ORDERED, that the Debtors are authorized, but not directed, to pay, in their sole discretion and in the ordinary course of business, all prepetition Sales Taxes to the applicable Taxing Authority including, but not limited to those listed on Exhibit B to the Motion, 2 and including, without limitation, all payments that remained uncashed prior to the filing of the Petition or that are otherwise returned by a Taxing Authority, as well as those Sales Taxes subsequently determined upon audit to be owed for periods before the Petition Date; and it is further ORDERED, that the Debtors' payment ofprepetition Sales Taxes owed to Taxing Authorities as authorized in this Order shall not exceed $30,000 in the aggregate (including amounts paid prepetition that may not have cleared on the Petition Date) unless otherwise ordered by the Bankruptcy Court; and it is further ORDERED, that the Banks are authorized, when requested by the Debtors in their sole discretion, to receive, honor, process and pay any and all checks or electronic transfers drawn on the Debtors' accounts to pay the Sales Taxes, whether those checks were presented before or after the Petition Date, provided that sufficient funds are available in the applicable accounts to make the payments; and it is further ORDERED, that nothing in the Motion or this Order shall be construed as impairing the Debtors' right to contest the validity, priority or amount of any Sales Taxes that may be due to any Taxing Authorities; and it is further

Inclusion of a Taxing Authority on Exhibit B to the Motion does not constitute an acknowledgment by the Debtors that the Debtors owe any obligation to any authority or that any authority will be paid pursuant to this Order.

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ORDERED, that the Debtors, their officers, employees and agents are authorized to take or refrain from taking such acts as are necessary and appropriate to implement and effectuate the relief granted in this Order without further order of the Bankruptcy Court; and it is further ORDERED, that the Bankruptcy Court shall retain exclusive jurisdiction to enforce the terms of this Order. Dated: _ _ _ _ _ _ _, 2009

UNITED STATES BANKRUPTCY JUDGE

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EXHIBITB

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TAX AUTHORITIES LIST

Arizona Department of Revenue

PO Box 29010 Phoenix, AZ 85038 USA PO Box 942879 Sacramento, CA 94279 USA Department of Revenue Denver, CO 80261 USA 5050 W. Tennessee Street Tallahassee, FL 32399 USA Mail Station 6330 St. Paul, MN 55146 USA 24 Avenue Doyen Louis Weil, BP 225 Grenoble Cedex 1, 3 8000 France 3F., No.131, Sec. 3, Nanjing E. Rd. Taipei, Taiwan 10410 PO Box 149355 Austin, TX 78714 USA

California State Board of Equalization

Colorado Department of Revenue

Florida Department of Revenue

Minnesota Department of Revenue

Sie Grenoble Vercors

Taipei National Tax Adiministration, Ministry of Finance Texas Comptroller of Public Accounts

ny-880105

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