UNITED STATES TAX COURT

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T.C. Memo.

2011-25

UNITED STATES TAX COURT

RALPHS GROCERY CO. &i SUBSIDIANIES f.lé.a. NALPHS SUPERMARKETS,

INC. , & SUBSIDIARIES, Petitio 1ers E.

- COMMISSIONER OF INTERNAL REVENIJE, Respondent

FRED MEYER,

INC.,

& SUBSIDIARIES, Petitione s

. COMMISSIONER OF

INTERNAL REVENUE, Reap nd nt

Docket'Nos. 2Ó364-06, 25959-06.

F le

JÄnuary 27, 2011.

Roqer J. Jones, Andrew R. Roberson, and Sarah S. Sandusky,

for petitioners.

Alan M. Jacobson, John E. Budde, and Laurie A. Nasky, -for

respondent .

EERVED JAN 2 7 2011

2 MEMORANDUM OPINION

CF ECHI, Judge:

partia

These

ases are before us on the motion for

summary judgment of petitioners (petitioners' motion) and

the mot on for partial summa y judgment of respondent (respondent's

otion) .

We shall grant petitioners' motion, and we shall

deny re pondent's motion.

B ckground

parties are in agreement regarding or do not dispute the

following facts.

At the time petitioner 1 alphs Grocery Co.

(RGC)..and its

subsidi ries filed the petit on in the~ case at docket No. 20364

06, all of RGC' s stores and its main warehouse were located, and

all goo s and services were

rovided, exclusively in California.

At the time petitioner Fred Meyer, Inc .

(Fred Meyer) , and

its subäidiaries filed .the pétition in the case at docket No.

Tl e parties filed with he Court a stipulation of facts

together with stipulated exhïbits attached and an agreed statement of material facts that ares to control for purposes of their

respective motions for partian summary judgment.

(We shall refer

to that stipulation together ith those exhibits and that agreed

stateme t as the parties' agreed facts.)

The parties' agreed

facts pertain to, inter alia, the requirements and effects of the

U.S. Ba kruptcy Code (Bankruptcy Code) , 11 U.S.C. (2006) .

Respond nt objected to several stipulated exhibits.

We shall not

rule on respondent's evidentiary objections. That is because we

need no rely on the exhibits to which respondent objects in

order to resolve the questions presented in the parties' respective mot ions for partial summary judgment .

- 3 25969-06, Fred Meyer had its headquarters :In Oregon and provided

goods and services primarily in Oregon and Washington.

At the time petitioners filed their respective petitions,

RGC and Fred Meyer were subsidiaries of the Kroger Co.

(Kroger)

and were members of Kroger' s consolidated group for Federal

income tax (tax) purposes.

At t-hat time, Krocjer had its head-

quarters in Ohio.

In 1873, George A. Ralphs founded a grocery store business

in Los Angeles, California (Ralphs-grocery store business) .

business remained privately owned for over 90 years.

Federated Department Stores-, Inc .

That

In 1968,

(Federated) , purchased the

Ralphs grocery store business from its then owners .

Federated

operated that business as an unincorporated division of Federated

until 1988.

In 1986, Campeau Corps

(Campeau) , ,a co pc ration organized

under the laws of Canada, acquired Allied Stores Corp.

for approximately $3.6 billion.

(Allied)

At that tiine, Allied operated

certain retail.department stores,through certain of its,subsidiaries.

In 1988, Campeau acquired Federated. for apyroximately $6.7

bill'ion.

At that time, in addition to operating the Ralphs

grocery store business, Fed rated operated ceÉtain retail depart-

ment stores through certain of its subsidi'aries.

Campeau's

acquisition of Federated constituted a qualified stock purchase

4 -

under

ection 338 (d) (3) .2

Federa

d, ,pursuant to secti n 1.5338-4T(f) (6), Temporary Income

Tax Reg .,

Ir connection with its acquisition of

50 Fed. Reg. -16413

(Apr.

25," 1985),

Campeau made a

protect ve, carryover basis e ection and an offset prohibition

eledti

In order to- finance Cam eau's acquisitions of Allied and

Federat d,3 certain subsidiaries of Campeau borrowed funds from

Citibank, sBank of Montreal,

J. DeBartolo Corp.

(EJDC) ,

anque Paribas (Paribas)", the Edward

a id Olympia & York CC Limited (O&Y) .

On June 6, 1988, Ralphs Acquisition Co. was incorporated

under the laws of Delaware.

Around that date, Federated trans'-

ferred all of the assets and the liabilities of the Ralphs

grocery store business to a t ransitory subsidiary (Newco) in

exchang

for all of the common stock of Newco.

merged

ith and into Ralphs

name to Ralphs Grocery Co.

Thereafter, Newco

cquisition Co., which changed -its

(Ralphs) .4

As part of that merger

2A]l section references are to the Internal Reeenue Ce>de

(Code)

n effect at all rele ant times.

3T1 e parties agree that ertain subsidiaries of Campeau

borrowe funds in order to finance Campeau's acquisitio~ns of

Allied nd, Federated . Howeve , the parties' agreed . f ac ts do not

refer to any amounts that Canpeau or any of its subsidiaries

borroweå with respect to the cquisition of Allied.

4Ralphs Grocery Co. that we shall refer to as Ralphs is not

the same entity as petitioner Ralphs Grocery Co. As discussed

below, in June 1995 Ralphs wa merged into Ralphs Supermarkets,

Inc. (R I) .

Thereafter, RSI, the surviving company, assumed the

name Ralphs Grocery Co.

- 5 -

Federated transferred to Ralphs all of the common stock of Newco

in exchange for a promissory note of Ralph

million.

the amount of $900

(We shall refer to the series of atransactions by which

Federated transferred the Ralphs grocery -store business to Newco

and Ralphs in exchange ,for a $900 mill'ion promissory note as the

Ralphs incorporation transaction.)

For ta

purposes, othe Ralphs

incorporation transaction was treated-in part as an intercompany

asset sale and in part as a.dividend distri ution of the Ralphs

grocery store business.-

The Ralphs tincorporation transaction

resulted in a deferred intercompany gain (

lyhs deferred inter-

company gain) in excess of $500 million.

Et an undisclosed date

after the Ralphs incorporation transaction

all of the outstand-

ing common stock of Ralphs" was transferNed to Allied and Holdt

ings III, Inc.

(Holdings III), an indirect subsidi'ary of Campeau

that had been incorporated in 1988.

Campeau organized its operations in'the-United States

through Federated Stores, Inc.

(FSI), a holding company formerly

sIn August 1988, Ralphs issued to certAin executives and

certain key employees of'Ralphs 170,0Ò0 shaked of nonvoting

series A preferred stock (series A nonvoting preferred stock) and

130,000 shares of nonvoting series B preferred stock (series B

nonvoting preferred stock) for an aggregate p ice of $3 million.

A portion of the series A nonvotingspreferreddstock was required

to be redeemed each year beginning;in 1992 and continuing through

1998.

A portion of the series B nonvoting þreferred stock was

required to be redeemed each year beginninga in 1992 and continuing through 1996.

In addition, Ralphs was permitted to redeem at

any time the series A nonvoting preferred stock and the series B

nonvoting preferred stock provided that -it gave the owners of

that respective stock five days notice of any esuch redemption.

- 6 known

s Campeau Corp .

(U . S .

Inc .

FSI was the parent corpora

tion of a consolidated group (FSI consolidated group) for tax

purpose

that consisted of-a proximately 60 other U.S. corpora-

tions,

ncluding Allied, Federated, and Ralphs, that filed a

single

onsolidated tax retu n for each of the taxable years

ended

nuary 31, 1989 throuch 1993, and that had an ownership

structuce as of October 28, 1991, as described below.'

Certain

members of the - FSI consolidat ed group were engaged in the real

estate

usiness, certain other members were engaged' in the retail

departm nt store business, a d Ralphs was engaged in the grocery

store b siness.

As of ,October 28, 1991, FSI owned:

outstanding common stock of I oldings III,

(1) 2100 percent of the

(2), 100,percent of the

outstan ing common stock of Campeau Properties,

Inc.

(CPI) , and

(3) 100 percent of the outst nding common stock of each of

certain corporations -(FSI shåpping center corporations) that each

owned c rtain shopping cente s .

As of October 28, 1991, CPI, which had been incorporated in

1988 Ån

was serving as a ho]ding company for FSI's ownership

6At tached as an appendix is a chart showing the ownership

structu e as of -Oct. 28, 199], of the members of the FSI consolidated g oup.

'E ch of the FSI shopping - center corporations held a 50 percent interest in certain partnerships. EJDC owned directly or

indirec ly the remaining 50-percent interest in each of those

partnerships .

7 -

interests in certain shopping -mall developments that FSI, EJDC,

and their.respective affiliates were to develop jointly, owned

7.5 percent of the outstanding common stock of Federated Holdings ,

Inc .

(Holdings ) .

As of October 28,

1991, Holdings III owned

(1)

100 percent

of the outstanding common stockiof Federated HoldingsJII, Inc.

(Holdings II) ,

(2) approximately 783 ..75 percent" of the outstand-

ing common stock of Ralphs; -(3) a promissory note due from

Federated (Federated hote) in the principal aniount of $75 mil- .

lion, and (4) a promissory note due from Allied (Allied note)r in

the principal amount of $100 milTion.

As of October 28, 1991, Holdi~ngs II, which had been incorpo-

-rated in 1990, owned:

(1) 100 percent of the joutstanding common

stock of Allied,' (2) 28.04 percent of the òutstanding:common

stock of «Holdings, and (3) a residual interest in certain collateral relating to a certain monetization fagreement .

As of October 28, 1991, Allied owned:

outstandirig .common stock of Holdings,

(1) 50 percent of the

(2) aþproximately 16.25

"In the parties' agreed facts, the parties agreed to the

approximate percentage of the outstanding common stock.of Ralphs

that Holdings III owned. For convenience, we shall not refer

hereinafter to that ownership percentage asl approximate.

"As of Oct. 28," 1991, Allied also had dutstanding certain

preferred stock that was publicly. traded.

- 8 percen

°. of the outstanding oommon stock of Ralphs, and (3) 10Ó

percen

of the stock of each of certain operating subsidiaries

that w

e engaged in the retÄil department store business .

As of October 28, 1991, certain investors unrelated to the

members of the FSI consolidat ed group owned 6 . 96 percent of the

outsta Sing common stock of Holdings.

owned

As of that date, EJDC

5 percent of the out tanding common stock of Holdings .

On Dece ber 12, 1991, EJDC s ld that stock of Holdings to FSI for

$1.-

Af car that sale, EJDC w s not a stockholder of any member of

the FSI consolidated group.

As of October 28,

1991, Holdings, which had been incorpo-

rated i

1988, owned:

(1)

1 0 percent of the outstanding common

stock o

Federated and (2) tl e residual interest iri a $1 million

escrow

und.

As of October 28, 1991, Federated owned 100 percent of the

stock o

each of certain ope ating subsidiaries that werer engaged

in the åetail department sto e business .

Ce tain members of the

SI consolidated group borrowed -funds

from ce tain financial institutions in order to finance Campeau's

acquisi ion of Federated (discussed above) .

Montrea

In May 1988, Bank of

and Paribas lent $500 million to FSI in order to finance

°I the parties'. agreed facts, the parties agreed to the

approxi ate percentage of the outstanding common stock of Ralphs

that Al ied owned. For conv nience, we shall not refer hereinaf

ter to t hat ownership percent age as approximate.

- 9 Campeau's acquisition of Federated.

that loan in full.

In April '1989, FSI prepaid

FSI made that payment by using"a $50Ò million

dividend that Holdings III had paid to FSI around that time.

Around April 1989, before paying that dividend, Holdirigs III

received a $500 million dividend from Holdings3 II:

same time, Holdings II had raised the $500

Aróund the

illion that it used

to pay that dividend by selling to Allied f r $500 million

(1) approximately 36.2 percent of the outst nding common stock of

Holdings and (2) an option to purchase an a ditional 1 percent^ of

the- outstanding common stock of Holdings

, In «May 1988, ~EJDC lent $480 million to FSI

loan)

(EJDC equity

to finance Campeau' s acquisition of Federated.

That loan

was evidenced by a promissorg note in the . a nount of $480 million

(FSI $480 million. note) that FSI issued to EJDC.A

In-connection

with the ; EJDC equity loan, EJDC, Campeau, FSI, ând CPI executed a

document entitled "MASTER PLEDGE AGREEMÉNT"

(EJDC master pledge

agreement) .

In April 1989, FSI and EJDC refinanced the EJDC equity loan

and renegotiated its terms.

Pursuant to that refinancing, EJDC

returned to FSI the FSI $480 million note in exchange for a new

promissory note from FSI in the amount of $480 million (FSI new

"EJDC also received -in consideration for the EJDC equity

loan (1) 7.5 percent of the outstanding comihon stock of Holdings,

which it owned as of Oct. 28, 1991, and (2) a pledge of the

outstanding common stock of Holdings that CPI owned (i l e . , 7 . 5

percent of the outstanding common stock of Holdinga) .

10 -

$480 m' .lion note) ."

Campean guaranteed FSI's payment of all

sums d a under the FSI new $480 million note.

In connection- with the

efinancing of the EJDC equity loan

EJDC, C mpeau, FSI, Holdings III/ CPI, -and the FSI shopping

center

orporations executed a document entitled ""MASTEP -PLEDGE

AGREEMEÑT"

the EJD

(EJDC. revised -mast er pledge agreement)" that superseded

master, pledge agreet ent .-

agreement, certain members o

Under that revised pledge

the FSI consolidated ,group .pledged

to EJDC the following propert ies as security for FSI' s perfor-

mance u der the FSI new $480 million note:

(1) 100 percent- of

the outstanding common stock of CPI that FSI owned,

(2) certain

partnership interests and ce tain stock that CPI owned; including

the common stock of Holdings that CPI owned,

(3) the stock- that

FSI own d in each of the FSI shopping center corporations and the

respective partnership interests that each of those corporations

owned,

Allied,

4) 100 percent of the outstanding common stock of

and (5) the 83.75 percent of the outstanding common -

stock of7Ralphs that Holding

III owned.

The. EJDC revisedsmaste

"E3DC re'tained the pledce consisting of the 7.5 perce'nt of

the outÊtanding common stock þf Holdings that CPI owned and that

EJDC ha received as conside ation' foi the EJDC equity loan. See

supra note 11.

FI April 1989, FSI owned directly 100 percent of the

outstancing common -stock of Allied. As of Oct. 28, 1991, Holdings II owned 100 percent of the outstanding-common stock of

Allied. The parties' agreed facts do not establish-how or when

Holding II acquired that sto :k.

- 11 -

pledge agreement provided that EJDC was to release on May 1,

1991, the pledge by Holdings III of the 83. 75 percent of the

outstanding stock of Ralphs that Holdings III owned.

EJDC did

not release that pledge on May 1, 1991

Each of the, pledges under the EJDC ,revå.sed master pledge

agreement was subordinate to (1) FSI' s payment of all sums due

under the FSI new $480 million note and (2) Campeau' s guaranty of

FSI' s payment of those sums . * The .EJDC trevised master pledge

agreement did not state that any pledge of property -under that

agreement had priority over any otheropledg

of property under

that agreement .

On April 7, " 1989, Citibank, Bank of' Mohtreal, and Pari:bas

provided to Allied: certain revolving working capital in the

amount of $280 million.

On the same date, Bank of Montreal and

Paribas provided to Allied a certain revolv ng inventory facility

in the amount of $70 million.

On- September 12, 1989, O&Y agreed to lendeup to $250 million

to Campeau.

- Thereafter, Cainpeau borrowed $ 75 million of that

$250 million from O&Y (Campeau $1'75 milliòn laan)

Campeau then

lent $175 million to FSI that was evidenced by a note from FSI 'in

the amount of $175 million i(FSI $175-mililio1 note) .

Thereafter,

FSI lent $175 million to Holdings III that Was evidenced by a

note from Holdings III in the amount of $175 million (Holdings

III note) .

The Holdings III note was payabie no later than

- 12 Septem er 12, 1991, and prov ded for an interest rate of 9.875

percen

per year-.

H ldings III used the $ 75 million that it borrowed from FSI

to len

$100 million to Alli d and $75 million to Federated that

were e

denced by the Allied note and the Federated note, respec-

tively.

On September 18, 1989,

$175 m

oldings III guaranteed the Campeau

lion loan that Campe u received from O&Y around September

12, 19 9.

On September 18, 1989, Holdings III also pledged to -

O&Y as security for that guaiAanty the outstanding common stock of

Ralphs

hat Holdings III owned (i . e . , 8 3 . 75 percent ) .

pledge

as subject to the se urity interest of EJDC in ,that stock

under t e EJDC revised maste

Thàt

pledge. agreement.

In late 1989, certain mèmbers of the FSI consolidated group

became

ware that they would be unable to make payments' timely

with re pect to the debt tha

each had incurred.

As a result,

between January 14 and March 30, 1990, FSI and certain of its

subsidiaries, including Hold ngs, Holdings II, and Holdings III,

filed i

the U.S. Bankruptcy Court for the Northern District of

California (California U.S.- Bankruptcy Court) respective volun-

tary pe itions for relief (cl apter 11 petitions) under chapter

11, ent tled "Reorganization", of the Bankruptcy, Code,- 11 U.S.C.

secs. 1 01-1174.

Of its

(We shall refer collectively to FSI and certain

ubSidiaries that fil d chapter 11 petitions in the

--13 California U.S. Bankruptcy Court as the FSI debtors.)

At the

time Holdings IIII filed its chapter 1-1 peti ion in the California

U.S: Bankruptcy Court, the Holdings III note was the only evi-

dence of indebtedness of Holdings III for money that it had

borrowed.

In the chapter 11 petition that it filed with the California

U.S. Bankruptcy Court, Holdings III reported total assets of

$1,2004,285,.000 and total liabilities of $65)',778,OOO.

In the-

consolidated balance sheets for each of the taxable years ended

January 31,

1991 through 1993, the FSI -consolidated group re-

ported, based on book value, the followins total'assets and total

liabilities (not including stockholders equ ty) 'of Holdings III

as of the beginning of each of- those taxable fears:

Date

Feb.

- Feb.

1990

1991

1992

Total Assets

otal Liabilities

$179,754,880

180,457,073

180,293,905

$179,754,879

179,754,880

179,775,064

On January 15, 1990,- Allied and certai

subsidiaries

of¡its

(collectively, Allied debtors) and Federated and

certain of its subsidiaries (collectively, Federated debtors) filed in the U.S. Bankruptcy Court -for the Southern District of

Ohio (Ohio U.S. Bankruptcy Court) chapter 11 petitions under ,

chapter 11 of the Bankruptcy; Code .:

(We shall refer collectively

to the Allied debtors and the Federated debtors as the Allied/

Federated debtors.)

On January 15, 1990, the Ohio U.S. Bank-

14 -

ruptcy

ourt consolidated th

Allied

ebtors and the Feder ted debtors for joint administration

under a single docket number

commen

respective chapter 11 cases of the

(We shall refer to the proceedings

d in the Ohio U.S. B nkruptcy Court that that court

consoli ated on January 15, i990, as the Allied chapter 11

procee

ngs . ) ;

In the.chapter 11 petit on that it filed with the Ohio U.S.

Bankru

cy Court, Allied repcrted, based -on book value, atotal

assets

f approximately $2, 934, 000, 000 and total liabilities of

approximately $2,406,000,000 as of October 28,

1989.

In the

chapter 11 petit-ion that it filed -with the Ohio U-.S. Bankruptcy

Court,

ederated reported,- based on book value, total assets of

approxihately $6,202,000,000 and total. liabilities of approximately

5, 339, 000, 000 as of Octobers 28,

1989.

On July 2, 1990, the California U.S. Bankruptcy Court

transferred venue in the res ective chapter 11 cases of the FSI

debtors to the Ohio U.S. Ban ruptcy Court.

On July 13, 1990, the

Ohio;U.

Bankruptcy Court å nsolidated those proceedings for

joint a

inistration under a single docket number.

(We shall

refer to the proceedings comrenced in the California U.S. Bank-

ruptcy tourt that the Ohio U.S. Bankruptcy Court consolidated-on

July 13

1990, as the FSI chàpter 11 proceedings.)

Thereafter,

the Ohio U.S. Bankruptcy Court considered and treated the Allied

- 15 -

chapter 11 proceedings and the FSI chapter 11 proceedings as

interrelated and closely coordinated those proceedings.

Around early 1990, Ralphs was' solvent.

At no time did

Ràlphs file a petition under the Bankruptcy Códe.

Nor was Ralphs

a debtor in either the FSI chapter 11 proceedings or the Allied

chapter 11 proceedings.

'As a result, no creditor claims were

filed against Ralphs in ther FSI chapter 11 proceedingd or in the

Allied chapter 11 proceedings .

The FSI consolidated group filed Form 1120, U.S. Corporation

Income Tax Return (Form 1120) , for its -taxable year ended January

31, 1991 (FSI consolidated, group 1/31/91 consolidated return) .

The FSI consolidated group attached to that return a consolidated

balance sheet in which it reported, based on book value", the

following total assets and total liabilities (not including

stockholders equity) as of the beginning of tliat taxable year

(i . e . , February» 1, 19 90 ) of that group and Jof certairi of its

member s :

- 16 --

Company/Group

Total Assetsi '

Total Liabilities

FSI onsolidated group

FSI

Hol ings III

Hold .ngs II

Holdings

$12, 022, 633, 639

836, 271, 594

179, 754,.880

476, 483, 273

-0 -

$13, 975, 652, 352

1, 008, 207, 723

179,'754, 879

477, 014, 279

30 , 540

6, 572, 255, 075

3, 020, 041, 662

1,404,826,686

6, 879, 178 , 50 0

3, 846, 033, 370

1,369,630,102

Fede ated

Alli d

Ralp s

T e term "Total Assets" does not include any amount representin the value of intangiŠle assets.

In the consolidated

balanc sheet that the FSI c0nsolidated group attached to the FSI

consol ated group 1/31/91 c$nsolidated return, line 13A, "INTANGIBLE

SETS", was left blan for each member of that consolidated group.

For the FSI consolidatec group' s taxable year ended January

31, 199 , Holdings claimed a worthless stock deduction with

respect to the common stock Šf Federated that it owned.

For that

taxable|year,- Allied; Holdin s II, and CPI each claimed a worthless stock deduction with respect to the common stock of Holdings

that ea h owned.

At all, times during the FSI chapter 11 proceedings, the FSI

debtors

including FSI and Holdings III, operated as debtors in

possess on under the Bankrupt cy Code. and conducted their respective on oing businesses subst antially as they had conducted thos

busines es before the FSI chåpter 11 proceedings had commenced.

During

he pendency of the FSI chapter 11 proceedings through

early F bruary 1992, FSI and the other FSI debtors continued to

be mana ed by the officers that had managed the respective FSI

- 17 debtors before the FSI chapter 11 proceedings had commenced. "

At no time during the FSI chapter 11 proceedings did the Ohio

U.S. Bankruptcy Court appoint any 'trustee to take control of the

assets and the business of any of the FSI debtors .

Nor did that

court appoint any examiner - for any of thosej debtors .

At no time

during the FSI chapter 11 proceedings did any creditor of FSI

object to FSI' s acting as a debtor in possession.

'Nor did any of

those creditors-ask the Ohio U.S. Bankruptcy Court to appoint any

trustee.

At all. times . during s the Allied chapter 11 proceedings , the

Allied/Federated debtors .also operated as dybtors in possession

and conducted their respective ongoing busihesses substantially

as they had conducted those businesses before the Allied chapter

11 proceedings had commenced.

From January 1990. to February 1992, G. William Miller

serired as the chairman and the chief executive officer of FSI.

1sThe parties' agreed facts do not indicate whethe~r during

the pendency of the Allied chapter 11 proceedings through early

February 1992 the Allied/Federated debtors continued to be

managed by the officers that had managed the respective Allied/

Federated debtors before the- Allied chapter 11 proceedings had

commenced. Nor do those agreed facts indicate whether certain

facts (discussed below) that the parties agree apply to the FSI

debtors and/or the FSI chapter 11 proceedings also apply to the

Allied/Federated debtors and/oi- the Allied chapter 11 proceedings .

However, neither party argues that 'any such fact does not

apply to the Allied/Federated debtors and/or the Allied chapter

11 proceedings.. We assume that is-because ïn making their

respective arguments with respect t·o their respective motions for

partial summary judgment the parties focus their arguments on the

receipt of certain RHC stock by certain creditors of FSI' and do

(continued . . . )

18 -

T e U.S. Trustee Progra

(U.S. trustee program), a component

of the

.S. -Department of Ju tice that is responsible for pi-omot-

ing th

efficiency and prote ting the integrity of the Federal

bankru

cy system,. oversaw t e FSI chapter 11 proceedings and the

Allied

hapter 11 proceeding .

officia

creditor committees were appointed in the Allied chapter

- 11 proc edings .

Pursuant to that program, six

Pursuant to the U . S . trus tee program, an of f i -

cial committee of unsecured

reditors of FSI -was, appointed in

the FSI chapter 11 proceedin s . "

None of EJDC, Bank of Mon-

treal, Paribas, O&Y, or Campëau was a member of the committee of

unsecur d creditors of FSI appointed pursuant to thë U.S. trustee

program in the FSI chapter 11 proceedings .

Se eral claims were filèd in the FSI chapter 11 proceedings

against the various FSI debtcrs, including -the following 'claims.

EJDC filed numerous claims i

including:

class 1

(1) Certain secu ed claims against FSI, identified as

under the EJDC revised master pledge agreement and the

FSI new $480 million note;

Holding

as (

the FSI chapter 11 proceedings,

(Ž) certain secured claims,against

II, identified as class 2, under a' certain agreement;

. . continued)

not focus on the, receipt of certain RHC stock by acertain creditors of Allied. See infra note 49.

"E ch of the respective official committees appointed

pursuan to the U.S. trustee program in the Allied chapter 11

proceedings and the official committee of unsecured creditors

appoint{d pursuant to that p ogram in the FSI chapter 11 procee ings possessed certain rights under the Bankruptcy Code.

- 19 -

(3) certain secured claims against Holdings III, identified as

class 3, under the EJDC revised master pledge agreement and any

pledge agreement regarding the Allied note orathe Federated note;

(4) certain secured claims against CPI, identified as class 4;

(5) certain respective unsecured claims against FSI,' Holdings

III, and CPI, identified as class 14, includirig any unsecured

deficiency claimsi? against those debtors; and (6) certain unse-cured claims Jagainst any of the FSI debtors-, identified as class

15, to the extent 'such claims were not inclúded in cla s 14.

EJDC's claims against the 'FSI debtors, except Holdings

totaled

approximately $480 million, not including -ihterest due on those

c laims .

In -the FSI chapter 11 proceedings, EJD

asserted a lien on

the following property of certain of the FSI debtors:

common stock of CPI that FSI owned;

(2) the common stock of e~ach

of the FSI shopping center corporations that FSI owned;

interest in the CHoldings III note;

that Holdings III owned;

(1) The

(3) FSI' s

(4) the dommon stock: of Ralphs

(5) the common stoek of Holdings that

7An "unsecured deficiency claim" was any portion of a claim

to the extent that. the value of the claimholder' s interest in the

applicable FSI debtor' s interest in any proþerty securing the

claim was less than the amount of the claimi or to the extent that

the amount of any claim subject to setoff was less than the

amount of such claim, as determined under sec., 506 (a) of the

Bankruptcy Code.

"Each of the debts on which he creditbr claims of EJDC

against the FSI debtors was based had been guaranteed by Campeau.

s - 20 CPI ow

(6) a certain genéral partnership interest that "CPI

owned ik a certain partnersh p;

(7) the 50-percent partnership

interest of each of the FSI shopping center corporations in the

partne ships that operated c rtain shopping malls jointly with

EJDC;

d (8) -the common sto k of Allied that Holdings II ownede

re were several pote tial grounds on which the FSI

debtors might have been able to invalidate the security interest

that E0 C claimed in the com on stock of Ralphs that Holdings III

owned.

The -FSI debtors claimed in certain documents filede wit'h

the Oh

U.S. Bankruptcy Cou t that if they were not able to

invali

te the security inte ests in the property of certain of

the FSI debtors that EJDC as erted, EJDC would be entitled to

(1) all of the value attribut able tos the common stock of Ralphs

that Holl.dings III owned, which the FSI debtors .estimated to equal

approximately $485.8 millionA and -(2) all of the value. attribute

able to the common stock of each of the FSI shopping center

corpora ions that FSI owned, which FSI estimated to- be not more

than $8

m llion, to the ext nt necessary to satisfy EJDC' s

oversec red claims totaling

pproximately $543 million.

Ba k of Montreal and Pa ibas filed certain unsecured claims

against the FSI debtors, ider tified as class 20, relating to the

$500 mi lion that they had

nt- to FSI in May 1988 .

Bank of

Montrea

and Paribas filed t ose claims as a~ protective measure

in the

vent FSI recovered ag a "voidable preference" under the

- 21 -

Bankruptcy Code a portion of the $500 million that -it had repaid

to Bank of Montreal and Paribas in April 1989.

O&Y filed a sedured claim -against Holdings III, identified

as class 8, under the terms of the Allied nöte and the Federated

note and under Hol:dings III's guaranty of th'e loan that O&Y had

agreed on September 12, 1989, to make available to Campeau.

O&Y

filed an unsecured deficiency claim against Hold'ings IfI ahd all

other FSI' debtors, identified as class 21.

O&Y also asserted as

security for its claims against Holdings II

a lien on" the common

stock of Ralþhs that Holdings III owned.

FSI filed a secured claim against Holdinge III, identified

as class 10, under the Holdings III note.

FSI also filed an

unsecured claim against Holdings III, identïfied'as clàss 24,

that included any unsecured deficiency claim.

Campeau filed a secured claim against FSI

class 9, under the FSI $175 million note.

identified as

Campeau-filed an

unsecured älaim against the FSI debtors, identified as class 22,

that included any -unsecdred deficiency'claims and any claims

Campeau may have assigned to O&Y as securit .

Campeau also

asserted a lienoon the claims that FSI-filed and that were

identified as class 10 and class 24.

Ralphs filed an unseau ed claim against the FSI debtors,

identified as class 26, under certain tax-sharing agreements that

certain members of the FSI consolidated groåp, including Ralphs,

- 22 had ent red into before the

SI chapter ll'proceedings had been

commenced.

H Ldings III held the i terest, identified as class 39, in

the out tanding common stock of Holdings II.

interes , identified as clas

FSI held the

40, in the outstanding common stock

of Hol ings III.

addition to the clains discussed above, Allied had

potenti l claims against the FSI debtors for fraudulent conveyance, b each of fiduciary du ies, indemnity, and civil

conspir cy.

Those claims wene asserted on behalf of Allied

against the FSI. debtors with respect to the funds thats FSI used

in Apri

1989 to repay to Bank of Montreal and Paribas the $500

million that those companies lent to FSI in May 19884.

FSI had

potenti l claims for preferer ce against Bank of Montreal and

Paribas with respect to the dlaims asserted on. Allied' s behalf

against th,e FSI debtors; , Bar k of Montreal and Paribas had

conting nt claims to recover from FSI any amount which .Bank of

Montrea

or. Paribas would be required to pay Allied or by which

their o her claims against A] lied might be. reduced as a result of

Allied'

claims against the FSI debtors with.respect to the $500

million that Bank of Montreal and Paribas had lent to FSI.

Bank

of Mont eal and Paribas- asserted that their respective claims

would be senior to those claims of EJDC that were secured by the

common

tock of Ralphs that Holdings III owned.

- 23 -

Several claims were filed in the Allied chapter 1L proceedings againsts the various Allied/Federated-debtors,

following claims.

including the

Bank of Montreal. and Paribas filed.secured and

unsecured claims against Allied, identified as classrA-6, class

AR-6, and class AO-6, with respect- to the respective revolving

working capital and.revolving inventory facilities that they had

extended to Allied on Aprile 7, 1989.

Holdings III filed an unsecured claim against Allied,

identified as class A-17, lunder the Allsied note.

Holdings III,

also filed an unsecured claim against Federated, identified as

class F-10) under the Federated.notes

EJDC and its affiliates filed more than 200 claims against

the Allied/Federated debtors .

EJDC asserted that its claims

againstsFederated were secured by a pledge of the Federated note

and the Allied note.

Holdings held the interest, identifiedtas class F-15, in the

outstanding common stock of Federated.

Holdings II held the

interest, identified as class F-19, in the outstanding common

stock of Allied.

The FSI debtors and the Allied/Federated debtors had obliga-

tions'under the Bankruptcy Code to file with the Ohio U.S.

Bankruptcy Court in the FSI chapter 11 proceedings and the Allied

chaptek 11 proceedings respective p oposed plgns of reorganiza-

- 24 -

tionU

nd respective disclos re statements with respect to those

propos

plans of reorganiza ion.

Under the Bankruptcy Code

FSI de

ors and the Allied/F derated debtors had an exclusive

right

ring the 120 days following the date on which those

debtors filed their respecti e chapter 11 petitions

sivity

the

(plan exclu-

eriod) to file respe tive proposed plans of reorganiza-

tion wi h the Ohio U.S. Bank uptcy Court.

On several occasions

the FSI debtors -and the Allied/Federated debtors requested

extensi ns of their respecti4e plan exclüsivity periods.

Ohio U.

The

. Bankruptcy Couet gnanted each of those requests.?

At no time did EJDC, Ba k of Montreal, Paribas, O&Y, or

Campeau seek to reduce the time during which FSI had the exclu-

sive ri ht to file a propose

plan of reorganization with the

Ohio U.S. Bankruptcy Court.

Nor did those creditors object'to

the req ests of FSI to extend the time during which it had the

exclusive right to file à pr posed* plan of reorganization with

that coürt.20

"T e term "plan of reorcjanization" is used herein to refer

to a plan described in ch. 11 of the Bankruptcy Co'de, 11 U.S.C.

secs. 1 01-1174.

Our use of that- term is not intended to refer

to a pl n of reorganization or tax purposes or to imply that any

propose .plan of reorganizat. on filed with the Ohio U.S., Bankruptcy €ourt constituted a plan of reorganization for tax purposes.

20T e docket sheet of thé Ohio U.S. Bankruptcy Court in the

FSI cha ter li proceedings did not' reflect (1) that EJDC, Bank of

Montrea , Paribas, O&Y, or C$mpeau requested that that court

shorten the FSI debtors' plan exclusivity period in the FSI

(cont inued . . . )

- 25 -

During the FSI chapter 11 proceedings and the Allied chapter

11 proceedings, the FSI debtors, the Allied debtors, the Federated debtors, Ralphs, the various creditors committees, and other

respective creditors of the FSI debtors and the Allied/Federated

debtors engaged in extensive -discussions .and riegotiations regarding the resolution of .the FSI chapter 11 proceedings and the

Allied chapter 11 proceedings .

Each of the; pdrticipants in those

discussions and negotiations was representeds by cseparate professional advisors.

The FSI debtors and the Allied/Federated debtors filed with

the Ohio U.S. Bankruptcy Court, respective joint proposed plans of

reorganization in sthe FSI chapter 11 proceedings and the Allied

chapter - 11 proceedings .

Thereafter , those debtors amended on -

several occasions the respective joint proposed plans and filed

with the Ohio U.S. Bankruptcy Court those ,respective amended

joint proposed plans.

None of: EJDC, Bank of lvíontreal, Paribas,

O&Y, or Campeau objected to the confirmation of any of the

respective proposed- plans of reorganization' that the FSI debtors

and the Allied/Federated debtors filed with the Ohio U.S. Bank-

( . . . continued)

chapter 11 proceedings or (2) that any of those creditors objected to the several reqtiests that the -FSI debtors made to the

Ohio U.S. Bankruptcy Court for .extensions of tihat plan exclusivity period.

- -26 ruptcy

ourt." - No party exc pt the FSI debtors and the Al-

lied/Fe erated debtors filed with that court a proposed plan of

reorgan zation in the FSI ch pter 11 proceedings or the Allied

chapter 11 proceedings .

On October 28, 1991, th -FSI debtors filed with the Ohio

U.S. Ba kruptcy Court in the FSI chapter 11 proceedings (1) a

documen

entitled "Third Ame ded Joint Plan of Reorganization for

Federat d Stores, -Inc.; Federated Holdings, Inc.; Federated

Holdings II, Inc . ; Federated Holdings III, Inc . and Campeau

Properties, Inc."

(October 1 91 proposed FSI chapter 11 plan) and

(2) a document entitled "Sec nd Amended Disclosure Statement

Pursuan

to Section 1125 of the Bankruptcy Code for Federated

Stores, Inc.; Federated Hold ngs, Inc:; Federated Holdings; II,

Inc . ; F derated Holdings III

Inc . and Campeau Properties , . Inc . "

(FSI disclosure"statement) .

On October 28, 1991, th

Allied/Federated debtors filed with

the Ohio U.S. Bankruptcy Cou t in the Allied chapter 11 proceedeings (1

a document entitled "Third Amended Joint Plan of Reorga-

"The docket sheet of the Ohio U.S. Bankruptcy Court in the

FSI cha] ter 11 proceedings didd not reflect that EJDC, Bank of

Montreai, Paribas, O&Y, or CZmpeau filed any document with that

Court o jecting to the confiŠmation of any of the respective

proposed joint plans of reorganization that the FSI debtors filed

with thÂt Court in those prodeedings .

"T e docket sheet of the Ohio U.S. Bankruptcy. Court in the

FSI cha ter 11- proceedings did not reflect that EJDC,, Bank of

Montreal, Paribas, O&Y, or Campeau filed any document with that

Court o jecting to the adequacy of the FSI disclosure statement.

- 27 -

nization of Federated Department Stores, Inc., Allied Stores

Corporation and Certain of Their Subsidiaries"

(October 1991

proposed Allied chapter 11 plan) and (2) a -document entitled

"Disclosure Statement Pursuant to Section 1125 of the'Bankruptcy

Code.for the Third Amended Joint Plan of Reorganization-for

Federated Department Stores, Inc., Allied Stores Corporation, and

Certain of Their Subsidiaries"

(Allied disclosure statement).

The October 1991 proposed FSI chapter il plan and the

October 1991 proposed Allied chapter 11 plan (collectively, the

October 1991 proposed chapter 11 plans) were interdependent. 2The

effectiveness of the October 199T proposed FSI chapter-11 plan

was conditioned on the satisfaction of or, lif'waivable, waiver of

all of the conditions to the effectiveness of the October 1991

proposed Allied chapter 11 plan.

According to the FSI debtors'and the Allied/Federated

debtors, the primary reason for filing separate proposed plans of

reorganization in their respective chapter 11 proceedings was the

existence of separate debt structures for the respective operations of the FSI debtors and the All'ied/Federated debtors.

Other

reasons of the FSI debtors and the Allied/Federated 'debtors for

filing separate sproposed plans of reorganization were:

(1) Allied, Federated, and Ralphs were separate reporting compa-

nies under certain Federal securities laws; -(2)- the agreement of

the respective- parties to the FSI chapter 11 proceedings and the

- 28 Allied chapter 11 proceeding

that the creditors of the retail

departn ent store businesses

hould become equity participants in

those

sinesses after the c apter 11 reorganization; and (3) the

retail

epartment store busi esses and the Ralphs grocery-store

busirie s had little in commo , having been operated separately

under

parate management anÅ from separate geographic locatioris

Ac ording to the FSI disclosure statement, the overall

purpos s of the October 1991 proposed FSI chapter 11 plan were:

(1) To distribute the assets of the FSI debtors among the credi

tors o

those debtors;, (2) to maximize the amount that the-

credit cs of the FSI debtors could recover on their respective

claims

gainst those debtors and to allocate that- amount in a

manner

hat the FSI debtors

(3) to

ettle and compromise certain significant disputes that

iewed as fair and reasonable; and

the FSI debtore -believed .wou d result in significant expense if

litigat d and that had the p tential to impact adversely, the FSI

debtors if determined advers ly to them.

Ac ording to the Allied disclosure statement, the-overall

apurpose

of the October 1991 proposed Allied chapter 11 plan

were:

1) To alter the respective debt and the respective

capital structures of the Al ied/Federated debtors sso that at the

conclus on of the Allied cha ter 11 proceedings those debtors

would p ssess. viable respective capital structures;

(2) to

maximizh the amount that .the creditors of the Allied/Federated

- 29 -

debtors could recover on their respective claims - against those

debtors and to allocate that amount in á manner that the Allied/

Federated debtors viewed as fair and reasonable; and (3) tò i

settle,. compromise, or otherwise dispose of certain claims of and

against the Allied/Federated debtors on terms *that those debtors

believed to be reasonable.

In addition, A]jlied/Federated debtors

intended for the October 1991 "proposed Allied chapter 11 plan to

preserve certain economies of scale and other benefits of the

joint operation of the Allied/Federated debtors.

As a specific, condition to any confirmation by the Ohio U S.

Bankruptcy Court of the October 1991-proposed chapter 11 plans,

the FSI debtors, the Allied/Federated debtors, and the respective

creditors of those debtors 'entered into an agreement (comprehen-

sive settlement agreement) that was to resolve" certain áctual and

potential claims that those parties had against each other under

terms that those parties determined were reasonable.

That

agreement provided, inter.alia, that the parties to that agreement generally agreed to use their best efforts to have the Ohio

U.S. Bankruptcy Court confirm the October 1991 proposed chapter

11 plans;

Under the comprehensive settlement agreement, the FSI

debtors, the Allied/Federated debtors, Ralphs, and some of the

respective creditors of those debtors were to execute releases

regarding potential and actual claims among| arid between the

- 30 -

parties to that agreement e

'hose claims included the various

respective claims of EJDC, B nk of Montreal, Paribas¡ O&Y, and'

Campeau.

Many of the issues raised by the, claims that the

parties to the comprehensive settlement agreement were to release

were n vel or unresolved iss es of law that could have required

time-c nsuming litigation to resolve.

Under the comprehensive settlement agreement, certain tax-

sharin

agreements between and among members of- the FSI

consol

ated group that had

een entered into before the com-

mencem nt of the FSI chapter 11 proceedings and the Allied

chapter 11 proceedings were

o be canceled as - a condition to the

execut

n of the comprehensiÝe settlement agreement and of the

Ohio U.

. -Bankruptcy Court' s confirmatiion of the October 1991

propos

chapter 11 plans .

er the comprehensive settlement agreement, the claim of

Holdin

III with respect to the Federated note was to be reduced

from $7

1 million to $40.7 tâillion in order .to account for

certain claims that the FedeÙatede debtors had against FSI with

"O e of the tax-sharing agre'ements was between Ralphs and

FSI. U ider that agreement, for each taxable year of the FSI

consoli lated group Ralphs waj obligated to pay to FSI an amount

equal t > the amount of tax tlíat Ralphs would have paid if Ralphs

had fil d a separate tax ret(rn for that taxable year.

return, each member of the FSI consolidated group agreed to

indemni y jointly and severalily and hold harmless Ralphs against

any claim of liability for t x of the FSI consolidated group.

- 31 respect to certain tax-sharing agreements among those debtors and

FSI.

The comprehensive settlement agreement st-ated that that

agreement was an essential 'element of and means of implementation

of the October 1991 proposed chapter 11 plaps

That agreement

also stated that each of the October 1991 proposed chapter 11

plans was an essential el.ement of and means of execution of the

comprehens ive se t t lement agreement .

The October 1991 proposed chapter 11 plans proposed to

separate the ownership and the operation of; the Ralphs grocery

store business from the respective ,ownership and the respective

operations of the real estate businesses- and the retai'l department store businesses .

In order -to 'achieve" that separation, the

October 1991 proposed chapter 11 plans ~proposeld, ~inter alia, that

Allied and Federated ,merge into a single surviving eritity, known

as New Federated, - thereby consolidating the real estate businesses and the retail department store businesses, and that a '

majority of the outstanding common stock of Ralphs be distributed

to EJDC, Bank of Montreal, and Paribas, all of which were unrelated to the FSI consolidated group.

In negotiating the terms of the October 1991 proposed FSI

chapter 11 plan,

FSI proposed to value all of the outstanding

common stock of Ralphs at $580 million solely for the purpose of

allocating the. outstanding common stock of Ralphs which Holdings

32 -

III ow ed and which the FSI debtors proposed in that plan that

Holdin

III transfer to EJDC, Bank of Montreal, Paribas, and

Campea .24

Although FSI had

roposed a value higher than $580

millio

for the outstanding

ommon stock of Ralphs, FSI was

willin

to, and did, propose a value of $580 million for that

stock

order to achieve a

onsensus among the parties that

negotia ed the terms of the dctober 1991 proposed FSI chapter 11

plan.

Based on a value of $$80 million for all of the outstand2

ing co

on stock of Ralphs, t he Allied/Federated .debtors assumeÃ

that t

a value of the outstai ding common stock of Ralphs that

Allied

wned ( i . e . , 16-. 25 peÈcent ) was approximately, $94 million

chapte

FSI debtors propose

sin the October 1991 proposed, FSI

11 plan that EJDC redeive the following with respect to

its cre itor claims identified as classes 1, 2, 3

4, 14, and 15:

(1) - 20 hiillion shares of thegoutstanding common stock of Ralphs,

representing approximately 60 . 34 percent of the total, outstanding

common

tock of Ralphs, to be distributed from the shares of •

Ralphs

ommon stock that Hol ings III owned;

(2) a release under

the comprehensive settlement agreement of any claims against

EJDC; and (3) certain respect ive real estate" partnership inter

24The net value of all of the outstanding common stock of

Ralphs as at least $475 milÈion.

-- 33 -

ests that the FSI .shopping center corporations owned or certain

stock of those corporations that FSI owned.23

The FSI debtors proposed in the October 1991 proposed FSI

chapter 11- -plan that Bank of Montreal and Paribas, in -consider-

ation for (1) their respective creditor claims identified -as

class 20,

(2) their respective agreements undër the comprehensive

settlement agreement to release any claims against EJDC, and

(3) their respective consents "to the October 1991 proposed Allied

chapter 11 plan as holders of the claims identified as class A-6,

receive the -following:

(1) e3,*514;286 shares of the outstanding

common stock of Ralphs, representing approximately 10.6 percent-

of the total outstanding common stock of Ralphs, to be distributed equally between Bank of Montreal and Paribas and to be

distributed from the shares of Ralphs common stock that Holdings

III owned and (2) releases under the comprehensive settlement

agreement of any potential claimst against/Bank of Montreal or

Paribas.

The FSI debtors pro'posed in the October 1991 proposed FSI

chapter 11 plan that Campeau receive the folldwing with respect

2sUnder the October 1991 proposèd FSI chapter ,11 plan, it

was proposed that EJDC receive the respective real estate partnership interests that each of the FSI shopping center corporations owned, unless FSI determined that any such distribution to

EJDC would have adverse tax consequences to FSI.

In that event,

under the October 1991 proposed FSI chapter 11 plan, it was

proposed that EJDC receive certain respective stock of the FSI

shopping center corporations that FSI owned.

- 34 to its areditor. claims against- FSI identified as classes -9 and

22:

(]) 4,244,241 shares of the outstanding common stock of

Ralphs

representing approxí atelys 12.8 percent of the total

outstan ing common stock of

alphs, to be distributed from the

that Holdings III owned,

f Ralphs common stoc

(2) cash,

and (3) a release under the comprehensive settlement agreement of

any pot antial claims against it .

Under the October 1991 proposed

FSI cha2ter -11 plan, the FSI debtors proposed that a portion

(i.e.,

.8 percent) of the o tstanding common stock of Ralphs

that th se debtors- proposed

e .distributed - to Campeau be distrib-

uted to FSI and be sold by FSI as needed in order to satisfy

certain obligations and expe ses arising under the October 1991

proposed FSI chapter 11 plan

sell an

To the extent. that. FSI did not .

portion of the Ralp s stock that it received, the FSI

debtors proposed in the Octo er 1991 proposed FSI chapter 11 plan

that FS

distribute that port ion to Campeau.

FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that O&Y rec ive the following with respect to

its creditor claims identified as classes 8 and: 21:

(1-) A

distrib tion from Campeau with respect to Holdings III's guaranty

of the

oan that O&Y agreed

n September 12, 1989, - to make

availab e to Campeau and (2) a release under the comprehensive

settlem nt agreement of any potential claims against it .

- 35 -

The FSI debtors proposed in the October 1991 proposed FSI

chapter- 11 plan that FSI receive with respect to its creditor *

claims identified-as classes 10-and 24 the property of the estate

of Holdings III, if any,.after the distribution pursuant to that

proposed plan of the common stock of Ralphs that Holdings III

owned.

In the October 1991 proposed FSI chapter 11 pl'an the FSI

debtors proposed that FSI adistribute pursuant to that plan any

such property that .it received.

The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that the respective creditor claims of EJDC, Bank

of Montreal, Paribas, O&Y, and Campeau all be impaired.

In that

proposed plan the FSIs debtors proposed that all secured claims

except the secured claims identified as class 11" bè ilmpaired.

In the October 1991 aproposed FSI chaptef 11?plan the FSI debtors

proposed that several creditors that had filed respeative unse-

cured claims against the FSI debtors receive certain distributions with respect to their claims.

The FSI debtors proposed in the October 1991 proposed FSI

chapter 11 plan that Holdings, Holdings II, Holdings III, and CPI

be dissolved and that their respective assets vest in and be held

by FSI as disbursing agent 'for -distribution under the October

"The claims identified as class 11 cor sisted of claims

against Holdings II under a certain loan agreement dated Apr. .29,

1988, pursuant to which Holdings II borrowed certain funds from

Citicorp Investment Bank Ltd.

- 36 -

1991 p oposed FSI chapter 11 plan.

debtor

In that proposed plan-the FSI

proposed that FSI co tinue in existence until the - October

1991 pr posed FSI chapter 11 plan had been fully consummated and

the Ohi

U.S. .Bankruptcy Cou t closed the FSI-chapter 11 proceed-

ings.

t that time FSI woul

dissolve.

FSI debtors propose

in the October 1991 proposed" FSI

chapte

11 plan that all. of t he outstanding common stock of

Holding

III be canceled upo

that n

property be distribut ed to FSI with respect to its

interes , identified as clas

Holding

the dissolution of· that company and

40, as the sole stockholder of

III.

In summary, the FSI debt ors proposed in the October 1991

propose

FSI chapter 11 plan that Holdings III transfer to the

followihg "creditors of FSI tl e following approximate percentages

of the utstanding common st ck of Ralphs:

FSI Creditor

Percentage of Outstanding

Common Stock of Ralphs

EJDC

Campe au

60 . 4

12 . 8

Bank of Montreal

5.3

Paribas

5.3

Allied/Federated de tors proposed in the October 1991

propose

Allied chapter 11 plan that on or after the effective

date of that proposed plan Allied and Federated merge and that

all of

heir respective assets vest in a single surviving comI

pany, t

be known as New Federated.

| 3

The Allied/Éederated debtors

,37 -

proposed in that proposed plan that.all of the outstanding common

stock of New Federated 4xa distributed to the respective creditors

of the Allied debtors and the Federated debtors.

The Allied/Federated debtors-proposed in the October 1991

proposed Allied chapter 11- plan that'Holdings III receive with

respect to its claim against Federated under the Federated note

816 000 shares of the common stock of New Federated.

The Al-

lied/Federated debtors proposed in that proposed planothat

588,000 of those 816,000 shares be distributed pursuant= to the

October 1991 proposed,FSI chapter 11: plan to the respective

general, unsecured creditors of FSI and Holdings III in satisfaction of those unsecured creditors' respective claims against FSI

and Holdings III.

The Allied/Federated debtors proposed in the

October 1991 proposed Allied chapter 11 plan that the remaining

228,000 shares of the common stock of New Federated that that,

plan proposed Holdings III receivesbe sold under the October 1991

proposed. FSI chapter 11 plan to' provide cash to FSI.

In the

October 1991 proposed Allied, chapter 11 plan the Allied/Federated

debtors proposed that Holdings III contribute to the capital of

Allied its claim against Allied under the Allied note and that no

property be distributed to Holdings III with respect to that

claim.

The Allied/Federated debtors p oposed in,the October 1991

proposed Allied chapter 11 plan that Bank of Montreal and Paribas

- 38 -

each r ceive, with respect to their respective claims identified

as cla ses A-6, AR-6, and AO 6 approximately- 4.83 ~percent of the

total

tstanding common sto k of Ralphs, to be distributed from

the sh

es of Ralphs common

tock that Allied owned and that New

Federat d" was to own pursua t to the October 1991 proposed

Allied chapter 11 plan.

Allied/Federated de tors proposed -in the October 1991

propos

Allied chapte$ 11 p an that Allied retain in its capac-

ity as

stockholder of Ralp s the shares of the Ralphs common

stock t at . it owned and that were not to be distributed to Bank

of Mont eal and Paribas (i.e , 6.6 percent -of the outstanding

common

tock of Ralphs) .

Federated, . as the successor - to

Allied, was to,retain and co tinue to own such stock.

summary, the Allied/Federated debtors proposed in the

October 1991 proposed Allied chapter 11 plan that the following

compani s own the following

pproximate percentages of the

outstar0ling common stock of

alphs after any distributions of

that stock proposed in that proposed plan:

A discussed above, th Allied/Federated debtors proposed

in the October 1991 proposed Allied chapter 11 plan that Allied

and Fed rated merge into a s ngle surviving entity known as New

Federat d.

39 -

Entity

Bank of Montreal

Paribas

New Federated

Percentage of Outstanding

Common Stock of Ralphs

4.8

6.6

As of February 3, 1991, an appraisal estimated that, excluding the then-outstanding debt of Ralphs of approximately $985

million and the cash and cash equivalents of $34 . 7 million that

Ralph owned, the value of Ralphs was between approximately $1.45

billion and $1.55 billion.

The FSI debtors, the Allied/Federated debtors, Ralphs, the

creditors that filed.claims in the FSI chapter 11 proceedings

and/or the Allied chapter 11 proceedings, and their respective

representatives negotiated the terms of an indemnification

agreement.

They believed that such an indemnification agreement

would be necessary in order to allocate among the members of the

FSI consolidated group responsibility for certain liàbilities,

including certain tax liabilities.

That was because of, inter

alia, the pendency of the FSI chapter 11 proceedings and the

Allied chapter 11 proceedings, the proposed cancellation of

certain tax-sharing agreements among the members of the FSI

consolidated group, the separation proposed in the October 1991

proposed chapter 11 plans of the retail department store businesses and the Ralphs grocery store business into entities with

- 40 separa e ownership, and the

act that the FSI consolidated group

was at all relevant times filing a single. consolidated tax

return.

October 1991, the FS

debtors, the Allied/Federated

debtor , Ralphs, and the creditors that filed claims in the FSI

chapter 11 proceedings and/or the Allied chapter 11 proceedings

filed

th the Ohio U.S. Ban ruptcy Court an unexecuted pr posed

indemni ication agreement (O tober 1991 proposed indemnificatioh

agreement) that they had negötiated and that they proposed be

effect i

as of the effecti

FSI chapter 11 plan.

date of the October 1991 proposed

The Ohio U.S. Bankruptcy Court did not

approve the October 1991 pro osed indemnification agreement.

It was proposed in the October 1991 proposed indemnificatio

agreeme t, inter alia, that

esponsibility for certain nontax

liabili ies arising from the conduct of the respective businesses

of the

arties to that agreen ent be allocated among those parties

and tha

certain tax liabilities be allocated among certain of

those parties .

Certain prop sals were made in the October 1991

proposed indemnification agrèement to address certain other

matters regarding the relati nship of the parties to that agreement after certain of those parties ceased to be members of the

FSI consolidated group.

It I was also proposed in the October 1991 proposed indemnification agreement that New Federated, FSI, and Ralphs indemnify

- 41 one another and certain other members of the FSI consolidated

group for certain losses relating to

resulting from, or arising

out of the conduct of their respective businesses before, on, or

after the effective date of the October 199-1 proposed 'FSI chapter

11 plan.

..-

It was further proposed in the October 1991 proposed indemnification agreement that New Federated indemnify and hold

harmless Ralphs, Holdings III,

FSI, and certain subsidiaries of

FSI from and -against certain tax liabilities - that became known

after the respective -effective dates of the October 1991 proposed

FSI chapter 11 plan and the October 1991 proposed- Allied chapter

11 plan but that were attributable to taxable years that ended on

or before those effective dates.

indemnification

In exchange for thatt proposed

it was proposed in the Octiober 1991 proposed

indemnification agreement that Ralphs pay to New Federated

(1) $10 million over a period of five years beginning on the

effective date of the October 1991 proposed FSI chapter 11 plan

and (2) an amount. equal to 21 percent of any taxes for which New

Federated.indemnified Ralphs but not to exceed $15 million,

adjusted by a certain $5 million credit potentially available to

Ralphs .

After the FSI debtors and; the-Allied/Federated debtors filed

the October 1991 proposed FSI chapter 11 plan and the October

1991 proposed Allied chapter 11 plan, respectively, the FSI

- 42 -

debtor , the Allied/Federate

debtors, Ralphs / and the respective

credit rs that had filed cla ms in the FSI chapter 11 proceedings

and/or the Allied ,chapter 11 proceedings discussed and riegotiated

certain modifications of the terms of those proposed- chapter 11

plans.

Under the respective modified proposed FSI chapter 11

plan a

the modified propos d Allied chapter 11 plan, the FSI

debtor

and the Allied/Federated debtors proposed (13) the incor-

porat i

of - a new company, R lphs Holding Co . , Inc .

(2) , th

transfer to it by Ho dings III and Allied of their

(RHC) ,

respective common stock owne†ship in Ralphs (i.e., 83.75 þercent

and 16 . 25 percent , respectiv ly) ,

III an

(3 ) the trans f er to Holdings

Allied by RHC of 83. 5 percent and 16.25 percent, respec-

tively, of RHC' s outstanding common stock,

(4) "the respective

distrib tions by Holdings II] to certain of FSI' s creditors and

by Alli d to certain of its

reditors of their respective shares

of outs anding common stock öf. RHC in the same amounts and in the

same ma ner as the parties t

the October 1991 proposed chapter

11 plan

had proposed in tho e proposed plans Holdings III and

Allied

istribute the common stock of Ralphs

(We shall refer to

the ser LeS Of transactions that the FSI debtors and the Allied/

Federat d debtors proposed ir the modifications to the October

1991 pr posed chapter- 11 plar s (namely, that RHC be incorporated

Holdings III and Allied tran(fer their respective common stock of

Ralphs to RHC, RHC transfer all of=its common stock to Holdings

- 43 III and Allied, and Holdings III and Allied distribute their

respective common stock of RHC) as the Ralphs stransaction.)

The proposed Ralphs transaction required;the parties that

negotiated the terms of thesOdtober 1991 proposed indemnification

agreement to revise the terms of that agreement to take into

account that proposed transactionue Around late 1991, Federated

and certain of its subsidiaries, Allied and certain of its

subsidiaries,.New Federated (asethe proposed successor to Allied

and Federated), FSI and certain of its subsidi'aries, Holdings

III, Ralphs, and RHC executed a document entitled "INDEMNIFICA-

TION AGREEMENT"

(proposed final indemnificati~on agreement)."

was proposed in.the proposed final indemnification -agreement that

that agreement be effective as of the effective "date of the

proposed FSI chapter 11 plan that the Ohio U.S. Bankruptcy Court

confirmede.

The execution of the proposed final indemnification

agreement was necessary in'order to induce the parties, to that

proposed agreement to approve any proposed chapter 11 plans inithe respective chapter 11 proceedings.

Howe'ver, any such indeš-

nification agreement would have been necessary to'induce such

approvals regardless of- whether the Ralphs transaction had been

"No stipuladed exhibit referred to the proposed final

indemnification agreement as being part of the consideration for

any transaction that ocòurred widh respect to the FSI chapter 11

proceedings or the Allied chapter 11 proceedings.

- 44 -

proposed as a modification t

posed

the respective October 1991 pro-

hapter 11 plans.

was also proposed in the proposed final indemnification

agreem at that Holdings III

e indemni-fied against« any deficiency

in tax attributable to the PÁlphs transaction, including any tax

attributable to an election under section 338 (h) (10) .

was further proposed in the proposed final indemnifica-

tion agceement that RHC beco e a joint and several co-obligor

with re pect to payments that

the proposed initial indemnifica-

tion ag ceement proposed be mŠde by Ralphs.1

As a result, in the

propose 1 .final indemnificati n agreement it was proposed that

Ralphs

nd RHC be jointly anc severally liable for þayments to a

New Fe

rated of not less th n $10 million and not more than $20

millio

January 8,. 1992, the FSI debtors filed with the Ohio U.S.

Bankrup cy Court in the FSI chapter 11 proceedings a documententitle1 ."Additional Modific tion (Effective Upon Filing Pursuant

to Bank uptcy Code Section 1 27/) of Third Amended Plan of Reorganizatio

for Federated Store , . Inc ; ; Federated Holdings , Inc .'; *

Federat d Holdings II, Inc . ; Federated Holding£ III, Inc . ; and

Campeau Properties, Inc."

(January 1992 proposed FSI chapter 11

plan) .

Around that date, the Allied/Federated debtors filed with

the Ohi

U.S. Bankruptcy Cou t in the Allied -chapter 11 proceed-

ings a

odification of the O tober 1991 proposed Allied chapter

- 45 -

11 plan (January 1992 proposed Allied chapter 11 plan)

Certain

revisions and modifications of certain provisions of the October

1991 proposed FSI chapter 11 plan údre proposed in the January

1992 proposed FSI chapter 11 plan in order to include the Ralphs

transaction, which inclùded the contemplated creation of RHC.

The January 1992 propòšed FSI-chapter 11 -plan proposêd to include

the following paragraph with respect to the contemplated creation

of RHC:

5t.

Creation of Ralphs Hol'ding Company

Prior to the Effective Date, Holdings "III and

Allied may, at their election (with the concurrence of

each party who will receive Ralphs Common Stock under

the [October 1991 proposed FSI bankruptcy] Plan) ,

contribute all of thè common stock of Ralphs owned by

those entities to a newly incorporated Delaware corporation which may be formed "for the purpose of holding

all of the issued and outstanding capital stock of

Ralphs (the "Ralphs Holding Company") .

In exchange for

contributing their respective holdings of common stock

of Ralphs to Ralphs Holding Company; Holdings III will

receive that number of shares of capital stock in

Ralphs Holding Company so that it owns the same percentage of the issued and outstanding capital stock of

Ralphs Holding Company as of th'e Effective Date as it

now owns of the common stock of Ralphs, and Allied will

receive that number of shares of capital stock in

Ralphs Holding Company so that it owns the same percentage of the issued and outstanding capital stock of

Ralphs Holding Company as of the Ef fective Date as it

now owns of the common stock of Ralphs .

Certain provisións were proposed in the January 1992 proposed FSI chapter 11 plan that diffefed from the p/ovisions

proposed in the October 1991 proposed FSI chapter 11 plan,

including the following.

The FSI debtors proposed in the January

- 46 -

1992 p oposed FSI chapter 11 plan that EJDC receive the following

with respect to its creditor claims identified as classes 1, 2,

3, 4,

4, and 215:

(1) 20 million shares of the common stock of

RHC, r presenting approximat ly 60 . 34 percent of .the total

outsta

ing common stock of

HC, to be distributed from the

shares Nf the outstanding co mon stock of RHC that Holdings III

was to

wn;

(2) a .release under the comprehensive settlement

agreem at of any claims agai Ist EJDC; and (3) certain respective

real e

ate partnership inte ests that the FSI shopping center

corpora ions owned or certain stock of those corporations that

FSI ow ad.

FSI debtors proposec in the January 19923 proposed FSI

chapter 11 plan that Bank of Montreals and Paribas, in consideration f r (1) their respecti e creditor claims identified as

class 2 J,

(2) their respecti e agreements under the comprehensivé

settlem nt agreement to rele se any claims against EJDC, and

(3) the r respective consenté to the January 1992 proposed Allied

chapter 11 plan as holders of the claims identified as class A-6,

receive the following:

common

(1)

,5.14,286 shares of the outstanding

tock of RHC, represe ting approximately 10.6 percent of

the tot 1 outstanding common stock of RHC, to be distributed

equally between Bank of Mont eal and Paribas and to be distrib

uted fr m the shares of RHC c ommon stock that Holdings III was to

"S e supra note 25.

- 47 own and (2).releases under the comprehensive settlement agreement

of any potential"claims against Bank of Montreal or Paribas.

The FSI debtors proposed in the January 1992 proposed-FSI

chapter 11 plan that Campeau receive the following with respect

to.its creditor claims against FSI identified-as classes 9 and

22:

(1) 4,244,241 shares of the outstanding common stock of RHC,

representing approximately 12.8 percent of the total outstanding

common stock of 3RHC, to be distributed from* the shares of RHC

common stock that Holdings III was to own,

(2);-cash, and (3) a

release-under the comprehensive settlement agreement of any.

potential claims against :it.

Under the January 1992 proposed FSI

chapter 11 plan.the FSI debtors proposed that a portion (i.e.,

0.8 percent) of the outstanding common stock of RHC that, those

debtors proposed be distributed to Campeau be distributed to FSI

and be, sold by FSI as needed in order to satisfy certain obliga-

tions and expenses arising under the January 1992 proposed FSI

chapter 11 plan.

To the extent that FSI did not sell any portion

of the RHC stock that -its received, the -FSI debtors proposed in

the January 1992 proposed FSI chapter 11 plan that FSI distribute

that portion to Campeau.

The FSI,debtors proposed in the January 1992 proposed FSI

chapter 11 plan that FSI receive with respect,to its creditor

claims identified as classes 10 and 24 any property of the estate

of Holdings III after the distribution pursuant to that proposed

- 48 -

plan of the common stock of

HC that Holdings III was to own'.

the Jar ary 1992 proposed FSÌ chapter 11 plan the FSI debtors

propos

that FSI distribute pursuant to that plan any such

propert

it - received.

chapte

FSI'debtors propose

in thê January 1992 proposed

11' plan that the -respective creditor claims of EJDC, Bank

of «Mont eal, Paribas, O&Ý, a d Campeau all be impaired.

In tliat

propose

plan, the' FSI debto s proposed that all secured claims

except

he secured claims id ntified as class¢ 113° be impaired.

In the

anuary 1992 proposed FSI chapter 11 plan the FSI debtors

propos

that several credit rs that had filed respective "unse

cured claims against the FSI debtors receiŸe certaine distributions wn.th respect to their

laims .

FSI debtors proposed in the January 1992 p oposed' FSI

chapter 11' plan that all of

he outstanding common stock of

Holdings III be canceled upon the dissolution of that company and

that no property be distributed to' FSI with respect to its

interes ,'identified as clas

40, as the'sole stockholder of

Holding , III .

In summary, the FSI debt ors proposed in the January 1992

propose - FSI chapter 11 plan that Holdings III ti-ansfer to the

following creditors of FSI tl e following approximate percentages

of the

utstanding common at ck of RHC:

SOS e supra note 26.

- 49 -

FSI Creditor

Percentage of Outstanding

Common Stock öf RHC

BJDC

Campeau

60 . A

12.8

Bank of Montreal

5.3

Paribas

5.3

The FSI debtors proposed, inter alia, in the January 1992

proposed FSI chapter 11 plan the following provision:

Nondischarge And -Injúnction.

Nondischarge Of Debtors .

Pursuant toasec'tion 1141-(d) (3) of the Bankruptcy

Code,' the Confirmation Order shall not di-scharge claims

against any of the [FSI] Debtors . However, no creditor

of any of said Debtors may receive any payment from, or

seek recourse against, any assets which are to be

distributed under Sections IV, V, and VI of this Plan,

ekcept for thóse distributions expressly provided for

in said Sections IV, V, and VI. As of the Confirmation

Date, all entities are precluded from asserting,

against -any property which is to be distributed under

Section IV, V or VI of- this Plan, any claims, obligations, rights, causes of adtion, liabilities or equity

interests based upon any act or ornission, tran'saction

or other activity of any kind or nature that occurred

prior to the Confirmation Date, other than as expressly

provided in"this Plans or, the Confirmation Order,

whether or not (a) a proof of claim or proof of interest based on such debt or interest is Filed or deemed

Filed pursuant to section 501 of the Bankruptcy Code,

(b) à claim or interëst based on s ch debt or interest

is allowed pursuant to section 502 of the Bankrupt-cy

Code or (c) the holder of a claim or interest based on

such debt or interest has accepted the Plan.

Injunction.

Except as otherwise provided in the Plan or the

Confirmation Order, on and after the Confirmation Date:

(1) All entities which have held, currently

hold or may hold a debt, claim, other liability or

interest against any Debtor that would be dis-

- 50 -

charged upon Confirmation of this Plan and the

Effective Date but for the provisions of section

1141(d) (3) of the Bankruptcy Code and Section

VI.G.1. hereof are(permanently enjoined from taking any of the following actions on account! of

such debt, claim, liability, interest or right:

(a) commencing or Éontinuing in any manner any

action or other präceeding on account of such

claim against prop rty which is to -be distributed

under Section IV, V, or VI of this Plan, other

than to enforce any right to distribution with

respect to such property under the Plan;

(b) enforcing, attÀching, collecting or recovering

in any manner any judgment, award, decree, or

order against any ÿroperty to be distributed to

creditors under Seätion IV, V, or VI of this Plan,

other than as perm tted under subparagraph (a)

above; and (c) cre ting, perfecting or enforcing

any lien or encumbrance against any property to be

distributed under ection IV, V, or VI, other than

as permitted by this Plan.

(2) All non-DÈbtor peïsons and entities are

permanently enjoinåd from commencing or continuing

in any manner any action or other proceeding

whether directly, derivatively or otherwise, on

account of or respècting any claim, debt, right,.

cause of action, oÊ liability released or to be

released pursuant $$ the Comprehensive Settlement

Agreement .

Allied/Federated de tors proposed in the January 1992

propose i Allied chapter 11 p an that Bank of Montreal and Paribas

each re eive with respect to tiheir respective claims identified

as clasjes A-6, AR-6, and AO 6 approximately 4.83 percent of the

total o tstanding common sto k of RHC, to be distributed from the

f RHC common stock tl at Allied was to own and that New

- 51 -

Federated" was to own after the .effective date of the January

1992 proposed Allied chapter 11 plan.

The Allied/Fêderated .debtors proposed"in the January 1992

proposed Allied chapter 11 plan that Allied i-etain in its Oapacity as a stockholder of 'RHC' the shares "of the'RHC oommori stock

that it was to own and that were nót to be distributed tio Bank of

Montreal and Paribas ( i . e .

stock of RHC)

6 . 6 apercènt of . the' outstanding common

New Federated,- as the successor to Allied, was to

retain and continue to own such stock.

In summary, . the Allied/Federated debtors proposed in. the

January 1992 proposed Allied chapter 11 plan that the following

companies own the followirig appròximate percerftages of the

outstanding common stock o'f RHC aftež any distributions of that

stock proposed in that proposed plan:

Entity

Bank of Montreal

Percentage of Outstanding

Common Stock of RHC

4.8

Paribas

4.8

New Federated

6.6

In connection with the inclusion of the Ralphs transaction

in the January 1992 proposed FSI chapter 11 plan and the January

1992 proposed Allied chapter 11 plan (collectively, the January

1992 proposed.chapter 11 plans), EJDC, Federated, FSI, and RHC

"The January 1992 proposed Allied chapter 11 plan, like the

October 1991 proposed Allied chapter 11 plan, -provided that

Allied and Federated were to merge into a single surviving entity

to be known as New Federated.

52 -

entere

int-o a certain agree ent (proposed tax election agree-

ment) ,

hich was to be effective as of the effective date of the

Januar

1992 proposed- FSI ch

posed i

the proposed tax el ction agreement that FSI and New

ter 11 plan. «Those parties pro-

Federa ed (as successor to, Federated) -agree to prosecute diligently

nd in good faith a ráquest to, be submitted to. the Inter-

nal Re

nue Service (IRS) fo

certain rulings (section 382/384

rulings) regarding the applieation of sections 382 and 384 to the

January 1992 proposed chapter 11 plans .

It was stated in the proposed tax election agreement that

FSI, Ne

Federated (as succe sor to Federated) , and RHC agreed to

prosecu e diligently and in

ood faith a.request to be submitted

to the [RS for rulings (sect on 338,(h) (10) rulings) that:

(1) The Ralphs transaction constituted a qualified stock purchase

under s ction 338 (d) (3) ;

electio

(2) RHC would be entitled to make an

under section 338 (a) and (h) (10) with respect to its

acquisi ion of Ralphs;

(3) F I would be entitled to make an

election under section 338 (h) (10) with respect to the Ralphs

transac ion; and (4) any such elections would not adversely

affect

ertain rulings that the IRS was expected to issue with

respect to whether the merge

of Allied and Federated" consti-

tuted a reorganization under section 368 (a) (1) (G) .

US e supra note 27.

- 53 -

The proposed tax election agreement stated that FSI agreed

to make an election under section 338(h) (10) if (1) the section

338 (h):(10) rulings that the IRS issued weres "favorable" and

(2) RHC determined- to.make an election under section 338(a) and

(h) (10).

FSI agreed to make that election whether or'not the

section 382/384 rulings that FSI and New Federated (as successor

to Federated) requested from the IRS were "favorable".

The January 1992 proposed FSI chapter 11 plan was accepted

in writ-ing by each of the creditors andeequity security holders

whose acceptance was -required under the Bankruptcy Code.

January 10, 1992, the Ohio UrS. Bankruptcy Court confirmed the

January 1992 proposed 2FSI chapter-11 plan.

(We shall refer to

the Januaryr1992 proposed FSI chapter 11 plan.as confirmed by the

Ohio U.S. Bankruptcy Court as the confirmed FSI chapter 11 plan.)

The effective date of the confirmed FSI chapter 11 plan was

February 2, 1992."

On January 10, 1992, the Ohio U.S. Bank-

"On Feb. 2, 1992, the proposed final indemnification agreement became effective. Ralphs and RHC, ,or their successors, made

all payments totaling $10 million required by that agreement.

Ralphs, RHC, or their successors claimed deductions for their

respective payments in their respective tax returns for the

taxable yeärs in which they made any such payments.

In the

notice, of deficiency for its taxable years ended Jan. 31, 1993,

Jan. 30, 1994, Jan. 28, 1995, and June 14, 1995, that respondent

issued to petitioner RGC on July 11, 2006,. respondent determined

that if a valid election under sec. 338 (h) (10) had been made with

respect to the Ralphs transaction, the payments made under the

final indemnification agreement would have been assumed or

contingent liabilities and therefore would not. have been deduct-

ible for the year of payment.

Petitioner RGC did not contest

(continued...)

- 54 -

ruptcy Court also confirmed the January 1992 proposed Allied

chapte

11 plan.

(We shall

efer to the January 1992 próposed

Allied chapter 211 plan -as confirmed by the Ohio U.S. Bankruptcy

Court

s the . conf irmed Allie

chapter 11 plan. )

The ef fective

date o

the confirmed Allied chapter 11 plan was February 4,

1992.

its or

Ohio U.S. Bankruptcy Court stated in pertinent past in

r confirming the Jan ary 1992 proposed FSI chaptee 11

plan (Chio U.S. Bankruptcy C urt'á order) the fol'lowing with

respect to its confirmation

f -that proposed plan.

The provisions of the Plan shall bind the

[F9I) Debtors, the Reor Janized Debtors and all credit cs and equity securitý holders of 'any of the [FSI]

De tors, whether or not (the respective claims or interes s of such creditors or equity security holders are s

im aired under the Plan, whether or not such creditors

an1 equity security holc}ers have accepted the Plan, and

wh ther or not such creditors and equity security

ho lders have filed proo(s of claim of interest or are

de med to have filed proofs of claim of interest.

D. Except as othe wise provided in the Plan or

thLs Order, on and afte the Confirmation -date:

(1) All entit es which have held, curi-ently .

hold or may hold a debt, claim, other liability or

interest against any [FSI] Debtor that would be

discharged, upon Ccnfirmation of the Plan and the

Effective Date but for the provisions of section

1141(d) (3) of the sankruptcy Code and Section

VI.G.1 of the Plan re permanently enjoined from

taking any of the following actions on account of

such debt, claim, Êiability, interest or right:

(a) commencing or continuing in any manner any

( . . continued)

that de ermination in the petition that it filed with the Court

- 55 -

action or other proceeding on account of such

claim against property which is to be distributed

under Section IV, V, or VI of the Plan, other than

to enforce any right to distribut~ion with respect

to such property under the Plan; (b) enforcing,

attaching, collecting or recovering in any manner

, any judgment, award, decree; or order -agàinst any

property to be distributed to creditors under

Section IV, V, or VI of the Plan,- other "than as

permitted under subparagraph (a) above; and

encumbrance against any property to be distributed

under section IV, V,r or,VI of the Plan, other than

as permitted by the Plan.

(2) All non-Debtor entities and individuals

are permanently enjoined from commencing or continuing in any manner, or otherwise prosecuting,

any action or proceeding, whether directly, derivatively or otherwise, on account of or respecting

any claim,«debt, right, cause of,action, or liability that is released or to be released pursuant

to the Comprehensive Settlement Agreement;- provided, however, that this injunction will not

prevent--any creditor (other than a Consénting

Additional Party) of any [FSI] Debtor whose claim

,against a [FSI] Debtor is guaranteed by a thirdparty non-Debtor from prosecuting any direct claim

against such third-party n'on-Debtor under any such

guaranty.

The foregoing injunction shall apply to the holder of a

debt, claim or interest, whether or not a proof of

claim was Filed or deemed Filed, whether such claim was

allowed, whether or not the holder of such claim accepted the Plan, and whether or not the right to payment was reduced to judgment, liquidated, unliquidated,

fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. Any

person injured by any willful violation of this injunction shallarecover actual damages, including costs and

attorneys' fees, and, in appropriate circumstances, may

recover punitive damages from the willfula violator.

- 56 -

Ir the Ohio U.S. Bankru tcy Court's order, that court

determi ed that the equity v lue of Ralphs was between $550

millior and $637 million.

As set forth in the Jan ary 1992 proposed FSI chapter 11

plan ar

in the Ohio U;S. Ba kruptcy Court's order, after the

confirmation of that proposed plan EJDC, Bank of -Montreal,

Paribas

and Campeau, as the parties that filed creditor claims

against the FSI debtors, wer

enjoined from further asserting any

of the

they had asserted in the FSI

espective claims tha

chapter 11 proceedings.

Af er the Ohio U.S. Ban ruptcy Court confirmed the January

1992 pr posed chapter 11 plans, the FSI debtors and the Al-

lied/Fe erated debtors took åteps to comply with the requirements

of the confirmed FSI chapter 11 plan and the confirmed Allied

chapter 11 plan, respectively.

Iminediately before the Ralphs transaction was ef fected, the

primary assets. of Holdings IIrI consisted, of :

(1) All of the

outstanding common stock of Holdings II, the assets of which

included directly or indirect ly the common stock and assets of

Allied, Holdings, Federated, and their respective subsidiaries,

(2) 83. /5 percent of the out tanding common stock of Ralphs,

(3) the Allied note, and (4) the Federated note.

Thé FSI consolidated group filed Form 1120 for its taxable

year en ed January 31, 1993 (FSI consolidated group 1/31/93

- 57 -

consolidated return).

The FSI consolidated group attached to

that return a consolidated balance sheet in which it reported,

based on book value, the following total assets and total liabil-

ities as of the beginning of that taxable year- (i.e., February 1,

1992) of that group and of certain of its members:

Company/Group FSI consolidated group

FSI

Holdings III

Holdings II

Holdings

Federated

Allied

Ralphs

Total Assetä

$11,471,163,367

227,757-,850.

180,293,905

470,188,023

957,957

5,979,262,404

3,060,396,285

1,357,571,286

Total Liabilities

$14,460,193,630

1,513,035,371

179,775,064

471,458,182

872,978

6,873,748,518

3,-719,114,874

1,414,776,300

The term "Total Assets" does not include any amount representing the value of intangible assets.

In the consolidated

balance sheet that the FSI consolidated group attached to the FSI

consolidáted group 1/31/93 consolidated return, line 13A, "INTANGIBLE ASSETS", was left blank for dach member of that consolidated group.

On January 29, 1992.,- Jan Charles Gray (Mr. Gray) , an officer

of Ralphs, incorporated RHC under the laws of Delaware.

February 2,'1992, Mr. Gray approved a resolution that provided:

RESOLVED FURTHER, that the fair considenation- for such

issuance of the common stock of the Corporation [RHC]

is the contribution by Allied Stores Corporation and

Federated Holdings III, Inc. of all of the issued and

outstanding common stock of Ralphs Grocery Company;

On February 3, 1992, Allied, Holdings III, and RHC entered

into an agreement entitled '"CONTRIBUTION AND SUBSCRIPTION AGREE-

MENT".

That agreement -provided in pertinent-part:

D. Allied, Holdings III, and Ralþhs Holdings

desire that the Holdings III Contributed Shares and the

A lied- Contributed Shares -be contributed to Ralphs

H ldings, in each case I.n exchange for the issuance to

H ldings III and Allied of the Ralphs Holding Common

St ock, such that immediately after giving effect

tl ereto Ralphs Holding Ñill own all of , the issued and

outstanding shares of RÀlphs Common Stock and Allied

a d Holdings III togethÈr will own- all of the'issued

ar d outstanding shares f Ralphs Holding Common Stock

ir the same respective proportion as they together

ogned all of the issued and outstanding shares of

Ra'lphs Common Stock imm diately prior to giving ef fect

tllereto.

NOW, THEREFORE, the parties hereto hereby agree as

lows:

Holdings III hereby contributes the Holdings

II Contributed Shares o Ralphs Holding in exchange

the issuance to Holdings III of 27, 758, 527 shares

of Ralphs Holding CommoÃ'Stock ("Holdings III Ralphs

H ding Shares") , and R lphs Holding hereby accepts the

transfer of the Holding III Contributed Shares in full

pa ment of the Holdings III Ralphs -Holding Shares.

2. Allied hereby áontributes the Allied Contribut d Shares to Ralphs Hålding in exchange for the

is uance to Allied of 5, 384, 330 shares of Ralphs Holdin Common Stock (the "Allied Ralphs Holding Shares") ,

an Ralphs Holding hereby accepts the transfer of the'

Al Lied Contributed Sharås in full payment of Allied

Ho L ding Shares .

On February,3, 1992, pugsuant to "the confirmed FSI chapter

11 plan and the confirmed Al]ied chapter 11 plan, respectively

Holding

III and Allied tran ferred to RHC the respective out-

s tandin

common s tock of Ral hs that they owned (i . e . , 8 3 . 75

percent and 16.25 percent, r spectively) .

Pursuant to those

confirm d plans, RHC transfe red to Holdings .III and Allied 83.75

percent and 16.25 percent, r spectively, of its outstanding

common

tock.

As a result o

those transfers, RHC acquired 100

- 59 -

percent of the outstanding common stock of Ralphs, which was the

only class of voting stock of Ralphs and, which accounted for over

80 percent of the total value of all of the stock. of Ralphs that

was outstanding on February 3, 1992.

After the Ralphs transac-

tion, RHC' s only asset was the common stock of Ralphs -that it

owned.

On Februarya 3, 1992, as required by the confirmed FSI

chapter 11 plan, Holdings III transferred the stock of RHC thata

it had received so that the following .creditors of FSI owned the

following approximate percentages of the outstanding common stock

of RHC:

FSI Creditor

Percentage of Outstanding

Common Stock of RHC

EJDC

60.4

Campeau

Bank of Montreal

Paribas

12.8

,5.3

5.3

Holdings III did not transfer to FSI any stock or assets of

Ralphs, RHC, Holdings, Holdings II, Kllied, Federated, or any of

their subsidiaries.

FSI did not receive the Allied note or the

Federated note from -Holdings III.

Except for the common stock of Ralphs that it received from

Allied as part of the Ralphs transaction, RHC did-not receive any

"On Feb. 3, .1992, RHC .and Ralphs entered into an agreement

under which RHC agreed to perform accounting, advisory, capital

raising, and other services for Ralphs in exchange . fort a fee

equal to the direct and indirect costs to RHC of performing those

serv-1.ces.

stock

assets of Holdings, Holdings II, Allied, Federated, oi

any of

heir -subsidiaries.

the Allied note or - the Feder

ferred

or did RHC receive from Holdings III

ed note .

ther FSI nor RHC received any of the outstanding pretock of Ralphs as pa t of the Ralphs transactions

February 3, 1992, as required by the confirmed Allied

chapter 11 plan and pursuant to a certain written, binding

agreem at, Allied transferred the common stock of RHC that' it had

receiv

so that the following entities owned the following

approxi ate percentages of t e outstanding common stock o'f RHC:

Percentage of Outstanding

Entity

Common Stock of RHC

Bank of Montreal

4.8

Paribas

¯ 4.8

Allied

6.6

discussed below, on Feb. 4, 1992, pursuant^ to the

confirm d Allied chapter 11 lan, Allied and Federatèd ,merged

into a ingle entity known a New Federated.

distribution of the RHC stock to EJDC, Bank of Montreal

Paribas

and Campeau as required by the confirmed FSI chapter 11

plan an

the confirmed Allied chapter 11 plan was not pro rata

with re pect to the respective amounts of the respective claims

asserte

by. creditors and wa

not pro rata with respect to the

status

f those creditors as secured or unsecured creditors .

Pu suant to the confirm d FSI chapter 11 plan, Holdings III

receive

with respect to its interest as the solei stockholder of

Holding

II any cash remaining after Holdings II paid certain

- 61 administrative claims and priority claims against it and made all

payments required to be made under that plan to certain of its

unsecured creditors.

Holdings III distributed that cash to FSI

for distribution pursuant.to the confirmed FSI chapter 11 plan.

Under the confirmed FSI chapter 11 plan, no property was

distributed to the following companies with respect to their

respective interests:

(1) FSI didinot receive any property with

respect to its interest:as the sole stockholder of Holdings III;

(2) Holdings did not receive any property with respect to its

interest as the sole stockholder of Federated; and (3) Holdings

II did not, receive any property with respect to its interest as,

the sole stockholder of Allied or with respect to its interest as

a stockholder of Holdings.

On February 4, 1992, pursuant to the confirmed Allied

chapter 11 plan, Allied and Federated merged into a single entity

known as New Federated.

As patt of that merger, the operating

assets of Allied's subsidiaries were -transferred to New Federated.

After the merger of Allied and -Federated, all of their

respective- stock was canceled, -and the -stock of New Federated was

issued to the respec'tive creditors of the Allied/Federated

debtors.

For purposes of the:distribution of the stock of New

Federated pursuant to the confirmed Allied,chapter 11 plan, the

value of New Federated was estimated to be approximately

$2,014,700,000 and the value of therNew Federated common stock

- 62 -

that wai distributed tò creditors of the Allied/Federated debtors

was est mated to be $25 per åhare.

The distribution of the stock

of New Jederated was not pro rata with respect to the respective

amounts of the respective claims asserted by creditors and was

not pro rata with respect to the status of those creditors as

secured or . unsecured credito s .

Pu suant to the confirm d Allied chapter 11 plan, Holdings

III received 816, 000 shares df. common stock of New Federated with

respect to its claim against Federated under the Federated Note.

Ass requ .red by the. confirmed FSI- chapter 11 plan, Holdings III

(1) dis ributed'588,000 of tlose sharessin satisfaction of

general

unsecured creditor-claims against FSI and Holdings III.

and (2) sold the remaining 2 8, 000 shares sto provide cash ,to FSI.

No othe

property was distril uted to or retained by Holdings III

with re pect to its claim against Federated under the Federated

note.

ursuant to the confi med Allied chapter 11 plan, Holdings

III con ributed to Allied it

claim against 'Allied under the

Allied note.

distributed to or retained by

Holding

No property wa

III on account of tl

t claim against Allied.

On January 29, 1992, the same date on which Mr. Gray incorporated RHC, Ralphse issued a

information statement (Ralphs

informa ion statement) to the persons who owned preferred stock

of Ralpl s and, the persons whd held certain rights under a certain

equity

ppreciation rights pl n (EAR plan) that Ralphs had

- 63 -

instituted in 1988.35

Ralphs attached the Ralphs information

statement to a .memorandum from Byron Allumbäugh, .the chairman and

the chief executive officer of Ralphs, that- was addressed to all

the officers of Ralphs.

That memorandum stated:

Enclosed for your- review is an Information Statement relating to the treatment of the outstanding

Series A and Series- B Preferred Stock ,("Preferred

Stock") of Ralphs Grocery Company and the Equity Rights

outstanding under the Ralphs Grocery Company -1988.

Equity Appreciation Rights Plan in connection with the

consummation of the plan of reorganization of Federated

Stores, Inc., which is expected to occur February 3,

1992.

The Information Statement describes the planned

redemption of your Preferred Stock, as well as certain

proposed amendments to the Equity Appreciation Rights

Plan and your individual Equity Rights Agreements

negotiated by Ralphs.

Please review the Information Statement carefully.

It describes the salient differences between the current provisions of the Equity Appreciation Rights Plan

and Equity Rights Agreements and theiproposed amendments to be adopted with your consent . The Information

Statement,also summarizes the terms of a Nonqualified

Stock Option Plan to be adopted by Ralphs' new parent.

company. As you know, it is proposed that each of you,

as well as certain other key employees of Ralphs, will

be granted options to purchase common stock of the

parent company as described in the Information Statement .

Patrick Collins [one of the directors of Ralphs],

Jan Charles Gray. [Ralphs' senior vice president- and .

general counsel] , Alan Reed [Ralphs' chief financial

officer] and I have spent many months considering and

consulting with counsel and others concerning the

proposed amendments .to the EquityaAppreciation Rights

Plan, as well as possible alternatives. We -believe the

asThe EAR plan was''one of several separú.te executive compensation arrangements that Ralphs had instituted. The participants

in the EAR plan had the right to a percentage -of the increase in

the appraised value of Ralphs over time.

- 64

. aÅndments resolve fairiy several issues under the Plan

an , when combined with the grant of stock options,

re9resents a very attractive ongoing incentive package.

Od this basis, Pat, Jan Alan and I intend to approve

th proposal and we urg each of you to do the same.

Ralphs information etatement described the material

changes to the EAR plan,that would be effected by the proposed

amendme ts to 4that plan, as described in that statement.

propose

The

amendments to the E R plan did not require the redemp-

tion cof any outstanding pref rred stock -of Ralphs .

Ralphs information

tatement described the approval

necessa y- to make the proposed, amendments to the EAR plan as

follows

APPROVAL REQUIRED

The Amended Plan w 11 become effective as of

Ja uary 31, 1992 only ife it is unanimously approved in

wr ting by the holders df the Equity. Rights . Attached

as Annex C to this Info mation Statement is a form of

Co sent of Equity Right Holder - by which the holders

are requested to evidende their approval of the,Amended

Pl n and of : the related First Amendment (attached

he eto as .Annex B) to. tlie Agreement .

To be effective, aßl such consents must be compl ted, sigríed and retu$ned to Jan Charles Gray, Esq.,

Ge eral Counsel of RalpÑs, on or before the close of bu iness on January 31, $1992.

In- additioñ, each Equity

Ri íhts holder also must complete, sign and return the

ex ra counterpart of th First Amendment to ther Agreeme t enclosed herewith. (Equity Rights holders may wish

to keep a copy of their onsent and the First Amendment

as returned to Ralphs . )

The, holders of Equ ty Rights are not required to

copsent to the adoption of the Amended Plan; . however,

th0 consequences of' failing to do so are uncertain.

- 65 The Ralphs information statement also discussed the proposed

redemption of the outstanding preferred stock of Ralphs .

As of

January 29,- 1992, - all of that preferred stock was owned by

management and key employees of Ralphs.

The Ralphs information

statement stated in pertinent part as follows with respect to

that proposed redemption:

As the FSI plan for reorganization was being

finalized, Ralphs's senior management engaged in discussions and negotiations with respect to, the treatment of

the outstanding Preferred Stock and the outstanding

Equity Rights in connection with the reorganization.

Under the provisions of the Plan, the consummation of '

the FSI plan of reorganization and the resulting change

in ownership of Ralphs' outstanding common stock could

possibly be deemed to constitute a "change in control"

of Ralphs within the meaning of the Plan. As such, and

as discussed below in more detail, the plan of reorganization had the potential to trigger an immediate cash

payout obligation to the Equity Rights holders upon a

consummation of the plan of reorganization. To avoid

this result, - and to eliminate future, charges to Ralphs'

earnings for financial accounting purposes associated

with the Plan, EJDC proposed certain modifications to

the Plan designed to- facilitate the FSI plan of reorganization while maintaining, to the extent practicable,

the current benefits to the Equity Rights holders,under

the Plan.

The proposed amendments to the Plan and the

Agreements discussed belowrare the end result of these

negotiat ions .

REDEMPTION OF PREFERRED STOCK

The.Certificates of Designations (the "Certificates") setting forth the respective rights, preferences and privileges of Ralphs' outstanding Series A

Preferred Stock and Series B Preferred Stock -each

provide for the mandatory redemption (i.e., repurchase)

of the Preferred Stock in the event of a -"change in

control" as defined therein. The Certificates also

permit Ralphs' to redeem the Preferred Stock at any.

- 66 -

ti e upon five days pri r notice to the Preferred Stock

ho l ders .

It is unclear whether the change in ownership

of Ralphs' outstanding dommon stock that will result

up n consummation of the FSI plan of reorganization

wo ld trigger a mandato y redemption of the Preferred

St ck pursuant to the Certificates; in any event,

ho ever, Ralphs has agr ed to redeem the Preferred

St ck, subject to the c nsummation of the plan of

re rganization of FSI, f or the original price paid for

the Preferred Stock of $10 per share in cash, or a

total of $3 million.

This Information s atement will sežve as the

re uisite notice of redŠmption under the Certificates.

Pl ase be advised, therdfore that all of the outstandin shares of Preferred Stock will be redeemed by

Ra phs on or about February 5, 1992 (the "Redemption

Date") , subject to the grior consummation of the plan

of reorganization of. FS]i.

All shares of Pref red Stock will be redeemed, if

are redeemed. Upon redemption, each holder of

Pr ferred Stock will receive from Ralphs the Redemption

Pr ce of $10 per share. On or after the Redemption

Da e, a holder of Prefe red Stock will not have any

rights as such holder ot her than -the right to receive

thå redemption price updn surrender of the certificates

ev dencing his or her P eferred Stock.

Ralphs information

tatemènt did not- indicate that

the redemption of the prefer ed stock of Ralphs was required or

prohibited by the conf irmed

SI- chapter 11 plan or , that any such

redempt on was part of or pròvided for in that plan.

firmed

The con-

SI chapter 11 plan c ntemplated that the preferred stock

of Ralp s would be redeemed

ver the period 1992 to 1998, as

specified in the terms of that preferred stock at the time that

stock was issued.

The confirned FSI chapter 11 plan stated in

pertinemt part as follows with respect to "any, redemption of the

preferred stock:

- 67 -

Ralphs may redeem at its option the shares of

Ralphs Preferred Stock held by any holder, at any time

in whole or in part, at .the Initial Purchase Price.

The Ra-lphs Preferred Stock has no voting rights

and may not be pledged or transferred except by the

laws of descent and distribution.

In the event. Ralphs

is subjected to a "change in control" (as defined in

Ral-phs' certificate of incorporation, as amended) , all

outstanding shares of Ralphs Preferred Stock will be

redeemed at the Initial Purchase Price.

The change in ownership of Ralphs Common Stock that will occur pursuant to the Plan may trigger the change in control

provision with respect to the Ralphs Preferred Stock,

thereby requiring redemption of the outstanding shares .

On: February 2, 1992, an attorney with iMorrison & Foerster,

attorneys for FSI, sent a letter to the board of directors of

Ralphs .

; In- that letter, the attorney stated his opinion that

"under subsection 4.20 of the indenture dated as of August 26,

1988 between Ralphs and the United States Trust Company of New

York as trustee . with respect to Ralphs 14 percent Senior Subordinated Debentures due 2000

(the "Indenture")" the Ralphs transac-

tion would not result in a "change of control" .

Each of the holders of rights under the EAR plan acknowledged having read and received the Ralphs information statement

and consented*to the amendments to the EAR Plan that were de-

scribed in that information statement.

68 -

Or February 3, 1992, EJDC, Bank of Montreal, Paribas, Camdev

Propert i.es , Inc . , * Allied, aÈid FSI, 37 as the stockholders of

RHC, el cted directors of RH

(RHC board of directors) :

On that

date, t ie RHC board of direc

rs met via telephonic conference.

At that meeting, the RHC board of directors, acting on behalf of

RHC as

he sole -common stock older of Ralphs, elected new direc-

tors of Ralphs (Ralphs board of directors) .

On February 3, 1992, th

telephonic conference.

Ralphs board of directors met via

At t at meeting, the Ralphs board of

directo s approved resolutior s (1) ratifying and approving all of

the- actGons of and resolutíor s approved by the prior board of

directo: s of Ralphs with res ect to the confirmed FSI chapter 11

plan, i icluding the issuance of the Ralphs information statement,

and aut orizing the officers and directors.of Ralphs to take all

necessa y actions to effect the transactions required by the

confirm d FSI chapter 11 plar and (2) calling for the redemptión

C milev Propertfies, Inc., which was an assignee'of Campeau,

receive approximately 12 pedcent of the total outstanding common

stock o RHC pursuant to the confirmed FSI chapter 11 plan:

37A discussed above, unc er the confirmed FSI chapter 11

plan, H ldings III distributeÊ to FSI a portion (i.e., 0.8

percent) of the outstanding chmmon stock of RHC that was to be

distrib ted to Campeau for subsequent sale for the purpose of

satisfy ng certain obligationî and expenses arising under that

plan.

o the extent FSI did ot sell any portion of that stock,

the conf irmed FSI chapter 11 þlan required that FSI distribute

that po tion to Campeau.

- 69 -

on February 3, 1992, of allsof the preferred stock of Ralphs.

February 3, 1992, the RHC board of directors passed a resolution

approving the decision of thé Ralphs board of directors to redeem

all of the outstanding preferred stock of Ralphs.

Neither the Ralphs.information statement nor the minutes of

the respective board meetings of the Ralphs board of directors

and the RHC board of directors indicated whether or not the $3

million required to redeem all of the outstanding preferred stock

was to be deposited into an escrow account.

No mention was made in the confirmed FSI chapter 11 plan,

the confirmed Allied chapter 11 plan, the FSI d.isclosure state-

ment, or the Allied disclosure statement of any negotiations

among the FSI debtors, the Allied/Federated debtors, Ralphs, RHC,

EJDC,, Bank of Montreal, Paribas, or Campeau with respeòt to aredemption of the outstanding preferred stock of Ralphs.'

Nor did

any of those documents discuss a planned redemption of that

stock.

No discussion appeared in the compreheñsive settlement

agreement, the proposed initial' indemnification agreement, the

proposed final indemnification agreement, or the proposed tax

election agreement regarding a planned redemption of the outstanding preferred stock of Ralphs.

Form 10-K, ANNUAL REPORT UNDER SECTION 13'OR 15(d)- OF THE

SECURITIES EXCHANGE ACT OF 1934, lhat Ralphs filed in May 1992

- 70 -

with th

U S. Securities and Exchange Commission (SEC) for its

fiscal

ear ended February 2

all of

he preferred stock of Ralphs remained outstanding as of

Februa

2, 1992, the last day of «Ralphs' fiscal year, and that

1992

(1992 Form 10-K)

that st ck was subsequently iedeemed for $3 million.

stated that

In as

sectio

titled "Ownership of the Company", the 1992 Form 10-K

stated

hat "Since February

, 1992

(the "Transfer Date") , all of

the out tanding capital stoc

of the Company, consisting of 100

f common stock, par

alue $1. 00 per share , (the "Common

Stock")

has been held by Ra phs Supermarkets, Inc.

(the "Holding

Company ) , a Delaware Corporation. "

Ralphs attached a balance sheet to the 1992 Form 10-K.

Ralphs

eported in that balar ce sheet the outstanding preferred

stock a

a $3 million liabil ty, and not as stockholders equity,

as of the end of each of its fiscal years endeda February 2, 1991,

and February 3, 1992.

The réspective amounts of total assets and

total liabilities as of Febr ary 2, 1992, that Ralphs reported in

the bal nce sheet that it att ached to the -1992 Form 10-K were

equal to the respective amour ts of - total assets and total liabilities that the FSI consolidat ed group reported in the balance

sheets ehat the FSI consolidated group attached to the- 4

FSI consolidated group 1/31/93 consolidated return.

"I the respective cons lidated balance sheets that the FSI

consoli at-ed group'attachéd t o the FSI consolidated group 1/31/91

(continued . . . )

- 71 -

On July 13, 1992, the Ralphs board of directors held a

meeting via telephonic conference.

At that meeting, the Ralphs

board of directors adopted a resolution declaring that no preferred stock of Ralphs remained outstanding, prohibiting the

issuance of any preferred stock in the future, and eliminating

all references to preferred stock in'Ralphs' certificate of

incorporation.

Pursuant to the confirmed FSI chapter: 11 plan, on February

3, 1992, . RHC, Ralphs, Allied, Bank of Montreal, Paribas, EJDC,

Camdev. Properties, Inc.," and FSI entered into a certain registration rights agreement as part of the Ralphs transaction.

RHC

granted to its stockholders under that agreement certain registration rights- that permitted those stockholders to participate

in certain registration offerings that RHC might inake of- its

stock and allowed them to demand -that RHC register~ the stock that

those stockholders received pursuant to the confirmed FSI chapter

11 plan and the confirmed All'ied chapter 11 plan.

" ( . . . continued)

consolidated return and the FSI consolidated group 1/31/93

consolidated return,

line 22A,

"CAPITAL STOCK - PREFERRED", was

blank with respect to Ralphs. That is because, unlike the

financial statement balance sheets that Ralphs attached to the

1992 Form 10-K, there was no line item fòi- "Redeemableipreferred

stock" in those consolidated balance sheets.

- 72 W:ithin three months aft r the Ralphs transaction was eff ec ted, RSI (i.. e . , Ralphs and Ralphs Supermarkets , , Inc . ) " adevel oped a cecapitalization plan for those two companies.

As- a

result, RSI filed a registra ion statement with the SEC with

respec

to a proposed public offering of the shares of common

stock

E RSI.

Ralphs filed à registration statement with the SEC

with re pect to a proposed offering of $300 million of Ralphs'

senior

subordinated notes .

On January 21', 1993, Ho dings III dissolved pursuant to the

laws of Delaware.

FSI as

The certificate of dissolution was signed' by

he sole stockholder

f Holdings III.

On the same date,

Holding , Holdings II, and C I also dissolved.

On July 19, 1993

FSI dis olved pursuant to th

The respective

laws of Delaware.

common stock of Holdings III and FSI was canceled upon the

dissolu ion of each of those companies .

At no time did Holdings

III rec ive any of its own s ock from -FSI.

In an order dated June 30, 1993, the Ohio U.S. Bankruptcy

Court f hund that the estate

f each of the FSI debtors had been

fully administered, granted in its entirety FSI's motion for a

final d cree, and entered a final decree closing the FSI chapter

11 proc edings.

kets,

April 1992, RHC cha ged- its name to Ralphs Supermar-

I c.

- 73 -

In . an order dated June 25 , 20 01, the Ohio U. S . Bankruptcy

Court found that the respective estates of the Al-lied debtors and

the Federated debtors had -been fully administered and entered a

final decree closing the Allied chapter 11 proceedings.

Around .October 12, -1993, FSI filed the FSI consol-idated

group 1/31/93 consòlidated return.

Ralphs was a member of the

FSI consolidated group during the period -February 1 to 3, 1992.

The FSI consolidated group attabhed Form 8023, Corporate

Qualified Stock Purchase Elections (Form 8023)

to the FSI

consolidated group 1/31/93 cons'olidated return.

In that form,

FSI (1) identified (a) itself as the common parent of Ithe selling

group,

(b)

"Ralphs Supermarkets, Inc."- as the purchasing-corpora-

tion, and (c)

"Ralphs Grocery Company" as the target corporation

and (2) checked the box "Joint election under section •

338 (h) (10) " .

The FSI consolidated group also attached to ther FSI

consolidated group 1/31/93 consolidated return a "Schedule

Required Under Regs. 1.338-1T(e) (1) as to Includable Affected Targets" .

In that schedule, FSI identified "Ralphs Grocery

Company" as the includible target and reported that the percentage of- Ralphs stock owned was 100 percent.

FSI did not- attach to

the FSI consolidated group' 1/31'/93 consolidated return a copy of

the confirmed FSI chapter 11 plan.

FSI also did not attach to

that - return a statement executed under penalties of perjury that

- 74 showed che purposes of or th t detailed all the transactions

incider - or- pursuant to the

onfirmed FSI chapter 11. plan.

FS t reported in the FSI consolidated group 1/31/93 consolidated

turn that $475 milli n of consideration was paid in the

Ralphs

ransaction, that Ral hs had total .liabilities of

$1,164, 90, 700, and -that Ral hs was subject to an election under

sectio

338 (h) (10) .

FSI identified all of the $475 million of

conside ation that it reported as paid in the Ralphs transaction

as "De

of Federated Stores

credito s" .

Inc . , and Subsidiaries held by

FSI did not rep rt in the FSI consolidated group .

1/31/93 consolidated return any amount of "cash" or "purchase

money d bt" as part of the c nsideration paid in the Ralphs

transac ion.

Thã FSI consolidated grdup attached Schedule D, Capital

Gains añd Losses (1/31/93 ScÈedule D) , to the FSI consolidated '

group 1 31/93 consolidated return.

ported

In that schedule, FSI re-

ith respect to the t ansaction in whi-cheFederated incor-

porated Ralphs long-term cap tal gain of $492,618,173 (i e.

Ralphs

the

1eferred intercompany gain) and ordinary income of

$81, 723 870 .

In addition, F I reported in that schedule with

respect to the Ralphs transac ion a gross sale price, of ,

$1,639,990,700, a cost. or other basis, plus expense of sale, of

$1, 303, 901, 70.0 , and a long-tdrm capital gain of $335, 889, 000 that

- 75 -

resulted from the election under section 338(h) (10) that FSI made

with respect to the Ralphs transaction.

The FSI consolidated group owed no Federal tax for the

taxable year sended January 31, 1993, except for the alternative

minimum tax, certain recapture taxes, and certain environmental

taxes.

Taking into account the-gain report-ed on the 1/31/93

Schedule D, FSI showed gain in excess. of $900 million resulting

from the Ralphs deferred intercompany gain,and the election under

section 338 (h) (10) that it made with respect to the Ralphs

transaction.

That gain was offset by a net operating,loss

deduction available to the FSI consolidated group for the taxable

year ended January 31, 1993 .

RSI filed Form 1120 for its consolidated group, which

included Ralphs, for each of the taxable years ended January 31,

1993 .(RSI consolidated group 1/31/93 consolidated return),

January 30,

1994

January -28,

1995,:and June 14,

1995.

RSI filed

an amended consolidated group return for the taxable year ended

January- 31, 1993 (RSI,consolidated group 1/31/93 amended consolidated return), which the IRS received around November 18, 1993,

and treated as filed on that date.

"FSI also attached to the FSI consolidated group 1/31/93

consolidated return Form 8594, Asset Acquisition Statement.

that form, FSI reported a total sale price and assets transferred

of $1,639,390,700 with respect to the Ralphs transaction.

- 76 -

the respective RSI consolidated returns filed for the

taxabl

years ended January 31, 1993, January 30, 1994, January

28, 19 5, and June 14, 1995, the Ralphs transaction was treated

as.a p rchase under section

38(h)-(3) because a timely election

under s'ection 338 (h) (10 ) had been made a

R I attached Form 8023 to both the RSI consolidated group

1/31/9

consolidated return And the RSI consolidated group

1/31/93 amended consolidated return.

In that form, RSI

(1) id atified itself as -the purchasing corporation and "Ralphs

Grocery Company" as the targ t corporation and " (2) checked the

box "J

nt election under seetion 338(h) (10)".

RSI also attached

to the RSI consolidated grou]S 1/31/93 consolidated return a

"Sched

e Required Under Regå; 1.338-1T(e) (1) as to Includable

Affecte

Targets".

Grocer

Company" as the incl dible target and reported that the

In that

chedule, RSI identified "Ralphs

percent ge of Ralphs stock o ned was 100 percent.

RSI did not

attach

o the RSI consolidat d group 1/31/93 consolidated return

or the

SI consolidated group 1/31/93 amended- consolidated return

a copy

f the ,confirmed FSI

hapter 11 plan.

RSI also did not

attach Þo either of those ret urns, a statement executed under

penalti s of perjury that sh wed the purposes of or that detailed

all the transactions inciden

chapter 11 plan.

or pursuant to the confirmed FSI

- 77 -

RSI reported in the RSI consolidated group 1/31/93 consolidated return that $475 ,million of consideration was paid in the

Ralphs transaction, that Ralphs had total liabilities of

$1,164,390,700, and that' Ralphs was subject to an election under

section 338 (h) (10) .

RSI identified all of the $475 million of

consideration that it reported as paid in the Ralphs transaction

as "Debt of Federated Stores,- Inc , ands Subsidiaries held by

creditors" .

RSI did not report in the RSI consolidated group

1/31/93 consolidated return any amount of "cash" or "purchase

money debt" as part of the consideration paid.

RSI attached Form 8594 to the RSI consolidated- group 1/31/93

consolidated return and the RSI consolidated group 1/31/93

amended consolidated return.

In that form, RSI reported a total

sale price and assets transferred of $1, 639, 390 , 700 . t In Form

8594, RSI allocated that sale" price to certain classes of assets

as follows:

Asset Class

Class

III

Amount

$ 6,800,000

-01, O06, 964 , 727

595, 625, 973

In the RSI consolidated group 1/31/93 consolidated return

and the RSI consolidated group 1/31/93 amended consolidated

return, pursuant to section 13261(g) (2) and (3) of the Omnibus

Budget Reconciliation Act of 1993,

Pub. L. 103-66,- sec.

13261(g) ,

78 -

107 St t. 540, RSI elected r troactive application of section

197, entitled. "Amortization of Goodwill and Certain Other

Intang bles"

O ! June 14,

1995, Food 4 Less Holdings, Inc.

(Food 4 Less)

acquir d all of the outstand ng common stock of R.SI.

On the same

date, Food 4 Less merged Ral hs with and into RSI, with RSI as

the surviving corporation.

RSI changed its name'after that

merger t·o Ralphs Grocery Com any (RGC) .

Or March 10, 1998, Fred Meyer acquired all of the common

stock

Food 4 Less in a me ger.

As a result of that merger,

Food 4 Less became a wholly Ewned subsidiary of Fred -Meyer.

Discussion

their respective motions for partial summary judgment,

the pa

ies ask us to decide whether RHC and FSI made a valid '

joint election under section 338(h) (10) with respect to RHC's

acquisi ion of all of the out standing common stock of Ralphs from

Holding

III and Allied that took place as part of the Ralphs

transac ion.

Before we addr ss that issue, we shall briefly

summarize the Ralphs tiransact ion that took place pursuant to theconfirm d FSI chapter 11 pla

and the confirmed Allied chapter 11

plan.

En that transaction, RHC, a newly formed company, acquired

all of

he outstanding commor stock of Ralphs from Holdings III

R C, RSI, and RGC are

the same entity as Ralphs .

11 the same entity, which is not

- 79 -

and Allied, the respective owners of 83 75 percent and 16.25

percent, of that outstanding stock.

In exchange for:the respec-

tive Ralphs stock that RHC acquiredefrom GHoldings III and Allied,

RHC issued to those companies 83.75 percent and 16.25 percent,

respectively, of its outstanding common stock.

Thereafter,

(1) Holdings III distributed all of the outstanding RHC common

stock that.it held to EJDC, Bank of Montreal, Paribas, and

Campeau," which were certain of FSI's creditofs, and (2) Allied

(a) distributed a.portion (i.e., 9.65 percent) of the outstanding

RHC common stock -that it held to Bank of Montréal and Paribas,

which were certain of Allied's creditors, and (b) retained the

balance (i.e., 6.6 percent)."

After those distributions to the

respective creditors of FSI and Allied, those' creditors owned the

following approximate gercentages of the outstanding common stock

of RHC:

Owner

EJDC

Campeau

Bank Montreal

Paribas

Percentage of Outstanding

Common Stock of RHC

60.4

" 12.8

- 10.1

10.1

"Campeau owned 100 percent of the- outstanding stock of FSI.

"As part of the confirmed Allied chapter 11 plan, Allied

merged with and into Federated, and the resulting company was

known as New Federated. As a result of that merger, New Federated held the assets of:Allied, which included 6.6 percent of the

outstanding RHC common stock that Allied had retained under theconfirmed Allied chapter 11 plan.

- 80 T e parties agree that there are no genuine issues of

material fact" and that summary adjudication is appropriate with

respect

to the issue under section 338 (h) (10) that the parties

ask us to decide in their respective motions for partial summary

judgment:

The parties also agree that (1) our fesolution of the

issue under section 338 (h) (10) depends on whether RHC's acquisition of all -of the outstanding common stock of Ralphs from

Holdin

III -and Allied constitutes a qualified stock purchase

under section 338 (d) (3) ;

(2) our resolution of that question

under

ection 338 (d) (3) depends on whether that acquisition

consti

tes a purchase under section 338 (h) (3) ;'S and (3) our

e e supra note 1.

4s(ec. 338 (h) (3) defines the term "purchase" in pertinent

part as follows:

SEC. 338(h) . Defi itions and Special Rules.--For

p cposes of this sectio

[338] -i

(3) Purchase. (A) In g neral.--The term "purchase"

means any acq isition of stock, but only if--

(i) the basis of the stock in the

hands of the purchasing corporat'ion is

not detei-mined (I) in whole-or in part

by referŠnce to the adjusted basis of

such stodk in the hands of the person

from whoS acquired, * * * [and]

(ii) the stock is not acquired in

an exchar ge to which section 351, 354,

(continued. . . )

- 81 resolution of that question under section 338 (h) (3) , and therefore our resolution of the question under section 338 (d) (3) ,

depends on whether; as respondent mairitains' and petitioners

disput.e, the Ralphs transaction constitutes a reorganization

under section 368 (a) (1) (B) ,

We thus address whether

the Ralphs,transaction constitutes a reorganization under section

368 (a) (1) (B) ,

It is the position of respondent that RHC's acquisition of

the outstanding common stock of Ralphs from Holdings III and

4s ( . . . continued)

355, or 356 applies and is not acquired

in any other transaction described in

regulations in which the transferor does

ndt recognize the entire amount of' the

gain or loss realized on the transaction

* * *

Respondent argues, inter alia, that as part of the Ralphs

transaction stock was acquired in an exchange to which sec. 354

applies and that therefore RHC's acquisition of the outstanding

common: stock. of Ralphs does not constitute a purchase because of

sec. 338 (h) (3) (A)~(ii) . Sec. 354 applies only to a transaction

that qualifies as a reorganization under sec. 368 (a) (1) .

Turnbow

Commissioner, 368 U.S.

337,

343

(1961).

If we were to find

that the Ralphs transaction does- not qualify as a reorganization

under sec . 368 (a) (1) (B) ,

"Our discuásion is limited to the three types of reorganizations on which respondent relies (i;e., the reorganizations

described in sec . 368 (a) (1) (B) , {C) , and (G) ) in support of

respondent' s position in respondent' s motion. The parties agree

that if the Ralphs transaction were to be treated as a reorgani-zation qualifying.under sec. 368(a) (1) (B), the target corporation

would be Ralphs. The parties also agree that if the Ralphs

transaction were to be treated as a reorganization qualifying

under sec . 368 (a) (1) (C) or (G) , the target corporation would be

Holdings III.

- 82 Allied does not constitute a purchase under section 338 (h) (3) and

thereföre does not constitute a qualified stock.purchase under

section 338 (d) (3) .

That is

ecause, according to respondent, the

Ralphs transaction qualifies as a .reorganization under section

368 (a) (1), (B) ,

basis u der section 362 in t

respective Ralphs common stock

that its received from Holdings III and Allied.,

338 (h) (3) (A) (i) (I) .47

were t

See sec.

Responelent does not dispute that if we

find that the Ralphs transaction does not qualify' as a

reorga ization under sec tion 368 (a) (1) (B) ,

acquisi ion of all of the outstanding common stock of Ralphs from

Holding

III and Allied woul , as petitioners maintain, consti-

tute a

urchase under sectio

purchas

under section -338 (d) (3) , and consequently RHC and FSI

338 (h) (3) and a qualified stock

would h ve made a valid joint election under section 338 (h) (10)

with respect to that purchase:

Seption 368 sets forth certain statutory requirements in

orde'r f r a transaction to qualify as a reorganization under

section 368 (a) (1) (B) ,

(2) ,

(b) .

(G)

See, e . g . ,

sec . 368 (a) (1) (B) ,

In addit ion to those statutory requirements,

the cou ts have established certain nonstatutory requirements in

order f r a transaction to q alify as a reorganization undet any

of those provisions of that

47S e supra note 45.

ection.

One 'of those nonstatutory

83 -

requirements known as the continuity-of -interest requirement

mandates that "the taxpayer' s ownership interest in the prior

organization must continue in a meaningful fashion in the reorganized enterprise."

Paulsen v. Commissioner, 469 U.S. 131, 136

(1985)4 see LeTulle v. Scofield, 308 U.S. 415 *(1940) ; Pinellas

Ice & Cold Storage Co. v. 'Commissioner,

287 U.S. 462

(1933) .

According to the Supreme Court of the Unite'd States (Supreme

Court) ,

"this interest must be definite and material;

[and]

must represent a substantial part of the value of the thing

transferred."

Helvering -v. Minn. Tea Co. ,a 296 U.S. Š78, 385

(1935) ; - see , Paulsen v . Commiss ioner, supra; secs . 1 . 368 -1 (b) ,

1.368-2(b) (2), Income Tax Regs.

We limit ourselves to consider-

ation of the continuity-of -interest requirement .

That is because

our resolution of whether the Ralphs transaction satisfies that

requirement resolves the question of whether that transaction

constitutes a reorganization under sdction 3Í58 (a) (1) .(B) ,

(G) .

For 1992, the year in which the Ralphs transaction. occurred,

transitory ownership of stock in the acquiring corporation by the

transferor's stockholders is to be disregarded in determining

whether the continuity-of-interest requïrement is satisfied."

"Under regulations applicable to transactions occurring

after Jan. 28, 1998, the continuitylof-interest requirement is

satisfied regardless of whether the stockholders of the transferor dispose of their stock in the acquiring company after those

(continued. . . )

See,

e.g.,

Penrod v. Commiss oner,

88 T.C.

1415,

1427

(1987) ;

Heintz (v. Commissioner, 25 T C. 132, 142-143 (1955) .

Respondent maintains thát the continuity-of -interest requirement would be satisfied with respect to the Ralphs transaction if certain creditors of FSI" were treated as equity owners

of FSI

or purposes of the r organization provisions on which

respond nt relies .

those

In suppo t of respondent' s argument that

reditors should be treated as equity owners for those

purposes, respondent relies on Helverinq -v. Ala. Asphaltic

Limestone Co . ,

315 U. S .

179

(1942)

(Alabama Asphaltic ) , which .

respond nt maintains "is squ rely applicable in this case

[sic]". °

According to respo dent:

" ( . . . continued)

stockhol.ders receive that stock.

See T.D. 8760, 1998-1 C.B. 803,

804.

" arsuant to the confirthed FSI chapter 11 plan, certain

credito s of FSI received 83.75 percent of all of the outstanding

common tock of RHC.

See infra note 54.

Thus, the parties focus

their arguments with respect to whether the Ralphs transaction

satisfi s the continuity-of- nterest requirement on the receipt

of cert in RHC stock by certa,in creditors of FSI and do not focus

on the receipt of certain RHC stock by certain creditors of

Allied. We shall do the samå.

soI is -respondent' s position that Congress' enactment into

the Cod of sec. 368 (a) (1) (G)) did not "change or eliminate the

fundamegtal stepping into the shoes principle of Alabama Asphalti c . " Ac cording to re sponder t :

, Th

19 0

law that was adopted as the "G" reorganization in

[Bankruptcy Tax Act of 1980,

Pub. L.

96-589,

sec.

4, 94 Stat. 3401] specifically approved the application

of Alabama Asphaltic and extended its principle to

(cont inued . . . )

- 85 -

The [Supreme] Court's rule stated in Alabama Asphaltic

is simple and direct. A valid reorganization in which

the stock of the newly-created entity is -transferred to

the creditors of a corporation rather than the stockholders requires that:

1) the debtor corporation must

be insolvent; and 2) -the insolvent debtor corporation's

creditors must receive the stock in the entity pursuant

to a reorganization.plan.. Alabama Asphaltic, 315' U.S.

183-84.

* * *

Relying on what respondent calls the "simple and direct"

rule of Alabama Asphaltic, respondent concludes that

the bankruptcy of FSI qualifies its creditors as equity

holders for continuity of interest purposes.

* * *

Therefore, the distribution by Holdings III of 83.75

percent of the stock of RHC to FSI's creditors maintains the qualification under the continuity of interest doctrine.

Respondent acknowledges that under Alabama Asphaltic."the

creditors must take effective command over the insolvent'* * *

corporation's assets".

According to respondent, such "effective

command"

is vital to sfinding continuity of interest, and * * *

is present in this case [sic]; * * * The creditors ofFSI took overt steps to exert their control over itsa

assets. FSI's assets included the Ralphs stock. While

(...continued) :

c editors who had·less than senior rights but who

became post-bankruptcy shareholders. * * *

Petitioners do not disagree with respondent's statements

with respect to the effect- of the enactment of sec. 368 (a) (1) (G)

on the principles of Alabama Asphaltic. We thus address the only

issue with respect to the continuity-of-interest requirement that

respondent argues. As discussed below, that issue is whether under Alabama Asphaltic- we should treat certain creditors of FSI

as equity owners of FSI for purposes of determining whether the

continuity-of-interest requirement is satisfied in the Ralphs

transaction.

R lphs was not the bankrupt corporation, Ralphs stock

was undeniably an asset of FSI, and was ultimately

t en possession of by SI's creditors in the bankruotcy plan.

{Citation omitted.]

• In support of responden ' s contention thats "the creditors of

FSI to

overt steps to exer

their control over -its [FSI' s]

assets"

respondent asserts that

o the date that EJDC and the other creditors institu ed bankruptcy procee ings, they stepped into the

sh es of Campeau and be ame the equity owners of FSI

an of all that FSI own d. They thereby gained effecti e command over the assets of FSI.

itioners counter tha

the instant cases are materially

disting ishable from Alabama Asphaltic.51

Alabama Asphaltic,

old corporation -[Al bama Rock Asphalt, Inc.] was a

su sidiary of a corporat ion which was in receivership

in 1929. -Stockholders f the parent had financed the

ol 1 corporation taking ånsecured notes for their adva ices . Maturity of thŠ notes was approaching and not

al of the noteholders Uould agree to take stock for

th ir claims. Accordinfly, a creditors' committee was

fo med, late in 1929, add a plan of reorganization was

pr posed to which all tlŠe noteholders, except two,

as ented. The plan pro ided that a new corporation

wo ld be formed which would acquire all the assets of

th old corporation. T1 e stock of the new corporation,

pr ferred and common, wSuld be issued to the creditors

in satisfaction of thei

claims.

Pursuant to the plan,

siP titioners also maint in that the instantycases are

materia ly distinguishable f om the cases decided after Helvering

v. Ala.ilAsphaltic Limestone Co., 315 U.S. 179 (1942), that have

found tnat case to be contro]Sling in holding that certain creditors inŸolved in those cases (should be treated as equity owners

for purboses of the continuitdy-of-interest .requirement.

(We

shall r fer to those cases d cided after Alabama Asphaltic" that

have -so held and that the pa ties cite as the Alabama Asphaltic

progeny )

- 87 -

involuntary bankruptcy proceedings were instituted in

1930.

* * * The bankruptcy trustee offered thes [insolvent corporation's] assets for sale at public auction.

They were bid in by the creditors' committee for

$150,000.

* * *, Thereafter, respondent

[Alabama Asphal-

tic Limestone Co.] was formed and acquired all the

assets of the bankrupt.corporation.

It does not appear

whether the acquisition was directly from the old

corporation on assignment of the bid or from the committee.

Pursuant to the plan, respondent issued its

stock to the creditors of the old corporation--over 95%

to the noteholders and the balance to small creditors.

* * *

Helvering v. Ala. Asphaltic Limestone Co., supra at 181-182.

On the basis.of the above-quoted facts, the Supreme Court

concluded in Alabama Asphaltic that the continuity-of-interest

requirement enunciated in cases like Pinellas Ice & Cold Storage

Co. v. Commissioner, 287 U.S. 462 (1933), and LeTulle v.

Scofield, 308 U..Sa 415 2(1940), was not satisfied

since the old stockholders were eliminated by the plan,

no-portion whatever of their proprietary interest being

preserved for them in the new corporation. And it is

clear that the fact that the creditors were for the

most part- stockholders of the parent compäny does not

bridge the gap. The equity interest in thé parent is

one step removed from the equity interest in the subsidiary.

In any event, the stockholders of the parent

were not grahted participation inathe plan qua stockholdere.

Helvering v

Ala. Asphaltic Limestone Co., supra at 183.

Nonetheless, the Supreme Court concluded in Alabama Asphaltic on the facts there involved

that it is immaterial that the transfer shifted the

ownership of the equity in the property from the stockholders to the creditors of the old corporation.

Plainly, the old côntinuity of interest was broken.

Technically, that did not occur in this proceeding

- 88 u til the judicial sale took place .' For practical

purposes, however, it took place not lat er than the

time when the creditors took steps to enforce their

demands, against their insolvent debtor.

In this case,

tlþt was the date of th institution of bankruptcy

proceedings . From that time ,on, they had ef f ective

command over the disposition of the property. The full

priority rule of Northefn Pacific Ry. Co. v. Boyd, 228

U.S. 482, applies to pr ceedings in bankruptcy as well

as to equity receiverships . is2> It gives' creditors,

w ther secured or unse ured, the right to exclude

st .ckholders entirely f om the reorganization plan when

debtor is insolvent

When the equity owners are

e luded and the old crŠditors become the stockholders

of the new corporation, it conforms ,to realities to

da e their equity ownership from the time when they

,in oked the processes of the law to enforce' their

rights of full priority. At that time they stepped

in o the shoes of the o d stockholders . The sale "did

no hing but recognize officially what had before been

tr e in fact." Helverir q v. New Haven & S.L.R. Co.

F . 2d 985,

987

[2d C$r . 1941) .

That conclusion involves no conflict with the

pra.nciple of the Le Tul e case.4533 A bondholder inter

s2In N. Pac. Ry. Co. v. Boyd,

228 U.S. 482

(1913),

the

Supreme Court held that a codrt-approved plan of reorganization

under which an insolvent cordoration sold its assets to a new

corpora ion that the stockho]Îders and certain bondholders of the

insolve t corporation owned cfid not serve to eliminate or defeat

the cla m of an unsecured cr/ditor of the insolvent corporation

who sought to enforce against the new corporation a judgment

against the insolvent corporation. The Supreme Court held that

the unsécured creditor's interest was superior to the interest of

the sto kholders of the insol ent corporation and thãt those

stockho ders took their interest in the new corporation sübject

to the claim of the unsecured creditor.

33Ne "Le Tulle case" to which the Supreme Court referred is

LeTulle v. Scofield, 308 U.S. 415 (1940) .

In that case, the .

Supreme Court held that there was no tax-free reorganization

where t e transferor company transferred its assets in exchange

for cash and shortiterm notes of the transfekee company.

In so

holding the Supreme Court concluded that, where the consideration f r the transfer consisted solely of the transferee' s

bonds,

he transferor did not retain any proprietary interest in

(continued. . . )

- 89 -

est in a.solvent, company plainly is not the equivalent

of a proprietary interest, even though upon default the

bondholders could retake the property transferred: The

mere possibility of a proprietary interest is, of

course, not its equivalent .

But the determinative and

controlling factors of the debtor's insolvency and an

effective command by the creditors over the property

were absent in the Le Tulle case.

[Citations omitted.]

Helvering v. Ala. Asphaltic Limestone Co., 315 U.S. at 183-184.

The parties in the instant cases agree, and we conclude,

that it was material to the Supreme Court' s holding in Alabama

Asphaltic that the continuity-of-interest requirement was satisfied that the creditors "had effective command over the disposition of the property", id. at 183, of the insolvent debtor

corporation.

A principal disagreement between the parties here

centers on the identity under Alabama Asphaltic of the insolvent

debtor corporation over whose property its creditors must have

such "e f f ec t ive command" .

Petitioners .argue that under Alabama Asphaltic (1) the

insolvent corporation over whose property its creditors must have

"effective command" must be the target corporation in the purported reorganization, and (2) the direct creditors of that

target, corporation must receive the stock of the company that

acquired the stock of the -insolvent target corporation or its

property.

According to petitioners, under Alabama Asphaltic the

continuity-of-interest requirement is not satisfied in the

(. .continued)

the new company.

- 90 -

instant cases because (1) Ralphs, which the parties agree would

be the target in the case of a reorganization qualifying under

sectio

368 (a) (1) (B) , and Holdings III, which the parties agree

would

a the target in the cise of a reorganization qualifying

under

oction 368 (a) (1) (C) o

(G) , were solvent at all times

during ghe chapter 11 proceedings, and (2) neither Ralphs nor

Holding3 III had any creditors who received RHC stock in the

Ralphs

ransaction.54

Re spondent does not dispute (1) that Ralphs and Holdings III

were so tvent at all times during the chapter 11 proceedings and

(2) th

neither Ralphs nor Holdings III had any creditors who

receive i RHC stock in the .Ra]iphs transaction.55

Respondent

argues Lnstead that under Al bama Asphaltic (1)

the insolvent

corpora ion over whose propeñty its creditors must obtain "effec-

tive co mand" need not be th

target corporation in the purported

s4P irsuant to the confirt ed FSI chapter 11 plan, Campeau was

to rece .ve 12.8 percent of tlje outstanding common stock of RHC.

However 0.8 percent of the dutstanding common stock of RHC that

Campeau was to receive was td be dïstributed to FSI pursuant to

that pl n.

FSI was required (to sell that stock for. the purpose

of sati fying certain obligatgons and expenses arising under the

confirm d FSI chapter 11 plar$. To the extent FSI did not sell

any por ion of the 0 .8 percerft of the outstanding common stock of

RHC tha it received, FSI was required under that plan to distribute that portion to Campeau.

ssS e supra note 54.

- 91 reorganization, " and (2) the direct creditors of that target

corporation need note receive the stock of the company that

acquired the stock of the insolvent target corporation or its

property.

According to respondent,

in determining whether the

continuity-of-interest requirement is satisfied in the Ralphs

transaction, it is appropriate and necessary under Alabama

Asphaltic to inquire (1) whether the creditors of the insolvent

FSI, which the parties 'agree would not be a target corporation in

the case of aareorganization qualifying under section

368 (a) (1) (B) ,

( C) , or (G) ,

"had ef f ective command oven the

disposition of the property [of FSI]", Helvering v. Ala. Asphal-

tic Limestone Co., supra at 183, and (2) whether the creditors of

the insolvent FSI received the st.ock of RHC.

Respondent main-

tains that the parties' agreed facts require affirmative answers

to the, foregoing inquiries.

We' need not resolve the' parties' disputes over (1) whether

or not under Alabama Asphaltic the -insolvent corporation over

whose property its credi'tors must have "effective dommand" must

be the target corporation in the purported reorganization and

s Respondent cites no case, and we have found none, in which

a court has held Alabama Asphaltic to be controlling on the

question of whether creditors of an insolvent corporation are to

be treated as equity owners of that corporation for purposes .of

the continuity-of-interest requirement where the insolvent

corporation (in the instant cases FSI) is not the target corporation in a purported reorganization.

- 92 -

(2) whether or not under that case the direct creditors of that

insolvent target corporation must receive the stock of the

compan

that acquired the st ck of that target corporation or its

property.

That is because, assuming arguendo that respondent a

were correct in respondent's view as to the appropriate and

necess ry two inquiries unde

made i

Alabama Asphaltic that should be

the instant cases, we find on the basis of the parties'

agreed facts that the answer to the first of those inquiries is

that t

FSI' s

creditors of FSI. di

not obtain "effective command" over

coperty. «

Alabama Asphaltic,

" ffective command" over the insolvent

corpora ion' s property arose because its creditors took steps by

instit

ing involuntary bankèuptcy proceedings against it to

enforce their rights under the so-called full priority rule of N.

Pac. Ry9. Co. v. Boyd, 228 U.S. 482 (1913) ,

"to exclude stockhold-

ers [of the insolvent corpor tion] entirely from the reorganization pl n when the debtor is insolvent."

Helvering v. -Ala.

Asphaltcc Limestone Co., sup a at. 183-184.

Un ike the facts in Alabama Asphaltic, in the instant cases

EJDC, B nk of Montreal, Pari as, and Campeau,57 the creditors of

FSI tha

pursuant to the conf irmed FSI chapter 11 plan received

s?W shall sometimes ref r collectively to EJDC, Bank of

Montrea l, Paribas , and Campeau as the FSI screditors .

- 93 83.75 percent" of the outstanding common stock of RHC from

Holdings III, did not take steps-against FSI to enforce their

rights under the so-called full priority rule -"to exclude stock-

holders [of FSI] entirely from the reorganization plan".

Id.

fact, unlike the.facts in Alabama Asphaltic, in the instant cases

the FSI creditors did not, as respondent asserts, commence

involuntary bankruptcy proceedings"against FST.

Instead, FSI

filed in the California U.S. Bankruptcy Court" a voluntary

petition under chapter 11, entitled "Reorganization", of the

Bankruptcy Code, 11 U.S.C. secs. 1101-1174.

Unlike the facts in

Alabama Asphaltic, in the instant cases FSI operated as a debtor

in possession" at all times, during the FSI chapter 11 proceedings.

The FSI creditors did not object during those proceedings

to FSI's acting as a debtor in possession.

Nor did any.of those

creditors ask the Ohio U.S. Bankruptcy Court to appoint a

"See supra note 54.

"Hereinafter, all references to the FSI chapter 11 proceedings are to those proceedings after venue in those proceedings

was transferred to the Ohio U-.S. Bankruptcy Court.

For convenience, we shall refer to any filing in the FSI chapter 11

proceedings with the Ohio U.S. Bankruptáy Court as FSI's filing

with that court.

"As a debtor in possession, FSI continued torcontrol its

assets and operate its business in the same manner as it had done

before the commencement of the chapter 11 proceedings.

addition, during the pendency of- the FSI chapter 11 proceedings

FSI continued to be managed by the officers that had managed FSI

before the FSI chapter 11 proceedings had commenced.

- 94 -

trusted."

The FSI creditors did not file with the Ohio U.S.

Bankru tcy - Court .any propose

chapte

1r proceedings.

plan of reorganization" in the FSI

Instead, on January 8,, 1992,% FSI filed

with the Ohio U.S. Bankruptcy Court- the January 1992 proposed FSI

chapte

11 plan."

Although ånder the January 1992 proposed FSI

he U.S. trustee program, a component of the U.S. Departs

ment of Justice that is respånsible for promoting the efficiency

and proyecting the integrity of the Federal bankruptcy system,

oversa |the FSI chapter 11 proceedings.

That program appointed

an offihial committee of unsdcured creditors in the FSI chapter

11 proc edings but did not t$ke possession of the assets of FSI

and did not have the authorit y to direct the disposition of that

company s assets or to managg that company's business during the

pendenc of ythe FSI chapter 111 proceedings . ,

"The term "plan of reoreanization" is used to refer to a

plan de%crilied in chapter 11 fof the Bankruptcy Code and is not

intendeÊì to refer to a plan f reorganization for tax purposes.

See supfa note 19.

"FSI filed several propoded plans of reorganization with

the OhiÊ> U.S. Bankruptcy Cou t before filing on Jan. 8, 1992,

another proposed FSI chapter 11 plan. At no time di'd the FSI

creditors seek to reduce the time during which FSI had the

exclusi e right· to file a pr posed plan of reorganization with

the Ohi¢ U.S. Bankruptcy Cou t. Nor did those creditors object

to the equests of FSI to ext end the time during which it had the

exclusi e right to file a proposed plan of reorganization with

that court .

"O Oct. 28, 1991, FSI filed with the Ohio U.S. Bankruptcy

Court t e October 1991 propoSed FSI chapter 11 plan. That plan

propose i inter alia, that tŠe FSI creditors receive from Holdings II certain stock of Ra]/phs in satisfaction of their creditor claims against FSI. Res](ondent focuses on that proposed plan

in furt er support of respon ent's assertion that the "creditors

of FSI ook overt steps to exert their control over its assets."

Respond nt contends :

The [Ralphs] transaction here was undertaken at

very end of the ban] ruptcy proceedings when the

(continued. . )

- 95 -

chapter 11 plan the claims of secured creditors of 4 FSI except

class 11" were impaired and certain unsecured creditors of FSI

were to receive property with respects.to their claims

none of

the FSI creditors objected to or rejected that proposed plan.

fact, those creditors accepted in writing the January 1992

proposed FSI chapter 11 plan, and the Ohio U.S: Bankruptcy Court

c onf irmed i t on January 10 , 19 92 .

On the parties' agreed facts, we find that under Alabama

Asphaltic the FSI creditors did not taker "effec.tive command" over

( . . . continued)

credibors' inchoate rights had matured into ef fective

control of the property. The initial plan had been for

the * * * [Ralphs] stock to go directly to the creditors.

However, after the creditors were already entitled to receive the * * * . [Ralphs] stock, the creditors directed that the * * * [Ralphs] stock, rather

than going'to the cžeditors themselves, should go to

the acquiring corporation (the creditor' s wholly-owned

holding company) [RHC] .

In directing the * * *

[Ralphs] stock to the acquiring corporation, the creditors controlled where the Ralphs stock went .

The above-quoted contentions of respondent are refuted by

the facts to which the parties agreed for purposes of their

respective motions for partial summary judgment . The FSI creditors were not entitled to any property of FSI or Holdings III

before the Ohio U.S. Bankruptcy Court confirmed the January 1992

proposed FSI chapter 11 plan. That confirmed plan required,

inter alia, that EJDC, Bank of Montreal, Paribas, and Campeau

receive certain stock of RHC, and not stock of Ralphs, in satis faction of their respective creditor claims against FSI.

The

October 1991 proposed FSI chapter 11 plan on which respondent

focuses was never confirmed by the Ohio U.S. Bankruptcy Court and

did not entitle the FSI creditors to any stock of Ralj;>hs .

ssSee supra note 26.

the, as ets of FSI."

We conc Lude that Alabama Asphaltic is

materi 11yr distinguishable from the instant cases, that respondent' s reliance on that case is misplaced, arid that that case is

not controlling in the instant cases.

also find the Alabama Asphaltic progeny, to be materially

distinguishable from the ins ant cases.

progen

In the Alabama Asphaltic

the courts concluded, as did the Supreme Court in

Alabama Asphaltic, that the determinative fact was whether the

credit

s of the -insolvent -c rporation took proáctive steps and

thereby obtained effective c mmand over the insolvent corporation's

roperty.

Commiss oner,

See, e.g., Palm Springs Holding Corp. v.

315 U.S.

185,

Union T ust Co. v. United St

1955) .

i88-189

(1942) ; Wells Fargo Bank &

tes, 225 F.2d 298, 300-301 (9th Cir.

Unlike the creditors involved in the instant cases, the

credito s involved in the Al bama Asphaltic progeny took

proactive steps to enforce or protect their rights in the insolvent corporations' propertieä, such as filing a foreclosure

action under mortgages secur ng the insolvent corporation's

"A suming arguendo that Holdings III, which the parties

agree w uld be the target corporation in a reorganization qualifying u der sec. 368(a) (1) (C) or (G), were insolvent and that it

were correct under Alabama Asphaltic to determine whether the .FSI

credito s had "effective comntand" over the property of Holdings

III, we would find for the råasons discussed above as to why the

FSI creditors did not have "(ffective command" over FSI's property th t the FSI creditors did not have such "effective command"

over th property of Holding III.

- 97 -

debt," selling the insolvent corporation's assets under an

indenture," filing a receivership action against the insolvent

corporation," or entering-into possession and operating the

property of the insolvent corporation.?°

In the instant cases,

none of the FSI creditors took.any proactive steps to enforce or

protect their respective rights to payment by FSI- of their

respective debts.

Based upon the parties' agreed facts, we, reject respondent's

argument that, in determining.whether the, continuity-of-interest

requirement is satisfied in the Ralphs transaction, Alabama

Asphaltic- requires us to treat as equity owners..of FSI the FSI s

creditors whor received 83.75 percent" of the outstanding common

stock of RHC..

Respondent does not cite, and we have not found,

any case in which a court has-held Alabama Asphaltic to be

controlling.under facts materially indistinguishable from the

"See, e.g., Wells Fargo Bank & Union Trust Co. v. United

States, 225 F.2d 298, 300 (9th Cir. 1955)-; Peabody Hotel Co. v.

Commissioner, 7 T.C. 600, 602-603 (1946); Pearson Hotel, Inc. v.

Commissioner, 199 F. Supp. 33, 35 (N.D. Ill. 1959).

U.S.

"See, e.g., Palm Springs Holding Corp. v. Commissioner, 315

185, 186 (1942).

675,

330,

676

333

See, e.g., Atlas Oil & Ref. Corp. v. Commissioner, 36 T.C.

(1961); Ky. Natural Gas Corp. ve- Commissioner, 47 B.T.A.

(1942).

7°See, e.g., Roosevelt Hotel Co. v. Commissioner,il3 T.C.

399, 401 s(1949) .

"See supra note 54.

parties

agreed facts in the instant cases.

Nor has respondent

offere

any persuasive reaso

Alabam

Asphaltic to the pai-ties' agreed facts.

why we should extend the holding of

We hold-that the continuity-of -interest requirement is not

satisfiad in' the Ralphs tranaaction and that that transaction is

not a r organization under s ction 368(a) (1) (B)",

Respond nt does not dispute

(C), or (G)-.72

hat if we were to hold, which' we

have, tnat the Ralphs transa tion is not a reorganization under

any of

hose provisions of ~ section 368,

(1) RHC' s acquisition of

the out standing common stock of Ralphs from Holdings III and

Allied

ould constitute a pu chase under section 338 (h) (3) and a

qualifi d stock purchase under section 338 (d)-(3) , and (2) RHC and

FSI wou d have made a valid

oint election under section

338 (h) ( LO) with respect to t at acquisition.

We have considered all

f the aontentions and arguments of

the par ies that are not disdussed herein with respect to the

matters that we address herein, and we find them to be without

merit,

rrelevant, and/or moot.

72I the light of our holdings that the Ralph' s transaction

does not satisfy the continuity-of -interest requirement and is

not a r0organization under s(c . 368 (a) (1) (B) , (C) , or (G) , we

need.noh and shall not address whether the Ralphs transaction

satisfiOs, as respondent mairYtains and petitioners dispute, the

other r quirements applicable to each of the three types of

reorgan zations on which resl$ondent relies .

- 99 -

To reflect the foregoing

An order granting petitioners' motion and denving respondent' s motion will be issued.

- 100 APPENDIX

Campeau

100%

FSI

100%

Holdings III

CPI

100%

Holdings II

7.5%

Others

83.75%

100%

Preferred

EJDC

stock held

28.04%

96%

Shopping

Center

Corps.

7.5%

by Mgmt.

Allied

50%

16.25%

100%

Federated

100%

Subsidiaries, including:

Allied credit Holdings

Allied Real Estate Subs.

Jordan Marsh Stores Corp.

Maas, Inc.

Stern's, Inc.

The Bon, Inc.

Subsidiaries, including:

Bloomingdales, Inc.

Bloomingdales By Mail

Burdine's, Inc.

Federated Credit Holdings

Federated Real Estate

Rich's, Inc.

100%

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.