Petition for a Writ of Certiorari — Meyer v. United States

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f DEC 22 1954

HAROLD B. WILEY, Glerk

IN THE

SHupreme Court of the United States

Ocroper Term, 1954

No. 493 ;

Leon R. Meyer, Petitioner,

vs.

THe Unrrep States or AMERICA.

Luctme H. Meysr, Petitioner,

vs.

THe Unrrep Srates or America.

Leon R. Meyer, TRANSFEREE OF MEYER JEWELRY Compary,

Petitioner,

vs.

Tue Untrep Srates or AMERICA.

PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF CLAIMS.

Homer CummMIncs,

Ausert L. REEvss, Jr.,

Wuumum D. Doxne ty,

Counsel for Petitioner,

1625 K Street,

Washington, D. C.

Cummines, Staniey, Truitt, Cross & REEVEs,

Of Counsel.

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REasoNS FOR GRANTING THE WRIT

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AppenDix: Opinion and judgment below ............ 1

Findings of fact and conclusion of law .... 14

CITATIONS

CaSEs:

Helvering v. Alabama Asphaltic Limestone Co., 315

i AOE sb a) oc thiniaee ces b cen kes caveskwek sek 5

Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734 .... 8

Mascot Stove Co. v. Commissioner, 120 F. 2d 153 .. 6,7

Mueller v. UG, TO VES. ions cuncdesasessess 8

Northern Pacific Ry. Co. v. Boyd, 228 U.S. 482 .... 5

Quincy, M. d P. R. Co. v. Humphreys, 145 U.S. 828

Templeton’s Jewelers, Inc. v. United States, 126 F.

BE ME Gav We SoS ES cece Pa BEN WERURN MEN Ane ccs 6,7

United States v. Weitzel, 246 U.S. 533 ............ 8

STaTursEs:

Revenue Act of 1928, c. 852, 45 Stat. 791 .......... 3

ey IS Cig ok Aba tan keane kes ace bese ane 3

We PEON acces cskactunetehc as 2, 3, 4, 5, 8

IN THE

SHupreme Court of the United States

Ocrosrer Term, 1954

No.

Leon R. Meyer, Petitioner,

Vs.

Tue Unrrep States or AMERICA.

Lucie H. Meyer, Petitioner,

vs.

Tue Unrrep States or AMERICA.

Leon R. Meyer, TRANSFEREE OF MEYER JEWELRY CoMPARY,

Petitioner,

vs.

Tue Unrrep States or AMERICA.

PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF CLAIMS.

The plaintiffs in the consolidated cases below pray that

a Writ of Certiorari issue to review the judgment therein

of the United States Court of Claims.

2

OPINION BELOW.

The opinion and judgment of the Court of Claims (R.

55-66) are reported at 121 F. Supp. 898, and, together with

that court’s findings of fact (R. 66) and conclusion of law

(R. 82) are printed in the Appendix to this petition.

JURISDICTION.

The judgment of the Court of Claims was entered on

June 8, 1954 (R. 55, 66). Plaintiffs’ motion for rehear-

ing was timely filed August 30, 1954, (R. 83) pursuant to

extension of time duly granted (R. 83), and was denied by

order entered October 5, 1954 (R. 83). The jurisdiction

of this Court is invoked under 28 U. S. C., Section 1255.

QUESTIONS PRESENTED.

1. Whether Section 112 (b) (3) of the Revenue Act of

1928, providing for tax-free corporate reorganizations, is

limited in its application to solvent corporations so that

stockholders of an insolvent corporation may never have

the benefit thereof, even though creditors voluntarily and

intentionally reduce and settle their claims so as to assure

the retention by the stockholders of the equity in the reor-

ganized corporation.

2. Whether the right of creditors to exclude stockholders

from the reorganization of an insolvent debtor under the

full priority rule, as announced and explained by the Su-

preme Court of the United States, must conclusively be

deemed to have been exercised as a matter of law, even

though it has not«been exercised as a matter of fact, but,

to the contrary the creditors have voluntarily and inten-

tionally reduced and settled their claims so as to assure

the retention of the equity by the stockholders.

3

STATUTE INVOLVED.

Revenue Act of 1928, c. 852, 45 Stat. 791, 816:

See. 112. Recognition or Gary Or Loss

‘*(a) General rule—Upon the sale or exchange of

property the entire amount of the gain or loss, deter-

mined under Section 111, shall be recognized, except as

hereinafter provided in this section.

‘*(b) Exchanges solely in kind.—

* * * * * - * = + *

‘*(3) Stock for Stock on Reorganization.—No gain

or loss shall be recognized if stock or securities in a

corporation a party to a reorganization are, in pursu-

ance of the plan of reorganization, exchanged solely

for stock or securities in such corporation or in another

corporation a party to the reorganization.

STATEMENT.

Meyer Jewelry Company having encountered financial

difficulties, a receiver was appointed on March 19, 1931,

upon the application of certain of its creditors made at

the suggestion of (Tr. 161), and joined in by, the debtor

corporation (Fdgs. 12, 13, App’x. 17). While the re-

ceivership proceedings were pending, the debtor arranged

for a settlement of its liabilities of approximately $88,000

for $22,000, plus administrative and court costs of $6,500

(Fdg. 16), and, pursuant to a written plan of reorganiza-

tion (Fdg. 17) and with the full knowledge, consent and ap-

proval of all of its creditors (Fdg. 15, Tr. 26-29, 44, 45, 49,

50) its assets were acquired by a new corporation with the

same name and with the same stockholders—each having

| a proprietary interest in the new corporation in the same

proportion as his interest in the old corporation (Fdg. 18).

The stock of the old corporation was turned in and can-

celled and the new stock was issued to the same stock-

holders with no money being paid therefor (Fdg. 18). To

repeat, the creditors desired that the stockholders of the

old corporation retain the proprietary interest in the new

company; the creditors deliberately and intentionally

ee

4

elected not to eliminate the interests of the stockholders;

the stockholders did, in fact, retain an equity having a very

substantial actual value. Upon the termination of the re-

ceivership proceedings, the equity of the stockholders in

the reorganized company was worth in excess of $50,000

(Fdg. 18). The new corporation received and owned the

same assets as the old corporation (Fdg. 18).

In July, 1943, the reorganized corporation was liqui-

dated and its assets were distributed to its sole stock-

holders, Petitioner Leon R. Meyer (plaintiff in case No.

49739) and Petitioner Lucile H. Meyer (plaintiff in case

No. 49740) in exchange for their stock (Fdg. 24). In de-

termining the gain to the stockholders on this exchange, the

Commissioner of Internal Revenue refused to permit them

to carry over as part of the basis of their stock the basis

of the stock of the old corporation (Fdg. 28). The Com-

missioner also determined that the reorganized Meyer

Jewelry Company (transferor of plaintiff in case No. 49741)

was not entitled to use the capital surplus account of the

old corporation in computing equity invested capital of the

reorganized company (Fdg. 27). The plaintiffs paid indi-

vidual income taxes and corporate excess profits taxes in

the amounts determined by the Commissioner (Fdgs. 28,

29) and brought suit for refund in the Court of Claims

which dismissed their petitions. All three cases turned on

the single issue of whether Meyer Jewery Compeny experi-

enced a tax-free reorganization within the meaning of Sec-

tion 112 (b) (3) of the Revenue Act of 1928.

The Court of Claims, in denying petitioners’ claims,

found that in 1931 the Meyer Jewelry Company was in-

solvent in the bankruptcy sense, and, upon the basis of

this finding, concluded as follows:

(a) notwithstanding the fact that ali of the creditors

voluntariiy and intentionally reduced and settled their

claims so as to assure the retention by the stock-

holders of the equity in the reorganized company, yet

5

under the full priority rule of Northern Pacific Ry. Co.

v. Boyd, 228 U. S. 482, 33 S. Ct. 554, the interest of the

stockholders was nonetheless eliminated as a matter

of law;

(b) therefore, the requisite continuity of interest

was lacking;

(ec) therefore, although all other requirements of a

tax-free reorganization had been met, the fact of in-

solvency, in and of itself, precluded Meyer Jewelry

Company from experiencing a tax-free reorganization.

REASONS FOR GRANTING THE WRIT.

1. The decision below erroneously applied the full pri-

ority rule of this Court in Northern Pacific Ry. Co. v. Boyd,

228 U. S. 482 and Helvering v. Alabama Asphaltic Lime-

stone Co., 315 U. S. 179, and, in effect, amended Section 112

(b) (3) of the Revenue Act of 1928 by judicial decree.

The full priority rule was announced by this Court in

the Northern Pacific case, supra, as follows, 1. ¢. 482:

‘‘Corporations, insolvent or financially embarrassed,

often find it necessary to scale their debts and readjust

stock issues with an agreement to conduct the same

business with the same property under a reorganiza-

tion. This may be done in pursuance of a private con-

tract between bondholders and stockholders. And

though the corporate property is thereby transferred

to a new company, having the same shareholders, the

transaction would be binding between the parties. But,

of course, such a transfer by stockholders from them-

selves cannot defeat the claim of a nonassenting credi-

tor.’’

and was explained by this Court in the Alabama Asphaltic

Limestone case, 315 U. S. 179, as follows (p. 183-184) :

‘‘The full priority rule of Northern Pacific Ry. Co.

v. Boyd, 228 U. S. 482, applies to proceedings in bank-

ruptcy as well as equity receiverships. Case v. Los

_Angeles Lumber Products Co., 308 U. 8. 106. It gives

6

creditors, whether secured or unsecured, the right to

exclude stockholders entirely from the reorganization

plan when the debtor is insolvent.’’

Summarized, the full priority rule of this Court is that

creditors of an insolvent corporation are entitled, if they

so choose, to eliminate the interest of stockholders. The

full priority rule is not a conclusive test of a tax-free cor-

porate reorganization; it is a protective rule for the benefit

of creditors if they choose to invoke it. But here the credi-

tors, with full knowledge of all of the facts, ably repre-

sented by counsel, and acting in their own self-interest, de-

sired that the business be continued under the same man-

agement, and, to accomplish such purpose, deliberately and

intentionally consented that the stockholders of the old

company retain the equity.

In the face of those undisputed facts, the Court of

Claims in its opinion held, 121 F. Supp. 898, 904 (R. 63,

App’x. pp. 10-11):

‘‘Therefore, since the old corporation was insolvent

in the bankruptcy sense, the creditors, under the full

priority rule of Northern Pacific Ry. Co. v. Boyd, 228

482, could have and im fact did, as a matter of law,

eliminate the interest of the stockholders in the old cor-

poration.’? (Emphasis supplied)

Because of the apparent similarity between the facts in

the Meyer Jewelry Company reorganization and the facts

in Mascot Stove Co. v. Commissioner, 120 F. 2d 153, and in

Templeton’s Jewelers, Inc. v. United States, 126 F. 2d 251

(both decided by the Sixth Circuit Court of Appeals with

opinion in both cases by Judge Simons), the Court of

Claims fell into the error of assuming that the decisions

announced in those cases should govern here. However, in

neither of those cases did the creditors desire and consent

that the stockholders retain the equity in the reorganized

company, nor did the stockholders in fact retain the equity

in the reorganized company. Therefore, although the full

priority rule may have been properly applied as the key-

7

stone of the decision in Mascot Stove Co. (on which Tem-

pleton’s Jewelers, Inc., depends), that rule is not applicable

under the factual situation of the Meyer Jewelry Company

reorganization. The record is clear that the creditors of

Meyer Jewelry Company neither desired nor intended to

wipe out the stockholders’ equity; on the contrary, they de-

sired and provided for such equity and a continuity of

interest. There was, in substance and in reality, a simple

settlement of an indebtedness of $88,000 for $22,000.

To say, as did the Court of Claims, that the creditors of

Meyer Jewelry Company ‘‘could have and in fact did, as

a matter of law, eliminate the interest of the stockholders

in the old corporation’’ not only disregards the undisputed

facts, but also diverts the full priority rule from the role

assigned to it by this Court of protecting creditors in the

assertion of their rights to the role of protecting them

against their wishes and their own judgment of their best

interests. As applied by the Court of Claims the full pri-

ority rule becomes a conclusive presumption of law under

which the actual facts and the wishes of the creditors are

disregarded. Cases should be decided on actual facts; con-

clusive legal presumptions to the contrary should only be

resorted to in cases involving matters of public policy.

2. The decision of the Court of Claims in the cases be-

low that Meyer Jewelry Company was insolvent in a bank-

ruptey sense is contrary to its own findings of fact. The

Court of Claims actually found: (a) that the merchandise

inventory alone as shown on the books of the old corpora-

tion had a book value of $107,651.97 (Fdg. 14, App’x 18);

(b) that the appraisers appointed in the receivership pro-

ceedings valued the assets of the old corporation at $50,211

on the basis of present cash value (not on the basis of a

going concern) (Fdg. 14); (c) that the net effect of the

settlement of the debts of the old corporation was to in-

crease the book equity of the stockholders by approximately

$59,485 (Fdg. 18, App’x 25); (d) that the new corporation

received and owned the same assets as the old corpora-

tion had held prior to the receivership and that no part

SE Pee ay Cee

8

thereof had been liquidated by the receiver (Fdg. 18) ; (e)

that the equity of the stockholders in the new corporation,

upon receiving the same from the old corporation, had a

book value of $51,161.68, even after the new corporation

took a voluntary writedown of $62,751.31 (Fdg. 18, App’x

25).

Obviously, when the liabilities of the old corporation were

sealed down to $28,515 with the consent of all of the credi-

tors (Fdg. 16, App’x 10; Tr. 26-29, 44, 45, 49, 50) the old

corporation was solvent. To substantiate its conclu-

sion of insolvency in the bankruptcy sense, the Court of

Claims necessarily ignored the facts that the settlement

with creditors (assented to by them) was made by the

old corporation as a part of a plan of reorganization

adopted shortly following the filing of the receivership pro-

ceedings (Fdg. 17), and that the settlement had been agreed

to in the receivership proceedings prior to the acquisition

of the assets by the new corporation (Fdg. 16, 17). The

Court of Claims in effect has attempted to substantiate its

conclusion by stating that since the creditors ‘‘could have”’

they ‘‘in fact did, as a matter of law, eliminate the interest

of stockholders in the old corporation’’,—that is to say,

that even though the creditors in actuality did settle and

reduce the liabilities of the old corporation, still, as a mat-

ter of law, they must be presumed not to have done so.

In respect of the essentials of continuity of interest and

retention of equity, the Court of Claims also refused to

recognize an important distinction between bankruptcy and

equity receivership, namely, that in the former title passes

by operation of law to the trustee in bankruptcy (Isaacs v.

Hobbs Tie & Timber Co., 282 U. S. 734; Mueller v. Nugent,

184 U. S. 1); while in the latter title remains in the debtor,

its property being merely in the custody of the Court

(United States v. Weitzel, 246 U.S. 533 ; Quincy, M. & P. R.

Co. v. Humphreys, 145 U. S. 82).

3. The limitation judicially appended by the Court of

Claims to Section 112 (b) (3) of the Revenue Act of 1928

adversely affects a great number of taxpayers, since the

9

language of the section has been incorporated substantially

without change in all succeeding revenue acts. The full

priority rule is not limited to tax cases, but is of importance

in defining generally the respective rights of creditors and

stockholders of insolvent corporations.

CONCLUSION.

For the foregoing reasons, we respectfully submit that

the Petition for a Writ of Certiorari should be granted.

Respectfully submitted,

Homer CuMMINGS,

Ausert L. REEVES, JB.,

Wim D. DonneELy,

Counsel for Petitioner,

Cummines, Stantey, Truitt, Cross & REEVES,

Of Counsel.

December , 1954.