803 F.2d 1288 (3rd Cir. 1986), 85-5636, United States v. Tabor Court Realty Corp.
|Docket Nº:||trustee, in No. 85-5636.|
|Citation:||803 F.2d 1288|
|Party Name:||UNITED STATES of America v. TABOR COURT REALTY CORP., McClellan Realty Co., Inc., Pagnotti Enterprises, Inc., Loree Associates, James J. Tedesco, Henry Ventre, Louis Pagnotti, II, Raymond Colliery Co., Inc., Blue Coal Company, Gillen Coal Mining Co., Carbondale Coal Co., Moffat Premium Anthracite, Northwest Mining, Inc., Maple City Coal Co., Powder|
|Case Date:||October 22, 1986|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued Sept. 10, 1986.
As Amended .
Rehearing and Rehearing En Banc Denied Nov. 24, 1986.
[Copyrighted Material Omitted]
Roger M. Olsen, Asst. Atty. Gen., Michael L. Paul, William S. Estabrook, Lisa A. Prager (argued), Tax Div., Dept. of Justice, Washington, D.C., for United States; James J. West, U.S. Atty., of counsel.
Robert J. Rosenberg (argued), Latham & Watkins, Bernard Ouziel, New York City, Joseph R. Solfanelli, Gerald J. Butler, Solfanelli & Butler, Scranton, Pa., for McClellan Realty Co., Inc. et al.
Doran, Nowalis & Flanagan, Robert C. Nowalis (argued), Wilkes-Barre, Pa., for James J. Haggerty, Trustee in Bankruptcy for Blue Coal Corp. and Glen Nan, Inc.
A. Bruce Schimberg, Frank R. Kennedy, Michael J. Sweeney, Richard B. Kapnick, Sidley & Austin, Chicago, Ill., for Nat. Commercial Finance Ass'n, Inc.
Before ALDISERT, Chief Judge, and HIGGINBOTHAM and HUNTER, Circuit Judge.
ALDISERT, Chief Judge.
We have consolidated appeals from litigation involving one of America's largest anthracite coal producers that emanate from a district court bench trial that extended over 120 days and recorded close to 20,000 pages of transcript. Ultimately, we have to decide whether the court erred in entering judgment in favor of the United States in reducing to judgment certain federal corporate tax assessments made
against the coal producers, in determining the priority of the government liens, and in permitting foreclosure on the liens. To reach these questions, however, we must examine a very intricate leveraged buy-out and decide whether mortgages given in the transaction were fraudulent conveyances within the meaning of the constructive and intentional fraud sections of the Pennsylvania Uniform Fraudulent Conveyances Act (UFCA), 39 Pa.Stat. Secs. 354-357, and if so, whether a later assignment of the mortgages was void as against creditors.
The district court made 481 findings of facts and issued three separate published opinions: United States v. Gleneagles Investment Co., 565 F.Supp. 556 (M.D.Pa.1983) (Gleneagles I); 571 F.Supp. 935 (1983) (Gleneagles II); and 584 F.Supp. 671 (1984) (Gleneagles III). We are told that this case represents the first significant application of the UFCA to leveraged buy-out financing.
We will address seven issues presented by the appellants and an amicus curiae, the National Commercial Finance Association, and by the United States and a trustee in bankruptcy as cross appellants:
* whether the court erred in applying the UFCA to a leveraged buy-out;
* whether the court erred in denying the mortgage assignee, McClellan Realty, a "lien superior to all other creditors";
* whether the court erred in "collapsing" two separate loans for the leveraged buy-out into one transaction;
* whether the court erred in holding that the mortgages placed by the borrowers on November 26, 1973 were invalid under the UFCA;
* whether the court erred in holding that the mortgages placed by the guarantors were invalid for lack of fair consideration;
* in the government's cross-appeal, whether the court erred in determining that the mortgage assignee, McClellan Realty, was entitled to an equitable lien for municipal taxes paid; and
in the government's and trustee in bankruptcy's cross-appeal, whether the court erred in placing the mortgage assignee, McClellan Realty, on the creditor list rather than removing it entirely.
We will summarize a very complex factual situation and then discuss these issues seriatim.
These appeals arise from an action by the United States to reduce to judgment delinquent federal income taxes, interest, and penalties assessed and accrued against Raymond Colliery Co., Inc. and its subsidiaries (the Raymond Group) for the fiscal years of June 30, 1966 through June 30, 1973 and to reduce to judgment similarly assessed taxes owed by Great American Coal Co., Inc. and its subsidiaries for the fiscal year ending June 30, 1975.
The government sought to collect these tax claims from surface and coal lands owned by the Raymond Group as well as from lands formerly owned by it but which, as a result of allegedly illegal and fraudulent county tax sales, were later owned by Gleneagles Investment Co., Inc. In addition, the government sought to assert the priority of its liens over liens held by others. The district court held in favor of the government on most of its claims and concluded the litigation by promulgating an order of priority of liens on Raymond Group lands.
Raymond Colliery, incorporated in 1962, was owned by two families, the Gillens and the Clevelands. It owned over 30,000 acres of land in Lackawanna and Luzerne counties in Pennsylvania and was one of the largest anthracite coal producers in the country. In 1966, Glen Alden Corporation sold its subsidiary, Blue Coal Corporation, to Raymond for $6 million. Raymond paid $500,000 in cash and the remainder of the purchase price with a note secured by a mortgage on Blue Coal's land. Lurking in the background of the financial problems present here are two important components
of the current industrial scene: first, the depressed economy attending anthracite mining in Lackawanna and Luzerne Counties, the heartland of this industry; and second, the Pennsylvania Department of Environmental Resources' 1967 order directing Blue Coal to reduce the amount of pollutants it discharged into public waterways in the course of its deep mining operations, necessitating a fundamental change from deep mining to strip or surface mining.
Very serious problems surfaced in 1971 when Raymond's chief stockholders--the Gillens and Clevelands--started to have disagreements over the poor performance of the coal producing companies. The stockholders decided to solve the problem by seeking a buyer for the group. On February 2, 1972, the shareholders granted James Durkin, Raymond's president, an option to purchase Raymond for $8.5 million. The stockholders later renewed Durkin's option at a reduced price of $7.2 million.
Durkin had trouble in raising the necessary financing to exercise his option. He sought help from the Central States Pension Fund of the International Brotherhood of Teamsters and also from the Mellon Bank of Pittsburgh. Mellon concluded that Blue Coal was a bad financial risk. Moreover, both Mellon and Central States held extensive discussions with Durkin's counsel concerning the legality of encumbering Raymond's assets for the purpose of obtaining the loan, a loan which was not to be used to repay creditors but rather to buy out Raymond's stockholders.
After other unsuccessful attempts to obtain financing for the purchase, Durkin incorporated a holding company, Great American, and assigned to it his option to purchase Raymond's stock. Although the litigation in the district court was far-reaching, most of the central issues have their genesis in 1973 when the Raymond Group was sold to Durkin in a leveraged buy-out through the vehicle of Great American.
A leveraged buy-out is not a legal term of art. It is a shorthand expression describing a business practice wherein a company is sold to a small number of investors, typically including members of the company's management, under financial arrangements in which there is a minimum amount of equity and a maximum amount of debt. The financing typically provides for a substantial return of investment capital by means of mortgages or high risk bonds, popularly known as "junk bonds." The predicate transaction here fits the popular notion of a leveraged buy-out. Shareholders of the...
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