Bankers Trust Company v. United States

• Citation: 518 F.2d 1210
• Decision Date: 11 July 1975
• Docket Number: No. 89-67.,89-67.
• Parties: BANKERS TRUST COMPANY et al. v. The UNITED STATES.
• Court: Court of Federal Claims

518 F.2d 1210

BANKERS TRUST COMPANY et al. v. The UNITED STATES.

No. 89-67.

United States Court of Claims.

July 11, 1975.

COPYRIGHT MATERIAL OMITTED

David W. Richmond, Washington, D. C., atty. of record for plaintiff; Robert L. Moore, II and Miller & Chevalier, Washington, D. C., of counsel.

Milan D. Karlan, Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant; Theodore D. Peyser, Jr. and Donald H. Olson, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG and BENNETT, Judges.

OPINION

DAVIS, Judge.

This action to recover corporate income taxes assessed and paid was brought on behalf of the Mesabi Trust by its trustees, as successor to the Mesabi Iron Company. The taxes were assessed as a deficiency in the Mesabi Company's 1960 return, and all relevant events occurred prior to the July 18, 1961 change to trust status. The company rather than the trust and trustees will be referred to as "Mesabi," "the taxpayer," and "plaintiff."

The disputed tax, amounting to $3,016,132.64 plus interest, arises from a difference between plaintiff and the Internal Revenue Service as to the value of 163,570 shares of Mesabi stock received by the company during 1960 from the Reserve Mining Company. The parties' earlier motions for summary judgment were denied without prejudice and the case remanded for full development of the facts. 459 F.2d 484, 198 Ct.Cl. 306 (1972). A trial was held before Trial Judge Lloyd Fletcher who decided in favor of the Government. We now confirm that conclusion.

I Facts

The events leading to the ultimate transfer of the stock, which are rather complex, are fully set out in the findings of fact made by Trial Judge Fletcher and which we adopt with minor modifications. Here we summarize only the most important steps. Mesabi Iron Company was incorporated in 1919 to mine iron ore in the Mesabi Iron Range in northern Minnesota. In consideration for the issuance of its stock, the company acquired fee ownership of a 5,700 acre tract and a leasehold interest in two other areas, one of 720 acres (Cloquet lease), and the other of 9,000 acres (Peters lease). Although Mesabi attempted to mine the leaseholds, the iron was a low grade ore called taconite and needed concentration in order to become commercially useful. Mesabi was unable to concentrate the ore on a profitable basis and suspended all mining operations in 1924.

By 1939, Mesabi was in debt by approximately $258,000 with few liquid assets. To pay its debts, but at the same time to retain the possibility of future profits from mining operations, Mesabi agreed with Reserve Mining Company, a newly formed corporation the stockholders of which were four iron and steel corporations, to lease to Reserve the lands which Mesabi owned and to assign to that firm the two leasehold interests. In return, Reserve took over Mesabi's debts and agreed, among other things, to pay Mesabi one-third of the net profits obtained from the lands, and to "endeavor to procure the highest current price known for material of like value in use and for like quantities" in making sales and determining profits. The parties set up a two-man board of arbitration to settle disputes, with a third arbitrator to be appointed if the first two disagreed.

Between 1942 and 1944, Reserve purchased through negotiation and on the open market, but with the help of Raymond B. Hindle, a stock broker who was also a director of Mesabi, 148,700 shares of Mesabi stock, or approximately 12% of the outstanding total. Starting in 1951, Reserve began to develop its Mesabi leaseholds, having devised a commercially feasible way of concentrating the taconite. This development required capital expenditures of approximately $178 million which was financed in part by Reserve's stockholders and in part by borrowing. By 1956, Reserve began producing taconite pellets, an extremely useful form of iron ore, the entire production of which was sold under a 1953 agreement to the two companies which by then had sole and equal interests in Reserve—Republic Steel Corporation and Armco Steel Corporation.

From 1953 on, Reserve issued annual reports to Mesabi in which the former stated its net profits for the year and calculated Mesabi's share. Mesabi refused to accept each of these reports, contending that the sale price of the taconite was too low in that it did not take into account the efficiencies obtained by using the uniform, concentrated pellet, that some charges by Reserve for such items as hauling the taconite on Reserve's private railroad from the mine near Babbit to the production facilities at Silver Bay were too high, and that various other charges, such as losses on in-town real estate sales in Silver Bay, should not have been assessed at all. In addition, Reserve wished to offset immediately Mesabi's part of pre-production losses against Mesabi's profit share, while Mesabi wanted to amortize these losses over a number of years.

The preproduction loss issue was settled in 1956 with an agreement to amortize the pre-1956 losses over a 13-year period, one-third falling on Mesabi and two-thirds on Reserve. The other questions were still outstanding before either a two-or a three-man board of arbitration in February 1960.

During the late 1950's the differences between Mesabi and Reserve came to a head in litigation. In 1957, several Mesabi shareholders filed a derivative action against Reserve and the then Mesabi board of directors, complaining about the failure of Mesabi to effectively prosecute its claims against Reserve. The complaint stated that Reserve was indebted to Mesabi for 1956 profits in the amount of $8,000,000. The Delaware court in which the suit was brought sequestered Reserve's stock holdings in Mesabi. In 1958, a dissident group of stockholders won a proxy fight against the old Mesabi management (Reserve voting its shares for the losing side). New management informed Mesabi shareholders that the arbitration would not lead to an acceptable agreement with Reserve in a reasonable period of time, and that Mesabi would now attempt to settle the differences in court. Reserve then filed an action in a Minnesota state court (removed at Mesabi's request to federal district court) to force Mesabi to live up to its agreement to arbitrate. Mesabi countered with counterclaims against Reserve and its stockholders, Armco and Republic, for antitrust violations in the distribution and pricing of taconite and for conspiring to interfere with the lease agreements. Mesabi also brought an antitrust action on a similar basis against Armco and Republic in the federal district court in Delaware and another suit in a Delaware state court against Reserve and Raymond Hindle, alleging a diversion of corporate opportunity in Reserve's 1940's purchases of Mesabi stock and requesting return of the stock. The new management also took over the position of the plaintiff stockholders in the Delaware derivative action. None of these cases was settled or completed prior to February 1960.

The alleged dollar values of the suits, according to the complaints were:

(1) $8,000,000 lost profits for 1956 in the derivative suit

(2) $16,166,667 lost profits for 1956 and 1957 in the Minnesota counterclaim

(3) $12,500,000 trebled ($37,500,000) for antitrust violations in the Minnesota counterclaim

(4) $22,500,000 trebled ($67,500,000) for antitrust violations in the Delaware federal suit

In addition, the Delaware state suit requested the return of 148,700 shares of Mesabi stock,¹ and Mesabi continued to pursue lost profit claims for 1958 and 1959 out of court. While the amounts listed above obviously overlap in some respects and are undoubtedly exaggerated, they do provide some idea of the magnitude of the claims Mesabi had outstanding against Reserve and its shareholders as of February 1960.²

By January 1960, the three-man board of arbitration had completed hearings on all questions except that of the propriety of Reserve's pricing of taconite pellets in its sales to its owners, Armco and Republic. On January 21, 1960, the independent arbitrator ruled that Reserve should turn over to Mesabi its records dealing with the price of taconite pellets in sales to Republic and Armco. The hearings were adjourned until March 1960.

Possibly because of this new development, the arbitration proceedings were never reconvened. Rather, Reserve initiated talks aimed at settlement of all disputes. Reserve's goal seems to have been to end all past, present, and future controversies over net profits by putting Mesabi's payments on a royalty-per-ton basis, a proposal Reserve had made several times since 1950. Mesabi was similarly anxious to get out of litigation on net profits, but only at a royalty substantially higher than that offered previously. Mesabi management was also very interested in acquiring Reserve's 12% of the outstanding Mesabi stock, in order to eliminate the threat that Reserve would vote its stock in its own interest rather than Mesabi's.

On February 18, 1960, the negotiators reached an agreement under which Mesabi would receive $400,000 and all of Reserve's stock in Mesabi (now 163,570 shares, see footnote 1, supra). Mesabi would drop all claims against Reserve, its shareholders, and Hindle, and the 1939 agreement would be modified to provide Mesabi with royalties of $1.00 per adjusted ton of taconite concentrate shipped. At Reserve's request, the agreement provided that it would not become effective until approved by a majority of Mesabi's outstanding shares but that the shares held by Reserve could not be voted nor counted toward the majority. The closing was to take place on the fifth business day following approval by Mesabi's shareholders.

On February 19, 1960, Reserve's directors and its two shareholders approved the agreement. Mesabi's directors met the same day and passed a series of approving resolutions. The only significant difference...