Estate of Mann
| Decision Date | 04 May 1984 |
| Docket Number | No. 82-1593,82-1593 |
| Citation | 731 F.2d 267 |
| Parties | 84-1 USTC P 9454 ESTATE OF Guy L. MANN, Deceased. Suzanne Mann DUVAL, Administratrix, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Glen L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Sec., Ann Belanger Durney, Robert S. Pomerance, Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.
Durant, Mankoff, Davis, Wolens & Francis, Charles D. Pulman, Davis, Meadows, Owens, Collier & Zachry, C.M. Meadows, Jr., Dallas, Tex., for plaintiff-appellee.
Appeal from the United States District Court for the Northern District of Texas.
Before BROWN, WISDOM and JOHNSON, Circuit Judges.
Our case today involves loans between a broker and a businessman--two brothers, in two businesses related almost as closely. Because of one bankruptcy, and no bucks, the broker loaned the businessman several million dollars. These loans ultimately were the basis of a bad business debt deduction under I.R.C. Sec. 166, and the resulting tax refund under Sec. 172, filed on behalf of the broker. The jury allowed the claim. The Government argues alternatively that the lending brother was merely being "generes," that he was just protecting his investment, and that the debts were never as bad as they initially appeared. Unpersuaded by these assertions, we affirm the jury's verdict. The Government also appeals the Court's finding below that it should not recoup a share of the refund award. Essentially on the basis of that Court's well-reasoned opinion, we again affirm.
The facts and circumstances leading up to this suit are of critical significance to its resolution.
Guy L. Mann (the taxpayer), now deceased, was the younger and only brother of Gerald C. Mann (Mann). Both attended and graduated from SMU in Dallas, Texas in the mid-1920s. There, (Gerald) Mann became an all-American football player. They went to law school--Mann at Harvard, the taxpayer at SMU--and then practiced law together in Dallas. In 1935, Mann was appointed Secretary of State and, later, elected to several terms as Attorney General of Texas. He returned to private law practice in 1944.
In that year, the taxpayer began a career as a "broker" of businesses. As a broker, the taxpayer was a financial matchmaker. He brought together owners of companies that were willing or who could be persuaded to sell and prospective suitors ready and able to buy. If the meeting led to a courtship, and the courtship to a sale, the taxpayer and his partner were compensated. Usually, they were paid in cash; sometimes they received stock. But if nothing developed, nothing was earned.
These deals were sporadic. Although the taxpayer actively promoted the corporate courtships, he generally was not involved in the actual sale negotiations. In major deals, even successful negotiations often took up to a year to come to fruition. That, and the time commitment of these major deals, limited the number which the taxpayer could broker.
The taxpayer's first deals involved Clint Murchison, a Dallas businessman of considerable wealth. In 1944, the taxpayer and an associate arranged a meeting between Murchison and representatives of five bus lines--Dixie Motor Coach Corporation, Sunshine Bus Line, Airline Motor Coaches, Texas Motor Coaches, and Union Bus Line. Murchison ultimately bought the companies, and the taxpayer shared a commission of $75,000. Later, in the early 1950s, the taxpayer also brokered Murchison's acquisition of the Simi Valley Development Company and, in the mid-1950s, the Bamburger Railroad Company. For the Bamburger Railroad deal, he and an associate received common stock in the railroad.
Shortly after his return from government service in 1944, Mann had also become associated with Murchison. Murchison, Mann, and a woman by the name of Hill, subsequently formed the Murmanill Corporation. From the beginning, Murmanill was a corporate parent--a company which bought companies on credit. 1
Eventually, Mann and Murchison parted ways in 1958. Mann retained control of Murmanill and became chairman of its board and chief executive officer. Murmanill continued to expand through its highly-leveraged corporate acquisitions.
The nascent relationship between the taxpayer--the business bride-finder--and Murchison's polygamous Murmanill solidified with Mann at the helm. 2 The taxpayer soon brokered a deal with Mann in 1959 in which Murmanill purchased the Glasscock Tidelands Oil Company, a publicly-held corporation. The same year, Glasscock Tidelands became Diversa Incorporated. Diversa, Murmanill, and a company named Inwood Securities became Mann's intertwined holding organization. Through Diversa 3 (the active entity of the three), Mann ultimately acquired over 30 companies, with operations involving oil and gas, real estate, apparel, computers, insurance, restaurants, animal feeds, and African diamond mines.
As the conglomerate grew during the late 1950s and mid-1960s, the taxpayer was involved in many of its major transactions. He brokered Diversa's acquisition of the Apparel Corporation, which became a major Diversa subsidiary, and the Southern Athletic Company. On this deal, he and his associate received a $30,000 commission. The Glasscock Tidelands deal in 1959 also included the Tidelands Drilling Company and certain associated companies. For this transaction, he shared a $75,000 commission. He brokered deals involving Bonanza International Incorporated and the Beautron Corporation. In 1962, he brokered the Texas Electronics Products Corporation transaction. In his largest deal, he brokered the acquisition of the Western Grain Company in 1964 or 1965, which also became a major subsidiary of Diversa. He shared a $150,000 commission for his work. Moreover, because he helped secure financing for the deal, he and his associate earned an additional $100,000 fee.
The taxpayer was also the intermediary in a deal in the mid-1960s involving the University Computing Company. University Computing was in immediate need of financial backing for an expedited purchase of its first large computer. The company turned to the taxpayer to find such a backer. He went to Diversa. Diversa agreed to guarantee the $600,000 loan in return for a majority interest in the company. The fledgling computing firm paid the taxpayer in its own stock for his part in the deal. University Computing prospered over the next few years. In 1968, the taxpayer sold half of this stock commission (which he had left after a 1967 divorce settlement) and earned $5.6 million. Such was the brokering business.
Unfortunately, the success initially enjoyed by the holding company was fleeting. The organization was undercapitalized from its inception, and, as we have said, its acquisitions were highly leveraged. In 1967-68, interest rates rose, and Diversa came under increasing financial strain. It was unable to obtain the credit necessary to (and responsible for) its existence. Moreover, Mann made some managerial errors, including a few ill-advised and costly acquisitions. Slowly, the large organization began collapsing under the weight of Mann's ambitions. To stave off creditors, he and his son (Mann Jr.), who was also an officer in the organization, began divesting Diversa of its best subsidiaries.
For over 20 years, Murmanill and then Diversa had been directly involved in the taxpayer's brokerage successes. He had earned commissions of both stock and cash that had made him a wealthy man. Even as the holding company crumbled, the taxpayer continued to approach Mann with ideas for new and possibly profitable ventures. 4
In its time of crisis, the quickly-fading organization sought out the taxpayer's help. He responded with a series of loans and loan guarantees, directly to Diversa, Murmanill, and Inwood Securities and indirectly to them, through Mann and Mann Jr. From 1967 through 1970, the loans--both secured and unsecured--totaled some $3 million. Many were acknowledged with promissory notes issued by one of the three companies.
Between 1967 and 1971, the brothers discussed repayment of the loans several times. They agreed that the taxpayer would be repaid when money was available over and above the demands of more immediately pressing (i.e., secured) creditors. Also, in May 1970, Mann pledged various corporate stocks (including shares of Murmanill) to the taxpayer in an effort to provide some security for the unsecured loans. By the end of 1971, these stocks had no value.
The credit drought weakened Diversa beyond recovery. By early 1971, the once robust organization was an emaciated hulk, parched of all its active businesses but a small office-cleaning outfit. In March 1971, Diversa was adjudged a bankrupt, reporting assets of $5.5 million and debts and claims against it amounting to $19.8 million. 5 Mann nevertheless remained optimistic and retained Phillip Palmer, a Dallas bankruptcy lawyer. Palmer, in no mean feat, managed to convert the proceeding into a Chapter XI reorganization with Diversa as debtor-in-possession. But, by December 31, 1971, even the cleaning company was in default.
Still, Mann worked to resurrect his company. A plan of arrangement was proposed in early 1972 and ratified by Diversa's unsecured creditors. Under the plan, those creditors would receive common stock in a rehabilitated Diversa in repayment for their debts. Mann contacted two English investors, who were to infuse a massive amount of capital into the defunct organization. When the re-funding scheme fell through, the plan was abandoned. Mann then proposed setting up a whole new organization--American Industries International. Again, the company was to be supported by a huge amount ($150 million) of foreign capital. Unsecured creditors and Diversa shareholders would have been equity holders in...
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