In re Imperial400'National Inc.

• Decision Date: 04 March 1974
• Docket Number: No. B-656-65.,B-656-65.
• Citation: 374 F. Supp. 949
• Parties: In the Matter of IMPERIAL `400' NATIONAL INC. et al., Debtors.
• Court: U.S. District Court — District of New Jersey

374 F. Supp. 949

In the Matter of IMPERIAL `400' NATIONAL INC. et al., Debtors.

No. B-656-65.

United States District Court, D. New Jersey.

March 4, 1974.

COPYRIGHT MATERIAL OMITTED

Michael R. Griffinger, Crummy, O'Neill, Del Deo & Dolan, Newark, N. J., for Thomas J. O'Neill Trustee.

Jerome Feller, Securities & Exchange Commission; Charles Stanziale, Newark, N. J., and Sidney Markley (New York Bar), for Continana.

David M. Satz, Jr., Norman E. Schlesinger, Newark, N. J., and Conrad B. Duberstein (New York Bar), Brooklyn, N. Y., for American Realty Trust.

Hannoch, Weisman, Stern & Besser by Ronald M. Sturtz, Newark, N. J., Carter, Ledyard & Milburn by Edward F. Clark, Jr., and Jack Kaplan (New York Bar), New York City, for Schiavone Const.

Morrill J. Cole, Cole, Berman & Belsky, Paterson, N. J., for Burnham Group.

Alvin Weiss, Riker, Danzig, Scherer & Brown, Morristown, N. J., for General Tire Pension Fund.

Roger C. Ward, Pitney, Hardin & Kipp, Newark, N. J., for Marine Midland Bank.

Sheldon Schachter, Kleinberg, Moroney, Masterson & Schachter, Newark, N. J., for Unsecured Creditors Committee.

Theodore S. Meth, Newark, N. J., for Co-Owners.

Bernard Hellring, Newark, N. J., for Stockholders Committee.

Laurence W. Levine, Walsh & Levine (New York Bar), New York City, for Union Bank.

OPINION

WHIPPLE, District Judge:

I. Introduction

This Court has before it four proposed Plans of Reorganization which have been forwarded to the SEC as being "worthy of consideration" and have been reviewed by that advisory body.¹ It is now my duty to determine whether one or more of the proposed Plans are fair, equitable and feasible, Bankruptcy Act, § 174.

In order to reach this determination, I have had the opportunity to preside over hearings in this reorganization for more than one and one-half years, have reviewed transcripts of prior hearings, have examined extensive exhibits, briefs, two SEC advisory reports, arguments and submissions of counsel. The extensive nature of these 9-year old proceedings have been attributable, in part, to the rarity of a Chapter X Court having not one, but four Plans from which to choose (not to mention earlier plans and earlier versions of the current Plans).

If more than one Plan is found to be fair, equitable and feasible, I conceive it to be the duty of the reorganization court to submit all such Plans to creditors and stockholders for their consideration. The language of Sections 174 and 175 of the Bankruptcy Act so indicates and such a policy seems to be codified in proposed Rule 10-305 of the proposed Chapter X Rules.² Notwithstanding this mandate, circumstances could arise, even in this case, whereby delay, confusion and the probability of no Plan being approved might persuade a Reorganization Court to consider special procedures when more than one Plan meets the statutory criteria. See, for example, In the Matter of Riker Delaware Corporation, No. B-597-67 (D.N.J., April 22, 1971); Heuston, Corporation Reorganizations under the Chandler Act, 38 Colum.L.Rev. 1199, 1217 (1938); In re Pressed Steel Car Co. of N. J., 16 F. Supp. 325, 326-327 (W.D.Pa.1936). Because of the conclusion reached herein with respect to the four Plans, I need not deal at this time with this thorny issue.

II. Valuation of the Debtor

The Judgment Order of the United States Court of Appeals for the Third Circuit dated October 16, 1973 affirmed this Court's valuation of the debtor corporations. 487 F.2d 1394. That Judgment Order, however, noted that the valuation "is subject to reconsideration" and may be revised, particularly in the light of continuing disputes "concerning appropriate interest deductions". One of the disputes pertaining to interest deductions involved the selection by this Court, in projecting future earnings, of an 8% interest rate on debt existing in the reorganized company. The selection of an 8% interest rate was premised upon a number of considerations, one of which was that the reorganized company would, in fact, have a modified debt structure, i. e., that some revision of the present debt structure or new borrowing would occur.

This point was challenged by Continana Corporation, ("Continana"), a proponent of a Plan of Reorganization, in its appeal from this Court's valuation determination. Continana took the position, in that appeal, that the debtor need not refinance, nor borrow additional funds, nor in any way disturb the existing debt structure. Subsequent to the filing of its brief furthering this contention in the Court of Appeals, Continana filed an amendment to its amended Plan which stated that its Plan now contemplated a distribution of $1,500,000 in cash and 1,100,000 shares of stock to creditors and stockholders of the debtor. The source of the $1,500,000 in cash was stated to be the funds of the debtor in excess of current needs and a borrowed sum. As Continana stated:³

"Imperial with a net worth of $8,000,000 under the internal plan could easily borrow up to $700,000 in order to fulfill its commitments under its plan."

Thus, it is clear that notwithstanding its protestations in its appeal that no new borrowing was required, the Continana Plan very definitely envisions the possibility of borrowing.

Other proponents similarly indicated that a restructuring of debt or the creation of new debt is a very logical possibility. At final argument, the Schiavone representatives stated that while the Schiavone Plan does not require borrowing, Schiavone would formulate its policy with respect to debt "in the exercise of ordinary business judgment."⁴ The Burnham Plan has borrowing as an essential component thereof. See Article IV of the Burnham Plan. And the record is replete with reference to restructuring and refinancing insofar as the testimony of the ART Plan representatives was concerned.⁵

In the light of these respective Plan provisions and statements, and the reasons set forth in my opinion on valuation, I see no reason to alter my conclusion that debt in a revised form will exist in the reorganized company and that 8% is an appropriate interest rate to utilize in projecting future interest expense.

Another valuation element left open by the United States Court of Appeals for the Third Circuit,⁶ is the value, of the net operating loss carryforward of which Imperial might be able to take advantage. In response to my request, I received an extensive opinion letter from counsel for the Trustee representing alternative computations and legal analysis with respect to this alleged asset of the debtor.⁷

The first determination I must make before I can reach the question of the value, if any, of this asset is whether or not the creditor-claimants in this reorganization are entitled to interest on indebtedness owed to them. I conclude that such creditors are entitled to interest since the debtor is clearly solvent. City of New York v. Saper, 336 U.S. 328, 69 S.Ct. 554, 93 L.Ed. 710 (1949); 6A Collier on Bankruptcy, § 9.08 (at p. 202) wherein the author states:

"In the case where the proposed Plan calls for payment to the creditors of 100% of their claims, which assumes the estate is sufficient for payment of 100 cents on the dollar, then certainly post-petition interest should be allowed on all claims . . . Interest to the date of payment would seem essential before anything is turned back to the debtor or its stockholders."

As stated in Collier, the "absolute priority rule" requires the payment of such interest. Northern Pacific Railroad Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931 (1913); Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939).

With respect to interest on instruments that specifically set forth a contractual rate of interest, interest computed at the contractual rate will be a proper portion of the claim, Ruskin v. Griffiths, 269 F.2d 827, 830 (2d Cir. 1959), cert. den., 361 U.S. 947, 80 S.Ct. 402, 4 L.Ed.2d 381 (1960), unless modified by previous or future court orders for good cause, Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162 (1946), reh. den., 329 U.S. 833, 67 S.Ct. 497, 91 L.Ed. 706.

With respect to general creditors, the SEC suggests⁸ that "claims not bearing a contractual rate of interest are entitled to the governing legal rate". The rate used by the SEC is the maximum legal mortgage interest rate. This rate has varied in New Jersey since the commencement of these proceedings and averages out to 7.02% from the beginning of the proceedings to December 31, 1973. For purposes of simplifying these proceedings and expediting consummation, I will allow general unsecured creditors 7% on their claims from the commencement of the proceedings until the entry of an Order of Confirmation of a Plan of Reorganization.⁹

Having established the fact that interest will be paid to creditors, the question then becomes when that interest accrued and was deductible. Interest on instruments with fixed interest rates appears to be deductible on a year-to-year basis throughout the proceeding. However, interest on general unsecured debt may accrue either on a year-to-year basis throughout the proceeding or in 1973, when I determined the debtor to be solvent. Only in the latter circumstance does the net operating loss carryforward appear to have a positive value.¹⁰ The after-tax value, in such case, could range as high as $415,000.

I have considered the opinion letter of counsel and the briefs of the parties filed in the United States Court of Appeals for the Third Circuit. I still believe that the value of the net operating loss carryforward, while existing, is speculative. Some of the factors leading me to this conclusion are:

1. The timing of the accrual and deduction of interest is the subject of conflicting theories. The ultimate disposition of any claimed deduction is, therefore, unpredictable.

2. If a deduction were taken for interest on general unsecured debt in 1973...