United States v. Cummins Distilleries Corporation

• Decision Date: 06 February 1948
• Docket Number: No. 10527.,10527.
• Citation: 166 F.2d 17
• Parties: UNITED STATES v. CUMMINS DISTILLERIES CORPORATION et al.
• Court: U.S. Court of Appeals — Sixth Circuit

166 F.2d 17 (1948)

UNITED STATES v. CUMMINS DISTILLERIES CORPORATION et al.

No. 10527.

Circuit Court of Appeals, Sixth Circuit.

February 6, 1948.

Homer R. Miller, of Washington, D. C. (Theron L. Caudle, Sewall Key, George A. Stinson and Homer R. Miller, all of Washington, D. C., and David C. Walls and A. Roy Copeland, both of Louisville, Ky., on the brief), for appellant.

J. Verser Conner, of Louisville, Ky. (Allen P. Dodd, Irvin Marcus, J. Verser Conner, A. C. Van Winkle and John K. Skaggs, Jr., all of Louisville, Ky., and Frederic P. Lee, of Washington, D. C., on the brief), for appellees.

Before SIMONS, ALLEN, and MARTIN, Circuit Judges.

SIMONS, Circuit Judge.

The principal question in the case is whether whiskey warehouse receipts assigned to stockholders of the appellees in pursuance of a plan of liquidation and sold by a stockholders' committee was in effect a sale by the corporation. If so, the corporation made a profit and was liable for taxes in stipulated amount to the United States, for the collection of which it had made a levy and filed a lien upon funds deposited with the Louisville Trust Company for distribution to stockholders. There is little or no dispute as to evidentiary facts, accepted by the appellant as found by the District Judge.

The suit below was begun by the Louisville Trust Company for a declaration of rights in the deposit because of a jeopardy assessment of income taxes against the Distilleries Corporation, followed by distraint. The defendants were the Collector of Internal Revenue for Kentucky, the Corporation, members of the Stockholders' Committee, sundry creditors, and selected stockholders as representatives of their class. The United States intervened, claiming a first and prior lien for delinquent income taxes of more than 2¼ million dollars. The court, by its original and substituted judgment, dismissed the claim of the appellant, set aside its lien, and directed the Trust Company to retain the fund and refrain from distributing it until its further order, the cause to remain upon the docket for such further proceedings as may be proper.

Cummins Distilleries Corporation was incorporated in 1933 under the laws of Delaware. In 1942, it had outstanding preferred stock upon which there was an accumulated unpaid dividend. Factional differences existed among the directors and receivership proceedings were threatened, both by common and preferred stockholders. It had also become known that the government, as part of its war program, would direct the distillation of beverage alcohol to be discontinued. Because of these conditions, the directors considered liquidation of the corporation in August, though no decision was arrived at until November 30, 1942, when a recommendation was made to stockholders that the corporation be liquidated and dissolved, and a stockholders' meeting called for December 21, 1942, to consider the recommendation. At that meeting the stockholders authorized dissolution and complete liquidation of the corporation. They adopted a plan calling for payment of preferred stockholders in cash, for payment of the company's obligations, and for distribution of assets to common stockholders, either in kind or in cash. On the same day, the directors instructed the executive officers to set aside certain assets of the corporation for the payment of preferred stockholders and settlement of its debts, and then adopted a resolution which provided for dissolution and liquidation to be made to owners of common stock out of the net equity of the company in warehouse receipts representing 51,694 barrels of whiskey. A bid for the distillery and other assets was accepted, and the officers were authorized to convey this property to the purchaser. The conveyance was made as directed and provision was made for payment of preferred stockholders and all known debts and taxes.

On December 25, some of the larger stockholders discussed the advisability of appointing a committee which could act for them in distributing to each stockholder the portion of the warehouse receipts to which he was entitled. The receipts had been pledged to various banks to secure a corporate indebtedness of approximately $1,113,000, and a practical problem was involved in converting the equity into cash. The stockholders agreed upon a committee of three, and an instrument was drawn authorizing it to receive from the company evidence of title to assets theretofore transferred to the stockholders in kind, to sell such assets, and to distribute the proceeds to the holders of the corporate stock. This document was circulated among the stockholders and signed by owners of 80% of the stock, who also executed an instrument authorizing the corporation to deliver to the committee the warehouse receipts to which they were entitled. They also executed a third document addressed to the corporation, reciting that it would be for the best interests of all that the committee should likewise act for the remaining 20% of the stockholders and requested the corporation to deliver to the committee their warehouse receipts, undertaking to protect and indemnify the company, its directors and officers, against any claims arising out of such assignment and delivery and to release the corporation from its bank indebtedness. On December 28, the corporation executed two assignments, by one of which it transferred its equity in 80% of the warehouse receipts to the stockholders who had appointed the committee, and by the other transferred to them its equity in the remaining 20% of the warehouse receipts.

The corporation had, in the meantime, caused its indebtedness to various banks to be consolidated in one loan from the Continental Illinois National Bank and Trust Company of Chicago, which thereby acquired possession of all the warehouse receipts as security. On December 29, 1942, the corporation issued and delivered to the committee substituted warehouse receipts which were to be validated and substituted for the original certificates, upon the committee securing the release of the corporation from its indebtedness to the Chicago bank. The committee immediately went to Chicago, executed its own note for the indebtedness owing to the Continental Bank, and caused the substituted warehouse receipts to be validated and pledged to the bank. The corporation's note and the original warehouse receipts were thereupon canceled. Immediately thereafter the committee met with L. A. Weiss, a whiskey broker, in his office in Chicago, who advised them of a news item to the effect that a ceiling price on sales of warehouse receipts would probably be imposed in the near future which would be less than the market price. The committee then decided upon an immediate sale, and authorized Weiss to sell the warehouse receipts at prices then fixed. Prior to that time, Weiss had negotiated neither for the sale of whiskey nor warehouse receipts for the company or the committee, although the corporation at some time prior thereto had indicated in a general way that it would possibly sell the whiskey at a later time, without definite date, purchasers, or sales prices being mentioned. Weiss had not previously been employed by the committee nor been given authority to act until he was authorized to do so on December 30. Following such authorization, Weiss immediately negotiated with possible purchasers by long distance telephone and obtained commitments covering all the warehouse receipts, with allocation of quantities to be later determined. On January 4, 1943, members of the committee again went to Chicago, closed the sales in pursuance of the commitments and allocations, delivered the receipts, and received payment of the purchase price. The proceeds were deposited in the Continental Bank to the credit of the committee, which then paid off its note to the bank, and later transferred $3,000,000 to the account of the committee at the Louisville Trust Company, in Louisville, Kentucky. In the meanwhile the State of Delaware had on December 31, 1942, issued its certificate dissolving the Cummins Distilleries Corporation.

On January 20, 1943, the committee employed the Louisville Trust Company as its agent to distribute the fund to the stockholders of the corporation. On January 21, it mailed to each stockholder a report of its action, stating the amount of distribution per share upon presentation of stock certificates duly endorsed. On the same day, the Trust Company mailed to each common stockholder a letter likewise advising of the proposed payment and calling upon stockholders to deliver their stock certificates properly endorsed for surrender and cancelation. By January 26, 1943, out of the total of 219,207 shares, 197,289 shares had been delivered or mailed to the Trust Company. Checks were issued and subsequently paid by the Trust Company on 148,110 shares. Distribution was halted, and the fund frozen when on January 26 the Collector made his jeopardy assessment on the theory that the sales of the warehouse receipts were made by the corporation and not by the stockholders. He levied on all the funds to the credit of the committee in the Trust Company, upon funds of the corporation, set aside for retiring its preferred stock and for the payment of its outstanding mortgage indebtedness and upon its general deposit accounts.

The Court concluded that the sale of the warehouse receipts was on behalf of the stockholders individually and not chargeable to the corporation. It found little, if any, direct evidence that the committee had carried out any contract previously negotiated by the corporation. It concluded upon unequivocal and uncontroverted testimony that the committee had no intention of selling the warehouse receipts when it went to Chicago to obtain possession of them from the bank and that no agreement with Weiss to sell them had previously been negotiated. It found it undisputed that purchasers, price and allocations were agreed upon...