Court Opinion

ID: 9443347
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:18:04.076527+00
Date Added: 2024-06-11T17:29:27.484413
License: Public Domain

JAMES ALGER FEE, District Judge
(dissenting).
There are no findings of fact which support the judgment of the Trial Court or the affirmance thereof by a majority of this Court.1 The cause should be remanded for *1007this reason alone.2 The Trial Court gives two reasons for decision against plaintiff: first, that the “tax escape” was a fraud on the government, and, second, that a recovery would violate the reorganization decree. Neither has any validity.
The major portion of the opinion of the Trial Court is devoted to the proposition that the “tax escape” was a fraud upon the government,3 and therefore the proceeds were given to the defendant, an active wrongdoer.4 This position that there was a fraud is given no support by the tax agents of the government who made the settlement.5 It was expressly repudiated in open court by every party in this case. The majority of this Court, as the opinion shows, does not rely upon it.
A second subsidiary theory was also advanced below with little emphasis. The Trial Court said it would be inequitable to allow recovery to plaintiff because the stock of the then subsidiary owned by plaintiff was denied participation in either the assets or earnings in the reorganization proceeding. This reason is as unstable as the first.6 The claim of plaintiff was not one against the original company, *1008which was placed in reorganization. Everyone admits the genesis of the loss of plaintiff occurred later. Therefore,' the claim would not in any event be barred by the decree of reorganization.7 The liability to the government for taxes was not barred by that decree either. Liability for the use of plaintiff’s loss long after the closure of the reorganization proceeding to obtain a benefit for defendant by compromise of the still existing tax claim could not be discharged nor affected by the decree in reorganization. The right furnished consideration for contractual liability between plaintiff and defendant as independent corporations. Plaintiff had a property right as owner of these shares of stock.8 The reorganization court had power to deny plaintiff participation in the assets of its subsidiary, and, as a result, all but nominal values in the shares in the subsidiary were lost. But plaintiff was not in reorganization itself.9 The company in reorganization did not own the stock and could not legally exercise the appurtenant property right to file a consolidated return. The reorganization court had no jurisdiction of plaintiff or of these property rights.
Decree of that court attempting to destroy rights of property in the stock owned by plaintiff would be void. The reorganization decree does not deal with the property rights in the stock and is therefore res judicata neither as to plaintiff nor as to its rights of property in the shares of stock or appurtenances.
Thus the two grounds advanced to sustain the judgment fail. The cause should be reversed for failure to state adequate findings to support the judgment. Findings must be made in the Trial Court. Appellate courts have no such right or function. The majority opinion attempts to accomplish justification of the result below by drawing inferences, deductions and conclusions from evidence which they claim to find in the record. It would be possible for other judges to set up a diametrically opposite set of facts from which a judgment in favor of plaintiff might be based. The very reason that Rule 52 requires findings of fact is illustrated by the majority opinion. For the technical difficulties of finding a basis of fact for this judgment are many. Indeed, such difficulties are insurmountable.
If recovery is to be denied, the findings of fact, upon which determination adverse to plaintiff is based, must deal with the admitted facts and the allegations of the complaints of intervenors and plaintiff. Thereby, these material claims must be negatived.
In order to indicate what findings must be made to negative plaintiff’s claim, a review of various phases thereof will be made. First, plaintiff had a property right *1009to ñle or refuse to file consolidated returns, which could neither be given away without consideration nor cut off judicially without due process. Second, a trust fund was apparently created to pay these taxes by the reorganization court, and no order thereof has been shown vesting this fund in defendant. Third, by stipulation with defendant, plaintiff, as trustee, deposited a trust fund in court, which has not been distributed. Fourth, as an independent corporation, plaintiff, at request of defendant, filed consolidated returns and made a settlement with the United States, from which defendant derived benefit. Therefore, plaintiff is entitled to recovery for at least as much as it was worth. Fifth, a recovery much in excess of bare compensation for doing the acts is foreshadowed. Plaintiff has not been found to be in a fiduciary capacity toward defendant, and therefore the actual cash benefit obtained by defendant by use of losses of plaintiff might well be compensated by award of an equitable portion of the tax remission which the United States allowed on account thereof. The findings made do not negative these contentions.
First then, plaintiff was found by the Trial Court to have been the owner of all the stock in the operating company when the petition for reorganization was filed. The Interstate Commerce Commission held that the assets of the operating company, at the initiation of the proceeding, were so shrunken that this stock was valueless for the purpose of participation in either the assets or earnings of the reorganization. The Supreme Court affirmed the denial of the petition of plaintiff for this relief. Plaintiff thereby is found to have sustained a loss of $75,000,000.00 There is no finding that the property right in the shares of stock was taken away from plaintiff either by this order or by the decree of reorganization.10 Because of this ownership of these shares, plaintiff claims, under the recent enactment of Congress, a property right appurtenant thereto to use this loss in consolidated return and to offset it against earnings made by the properties in reorganization. Since, under the law, all corporations concerned must consent to the filing of consolidated returns, it is clear, contrary to the statement in the majority opinion, that plaintiff had no duty requiring it to file these returns. Plaintiff had a legal right to refuse to file. There is neither finding of fact that this property right did not accrue to plaintiff nor a finding that the right vested in the subsidiary, the trustees in reorganization or in defendant.
It is found that plaintiff, by contract, transferred the stock in the former subsidiary to the reorganization trustees, after the right to file consolidated returns and have the benefit of offsetting losses against operating gains by the trustees, for income tax purposes, had accrued. These shares are thus recognized as property rights. There is no finding that the right to file or refrain from filing consolidated returns was sold and transferred with the shares of stock to the reorganization trustees.
And here it might be well to deal with one specious argument. It seems to be assumed that the officers of plaintiff could give away the property right to file or refuse to file consolidated returns either voluntarily or acting under the control of defendant or the reorganization trustees. This is strange doctrine. At the time of the transfer of stock, rights of creditors of plaintiff as well as those of stockholders were involved. By the enactment of Elizabeth, an insolvent corporation cannot hinder, delay or defraud its creditors by a transfer of property in their despite.11 The equitable considerations are stressed by the Trial Court. The Chancellors have universally held that a transfer of all the assets of corporation, at the time not insolvent, cannot be made even by a ma*1010jority of the stock.12 Neither officers nor directors, without a vote of the majority, have such power.13 In this case, it is of stellar importance that this right of plaintiff was its sole asset and that, upon appropriation thereof, it became insolvent.14 Specifically in any event, the transfer must be for adequate consideration and not in fraud of creditors or it will be invalid as against stockholders.15 There are thus equitable considerations which the findings did not exclude.16
In a suit where stockholders of plaintiff intervene, there must be findings that there was adequate consideration for the shares of stock and the appurtenant right of filing a return. Otherwise, the District Court would be obliged to set aside the reorganization decree in order to grant relief by recapturing the assets of plaintiff improvidently.given away.17
But a jury argument is made based upon a bare offer, which the Trial Court properly held incompetent, that the present stockholders of plaintiff did not pay adequate value for the stock. Suffice it to say that the James interests, which are present stockholders of defendant and which will share in this windfall, apparently acquired that stock to some extent by compromise of the interests of plaintiff in the stock which it formerly held.
Second, plaintiff claims there was a trust fund created by the reorganization court in the amount of $7,100,000.00 for the payment of taxes, and that defendant added $3,000,000.00 to the fund for the same purpose. Plaintiff claims, 'since these funds were saved by its action in filing the consolidated returns and making a contract of settlement with the government, that it is entitled to receive some compensation for conserving the trust funds. This claim is not valid as to the fund initiated by defendant itself. A corporation has a right to set up reserves from its funds to meet contingencies. But the money impounded by the Bankruptcy Court to pay taxes was made up of funds in the hands of the reorganization trustees. There must be a finding that the Court decreed that this money should become the property of the defendant if not used to pay taxes.- Otherwise, it constitutes a trust fund of undistributed assets of the reorganization.18
Third, plaintiff claims defendant stipulated that the $3,385,290.00 should be treated as if it had -been paid to plaintiff “ai agent” and the latter had placed this trusl fund in court for distribution.19 By the *1011stipulation, plaintiff “as agent” was trustee of an express trust and, as such, had a right to deposit the fund and ask for a determination of the rights of all parties thereto, as in the nature of interpleader. Plaintiff affirmatively demanded findings upon this feature, and the Trial Judge refused to make them. A stipulation of parties to litigation that a fund is deposited in court is sufficient. The Court must give affirmative directions that the fund be paid to the proper party.20 Before such a judgment be entered, findings of fact are required. It is assigned as error that the Trial Judge refused to make findings on this point. The Rule requires findings of fact. This is error requiring reversal. The judgment here against plaintiff did not end the case. According to the very record before us, there is still a fund in the Trial Court which has not been distributed.
Fourth, we need not go so, far afield. If we disregard control of the officers21 of plaintiff by defendant, the ownership of the stock and the appurtenant right to file returns and the presence of a trust fund, still a cause of action was proven prima facie22 by facts which the Trial Court did find. We need only to be sophomorical enough to remind ourselves that, where one, at the special instance and request of another, does an act and benefit accrues to the one who made the request, the legal result is so standardized that for centuries it has been stated in one of the common counts.23 Here there were two independent corporations at the time of the settlement of tax liability. They were capable of contracting with each other. Neither was longer connected with the other. Plaintiff, at the request of defendant long after the reorganization had been closed, entered into a settlement with the United States, whereby its losses were used to obtain a benefit of $17,000,000.00 for defendant. Plaintiff was not bound to refuse consent to the filing of consolidated returns. It would seem, therefore, that sufficient facts are shown so that, in an action on the claim, plaintiff should recov*1012er (quantum meruit) 24 as much as the service was worth. Findings as to any affirmative defense should be specific.
If defendant had emerged sufficiently from reorganization to pay its own attorneys $300,000.00 for the same service, it is difficult to see how the reorganization decree prevents defendants from compensating plaintiff at least for what the services were worth, which were rendered at its request and which resulted in benefit to it.
Fifth, it seems clear that definitive findings must be made on other phases in order to deny plaintiff a much broader recovery. An argument is made that plaintiff is a fiduciary as respects defendant. The tax statute ¡provides that plaintiff could use its loss of $75,000,000.00 to offset the earnings of the reorganization trustees and thereby obtain a remission of. taxes for the reorganized company. . Without the loss - to plaintiff, the statute would not have applied. Without consent of plaintiff, neither could consolidated returns have been filed nor settlement made. The tax statute does not go farther and lay ■down any rule for allocation of the benefits ■obtained from a remission of taxes. The principles of equity should control division.25 It is said, although there are no findings, that the history of prior consolidated returns is controlling.26 Of course, it cannot probably be shown how plaintiff heretofore dealt with a consolidated return after there had been a divorce from a subsidiary. If we look at it realistically, but little question arises. If plaintiff were «till the owner of the stock of defendant, then the allocation of the $17,000,000.00 tc defendant would be reflected in the increased value of its stock. The transfer of the stock left the right untouched. Since increase in value of stock in defendant no longer is of avail to plaintiff, there should be another method of applying the remission to the loss.
Finally, it may be, as the Trial Court said, that there is an overwhelming public policy which dictates that the reorganized company should 'be left alone as owner of the “amazing and undeserved tax” [85 F. Supp. 875] remission. But, before we, as Judges, take this sole remaining asset without compensation from stockholders of the plaintiff, who bore the losses, and give it as a surplus to distribute to the stockholders of the reorganized company, we should set out in clear and specific findings of fact the exact steps by which we accomplish such a result.
The cause should be reversed in order to permit adequate findings to be made.

. The patent insufficiency of the findings of the lower court to support'the weight of the superstructure now imposed is ap-? parent. The order adopted "the opinion as findings:. “Findings of Fact. Plaintiff having proposed findings of fact in addition to the findings contained in the Court’s opinion filed herein on September 6, 1949, and the defendant having objected thereto, and the Court being now satis*1007fied that all facts necessary for decision are found in the opinion of September 6, 1949, now adopts by reference all such findings as its formal findings of fact in this cause, for all purposes as if the same were fully set forth herein. Conclusions of law. The Court concludes that the plaintiff shall take nothing herein and that the defendants shall have judgment in their favor for their costs of suit.”
Rule 52, Federal Rules of Civil Procedure; 28 U.S.C.A. § 2100; Interstate Circuit v. United States, 304 U.S. 55, 56, 58 S.Ct. 708, 82 L.Ed. 1146; Kelley v. Everglades District, 319 U.S. 415, 420, 421, 63 S.Ct. 1141, 87 L.Ed. 1485.

. The opinion of September 6, 1949, thus referred to, appears in D.C., 85 F.Supp. S68. Insufficiency of findings appears in important particulars indicated below.
There are no findings as to the mechanics of use of the right of plaintiff. It is not shown whether any resolutions were passed by the Board of Directors or stockholders of plaintiff authorizing the use for benefit of defendant. There is no finding whether a gift of the right was intended or whether there was an attempted payment of consideration.
There is no finding that plaintiff was ever a party to the reorganization proceeding. There is no finding that plaintiff had any connection with the proceeding except to prosecute a claim for value of stock, which was disallowed.
There is no finding that the compromise settlement with the government, in which plaintiff participated and from which benefit to defendant arose, was connected with or contemporaneous with the reorganization proceeding.
The court should have found that defendant honestly believed that it was rightfully entitled to use the loss of plaintiff without consulting those beneficially interested in plaintiff or it used the loss fraudulently in deliberate disregard of the rights of those beneficially interested in plaintiff. The court should have found whether defendant was guilty either of mistake or of fraud. The belief of defendant’s officers as to its rights at the time of filing the consolidated returns is one of the key facts in the case and should have been the subject of findings.

. The rationale of the opinion is set forth in colorful language. D.O., 85 F.Supp. 868, 875: “An array of able counsel on both sides have put forth prodigious and ingenious efforts, one side to retain the benefits of the tax ‘escape,’ and the other to obtain them. And all the time the taxes escaped in reality belong to the United States 1
“The Court cannot cause these taxes to be paid, where they should be paid, to the United States.”

. Even if the transaction were illegal, the result reached by the Trial Court could not stand. Cf. Barney v. Saunders, 16 How. 535, 57 U.S. 535, 543, 14 L.Ed. 1047: “They cannot be allowed to aver that the profits made on the trust funds should be put in their own pockets, because they were unlawful gains, for fear that the conscience of the cestui que trust should be defiled by participation in them. To indulge trustees in such an obliquity of conscience, would be holding out immunity for misconduct and an inducement to speculate with the trust funds, and put them in peril.”

. The fact that the agents of the government, who effected the settlement, did not agree that there was a fraud on the United States is shown by United States ex rel. Roberts v. Western Pacific Railroad, 9 Cir., 1951, 190 F.2d 243.

. The error of the lower court was in assuming that plaintiff is seeking an interest in the defendant corporation instead . of compensaton for property taken by defendant which belonged to plaintiff. The *1008Trial Court made no finding as to the nature of the right to file consolidated returns, which only plaintiff could exercise (Reg. 104, § 23.16(a) ), but which it could refuse to exercise (Reg. 104, § 23.11(a) ). Until such findings are made, there is no basis for a judgment denying participation in benefit.

. The effect of the decree is provided by 11 U.S.C.A. § 205 sub. f, Tilt v. Kelsey, 207 U.S. 43, 52, 28 S.Ct. 1, 52 L.Ed. 95. Since the tax settlement between the government and the corporation occurred after the decree in reorganization, there could be no res judicata. Commissioner of Internal-Revenue v. Sunnen, 333 U.S. 591, 597 et seq., 68 S.Ct. 715, 92 L.Ed. 898; Diaz v. United States, 223 U.S. 442, 449, 32 S.Ct. 250, 56 L.Ed. 500.

. An incontrovertible proof of the proposition that plaintiff had no duty to apply the loss for the benefit of defendant may be cited. If plaintiff bad sold a gold mine for a profit of over $75,000,000.00, its loss on the stock of the subsidiary could have been applied to offset any taxes against plaintiff. In that event, the trustees in reorganization would have been required to pay taxes against the operating company. Once used, the power of applying the loss would be functus officio, and plaintiff would have received the entire benefit.

. Callaway v. Benton, 336 U.S. 132, 69 S.Ct. 435, 93 L.Ed. 553. The error in this proceeding, therefore, was the failure to reorganize plaintiff also. An illustrative case, where the parent was in reorganization, is reported in a series of opinions as In re Portland Electric Power Co., D.C., 97 F.Supp. 857-921. There a consolidated return was filed during the proceedings and the benefits appropriately' distributed.

. It is inconceivable that a decree of reorganization prevents the company, when •released from tutelage, from entering engagements and incurring liabilities. Otherwise, the reorganization would be perpetual. See In re Portland Electric Power Co., D.C., 97 F.Supp. 857, 873.

. Act of 1571, 13 Eliz. c. 5; 1 Glenn, Fraudulent Conveyances and Preferences (Rev.Ed.,1940.) §§ 61d, e.

. Des Moines Life & Annuity Co. v. Midland Insurance Co., D.C., 6 F.2d 228. The statutes carry out the principle with various limitations. As plaintiff is a Delaware corporation, see Del.Rev.Code, 1935, c. 65, § 2097.

. Fletcher, Cyclopedia of the Law of Private Corporations (Perm.Ed.) § 1107.

. The trust fund theory probably applies. See Fletcher, Cyclopedia of the Law of Private Corporations (Perm. Ed.) § 7371.

. Fletcher, Cyclopedia of the Law of Private Corporations (Perm.Ed.) § 2946, notes 99 and 1.

. An interesting case in this Court, where the subsidiary was held liable for the unauthorized transfer of property of the parent by an officer of the subsidiary, is Clark & Wilson Lumber Company v. Mc-Allister, 9 Cir., 101 F.2d 709.

. Since plaintiff is a Delaware corporation, the decisions of that state are cited as illustrative of the general principle. Robinson v. Pittsburgh Oil Refining Corporation, 14 Del.Ch. 193, 199, 126 A. 46; Hutton v. West Cork Railway Company, 23 L.R. Chancery Div. (1883) 654, 671, 677; Revised Code of Delaware, 1935, Ch. 65, § 2097; Ch. 174, § 6059 et seq. Cf. Laws of Delaware 1941, Ch. 132, § 1.

. The Court below, the United States District Court for the Northern District of California, Southern Division, was the reorganization court. 34 F.Supp. 493. It therefore had the power to set aside the decree in reorganization, 11 U.S.C.A. §§ 11, sub. a (8), 205, sub. (Z), and administer this unadministered asset. Incidentally, the defendant cannot escape under any theory since it is under bond to pay all claims against the trustees.

. The stipulation of the parties was that . a fund was paid into Court by plaintiff and therefore it must be returned to plaintiff’s possession, unless some affirmative proof showed defendant was entitlt-d thereto. The Trial Court held: “But, as between the parties, no persuasion of conscience or equity impels me to do otherwise than to leave the parties where *1011they aro, the defendant with its amazing and undeserved tax success; the plaintiff, as the reorganization * * * left it, without interest in the debtor.” Instead of restoring the parties to status quo ante, the Trial Court affirmatively awarded this fund to defendant. But no findings to sustain affirmative award are present.

. Rule 67, Federal Rules of Civil Procedure; 28 U.S.C.A. §§ 2041, 2042; Governor of Georgia v. Madrazo, 1 Pet. 310, 26 U.S. 110, 121, 7 L.Ed. 73; United States v. Morgan, 307 U.S. 183, 393, 59 S.Ct. 795, 83 L.Ed. 3211; Osborn v. United States, 91 U.S. 474, 479, 23 L.Ed. 388.

. As to the nature of the confidential relationship involved, where corporations have officers in common, see eases collected in annotation in 114 A.L.R. 299.
“It [a constructive trust] arises where one person acquires title to property from another by an abuse of a fiduciary or confidential relation between them * * Restatement of Restitution, § 166, Comment d. 3 Scott on Trusts, § 648, p. 2336. Johnson v. Umsted, 8 Cir., 1933, 64 F.2d 316; Johnson v. Clark, 1936, 7 Cal.2d 529, 61 P.2d 767; Duncan v. Dazey, 1925, 318 Ill. 500, 149 N.E. 495; Theis v. Vonderheyden, 1922, 94 N. J.Eq. 317, 139 A. 502, Id., 94 N.J.Eq. 807, 121 A. 927.

. Other grounds for constructive trust, which it is possible for the trier of the fact to find upon the basis of evidence in the record, are fraud (Restatement of Restitution, § 166, Comment b; Templeton v. Hollinshead, 119 Or. 620, 250 P. 747), mistake (Restatement of Restitution, §§ 49, 170; 3 Scott on Trusts, § 468), and conversion or misappropriation, (Burke Grain Co. v. St. Paul Mercury Indemnity Co., 8 Cir., 94 F.2d 458; Pioneer Mining Co. v. Tyberg, 9 Cir., 215 F. 501, L.R.A.1915B, 442.) As noted in the text following, a trust need not be worked out in all probability since simpler theories may serve for recovery.

. Matarese v. Moore McCormack Lines, 2 Cir., 158 F.2d 631, 170 A.L.R. 440 and note; Corbin on Contracts, § 1112; 1 Williston on Contracts, § 41, p. 115; Costigan, Implied in Fact Contracts and Mutual Assent, 33 Harv.L.R. 376; Burton v. Burton Stock Car Co., 1898, 171 Mass. 437, 50 N.E. 1029; Ft. Wayne, C. & L. R. Co. v. Haberkorn, 1896, 15 Ind. App. 479, 44 N.E. 322.

. Assumpsit would lie even though the Trial Court made findings of misappropriation, embezzlement and conversion. Reynolds v. New York Trust Co., 1 Cir., 188 F. 611, 39 L.R.A.N.S., 391; Terry v. Hunger, 1890, 121 N.Y. 161, 24 N.E. 272, 8 L.R.A. 216, 18 Am.St.Rep. 803; Conaway v. Pepper, 1919, 7 Boyce, Del., 511, 108 A. 676; Roberts v. Evans, 1872, 43 Cal. 380; consult annotation 97 A.L.R. 250 and text treatment 1 C.J.S., Actions, § 50(b).

. Restatement, Restitution, §§ 1, 81; Phillips-Jones Corporation v. Parmley, 302 U.S. 233, 58 S.Ct. 197, 82 L.Ed. 221.

. See Note 8, supra.