Ralphs Grocery Company And Subsidiaries f.k.a. Ralphs Supermarkets, Inc. And Subsidiaries, Petitioners

T.C. Memo. 2011-25 UNITED STATES TAX COURT li RALPHS GROCERY CO.

&i SUBSIDIANIES f.lé.a. NALPHS SUPERMARKETS, INC. , & SUBSIDIARIES, Petitio 1ers E. - COMMISSIONER OF INTERNAL REVENIJE, Respondent FRED MEYER, INC., & SUBSIDIARIES, Petitione s . COMMISSIONER OF INTERNAL REVENUE, Reap nd nt Docket'Nos. 2Ó364-06, 25959-06.

F le JÄnuary 27, 2011.

Roqer J. Jones, Andrew R. Roberson, and Sarah S. Sandusky, for petitioners.

Alan M. Jacobson, John E. Budde, and Laurie A. Nasky, -for respondent .

EERVED JAN 2 7 2011 2 -

MEMORANDUM OPINION

CF ECHI, Judge:

These ases are before us on the motion for partia summary judgment of petitioners (petitioners' motion) and the mot on for partial summa y judgment of respondent (respon- dent's otion) .

We shall grant petitioners' motion, and we shall deny re pondent's motion.

B ckground T parties are in agreement regarding or do not dispute the following facts.

At the time petitioner 1 alphs Grocery Co.

(RGC)..and its subsidi ries filed the petit on in the~ case at docket No. 20364 06, all of RGC' s stores and its main warehouse were located, and all goo s and services were rovided, exclusively in California.

At the time petitioner Fred Meyer, Inc .

(Fred Meyer) , and its subäidiaries filed .the pétition in the case at docket No.

Tl e parties filed with he Court a stipulation of facts facts that ares to control for purposes of their together with stipulated exhïbits attached and an agreed state- ment of material respective motions for partian summary judgment. to that stipulation together stateme t as the parties' agreed facts.) facts pertain to, U.S. Ba kruptcy Code (Bankruptcy Code) , 11 U.S.C. Respond nt objected to several stipulated exhibits. rule on respondent's evidentiary objections. That need no order to resolve the questions presented in the parties' tive mot ions for partial summary judgment .

The parties' agreed the requirements and effects of rely on the exhibits to which respondent objects in ith those exhibits and that agreed is because we inter alia, respec- (2006) .

(We shall refer We shall not the 25969-06, Fred Meyer had its headquarters :In Oregon and provided goods and services primarily in Oregon and Washington.

At the time petitioners filed their respective petitions, RGC and Fred Meyer were subsidiaries of the Kroger Co.

(Kroger) and were members of Kroger' s consolidated group for Federal income tax (tax) purposes. At t-hat time, Krocjer had its head- quarters in Ohio.

In 1873, George A. Ralphs founded a grocery store business in Los Angeles, California (Ralphs-grocery store business) .

That business remained privately owned for over 90 years.

In 1968, Federated Department Stores-, Inc .

(Federated) , purchased the Ralphs grocery store business from its then owners .

Federated operated that business as an unincorporated division of Federated until 1988.

In 1986, Campeau Corps (Campeau) , ,a co pc ration organized under the laws of Canada, acquired Allied Stores Corp.

(Allied) for approximately $3.6 billion. At that tiine, Allied operated certain retail.department stores,through certain of its,subsid- iaries.

In 1988, Campeau acquired Federated. for apyroximately $6.7 bill'ion. At that time, in addition to operating the Ralphs grocery store business, Fed rated operated ceÉtain retail depart- ment stores through certain of its subsidi'aries. Campeau's acquisition of Federated constituted a qualified stock purchase under ection 338 (d) (3) .2 Ir connection with its acquisition of Federa d, ,pursuant to secti n 1.5338-4T(f) (6), Temporary Income Tax Reg ., 50 Fed. Reg. -16413 (Apr. 25," 1985), Campeau made a protect ve, carryover basis e ection and an offset prohibition eledti .

i In order to- finance Cam eau's acquisitions of Allied and Federat d,3 certain subsidiaries of Campeau borrowed funds from Citibank, sBank of Montreal, anque Paribas (Paribas)", the Edward J. DeBartolo Corp.

(EJDC) , a id Olympia & York CC Limited (O&Y) .

On June 6, 1988, Ralphs Acquisition Co. was incorporated under the laws of Delaware. Around that date, Federated trans'- ferred all of the assets and the liabilities of the Ralphs grocery store business to a t ransitory subsidiary (Newco) in exchang for all of the common stock of Newco. Thereafter, Newco merged ith and into Ralphs cquisition Co., which changed -its name to Ralphs Grocery Co.

(Ralphs) .4 As part of that merger 2A]l section references are to the Internal Reeenue Ce>de (Code) n effect at all rele ant times.

3T¹ e parties agree that ertain subsidiaries of Campeau funds in order to finance Campeau's acquisitio~ns of borrowe Allied nd, Federated . refer to any amounts that Canpeau or any of borroweå with respect Howeve , to the cquisition of Allied.

its subsidiaries the parties' agreed . f ac ts do not 4Ralphs Grocery Co.

that we shall refer to as Ralphs is not As discussed in June 1995 Ralphs wa merged into Ralphs Supermarkets, the same entity as petitioner Ralphs Grocery Co. below, Inc. name Ralphs Grocery Co.

the surviving company, assumed the (R I) . Thereafter, RSI, Federated transferred to Ralphs all of the common stock of Newco in exchange for a promissory note of Ralph i the amount of $900 million.

(We shall refer to the series of atransactions by which Federated transferred the Ralphs grocery -store business to Newco and Ralphs in exchange ,for a $900 mill'ion promissory note as the Ralphs incorporation transaction.)

For ta purposes, othe Ralphs incorporation transaction was treated-in part as an intercompany asset sale and in part as a.dividend distri ution of the Ralphs grocery store business.- The Ralphs tincorporation transaction resulted in a deferred intercompany gain ( lyhs deferred inter- company gain) in excess of $500 million. Et an undisclosed date after the Ralphs incorporation transaction all of the outstand- ing common stock of Ralphs" was transferNed to Allied and Holdt ings III, Inc.

(Holdings III), an indirect subsidi'ary of Campeau that had been incorporated in 1988.

Campeau organized its operations in'the-United States through Federated Stores, Inc.

(FSI), a holding company formerly sIn August 1988, Ralphs issued to certAin executives and for an aggregate p ice of $3 million. the series A nonvotingspreferreddstock was required certain key employees of'Ralphs 170,0Ò0 shaked of nonvoting series A preferred stock (series A nonvoting preferred stock) and 130,000 shares of nonvoting series B preferred stock (series B nonvoting preferred stock) A portion of to be redeemed each year beginning;in 1992 and continuing through 1998. required to be redeemed each year beginninga in 1992 and continu- ing through 1996. any time the series A nonvoting preferred stock and the series B nonvoting preferred stock provided that -it gave the owners of that respective stock five days notice of any esuch redemption.

the series B nonvoting þreferred stock was In addition, Ralphs was permitted to redeem at A portion of known s Campeau Corp .

(U . S .

Inc .

FSI was the parent corpora tion of a consolidated group (FSI consolidated group) for tax purpose that consisted of-a proximately 60 other U.S. corpora- tions, ncluding Allied, Federated, and Ralphs, that filed a single onsolidated tax retu n for each of the taxable years ended nuary 31, 1989 throuch 1993, and that had an ownership structuce as of October 28, 1991, as described below.' Certain members of the - FSI consolidat ed group were engaged in the real estate usiness, certain other members were engaged' in the retail departm nt store business, a d Ralphs was engaged in the grocery store b siness.

As of ,October 28, 1991, FSI owned:

(1) 2100 percent of the outstanding common stock of I oldings III, (2), 100,percent of the outstan ing common stock of Campeau Properties, Inc.

(CPI) , and (3) 100 percent of the outst nding common stock of each of certain corporations -(FSI shåpping center corporations) that each owned c rtain shopping cente s .

As of October 28, 1991, CPI, which had been incorporated in 1988 Ån was serving as a ho]ding company for FSI's ownership 6At tached as an appendix is a chart showing the ownership structu e as of -Oct. 28, 199], of dated g oup.

the members of the FSI consoli- 'E ch of the FSI shopping - center corporations held a 50 - interest in certain partnerships.

percent indirec ly the remaining 50-percent partnerships .

EJDC owned directly or interest in each of those interests in certain shopping -mall developments that FSI, EJDC, and their.respective affiliates were to develop jointly, owned 7.5 percent of the outstanding common stock of Federated Hold- ings , Inc .

(Holdings ) .

As of October 28, 1991, Holdings III owned (1) 100 percent of the outstanding common stockiof Federated HoldingsJII, il Inc.

(Holdings II) , (2) approximately 783 ..75 percent" of the outstand- ing common stock of Ralphs; -(3) a promissory note due from || Federated (Federated hote) in the principal aniount of $75 mil- .

lion, and (4) a promissory note due from Allied (Allied note)r in the principal amount of $100 milTion.

As of October 28, 1991, Holdi~ngs II, which had been incorpo- -rated in 1990, owned:

(1) 100 percent of the joutstanding common stock of Allied,' (2) 28.04 percent of the òutstanding:common stock of «Holdings, and (3) a residual interest in certain collat- eral relating to a certain monetization fagreement .

As of October 28, 1991, Allied owned:

(1) 50 percent of the outstandirig .common stock of Holdings, (2) aþproximately 16.25 "In the parties' agreed facts, the parties agreed to the approximate percentage of that Holdings III owned. hereinafter to that ownership percentage asl approximate.

the outstanding common stock.of Ralphs For convenience, we shall not refer "As of Oct. 28," 1991, Allied also had dutstanding certain preferred stock that was publicly. traded.

percen °. of the outstanding oommon stock of Ralphs, and (3) 10Ó percen of the stock of each of certain operating subsidiaries that w e engaged in the retÄil department store business .

As of October 28, 1991, certain investors unrelated to the members of the FSI consolidat ed group owned 6 . 96 percent of the outsta Sing common stock of Holdings.

As of that date, EJDC owned 5 percent of the out tanding common stock of Holdings .

On Dece ber 12, 1991, EJDC s ld that stock of Holdings to FSI for $1.- Af car that sale, EJDC w s not a stockholder of any member of the FSI consolidated group.

As of October 28, 1991, Holdings, which had been incorpo- rated i 1988, owned:

(1) 1 0 percent of the outstanding common stock o Federated and (2) tl e residual interest iri a $1 million escrow und.

As of October 28, 1991, Federated owned 100 percent of the stock o each of certain ope ating subsidiaries that werer engaged in the åetail department sto e business .

Ce tain members of the SI consolidated group borrowed -funds from ce tain financial institutions in order to finance Campeau's acquisi ion of Federated (discussed above) .

In May 1988, Bank of Montrea and Paribas lent $500 million to FSI in order to finance °I the parties'. agreed facts, the parties agreed to the approxi ate percentage of ied owned. that Al ter to t hat ownership percent age as approximate.

the outstanding common stock of Ralphs For conv nience, we shall not refer hereinaf Campeau's acquisition of Federated.

In April '1989, FSI prepaid that loan in full.

FSI made that payment by using"a $50Ò million dividend that Holdings III had paid to FSI around that time.

Around April 1989, before paying that dividend, Holdirigs III II received a $500 million dividend from Holdings³ II: Aróund the same time, Holdings II had raised the $500 illion that it used to pay that dividend by selling to Allied f r $500 million (1) approximately 36.2 percent of the outst nding common stock of Holdings and (2) an option to purchase an a ditional 1 percent^ of the- outstanding common stock of Holdings , In «May 1988, ~EJDC lent $480 million to FSI (EJDC equity loan) to finance Campeau' s acquisition of Federated.

That loan was evidenced by a promissorg note in the . a nount of $480 million (FSI $480 million. note) that FSI issued to EJDC.A In-connection with the ; EJDC equity loan, EJDC, Campeau, FSI, ând CPI executed a document entitled "MASTER PLEDGE AGREEMÉNT" (EJDC master pledge agreement) .

In April 1989, FSI and EJDC refinanced the EJDC equity loan and renegotiated its terms. Pursuant to that refinancing, EJDC returned to FSI the FSI $480 million note in exchange for a new promissory note from FSI in the amount of $480 million (FSI new "EJDC also received -in consideration for the EJDC equity loan (1) 7.5 percent of which it owned as of Oct. 28, 1991, and (2) a pledge of outstanding common stock of Holdings that CPI owned (i l e . percent of the outstanding common stock of Holdinga) .

the outstanding comihon stock of Holdings, the , 7 . 5 10 - $480 m' .lion note) ." Campean guaranteed FSI's payment of all sums d a under the FSI new $480 million note.

In connection- with the efinancing of the EJDC equity loan EJDC, C mpeau, FSI, Holdings III/ CPI, -and the FSI shopping center orporations executed a document entitled ""MASTEP -PLEDGE AGREEMEÑT" (EJDC. revised -mast er pledge agreement)" that superseded the EJD master, pledge agreet ent .- Under that revised pledge agreement, certain members o the FSI consolidated ,group .pledged to EJDC the following propert ies as security for FSI' s perfor- mance u der the FSI new $480 million note:

(1) 100 percent- of the outstanding common stock of CPI that FSI owned, (2) certain partnership interests and ce tain stock that CPI owned; including the common stock of Holdings that CPI owned, (3) the stock- that FSI own d in each of the FSI shopping center corporations and the respective partnership interests that each of those corporations owned, 4) 100 percent of the outstanding common stock of Allied, and (5) the 83.75 percent of the outstanding common - stock of7Ralphs that Holding III owned.

The. EJDC revisedsmaste "E3DC re'tained the pledce consisting of the 7.5 perce'nt of the outÊtanding common stock þf Holdings that CPI owned and that EJDC ha supra note 11.

received as conside ation' foi the EJDC equity loan.

See FI April 1989, FSI owned directly 100 percent of the outstancing common -stock of Allied. ings II owned 100 percent of Allied. Holding II acquired that sto :k.

The parties' agreed facts do not establish-how or when As of Oct. 28, 1991, Hold- the outstanding-common stock of * pledge agreement provided that EJDC was to release on May 1, 1991, the pledge by Holdings III of the 83. 75 percent of the outstanding stock of Ralphs that Holdings III owned.

EJDC did not release that pledge on May 1, 1991 Each of the, pledges under the EJDC ,revå.sed master pledge it agreement was subordinate to (1) FSI' s payment of all sums due under the FSI new $480 million note and (2) Campeau' s guaranty of FSI' s payment of those sums .

* The .EJDC trevised master pledge agreement did not state that any pledge of property -under that agreement had priority over any otheropledg of property under that agreement .

On April 7, " 1989, Citibank, Bank of' Mohtreal, and Pari:bas provided to Allied: certain revolving working capital in the amount of $280 million.

On the same date, Bank of Montreal and Paribas provided to Allied a certain revolv ng inventory facility in the amount of $70 million.

On- September 12, 1989, O&Y agreed to lendeup to $250 million to Campeau.

- Thereafter, Cainpeau borrowed $ 75 million of that $250 million from O&Y (Campeau $1'75 milliòn laan) Campeau then lent $175 million to FSI that was evidenced by a note from FSI 'in the amount of $175 million i(FSI $175-mililio¹ note) . Thereafter, FSI lent $175 million to Holdings III that Was evidenced by a note from Holdings III in the amount of $175 million (Holdings III note) .

The Holdings III note was payabie no later than Septem er 12, 1991, and prov ded for an interest rate of 9.875 percen per year-.

H ldings III used the $ 75 million that it borrowed from FSI to len $100 million to Alli d and $75 million to Federated that were e denced by the Allied note and the Federated note, respec- tively.

On September 18, 1989, oldings III guaranteed the Campeau $175 m lion loan that Campe u received from O&Y around September 12, 19 9.

On September 18, 1989, Holdings III also pledged to - O&Y as security for that guaiAanty the outstanding common stock of Ralphs hat Holdings III owned (i . e .

, 8 3 . 75 percent ) .

Thàt pledge as subject to the se urity interest of EJDC in ,that stock under t e EJDC revised maste pledge. agreement.

In late 1989, certain mèmbers of the FSI consolidated group became ware that they would be unable to make payments' timely with re pect to the debt tha each had incurred.

As a result, between January 14 and March 30, 1990, FSI and certain of its subsidiaries, including Hold ngs, Holdings II, and Holdings III, filed i the U.S. Bankruptcy Court for the Northern District of California (California U.S.- Bankruptcy Court) respective volun- tary pe itions for relief (cl apter 11 petitions) under chapter 11, ent tled "Reorganization", of the Bankruptcy, Code,- 11 U.S.C.

secs.

1 01-1174.

(We shall refer collectively to FSI and certain Of its ubSidiaries that fil d chapter 11 petitions in the --13 - California U.S. Bankruptcy Court as the FSI debtors.) At the time Holdings IIII filed its chapter 1-1 peti ion in the California U.S: Bankruptcy Court, the Holdings III note was the only evi- dence of indebtedness of Holdings III for money that it had borrowed.

In the chapter 11 petition that it filed with the California U.S. Bankruptcy Court, Holdings III reported total assets of $1,2004,285,.000 and total liabilities of $65)',778,OOO.

In the- consolidated balance sheets for each of the taxable years ended January 31, 1991 through 1993, the FSI -consolidated group re- ported, based on book value, the followins total'assets and total liabilities (not including stockholders equ ty) 'of Holdings III as of the beginning of each of- those taxable fears:

Date Feb. 1, 1990 Feb. 1, 1991 - Feb. 1, 1992 Total Assets $179,754,880 180,457,073 180,293,905 otal Liabilities $179,754,879 179,754,880 179,775,064 On January 15, 1990,- Allied and certai of¡its subsidiaries (collectively, Allied debtors) and Federated and certain of its subsidiaries (collectively, Federated debtors) - filed in the U.S. Bankruptcy Court -for the Southern District of Ohio (Ohio U.S. Bankruptcy Court) chapter 11 petitions under , chapter 11 of the Bankruptcy; Code .:

(We shall refer collectively to the Allied debtors and the Federated debtors as the Allied/ Federated debtors.)

On January 15, 1990, the Ohio U.S. Bank- 14 - ruptcy ourt consolidated th respective chapter 11 cases of the Allied ebtors and the Feder ted debtors for joint administration under a single docket number (We shall refer to the proceedings commen d in the Ohio U.S. B nkruptcy Court that that court consoli ated on January 15, i990, as the Allied chapter 11 procee ngs . ) ; In the.chapter 11 petit on that it filed with the Ohio U.S.

Bankru cy Court, Allied repcrted, based -on book value, atotal assets f approximately $2, 934, 000, 000 and total liabilities of approximately $2,406,000,000 as of October 28, 1989.

In the chapter 11 petit-ion that it filed -with the Ohio U-.S. Bankruptcy Court, ederated reported,- based on book value, total assets of approxihately $6,202,000,000 and total. liabilities of approxi- mately 5, 339, 000, 000 as of Octobers 28, 1989.

On July 2, 1990, the California U.S. Bankruptcy Court transferred venue in the res ective chapter 11 cases of the FSI debtors to the Ohio U.S. Ban ruptcy Court.

On July 13, 1990, the Ohio;U.

Bankruptcy Court å nsolidated those proceedings for joint a inistration under a single docket number.

(We shall refer to the proceedings comrenced in the California U.S. Bank- ruptcy tourt that the Ohio U.S. Bankruptcy Court consolidated-on July 13 1990, as the FSI chàpter 11 proceedings.) Thereafter, the Ohio U.S. Bankruptcy Court considered and treated the Allied chapter 11 proceedings and the FSI chapter 11 proceedings as interrelated and closely coordinated those proceedings.

Around early 1990, Ralphs was' solvent. At no time did Ràlphs file a petition under the Bankruptcy Códe. Nor was Ralphs a debtor in either the FSI chapter 11 proceedings or the Allied chapter 11 proceedings.

'As a result, no creditor claims were filed against Ralphs in ther FSI chapter 11 proceedingd or in the Allied chapter 11 proceedings .

The FSI consolidated group filed Form 1120, U.S. Corporation Income Tax Return (Form 1120) , for its -taxable year ended January 31, 1991 (FSI consolidated, group 1/31/91 consolidated return) .

The FSI consolidated group attached to that return a consolidated balance sheet in which it reported, based on book value", the following total assets and total liabilities (not including stockholders equity) as of the beginning of tliat taxable year (i . e .

, February» 1, 19 90 ) of that group and Jof certairi of its member s :

il Company/Group FSI onsolidated group FSI Hol Hold .ngs II Holdings ings III Fede ated Alli d Ralp s - 16 -- Total Assetsi $12, 022, 633, 639 836, 271, 594 179, 754,.880 476, 483, 273 ' Total Liabilities $13, 975, 652, 352 1, 008, 207, 723 179,'754, 879 477, 014, 279 30 , 540 6, 572, 255, 075 3, 020, 041, 662 1,404,826,686 6, 879, 178 , 50 0 3, 846, 033, 370 1,369,630,102 include any amount repre- In the consolidated T e term "Total Assets" does not sentin the value of sheet balanc ated group 1/31/91 c$nsolidated return, consol GIBLE SETS", was left blan for each member of that consoli- dated group.

that the FSI c0nsolidated group attached to the FSI "INTAN- intangiŠle assets.

line 13A, For the FSI consolidatec group' s taxable year ended January 31, 199 , Holdings claimed a worthless stock deduction with respect to the common stock Šf Federated that it owned.

For that taxable|year,- Allied; Holdin s II, and CPI each claimed a worth- less stock deduction with respect to the common stock of Holdings that ea h owned.

At all, times during the FSI chapter 11 proceedings, the FSI debtors including FSI and Holdings III, operated as debtors in possess on under the Bankrupt cy Code. and conducted their respec- tive on oing businesses subst antially as they had conducted thos busines es before the FSI chåpter 11 proceedings had commenced.

During he pendency of the FSI chapter 11 proceedings through early F bruary 1992, FSI and the other FSI debtors continued to be mana ed by the officers that had managed the respective FSI debtors before the FSI chapter 11 proceedings had commenced. " At no time during the FSI chapter 11 proceedings did the Ohio U.S. Bankruptcy Court appoint any 'trustee to take control of the assets and the business of any of the FSI debtors . Nor did that court appoint any examiner - for any of thosej debtors . At no time during the FSI chapter 11 proceedings did any creditor of FSI object to FSI' s acting as a debtor in possession.

'Nor did any of those creditors-ask the Ohio U.S. Bankruptcy Court to appoint any trustee.

At all. times . during s the Allied chapter 11 proceedings , the Allied/Federated debtors .also operated as dybtors in possession and conducted their respective ongoing busihesses substantially as they had conducted those businesses before the Allied chapter 11 proceedings had commenced.

From January 1990. to February 1992, G. William Miller serired as the chairman and the chief executive officer of FSI.

1sThe parties' agreed facts do not indicate whethe~r during the Allied chapter 11 proceedings through early the pendency of February 1992 the Allied/Federated debtors continued to be managed by the officers that had managed the respective Allied/ Federated debtors before the- Allied chapter 11 proceedings had commenced. Nor do those agreed facts indicate whether certain that the parties agree apply to the FSI facts (discussed below) debtors and/or the FSI chapter 11 proceedings also apply to the Allied/Federated debtors and/oi- the Allied chapter 11 proceed- ings . However, neither party argues that 'any such fact does not apply to the Allied/Federated debtors and/or the Allied chapter 11 proceedings.. We assume that respective arguments with respect partial summary judgment receipt of certain RHC stock by certain creditors of FSI' and do .

t·o their respective motions for the parties focus their arguments on the is-because ïn making their (continued .

) .

18 - T e U.S. Trustee Progra (U.S.

trustee program), a component of the .S. -Department of Ju tice that is responsible for pi-omot- ing th efficiency and prote ting the integrity of the Federal bankru cy system,. oversaw t e FSI chapter 11 proceedings and the Allied hapter 11 proceeding . Pursuant to that program, six officia creditor committees were appointed in the Allied chapter - 11 proc edings . Pursuant to the U . S .

trus tee program, an of f i - cial committee of unsecured reditors of FSI -was, appointed in the FSI chapter 11 proceedin s . " None of EJDC, Bank of Mon- treal, Paribas, O&Y, or Campëau was a member of the committee of unsecur d creditors of FSI appointed pursuant to thë U.S.

trustee program in the FSI chapter 11 proceedings .

Se eral claims were filèd in the FSI chapter 11 proceedings against the various FSI debtcrs, including -the following 'claims.

EJDC filed numerous claims i the FSI chapter 11 proceedings, including:

(1) Certain secu ed claims against FSI, identified as class 1 under the EJDC revised master pledge agreement and the FSI new $480 million note; (Ž) certain secured claims,against Holding II, identified as class 2, under a' certain agreement; .

. continued) as ( focus on the, receipt of certain RHC stock by acertain credi- not tors of Allied.

See infra note 49.

"E ch of the respective official committees appointed pursuan to the U.S. trustee program in the Allied chapter 11 proceedings and the official committee of unsecured creditors appoint{d pursuant ings possessed certain rights under the Bankruptcy Code.

to that p ogram in the FSI chapter 11 procee - (3) certain secured claims against Holdings III, identified as class 3, under the EJDC revised master pledge agreement and any pledge agreement regarding the Allied note orathe Federated note; (4) certain secured claims against CPI, identified as class 4; (5) certain respective unsecured claims against FSI,' Holdings III, and CPI, identified as class 14, includirig any unsecured deficiency claimsi? against those debtors; and (6) certain unse- -cured claims Jagainst any of the FSI debtors-, identified as class 15, to the extent 'such claims were not inclúded in cla s 14.

EJDC's claims against the 'FSI debtors, except Holdings totaled approximately $480 million, not including -ihterest due on those c laims .

In -the FSI chapter 11 proceedings, EJD asserted a lien on the following property of certain of the FSI debtors:

(1) The common stock of CPI that FSI owned; (2) the common stock of e~ach of the FSI shopping center corporations that FSI owned; (3) FSI' s interest in the CHoldings III note; (4) the dommon stock: of Ralphs that Holdings III owned; (5) the common stoek of Holdings that that. the value of 7An "unsecured deficiency claim" was any portion of a claim the claimholder' s interest in the to the extent applicable FSI debtor' s interest in any proþerty securing the claim was less than the amount of the amount of any claim subject amount of such claim, as determined under sec., 506 (a) of Bankruptcy Code.

to setoff was less than the the claimi or to the extent that the "Each of the debts on which he creditbr claims of EJDC against the FSI debtors was based had been guaranteed by Campeau.

s - 20 - CPI ow d; (6) a certain genéral partnership interest that "CPI owned ik a certain partnersh p; (7) the 50-percent partnership interest of each of the FSI shopping center corporations in the partne ships that operated c rtain shopping malls jointly with

EJDC;

d (8) -the common sto k of Allied that Holdings II ownede T¹ re were several pote tial grounds on which the FSI debtors might have been able to invalidate the security interest that E⁰ C claimed in the com on stock of Ralphs that Holdings III owned.

The -FSI debtors claimed in certain documents filede wit'h the Oh U.S. Bankruptcy Cou t that if they were not able to invali te the security inte ests in the property of certain of the FSI debtors that EJDC as erted, EJDC would be entitled to a (1) all of the value attribut able tos the common stock of Ralphs that Holl.dings III owned, which the FSI debtors .estimated to equal approximately $485.8 millionA and -(2) all of the value. attribute able to the common stock of each of the FSI shopping center corpora ions that FSI owned, which FSI estimated to- be not more than $8 m llion, to the ext nt necessary to satisfy EJDC' s oversec red claims totaling pproximately $543 million.

Ba k of Montreal and Pa ibas filed certain unsecured claims against the FSI debtors, ider tified as class 20, relating to the $500 mi lion that they had nt- to FSI in May 1988 .

Bank of Montrea and Paribas filed t ose claims as a~ protective measure in the vent FSI recovered ag a "voidable preference" under the Bankruptcy Code a portion of the $500 million that -it had repaid to Bank of Montreal and Paribas in April 1989.

O&Y filed a sedured claim -against Holdings III, identified as class 8, under the terms of the Allied nöte and the Federated note and under Hol:dings III's guaranty of th'e loan that O&Y had agreed on September 12, 1989, to make available to Campeau.

O&Y filed an unsecured deficiency claim against Hold'ings IfI ahd all other FSI' debtors, identified as class 21.

O&Y also asserted as security for its claims against Holdings II a lien on" the common stock of Ralþhs that Holdings III owned.

FSI filed a secured claim against Holdinge III, identified as class 10, under the Holdings III note.

FSI also filed an unsecured claim against Holdings III, identïfied'as clàss 24, that included any unsecured deficiency claim.

Campeau filed a secured claim against FSI identified as class 9, under the FSI $175 million note. Campeau-filed an unsecured älaim against the FSI debtors, identified as class 22, that included any -unsecdred deficiency'claims and any claims Campeau may have assigned to O&Y as securit .

Campeau also asserted a lienoon the claims that FSI-filed and that were identified as class 10 and class 24.

Ralphs filed an unseau ed claim against the FSI debtors, identified as class 26, under certain tax-sharing agreements that certain members of the FSI consolidated groåp, including Ralphs, had ent red into before the SI chapter ll'proceedings had been commenced.

H Ldings III held the i terest, identified as class 39, in the out tanding common stock of Holdings II.

FSI held the interes , identified as clas 40, in the outstanding common stock of Hol ings III.

I addition to the clains discussed above, Allied had potenti l claims against the FSI debtors for fraudulent convey- ance, b each of fiduciary du ies, indemnity, and civil conspir cy.

Those claims wene asserted on behalf of Allied e against the FSI. debtors with respect to the funds thats FSI used in Apri 1989 to repay to Bank of Montreal and Paribas the $500 million that those companies lent to FSI in May 19884.

FSI had potenti l claims for preferer ce against Bank of Montreal and Paribas with respect to the dlaims asserted on. Allied' s behalf against th,e FSI debtors; , Bar k of Montreal and Paribas had conting nt claims to recover from FSI any amount which .Bank of Montrea or. Paribas would be required to pay Allied or by which their o her claims against A] lied might be. reduced as a result of Allied' claims against the FSI debtors with.respect to the $500 million that Bank of Montreal and Paribas had lent to FSI.

Bank of Mont eal and Paribas- asserted that their respective claims would be senior to those claims of EJDC that were secured by the common tock of Ralphs that Holdings III owned.

Several claims were filed in the Allied chapter 1L proceed- ings againsts the various Allied/Federated-debtors, including the following claims.

Bank of Montreal. and Paribas filed.secured and unsecured claims against Allied, identified as classrA-6, class AR-6, and class AO-6, with respect- to the respective revolving working capital and.revolving inventory facilities that they had extended to Allied on Aprile 7, 1989.

Holdings III filed an unsecured claim against Allied, identified as class A-17, lunder the Allsied note. Holdings III, also filed an unsecured claim against Federated, identified as class F-10) under the Federated.notes EJDC and its affiliates filed more than 200 claims against the Allied/Federated debtors .

EJDC asserted that its claims againstsFederated were secured by a pledge of the Federated note and the Allied note.

Holdings held the interest, identifiedtas class F-15, in the outstanding common stock of Federated. Holdings II held the interest, identified as class F-19, in the outstanding common stock of Allied.

The FSI debtors and the Allied/Federated debtors had obliga- tions'under the Bankruptcy Code to file with the Ohio U.S.

Bankruptcy Court in the FSI chapter 11 proceedings and the Allied chaptek 11 proceedings respective p oposed plgns of reorganiza- tionU nd respective disclos re statements with respect to those propos plans of reorganiza ion. Under the Bankruptcy Code the FSI de ors and the Allied/F derated debtors had an exclusive right ring the 120 days following the date on which those debtors filed their respecti e chapter 11 petitions (plan exclu- sivity eriod) to file respe tive proposed plans of reorganiza- tion wi h the Ohio U.S. Bank uptcy Court.

On several occasions the FSI debtors -and the Allied/Federated debtors requested extensi ns of their respecti4e plan exclüsivity periods.

The Ohio U.

. Bankruptcy Couet gnanted each of those requests.?

At no time did EJDC, Ba k of Montreal, Paribas, O&Y, or Campeau seek to reduce the time during which FSI had the exclu- sive ri ht to file a propose plan of reorganization with the Ohio U.S. Bankruptcy Court. Nor did those creditors object'to the req ests of FSI to extend the time during which it had the exclusive right to file à pr posed* plan of reorganization with that coürt.²⁰ 1 01-1174. Our use of "T e term "plan of reorcjanization" is used herein to refer the Bankruptcy Co'de, 11 U.S.C. intended to refer to a plan described in ch. 11 of secs. to a pl n of reorganization or tax purposes or to imply that any propose .plan of reorganizat. on filed with the Ohio U.S., Bank- ruptcy €ourt constituted a plan of reorganization for tax pur- poses.

that- term is not 20T e docket sheet of thé Ohio U.S. Bankruptcy Court in the FSI cha ter li proceedings did not' reflect Montrea , Paribas, O&Y, or C$mpeau requested that shorten the FSI debtors' plan exclusivity period in the FSI that court that EJDC, Bank of (1) (cont inued .

.

.

) During the FSI chapter 11 proceedings and the Allied chapter 11 proceedings, the FSI debtors, the Allied debtors, the Feder- ated debtors, Ralphs, the various creditors committees, and other respective creditors of the FSI debtors and the Allied/Federated debtors engaged in extensive -discussions .and riegotiations regard- ing the resolution of .the FSI chapter 11 proceedings and the Allied chapter 11 proceedings .

Each of the; pdrticipants in those discussions and negotiations was representeds by cseparate profes- sional advisors.

.

The FSI debtors and the Allied/Federated debtors filed with the Ohio U.S. Bankruptcy Court, respective joint proposed plans of reorganization in sthe FSI chapter 11 proceedings and the Allied chapter - 11 proceedings . Thereafter , those debtors amended on - several occasions the respective joint proposed plans and filed with the Ohio U.S. Bankruptcy Court those ,respective amended joint proposed plans.

None of: EJDC, Bank of lvíontreal, Paribas, O&Y, or Campeau objected to the confirmation of any of the respective proposed- plans of reorganization' that the FSI debtors and the Allied/Federated debtors filed with the Ohio U.S. Bank- ( .

.

. continued) chapter 11 proceedings or jected to the several reqtiests that the -FSI debtors made to the tihat plan exclusiv- Ohio U.S. Bankruptcy Court for .extensions of ity period.

those creditors ob- that any of (2) - -26 - ruptcy ourt." - No party exc pt the FSI debtors and the Al- lied/Fe erated debtors filed with that court a proposed plan of reorgan zation in the FSI ch pter 11 proceedings or the Allied chapter 11 proceedings .

On October 28, 1991, th -FSI debtors filed with the Ohio U.S. Ba kruptcy Court in the FSI chapter 11 proceedings (1) a documen entitled "Third Ame ded Joint Plan of Reorganization for Federat d Stores, -Inc.; Federated Holdings, Inc.; Federated Holdings II, Inc .

; Federated Holdings III, Inc . and Campeau Properties, Inc."

(October 1 91 proposed FSI chapter 11 plan) and (2) a document entitled "Sec nd Amended Disclosure Statement Pursuan to Section 1125 of the Bankruptcy Code for Federated Stores, Inc.; Federated Hold ngs, Inc:; Federated Holdings; II, Inc .

; F derated Holdings III Inc . and Campeau Properties , . Inc . " (FSI disclosure"statement) .

On October 28, 1991, th Allied/Federated debtors filed with the Ohio U.S. Bankruptcy Cou t in the Allied chapter 11 proceed- eings (1 a document entitled "Third Amended Joint Plan of Reorga- "The docket sheet of the Ohio U.S. Bankruptcy Court in the FSI cha] ter 11 proceedings didd not reflect that EJDC, Bank of Montreai, Paribas, O&Y, or CZmpeau filed any document with that Court o jecting to the confiŠmation of any of proposed joint plans of reorganization that with thÂt Court in those prodeedings .

the respective the FSI debtors filed "T e docket sheet of the Ohio U.S. Bankruptcy. Court in the FSI cha ter 11- proceedings did not reflect that EJDC,, Bank of Montreal, Paribas, O&Y, or Campeau filed any document with that the FSI disclosure statement. Court o jecting to the adequacy of nization of Federated Department Stores, Inc., Allied Stores Corporation and Certain of Their Subsidiaries" (October 1991 proposed Allied chapter 11 plan) and (2) a -document entitled "Disclosure Statement Pursuant to Section 1125 of the'Bankruptcy Code.for the Third Amended Joint Plan of Reorganization-for Federated Department Stores, Inc., Allied Stores Corporation, and Certain of Their Subsidiaries" (Allied disclosure statement).

The October 1991 proposed FSI chapter il plan and the October 1991 proposed Allied chapter 11 plan (collectively, the October 1991 proposed chapter 11 plans) were interdependent. 2The effectiveness of the October 199T proposed FSI chapter-11 plan was conditioned on the satisfaction of or, lif'waivable, waiver of all of the conditions to the effectiveness of the October 1991 proposed Allied chapter 11 plan.

According to the FSI debtors'and the Allied/Federated debtors, the primary reason for filing separate proposed plans of reorganization in their respective chapter 11 proceedings was the existence of separate debt structures for the respective opera- tions of the FSI debtors and the All'ied/Federated debtors. Other reasons of the FSI debtors and the Allied/Federated 'debtors for filing separate sproposed plans of reorganization were:

(1) Allied, Federated, and Ralphs were separate reporting compa- nies under certain Federal securities laws; -(2)- the agreement of the respective- parties to the FSI chapter 11 proceedings and the Allied chapter 11 proceeding that the creditors of the retail departn ent store businesses hould become equity participants in those sinesses after the c apter 11 reorganization; and (3) the retail epartment store busi esses and the Ralphs grocery-store busirie s had little in commo , having been operated separately under parate management anÅ from separate geographic locatioris Ac ording to the FSI disclosure statement, the overall purpos s of the October 1991 proposed FSI chapter 11 plan were:

(1) To distribute the assets of the FSI debtors among the credi tors o those debtors;, (2) to maximize the amount that the- credit cs of the FSI debtors could recover on their respective claims gainst those debtors and to allocate that- amount in a manner hat the FSI debtors iewed as fair and reasonable; and (3) to ettle and compromise certain significant disputes that the FSI debtore -believed .wou d result in significant expense if litigat d and that had the p tential to impact adversely, the FSI debtors if determined advers ly to them.

Ac ording to the Allied disclosure statement, the-overall apurpose of the October 1991 proposed Allied chapter 11 plan were:

1) To alter the respective debt and the respective capital structures of the Al ied/Federated debtors sso that at the conclus on of the Allied cha ter 11 proceedings those debtors would p ssess. viable respective capital structures; (2) to maximizh the amount that .the creditors of the Allied/Federated debtors could recover on their respective claims - against those debtors and to allocate that amount in á manner that the Allied/ Federated debtors viewed as fair and reasonable; and (3) tò i settle,. compromise, or otherwise dispose of certain claims of and against the Allied/Federated debtors on terms *that those debtors believed to be reasonable.

In addition, A]jlied/Federated debtors intended for the October 1991 "proposed Allied chapter 11 plan to preserve certain economies of scale and other benefits of the joint operation of the Allied/Federated debtors.

As a specific, condition to any confirmation by the Ohio U S.

Bankruptcy Court of the October 1991-proposed chapter 11 plans, the FSI debtors, the Allied/Federated debtors, and the respective creditors of those debtors 'entered into an agreement (comprehen- sive settlement agreement) that was to resolve" certain áctual and potential claims that those parties had against each other under terms that those parties determined were reasonable.

That agreement provided, inter.alia, that the parties to that agree- ment generally agreed to use their best efforts to have the Ohio U.S. Bankruptcy Court confirm the October 1991 proposed chapter 11 plans; Under the comprehensive settlement agreement, the FSI debtors, the Allied/Federated debtors, Ralphs, and some of the respective creditors of those debtors were to execute releases regarding potential and actual claims among| arid between the parties to that agreement e 'hose claims included the various respective claims of EJDC, B nk of Montreal, Paribas¡ O&Y, and' Campeau. Many of the issues raised by the, claims that the parties to the comprehensive settlement agreement were to release were n vel or unresolved iss es of law that could have required time-c nsuming litigation to resolve.

Under the comprehensive settlement agreement, certain tax- sharin agreements between and among members of- the FSI consol ated group that had een entered into before the com- mencem nt of the FSI chapter 11 proceedings and the Allied chapter 11 proceedings were o be canceled as - a condition to the execut n of the comprehensiÝe settlement agreement and of the Ohio U.

. -Bankruptcy Court' s confirmatiion of the October 1991 propos chapter 11 plans .

U er the comprehensive settlement agreement, the claim of Holdin III with respect to the Federated note was to be reduced from $7 1 million to $40.7 tâillion in order .to account for certain claims that the FedeÙatede debtors had against FSI with "O e of the tax-sharing agre'ements was between Ralphs and the amount of U ider that agreement, for each taxable year of FSI. consoli lated group Ralphs waj obligated to pay to FSI an amount equal t > had fil d a separate tax ret(rn for that taxable year. return, each member of indemni y jointly and severalily and hold harmless Ralphs against any claim of liability for t x of tax tlíat Ralphs would have paid if Ralphs the FSI consolidated group agreed to the FSI consolidated group.

the FSI In !

respect to certain tax-sharing agreements among those debtors and FSI.

The comprehensive settlement agreement st-ated that that agreement was an essential 'element of and means of implementation of the October 1991 proposed chapter 11 plaps That agreement also stated that each of the October 1991 proposed chapter 11 plans was an essential el.ement of and means of execution of the comprehens ive se t t lement agreement .

The October 1991 proposed chapter 11 plans proposed to separate the ownership and the operation of; the Ralphs grocery store business from the respective ,ownership and the respective operations of the real estate businesses- and the retai'l depart- ment store businesses .

In order -to 'achieve" that separation, the October 1991 proposed chapter 11 plans ~proposeld, ~inter alia, that Allied and Federated ,merge into a single surviving eritity, known as New Federated, - thereby consolidating the real estate busi- nesses and the retail department store businesses, and that a ' majority of the outstanding common stock of Ralphs be distributed to EJDC, Bank of Montreal, and Paribas, all of which were unre- lated to the FSI consolidated group.

In negotiating the terms of the October 1991 proposed FSI chapter 11 plan, FSI proposed to value all of the outstanding common stock of Ralphs at $580 million solely for the purpose of allocating the. outstanding common stock of Ralphs which Holdings 32 - III ow ed and which the FSI debtors proposed in that plan that Holdin III transfer to EJDC, Bank of Montreal, Paribas, and Campea .24 Although FSI had roposed a value higher than $580 millio for the outstanding ommon stock of Ralphs, FSI was willin to, and did, propose a value of $580 million for that stock order to achieve a onsensus among the parties that negotia ed the terms of the dctober 1991 proposed FSI chapter 11 plan.

Based on a value of $$80 million for all of the outstand² ing co on stock of Ralphs, t he Allied/Federated .debtors assumeà that t a value of the outstai ding common stock of Ralphs that Allied wned ( i . e .

, 16-. 25 peÈcent ) was approximately, $94 million Th FSI debtors propose sin the October 1991 proposed, FSI chapte 11 plan that EJDC redeive the following with respect to its cre itor claims identified as classes 1, 2, 4, 14, and 15:

(1) - 20 hiillion shares of thegoutstanding common stock of Ralphs, representing approximately 60 . 34 percent of the total, outstanding common tock of Ralphs, to be distributed from the shares of • Ralphs ommon stock that Hol ings III owned; (2) a release under the comprehensive settlement agreement of any claims against EJDC; and (3) certain respect ive real estate" partnership inter 24The net as at Ralphs the value of all of least $475 milÈion.

outstanding common stock of I -- 33 - ests that the FSI .shopping center corporations owned or certain stock of those corporations that FSI owned.²³ The FSI debtors proposed in the October 1991 proposed FSI chapter 11- -plan that Bank of Montreal and Paribas, in -consider- ation for (1) their respective creditor claims identified -as class 20, (2) their respective agreements undër the comprehensive settlement agreement to release any claims against EJDC, and (3) their respective consents "to the October 1991 proposed Allied chapter 11 plan as holders of the claims identified as class A-6, receive the -following:

(1) e³,*514;286 shares of the outstanding common stock of Ralphs, representing approximately 10.6 percent- of the total outstanding common stock of Ralphs, to be distrib- uted equally between Bank of Montreal and Paribas and to be distributed from the shares of Ralphs common stock that Holdings III owned and (2) releases under the comprehensive settlement agreement of any potential claimst against/Bank of Montreal or Paribas.

The FSI debtors pro'posed in the October 1991 proposed FSI chapter 11 plan that Campeau receive the folldwing with respect 2sUnder the October 1991 proposèd FSI chapter ,11 plan, it was proposed that EJDC receive the respective real estate part- the FSI shopping center corpora- nership interests that each of tions owned, unless FSI determined that any such distribution to In that event, EJDC would have adverse tax consequences to FSI. under the October 1991 proposed FSI chapter 11 plan, it was proposed that EJDC receive certain respective stock of shopping center corporations that FSI owned.

the FSI to its areditor. claims against- FSI identified as classes -9 and 22:

(]) 4,244,241 shares of the outstanding common stock of Ralphs representing approxí atelys 12.8 percent of the total outstan ing common stock of alphs, to be distributed from the shares f Ralphs common stoc that Holdings III owned, (2) cash, and (3) a release under the comprehensive settlement agreement of any pot antial claims against it . Under the October 1991 proposed FSI cha2ter -11 plan, the FSI debtors proposed that a portion I!

(i.e., .8 percent) of the o tstanding common stock of Ralphs that th se debtors- proposed e .distributed - to Campeau be distrib- uted to FSI and be sold by FSI as needed in order to satisfy certain obligations and expe ses arising under the October 1991 proposed FSI chapter 11 plan To the extent. that. FSI did not .

sell an portion of the Ralp s stock that it received, the FSI debtors proposed in the Octo er 1991 proposed FSI chapter 11 plan that FS distribute that port ion to Campeau.

Th FSI debtors proposed in the October 1991 proposed FSI chapter 11 plan that O&Y rec ive the following with respect to its creditor claims identified as classes 8 and: 21:

(1-) A distrib tion from Campeau with respect to Holdings III's guaranty of the oan that O&Y agreed n September 12, 1989, - to make availab e to Campeau and (2) a release under the comprehensive settlem nt agreement of any potential claims against it .

!i The FSI debtors proposed in the October 1991 proposed FSI chapter- 11 plan that FSI receive with respect to its creditor * claims identified-as classes 10-and 24 the property of the estate of Holdings III, if any,.after the distribution pursuant to that proposed plan of the common stock of Ralphs that Holdings III owned.

In the October 1991 proposed FSI chapter 11 pl'an the FSI debtors proposed that FSI adistribute pursuant to that plan any such property that .it received.

The FSI debtors proposed in the October 1991 proposed FSI chapter 11 plan that the respective creditor claims of EJDC, Bank of Montreal, Paribas, O&Y, and Campeau all be impaired.

In that proposed plan the FSIs debtors proposed that all secured claims except the secured claims identified as class 11" bè ilmpaired.

In the October 1991 aproposed FSI chaptef 11?plan the FSI debtors proposed that several creditors that had filed respeative unse- cured claims against the FSI debtors receive certain distribu- tions with respect to their claims.

The FSI debtors proposed in the October 1991 proposed FSI chapter 11 plan that Holdings, Holdings II, Holdings III, and CPI be dissolved and that their respective assets vest in and be held by FSI as disbursing agent 'for -distribution under the October "The claims identified as class 11 cor sisted of claims against Holdings II under a certain loan agreement dated Apr. 1988, pursuant Citicorp Investment Bank Ltd.

to which Holdings II borrowed certain funds from .29, 1991 p oposed FSI chapter 11 plan.

In that proposed plan-the FSI debtor proposed that FSI co tinue in existence until the - October 1991 pr posed FSI chapter 11 plan had been fully consummated and the Ohi U.S.

.Bankruptcy Cou t closed the FSI-chapter 11 proceed- ings.

t that time FSI woul dissolve.

T FSI debtors propose in the October 1991 proposed" FSI chapte 11 plan that all. of t he outstanding common stock of Holding III be canceled upo the dissolution of· that company and that n property be distribut ed to FSI with respect to its interes , identified as clas 40, as the sole stockholder of Holding III.

In summary, the FSI debt ors proposed in the October 1991 propose FSI chapter 11 plan that Holdings III transfer to the followihg "creditors of FSI tl e following approximate percentages I of the utstanding common st ck of Ralphs:

FSI Creditor EJDC Campe au Bank of Montreal Paribas Percentage of Outstanding Common Stock of Ralphs 60 . 4 12 . 8 5 . 3 5 . 3 Th Allied/Federated de tors proposed in the October 1991 propose Allied chapter 11 plan that on or after the effective date of that proposed plan Allied and Federated merge and that all of heir respective assets vest in a single surviving com- be known as New Federated.

The Allied/Éederated debtors pany, t I | 3 ,37 - proposed in that proposed plan that.all of the outstanding common stock of New Federated 4xa distributed to the respective creditors of the Allied debtors and the Federated debtors.

The Allied/Federated debtors-proposed in the October 1991 proposed Allied chapter 11- plan that'Holdings III receive with respect to its claim against Federated under the Federated note 816 000 shares of the common stock of New Federated.

The Al- lied/Federated debtors proposed in that proposed planothat 588,000 of those 816,000 shares be distributed pursuant= to the October 1991 proposed,FSI chapter 11: plan to the respective general, unsecured creditors of FSI and Holdings III in satisfac- tion of those unsecured creditors' respective claims against FSI and Holdings III.

The Allied/Federated debtors proposed in the October 1991 proposed Allied chapter 11 plan that the remaining 228,000 shares of the common stock of New Federated that that, plan proposed Holdings III receivesbe sold under the October 1991 proposed. FSI chapter 11 plan to' provide cash to FSI.

In the October 1991 proposed Allied, chapter 11 plan the Allied/Federated debtors proposed that Holdings III contribute to the capital of Allied its claim against Allied under the Allied note and that no property be distributed to Holdings III with respect to that claim.

The Allied/Federated debtors p oposed in,the October 1991 proposed Allied chapter 11 plan that Bank of Montreal and Paribas each r ceive, with respect to their respective claims identified as cla ses A-6, AR-6, and AO 6 approximately- 4.83 ~percent of the total tstanding common sto k of Ralphs, to be distributed from the sh es of Ralphs common tock that Allied owned and that New Federat d" was to own pursua t to the October 1991 proposed Allied chapter 11 plan.

Th Allied/Federated de tors proposed -in the October 1991 propos Allied chapte$ 11 p an that Allied retain in its capac- ity as stockholder of Ralp s the shares of the Ralphs common stock t at . it owned and that were not to be distributed to Bank of Mont eal and Paribas (i.e , 6.6 percent -of the outstanding common tock of Ralphs) .

Ne Federated, . as the successor - to Allied, was to,retain and co tinue to own such stock.

I summary, the Allied/Federated debtors proposed in the October 1991 proposed Allied chapter 11 plan that the following compani s own the following pproximate percentages of the outstar0ling common stock of alphs after any distributions of that stock proposed in that proposed plan:

A discussed above, th Allied/Federated debtors proposed in the October 1991 proposed Allied chapter 11 plan that Allied and Fed rated merge into a s ngle surviving entity known as New Federat d.

39 - Entity Bank of Montreal Paribas New Federated Percentage of Outstanding Common Stock of Ralphs 4 . 8 4.8 6.6 As of February 3, 1991, an appraisal estimated that, exclud- ing the then-outstanding debt of Ralphs of approximately $985 million and the cash and cash equivalents of $34 . 7 million that Ralph owned, the value of Ralphs was between approximately $1.45 billion and $1.55 billion.

The FSI debtors, the Allied/Federated debtors, Ralphs, the creditors that filed.claims in the FSI chapter 11 proceedings and/or the Allied chapter 11 proceedings, and their respective representatives negotiated the terms of an indemnification agreement.

They believed that such an indemnification agreement would be necessary in order to allocate among the members of the FSI consolidated group responsibility for certain liàbilities, including certain tax liabilities.

That was because of, inter alia, the pendency of the FSI chapter 11 proceedings and the Allied chapter 11 proceedings, the proposed cancellation of certain tax-sharing agreements among the members of the FSI consolidated group, the separation proposed in the October 1991 proposed chapter 11 plans of the retail department store busi- nesses and the Ralphs grocery store business into entities with separa e ownership, and the act that the FSI consolidated group was at all relevant times filing a single. consolidated tax return.

I October 1991, the FS debtors, the Allied/Federated debtor , Ralphs, and the creditors that filed claims in the FSI chapter 11 proceedings and/or the Allied chapter 11 proceedings filed th the Ohio U.S. Ban ruptcy Court an unexecuted pr posed indemni ication agreement (O tober 1991 proposed indemnificatioh agreement) that they had negötiated and that they proposed be effect i as of the effecti date of the October 1991 proposed FSI chapter 11 plan.

The Ohio U.S. Bankruptcy Court did not approve the October 1991 pro osed indemnification agreement.

It was proposed in the October 1991 proposed indemnificatio agreeme t, inter alia, that esponsibility for certain nontax liabili ies arising from the conduct of the respective businesses of the arties to that agreen ent be allocated among those parties and tha certain tax liabilities be allocated among certain of those parties . Certain prop sals were made in the October 1991 proposed indemnification agrèement to address certain other matters regarding the relati nship of the parties to that agree- ment after certain of those parties ceased to be members of the FSI consolidated group.

It I was also proposed in the October 1991 proposed indemnifi- cation agreement that New Federated, FSI, and Ralphs indemnify one another and certain other members of the FSI consolidated group for certain losses relating to resulting from, or arising out of the conduct of their respective businesses before, on, or after the effective date of the October 199-1 proposed 'FSI chapter 11 plan.

..- It was further proposed in the October 1991 proposed indem- nification agreement that New Federated indemnify and hold harmless Ralphs, Holdings III, FSI, and certain subsidiaries of FSI from and -against certain tax liabilities - that became known after the respective -effective dates of the October 1991 proposed FSI chapter 11 plan and the October 1991 proposed- Allied chapter 11 plan but that were attributable to taxable years that ended on or before those effective dates.

In exchange for thatt proposed indemnification it was proposed in the Octiober 1991 proposed indemnification agreement that Ralphs pay to New Federated (1) $10 million over a period of five years beginning on the effective date of the October 1991 proposed FSI chapter 11 plan and (2) an amount. equal to 21 percent of any taxes for which New Federated.indemnified Ralphs but not to exceed $15 million, adjusted by a certain $5 million credit potentially available to Ralphs .

After the FSI debtors and; the-Allied/Federated debtors filed the October 1991 proposed FSI chapter 11 plan and the October 1991 proposed Allied chapter 11 plan, respectively, the FSI debtor , the Allied/Federate debtors, Ralphs / and the respective credit rs that had filed cla ms in the FSI chapter 11 proceedings and/or the Allied ,chapter 11 proceedings discussed and riegotiated certain modifications of the terms of those proposed- chapter 11 plans. Under the respective modified proposed FSI chapter 11 plan a the modified propos d Allied chapter 11 plan, the FSI debtor and the Allied/Federated debtors proposed (13) the incor- porat i of - a new company, R lphs Holding Co .

, Inc .

(RHC) , (2) , th transfer to it by Ho dings III and Allied of their respective common stock owne†ship in Ralphs (i.e., 83.75 þercent and 16 . 25 percent , respectiv ly) , (3 ) the trans f er to Holdings III an Allied by RHC of 83.

5 percent and 16.25 percent, respec- tively, of RHC' s outstanding common stock, (4) "the respective distrib tions by Holdings II] to certain of FSI' s creditors and by Alli d to certain of its reditors of their respective shares of outs anding common stock öf. RHC in the same amounts and in the .

same ma ner as the parties t the October 1991 proposed chapter 11 plan had proposed in tho e proposed plans Holdings III and Allied istribute the common stock of Ralphs (We shall refer to the ser LeS Of transactions that the FSI debtors and the Allied/ Federat d debtors proposed ir the modifications to the October 1991 pr posed chapter- 11 plar s (namely, that RHC be incorporated Holdings III and Allied tran(fer their respective common stock of Ralphs to RHC, RHC transfer all of=its common stock to Holdings III and Allied, and Holdings III and Allied distribute their respective common stock of RHC) as the Ralphs stransaction.)

The proposed Ralphs transaction required;the parties that negotiated the terms of thesOdtober 1991 proposed indemnification agreement to revise the terms of that agreement to take into account that proposed transactionue Around late 1991, Federated and certain of its subsidiaries, Allied and certain of its subsidiaries,.New Federated (asethe proposed successor to Allied and Federated), FSI and certain of its subsidi'aries, Holdings III, Ralphs, and RHC executed a document entitled "INDEMNIFICA-

TION AGREEMENT"

(proposed final indemnificati~on agreement)."

It was proposed in.the proposed final indemnification -agreement that that agreement be effective as of the effective "date of the proposed FSI chapter 11 plan that the Ohio U.S. Bankruptcy Court confirmede.

The execution of the proposed final indemnification agreement was necessary in'order to induce the parties, to that proposed agreement to approve any proposed chapter 11 plans ini- the respective chapter 11 proceedings.

Howe'ver, any such indeš- nification agreement would have been necessary to'induce such approvals regardless of- whether the Ralphs transaction had been "No stipuladed exhibit referred to the proposed final indemnification agreement as being part of any transaction that ocòurred widh respect proceedings or the Allied chapter 11 proceedings.

the consideration for to the FSI chapter 11 !

proposed as a modification t the respective October 1991 pro- posed hapter 11 plans.

I was also proposed in the proposed final indemnification agreem at that Holdings III e indemni-fied against« any deficiency in tax attributable to the PÁlphs transaction, including any tax attributable to an election under section 338 (h) (10) .

I was further proposed in the proposed final indemnifica- tion agceement that RHC beco e a joint and several co-obligor with re pect to payments that the proposed initial indemnifica- tion ag ceement proposed be mŠde by Ralphs.¹ As a result, in the propose 1 .final indemnificati n agreement it was proposed that Ralphs nd RHC be jointly anc severally liable for þayments to a New Fe rated of not less th n $10 million and not more than $20 millio O January 8,. 1992, the FSI debtors filed with the Ohio U.S.

Bankrup cy Court in the FSI chapter 11 proceedings a document- entitle¹ ."Additional Modific tion (Effective Upon Filing Pursuant to Bank uptcy Code Section 1 27/) of Third Amended Plan of Reorga- nizatio for Federated Store , . Inc ; ; Federated Holdings , Inc .'; * Federat d Holdings II, Inc . ; Federated Holding£ III, Inc .

; and Campeau Properties, Inc."

(January 1992 proposed FSI chapter 11 plan) . Around that date, the Allied/Federated debtors filed with the Ohi U.S. Bankruptcy Cou t in the Allied -chapter 11 proceed- ings a odification of the O tober 1991 proposed Allied chapter 11 plan (January 1992 proposed Allied chapter 11 plan) Certain revisions and modifications of certain provisions of the October 1991 proposed FSI chapter 11 plan údre proposed in the January 1992 proposed FSI chapter 11 plan in order to include the Ralphs transaction, which inclùded the contemplated creation of RHC.

The January 1992 propòšed FSI-chapter 11 -plan proposêd to include the following paragraph with respect to the contemplated creation of RHC:

5t. Creation of Ralphs Hol'ding Company Prior to the Effective Date, Holdings "III and Allied may, at their election (with the concurrence of each party who will receive Ralphs Common Stock under the [October 1991 proposed FSI bankruptcy] Plan) , contribute all of thè common stock of Ralphs owned by those entities to a newly incorporated Delaware corpo- ration which may be formed "for the purpose of holding all of the issued and outstanding capital stock of Ralphs (the "Ralphs Holding Company") . contributing their respective holdings of common stock of Ralphs to Ralphs Holding Company; Holdings III will receive that number of shares of capital stock in Ralphs Holding Company so that it owns the same per- centage of Ralphs Holding Company as of now owns of the common stock of Ralphs, and Allied will receive that number of shares of capital stock in Ralphs Holding Company so that it owns the same per- centage of Ralphs Holding Company as of now owns of the issued and outstanding capital stock of the issued and outstanding capital stock of the common stock of Ralphs .

th'e Effective Date as it the Ef fective Date as it In exchange for Certain provisións were proposed in the January 1992 pro- posed FSI chapter 11 plan that diffefed from the p/ovisions proposed in the October 1991 proposed FSI chapter 11 plan, including the following.

The FSI debtors proposed in the January 1992 p oposed FSI chapter 11 plan that EJDC receive the following with respect to its creditor claims identified as classes 1, 2, 3, 4, 4, and 215:

(1) 20 million shares of the common stock of RHC, r presenting approximat ly 60 . 34 percent of .the total outsta ing common stock of HC, to be distributed from the shares Nf the outstanding co mon stock of RHC that Holdings III was to wn; (2) a .release under the comprehensive settlement agreem at of any claims agai Ist EJDC; and (3) certain respective real e ate partnership inte ests that the FSI shopping center corpora ions owned or certain stock of those corporations that FSI ow ad.

Th FSI debtors proposec in the January 19923 proposed FSI chapter 11 plan that Bank of Montreals and Paribas, in consider- ation f r (1) their respecti e creditor claims identified as class 2 J, (2) their respecti e agreements under the comprehensivé settlem nt agreement to rele se any claims against EJDC, and (3) the r respective consenté to the January 1992 proposed Allied chapter 11 plan as holders of the claims identified as class A-6, receive the following:

(1) ,5.14,286 shares of the outstanding common tock of RHC, represe ting approximately 10.6 percent of the tot 1 outstanding common stock of RHC, to be distributed equally between Bank of Mont eal and Paribas and to be distrib uted fr m the shares of RHC c ommon stock that Holdings III was to "S e supra note 25.

own and (2).releases under the comprehensive settlement agreement of any potential"claims against Bank of Montreal or Paribas.

The FSI debtors proposed in the January 1992 proposed-FSI chapter 11 plan that Campeau receive the following with respect to.its creditor claims against FSI identified-as classes 9 and 22:

(1) 4,244,241 shares of the outstanding common stock of RHC, representing approximately 12.8 percent of the total outstanding common stock of 3RHC, to be distributed from* the shares of RHC common stock that Holdings III was to own, (2);-cash, and (3) a release-under the comprehensive settlement agreement of any.

potential claims against :it. Under the January 1992 proposed FSI chapter 11 plan.the FSI debtors proposed that a portion (i.e., 0.8 percent) of the outstanding common stock of RHC that, those debtors proposed be distributed to Campeau be distributed to FSI and be, sold by FSI as needed in order to satisfy certain obliga- tions and expenses arising under the January 1992 proposed FSI chapter 11 plan.

To the extent that FSI did not sell any portion of the RHC stock that -its received, the -FSI debtors proposed in the January 1992 proposed FSI chapter 11 plan that FSI distribute that portion to Campeau.

The FSI,debtors proposed in the January 1992 proposed FSI chapter 11 plan that FSI receive with respect,to its creditor claims identified as classes 10 and 24 any property of the estate of Holdings III after the distribution pursuant to that proposed plan of the common stock of HC that Holdings III was to own'.

In the Jar ary 1992 proposed FSÌ chapter 11 plan the FSI debtors propos that FSI distribute pursuant to that plan any such propert it - received.

T Tl FSI'debtors propose in thê January 1992 proposed SI chapte 11' plan that the -respective creditor claims of EJDC, Bank of «Mont eal, Paribas, O&Ý, a d Campeau all be impaired.

In tliat propose plan, the' FSI debto s proposed that all secured claims except he secured claims id ntified as class¢ 113° be impaired.

In the anuary 1992 proposed FSI chapter 11 plan the FSI debtors propos that several credit rs that had filed respective "unse cured claims against the FSI debtors receiŸe certaine distribu- tions wn.th respect to their laims .

Th FSI debtors proposed in the January 1992 p oposed' FSI chapter 11' plan that all of he outstanding common stock of Holdings III be canceled upon the dissolution of that company and that no property be distributed to' FSI with respect to its interes ,'identified as clas 40, as the'sole stockholder of Holding , III .

In summary, the FSI debt ors proposed in the January 1992 propose - FSI chapter 11 plan that Holdings III ti-ansfer to the following creditors of FSI tl e following approximate percentages of the utstanding common at ck of RHC:

SOS e supra note 26.

FSI Creditor BJDC Campeau Bank of Montreal Paribas Percentage of Outstanding Common Stock öf RHC 6 0 . A 12.8 5.3 5 . 3 The FSI debtors proposed, inter alia, in the January 1992 proposed FSI chapter 11 plan the following provision:

H. Nondischarge And -Injúnction.

1. Nondischarge Of Debtors .

Pursuant toasec'tion 1141-(d) (3) of the Bankruptcy As of the Confirmation Code,' the Confirmation Order shall not di-scharge claims the [FSI] Debtors . However, no creditor against any of from, or of any of said Debtors may receive any payment seek recourse against, any assets which are to be distributed under Sections IV, V, and VI of this Plan, ekcept for thóse distributions expressly provided for in said Sections IV, V, and VI. Date, all entities are precluded from asserting, against -any property which is to be distributed under Section IV, V or VI of- this Plan, any claims, obliga- tions, rights, causes of adtion, interests based upon any act or ornission, tran'saction or other activity of any kind or nature that occurred prior to the Confirmation Date, other than as expressly provided in"this Plans or, the Confirmation Order, whether or not (a) a proof of claim or proof of est based on such debt or interest Filed pursuant (b) à claim or interëst based on s ch debt or interest is allowed pursuant Code or (c) such debt or interest has accepted the Plan.

inter- is Filed or deemed the Bankruptcy Code, the holder of a claim or interest based on liabilities or equity to section 501 of to section 502 of the Bankrupt-cy 2.

Injunction.

Except as otherwise provided in the Plan or the Confirmation Order, on and after the Confirmation Date:

(1) All entities which have held, currently hold or may hold a debt, claim, other liability or interest against any Debtor that would be dis- the Bankruptcy Code and Section charged upon Confirmation of this Plan and the Effective Date but for the provisions of section 1141(d) (3) of VI.G.1. hereof are(permanently enjoined from tak- the following actions on account! of ing any of such debt, claim, liability, interest or right: (a) commencing or Éontinuing in any manner any action or other präceeding on account of such claim against prop rty which is to -be distributed under Section IV, V, or VI of this Plan, other than to enforce any right to distribution with respect (b) enforcing, attÀching, collecting or recovering in any manner any judgment, award, decree, or order against any ÿroperty to be distributed to creditors under Seätion IV, V, or VI of this Plan, other than as perm tted under subparagraph (a) above; and (c) cre ting, perfecting or enforcing any lien or encumbrance against any property to be distributed under ection IV, V, or VI, other than as permitted by this Plan.

to such property under the Plan; (2) All non-DÈbtor peïsons and entities are permanently enjoinåd from commencing or continuing in any manner any action or other proceeding whether directly, derivatively or otherwise, on account of or respècting any claim, debt, right,. cause of action, oÊ liability released or to be released pursuant $$ the Comprehensive Settlement Agreement .

Th Allied/Federated de tors proposed in the January 1992 propose i Allied chapter 11 p an that Bank of Montreal and Paribas each re eive with respect to tiheir respective claims identified as clasjes A-6, AR-6, and AO 6 approximately 4.83 percent of the total o tstanding common sto k of RHC, to be distributed from the shares f RHC common stock tl at Allied was to own and that New Federated" was to own after the .effective date of the January 1992 proposed Allied chapter 11 plan.

The Allied/Fêderated .debtors proposed"in the January 1992 proposed Allied chapter 11 plan that Allied i-etain in its Oapac- ity as a stockholder of 'RHC' the shares "of the'RHC oommori stock that it was to own and that were nót to be distributed tio Bank of Montreal and Paribas ( i . e .

6 . 6 apercènt of . the' outstanding common stock of RHC) New Federated,- as the successor to Allied, was to retain and continue to own such stock.

In summary, . the Allied/Federated debtors proposed in. the January 1992 proposed Allied chapter 11 plan that the following companies own the followirig appròximate percerftages of the outstanding common stock o'f RHC aftež any distributions of that stock proposed in that proposed plan:

Entity Bank of Montreal Paribas New Federated Percentage of Outstanding Common Stock of RHC 4 . 8 4 . 8 6 . 6 In connection with the inclusion of the Ralphs transaction in the January 1992 proposed FSI chapter 11 plan and the January 1992 proposed Allied chapter 11 plan (collectively, the January 1992 proposed.chapter 11 plans), EJDC, Federated, FSI, and RHC "The January 1992 proposed Allied chapter 11 plan, October 1991 proposed Allied chapter 11 plan, -provided that Allied and Federated were to merge into a single surviving entity to be known as New Federated.

like the 52 - entere int-o a certain agree ent (proposed tax election agree- ment) , hich was to be effective as of the effective date of the Januar 1992 proposed- FSI ch ter 11 plan. «Those parties pro- posed i the proposed tax el ction agreement that FSI and New Federa ed (as successor to, Federated) -agree to prosecute dili- gently nd in good faith a ráquest to, be submitted to. the Inter- nal Re nue Service (IRS) fo certain rulings (section 382/384 rulings) regarding the applieation of sections 382 and 384 to the January 1992 proposed chapter 11 plans .

It was stated in the proposed tax election agreement that FSI, Ne Federated (as succe sor to Federated) , and RHC agreed to prosecu e diligently and in ood faith a.request to be submitted to the [RS for rulings (sect on 338,(h) (10) rulings) that:

(1) The Ralphs transaction constituted a qualified stock purchase under s ction 338 (d) (3) ; (2) RHC would be entitled to make an electio under section 338 (a) and (h) (10) with respect to its acquisi ion of Ralphs; (3) F I would be entitled to make an election under section 338 (h) (10) with respect to the Ralphs transac ion; and (4) any such elections would not adversely affect ertain rulings that the IRS was expected to issue with respect to whether the merge of Allied and Federated" consti- tuted a reorganization under section 368 (a) (1) (G) .

US e supra note 27.

The proposed tax election agreement stated that FSI agreed to make an election under section 338(h) (10) if (1) the section 338 (h):(10) rulings that the IRS issued weres "favorable" and (2) RHC determined- to.make an election under section 338(a) and (h) (10).

FSI agreed to make that election whether or'not the section 382/384 rulings that FSI and New Federated (as successor to Federated) requested from the IRS were "favorable".

The January 1992 proposed FSI chapter 11 plan was accepted in writ-ing by each of the creditors andeequity security holders whose acceptance was -required under the Bankruptcy Code.

On January 10, 1992, the Ohio UrS. Bankruptcy Court confirmed the January 1992 proposed 2FSI chapter-11 plan.

(We shall refer to the Januaryr1992 proposed FSI chapter 11 plan.as confirmed by the Ohio U.S. Bankruptcy Court as the confirmed FSI chapter 11 plan.)

The effective date of the confirmed FSI chapter 11 plan was February 2, 1992." On January 10, 1992, the Ohio U.S. Bank- "On Feb. 2, 1992, the proposed final indemnification agree- ,or their successors, made ment became effective. Ralphs and RHC, all payments totaling $10 million required by that agreement. Ralphs, RHC, or their successors claimed deductions for their respective payments in their respective tax returns for the In the taxable yeärs in which they made any such payments. notice, of deficiency for its taxable years ended Jan. 31, 1993, Jan. 30, 1994, Jan. 28, 1995, and June 14, 1995, that respondent issued to petitioner RGC on July 11, 2006,. respondent determined that if a valid election under sec. 338 (h) (10) had been made with respect final contingent ible for the year of payment. Petitioner RGC did not contest liabilities and therefore would not. have been deduct- indemnification agreement would have been assumed or the payments made under the to the Ralphs transaction, (continued...)

ruptcy Court also confirmed the January 1992 proposed Allied chapte 11 plan.

(We shall efer to the January 1992 próposed Allied chapter 211 plan -as confirmed by the Ohio U.S. Bankruptcy Court s the . conf irmed Allie chapter 11 plan. ) The ef fective date o the confirmed Allied chapter 11 plan was February 4, 1992.

T Ohio U.S. Bankruptcy Court stated in pertinent past in its or r confirming the Jan ary 1992 proposed FSI chaptee 11 plan (Chio U.S. Bankruptcy C urt'á order) the fol'lowing with respect to its confirmation f -that proposed plan.

C.

The provisions of the Plan shall bind the the Reor Janized Debtors and all credi- [F9I) Debtors, t cs and equity securitý holders of 'any of De tors, whether or not (the respective claims or inter- es s of such creditors or equity security holders are s im aired under the Plan, whether or not such creditors an¹ equity security holc}ers have accepted the Plan, and ' wh ther or not such creditors and equity security ho lders have filed proo(s of claim of de med to have filed proofs of claim of interest or are interest.

the [FSI] D. Except as othe wise provided in the Plan or thLs Order, on and afte the Confirmation -date:

(1) All entit es which have held, curi-ently .

hold or may hold a debt, claim, other liability or interest against any [FSI] Debtor that would be discharged, upon Ccnfirmation of Effective Date but for the provisions of section 1141(d) (3) of VI.G.1 of taking any of such debt, claim, Êiability, interest or right: (a) commencing or continuing in any manner any the sankruptcy Code and Section the Plan re permanently enjoined from the following actions on account of the Plan and the , ( .

. continued) that de ermination in the petition that it filed with the Court action or other proceeding on account of such claim against property which is to be distributed under Section IV, V, or VI of to enforce any right to distribut~ion with respect to such property under the Plan; attaching, collecting or recovering in any manner , any judgment, award, decree; or order -agàinst any (b) enforcing, the Plan, other than property to be distributed to creditors under Section IV, V, or VI of permitted under subparagraph (a) above; and (c) creating, perfecting or enforcing any lien or encumbrance against any property to be distributed under section IV, V,r or,VI of the Plan, other than as permitted by the Plan.

the Plan,- other "than as (2) All non-Debtor entities and individuals are permanently enjoined from commencing or con- tinuing in any manner, or otherwise prosecuting, any action or proceeding, whether directly, deri- vatively or otherwise, on account of or respecting any claim,«debt, right, cause of,action, or lia- bility that is released or to be released pursuant to the Comprehensive Settlement Agreement;- pro- that this injunction will not vided, however, prevent--any creditor (other than a Consénting Additional Party) of any [FSI] Debtor whose claim ,against a [FSI] Debtor is guaranteed by a third- party non-Debtor from prosecuting any direct claim against such third-party n'on-Debtor under any such guaranty.

the holder of such claim ac- The foregoing injunction shall apply to the holder of a debt, claim or interest, whether or not a proof of claim was Filed or deemed Filed, whether such claim was allowed, whether or not cepted the Plan, and whether or not ment was reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undis- puted, legal, equitable, secured, or unsecured. person injured by any willful violation of this injunc- tion shallarecover actual damages, including costs and attorneys' recover punitive damages from the willfula violator.

in appropriate circumstances, may the right to pay- fees, and, Any Ir the Ohio U.S. Bankru tcy Court's order, that court determi ed that the equity v lue of Ralphs was between $550 millior and $637 million.

As set forth in the Jan ary 1992 proposed FSI chapter 11 plan ar in the Ohio U;S. Ba kruptcy Court's order, after the confirmation of that proposed plan EJDC, Bank of -Montreal, Paribas and Campeau, as the parties that filed creditor claims against the FSI debtors, wer enjoined from further asserting any of the espective claims tha they had asserted in the FSI chapter 11 proceedings.

Af er the Ohio U.S. Ban ruptcy Court confirmed the January 1992 pr posed chapter 11 plans, the FSI debtors and the Al- lied/Fe erated debtors took åteps to comply with the requirements of the confirmed FSI chapter 11 plan and the confirmed Allied chapter 11 plan, respectively.

Iminediately before the Ralphs transaction was ef fected, the primary assets. of Holdings IIrI consisted, of :

(1) All of the outstanding common stock of Holdings II, the assets of which included directly or indirect ly the common stock and assets of Allied, Holdings, Federated, and their respective subsidiaries, (2) 83. /5 percent of the out tanding common stock of Ralphs, (3) the Allied note, and (4) the Federated note.

Thé FSI consolidated group filed Form 1120 for its taxable year en ed January 31, 1993 (FSI consolidated group 1/31/93 consolidated return).

The FSI consolidated group attached to that return a consolidated balance sheet in which it reported, based on book value, the following total assets and total liabil- ities as of the beginning of that taxable year- (i.e., February 1, 1992) of that group and of certain of its members:

Company/Group - FSI consolidated group FSI Holdings III Holdings II Holdings Federated Allied Ralphs Total Assetä $11,471,163,367 227,757-,850. 180,293,905 470,188,023 957,957 5,979,262,404 3,060,396,285 1,357,571,286 Total Liabilities $14,460,193,630 1,513,035,371 179,775,064 471,458,182 872,978 6,873,748,518 3,-719,114,874 1,414,776,300 include any amount repre- In the consolidated The term "Total Assets" does not senting the value of balance sheet that the FSI consolidated group attached to the FSI consolidáted group 1/31/93 consolidated return, "INTAN- GIBLE ASSETS", was left blank for dach member of dated group.

intangible assets.

that consoli- line 13A, On January 29, 1992.,- Jan Charles Gray (Mr. Gray) , an officer of Ralphs, incorporated RHC under the laws of Delaware.

On February 2,'1992, Mr. Gray approved a resolution that provided:

that RESOLVED FURTHER, the Corporation [RHC] issuance of is the contribution by Allied Stores Corporation and Federated Holdings III, Inc. of all of outstanding common stock of Ralphs Grocery Company; the fair considenation- for such the common stock of the issued and On February 3, 1992, Allied, Holdings III, and RHC entered into an agreement entitled '"CONTRIBUTION AND SUBSCRIPTION AGREE-

MENT".

That agreement -provided in pertinent-part:

D. Allied, Holdings III, and Ralþhs Holdings desire that the Holdings III Contributed Shares and the the Ralphs Holding Common immediately after giving effect in each case I.n exchange for the issuance to A lied- Contributed Shares -be contributed to Ralphs H ldings, H ldings III and Allied of St ock, such that tl ereto Ralphs Holding Ñill own all of , the issued and outstanding shares of RÀlphs Common Stock and Allied a d Holdings III togethÈr will own- all of the'issued ar d outstanding shares ir the same respective proportion as they together ogned all of Ra'lphs Common Stock imm diately prior to giving ef fect tllereto.

the issued and outstanding shares of f Ralphs Holding Common Stock

NOW, THEREFORE,

lows:

f the parties hereto hereby agree as 1. Holdings III hereby contributes the Holdings o Ralphs Holding in exchange the issuance to Holdings III of 27, 758, 527 shares II Contributed Shares f of Ralphs Holding CommoÃ'Stock ("Holdings III Ralphs H ding Shares") , and R lphs Holding hereby accepts the transfer of the Holding III Contributed Shares in full pa ment of the Holdings III Ralphs -Holding Shares.

2. Allied hereby áontributes the Allied Contrib- ut d Shares to Ralphs Hålding in exchange for the is uance to Allied of 5, 384, 330 shares of Ralphs Hold- in Common Stock (the "Allied Ralphs Holding Shares") , an Ralphs Holding hereby accepts the transfer of the' Al Lied Contributed Sharås in full payment of Allied Ho L ding Shares .

On February,3, 1992, pugsuant to "the confirmed FSI chapter 11 plan and the confirmed Al]ied chapter 11 plan, respectively Holding III and Allied tran ferred to RHC the respective out- s tandin common s tock of Ral hs that they owned (i . e .

, 8 3 . 75 percent and 16.25 percent, r spectively) . Pursuant to those confirm d plans, RHC transfe red to Holdings .III and Allied 83.75 percent and 16.25 percent, r spectively, of its outstanding common tock.

As a result o those transfers, RHC acquired 100 percent of the outstanding common stock of Ralphs, which was the only class of voting stock of Ralphs and, which accounted for over 80 percent of the total value of all of the stock. of Ralphs that was outstanding on February 3, 1992. After the Ralphs transac- tion, RHC' s only asset was the common stock of Ralphs -that it owned.

On Februarya 3, 1992, as required by the confirmed FSI chapter 11 plan, Holdings III transferred the stock of RHC thata it had received so that the following .creditors of FSI owned the following approximate percentages of the outstanding common stock of RHC:

FSI Creditor EJDC Campeau Bank of Montreal Paribas Percentage of Outstanding Common Stock of RHC 60.4 12.8 ,5.3 5 . 3 , Holdings III did not transfer to FSI any stock or assets of Ralphs, RHC, Holdings, Holdings II, Kllied, Federated, or any of their subsidiaries.

FSI did not receive the Allied note or the Federated note from -Holdings III.

Except for the common stock of Ralphs that it received from Allied as part of the Ralphs transaction, RHC did-not receive any "On Feb. 3, .1992, RHC .and Ralphs entered into an agreement under which RHC agreed to perform accounting, advisory, capital raising, and other services for Ralphs in exchange . fort a fee equal serv-1.ces.

to the direct and indirect costs to RHC of performing those stock assets of Holdings, Holdings II, Allied, Federated, oi any of heir -subsidiaries.

or did RHC receive from Holdings III the Allied note or - the Feder ed note .

N ther FSI nor RHC received any of the outstanding pre- ferred tock of Ralphs as pa t of the Ralphs transactions O February 3, 1992, as required by the confirmed Allied chapter 11 plan and pursuant to a certain written, binding agreem at, Allied transferred the common stock of RHC that' it had receiv so that the following entities owned the following approxi ate percentages of t e outstanding common stock o'f RHC:

Entity Bank of Montreal Paribas Allied Percentage of Outstanding Common Stock of RHC 4.8 ¯ 4 . 8 6 . 6 discussed below, on Feb. 4, 1992, pursuant^ to the confirm d Allied chapter 11 into a ingle entity known a New Federated.

lan, Allied and Federatèd ,merged Th distribution of the RHC stock to EJDC, Bank of Montreal Paribas and Campeau as required by the confirmed FSI chapter 11 plan an the confirmed Allied chapter 11 plan was not pro rata with re pect to the respective amounts of the respective claims asserte by. creditors and wa not pro rata with respect to the status f those creditors as secured or unsecured creditors .

Pu suant to the confirm d FSI chapter 11 plan, Holdings III receive with respect to its interest as the solei stockholder of Holding II any cash remaining after Holdings II paid certain administrative claims and priority claims against it and made all payments required to be made under that plan to certain of its unsecured creditors. Holdings III distributed that cash to FSI for distribution pursuant.to the confirmed FSI chapter 11 plan.

Under the confirmed FSI chapter 11 plan, no property was distributed to the following companies with respect to their respective interests:

(1) FSI didinot receive any property with respect to its interest:as the sole stockholder of Holdings III; (2) Holdings did not receive any property with respect to its interest as the sole stockholder of Federated; and (3) Holdings II did not, receive any property with respect to its interest as, the sole stockholder of Allied or with respect to its interest as a stockholder of Holdings.

On February 4, 1992, pursuant to the confirmed Allied chapter 11 plan, Allied and Federated merged into a single entity known as New Federated.

As patt of that merger, the operating assets of Allied's subsidiaries were -transferred to New Feder- ated. After the merger of Allied and -Federated, all of their respective- stock was canceled, -and the -stock of New Federated was issued to the respec'tive creditors of the Allied/Federated debtors.

For purposes of the:distribution of the stock of New Federated pursuant to the confirmed Allied,chapter 11 plan, the value of New Federated was estimated to be approximately $2,014,700,000 and the value of therNew Federated common stock that wai distributed tò creditors of the Allied/Federated debtors was est mated to be $25 per åhare.

The distribution of the stock of New Jederated was not pro rata with respect to the respective amounts of the respective claims asserted by creditors and was not pro rata with respect to the status of those creditors as secured or . unsecured credito s .

Pu suant to the confirm d Allied chapter 11 plan, Holdings III received 816, 000 shares df. common stock of New Federated with respect to its claim against Federated under the Federated Note.

Ass requ .red by the. confirmed FSI- chapter 11 plan, Holdings III (1) dis ributed'588,000 of tlose sharessin satisfaction of general unsecured creditor-claims against FSI and Holdings III.

and (2) sold the remaining 2 8, 000 shares sto provide cash ,to FSI.

No othe property was distril uted to or retained by Holdings III with re pect to its claim against Federated under the Federated note.

ursuant to the confi med Allied chapter 11 plan, Holdings III con ributed to Allied it claim against 'Allied under the Allied note.

No property wa distributed to or retained by Holding III on account of tl t claim against Allied.

On January 29, 1992, the same date on which Mr. Gray incor- porated RHC, Ralphse issued a information statement (Ralphs informa ion statement) to the persons who owned preferred stock of Ralpl s and, the persons whd held certain rights under a certain á equity ppreciation rights pl n (EAR plan) that Ralphs had | instituted in 1988.35 Ralphs attached the Ralphs information statement to a .memorandum from Byron Allumbäugh, .the chairman and the chief executive officer of Ralphs, that- was addressed to all the officers of Ralphs.

That memorandum stated:

Enclosed for your- review is an Information State- ment relating to the treatment of the outstanding Series A and Series- B Preferred Stock ,("Preferred Stock") of Ralphs Grocery Company and the Equity Rights outstanding under the Ralphs Grocery Company -1988. Equity Appreciation Rights Plan in connection with the consummation of Inc., which is expected to occur February 3, Stores, 1992. The Information Statement describes the planned redemption of your Preferred Stock, as well as certain proposed amendments to the Equity Appreciation Rights Plan and your individual Equity Rights Agreements negotiated by Ralphs.

the plan of reorganization of Federated Please review the Information Statement carefully.

the Equity Appreciation Rights Plan It describes the salient differences between the cur- rent provisions of and Equity Rights Agreements and theiproposed amend- ments to be adopted with your consent . Statement,also summarizes the terms of a Nonqualified Stock Option Plan to be adopted by Ralphs' new parent. company. As you know, it is proposed that each of you, as well as certain other key employees of Ralphs, will be granted options to purchase common stock of parent company as described in the Information State- ment .

The Information the Patrick Collins [one of the directors of Ralphs], Jan Charles Gray. [Ralphs' senior vice president- and . general counsel] , Alan Reed [Ralphs' chief financial officer] and I have spent many months considering and consulting with counsel and others concerning the proposed amendments .to the EquityaAppreciation Rights Plan, as well as possible alternatives.

We -believe the asThe EAR plan was''one of several separú.te executive compen- sation arrangements that Ralphs had instituted. in the EAR plan had the right to a percentage -of the appraised value of Ralphs over time.

The participants the increase in - 64 . aÅndments resolve fairiy several issues under the Plan an , when combined with the grant of stock options, re9resents a very attractive ongoing incentive package. Od this basis, Pat, Jan Alan and I intend to approve th proposal and we urg each of you to do the same.

T Ralphs information etatement described the material changes to the EAR plan,that would be effected by the proposed amendme ts to 4that plan, as described in that statement.

i The propose amendments to the E R plan did not require the redemp- tion cof any outstanding pref rred stock -of Ralphs .

Th Ralphs information tatement described the approval necessa y- to make the proposed, amendments to the EAR plan as follows

APPROVAL REQUIRED

The Amended Plan w 11 become effective as of Ja uary 31, 1992 only ife it is unanimously approved in wr ting by the holders df the Equity. Rights . Attached as Annex C to this Info mation Statement Co sent of Equity Right Holder - by which the holders are requested to evidende their approval of Pl n and of : the related First Amendment he eto as .Annex B) to. tlie Agreement .

is a form of (attached the,Amended To be effective, aßl such consents must be com- ted, sigríed and retu$ned to Jan Charles Gray, Esq., pl Ge eral Counsel of RalpÑs, on or before the close of bu iness on January 31, $1992. Ri íhts holder also must complete, sign and return the ex ra counterpart of th First Amendment me t enclosed herewith. (Equity Rights holders may wish to keep a copy of their onsent and the First Amendment as returned to Ralphs .

- In- additioñ, each Equity to ther Agree- ) Ì The, holders of Equ ty Rights are not required to the Amended Plan; . however, copsent th⁰ consequences of' failing to do so are uncertain.

to the adoption of The Ralphs information statement also discussed the proposed redemption of the outstanding preferred stock of Ralphs .

As of January 29,- 1992, - all of that preferred stock was owned by management and key employees of Ralphs.

The Ralphs information statement stated in pertinent part as follows with respect to that proposed redemption:

the Plan, the consummation of ' As the FSI plan for reorganization was being finalized, Ralphs's senior management engaged in discus- sions and negotiations with respect to, the treatment of the outstanding Preferred Stock and the outstanding Equity Rights in connection with the reorganization. Under the provisions of the FSI plan of reorganization and the resulting change in ownership of Ralphs' outstanding common stock could possibly be deemed to constitute a "change in control" of Ralphs within the meaning of as discussed below in more detail, nization had the potential payout obligation to the Equity Rights holders upon a consummation of the plan of reorganization. To avoid this result, - and to eliminate future, charges to Ralphs' earnings for financial accounting purposes associated with the Plan, EJDC proposed certain modifications to the Plan designed to- facilitate the FSI plan of reorga- nization while maintaining, the current benefits to the Equity Rights holders,under the Plan. Agreements discussed belowrare the end result of negotiat ions .

The proposed amendments to the Plan and the these to trigger an immediate cash to the extent practicable, the plan of reorga- As such, and the Plan.

* * * * *

REDEMPTION OF PREFERRED STOCK

The.Certificates of Designations (the "Certifi- cates") setting forth the respective rights, prefer- ences and privileges of Ralphs' outstanding Series A Preferred Stock and Series B Preferred Stock -each provide for the mandatory redemption (i.e., of control" as defined therein. permit Ralphs' the Preferred Stock in the event of a -"change in The Certificates also to redeem the Preferred Stock at any.

repurchase) ti e upon five days pri r notice to the Preferred Stock ho l ders . It is unclear whether the change in ownership of Ralphs' outstanding dommon stock that will result up n consummation of wo ld trigger a mandato y redemption of St ck pursuant to the Certificates; ho ever, Ralphs has agr ed to redeem the Preferred St ck, subject re rganization of FSI, the Preferred Stock of $10 per share in cash, or a total of $3 million.

f or the original price paid for the FSI plan of reorganization to the c nsummation of the Preferred in any event, the plan of This Information s atement will sežve as the re uisite notice of redŠmption under the Certificates. Pl ase be advised, in shares of Preferred Stock will be redeemed by Ra phs on or about February 5, 1992 (the "Redemption Date") , subject of reorganization of. FS]i.

to the grior consummation of therdfore that all of the plan the outstand- All shares of Pref red Stock will be redeemed, if are redeemed.

Upon redemption, each holder of a Pr ferred Stock will receive from Ralphs the Redemption On or after the Redemption Pr ce of $10 per share. Da e, a holder of Prefe red Stock will not have any rights as such holder ot her than -the right to receive thå redemption price updn surrender of ev dencing his or her P eferred Stock.

the certificates Th Ralphs information tatemènt did not- indicate that the redemption of the prefer ed stock of Ralphs was required or prohibited by the conf irmed SI- chapter 11 plan or , that any such redempt on was part of or pròvided for in that plan.

The con- firmed SI chapter 11 plan c ntemplated that the preferred stock of Ralp s would be redeemed ver the period 1992 to 1998, as specified in the terms of that preferred stock at the time that stock was issued.

The confirned FSI chapter 11 plan stated in pertinemt part as follows with respect to "any, redemption of the preferred stock:

Ralphs may redeem at its option the shares of Ralphs Preferred Stock held by any holder, at any time in whole or in part, at .the Initial Purchase Price.

* * * -* * * * The Ra-lphs Preferred Stock has no voting rights and may not be pledged or transferred except by the laws of descent and distribution. is subjected to a "change in control" Ral-phs' certificate of outstanding shares of Ralphs Preferred Stock will be redeemed at The change in - the Initial Purchase Price. ownership of Ralphs Common Stock that will occur pursu- ant provision with respect thereby requiring redemption of to the Plan may trigger the change in control In the event. Ralphs (as defined in incorporation, as amended) , all to the Ralphs Preferred Stock, the outstanding shares .

On: February 2, 1992, an attorney with iMorrison & Foerster, attorneys for FSI, sent a letter to the board of directors of Ralphs .

; In- that letter, the attorney stated his opinion that "under subsection 4.20 of the indenture dated as of August 26, 1988 between Ralphs and the United States Trust Company of New York as trustee . with respect to Ralphs 14 percent Senior Subordi- nated Debentures due 2000 (the "Indenture")" the Ralphs transac- tion would not result in a "change of control" .

Each of the holders of rights under the EAR plan acknowl- edged having read and received the Ralphs information statement and consented*to the amendments to the EAR Plan that were de- scribed in that information statement.

68 - Or February 3, 1992, EJDC, Bank of Montreal, Paribas, Camdev Propert i.es , Inc .

, * Allied, aÈid FSI, 37 as the stockholders of RHC, el cted directors of RH (RHC board of directors) : On that date, t ie RHC board of direc rs met via telephonic conference.

At that meeting, the RHC board of directors, acting on behalf of RHC as he sole -common stock older of Ralphs, elected new direc- tors of Ralphs (Ralphs board of directors) .

On February 3, 1992, th Ralphs board of directors met via telephonic conference. At t at meeting, the Ralphs board of directo s approved resolutior s (1) ratifying and approving all of the- actGons of and resolutíor s approved by the prior board of directo: s of Ralphs with res ect to the confirmed FSI chapter 11 plan, i icluding the issuance of the Ralphs information statement, and aut orizing the officers and directors.of Ralphs to take all necessa y actions to effect the transactions required by the confirm d FSI chapter 11 plar and (2) calling for the redemptión C milev Propertfies, Inc., which was an assignee'of Campeau, receive approximately 12 pedcent of stock o RHC pursuant to the confirmed FSI chapter 11 plan:

the total outstanding common 37A discussed above, unc er the confirmed FSI chapter 11 the outstanding chmmon stock of RHC that was to be plan, H ldings III distributeÊ to FSI a portion (i.e., 0.8 percent) of distrib ted to Campeau for subsequent sale for the purpose of satisfy ng certain obligationî and expenses arising under that plan. the conf irmed FSI chapter 11 þlan required that FSI distribute that po tion to Campeau.

o the extent FSI did ot sell any portion of that stock, on February 3, 1992, of allsof the preferred stock of Ralphs.

On February 3, 1992, the RHC board of directors passed a resolution approving the decision of thé Ralphs board of directors to redeem all of the outstanding preferred stock of Ralphs.

Neither the Ralphs.information statement nor the minutes of the respective board meetings of the Ralphs board of directors and the RHC board of directors indicated whether or not the $3 million required to redeem all of the outstanding preferred stock was to be deposited into an escrow account.

No mention was made in the confirmed FSI chapter 11 plan, the confirmed Allied chapter 11 plan, the FSI d.isclosure state- ment, or the Allied disclosure statement of any negotiations among the FSI debtors, the Allied/Federated debtors, Ralphs, RHC, EJDC,, Bank of Montreal, Paribas, or Campeau with respeòt to a- redemption of the outstanding preferred stock of Ralphs.' Nor did any of those documents discuss a planned redemption of that stock.

No discussion appeared in the compreheñsive settlement agreement, the proposed initial' indemnification agreement, the proposed final indemnification agreement, or the proposed tax election agreement regarding a planned redemption of the out- standing preferred stock of Ralphs.

Form 10-K, ANNUAL REPORT UNDER SECTION 13'OR 15(d)- OF THE SECURITIES EXCHANGE ACT OF 1934, lhat Ralphs filed in May 1992 with th U S. Securities and Exchange Commission (SEC) for its fiscal ear ended February 2 1992 (1992 Form 10-K) stated that all of he preferred stock of Ralphs remained outstanding as of Februa 2, 1992, the last day of «Ralphs' fiscal year, and that that st ck was subsequently iedeemed for $3 million.

In as sectio titled "Ownership of the Company", the 1992 Form 10-K stated hat "Since February , 1992 (the "Transfer Date") , all of the out tanding capital stoc of the Company, consisting of 100 shares f common stock, par alue $1. 00 per share , (the "Common Stock") has been held by Ra phs Supermarkets, Inc.

(the "Holding Company ) , a Delaware Corporation. " Ralphs attached a balance sheet to the 1992 Form 10-K.

Ralphs eported in that balar ce sheet the outstanding preferred stock a a $3 million liabil ty, and not as stockholders equity, as of the end of each of its fiscal years endeda February 2, 1991, and February 3, 1992.

I The réspective amounts of total assets and total liabilities as of Febr ary 2, 1992, that Ralphs reported in the bal nce sheet that it att ached to the -1992 Form 10-K were equal to the respective amour ts of - total assets and total liabil- * ities that the FSI consolidat ed group reported in the balance sheets ehat the FSI consolidated group attached to the- FSI consolidated group 1/31/93 consolidated return.

"I the respective cons lidated balance sheets that the FSI consoli at-ed group'attachéd t o the FSI consolidated group 1/31/91 . ) (continued .

.

On July 13, 1992, the Ralphs board of directors held a meeting via telephonic conference. At that meeting, the Ralphs board of directors adopted a resolution declaring that no pre- ferred stock of Ralphs remained outstanding, prohibiting the issuance of any preferred stock in the future, and eliminating all references to preferred stock in'Ralphs' certificate of incorporation.

Pursuant to the confirmed FSI chapter: 11 plan, on February 3, 1992, . RHC, Ralphs, Allied, Bank of Montreal, Paribas, EJDC, Camdev. Properties, Inc.," and FSI entered into a certain registra- tion rights agreement as part of the Ralphs transaction.

RHC granted to its stockholders under that agreement certain regis- tration rights- that permitted those stockholders to participate in certain registration offerings that RHC might inake of- its stock and allowed them to demand -that RHC register~ the stock that those stockholders received pursuant to the confirmed FSI chapter 11 plan and the confirmed All'ied chapter 11 plan.

" ( .

.

. continued) consolidated return and the FSI consolidated group 1/31/93 consolidated return, blank with respect financial statement balance sheets that Ralphs attached to the 1992 Form 10-K, stock" in those consolidated balance sheets.

"CAPITAL STOCK - PREFERRED", was is because, unlike the That there was no line item fòi- "Redeemableipreferred to Ralphs.

line 22A, W:ithin three months aft r the Ralphs transaction was ef- f ec ted, RSI (i.. e .

, Ralphs and Ralphs Supermarkets , , Inc . ) " adevel - oped a cecapitalization plan for those two companies.

As- a result, RSI filed a registra ion statement with the SEC with respec to a proposed public offering of the shares of common stock E RSI. Ralphs filed à registration statement with the SEC with re pect to a proposed offering of $300 million of Ralphs' senior subordinated notes .

On January 21', 1993, Ho dings III dissolved pursuant to the laws of Delaware.

The certificate of dissolution was signed' by FSI as he sole stockholder f Holdings III.

On the same date, Holding , Holdings II, and C I also dissolved.

On July 19, 1993 FSI dis olved pursuant to th laws of Delaware.

The respective common stock of Holdings III and FSI was canceled upon the dissolu ion of each of those companies . At no time did Holdings III rec ive any of its own s ock from -FSI.

In an order dated June 30, 1993, the Ohio U.S. Bankruptcy Court f hund that the estate f each of the FSI debtors had been fully administered, granted in its entirety FSI's motion for a final d cree, and entered a final decree closing the FSI chapter 11 proc edings.

kets, I April 1992, RHC cha ged- its name to Ralphs Supermar- I c.

In . an order dated June 25 , 20 01, the Ohio U. S . Bankruptcy Court found that the respective estates of the Al-lied debtors and the Federated debtors had -been fully administered and entered a final decree closing the Allied chapter 11 proceedings.

Around .October 12, -1993, FSI filed the FSI consol-idated group 1/31/93 consòlidated return. Ralphs was a member of the FSI consolidated group during the period -February 1 to 3, 1992.

The FSI consolidated group attabhed Form 8023, Corporate Qualified Stock Purchase Elections (Form 8023) to the FSI consolidated group 1/31/93 cons'olidated return.

In that form, FSI (1) identified (a) itself as the common parent of Ithe selling group, (b) "Ralphs Supermarkets, Inc."- as the purchasing-corpora- tion, and (c) "Ralphs Grocery Company" as the target corporation and (2) checked the box "Joint election under section • 338 (h) (10) " .

The FSI consolidated group also attached to ther FSI consolidated group 1/31/93 consolidated return a "Schedule Required Under Regs. 1.338-1T(e) (1) as to Includable Affected - Targets" .

In that schedule, FSI identified "Ralphs Grocery Company" as the includible target and reported that the percent- age of- Ralphs stock owned was 100 percent.

FSI did not- attach to the FSI consolidated group' 1/31'/93 consolidated return a copy of the confirmed FSI chapter 11 plan.

FSI also did not attach to that - return a statement executed under penalties of perjury that showed che purposes of or th t detailed all the transactions incider - or- pursuant to the onfirmed FSI chapter 11. plan.

FS t reported in the FSI consolidated group 1/31/93 consoli- dated turn that $475 milli n of consideration was paid in the Ralphs ransaction, that Ral hs had total .liabilities of $1,164, 90, 700, and -that Ral hs was subject to an election under sectio 338 (h) (10) .

FSI identified all of the $475 million of conside ation that it reported as paid in the Ralphs transaction as "De of Federated Stores Inc .

, and Subsidiaries held by credito s" .

FSI did not rep rt in the FSI consolidated group .

1/31/93 consolidated return any amount of "cash" or "purchase money d bt" as part of the c nsideration paid in the Ralphs transac ion.

Thã FSI consolidated grdup attached Schedule D, Capital Gains añd Losses (1/31/93 ScÈedule D) , to the FSI consolidated ' group 1 31/93 consolidated return.

In that schedule, FSI re- ported ith respect to the t ansaction in whi-cheFederated incor- porated Ralphs long-term cap tal gain of $492,618,173 (i e.

the Ralphs 1eferred intercompany gain) and ordinary income of $81, 723 870 .

In addition, F I reported in that schedule with respect to the Ralphs transac ion a gross sale price, of , $1,639,990,700, a cost. or other basis, plus expense of sale, of $1, 303, 901, 70.0 , and a long-tdrm capital gain of $335, 889, 000 that resulted from the election under section 338(h) (10) that FSI made with respect to the Ralphs transaction.

The FSI consolidated group owed no Federal tax for the taxable year sended January 31, 1993, except for the alternative minimum tax, certain recapture taxes, and certain environmental taxes.

Taking into account the-gain report-ed on the 1/31/93 Schedule D, FSI showed gain in excess. of $900 million resulting from the Ralphs deferred intercompany gain,and the election under section 338 (h) (10) that it made with respect to the Ralphs transaction.

That gain was offset by a net operating,loss deduction available to the FSI consolidated group for the taxable year ended January 31, 1993 .

RSI filed Form 1120 for its consolidated group, which included Ralphs, for each of the taxable years ended January 31, 1993 .(RSI consolidated group 1/31/93 consolidated return), January 30, 1994 January -28, 1995,:and June 14, 1995. RSI filed an amended consolidated group return for the taxable year ended January- 31, 1993 (RSI,consolidated group 1/31/93 amended consoli- dated return), which the IRS received around November 18, 1993, and treated as filed on that date.

"FSI also attached to the FSI consolidated group 1/31/93 consolidated return Form 8594, Asset Acquisition Statement. that of $1,639,390,700 with respect form, FSI reported a total sale price and assets transferred to the Ralphs transaction.

In I the respective RSI consolidated returns filed for the taxabl years ended January 31, 1993, January 30, 1994, January 28, 19 5, and June 14, 1995, the Ralphs transaction was treated as.a p rchase under section 38(h)-(3) because a timely election under s'ection 338 (h) (10 ) had been made a R I attached Form 8023 to both the RSI consolidated group 1/31/9 consolidated return And the RSI consolidated group 1/31/93 amended consolidated return.

In that form, RSI (1) id atified itself as -the purchasing corporation and "Ralphs Grocery Company" as the targ t corporation and " (2) checked the box "J nt election under seetion 338(h) (10)". RSI also attached to the RSI consolidated grou]S 1/31/93 consolidated return a "Sched e Required Under Regå; 1.338-1T(e) (1) as to Includable Affecte Targets".

In that chedule, RSI identified "Ralphs Grocer Company" as the incl dible target and reported that the percent ge of Ralphs stock o ned was 100 percent.

RSI did not attach o the RSI consolidat d group 1/31/93 consolidated return or the SI consolidated group 1/31/93 amended- consolidated return a copy f the ,confirmed FSI hapter 11 plan.

RSI also did not attach Þo either of di those ret urns, a statement executed under penalti s of perjury that sh wed the purposes of or that detailed all the transactions inciden or pursuant to the confirmed FSI chapter 11 plan.

RSI reported in the RSI consolidated group 1/31/93 consoli- dated return that $475 ,million of consideration was paid in the Ralphs transaction, that Ralphs had total liabilities of $1,164,390,700, and that' Ralphs was subject to an election under section 338 (h) (10) .

RSI identified all of the $475 million of consideration that it reported as paid in the Ralphs transaction as "Debt of Federated Stores,- Inc , ands Subsidiaries held by creditors" .

RSI did not report in the RSI consolidated group 1/31/93 consolidated return any amount of "cash" or "purchase money debt" as part of the consideration paid.

RSI attached Form 8594 to the RSI consolidated- group 1/31/93 consolidated return and the RSI consolidated group 1/31/93 amended consolidated return.

In that form, RSI reported a total sale price and assets transferred of $1, 639, 390 , 700 .

t In Form 8594, RSI allocated that sale" price to certain classes of assets as follows:

Asset Class Class I Class II Class III Class IV . Amount $ 6,800,000 1, O⁰⁶, 964 , 727 595, 625, 973 In the RSI consolidated group 1/31/93 consolidated return and the RSI consolidated group 1/31/93 amended consolidated return, pursuant to section 13261(g) (2) and (3) of the Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66,- sec. 13261(g) , 78 - 107 St t. 540, RSI elected r troactive application of section 197, entitled. "Amortization of Goodwill and Certain Other Intang bles" O ! June 14, 1995, Food 4 Less Holdings, Inc.

(Food 4 Less) acquir d all of the outstand ng common stock of R.SI.

On the same date, Food 4 Less merged Ral hs with and into RSI, with RSI as the surviving corporation.

RSI changed its name'after that merger t·o Ralphs Grocery Com any (RGC) .

Or March 10, 1998, Fred Meyer acquired all of the common stock Food 4 Less in a me ger.

As a result of that merger, Food 4 Less became a wholly Ewned subsidiary of Fred -Meyer.

Discussion I their respective motions for partial summary judgment, the pa ies ask us to decide whether RHC and FSI made a valid ' joint election under section 338(h) (10) with respect to RHC's acquisi ion of all of the out standing common stock of Ralphs from Holding III and Allied that took place as part of the Ralphs transac ion. Before we addr ss that issue, we shall briefly summarize the Ralphs tiransact ion that took place pursuant to the- confirm d FSI chapter 11 pla and the confirmed Allied chapter 11 plan.

En that transaction, RHC, a newly formed company, acquired all of he outstanding commor stock of Ralphs from Holdings III R C, RSI, and RGC are the same entity as Ralphs .

11 the same entity, which is not and Allied, the respective owners of 83 75 percent and 16.25 percent, of that outstanding stock.

In exchange for:the respec- tive Ralphs stock that RHC acquiredefrom GHoldings III and Allied, RHC issued to those companies 83.75 percent and 16.25 percent, respectively, of its outstanding common stock. Thereafter, (1) Holdings III distributed all of the outstanding RHC common stock that.it held to EJDC, Bank of Montreal, Paribas, and Campeau," which were certain of FSI's creditofs, and (2) Allied (a) distributed a.portion (i.e., 9.65 percent) of the outstanding RHC common stock -that it held to Bank of Montréal and Paribas, which were certain of Allied's creditors, and (b) retained the balance (i.e., 6.6 percent)." After those distributions to the respective creditors of FSI and Allied, those' creditors owned the following approximate gercentages of the outstanding common stock of RHC:

,, Owner EJDC Campeau Bank Montreal Paribas Percentage of Outstanding Common Stock of RHC 60.4 " 12.8 - 10.1 10.1 "Campeau owned 100 percent of the- outstanding stock of FSI.

"As part of the confirmed Allied chapter 11 plan, Allied merged with and into Federated, and the resulting company was known as New Federated. ated held the assets of:Allied, which included 6.6 percent of outstanding RHC common stock that Allied had retained under the- confirmed Allied chapter 11 plan.

As a result of that merger, New Feder- the T e parties agree that there are no genuine issues of material fact" and that summary adjudication is appropriate with respect to the issue under section 338 (h) (10) that the parties ask us to decide in their respective motions for partial summary judgment:

The parties also agree that (1) our fesolution of the issue under section 338 (h) (10) depends on whether RHC's acquisi- tion of all -of the outstanding common stock of Ralphs from Holdin III -and Allied constitutes a qualified stock purchase under section 338 (d) (3) ; (2) our resolution of that question under ection 338 (d) (3) depends on whether that acquisition consti tes a purchase under section 338 (h) (3) ;'S and (3) our e e supra note 1.

4s(ec. 338 (h) (3) defines the term "purchase" in pertinent part as follows:

SEC. 338(h) . Defi p cposes of this sectio itions and Special Rules.--For [338] -- i * * * * * * (3) Purchase.

(A) In g neral.--The term "purchase" means any acq isition of stock, but only if-- the stock in the the basis of the purchasing corporat'ion is in whole-or in part (i) hands of not detei-mined (I) by referŠnce to the adjusted basis of the person such stodk in the hands of [and] from whoS acquired, * * * (ii) the stock is not acquired in an exchar ge to which section 351, 354, (continued. .

. ) resolution of that question under section 338 (h) (3) , and there- fore our resolution of the question under section 338 (d) (3) , depends on whether; as respondent mairitains' and petitioners disput.e, the Ralphs transaction constitutes a reorganization under section 368 (a) (1) (B) , (C) , or (G) .

We thus address whether the Ralphs,transaction constitutes a reorganization under section 368 (a) (1) (B) , (C) , .or (G) .4 It is the position of respondent that RHC's acquisition of the outstanding common stock of Ralphs from Holdings III and 4s ( .

.

. continued) 355, or 356 applies and is not acquired in any other transaction described in regulations in which the transferor does ndt recognize the entire amount of' the gain or loss realized on the transaction * * * Respondent argues, inter alia, that as part of the Ralphs transaction stock was acquired in an exchange to which sec. 354 the outstanding applies and that therefore RHC's acquisition of common: stock. of Ralphs does not constitute a purchase because of sec. 338 (h) (3) (A)~(ii) . that qualifies as a reorganization under sec. 368 (a) (1) . v. Commissioner, 368 U.S. 337, 343 (1961). that under sec . 368 (a) (1) (B) , the Ralphs transaction does- not qualify as a reorganization Sec. 354 applies only to a transaction . 354 would not apply.

If we were to find (G) , sec .

(C) , or Turnbow "Our discuásion is limited to the three types of reorgani- the reorganizations zations on which respondent relies (i;e., described in sec . 368 (a) (1) (B) , {C) , and (G) ) respondent' s position in respondent' s motion. The parties agree that if the Ralphs transaction were to be treated as a reorgani-- zation qualifying.under sec. 368(a) (1) (B), would be Ralphs. transaction were to be treated as a reorganization qualifying under sec . 368 (a) (1) (C) or Holdings III.

The parties also agree that if the Ralphs the target corporation would be in support of the target corporation (G) , Allied does not constitute a purchase under section 338 (h) (3) and thereföre does not constitute a qualified stock.purchase under section 338 (d) (3) .

That is ecause, according to respondent, the Ralphs transaction qualifies as a .reorganization under section 368 (a) (1), (B) , (C) ,- and (G) , and consequently RHC has' a carryover basis u der section 362 in t respective Ralphs common stock that its received from Holdings III and Allied., See sec.

338 (h) (3) (A) (i) (I) .47 Responelent does not dispute that if we were t find that the Ralphs transaction does not qualify' as a reorga ization under sec tion 368 (a) (1) (B) , (C) , or (G) , RHC' s acquisi ion of all of the outstanding common stock of Ralphs from Holding III and Allied woul , as petitioners maintain, consti- tute a urchase under sectio 338 (h) (3) and a qualified stock purchas under section -338 (d) (3) , and consequently RHC and FSI would h ve made a valid joint election under section 338 (h) (10) with respect to that purchase:

Seption 368 sets forth certain statutory requirements in orde'r f r a transaction to qualify as a reorganization under section 368 (a) (1) (B) , (C) , o (G) See, e . g .

, sec . 368 (a) (1) (B) , (C) , (G (2) , (b) .

In addit ion to those statutory requirements, the cou ts have established certain nonstatutory requirements in order f r a transaction to q alify as a reorganization undet any of those provisions of that ection.

One 'of those nonstatutory 47S e supra note 45.

83 - requirements known as the continuity-of -interest requirement mandates that "the taxpayer' s ownership interest in the prior organization must continue in a meaningful fashion in the reorga- nized enterprise." Paulsen v. Commissioner, 469 U.S. 131, 136 (1985)4 see LeTulle v. Scofield, 308 U.S. 415 *(1940) ; Pinellas Ice & Cold Storage Co. v.

'Commissioner, 287 U.S. 462 (1933) .

According to the Supreme Court of the Unite'd States (Supreme Court) , "this interest must be definite and material; [and] it must represent a substantial part of the value of the thing transferred." Helvering -v. Minn. Tea Co. ,a 296 U.S. Š78, 385 (1935) ; - see , Paulsen v . Commiss ioner, supra; secs .

1 . 368 -1 (b) , 1.368-2(b) (2), Income Tax Regs.

We limit ourselves to consider- ation of the continuity-of -interest requirement .

That is because our resolution of whether the Ralphs transaction satisfies that requirement resolves the question of whether that transaction constitutes a reorganization under sdction 3Í58 (a) (1) .(B) , (C) , or (G) .

For 1992, the year in which the Ralphs transaction. occurred, transitory ownership of stock in the acquiring corporation by the transferor's stockholders is to be disregarded in determining whether the continuity-of-interest requïrement is satisfied."

"Under regulations applicable to transactions occurring after Jan. 28, 1998, satisfied regardless of whether the stockholders of feror dispose of their stock in the acquiring company after those ) the continuitylof-interest requirement is the trans- (continued. .

.

See, e.g., Penrod v. Commiss oner, 88 T.C. 1415, 1427 (1987) ; Heintz (v. Commissioner, 25 T C. 132, 142-143 (1955) .

Respondent maintains thát the continuity-of -interest re- quirement would be satisfied with respect to the Ralphs transac- tion if certain creditors of FSI" were treated as equity owners of FSI or purposes of the r organization provisions on which respond nt relies .

In suppo t of respondent' s argument that those reditors should be treated as equity owners for those purposes, respondent relies on Helverinq -v. Ala. Asphaltic Limestone Co .

, 315 U. S . 179 (1942) (Alabama Asphaltic ) , which .

respond nt maintains "is squ rely applicable in this case [sic]". ° According to respo dent:

" ( .

.

. continued) stockhol.ders receive that stock. 804.

See T.D. 8760, 1998-1 C.B. 803, " arsuant to the confirthed FSI chapter 11 plan, certain credito s of FSI received 83.75 percent of all of common tock of RHC. their arguments with respect satisfi s the continuity-of- nterest requirement on the receipt in RHC stock by certa,in creditors of FSI and do not of cert on the receipt of certain RHC stock by certain creditors of Allied.

to whether the Ralphs transaction the outstanding the parties focus We shall do the samå.

See infra note 54.

focus Thus, soI is -respondent' s position that Congress' enactment into the Cod of sec. 368 (a) (1) (G)) did not fundamegtal stepping into the shoes principle of Alabama Asphal- ti c . " "change or eliminate the Ac cording to re sponder t :

law that was adopted as the "G" reorganization in [Bankruptcy Tax Act of 1980, Pub. L. 96-589, sec.

, Th 19 0 4, 94 Stat. 3401] specifically approved the application of Alabama Asphaltic and extended its principle to (cont inued .

.

. ) the newly-created entity is -transferred to The [Supreme] Court's rule stated in Alabama Asphaltic is simple and direct. A valid reorganization in which the stock of the creditors of a corporation rather than the stock- holders requires that: be insolvent; and 2) -the insolvent debtor corporation's creditors must receive the stock in the entity pursuant to a reorganization.plan.. Alabama Asphaltic, 315' U.S. 183-84.

the debtor corporation must 1) * * * Relying on what respondent calls the "simple and direct" rule of Alabama Asphaltic, respondent concludes that the bankruptcy of FSI qualifies its creditors as equity holders for continuity of Therefore, percent of tains the qualification under the continuity of est doctrine.

the distribution by Holdings III of 83.75 the stock of RHC to FSI's creditors main- interest purposes.

inter- * * * Respondent acknowledges that under Alabama Asphaltic."the creditors must take effective command over the insolvent'* * * corporation's assets". According to respondent, such "effective command" to sfinding continuity of in this case [sic]; * * The creditors of- took overt steps to exert their control over itsa is vital is present FSI assets. FSI's assets included the Ralphs stock. While interest, and * * * * (...continued) :

c editors who had·less than senior rights but who became post-bankruptcy shareholders.

* * * Petitioners do not disagree with respondent's statements to the effect- of the enactment of sec. 368 (a) (1) (G) with respect on the principles of Alabama Asphaltic. issue with respect respondent argues. under Alabama Asphaltic- we should treat certain creditors of FSI as equity owners of FSI for purposes of determining whether the continuity-of-interest requirement transaction.

We thus address the only to the continuity-of-interest requirement that that As discussed below, is satisfied in the Ralphs issue is whether - the bankrupt corporation, Ralphs stock R lphs was not was undeniably an asset of FSI, and was ultimately t en possession of by SI's creditors in the bank- ruotcy plan.

{Citation omitted.]

• In support of responden ' s contention thats "the creditors of FSI to overt steps to exer their control over -its [FSI' s] assets" respondent asserts that the date that EJDC and the other creditors insti- o tu ed bankruptcy procee ings, sh es of Campeau and be ame the equity owners of FSI an of all that FSI own d. ti e command over the assets of FSI.

they stepped into the They thereby gained effec- P itioners counter tha the instant cases are materially disting ishable from Alabama Asphaltic.⁵¹ I Alabama Asphaltic, Inc.] was a -Stockholders thŠ notes was approaching and not old corporation -[Al bama Rock Asphalt, the noteholders Uould agree to take stock for T su sidiary of a corporat ion which was in receivership in 1929. f the parent had financed the ol 1 corporation taking ånsecured notes for their ad- va ices . Maturity of al of th ir claims. Accordinfly, a creditors' committee was fo med, late in 1929, add a plan of reorganization was pr posed to which all tlŠe noteholders, except as ented. wo ld be formed which would acquire all th old corporation. the new corporation, pr ferred and common, wSuld be issued to the creditors to the plan, in satisfaction of The plan pro ided that a new corporation claims. Pursuant the assets of T¹ e stock of thei two, the instantycases are siP titioners also maint in that materia ly distinguishable f om the cases decided after Helvering v. Ala.ilAsphaltic Limestone Co., 315 U.S. 179 (1942), found tnat case to be contro]Sling in holding that certain credi- tors inŸolved in those cases (should be treated as equity owners for purboses of shall r fer to those cases d cided after Alabama Asphaltic" that the pa ties cite as the Alabama Asphaltic have -so held and that progeny ) the continuitdy-of-interest .requirement.

that have (We * * * * *, Thereafter, * The bankruptcy trustee offered thes [insol- involuntary bankruptcy proceedings were instituted in 1930. vent corporation's] assets for sale at public auction. They were bid in by the creditors' committee for $150,000. tic Limestone Co.] was formed and acquired all assets of the bankrupt.corporation. whether the acquisition was directly from the old corporation on assignment of mittee. Pursuant stock to the creditors of to the noteholders and the balance to small creditors. * the old corporation--over 95% the bid or from the com- It does not appear [Alabama Asphal- to the plan, respondent issued its respondent the * * Helvering v. Ala. Asphaltic Limestone Co., supra at 181-182.

On the basis.of the above-quoted facts, the Supreme Court concluded in Alabama Asphaltic that the continuity-of-interest requirement enunciated in cases like Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462 (1933), and LeTulle v.

Scofield, 308 U..Sa 415 2(1940), was not satisfied since the old stockholders were eliminated by the plan, no-portion whatever of their proprietary interest being preserved for them in the new corporation. clear that the fact that most part- stockholders of the parent compäny does not is The equity interest bridge the gap. one step removed from the equity interest in the sub- sidiary. were not grahted participation inathe plan qua stock- holdere.

the stockholders of the parent the creditors were for the in thé parent In any event, And it is Helvering v Ala. Asphaltic Limestone Co., supra at 183.

Nonetheless, the Supreme Court concluded in Alabama Asphal- tic on the facts there involved that it is immaterial ownership of holders to the creditors of Plainly, Technically, that the transfer shifted the the equity in the property from the stock- the old corporation.

the old côntinuity of interest was broken. that did not occur in this proceeding In this case, the property.

it took place not they had ef f ective is2> ther secured or unse ured, u til the judicial sale took place .' For practical purposes, however, lat er than the time when the creditors took steps to enforce their demands, against their insolvent debtor. tlþt was the date of th institution of bankruptcy proceedings . From that time ,on, command over the disposition of priority rule of Northefn Pacific Ry. Co. v. Boyd, 228 U.S. 482, applies to pr ceedings in bankruptcy as well as to equity receiverships . w st .ckholders entirely f om the reorganization plan when t e of it conforms ,to realities to da e their equity ownership from the time when they ,in oked the processes of the law to enforce' their rights of full priority. At that in o the shoes of no hing but recognize officially what had before been tr e in fact." Helverir q v. New Haven & S.L.R. Co.

luded and the old crŠditors become the stockholders the new corporation, It gives' creditors, the right to exclude F . 2d 985, 987 [2d C$r . 1941) .

When the equity owners are the o d stockholders .

debtor is insolvent time they stepped The sale "did The full That conclusion involves no conflict with the pra.nciple of the Le Tul e case.4533 A bondholder inter s2In N. Pac. Ry. Co. v. Boyd, 228 U.S. 482 (1913), the the stockho]Îders and certain bondholders of Supreme Court held that a codrt-approved plan of reorganization under which an insolvent cordoration sold its assets to a new corpora ion that the insolve t corporation owned cfid not serve to eliminate or defeat the cla m of an unsecured cr/ditor of who sought against the unsécured creditor's interest was superior to the interest of the sto kholders of stockho ders took their interest in the new corporation sübject to the claim of the insol ent corporation and thãt the new corporation a judgment The Supreme Court held that the insolvent corporation.

the insolvent corporation the unsecured creditor.

to enforce against those 33Ne "Le Tulle case" to which the Supreme Court referred is LeTulle v. Scofield, 308 U.S. 415 (1940) . Supreme Court held that there was no tax-free reorganization where t e transferor company transferred its assets in exchange for cash and shortiterm notes of In so holding the Supreme Court concluded that, where the consider- ation f r the transfer consisted solely of bonds, he transferor did not retain any proprietary interest in . ) the transfekee company.

the transferee' s In that case, (continued. .

the .

in a.solvent, company plainly is not est of a proprietary interest, even though upon default bondholders could retake the property transferred: mere possibility of a proprietary interest is, of course, not controlling factors of the debtor's insolvency and an effective command by the creditors over the property were absent in the Le Tulle case.

its equivalent . But the determinative and [Citations omitted.]

the equivalent the The Helvering v. Ala. Asphaltic Limestone Co., 315 U.S. at 183-184.

The parties in the instant cases agree, and we conclude, that it was material to the Supreme Court' s holding in Alabama Asphaltic that the continuity-of-interest requirement was satis- fied that the creditors "had effective command over the disposi- tion of the property", id. at 183, of the insolvent debtor corporation.

A principal disagreement between the parties here centers on the identity under Alabama Asphaltic of the insolvent debtor corporation over whose property its creditors must have such "e f f ec t ive command" .

Petitioners .argue that under Alabama Asphaltic (1) the insolvent corporation over whose property its creditors must have "effective command" must be the target corporation in the pur- ported reorganization, and (2) the direct creditors of that target, corporation must receive the stock of the company that acquired the stock of the -insolvent target corporation or its property. According to petitioners, under Alabama Asphaltic the continuity-of-interest requirement is not satisfied in the (. the new company.

.continued) instant cases because (1) Ralphs, which the parties agree would be the target in the case of a reorganization qualifying under sectio 368 (a) (1) (B) , and Holdings III, which the parties agree would a the target in the cise of a reorganization qualifying under oction 368 (a) (1) (C) o (G) , were solvent at all times during ghe chapter 11 proceedings, and (2) neither Ralphs nor Holding³ III had any creditors who received RHC stock in the Ralphs ransaction.⁵⁴ Re spondent does not dispute (1) that Ralphs and Holdings III were so tvent at all times during the chapter 11 proceedings and (2) th neither Ralphs nor Holdings III had any creditors who receive i RHC stock in the .Ra]iphs transaction.⁵⁵ Respondent argues Lnstead that under Al bama Asphaltic (1) the insolvent corpora ion over whose propeñty its creditors must obtain "effec- tive co mand" need not be th target corporation in the purported s4P irsuant to the confirt ed FSI chapter 11 plan, Campeau was 0.8 percent of tlje outstanding common stock of RHC.

the dutstanding common stock of RHC that to rece .ve 12.8 percent of However Campeau was to receive was td be dïstributed to FSI pursuant that pl n. of sati confirm d FSI chapter 11 plar$. any por ion of RHC tha it received, FSI was required under that plan to dis- tribute that portion to Campeau.

to that stock for. the purpose fying certain obligatgons and expenses arising under the To the extent FSI did not sell FSI was required (to sell the outstanding common stock of the 0 .8 percerft of ssS e supra note 54.

reorganization, " and (2) the direct creditors of that target corporation need note receive the stock of the company that acquired the stock of the insolvent target corporation or its property. According to respondent, in determining whether the continuity-of-interest requirement is satisfied in the Ralphs transaction, it is appropriate and necessary under Alabama Asphaltic to inquire (1) whether the creditors of the insolvent FSI, which the parties 'agree would not be a target corporation in the case of aareorganization qualifying under section 368 (a) (1) (B) , ( C) , or (G) , "had ef f ective command oven the disposition of the property [of FSI]", Helvering v. Ala. Asphal- tic Limestone Co., supra at 183, and (2) whether the creditors of the insolvent FSI received the st.ock of RHC. Respondent main- tains that the parties' agreed facts require affirmative answers to the, foregoing inquiries.

We' need not resolve the' parties' disputes over (1) whether or not under Alabama Asphaltic the -insolvent corporation over whose property its credi'tors must have "effective dommand" must be the target corporation in the purported reorganization and s Respondent cites no case, and we have found none, a court has held Alabama Asphaltic to be controlling on the question of whether creditors of an insolvent corporation are to be treated as equity owners of the continuity-of-interest requirement where the insolvent corporation (in the instant cases FSI) tion in a purported reorganization.

that corporation for purposes .of the target corpora- in which is not (2) whether or not under that case the direct creditors of that insolvent target corporation must receive the stock of the compan that acquired the st ck of that target corporation or its property.

That is because, assuming arguendo that respondent a were correct in respondent's view as to the appropriate and necess ry two inquiries unde Alabama Asphaltic that should be made i the instant cases, we find on the basis of the parties' agreed facts that the answer to the first of those inquiries is that t creditors of FSI. di not obtain "effective command" over FSI' s coperty. « I Alabama Asphaltic, " ffective command" over the insolvent corpora ion' s property arose because its creditors took steps by instit ing involuntary bankèuptcy proceedings against it to enforce their rights under the so-called full priority rule of N.

Pac. Ry⁹. Co. v. Boyd, 228 U.S. 482 (1913) , "to exclude stockhold- il ers [of the insolvent corpor tion] entirely from the reorganiza- tion pl n when the debtor is insolvent." Helvering v. -Ala.

Asphaltcc Limestone Co., sup a at. 183-184.

Un ike the facts in Alabama Asphaltic, in the instant cases EJDC, B nk of Montreal, Pari as, and Campeau,57 the creditors of FSI tha pursuant to the conf irmed FSI chapter 11 plan received s?W shall sometimes ref r collectively to EJDC, Bank of Montrea l, Paribas , and Campeau as the FSI screditors .

83.75 percent" of the outstanding common stock of RHC from Holdings III, did not take steps-against FSI to enforce their rights under the so-called full priority rule -"to exclude stock- holders [of FSI] entirely from the reorganization plan".

Id.

In fact, unlike the.facts in Alabama Asphaltic, in the instant cases the FSI creditors did not, as respondent asserts, commence involuntary bankruptcy proceedings"against FST.

Instead, FSI filed in the California U.S. Bankruptcy Court" a voluntary petition under chapter 11, entitled "Reorganization", of the Bankruptcy Code, 11 U.S.C. secs. 1101-1174. Unlike the facts in Alabama Asphaltic, in the instant cases FSI operated as a debtor in possession" at all times, during the FSI chapter 11 proceed- ings.

The FSI creditors did not object during those proceedings to FSI's acting as a debtor in possession. Nor did any.of those creditors ask the Ohio U.S. Bankruptcy Court to appoint a "See supra note 54.

"Hereinafter, all references to the FSI chapter 11 proceed- ings are to those proceedings after venue in those proceedings was transferred to the Ohio U-.S. Bankruptcy Court. For conve- nience, we shall refer to any filing in the FSI chapter 11 proceedings with the Ohio U.S. Bankruptáy Court as FSI's filing with that court.

"As a debtor in possession, FSI continued torcontrol its assets and operate its business in the same manner as it had done before the commencement of addition, during the pendency of- the FSI chapter 11 proceedings FSI continued to be managed by the officers that had managed FSI before the FSI chapter 11 proceedings had commenced.

the chapter 11 proceedings.

In trusted."

The FSI creditors did not file with the Ohio U.S.

Bankru tcy - Court .any propose plan of reorganization" in the FSI chapte 1r proceedings.

Instead, on January 8,, 1992,% FSI filed with the Ohio U.S. Bankruptcy Court- the January 1992 proposed FSI chapte 11 plan." Although ånder the January 1992 proposed FSI trustee program, a component of is respånsible for promoting the efficiency he U.S. ment of Justice that and proyecting the integrity of That program appointed oversa |the FSI chapter 11 proceedings. an offihial committee of unsdcured creditors in the FSI chapter 11 proc edings but did not the assets of FSI and did not have the authorit y to direct the disposition of that company s assets or to managg that company's business during the pendenc of ythe FSI chapter 111 proceedings .

the Federal bankruptcy system, t$ke possession of the U.S. Departs , "The term "plan of reoreanization" is used to refer to a the Bankruptcy Code and is not plan de%crilied in chapter 11 fof intendeÊì to refer to a plan f reorganization for tax purposes. See supfa note 19.

"FSI filed several propoded plans of reorganization with the OhiÊ> U.S. Bankruptcy Cou t before filing on Jan. 8, 1992, another proposed FSI chapter 11 plan. At no time di'd the FSI creditors seek to reduce the time during which FSI had the exclusi e right· to file a pr posed plan of reorganization with the Ohi¢ U.S. Bankruptcy Cou t. Nor did those creditors object to the exclusi e right to file a proposed plan of reorganization with that court .

to ext end the time during which it had the equests of FSI inter alia, "O Oct. 28, 1991, FSI filed with the Ohio U.S. Bankruptcy That plan that tŠe FSI creditors receive from Hold- Court t e October 1991 propoSed FSI chapter 11 plan. propose i ings II certain stock of Ra]/phs in satisfaction of their credi- tor claims against FSI. Res](ondent in furt er support of respon ent's assertion that of FSI Respond nt contends :

the "creditors ook overt steps to exert their control over its assets."

focuses on that proposed plan * The [Ralphs] transaction here was undertaken at th very end of the ban] ruptcy proceedings when the (continued. .

) chapter 11 plan the claims of secured creditors of 4 FSI except class 11" were impaired and certain unsecured creditors of FSI were to receive property with respects.to their claims none of the FSI creditors objected to or rejected that proposed plan.

In fact, those creditors accepted in writing the January 1992 proposed FSI chapter 11 plan, and the Ohio U.S: Bankruptcy Court c onf irmed i t on January 10 , 19 92 .

On the parties' agreed facts, we find that under Alabama Asphaltic the FSI creditors did not taker "effec.tive command" over ( .

.

. continued) * * The initial plan had been for inchoate rights had matured into ef fective the property. [Ralphs] stock to go directly to the credi- credibors' control of the * tors. However, after the creditors were already enti- * . tled to receive the * tors directed that * than going'to the cžeditors themselves, should go to the acquiring corporation (the creditor' s wholly-owned In directing the * . holding company) [Ralphs] stock to the acquiring corporation, tors controlled where the Ralphs stock went .

[Ralphs] stock, * the credi- rather [Ralphs] stock, the credi- the * [RHC] * * * The above-quoted contentions of respondent are refuted by the facts to which the parties agreed for purposes of their respective motions for partial summary judgment . tors were not entitled to any property of FSI or Holdings III before the Ohio U.S. Bankruptcy Court confirmed the January 1992 proposed FSI chapter 11 plan. inter alia, receive certain stock of RHC, and not stock of Ralphs, faction of their respective creditor claims against FSI. October 1991 proposed FSI chapter 11 plan on which respondent focuses was never confirmed by the Ohio U.S. Bankruptcy Court and did not entitle the FSI creditors to any stock of Ralj;>hs .

that EJDC, Bank of Montreal, Paribas, and Campeau That confirmed plan required, The FSI credi- in satis - The ssSee supra note 26.

the, as ets of FSI." We conc Lude that Alabama Asphaltic is materi 11yr distinguishable from the instant cases, that respon- dent' s reliance on that case is misplaced, arid that that case is not controlling in the instant cases.

W also find the Alabama Asphaltic progeny, to be materially distinguishable from the ins ant cases.

In the Alabama Asphaltic progen the courts concluded, as did the Supreme Court in Alabama Asphaltic, that the determinative fact was whether the credit s of the -insolvent -c rporation took proáctive steps and thereby obtained effective c mmand over the insolvent corpora- tion's roperty.

See, e.g., Palm Springs Holding Corp. v.

Commiss oner, 315 U.S. 185, i88-189 (1942) ; Wells Fargo Bank & Union T ust Co. v. United St tes, 225 F.2d 298, 300-301 (9th Cir.

1955) . Unlike the creditors involved in the instant cases, the credito s involved in the Al bama Asphaltic progeny took proactive steps to enforce or protect their rights in the insol- vent corporations' propertieä, such as filing a foreclosure action under mortgages secur ng the insolvent corporation's "A suming arguendo that Holdings III, which the parties agree w uld be the target corporation in a reorganization quali- fying u der sec. 368(a) (1) (C) or (G), were insolvent and that it were correct under Alabama Asphaltic to determine whether the .FSI credito s had "effective comntand" over the property of Holdings III, we would find for the råasons discussed above as to why the FSI creditors did not have "(ffective command" over FSI's prop- erty th t the FSI creditors did not have such "effective command" over th property of Holding III.

debt," selling the insolvent corporation's assets under an indenture," filing a receivership action against the insolvent corporation," or entering-into possession and operating the property of the insolvent corporation.?° In the instant cases, none of the FSI creditors took.any proactive steps to enforce or protect their respective rights to payment by FSI- of their respective debts.

Based upon the parties' agreed facts, we, reject respondent's argument that, in determining.whether the, continuity-of-interest requirement is satisfied in the Ralphs transaction, Alabama Asphaltic- requires us to treat as equity owners..of FSI the FSI s creditors whor received 83.75 percent" of the outstanding common stock of RHC.. Respondent does not cite, and we have not found, any case in which a court has-held Alabama Asphaltic to be controlling.under facts materially indistinguishable from the "See, e.g., Wells Fargo Bank & Union Trust Co. v. United States, 225 F.2d 298, 300 (9th Cir. 1955)-; Peabody Hotel Co. v. Commissioner, Commissioner, 199 F. Supp. 33, 35 (N.D. Ill. 1959).

"See, e.g., Palm Springs Holding Corp. v. Commissioner, 315 U.S. 185, 186 (1942).

See, e.g., Atlas Oil & Ref. Corp. v. Commissioner, 36 T.C. 675, 676 (1961); Ky. Natural Gas Corp. ve- Commissioner, 47 B.T.A. 330, 333 (1942).

7°See, e.g., Roosevelt Hotel Co. v. Commissioner,il³ T.C.

399, 401 s(1949) .

"See supra note 54.

parties agreed facts in the instant cases. Nor has respondent offere any persuasive reaso why we should extend the holding of Alabam Asphaltic to the pai-ties' agreed facts.

We hold-that the continuity-of -interest requirement is not satisfiad in' the Ralphs tranaaction and that that transaction is not a r organization under s ction 368(a) (1) (B)", (C), or (G)-.72 Respond nt does not dispute hat if we were to hold, which' we have, tnat the Ralphs transa tion is not a reorganization under any of hose provisions of ~ section 368, (1) RHC' s acquisition of the out standing common stock of Ralphs from Holdings III and Allied ould constitute a pu chase under section 338 (h) (3) and a qualifi d stock purchase under section 338 (d)-(3) , and (2) RHC and FSI wou d have made a valid oint election under section 338 (h) ( LO) with respect to t at acquisition.

We have considered all f the aontentions and arguments of the par ies that are not disdussed herein with respect to the matters that we address herein, and we find them to be without merit, rrelevant, and/or moot.

72I the light of our holdings that the Ralph' s transaction does not satisfy the continuity-of -interest requirement and is not a r0organization under s(c . 368 (a) (1) (B) , (G) , we need.noh and shall not address whether the Ralphs transaction satisfiOs, as respondent mairYtains and petitioners dispute, the three types of other r quirements applicable to each of reorgan zations on which resl$ondent relies .

(C) , or the To reflect the foregoing An order granting petition- ers' motion and denving respon- dent' s motion will be issued.

| .1 .1 I I I. L'

APPENDIX

Campeau 100% FSI 100% 100% 100% Holdings III CPI 100% Holdings II SI Shopping Center 83.75% Corps.

Others EJDC 7.5% 100% 28.04% Allied Preferred stock held by Mgmt.

96% 7.5% 50% 100% 16.25% 100% 100% Federated 100% Subsidiaries, including:

Allied credit Holdings Allied Real Estate Subs. Jordan Marsh Stores Corp. Maas, Stern's, The Bon, Inc. Inc.

Inc.

Subsidiaries, including:

Inc.

Bloomingdales, Bloomingdales By Mail Burdine's, Inc. Federated Credit Holdings Federated Real Estate Inc. Rich's,

7. T.C. 600, 602-603 (1946); Pearson Hotel, Inc. v.