Before Hastings, Chief Judge, and Knoch and Kiley, Circuit Judges.
Petitioner, Huyler's, was organized in New York in 1881 with broad powers. According to the Restated Certificate of Incorporation filed November 1, 1950, the purposes for which the corporation was formed included the following:
"(d) To buy, hold, own, manufacture, produce, sell, exchange, import, export, and otherwise hold and dispose of, either as principal or agent, and upon commission or otherwise, all kinds of personal property whatsoever, except bills of exchange, without limit as to amount and without restriction as to location;
"(e) To apply for, purchase, or otherwise acquire, hold, own, use, operate, sell, assign and grant, or conduct licenses, in respect to, any or all inventions, improvements and processes issued in connection with or secured under Letters Patent of the United States or elsewhere."
Initially, Huyler's engaged in operating restaurants and making candy. In April, 1951, a petition for an arrangement under Chapter XI of the Bankruptcy Act was filed in New York, as a result of which a receiver was appointed who operated Huyler's affairs and issued Receiver's Certificates which constituted a first lien on all Huyler's assets. The Chapter XI proceeding was dismissed in February 1952. At that time Huyler's was no longer making candy and was operating only eleven restaurants. In April of the same year another petition was filed, this time for reorganization of Huyler's under Chapter X of the Bankruptcy Act.
The amended plan of reorganization which was approved in that proceeding provided for the same corporation to continue although the Certificate of Incorporation was amended to eliminate existing preferred and common stock and the interests of all the original shareholders, and to provide for 100,000 shares of $1 par value capital stock. Distribution was as follows: 2,000 to holders of the aforesaid Receiver's Certificates with first priority and to creditors who received about one share for each $36 in claims; 48,000 to three new investors who invested $250,000 in Huyler's. (In May and August 1954, these 48,000 shares were sold for an aggregate price of $315,000.) These three new investors also received $250,000 of 5% Debentures. (These debentures were surrendered to Huyler's in advance of redemption at par on August 31, 1954.) $362,041.24 of Subordinated 6% Debentures were issued to the United States in payment of outstanding tax liability and to other taxing authorities and creditors.For each year in which Huyler's was not obliged to pay an income tax, 52% of the net income was to go into a sinking fund for these subordinate debentures.
Huyler's interest in four restaurants was assigned to the designate of owners of the Receiver's Certificates to satisfy priority claims. Officers and a new Board of Directors were elected to take over operations.
The Bankruptcy Court in approving the plan notes that:
"[Liquidation] in bankruptcy * * would not realize enough money to pay the Chapter XI Receiver's Certificates, and it follows that general creditors would receive nothing in such a liquidation." and that:
"[Any] plan of reorganization will not provide for participation by the debtor's stockholders."
Under the amended plan of reorganization the United States claim was paid in full with interest.
However, operation of the remaining restaurants proved unprofitable and restaurant operations were discontinued by disposing of the restaurants over a period of time ending September 15, 1954.
Huyler's available cash reserves came from the three new investors mentioned above. On March 13, 1953, Huyler's bought all the stock of Basca Manufacturing Company, Inc., in order to acquire the assets of that company, for a purchase price of $2,600,000 of which $240,000 was paid in cash at the closing, the remainder to be paid over a period of about ten years through installments secured by specific liens and mortgages. The assets were all distributed to Huyler's on April 1, 1953. On May 28, 1953, Articles of Voluntary Dissolution of Basca Manufacturing Company, Inc., were filed. Huyler's moved its principal office to Indianapolis, Indiana, where Basca's plant was located.
Basca's outstanding capital stock consisted of 86 shares of common stock, 80 1/2 of which were held by Basca's president, Gerald L. Canfield, who was employed as vice president by Huyler's. In 1957 he became president. His sister and his attorney held the remaining 5 1/2 shares. When the three new investors sold their 48,000 shares in Huyler's in May and August 1954, 24,000 shares went to Mr. Canfield and members of his family.The rest went to Millard H. Pryor, members of his family, and trusts for his children. Mr. Pryor had been a director of ...