4. The preservation of a pre-proceedings net operating loss carryforward to offset post-proceedings profits is seldom allowed by Internal Revenue Service or the courts.
5. At best, the attempt to preserve and utilize the net operating loss carryforward might well result in considerable legal and accounting fees in the furthering of the contentions in favor of availability of the net operating loss carryforward.
I conclude that it is appropriate to substantially discount the alleged value of the net operating loss carryforward. For the purposes of this opinion, it is my determination that the net operating loss carryforward has a value in the range of $100,000 to $200,000.
At the end of my opinion on valuation, I indicated that the precise figure for excess cash on hand in the debtor corporation could not be known until administration expenses were allowed, other adjustments made and "the exact cash to be turned over to the reorganized debtor is known." At the final argument on the respective Plans of Reorganization, the Trustee furnished this Court with an updated schedule of cash balances.
I have reviewed this submission and it does not appear to be inconsistent with my earlier conclusions pertaining to probable excess cash.
Moreover, neither the precise amount of cash on hand at consummation nor the precise value of any available net operating loss carryforward is a critical factor for the determinations to be made in this opinion. It need only be shown, in my view, that creditors and stockholders receive full value under any approved Plan of Reorganization for the rights and values they surrender. In other words, to be "fair" a Plan must distribute cash, securities or other items of value to creditors and stockholders in an amount equivalent to their rights (debt or equity) in the debtor.
Accordingly, modest fluctuations in the excess cash ultimately on hand at consummation or the realized value of a carryforward tax loss should not alter the "fairness" of a Plan. Of course, any material variation in the debtor's assets, be it cash or otherwise, between the time of Plan approval and confirmation or consummation would permit modification of a Plan to do equity to all parties. In re Deep Rock Oil Corporation, 113 F.2d 266 (10th Cir. 1940), cert. den., 311 U.S. 699, 61 S. Ct. 138, 85 L. Ed. 453; Bankruptcy Act § 222.
Proponent Continana suggests a valuation for Imperial of approximately $14,000,000.00 plus such value as might be determined to be attributed to the net operating loss carryforward. This contention is based in part upon the selection of a multiple of 22 by Continana as opposed to the capitalization rate of 20 used in my previous valuation determination. Continana also furthers its contentions made here at the valuation hearings and in the Third Circuit on appeal pertaining to interest rates, excess cash and the net operating loss carryforward.
Since I have dealt with each of these contentions, the only adjustment that I choose to make is the addition of a value, as stated above, for the net operating loss carryforward. I find no major alteration in the operations of Imperial nor any facts that indicate such a change of circumstances as would warrant a total reconsideration of my previous valuation determination. The continuity of operations here is quite different from the set of circumstances existing in TMT Trailer Ferry v. Anderson, 390 U.S. 414, 88 S. Ct. 1157, 20 L. Ed. 2d 1 (1968).
By stating that a total reconsideration of the Imperial valuation is unnecessary, I do not mean to state that I am not cognizant of recent economic and business changes that have occurred internationally, nationally and in the business in which Imperial presently finds itself. I am aware of the decrease in multiples of public companies in the hotel/motel industry since the close of the hearings, and I am well aware of the impact that the current "energy crisis" may have on motel revenues. I am also aware of the fact that Imperial's motel locations are basically in downtown areas as opposed to locations along interstate highways. This latter fact may be considered a positive force. But to continue to speculate and revise valuation determinations would be an unproductive exercise absent seriously changed circumstances. Rather, in light of the recognized inexactitude of any valuation, Consolidated Rock Products Co. v. DuBois, 312 U.S. 510, 520-524, 61 S. Ct. 675, 85 L. Ed. 982 (1941); In re Inland Gas Corp., 211 F.2d 381, 385 (6th Cir. 1954), cert. den. sub nom., Kern v. Williamson, 348 U.S. 840, 75 S. Ct. 45, 99 L. Ed. 662, a final valuation is a desirable end in itself. Thus, I feel no need to speculate further on the subject I have already examined in great depth in my previous opinion on valuation. In re Deep Rock Oil Corporation, 113 F.2d 266 (10th Cir. 1940), cert. den. 311 U.S. 699, 61 S. Ct. 138, 85 L. Ed. 453; Bankruptcy Act, § 222.
Accordingly, I find that the valuation of Imperial of $10,693,000, as found by me in my previous opinion and as affirmed by the United States Court of Appeals for the Third Circuit,
should be modified to add a maximum of $200,000 for my valuation of the net operating loss carryforward, bringing the total maximum value for the enterprise to $10,893,000. In reaching this conclusion, I emphasize that this valuation is considered by me to be a tool to aid me in determining whether or not one of the filed Plans discussed below is fair, equitable and feasible. For that reason, the precision of the dollar conclusion is of major, but not overriding, significance.
III. The Burnham Plan
An amended Plan of Reorganization was filed on October 20, 1972 by the Burnham Group. The Plan calls for the creation of a new structure of debt and equity that need not be detailed here. A summary is contained at pp. 11 and 12 of the SEC report.
Brief proofs were presented in conjunction with the Burnham Plan and the Plan was deemed worthy of consideration and sent to the SEC for its advisory opinion. The SEC has analyzed the Burnham Plan and reported to this Court that, in its opinion, the Burnham Plan is not fair and equitable, nor is it feasible.
The SEC feels that the cash needed to service the debt called for under the Burnham Plan would severely impair the operations of Imperial. Moreover, it is the view of the SEC that stockholders would be given nothing, which is impermissible in a solvent Chapter X Reorganization. Accordingly, the SEC concludes that the Burnham Plan is not acceptable in the form as filed. The SEC suggests that the Burnham Plan "could be amended to meet the statutory standards," and suggests a method of amendment that would render the Burnham Plan fair, equitable and feasible.
The Burnham Group never amended their Plan either to meet the objections of the SEC or for any other reasons. Rather, the Burnham Group wrote a letter to this Court on September 20, 1973, an extended deadline date for the filing of amendments to existing Plans, indicating "an amended plan is in formulation."
The letter indicated that "when the amendment can be presented in good faith with the full financial backing required, it will be submitted to the Court . . .."
The letter goes on to outline the proposed amendment, including the substitution of a public corporation, the United National Corporation, as a new proponent. A copy of the 1973 Annual Report of the United National Corporation was enclosed with the letter. The letter concluded with the representation that the letter constituted a "notice of intent" rather than a formal amendment, stating that such amendment should be filed "within a very few days."
No further documents were ever filed by the Burnham Group or United National Corporation.
On October 24, 1973, this Court received a telephone call from Mr. Morrill J. Cole of Cole, Berman & Belsky, attorneys for the Burnham Group. The following message received from Mr. Cole was read into the record at the hearing held on that date:
"Mr. Cole, attorney for the Burnham Group, will not appear this morning. The Burnham Group has not been able to complete the amendment for their proposed new plan. The group presently does not have sufficient money in the bank."