text:
    In the Matter of UNISHOPS, INC., Debtor.
    No. 996, Docket 74-1309.
    United States Court of Appeals, Second Circuit.
    Argued March 21, 1974.
    Decided March 27, 1974.
    Michael J. Crames, New York City (Levin & Weintraub, Martin I. Klein, New York City, of counsel), for debtor-appellant Unishops, Inc.
    William I. Popper, New York City (Popper & Popper, New^York City, on the brief), for appellee Questor Ed. Products Co. and Child Horizons, Inc.
    Samuel Kaufman, Pittsburgh, Pa. (Kaufman & Harris, John M. Crimmins, Pittsburgh, Pa., Jackson, Lewis, Schnit-zler & Krupman, Victor Schachter, New York City, on the brief), for appellee Action Industries.
    Allen N. Ross, New York City (Blum-berg, Singer, Ross, Gottesman & Gordon, Frederick Newman, New York City, of counsel), for appellee Brunswick Corp.
    William T. Sullivan, New York City (Willkie Farr & Gallagher, New York City, on the brief), for appellee Rogers Wholesalers, Inc.
    Kenneth Simon, New York City (Taylor, Ferencz & Simon, New York City, on the brief), for appellee AC&R Advertising Inc.
    Lowell A. Margolin, New York City (Hess Segall Popkin Guterman Pelz & Steiner, New York City, on the brief), for appellee Manow Int. Corp.
    Murray A. Gordon, New York City (Ronald H. Shechtman, New York City, of counsel), for appellee Retread Distributors, Inc.
    Robert P. Herzog, New York City, for appellee Vic Chemical Co. Div., of Richardson-Merrell, Inc.
    Before MOORE, FEINBERG and MULLIGAN, Circuit Judges.
   PER CURIAM:

This is an appeal by the debtor and the debtor in possession, Unishops, from an order of the United States District Court for the Southern District of New York, Hon. Charles L. Brieant, Jr., Judge, dated March 4, 1974, affirming an order of Bankruptcy Referee Roy Babitt, dated February 6, 1974, which denied an application of Unishops for an injunction restraining suits against its subsidiaries by vendors who claim to be creditors of those subsidiaries. The application was brought on by an order to show cause, containing a temporary restraining order, entered in the bankruptcy court on December 13, 1973. After hearing the parties, Referee Babitt held that even assuming the truth of the applicant’s allegations and looking at them in their most favorable light, no jurisdiction existed to grant the injunction. The Referee, however, continued the stay pending appeal to the district court. Judge Brieant heard argument on February 28, 1974 and issued a memorandum opinion and order affirming the Referee on the ground that the bankruptcy court lacked jurisdiction. The district court also granted a limited stay. On March 8, 1974, Unishops filed a notice of appeal and Circuit Judge •Walter R. Mansfield signed an order to show cause continuing the stay until the argument of this appeal. The order of the district court is affirmed and the stay is hereby dissolved.

Unishops is the sole stockholder of some 13 subsidiary corporations which sell clothing, cosmetics and paper goods through numerous retail discount and specialty stores, as well as 281 leased departments in stores owned by others. In May 1973, Unishops agreed with certain banks that in the future all merchandise intended for public sale by its subsidiaries would be purchased by the parent instead of the prior practice which involved purchase by each subsidiary on its own faith and credit. On June 1, 1973, Unishops advised “all vendors” that “all orders now in your possession or hereafter given to you shall be considered given by the parent corporation, Unishops, Inc., and the parent corporation hereby assumes liability for the payment of all invoices.” Five months later, on November 30, 1973, Un-ishops filed a petition for arrangement under Chapter XI of the Bankruptcy Act, and since that time has continued business as a debtor in possession. None of its subsidiaries have so filed.

Unishops contends that despite this failure of its subsidiaries to invoke the jurisdiction of the bankruptcy court, the court erred in refusing to restrain the appellees here, and other persons claiming to be creditors of its subsidiaries, from prosecuting actions in state courts against those companies. The position of Unishops that the bankruptcy court has jurisdiction to enjoin any threatened or pending state actions on the theory that the parent, and not the subsidiaries, is the real debtor, is without any legal precedent and must be rejected for the reasons set forth in Judge Brieant’s opinion below. This court has recently held, In Re Beck Industries, Inc., 479 F. 2d 410, 416 (2d Cir. 1973), that the bankruptcy court cannot expand its jurisdiction over a debtor’s subsidiary absent a showing that the subsidiary is a mere sham rather than a viable entity.

We agree with the position of the bankruptcy court and the district court that even accepting all the allegations in Unishops’ application to be true, the subsidiaries cannot be characterized as shams in any real sense. The fact that the parent may have assumed liability for the debts of its subsidiaries does not alter their corporate viability. We have been cited no authority for the proposition that a federal bankruptcy court can properly enjoin creditors from pursuing in the state courts actions against the subsidiaries which involve a variety of fact patterns and legal relationships arising under the laws of numerous states. As we pointed out in Beck, even though a successful action against a subsidiary may reduce the value of the debtor’s estate, Congress has not given the bankruptcy court jurisdiction over all controversies which affect that estate. 479 F.2d at 415. Certainly the unilateral action of Unishops, evidenced by its letters of June 1, 1973, cannot properly be the basis for thwarting actions by creditors against the subsidiaries in state courts. The subsidiaries obviously are free in those forums to present whatever defenses they may wish to urge, but to prevent such litigation in advance would constitute an extraordinary interference clearly beyond the jurisdiction of the federal court. If the subsidiary companies seek the protection of the bankruptcy court against a plethora of actions, then, of course, they should invoke its jurisdiction.

Affirmed.


source: Caselaw Access Project

author: PER CURIAM.

license: Public Domain

text:
    George DAVIS, Plaintiff-Appellant, v. WINTERS INDEPENDENT SCHOOL DISTRICT, etc., et al., Defendants-Appellees.
    No. 73-2735.
    United States Court of Appeals, Fifth Circuit.
    May 24, 1974.
    Larry Watts, Houston, Tex., for plaintiff-appellant.
    Donald W. Griffis, San Angelo, Tex., for defendants-appellees.
    Before GEWIN, THORNBERRY and SIMPSON, Circuit Judges.
   PER CURIAM.

After giving full consideration to oral argument of counsel, the briefs, trial record and the opinion and findings of the district court, 359 F.Supp. 1065, we see no valid basis for reversal under the facts disclosed by the record in this case.

Judgment of the district court is affirmed.


author: PER CURIAM:

text:
    Sandra Lee BECKER, etc., et al., Plaintiffs, Richard Guy Steffel, Plaintiff-Appellant, v. John R. THOMPSON, etc., et al., Defendants-Appellees.
    No. 71-1856.
    United States Court of Appeals, Fifth Circuit.
    May 28, 1974.
    Howard Moore, Jr., Peter E. Rinds-kopf, William H. Traylor, Emory University School of Law, John R. Myer, Atlanta, Ga., for plaintiff-appellant.
    Robert E. Mozley, George P. Dillard, Decatur, Ga., Dock H. Davis, Atlanta, Ga., for defendants-appellees.
    Before TUTTLE, GEWIN and DYER, Circuit Judges.
   PER CURIAM:

In accordance with the mandate of the Supreme Court of the United States, 94 S.Ct. 1209, 39 L.Ed.2d 505, which reversed 5 Cir., 459 F.2d 919, 463 F.2d 1338, the judgment of the district court, 334 F.Supp. 1386, is reversed and the cause is remanded for further proceedings in conformity with the opinion of the Supreme Court.


text:
    Herbert D. WIENER and Shirley M. Wiener, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. George M. WIENER and Barbara E. Wiener, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
    Nos. 72-2933, 72-2934.
    United States Court of Appeals, Ninth Circuit.
    April 19, 1974.
    Sidney J. Machtinger (argued), Greenberg & Glusker, Los Angeles, Cal., for petitioners-appellants.
    Scott P. Crampton, Asst. Atty. Gen. (argued), Meyer Rothwacks, Tax Div., U. S. Dept, of Justice, .Washington, D. C., Lee H. Henkel, Jr., Chief Counsel, I. R. S., Washington, D. C., for respondent-appellee.
    Before D UNIWAY and TRASK, Circuit Judges, and POWELL, District Judge.

       The Honorable Charles L. Powell, Senior United States District Judge for the Eastern District of Washington, sitting by designation.

   OPINION

PER CURIAM:

These are appeals from a decision of the Tax Court which is reported at 58 T.C. 81 (1972). The question presented is one of mixed fact and law. Our examination of the record convinces us that the Tax Court’s findings of fact are not clearly erroneous, and that its legal conclusions are correct.

Affirmed.


text:
    NATIONAL LABOR RELATIONS BOARD, Petitioner, v. DIRECTORS GUILD OF AMERICA, INC., Respondent, Milton Trager, Intervenor.
    No. 73-1134.
    United States Court of Appeals, Ninth Circuit.
    March 12, 1974.
    Elliott Moore, Acting Asst. Gen. Counsel, Allison Brown, Jr. (argued) Atty., N.L.R.B., Washington, D.C., Abraham Siegel, Director, Region 31, N.L.R. B., Los Angeles, Cal., for petitioner.
    William B. Haighton, (argued), Hollywood, Cal., for Directors Guild of America, Inc. of Hollywood, Cal.
    Jack Corinbilt (argued), Los Angeles, Cal., for charging party Milton Trager (intervenor), Association of Motion Picture & Television Producers, Inc. of Hollywood, Cal.
    Before KOELSCH, BROWNING and KILKENNY, Circuit Judges.
   PER CURIAM:

The critical issues before us, and a detailed statement of the facts, are clearly delineated in the order of the Board. In re Directors Guild of America, 198 N.L. R.B. No. 103, 81 LRRM 1477 (1972). In full support of the Board’s order is In re International Photographers of the Motion Picture Industries, Local 659, etc., 197 NLRB No. 134, 81 LRRM 1223 (1972) enforced, 477 F.2d 450 (C.A.D. C.1973), cert denied 414 U.S. 1157, 94 S. Ct. 914, 39 L.Ed.2d 109 (1974).

We have considered NLRB v. Gray Line Tours, Inc., 461 F.2d 763 (C.A.9 (1972) and Arizona Public Service Co. v. NLRB, 453 F.2d 228 (C.A.9, 1971), and other cases slanted toward respondent’s viewpoint, but find them distinguishable. In the final analysis, they turn on their own facts and cannot be used as a yardstick on a somewhat similar, yet clearly distinguishable state of facts. Except in unusual cases, we should leave the complexity of these problems to the Board’s expertise and abide by its decisions. For the reasons stated in the order of the Board, we grant the application and enforce the order.

Order enforced.


author: KASHIWA, Judge.

text:
    MOVIELAB, INC., as Successor to Movielab Color Corporation v. The UNITED STATES.
    No. 97-72.
    United States Court of Claims.
    March 20, 1974.
    James B. Lewis, New York City, attorney of record, for plaintiff. Peter J. Rothenberg and Robert Thornton Smith, New York City, of counsel.
    Kenneth R. Boiarsky, Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant. Gilbert E. Andrews, Jr., and Joseph Kov-ner, Washington, D.C., of counsel.
    Before NICHOLS, KASHIWA, and KUNZIG, Judges.
   OPINION

KASHIWA, Judge.

This is a suit for the refund of federal income taxes paid for the years 1963 and 1966 in the amounts of $20,615 and $954,849, respectively, plus interest as provided by law. For reasons hereinafter stated, we hold for the plaintiff and against the defendant.

The essential stipulated facts may be summarized as follows. Movielab Color Corporation (hereinafter “Color”) was a wholly owned subsidiary of Movielab, Inc. (hereinafter “Movielab”). Both Color and Movielab at all relevant times operated on a taxable year which is a year of 52 or 53 weeks ending on the Saturday nearest to December 31. For 1967 and prior years, Movielab and its subsidiaries filed separate income tax returns. For 1968 and subsequent years, Movielab and its subsidiaries have filed consolidated income tax returns.

By statutory merger consummated on July 2, 1967, Color was merged into Movielab. All the assets and liabilities of Color were acquired by Movielab, and all the shares of Color’s stock held by Movielab were canceled. The business purpose of the merger was to simplify bookkeeping and administration. There was continuity of interest on the part of the Movielab shareholders.

Prior to the date of the merger, Mov-ielab conducted a black-and-white film processing business and Color conducted a color film processing business on the same premises. Following the date of the merger, Movielab conducted both the black-and-white and the color film processing businesses. No change in the method of operating either business was made as a result of the merger.

During the taxable year 1969, Movie-lab incurred a net operating loss (hereinafter “NOL”) of $3,817,402.12, of which $3,343,124.18 was incurred with respect to the conduct of the business acquired from Color. For the taxable year 1966, Color (then a subsidiary of Movielab) had, without reference to the NOL carryback, taxable income of $2,056,289.02.

Movielab, as successor to Color, claims refund of the 1966 income tax of $954,849 paid by Color, by carryback to Color’s 1966 taxable year of the above-described $3,343,124.18 NOL. The computational question thereby raised is whether the 1969 post-merger NOL incurred by Movielab with respect to the business acquired by it from Color may be carried back to the 1966 pre-merger taxable year of Color. In order to resolve this question, this court is faced with two legal issues: (1) Was the merger of Color into Movielab a reorganization described in section 368(a)(1)(F) of the Internal Revenue Code of 1954 so that a post-merger NOL incurred by Movielab may be carried back under section 381(b) to pre-merger taxable years of Color, and (2) Even if the merger is one described in section 368(a)(1)(F), does the fact that the merger also constituted a liquidation of a subsidiary by its parent within the provisions of section 332 constitute a bar to the above-described carryback.

With respect to the question of whether the statutory merger of Color and Movielab also constituted a reorganization described in section 368(a)(1)(F) (hereinafter sometimes described as an “F” reorganization), it is necessary briefly to describe the statutory context in which the case arises. The loss carryover provisions contained in section 172 basically represent an attempt to stabilize business income by, in effect, setting up a form of averaging system for a business cycle of nine years. By use of carryovers, the losses of bad years may be used to offset income in gain years. In that way the income tax system does not operate, in loss years, as a tax on capital for the relevant period. Section 172(b)(1)(A) and (2) allows a taxpayer to utilize an NOL for any taxable year as an NOL carryback to the third preceding taxable year. Thus, section 172 in effect takes note of the fact that a business is an ongoing enterprise with fluctuating performance. Particularly poor performance should be offset against successful performance of the same enterprise.

In the context of corporate reorganizations, the problem of “trafficking” in loss carryovers led to revision of the Code provisions governing allowance of various carryovers. Immediately relevant to our consideration of the allowa-bility of offsetting post-merger losses against pre-merger gains are sections 381(a) and (b). The Government argues that the general rule of section 381(b)(3)- — that a corporate acquiror of assets of another corporation may not carry back an NOL to a taxable year of the other corporation — is fully applicable to the instant case. The plaintiff, on the other-hand, while conceding that general rule to the Government, argues that the 1967 reorganization fully qualified as an “F” reorganization. Being such, the general prohibition with respect to carrybacks has no force since section 381(b) specifically states that the prohibition is to apply

“(a) General rule. In the case of the acquisition of assets of a corporation by another corporation—
“(1) in a distribution to such other corporation to which section 332 (relating to liquidation of .subsidiaries) applies, except in a case in which the basis of the assets distributed is determined under section 334(b) (2) ; or
“(2) in a transfer to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, but only if the transfer is in connection with a reorganization described in subparagraph (A), (O), (D)
(but only if the requirements of subpara-graphs (A) and (B) of section 354(b)(1) are met), or (F) of section 368(a) (1),
the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c).
“(b) Operating rules. Except in the case of an acquisition in connection with a reorganization described in subparagraph (F) of section 368(a) (1)- — ■
“(1) The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer.
“(2) For.purposes of this section, the date of distribution or transfer shall be the day on which the distribution or transfer is com-jileted; except that, under regulations prescribed by the Secretary or Ms delegate, the date when substantially all of the property has been distributed or transferred may be used if the distributor or transferor corporation ceases all operations, other than liquidating activities, after such date.
“(3) The corporation acquiring property in a distribution or transfer described in subsection (a) shall not be entitled to carry back a net operating loss or a net capital loss for a taxable year ending after the date of distribution or transfer to a taxable year of the distributor or transferor corporation.”
Except in the case of an acquisition in connection with a reorganization described in subparagraph (F) of section 368(a) (1)- — ■

The basic contention of the Government is that the merger of two operating companies cannot be an “F” reorganization. The Government interprets the language of section 368(a)(1)(F)— “a mere change in identity, form, or place of organization, however effected” —to be so restrictive as to exclude the amalgamation of two or more separate operating corporations. The Government points to supposed accounting and tax difficulties if the corporations involved have different taxable years or if many predecessor corporations are involved and an apportionment of the NOL must be made. The stipulated facts of this case, of course, raise no such problem. In any event, accounting difficulties, if such were to arise when corporations with different tax years are involved, do not, in and of themselves, determine fundamental tax consequences.

The Government has been consistently unsuccessful in urging its position that the definition of an “F” reorganization cannot accommodate the amalgamation of two or more separate operating corporations. Ironically, the courts first began to probe the definitional contours of the “F” reorganization concept in response to the Government’s use of the provision in the liquidation-reincorporation area. In Davant v. Commissioner, 366 F.2d 874, 884 (5th Cir. 1967), cert, denied 386 U.S. 1022, 87 S.Ct. 1370, 18 L.Ed.2d 460 (1966), the court said:

The term “mere change in identity [or] form” obviously refers to a situation which represents a mere change in form [Emphasis in original] as opposed to a change in substance. Whatever the outer limits of Section 368(a)(1)(F), it can clearly be applied where the corporate enterprise continues uninterrupted, except for a distribution of some liquid assets or cash. Under such circumstances, there is a change of corporate vehicles but not a change in substance, -x- * * At least where there is a complete identity of shareholders and their proprietary interests, as here, we hold that the type of transaction involved is a type (F) reorganization.

Following Davant, the Fifth and Ninth Circuits, in adopting the position of the plaintiffs involved therein, have again and again rejected the Government’s argument that the “F” reorganization can apply only to the reorganization of a single corporation. In Estate of Stauf-fer v. Commissioner, 403 F.2d 611 (9th Cir. 1968), three separate but commonly owned corporations were consolidated into a newly formed corporation. After the reorganization, the new corporation suffered losses and attempted to carry them back to be applied against pre-reorganization income of one of the three original corporations. The court held that

* * * The principle we derive from Davant is that a shift in operating assets from the transferor corporation to its alter ego wherein the identity of the proprietary interest remains intact and the business enterprise of the transferor corporation continues unimpaired results in an “F” reorganization. There is a change of corporate vehicles but not a change in the substance of the trans-feror corporation. * * * In the instant case, the only change that took place was that Stauffer New Mexico reported the combined income of the three pre-merger corporations in one tax return; the individual books of the constituent enterprises were kept as they had been before the merger; the enterprises continued to operate in the same manner and at the same locations as before the merger; the change was one of corporate vehicles only. The Regulations, § 1.381(b)-1(a) (2), state that in an “F” reorganization the acquiring corporation is to be treated “just as the transferor corporation would have been treated if there had been no reorganization.” Thus, the identity of pre- and post-merger entities is so complete that for tax purposes the latter is the former. That Stauffer New Mexico stood in the shoes of the three constitutent corporations cannot be here denied; it was the alter ego of each of the three pre-merger entities. [Emphasis supplied.] [403 F.2d at 619-620.]

Associated Machine v. Commissioner, 403 F.2d 622 (9th Cir. 1968), also involved the section 381(b) loss carryback provisions. In that case, one operating corporation was merged into another commonly owned operating corporation. The Government balked at the attempt to carry back a post-merger N.OL to a pre-merger year of the corporation which had lost its identity in the merger. The Government conceded that the “F” definition was broad enough to entertain the transfer of a single corporate enterprise to a “shell” corporation fabricated for the reorganization but argued that the definition simply could not accommodate the merger of one active corporation into another. In rejecting the Government’s argument, the court stated:

* * * Briefly, we hold that an “F” reorganization can involve more than one active corporation and that, therefore, under certain narrowly defined circumstances, a statutory merger, which is a § 368(a)(1)(A) reorganization, can also be an “F” reorganization. * * * [W]e hold this to be a reorganization effected through merger resulting only in a change of identity.
Our analysis logically begins with a consideration of whether an “F” reorganization can encompass more than one “active” corporation. While the Commissioner concedes that two corporations can be involved when one, the receiving corporation, is a “shell” fabricated for the reorganization, he contends that the intended simplicity of function of the “F” type reorganization prevents its being extended to the merger of two corporations independent in the sense of being separately incorporated for valid business reasons. It is the Commissioner’s position that “F” reorganizations are limited to “mere formalistic changes in the charter or place of organization of a single corporate enterprise.” In our judgment, the Commissioner’s conception of the “F” reorganization is overly narrow. No logical distinction exists between a “shell receiver” and an “active receiver” when two factors co-exist: one, when the proprietary interest in the transferor and transferee is identical; and two, when the business is not interrupted.
This conclusion is consistent with tax court decisions in the area of reorganization-liquidation, apparently the only decisions dealing with the characteristics of the “F” reorganization. These cases identify the salient trait of an “F” reorganization as being an identity of proprietary interest in the transferee and transferor corporations. Berghash v. Commissioner, 43 T.C. 743, 752-754 (1965), aff’d 361 F.2d 257 (2d Cir. 1966); Gallagher v. Commissioner, 39 T.C. 144, 162 (1962), appeals dismissed Nos. 18844, 18845 (9th Cir. Sept. 19, 1963); Estate of James F. Suter v. Commissioner, 29 T.C. 244, 258 (1957). See Lane, “The Reincorporation Game: Have the Ground Rules Really Changed?” 77 Harv.L.Rev. 1218, 1247 (1964). In focusing on the indi-cia which we judge indicate whether or not a “mere change in identity” has occurred, we seek to avoid the mechanical approach advocated by the Commissioner which would frustrate what we believe is the function of § 368(a) (1) (F): a tax free reorganization involving corporate form but not substance. [Emphasis supplied.] [403 F.2d at 624.]

Home Construction Corp. of America v. United States, 439 F.2d 1165 (5th Cir. 1971), involved the merger of 123 separate corporations involved in the home construction business into a single newly formed corporation. Again, post-merger losses were sought to be carried back against previous years of the predecessor corporations. In ruling for the plaintiff, the Fifth Circuit followed the rationale of its earlier decision in Dav-ant:

In summary, we hold that Davant establishes criteria which adequately define when a reorganization qualifies as a mere change in form, identity, or place of incorporation. These include identity of shareholders and their proprietary interests, unimpaired continuity of the essential business enterprise and a new form which is the alter ego of the old. While the instant reorganization was more complex, it still meets all the criteria established by Davant. It therefore was an F reorganization. [439 F.2d at 1170.]

Having reviewed the cases and the arguments of both parties, we see no reason to depart from the rationale adopted by the Fifth and Ninth Circuits. It is our view that the Government has totally misconstrued the intent of Congress when the latter body defined an “F” reorganization to be “a mere change in identity, form, or place of organization * * There is nothing in these words to suggest the imposition of a one-active-corporation requirement as a hard and fast rule. The purpose of Congress in enacting the “F” reorganization provision was not to impose such a mechanical test nor was it to limit “F” reorganizations to fairly uncomplicated situations. The purpose was to limit “F” reorganizations to those of mere changes of form, as opposed to those involving changes of substance. Needless to say, the definition articulated by the Fifth and Ninth Circuits does not expand the “F” reorganization concept in such a way as to overwhelm the other reorganization provisions.

It is true that, as a statutory merger, the instant transaction was an “A,” as well as an “F,” reorganization. However, subparagraph (F) of section 368(a)(1) frequently overlaps with sub-paragraph (A), (C), or (D), which define the term “reorganization” to include, respectively, a statutory merger or consolidation, certain acquisitions by one corporation of properties of another corporation in exchange for voting stock of the acquiring corporation, and certain transfers by one corporation of assets to another corporation controlled by the transferor corporation or its shareholders. For example, transfer of the operating assets of one corporation to another corporation owned by the same shareholders, although a “D” reorganization (Davant v. Commissioner, supra; Commissioner v. Morgan, 288 F.2d 676 (3d Cir. 1961), cert, denied 368 U.S. 836, 82 S.Ct. 32, 7 L.Ed.2d 37 (1961)), is nonetheless an “F” reorganization (Davant v. Commissioner, supra).

In Rev.Rul. 57-276, 1957-1 Cum.Bull. 126, the Commissioner ruled on the tax consequences of a statutory merger by which a corporation reincorporated under the laws of a state other than that of its original incorporation. Noting that the merger qualified as a reorganization under subparagraphs ('A) and (F) of section 368(a)(1), the Commissioner held as follows:

* * * Often a reorganization under section 368(a)(1)(F) of the Code will meet the requirements of subpar-agraphs (A), (C), or (D) of section 368(a)(1). It is believed that it was not the intention of Congress in enacting section 368(a)(1) of the Code to hold that just because a reorganization meets some other provision of section 368(a)(1) the provisions of subparagraph (F) of that section are not complied with even though the transaction also qualifies under sub-paragraph (F). Taking a contrary view under the 195k Code would, for all practical purposes, defeat the provisions of section 381(b) of the Code, since many section 368(a)(1)(F) reorganizations meet some other provisions of section 368(a)(1) [Emphasis supplied.] [at p. 127.]

So long as the reorganization is characterized by an identity of shareholders and their proprietary interests, as well as unimpaired continuity in the essential business enterprise, the new form will be the alter ego of the old. The change which results will, by definition, be one of mere form.

The fact-pattern of the instant case presents an even more clear cut example of a formalistic change made merely to simplify bookkeeping and administration. Except for the fact that the business of Color ceased to be conducted in the separate context of a subsidiary, and instead became one aspect of Movielab, no changes occurred on the day following the merger. The same business was being conducted — without interruption —at the same location, by the same management and for the same proprietary interests.

Cases which have denied “F” reorganization status do so on the basis that there has been a substantial shifting of proprietary interests or, secondly, that the same business is no longer being conducted in the new form. Obviously, when there is a substantial shift in ownership, it cannot be argued that the change has been merely of form. See Helvering v. Southwest Consolidated Corp., 315 U.S. 194, 202-203, 62 S.Ct. 546, 86 L.Ed. 789 (1942). Further, it is clear that “F” status cannot be had unless there is a continuation of the business enterprise. See Pridemark, Inc. v. Commissioner, 345 F.2d 35, 42 (4th Cir. 1965). As has been demonstrated, supra, there can be no doubt that the reorganization at issue met the tests of continuation of proprietary interests and business enterprise. These tests are sufficient to insure that the changes wrought by the reorganization are merely those of form, however complicated or involved.

The Government cites to us our decision in Columbia Gas of Maryland, Inc. v. United States, 177 Ct.Cl. 97, 366 F.2d 991 (1966), for the proposition that only where the reorganization involves a single corporation is the change “a mere change in identity [or] form.” It is our view that Columbia Gas cannot be so read. That case involved the division of an operating corporation into two separate operating corporations. The case arose in the context of the documentary stamp tax provisions but the issue was akin to that under income tax: was the division “a mere change of identity, form, or place of organization.” Basically, the company involved caused its subsidiary to drop one of its businesses into a sub-subsidiary and then the stock of the sub-subsidiary was distributed to the parent in retirement of a portion of the formerly outstanding stock in the first subsidiary. This divisive transaction is governed by section 355, which was substantially rewritten as part of the 1954 Code revision. The crucial point to remember is that the only variety of (section 368(a)(1)) reorganization which can qualify for corporate division under section 355 is a “D” reorganization. Thus, section 368(a) (1) (D) becomes the sole arbiter of section 355 transactions such as that involved in Columbia Gas. This court’s limited holding was based on the fact that we had before us a corporate division, for which Congress, through the highly intricate provisions of section 355, had provided special standards. To consider the transaction an “F” reorganization would allow the transaction to escape untested from those standards. For a similar result in the income tax field, see Gordon v. Commissioner, 424 F.2d 378 (2d Cir. 1970), holding that Congressional intention would be thwarted by treating the division as an “F” reorganization since

* * * a divisive reorganization should not qualify as a mere change in form for purposes of Section 354 unless it meets the standards of either Section 354(b) or Section 355. [424 F.2d at 385.]

In light of the above, it seems clear that the Columbia Gas-Gordon line of cases is totally beside the point in the context of corporate amalgamations. The tax-avoidance practices so apparent in the context of divisive reorganizations, which led to the enactment of section 355, are not present in a case such as that before us. There is no reason to withhold the benefits flowing from the finding of an “F” reorganization merely because the transaction also qualified as an “A.”

After determining that the reorganization satisfied the definitional requirements of an “F” reorganization, it would appear that the exceptional treatment established for “F" reorganizations by 381(b) would follow. The Government, however, argues that even if the amalgamation of two operating corporations meets the requirements of an “F” reorganization, the loss carryback is nonetheless prohibited by section 381(b)(3) since this particular amalgamation is also within the provisions of section 332, which latter provision takes precedence over the reorganization provisions.

Basically, section 332 provides nonrecognition treatment on the receipt by a corporation of property distributed in complete liquidation of another corporation. The amalgamation of Color into its parent, Movielab, technically falls within the scope of section 332. From the standpoint of tax realism, the question facing us is whether different tax treatment should attach to the amalgamation of brother-sister corporations as in, e. g., Estate of Stauffer, Associated Machine, and Home Construction, swpra, as opposed to the amalgamation of parent and subsidiary corporations.

This very issue was recently decided in favor of the taxpayer in the case of Performance Systems, Inc. v. United States, 32 AFTR 2d [[73-5246 (M.D. Tenn. 8/30/73). The court held that the merger of subsidiary into parent qualified as an “F” reorganization; and, thus, post-merger losses could be carried back against pre-merger income of the same enterprise. The court also discussed the effect of qualification under section 332:

* * * The legislative draftsmen chose to except “F” reorganizations from the prohibition of carrybacks provided in Section 381(b). They did not choose to except liquidations under Section 332. They obviously felt that carryback of losses should be allowed in situations qualifying as “F” reorganizations. If they had intended that not all transactions which meet the requirements of an “F” reorganization be entitled to this relief, they would have so specified. * * * [32 AFTR 2d [[73-5246, at p. 73-5780.]

There is obviously good reason not to allow carryback treatment to all section 332 liquidations. Not every 332 liquidation could qualify under the stricter continuity of proprietary interest and business enterprise tests which have evolved for “F” reorganization status. But if the reorganization does, as we so hold, qualify as an “F” reorganization, we can see no purpose, in either the technical or policy sense, in denying the “F” carry-back benefits merely because of additional qualification under section 332. As the court pointed out in Performance Systems:

* * * If instead of liquidating-the subsidiary, a parent merged,, into the subsidiary in a merger qualifying as an “F” reorganization, there would be no doubt that the carryback provision of Section 381(b) would be applicable. What difference should there be if a parent merges into subsidiary or subsidiary is merged into parent? The resulting business enterprise, proprietary interests, and identity of shareholders is the same. Therefore, there is merely a change in form, but not substance, and the tax consequence should be the same regardless of the direction of the transaction. [32 AFTR 2d [[73-5246, at p. 73-5780.]

It has long been recognized that one transaction may be a merger as well as a liquidation. See Rogan v. Starr Piano Co., 139 F.2d 671 (9th Cir. 1943), cert, denied 322 U.S. 728, 64 S.Ct. 945, 88 L.Ed. 1563 (1943). The Government, however, looks to the structure of section 381(a) and argues that the plaintiff’s only entrance into that section is through paragraph (1) of section 381(a):

* * in a distribution * * * to which section 332 (relating to liquidations of subsidiaries) applies, * * -X-

The plaintiff, argues the Government, cannot gain entrance through paragraph (2) of section 381(a) because the transfer is not one

* * * to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, * * *.

We could agree with the Government on this point for plainly section 361 does not apply to the facts of the instant case; there has been no exchange of the assets of the subsidiary for stock of the parent. The crucial question, however, involves the effect of this argument when we come down to the operating rules of section 381(b). It is our view that section 381(b) is broader than section 381(a)(2). There is no reference in section 381(b) to section 361 and certainly no requirement that the reorganization qualify for nonrecognition treatment under section 361. Whereas section 381(a)(2) only covers reorganizations — “F” as well as others — qualifying for nonrecognition under section 361, section 381(b) excepts all “F” reorganizations from the carryback prohibition rule so long as the “F” is definitionally pure. Not qualifying under section 361 does not make the transaction any less an “F” reorganization. Had Congress so chosen, it could have kept the operating rules of section 381(b) as narrow as the entrance rules of section 381(a). The fact of the matter is that Congress saw no reason to require anything more than satisfaction of the definitional requirements of “F” status. Thus, we find that section 381(b) requires only that the acquisition be “ * * * described in subparagraph (F) of section 368(a)(1).” [Emphasis supplied.] There is no requirement, as in section 381(a)(2), that the transaction be one which is subject to the nonrecognition provisions of section 361.

Defendant cites to us the case of Kansas Sand & Concrete, Inc. v. Commissioner, 462 F.2d 805 (10th Cir. 1972), for the general proposition that the section 332 liquidation provisions take precedence over the reorganization provisions. The question of precedence really depends upon whether an intention was evident to make one provision exclusive in a particular context. We have noted such an intention with respect to divisive “D” reorganizations and section 355. See Columbia Gas and Gordon, supra. In the context of the instant case, we have noted that the satisfaction of the stringent continuity of proprietary interest and business enterprise standards provide sufficient safeguards as a test of “F” reorganization status. Thus, it is really beside the point that the transaction is technically within the broader provision of section 332. Obviously, all section 332 liquidations could not qualify for section 381(b) carryback exception, but those liquidations which are also “F” reorganizations can and should so qualify. Once the strict standards for “F” status are met, additional qualification under section 332 does not cause the test of those strict standards to be less meaningful.

In Kansas Sand & Concrete, stock had been purchased and a merger followed in order to acquire the subsidiary’s assets. The issue became one of basis. If the transaction was to be treated as an “A” reorganization, then the basis would be determined by section 362(b), allowing the taxpayer to carry over the adjusted basis assigned to the assets by the acquired company on the date of the merger. The Government argued that a 334(b)(2) basis was proper, thereby requiring the taxpayer to allocate its basis in the acquired company’s stock among the assets received from the acquired company. The Tenth Circuit cited Treas.Reg. § 1.332-2(d) and recognized that the operative nonrecognition provision was section 332(a) and, thus, the controlling basis provision was section 334(b)(2):

* * * Thus the transaction, even though qualifying under Section 368(a)(1)(A) as a reorganization must be treated as a complete liquidation for federal income tax purposes. We hold that Section 332 takes precedence over Section 368 in these particular circumstances. * * * [Emphasis supplied.] [462 F.2d at 807.]

We interpret this case as merely holding that, under the circumstances, section 334(b)(2) was the exclusive basis provision. In the instant case, however, we are dealing with a provision (section 381(b)) hinged only to definitionally qualifying “F” reorganizations. Thus, Kansas Sand & Concrete is perfectly consistent with our holding.

For the foregoing reasons, we hold that the statutory merger of subsidiary into parent was a section 368(a)(1)(F) reorganization. Therefore, the plaintiff may carry back a post-merger loss to pre-merger years under section 381 (b) . The fact that the transaction technically also qualified as a 332 liquidation does not preclude relief. The amount of recovery will be determined in subsequent proceedings pursuant to Rule 131(c).

CONCLUSION OF LAW

Upon the foregoing opinion, which contains the essential findings of fact as stipulated by the parties, the court concludes as a matter of law that the plaintiff is entitled to recover and judgment is entered to that effect. The amount of recovery will be determined in subsequent proceedings pursuant to Rule 131(c).

       This opinion contains all tlie essential findings of fact which the parties have stipulated pursuant to Rule 134(b) (2) of the Rules of this court.

      . The remaining portion of the refund claim arises in the following way: Carryback of Movielab’s 1969 NOL to Color’s 1966 taxable year results in an unused investment credit of $27,169.69 for 1966. For the taxable year 1963, Color had taxable income of $313,605.43 and an investment credit (computed without reference to the unused investment credit carryback) of $18,749.86. Movielab, as successor to Color, claims refund of $20,615 of 1963 tax based on carry-back to that year of the 1966 unused investment credit. The Government concedes that if the plaintiff is entitled to the refund of Color’s 1966 taxes, then the 1963 portion follows as a matter of course.

      . All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise stated.

      . The relevant portions of section 368 are: “Sec. 368. Definitions Relating To Corporate Reorganisations.

      “(a) Reorganization.
      “(1) In general. For purposes of parts I and II and this part, the term ‘reorganization’ means — •
      “ (A) a statutory merger or consolidation;
      * * * a: *
      “(D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transfer- or, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356;
      * * * * •!■
      “(F) a mere change in identity, form, or place of organization, however effected.”

      . “Sec. 172. Net Operating Loss Deduction.

      * * 'A- *
      “(b) Net operating loss carrybacks and carryovers.
      “(1) Years to which loss may be carried.
      “(A) (i) Except as provided in clause (ii) and in subparagraphs (D), (E), (F), and (G), a net operating loss for any taxable year ending after December 31, 1957, shall be a net operating loss carryback to each of the 3 taxable years preceding the taxable year of such loss.
      * * * * *
      “(2) Amount of carrybacks and carryovers. — Except as provided in subsections (i) and (j), the entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the “loss year”) shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable years shall be computed—
      “(A) with the modifications specified in subsection (d) other than paragraphs (1), (4), and (6) thereof; and
      “(B) by determining the amount of the net operating loss deduction—
      “(i) without regard to the net operating loss for the loss year or for any taxable year thereafter, and
      “(ii) without regard to that portion, if any, of a net operating loss for a taxable year attributable to a foreign expropriation loss, if such portion may not, under paragraph (1) (D), be carried back to such prior taxable year,
      “and the taxable income so computed shall not be considered to be less than zero.
      * !¡í * Í)
      * * * * *

      . See, generally, Libson Shops, Inc. v. Koehler, 353 U.S. 382, 77 S.Ct. 990, 1 L.Ed.2d 924 (1957).

      . Sec. 381. Carryovers In Certain Corporate Acquisitions.

      . This would include, under the Government’s view, a transfer by a single active corporate enterprise to a “shell” corporation fabricated for the reorganization.

      . A de minimis change in stockholdings does not disqualify an intercorporate transfer of assets as an “F” reorganization. Rev-Rul. 66-284, 1966-2 Cum.Bull. 115.

      . The continuity of interest test required for all reorganizations and the identity of proprietary interest test required for “F” status are met. The acquiring corporation was owned by “persons who, directly or indirectly, were the owners of the enterprise prior to the reorganization.” Treas.Reg. § 1.368-1(b). Thus, the stockholders of Movielab had the requisite continuity of interest, even though they owned Color prior to the reorganization indirectly through Movielab.

      . Section 4382(b)(1)(D).

      . “Sec. 332. Complete Liquidations Of Subsidiaries.

      “(a) General rule. No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation.”

      . The case has been appealed by the Government to the Sixth Circuit.

      . The question of which provision is to control is entirely different from the question of whether the transaction can be recharac-terized depending upon the result. We think it obvious that the Government cannot have one definition of “F” reorganization for liquidation-reincorporation purposes and another for section 381(b) carryback purposes: “We do not see how the definitive principles of an “F” reorganization can change from one case to another, from one context to another, dependent upon which position the Commissioner of Internal Revenue prefers. While the factual situation which gives rise to a determination in a given case will invariably differ, the standards by which the determination is to be made cannot. An “F” reorganization is just that, and tax consequences flow from that determination, not vice versa.” [Estate of Stauffer v. Commissioner, supra, 403 F.2d at 619.]

      . It should be noted that the amounts claimed by the plaintiff are consistent with the equitable principle announced in Libson Shops v. Koehler, sxtpra footnote 5, that a loss could not be utilized in such a way as to produce greater tax benefit than the loss would have produced had there been no merger. Thus, the taxpayer is entitled to carry back to prior years of the predecessor corporation only that portion of the post-reorganization loss that was sustained by the business, operated by the predecessor corporation. See Estate of Stauffer, stipra, 403 F.2d at pp. 621-622.


text:
    The UNITED STATES, Appellant, v. VOLKSWAGEN OF AMERICA, INC., Appellee.
    Customs Appeal No. 5511.
    United States Court of Customs and Patent Appeals.
    April 18, 1974.
    Irving Jaffe, Acting Asst. Atty. Gen., Andrew P. Vance, Chief, Customs Section, Herbert P. Larsen, New York City, for United States.
    Joseph F. Donohue, Donohue & Shaw, New York City, atty. of record, for ap-pellee.

      Before MARKEY, Chief Judge, and RICH, BALDWIN, LANE and MILLER, Associate Judges.
   PER CURIAM.

This appeal is from the decision and judgment of the United States Customs Court, First Division, 68 Cust.Ct. 122, C.D. 4348, 340 F.Supp. 983 (1972). The court sustained the importer’s protest against the classification of two types of paint respectively containing 33 and 33-42 per cent of alkyd resin under TSUS item 409.00 as “mixtures” in whole or in part of benzenoid products holding the importations properly classified under TSUS item 405.25 as benzenoid “plastics material.” We affirm.

We find no error in the decision of the First Division or ,in the learned opinion which accompanied it. We therefore adopt the reasoning of the trial court and affirm its decision and judgment.

Affirmed.


author: STEPHENSON, Circuit Judge.

text:
    Frederick E. HERNON, Plaintiff-Appellant, v. REVERE COPPER & BRASS, INC., Defendant-Appellee.
    No. 73-1603.
    United States Court of Appeals, Eighth Circuit.
    Submitted Jan. 16, 1974.
    Decided April 18, 1974.
    Rehearing Denied May 13, 1974.
    Lon Hocker, Clayton, Mo., for appellant.
    Robert C. Ely, St. Louis, Mo., for ap-pellee.
    Before LAY, BRIGHT and STEPHENSON, Circuit Judges.
   STEPHENSON, Circuit Judge.

This ease presents a challenge to the grant of a judgment notwithstanding the verdict and the alternative grant of a new trial. We affirm the judgment n. O. v.

In an opinion reported at 363 F.Supp. 96 (E.D.Mo.1973) Judge Webster set aside a jury verdict in the amount of $550,000 actual damages and $75,000 punitive damages in favor of appellant Frederick E. Hernon and against Revere Copper & Brass, Incorporated. Her-non’s cause of action was for malicious prosecution.

The trial court’s opinion contains a general factual scenario. We will detail the facts only as they become essential to a determination of the issues.

The original lawsuit which spawned the malicious prosecution action in question here was a New Jersey state court action by Revere against International Aluminum, Ltd. (I.A.L.) and certain of its directors, including appellant Hernon. Hernon alleges that the suit brought by Revere, although it sounded in replevin, was malicious since the real purpose of the suit was to oust Hernon from his position with I.A.L.

Upon Revere’s motion under Fed.R. Civ.P. 50(b) the trial court entered judgment for Revere notwithstanding the jury’s verdict in favor of Hernon saying:

The court concludes that there was insufficient evidence to support a verdict in favor of plaintiff on the issue of liability because the plaintiff failed to sustain his burden of showing that the civil action initiated by defendant was brought without probable cause. The defendant affirmatively established that it reasonably believed in the existence of the facts upon which its claim was based and so believed in reliance upon the advice of counsel after a full and truthful disclosure. 363 F.Supp. 96, 101.

On appeal Hernon contends that the trial court acted improperly in entering judgment n. o. v. since advice of counsel was an affirmative defense to be proved by defendant Revere and the evidence showed neither reliance or full disclosure to the attorneys. The question becomes, then, whether the trial court was correct in holding, as a matter of law, that Revere acted upon its lawyers’ advice after full disclosure of all relevant facts.

A review of the law governing malicious prosecution or wrongful civil proceedings is essential to an understanding of the situation which faced the trial court.

The elements necessary to establish an action for malicious prosecution are clearly stated in Restatement, Torts, § 674:

One who initiates or procures the initiation of civil proceedings against another is liable to him for the harm done thereby, if

(a) the proceedings are initiated
(i) without probable cause, and
(ii) primarily for a purpose other than that of securing the adjudication of the claim on which the proceedings are based, and
(b) except where they are ex parte, the proceedings have terminated in favor of the person against whom they are brought.
The Restatement explains the important “probable cause” element as follows:
One who initiates civil proceedings against another has proabable cause for so doing if he reasonably believes in the existence of the facts upon which his claim is based and
(a) reasonably believes that under such facts the claim may be valid at common law or under an existing statute, or
(b) so believes in reliance upon the advice of counsel given under the conditions stated in § 666.

If the plaintiff is to prove malicious prosecution he must demonstrate that in the prior action there was lack of probable cause. However, where defendant can show that he brought the prior action on advice of counsel, he has an absolute defense. In other words, he has shown that there was probable cause. Rogers v. General Electric Company, 341 F. Supp. 971, 976 (D.Ark.1972). While the defendant has the burden of proving advice of counsel, advice of counsel, itself, is inextricably bound up with the plaintiff’s burden to demonstrate lack of probable cause.

Probable cause is a question of law for the court where there is no dispute in the facts of the case. Stewart v. Sonneborn, 98 U.S. 187, 194, 25 L.Ed. 116 (1878); Mayflower Industries v. Thor Corp., 15 N.J.Super. 139, 83 A. 2d 246, 257 (1951); Dombroski v. Metropolitan Life Ins. Co., 126. N.J.L. 545, 19 A.2d 678, 679 (1941); 52 Am.Jur.2d Malicious Prosecution § 184 p. 303 (1970). Restatement, Torts, has this to say regarding the unique function of the court in malicious prosecution cases:

* * * [T]he jury has only the function of finding the circumstances under which the defendant acted. The court determines whether, under the circumstances, the termination was sufficiently favorable to the accused, and whether the defendant had or had not probable cause. Where there is no conflict in the testimony as to what the circumstances were, the court has no need for a finding of the jury. The jury is not called upon to act unless there is conflict in the testimony which presents an issue of fact for its determination. Restatement, Torts § 673 comment (d) (made applicable to § 674 by comment (f) thereof).

Unlike other tort actions the rule in malicious prosecution cases appears to be that the court determines the reasonableness of conduct. This rule is almost universally accepted in the cases. See eases collected at Annot., 87 A.L.R.2d 183, 188-196 (1963).

The reason for this rule has been said to be that, were probable cause left to the jury the rights of defendants might not be sufficiently safeguarded and the bringing of complaints would be discouraged. Annot., 87 A.L.R.2d supra at 186, 192; see also Mayflower, supra 83 A.2d at 253. In this same vein, the general rule is that suits for malicious prosecution are viewed with disfavor and are to be carefully guarded against. Siegman v. Equitable Trust Co., 297 A.2d 758 (N.J.1972); Mayflower, supra 83 A.2d at 253. As the instant case demonstrates, malicious prosecution cases present situations difficult for the jury to distinguish. There is a constant interplay between the original lawsuit and the malicious prosecution suit. The defendant in the original suit becomes the plaintiff. The original defendant’s alleged fault becomes a basis for the present defendant’s alleged liability. This difficulty coupled with the reluctance of the courts to have potential plaintiffs feel a chilling effect from a possible counter lawsuit sheds some light upon the reason for the development of this rule. But if there is no material contradiction in the evidence that advice of counsel was relied upon after all material facts and circumstances had been disclosed by defendant, the court should rule on probable cause as a matter of law. See Cabakov v. Thatcher, 37 N.J.Super. 298, 117 A.2d 298, 302 (1955); Dombroski, supra 19 A.2d 678; Mayflower, supra; Liberty Loan Corp. of Des Moines v. Williams, 201 N.W.2d 462, 465-466 (Ia. 1972); Simmons v. Gardner, 46 Wash. 282, 89 P. 887 (1907); Steadman v. Topham, 80 Wyo. 63, 338 P.2d 820 (1959); 52 Am.Jur.2d Malicious Prosecution § 174 p. 294 (1970). See also Annot., 87 A.L.R.2d 183 (1963).

Where there is dispute in the evidence as to whether the relevant and material facts within a defendant’s knowledge were presented to counsel, the defense of advice of counsel should be submitted to the jury for a factual determination. 363 F.Supp. at 98-99.

In view of the above principles we turn to the evidence in this ease to determine whether or not it reflects reliance upon advice of counsel after full and fair disclosure.

Hernon’s case consisted of but one witness, Frederick E. Hernon, himself. Revere’s case consisted of testimony by three witnesses, Frank Vecchione, one of Revere’s retained attorneys in the original New Jersey suit; John W. Eason, executive vice-president of Revere; and Dominic Virga, a former operations manager for Hernon’s company, I.A.L.

The record demonstrates that I.A.L. and Revere had entered into a contract in 1968 whereby Revere shipped materials to I.A.L. on a retained title basis. Difficulties arose between the parties. I.A.L. was in arrears in payments to Revere as well as to other companies. Hernon testified that Revere was not meeting quantity and quality obligations.

Shortly after Hernon threatened Revere with legal action I.A.L. distributors received orders to sell Revere products at distressed prices if necessary to bring in cash. Virga, then operations manager for I.A.L., reported this development to Eason of Revere who then telegraphed I.A.L. officials, including Her-non, to discontinue selling Revere’s products. Hernon thereafter directed his sales offices to ignore Revere’s instructions to discontinue distress sales of Revere products. Revere then contacted New Jersey counsel for the purpose of protecting the company’s interests. Revere executive vice-president Eason testified that he went to the office of the New Jersey lawyers and gave them the information relative to the problem.

From the unrebutted testimony of New Jersey attorney Vecchione it becomes clear that the original action filed against I.A.L. and its executives was for injunctive relief and a restraining or-, der; that the attorneys, Vecchione and Dolan, made the decision to join Hernon as a defendant because they felt he was acting beyond the scope of his authority; that when the injunctive relief was denied the attorneys determined that the complaint should be amended to plead an action of replevin. Vecchione testified further that when the original complaint was amended to sound in replevin nothing was done by way of amendment regarding Hernon.

Hernon contends that there is evidence in the record from which a jury could find that Revere did not disclose all facts to its attorneys. He refers to the testimony of attorney Vecchione to the effect that the attorneys were unaware at the time they brought these actions that Revere might be liable to I.A. L. for damages resulting from Revere’s alleged breaches of contract. The fact that the attorneys were unaware of these possible off-setting claims is not material to the issue of lack of full disclosure since those claims have no bearing on the legitimacy of Revere’s efforts to protect its property from distress sales.

Our review of the entire record along with the exhibits satisfies us that the facts themselves are not in dispute. There is no substantial evidence which can be fairly said to raise a question as to whether Revere relied upon counsel. Neither are there any conflicting circumstances in evidence concerning disclosure of all relevant and material facts. The parties disagree only upon whether the facts present probable cause. That question, in view of the cases and authorities set out earlier, is one of law for the court.

Of course, the court should not grant a motion for judgment n. o. v. “unless as a matter of law the opposing party failed to make a case and a verdict in the movant’s favor should have been directed.” Schneider v. Chrysler Motors Corporation, 401 F.2d 549, 554 (C.A.8 1968); Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251, 61 S.Ct. 189, 85 L.Ed. 147 (1940). There must be conflict in substantial evidence to create a jury question. Neither a directed verdict or judgment n. o. v. should be granted unless the evidence is such that without weighing the credibility of the witnesses there can be but one reasonable conclusion. Brady v. Southern Ry., 320 U.S. 476, 479, 64 S.Ct. 232, 88 L.Ed. 239 (1943); Midcontinent Broadcast. Co. v. North Central Air., Inc., 471 F.2d 357, 358-359 (C.A.8 1973).

We agree with the trial court that upon this record “it may reasonably be concluded that defendant presented all the known material facts” to its attorneys and thereafter reasonably relied upon counsel’s advice. Revere presented a complete defense as a matter of law.

The judgment n. o. v. is affirmed. Accordingly we need not consider the other contentions raised by the parties nor the challenge to the trial court’s alternative new trial order.

Affirmed.

      . This case came to the United States District Court for the Eastern District of Missouri by removal from Missouri state court instigated by Revere, a Maryland Corporation.

      . The law of New Jersey is therefore applicable to the substantive issues regarding malicious prosecution actions.

      . In states which recognize actions for malicious prosecution of civil suits the governing rules are primarily the same as for malicious criminal prosecutions. See Mayflower Industries v. Thor Corp., 15 N.J.Super. 139, 83 A.2d 246, 252 (1951).

      . The amended complaint alleges facts in support of a replevin and concludes :
      WHEREFORE, plaintiff, in addition to the demands set forth in the original complaint filed herein, demands that a judgment be entered against the defendants, jointly and severally, directing the immediate return of the finished products and raw materials in the possession of said defendants to the plaintiff and for money damages caused by the delay in returning said materials to the plaintiff together with interest and costs of suit.


author: DONALD RUSSELL, Circuit Judge:

text:
    UNITED STATES, ex rel. PFC Christopher H. COATES, 2362375 USMCR (K), Maint. Bn., 4th FSR, Charlotte, North Carolina, Appellee, v. Melvin LAIRD, Secretary of Defense of the United States, et al., Appellants.
    No. 73-1778.
    United States Court of Appeals, Fourth Circuit.
    Argued Nov. 7, 1974.
    Decided April 1, 1974.

      David B. Sentelle, Asst. U. S. Atty. (Keith S. Snyder, U. S. Atty., on brief) for appellants.
    Adam Stein, Charlotte, N. C. (Chambers, Stein, Ferguson & Lanning, Charlotte, N. C., Loflin, Anderson, Loflin & Goldsmith and Thomas F. Loflin, III, Durham, N. C., on brief) for appellee.
    Before CLARK, Associate Justice, and WINTER and RUSSELL, Circuit Judges.

       Supreme Court of the United States (retired) sitting by designation.

   DONALD RUSSELL, Circuit Judge:

The petitioner-appellee Coates is a Marine reservist, who, denied discharge administratively as a conscientious objector, filed this habeas proceeding to secure judicial review of that administrative denial. In response to motion to dismiss, the District Court found the administrative denial defective and ordered forthwith Coates’ discharge from the service. The Government has appealed. We reverse.

The denial of Coates’ application by the Corps did not set forth the reasons on which it was based. Such omission cannot be excused on the claim that Coates failed to state a prima'facie case for CO status. It matters not whether Coates, in his statement of beliefs, set forth a prima facie case for release or not. The establishment of a prima facie case as a prerequisite for a statement of reasons for denial of CO status is applicable only in Selective Service cases. It has no relevancy in in-service applications such as this, the processing of which is controlled by Department of Defense Directive 1300.6. That Directive expressly provides that, “[T]he reasons for an adverse decision will be made a part of the record and will be provided to the individual.” It makes no exceptions in its application. Compliance with its requirement is obligatory on the military services, first, because an agency must comply with its own regulations, and, second, “when there is a requirement of law [or regulation] that reasons be stated by executive officials or administrative agencies responsible for decisions, there is an implicit corollary that the decision must stand or fall on the basis of the reasons stated.”

The District Court, while finding that the Corps had not stated any reasons for the denial, reviewed the full military record in order to glean from it possible reasons for the denial. This was unnecessary. No obligation rests on the Court, in its judicial review of administrative action, to search through the administrative record in order to find possible reasons for an agency action when the agency has stated no reasons. It was the duty of the Corps, similar to that of any agency given decision authority, to articulate its reasons for its decision and to articulate them clearly. Failure to observe this requirement invalidated the administrative denial of Coates’ application, and the District Court properly so concluded.

But because the initial denial by the Marine Corps was defective for failure to assign a reason, it does not follow that Coates’ application for discharge must necessarily be granted. See Gillette v. United States (1971) 401 U.S. 437, 91 S.Ct. 828, 28 L.Ed.2d 168. The proper procedure in such a case where the record evidences alternative grounds, one possibly valid and the other invalid, is to remand the proceedings to the service for reprocessing and for compliance with the requirement of a statement of reasons. This was the procedure suggested in Krieger v. Terry (9th Cir. 1969) 413 F.2d 73, 75; it was the procedure followed in Hammond v. Lenfest (2d Cir. 1968) 398 F.2d 705, 718 (on Petition for Rehearing), which, incidentally, was the first Circuit Court decision to sustain the right of an in-service claimant to CO status to invoke habeas jurisdiction for review of the denial of his application for discharge (in Brown v. McNamara, 3d Cir. 1967, 387 F.2d 150, cert, denied 390 U.S. 1005, 88 S.Ct. 1244, 20 L.Ed.2d 105 the jurisdiction to review via habeas was recognized but relief was denied); and it is the established procedure in the judicial review of administrative decisions generally, including in-service CO cases. Thus, in DuTerroil, Remanding an In-Service Conscientious Objector Case to the Military: Use or Abuse of the Power to Remand, 3 St. Mary’s L.R. 294, 305 (1971), the author after an exhaustive review of the authorities, declares that, if there are procedural defects in the denial at the military level of an in-service CO application, such as failure to state the reasons for denial, remand to the military “so that the application [may be] considered and decided in compliance with established procedural requirements and existing and changing substantive law * * *,” is the proper procedure, unless the record shows that there is “no basis in fact” for denial on any valid ground. The same procedure is stated in Hansen, Judicial Review of In-Service Conscientious Objector Claims, 17 U.C.L.A.L.R. 975, 1002 (1970). There, the author states that “ * * * if it finds procedural defects in the service’s handling of the request for discharge,” the Court “should remand the case to the service for proper processing, retaining jurisdiction, if indicated by necessity, to restrain the military from using the extra time to further harm or injure the serviceman.” And this is the procedure that was followed in United States ex Rel. Donham v. Resor (2d Cir. 1971) 436 F.2d 751; Rosengart v. Laird (2d Cir. 1971) 449 F.2d 523; United States ex rel. Checkman v. Laird (2d Cir. 1972) 469 F.2d 773; Rothfuss v. Resor (5th Cir. 1971) 443 F.2d 554; Morrison v. Larsen (9th Cir. 1971) 446 F.2d 250; and Zemke v. Larsen (9th Cir. 1970) 434 F.2d 1281, 1283.

It follows that the District Court in this case should not have summarily-granted discharge to Coates. The proper procedure, as established by the authorities cited, was to remand the proceedings to the Marine Corps with directions (1) to “follow scrupulously” the regulation, United States ex rel. Brooks v. Clifford (4th Cir. 1969) 409 F.2d 700, 706, and (2) to correctly apply the “three basic tests” articulated in Clay v. United States (1971) 403 U.S. 698, 700, 91 S.Ct. 2068, 29 L.Ed.2d 810.

The case is accordingly reversed and remanded to the District Court with directions to, in turn, remand the proceedings to the Marine Corps for processing in accordance with this opinion. No disciplinary sanctions are to be visited upon Coates because of his actions with reference hereto.

      . The procedure to be followed in connection with in-service applications for CO release is outlined in United States ex rel. Brooks v. Clifford (4th Cir. 1969) 409 F.2d 700, 702-703; see, also, Gideon, Conscientious Objection : Procedures Governing the In-Service Objector, 37 Mo.L.Rev. 494, 496-7 (1972) ; Sherman, Judicial Review of Military Deter-ruinations and Exhaustion of Remedies Requirement, 55 Va.L.Rev. 483, 506-7 (1969).

      . United States ex rel. Brooks v. Clifford, supra (409 F.2d at 705) established, so far as this Circuit is concerned, the right in ha-beas to a judicial review of a denial of CO status in an in-service case. See, also, Brown v. McNamara (3d Cir. 1967) 387 F. 2d 150, cert, denied 390 U.S. 1005, 88 S.Ct. 1244, 20 L.Ed.2d 105.

      . Cf. United States v. Wood (4th Cir. 1972) 454 F.2d 765, 767, where, because of failure of registrant to state a prima facie case, it was held the Selective Service Board was under no duty to state reasons for denial of CO status, with United States v. Broyles (4th Cir. 1970) 423 F.2d 1299, 1303-1304, where, because the registrant had set forth a prima facie case, a statement of reasons for denial was found to be compelled. In 1971 the Selective Service Act was amended to require, on demand, a statement of reasons in all cases of a denial. The amendment is in this language :
      “(4) In the event of a decision adverse to the claim of a registrant, the local or appeal board making such decision shall, upon request, furnish to such registrant a brief written statement of the reasons for its decision.” 50 U.S.C. App. § 471a.

      . This Directive, issued in 1962, and reissued with changes in 1968 and again in 1971, extended the Congressionally approved conscientious objector exemption for pre-induction personnel to in-service members of the Armed Services by providing for administrative discharge on grounds of conscientious objection, pursuant to the standards set forth in § 6(j) of the Universal Military Training and Service Act, 50 U.S.C. App. § 456(j).

      . § YI, F, of the Directive.

      . United States v. Heffner (4th Cir. 1970) 420 F.2d 809, 811-812.

      . United States ex re. Checkman v. Laird (2d Cir. 1972) 469 F.2d 773, 780.

      . See United States ex rel. Checkman v. Laird, supra (469 F.2d at 780, n. 10, quoting from Gresham v. Franklin (D.C.Cal. 1970) 315 F.Supp. 850, 853) :
      “ ‘ [I] t is not the function of this court to search the record for some basis to affirm the Army’s decision when the reasons given are therefor inadequate.’ ”
      The reasons for such rule was thus explicated (469 F.2d at 781) :
      “Otherwise a court, if it sustains a decision by recourse to reasons outside those specified, opens the door to an improper substituting of the court’s judgment and evaluation of evidence in place of that of the agency [here the CORB] or official with responsibility. The court’s judgment, its reasons and approaches, may not be acceptable to and may even have been discredited by the administrative officials responsible.”

      . Securities Comm’n v. Chenery Corp. (1943) 318 U.S. 80, 94, 63 S.Ct. 454, 87 L.Ed. 626. This is different from the rule followed when an appellate court is reviewing a decision of a lower court. In the latter case, the appellate court will affirm if sound grounds therefor appear, irrespective of the reasons given by the lower court. But no such rule prevails when a decision of an administrative agency is being reviewed. The reason for the difference has been stated as follows: “The justification for the difference is that a reviewing court may formulate the ground upon which a lower court should have acted but may not initially decide a question which is committed to an agency for initial determination.” 2 Davis, Administrative Law, § 16.12 at p. 482; cf., Denver & R.G.W.R. Co. v. Union P.R. Co. (1956) 351 U.S. 321, 337 and 341, 76 S.Ct. 982, 100 L.Ed. 1220 (Frankfurter, J., dissenting).

      . Gulf States Utilities Co. v. FPC (1973) 411 U.S. 747, 763-764, 93 C.Ct. 1870, 36 L.Ed.2d 635; Securities Comm’n v. Chenery Corp. (1943) 318 U.S. 80, 95, 63 S.Ct. 454, 87 L.Ed. 626; Friendly, Chenery Revisited: Reflections on Reversal and Remand of Administrative Orders, 1969, Duke L.Journal 199. For a case in which the agency assigned alternative grounds, some of which are valid, see Michigan Consolidated Gas Co. v. Federal Power Com’n. (1960) 108 U.S.App.D.C. 409, 283 F.2d 204, 220, cert, denied, Panhandle Eastern Pipe Line Co. v. Michigan Consol. Gas. Co., 364 U.S. 913, 81 S.Ct. 276, 5 L.Ed.2d 227, 364 U.S. 913, where the Court said that in such a case the “court must remand the case for reconsideration [by the agency] if the agency has failed to state whether it would have rested its action on the sustained ground alone” (headnote 12). Citizens Ass’n. of Georgetown, Inc. v. Zoning Com’n of D.C. (1973) 155 U.S.App.D.C. 233, 241-242, 477 F.2d 402, 410-411; Environmental Defense Fund, Incorporated v. Hardin (1970) 138 U.S.App.D.C. 391, 428 F.2d 1093, 1100; Air Line Pilots Association, International v. C.A.B. (1973), 154 U.S. App.D.C. 316, 322, 475 F.2d 900, 906, and Bell Aerospace Company Div. of Textron Inc. v. N.L.R.B. (2d Cir. 1973), 475 F.2d 485, 497, illustrate the rule requiring remand where the agency gives no reason for its action.