SEC Division of Investment Management staff letter: MPC Liquidating Trust

1 0 MAR 1994
, ~)\ ~c Our Ref. No. 94-50-CC

,,~~~ESPONSE OF THE OFFICE OF CHIEF COUNSEL MPC Liquidating Trust V DIVISION OF INVESTMENT MAAGEMENT File No. 132-3

On the basis of the facts and representations in your letter

of January 25, 1994, we would not recommend enforcement action to

the Commission if the trust created to liquidate the assets of

McCrory Parent Corp. ("MPC") and to distribute its proceeds (the

"Trust") does not register under the Investment Company Act of

1940 (the "1940 Act") in reliance on the exemption in Section 7 (b) for "transactions which are merelr incidental to the dissolution of an investment company." This position is based

on your representations that the Trust: (1) exists solely to

liquidate MPC's assets and to distribute the proceeds to

beneficiaries; (2) will be prohibited from conducting a trade or

business, and from making any investments, except for temporary

investments in government securities, pending the distribution of

liquidation proceeds to beneficiaries; (3) will not hold itself

out to be an investment company, but rather as a trust in the

process of liquidation; (4) will be under the continuing

jurisdiction of the Bankruptcy Court; and (5) will terminate on

or before the third anniversary of the effective date of the plan

of liquidation unless the Bankruptcy Court grants an extension

for cause, and additional no-action assurance is obtained from

the staff. This position is also based on your representations

that, although the certificates of beneficial interest in the

Trust (the "CBIs") will be transferable for the benefit of the

creditors: (1) the CBIs will not be listed on any national

securities exchange or NASDAQ; (2) neither the Trust nor the

trustees will engage the services of any market maker, facilitate

the development of an active trading market or encourage others

to do so, place any adverlisements in the media promoting

investments in the Trust, or collect or publish information

about prices at which the CBIs may be transferred; (3) an active

trading market in the CBIs is unlikely to develop; and (4) the

Trust will comply with. the registration and reporting

requirements of the Securities Exchange Act of 1934.

Our -position is based on the facts and representations in your letter. Any different facts or representations may require

a different conclusion. Moreover, this response expresses the

Division's position on enforcement action only and does not

express any legal conclusions on the issues presented.

Edward J. Rubenstein

Attorney
1 We express no opinion on whether the principal assets

of the Trust would constitute "securities" for purposes of Section 2 (a) (36), or "investment securities" for purposes of Section 3 (a) (3) . 2 Telephone conversation between Edward J. Rubenstein and

Michael J. Rosenfelder, March 7, 1994.

DEWEY BALLANTINE
ISOI AVENUE OF THE AMERICAS t"O",f ~~ ~,?\ NEW YORK 10019-6092 ~..",~, ¿ ~ '.~ ,',_ _ ~ ..1 TELEPHONE 212 259-1000 FACSIMILE 212259-6333 . Io ~,-~ ..

Investment Company Act

§§2(a) (36), 3(a) (3) and 7(b)

January 25, 1994

1: c.-A

Office of Chief Counsel
ION ~~ Àl ~lj t., ~\o) Division of Investment Management

Securi ties and Exchange Commission BU

450 Fifth street, N.W.

Washington, D. C. 20549 ~~~BIL~ Re: MPC Liauidatina Trust

Ladies and Gentlemen:

As counsel to and on behalf of the Official

Committee of Unsecured Creditors (the "Committee") of

McCrory Parent Corp., a Delaware corporation ("MPC"), we

respectfully request that the staff of the Division of

Investment Management (the "Staff") confirm that it will not

recommend any enforcement action to the Securities and

Exchange Commission based upon the facts set forth below, if

the liquidating trust created by MPC (the "Trust") pursuant

to a plan of liquidation (the "Plan") proposed by the

Committee under Chapter 11 of Title 11 of the United states

Code (the "Bankruptcy Code") carries out the program for

liquidation of its assets and distribution of the proceeds

thereof without registering as an investment company under

the Investment Company Act of 1940, as amended (the "1940

Act"), in reliance on the last sentence of section 7 (b) thereof.
I. MPC

MPC was formed in 1989 as a successor in interest

to substantially all the assets and certain of the

liabilities of Rapid American Corporation, a Delaware

corporation, pursuant to a purchase agreement dated as of

May 20, 1989. On November 25, 1991, an involuntary petition

for relief under Chapter 11 of Title 11 of the Bankruptcy

Code was filed against MPC by certain of its creditors in

the united States Bankruptcy Court for the Southern District

of New York (the "Bankruptcy Court"). On March 4, 1992,

MPC I S bankruptcy case was converted to a voluntary Chapter

NE TOBI YASBIGTN LOS AJCELES LONDON

11 case. As discussed in the disclosure statement relating to the Plan (the "Disclosure statement"), MPC has as of the

date hereof, total assets of approximately $29 million and

total liabilities to its creditors (the "Claimants") of

approximately $536 million. Of MPC' s total assets of $29

million, it is expected that approximately $24 million will

be transferred to the Trust.

II. The Plan and Trust

The Committee has recently filed the Plan with the

Bankruptcy Court. The Plan contemplates that as of its

effective date (the "Effective Date"), MPC will distribute

its cash on hand to the Claimants, retain reserves for

certain costs and expenses and the payment of certain

currently disputed claims, and transfer the remainder of its

assets (the "Trust Property") to the Claimants, who will

immediately transfer the Trust Property to the Trust which

will hold the Trust Property on behalf of the Claimants.

Under the Plan, MPC is to dissolve itself as quickly as

possible after the Effective Date. The Trust will be

established pursuant to a trust agreement (the "Trust

Agreement") to liquidate and distribute the Trust's assets

to designated beneficiaries of the Trust, who will be those

Claimants with allowed claims ("Allowed Claims"). The Trust

will also be responsible for settling and resolving certain

disputed claims ("Disputed Claims") that are not resolved by 1 the Effective Date.

Under the Plan, each holder of an Allowed Claim

will receive for such Claim a pro rata portion' of the TrUst

Property and immediately thereafter transfer such property

to the Trust in exchange for CBIs issued by the Trust. CBIs

will be issued pro rata to the dollar value of Claims

exchanged therefor in accordance with a ratio set forth in

the Plan applicable to each class of Claimant.. The CBIs

will evidence a fractional undivided beneficial interest in

the Trust and will be transferable for the benefit of the

Claimants.. The Plan provides that the Trust will issue the

CBIs on the later of (i) the Effective Date or (ii) the date

1 The Plan provides for Claimants with Disputed Claims

against MPC by creating reserves (as described below). Upon

resolution of their Disputed Claims and to the extent such

Disputed Claims become Allowed Claims, the holders of such

Allowed Claims will receive CBIs as provided in the Plan and

Trust Agreement..

each Disputed Claim becomes an Allowed Claim. The CBIs are

evidenced by certificates and are freely transferable.

A. Terms of the Trust

The Trust will liquidate all its assets and

terminate on or before the third anniversary of the Plan' s

Effective Date, unless such time is extended for cause by

the Bankruptcy Court which will retain jurisdiction over the

Trust for various purposes, including settling Disputed

Claims, supervising distributions to holders of CBIs,

remedying any omissions or inconsistencies with respect to

the CBIs and issuing or mOdifying any injunctions or other

orders as necessary to effectuate the purposes of the Plan.

In addition, the Trust will be prohibited from extending its

existence beyond the three year term without first obtaining

addi tional no-action assurance from the Staff. The Trust. s

affairs will be managed by three trustees ("Trustees") who

will be appointed by the Committee and thereafter, upon a Trustee vacancy, by the remaining Trustee (s) . Under the Trust Agreement, the powers of the Trustees are exercisable

solely in a fiduciary capacity consistent with, and in

furtherance of, the purposes of the Trust as set forth in

the Trust Agreement. The Trustees may act only upon a

majority vote at any meeting at which all Trustees received

reasonable advance notice, or by unanimous written consent.

Trustees maybe removed upon the vote of persons holding in

excess of 66% of the outstanding numer of CBls.

Under the Trust Agreement, the Trust will be

prohibi ted from conducting a trade or business and from

making any investments, except that it will be allowed to

temporarily invest its cash pending quarterly distribution

in securities guaranteed by the United states or an agency,

department or instrumentality of the United states, or

backed by the full faith and credit of the United states.

The Trust will comply with the registration and

reporting requirements of the Securities and Exchange Act of

1934, as amended (the "1934 Act"). The Trust will enter

into a registration rights agreement (the "Registration

Rights Agreement") which will give holders of CBIs the right

to require that the Trust register the CBIs under Rule 415

under the Securities Act of 1933, as amended (the "1933

Act"). The Trust Agreement will provide that the Trustees

are permitted to comply with the Registration Rights

Agreement but are not authorized to otherwise facilitate the

development of an active trading market for the CBIs.

Nei ther the Trustees nor the Trust will make a market in the

.

CBIs, encourage others to do so i or list the CBIs on a

national securities exchange or the Nasdaq National Market

or collect or publish information about prices at which the

CBIs are transferred. It is anticipated that transfers of

the CBIs will be settled and cleared through the Depository

Trust Company.

The Trust will not hold itself out to be an

investment company but rather as a trust in the process of

liquidation. Further, it will not place any advertisements

in the media promoting investments in itself on the basis of

compensation of or returns earned on its assets.

B. The Assets and Liabilities of the Trust

It is anticipated that on the Effective Date i the

Trust's assets and liabilities will consist of the following

items :

1. The E-II Obligation. The remaining portion

of a $38.5 million claim (the "E-II Obligation") against

another liquidating trust (the "E-II Trust") created by E-II

Holdings, Inc. ("E-II") i a former affiliate of MPC, under E￾II's plan of reorganization confirmed in its own Chapter 11

case. The E-II Obligation represents the settlement of a claim in excess of $900 million against E-II in E-II' s
Chapter 11 case arising out of certain asset transfers from

MPC to E-II alleged by the Committee to have been fraudulent

conveyances. In consideration of MPC' s release of E-II, MPC

received the E-II Obligation and the parties agreed that it

would be paid by the E-II Trust. The E-II Obligation is not

certificated and is evidenced only by an order of the

Bankruptcy Court. The E-II Obligation requires the E-II

Trust to pay to the Trust by no later than approximately 36 months from the date E-II i s plan of reorganization was confirmed a percentage of $38.5 million equal to the rate of

recovery realized by E-II's other creditors, less payments

already received by MPC. The E-II Trust has already paid to

MPC $3.85 million on account of the E-II Obligation. The

Disclosure statement indicates that the E-II Obligation has

an approximate present value of $16.4 million.

2. The E-II Beneficial Interest. A 25%

beneficial interest in the E-II Trust (the "E-II Beneficial

Interest") . The E-II Beneficial Interest represents the

right to 25% of the remaining assets of the E-II Trust after

the payment of the E-II Obligation and the E-II Trust i s other obligations. The E-II Beneficial Interest is (i) evidenced by an order of the Bankruptcy Court and is not

certificated, and (ii) non-transferable except by will,

intestate succession by operation of law or under

circumstances that would not require registration under the

federal securities laws. The Disclosure statement indicates

that the E-II Beneficial Interest has an approximate present

value of approximately $5.6 million.

3. 7th Avenue Leasehold Sale Proceeds. The

right to receive $100,000 each month from the date hereof

through September, 1994 from the landlord of certain

property as a result of the landlord's buyout of MPC' s lease

of the property pursuant to an agreement approved by an

order of the Bankruptcy Court.

4. McGregor Preferred Stock Dividend. $1.37

million present value in dividends previously paid by

McGregor Corporation, a subsidiary of E-II, on certain of

its preferred stock which will be received by MPC from an E￾LI escrow account as part of a settlement of a dispute

between MPC and McCrory Corporation, a former subsidiary of

MPC which is also a Chapter 11 debtor, approved by an order

of the Bankruptcy Court.

5. Administrative Expense Reserve. Cash of

approximately $1,000,000 for administrative expenses,

expenses incurred in resolving Disputed Claims and in operating the Trust.
6. The Disputed Claims. Under the Plan, prior

to the Effective Date, MPC will calculate the amount of cash

and CBIs necessary to reserve on account of holders of

Disputed Claims. On the Effective Date, MPC will transfer

to the Trust, and the Trust will assume liability with

respect to, Disputed Claims relating to senior, general

unsecured and subordinated debt claims against MPC and the

Trust will receive from MPC certain reserves on account of

holders of such Disputed Claims. Under the Plan, MPC will

upon its dissolution, transfer additional reserves to the Trust. All CBIs held in the Trust i s reserves as of any date will be treated in all respects as "outstanding" CBIs

and will be deemed to have voted, and to have abstained from

voting, in the same proportion as the CBIs not held in

reserve. The Trust will distribute to the relevant reserve

such CBls' pro rata share of all distributions made by the

Trust on account of CBIs.

Discussion
The relevant definition of investment company, as

set forth in Section 3 (a) (3) of the 1940 Act, is any issuer

which:
"is engaged or proposes to engage in the business of

investing, reinvesting, owning, holding, or trading in

securi ties, and owns or proposes to acquire investment

securities having a value exceeding 40 per centum of

the value of such issuer's total assets (exclusive of

Government securities and cash items) on an

unconsolidated basis."

It is unclear whether the Trust's principal assets

such as the E-II Obligation or the E-II Beneficial Interest

would constitute "securities" under the 1940 Act's statutory

defini tion2 or the tests set forth in the leading cases

under the federal securities laws.3 Even if such assets

are "securities," it is unclear whether they constitute

"investment securities" for purposes of the 40% test set

forth in Section 3 (a) (3) . In SEC v. Fifth Avenue Coach

2 Section 2 (a) (36) of the 1940 Act.
3 E.g., SEC v. W.J. Howey & Co., 328 U.S. 293 (1946)

setting forth a four-part test to determine whether a

financial interest constitutes an "investment contract"

within the general definition of "security" under the 1933

Act. The Howey test turns on "the presence of an investment

in a common venture premised on a reasonable expectation of

profit to be derived from the entrepreneurial efforts of

others." United Housing Foundation, Inc. v. Forman, 421

u.S. 837, 852 (1975). See also Reves v. Ernst & Young, 494

U.S. 56 (1990), adopting the "family resemblance test" to

determine. whether notes are securities. Under the family

resemblance test, every note is presumed to be a security

unless it bears a strong resemblance to other notes that are

not viewed as securities. If the instruent bears a

resemblance to a note that is viewed as a security, then the

underlying transaction is examined to see whether it is an

investment with a reasonable expectation of profit, offered

to a broad segment of the public for common trading and

whether another regulatory scheme exists to significantly

reduce the risk of the instrument.

Lines, 289 F. Supp. 3 (1968), a judgment in compensation for

the taking of property by eminent domain was held not to be an "investment security" for purposes of section 3 (a) (3) because the holder of the judgment was not "investing" in

either the suit or the resulting judgment. As described

above, the E-II Obligation and the E-II Beneficial Interest

exist by virtue of an order of the Bankruptcy Court in

compensation for the release of fraudulent conveyance claims and other disputes. Neither the E-II obligation nor the E￾II Beneficial Interest should be viewed as an "investment

security. "
If the Trust's assets are nevertheless deemed to

include investment securities and if such assets have a

value exceeding 40 percent of the value of the Trust's assets as calculated in accordance with Section 3 (a) (3), the Trust would be deemed to be an investment company subj ect to the prOhibitions of Section 7 (b). Section 7 (b) prohibits an

investment company without a board of directors and that has

not registered under Section 8 from engaging in any business

in interstate commerce, among other things. However, the

last sentence of Section 7 (b) provides that the subsection

"shall not apply to transactions which are merely incidental to the dissolution of an investment company." It is our view that if the Trust is an investment company, its activities are merely incidental to its dissolution and satisfy the requirements of the last sentence of Section 7 (b) . Review of No-Action Letter criteria

The Staff has issued a number of no-action letters

providing exemption from the registration requirements of the 1940 Act based on the last sentence of Section 7 (a) or 7 (b), both to corporations in the process of liquidation and

dissolution,4 and to liquidating trustsS established to

6 effectuate a liquidation.

Letters from liquidating trusts requesting Section

7 relief have historically involved concurrent requests for

relief from the registration and reporting requirements of

the 1934 Act.7 Such trusts's requests for 1934 Act relief

have usually been predicated on the theory that the

beneficial interests of the trust are not "securities" for

1934 Act purposes and have recited, among other things, that

the beneficial interests in the trust are not transferable

except in certain limited circumstances such as by operation

of law or pursuant to the laws of descent and distribution.

Letters from corporations, on the other hand, have generally

not involved concurrent requests for 1934 Act relief.8

Requesting corporations generally have had transferable

interests (common stock) outstanding and have usually been

already registered under the 1934 Act. There have been no

recent Section 7 requests from a liquidating trust such as

4 E. g ., Fund American Companies, Inc. (available

November 16, 1990) ¡ and LDX Group, Inc. (available May 4,

1990) ¡ Merit Clothing Company (available March 9, 1982) ¡

Atlanta/LaSalle Corp. (available March 5, 1979) American

Recreation Group, Inc. (available October 31, 1975).

5 E. g., VH Enterprises, Inc. (available January 7,

1993) ¡ Grub & Ellis Realty Income Trust (available May 26,

1992) ¡ Western Air Lines, Inc. (available January 28, 1992) ¡

Newhall Investment Properties (available September 21,

1988) ¡ Timber Realization company (available June 15,

1987) ¡ Official Unseçured Creditors' Committee of D.H.

Baldwin Co. (available June 13, 1986): Invest-Tex, Inc.

(available January 12, 1987) ¡ United Western Corp.

(available October 29, 1984) and Raymond Industries, Inc.,

(available September 12, 1984).

6 The process of liquidation is essentially similar

whether a corporation or a liquidating trust is involved,

and the form of entity does not alter the fact that the

entity is liquidating and distributing its assets to holders

of its beneficial interests. See Fund American Companies,

Inc., supra, and LDX Group, Inc., supra.

7 See note 5, supra. Cf. Management Assistance Inc.

(available January 17, 1986).

8 See note 4, supra.

the Trust that has transferable interests and that is or

will be registered under the 1934 Act.

It is our view that the transferability of a

trust's interests should not be relevant to a request for

Section 7 relief if the trust is a 1934 Act registrant.

Requiring non-transferability as a condition to Section 7

relief would be in keeping with the policies and purposes

underlying the 1940 Act and the 1934 Act when an issuer is

not a 1934 Act registrant, as such requirement would prevent

the development of an active trading market for the

securities of a liquidating investment company when there is

no currently available public information about the issuer.

If, however, a liquidating trust is a 1934 Act registrant,

it is unclear why non-transferability should be relevant.

In a recent no-action letter, Western Air Lines,

Inc. ("Western Air") (available January 28, 1992), the Staff

took a no-action position under Section 7 and granted an

exemption under the 1934 Act9 where the beneficial

interests in the liquidating trust were transferable and an

active trading market for the trust's beneficial interests

was unlikely to develop.10 If the staff is unable to

concur in our view that transferability is not relevant to a

1934 Act-registered trust's request for Section 7 relief, we

seek the staff's concurrence with our view that the Trust

satisfies the conditions for Section 7 relief set forth in

Western Air.
Like the Western Air trust, the Trust (1) exists

solely to liquidate the company's assets and distribute the

proceeds to beneficiaries, (2) will not make any new

investments except fQr temporary investments in government

securities pending the distribution of liquidation proceeds

to beneficiaries, (3) will terminate within a reasonable

time (three years, unless extended for cause by court order,

9 Western Air and Securities Exchange Rel. Nos. 29861

(Oct. 25, 1991) (notice of application for exemptive relief)

and 30052 (Dec 9, 1991) (order granting application).

10 In our view, trading market activity, like

transferability, should only be relevant to the question of

whether beneficial interests in a trust are securities for

1934 Act purposes. Trading market activity was not an issue

under Section 7 for issuers of transferable interests that

were registered under the 1934 Act. See note 4, supra.

.

as opposed to ten years for the Western Air trust), (4) will

issue reports no less frequently than semiannually (the

Trust will issue reports quarterly pursuant to the 1934

Act), (5) will not hold itself out to be an investment

company and (6) will not facilitate the development of an

active trading market.

The Western Air letter emphasized that an active

trading market was unlikely to develop for its beneficial

interests and the Committee believes this also to be the

case for the Trust. The Trust Agreement will provide that

the Trustees are not authorized to facilitate the

development of an active trading market or encourage others

to do so. The CBls will not be listed on any national

securities exchange or Nasdaq nor will the Trustees engage

the services of any market makers. 11

While it is possible that following the Effective

Date a limited amount of trading of CBls will occur among

the initial CBI holders, the Committee believes it is

unlikely that such trading will be active or that a

significant market of non-initial holders will develop.

Unless the CBI holders require that the Trust register

transfers of CBls under the 1933 Act pursuant to the

Registration Rights Agreement, the Trust will not do so.

Even if a registration statement for transfers of CBIs is

filed under the 1933 Act, under most state securities law

statutes, in the absence of a registration permit for the

CBIs, a holder of the CBls would be unable to resell the

CBIs except to a person who qualified as an institutional

investor under the applicable state securities act or

pursuant to an isolated non-issuer transactional exemption.

In addition, given the nature of the Trust's assets, the

limited duration of its existence and its limited purpose,

the Committee believes any such trading is unlikely to

extend far beyond the universe of initial holders of the

CBIs who are familiar with the facts surrounding the Trust.

Accordingly, it is our view that the Trust satisfies the

condi tions for section 7 relief set forth in Western Air.

We note that in Western Air, the issuer

undertook to comply with various provisions of the following

11 See also LDX Group, Inc., supra, in which the Staff

adopted a no-action position under Section 7 (a) despite the company granting registration rights under the 1933 Act on

behalf of minority stockholders who desired increased

liquidity during the liquidation process.

sections of the 1940 Act: Section 9 (Ineligibility of

certain affiliated persons and underwriters) ¡ Section 17

(Transactions between certain affiliated persons and

underwriters) ¡ Section 26 (Unit investment trusts) and

Section 36 (Breach of fiduciary duty).

We do not believe that it should be necessary for

the Trust to undertake to comply with the indicated

provisions to achieve the purposes of the 1940 Act. In

granting no-action relief in Fund American Companies, for

example, the Staff noted that the issuer had established

personnel policies designed to avoid the possibility of

self-dealing by its officers, directors" and employees

during the course of the issuer's proposed six-year

liquidation. The Trustees of the Trust will be subject to

similar, if not greater, obligations as a' result of their

fiduciary obligations imposed by the Trust Agreement as well

as the Bankruptcy Court's continuing jurisdiction over the

Trust's affairs. Accordingly, we believe no further purpose

would be achieved by requiring that the Trust undertake to

comply with the provisions of the 1940 Act.

Concl us ion
For the reasons stated above, we respectfully

request that the Division of Investment Management confirm

that it will not recommend enforcement action if the Trust

carries out the program of liquidation and distribution of

its assets as described above without registration as an

investment company under Section 8 of the 1940 Act, in reliance on the last sentence of Section 7 (b) . In compl iance with the procedures set forth in

Securities Act Release Nos. 6269 (December 5, 1980) and 5127

(January 25, 1971), seven copies of this letter are

submitted herewith, and the specific subsection of the

particular statute to which this letter pertains is

indicated in the upper right corner of the first page of

this letter and each copy.

If for any reason you do not concur with our

conclusions, we respectfully request a conference with the

Staff before any adverse written response to this letter is

rendered. Should any member of the Staff have any questions

concerning the foregoing or need additional information or

clarification, please call me at 212-259-6615.

Very truly yours,

/V~ ()~,~

Michael J. Rosenfelder

.