“No, Reuben. Let’s go someplace down here; I’ve got to see you alone,” Merritt said, the words flowing desperately fast.
“Well, can’t we talk right here?” Frost asked.
“No, no, I won’t be able to say what I have to say without a drink.”
Frost had never seen Merritt, a modest imbiber as far as Frost knew, so insistent on drinking. What on earth was bothering him? There was only one way to find out, so Frost agreed, reluctantly, to his odd request.
“Where shall we go?” Frost said. “The club is closed by now.”
“I don’t know. I seldom go to bars down here. Isn’t there one up on Hanover Square?”
“I think there is. Shall we go there?” Frost asked.
“Yes.”
“And can I have at least a hint about what this is all about?”
“Wait till we get there,” Merritt said.
Harry’s Bar was crowded with a noisy, rowdy group of what Frost took to be stockbrokers. Did their roisterous drinking mean that the market was up or down? Frost never could remember which reaction was supposed to trigger marathon imbibing and in fact had the suspicion that there was a breed of stockbroker that ended the day with fraternity-style boozing no matter how the market had performed. The raucous group at Harry’s looked the same as the crowd he had often seen in the Wall Street bars in his associate days, when the dignified premises of the Hexagon Club had not been open to him. The only difference seemed to be the substitution of women brokers in their dressed-for-success suitlets for the secretaries who used to hang out in the bars after working hours.
“Great place you’ve got here, Keith,” Frost said over the din.
Merritt smiled weakly. “It’s all right, Reuben. If we go over there in the back, I think we can be alone.”
They edged their way through the noisy crowd and found a quiet table in the next room. Merritt called the waiter and, quite out of character for him, ordered a double Scotch. Frost asked for a single.
“Now, Keith, will you please tell me what this is all about?”
“Reuben, I’ve known you almost since the day I walked in Chase & Ward’s front door. I’ve always respected you and felt that you were one of my backers when I made partner.”
Frost grunted noncommittally, though Merritt’s surmise was in fact correct.
“When I saw your light on tonight, I decided I had to talk to you—talk to you or somebody. What I’m about to tell you isn’t going to be easy. It would have been bad enough without Graham’s death, but his death in some ways makes it worse,” Merritt said. He paused and looked down at the table.
“Keith, please. What the hell are you talking about?”
“Reuben, just give me time. I’ll get to the point.”
“Please do. I really want to get this over with,” Frost said.
“Do you remember the leveraged lease deal we did for Maxwell Foundries two years ago?”
“Vaguely. I guess I saw it on the list of new client matters. What about it?”
“Well, you’re not keyed into leasing, so it probably doesn’t mean that much to you. But for those of us in the leasing field, the deal is quite well known. At the time it was completed, it was the largest leasing transaction ever done and, if inflation hadn’t sent up prices, it would probably still be the biggest.”
“What do you mean by biggest?” Frost asked.
“I mean the biggest goddam lease ever written in the history of the world. Literally. A twenty-year lease of a billion-dollar heavy machinery plant, calling for total rent payments of one-point-six billion dollars.”
“I’m impressed. But what’s the problem?” Frost said.
“It’s a placed in service problem,” Merritt answered.
“Placed in service problem? What are you talking about? Is that tax jargon?” Frost asked. “If so, please keep in mind that my tax knowledge, such as it is, all but ended with the ’39 Code. The Code of 1954 was, and is, a great mystery to me.”
“And you always avoided learning anything about leasing,” Merritt said.
“You’re right. I was too old a dog to be taught the leasing tricks when they came along.”
“Okay, okay. I won’t give you a complete course in leasing, but there are a couple of things you have to know so that you can understand the mess I’m talking about.”
“Fire away,” Frost said with resignation.
“All right. Well, you know that there are three basic parties to a leveraged lease—the lessee, the lessor and the lender. The lessee, Maxwell Foundries in our case, wanted to buy an asset, the new Ohio plant, but because of its depressed earnings could not use the tax benefits from owning the plant—that is, the investment credit and the depreciation deductions. Are you with me so far?”
“Yes, yes, go ahead,” Frost answered impatiently.
“So, it went out and found Global Leasing, one of the companies in the Multibank Group. Multibank is very profitable, as you know, and was eager to get the tax benefits on the plant. So Global Leasing agreed to buy the plant and, as is usual in these transactions, borrowed a big part of the purchase price from a group of insurance companies, headed by Equitable as I recall. It then leased the plant to Maxwell for the one-point-six-billion-dollar rent I referred to—rent that is enough to pay off the debt to the insurance companies and to give Global Leasing a profit as well. In addition, Global gets the benefits of owning the plant by taking the investment credit against its federal tax bill and taking depreciation deductions on the plant in computing its taxable income.”
“Yes, Keith, I understand that much. I’m not quite as complete an ignoramus about these things as I made out,” Frost said. “But I still don’t see where there’s a problem.”
“Reuben, be patient,” Merritt went on. “As you also know, this shifting of tax benefits is not very popular in Washington, outside the Reagan White House anyway. Except for the Reaganites, the Federal Government in general has been very hostile to leasing for tax purposes and the Internal Revenue Service has erected a lot of roadblocks to make leasing more difficult. Like the question of placed in service.”
“Which means what?” Frost asked.
“The asset in question—our plant—cannot have been placed in service before Global bought it. Otherwise, Global would not have been entitled to take the investment credit on the transaction—which in this case was big bucks, ten percent of the billion-dollar purchase price or one hundred million dollars. And one hundred million that goes straight to the bottom line as a credit against the Multibank Group’s tax bill.”
“So I suppose the IRS is now saying that Maxwell’s plant was placed in service before Global bought it and has disallowed the credit?”
“Precisely,” Merritt said. “The agents are now auditing the transaction and that is the position they are taking.”
“But can there be any argument? Isn’t it easy enough to tell whether the plant was placed in service or not?” Frost asked.
“Unfortunately, like most IRS questions, it’s not so simple. It’s not a black-and-white proposition, but one that depends on all the facts. For example, if material was put through the plant assembly line just to test it out, that would probably not mean it was placed in service. But when does testing end? When is the plant ready to go, once you turn the switch? These are terribly complicated questions, Reuben, and even though they provide grist for the mill of tax lawyers, most of us wish they would go away.”
Merritt paused and took another large gulp of his drink, draining the glass. Almost simultaneously he commandeered another—Frost passed—and continued his lecture.
“So, to get down to the Maxwell case. We gave a Chase & Ward opinion in the Maxwell transaction that the plant had not, for tax purposes, been placed in service when Global put up its money in 1979,” Merritt explained.
“And what did you base that opinion on?” Frost asked.
“Lots of things, Reuben. A visit to the plant, talks with Maxwell personnel and enginee
rs for the contractor. We did a very careful job, because it was a complicated matter and a lot of money was at stake,” Merritt said.
“But the IRS says you were wrong,” Frost said.
“Worse than that, Reuben. In conducting their audit they came across a memorandum from the chief engineer of the plant division to the division president saying that the plant was ready to go. And that memo was dated six weeks before we gave our opinion saying it had not been placed in service.”
“But the two aren’t necessarily inconsistent, are they?” Frost said. “Being ready to go doesn’t mean you’ve gone.”
“Not necessarily, but the lecture on that subject—the difference between being placed in service and being ready to be placed in service—could go on all night. That isn’t the problem. The problem is the engineer’s memo shows that I got a copy. Which, if true, means that our opinion was not only wrong but probably negligent as well.”
Frost was stunned. Lawyers, like doctors, constantly fear malpractice cases. Financial lawyers, like those at Chase & Ward, working on multimillion- and multibillion-dollar transactions, have particular nightmares about their potential liabilities. Nowhere is this more acute than the tax area, where advice is not bad, mediocre or good but right or wrong. Frost suddenly reassessed his long-held belief that tax lawyers—including his former partner Merritt—were a generally quirky and eccentric lot. He had always thought it was somehow related to the particularly bookish nature of the practice, dependent as it was on the Internal Revenue Code and countless regulations, rulings, procedures, and the like on such esoteric and not entirely real questions as “placed in service.” But perhaps there was another cause for the eccentricity, that cause being the highly dangerous tightrope walking that tax lawyers have to do day in and day out in advising their clients. But there was no time for ruminations of this sort now. Frost had to get out of Merritt all the facts about the Maxwell problem.
“Well, Keith, did you get the memorandum?” Frost asked, in as even a voice as possible.
“Reuben, I swear I didn’t. Obviously if I had, the opinion never would have been given unless I’d been fully satisfied that the engineer was wrong in what he said in his memo. Life is too short to cut corners like that,” Merritt said with conviction.
Frost believed him. Merritt might be eccentric and flighty at times, but he was a complete straight arrow in terms of his professional conduct.
“I’ve searched the office’s files and my personal file on the matter and there is nothing. I’ve talked to Bill Roy, who worked on the Maxwell matter while he was still an associate, and he has no recollection of it either.”
“How do you explain your name on the memo then?” Frost asked.
“Look, none of the engineering or business types at Maxwell had ever done a transaction anything like the Global lease. And since its success depended so much on tax matters, I was sort of a guru for them. Everybody fed me information; I scratched my belly and gave them back answers. So they were all instructed to send me every interoffice communication that had any bearing on the tax issues. My guess is Mr. Engineer dutifully told his secretary to send me a copy, secretary dutifully typed my name on the bottom of the memo, and then secretary forgot to send it. I was the only outside addressee; she probably didn’t know where to reach me.”
“What does the guy say who got the memo? Why did he never raise the issue with you?” Frost asked.
“Get ready for a good one,” Merritt said. “The fact is the fellow who got the memo wouldn’t recognize the issues it raised if they bit him. Of course, he now says that he realized the memo cast doubt on the placed-in-service conclusion. But since I was shown as a recipient of the memo, he just assumed that I had gotten it and had taken it into account in reaching the result.”
“Good God,” Frost said. “Good God in heaven.” Frost reflected that through some combination of skill and luck—in the case of Chase & Ward, most people who knew the firm well would have said skill—no real threat of malpractice liability had ever occurred. Now, on top of everything else, Keith Merritt was telling him that the firm might face a malpractice claim of staggering proportions. And even though he no longer shared in the partnership profits, Frost was nonetheless concerned for his former partners and the reputation of the firm where he had spent his working life.
“Keith, I assume that Maxwell has to pay up if Global loses the investment credit,” Frost said.
“That’s right. Maxwell gave a typical indemnity agreement to Global, saying that if Global ever lost any of the tax benefits it expected in the transaction, Maxwell would make Global whole on an after-tax basis.”
“After tax?”
“Right.”
“What are the dollars involved, Keith?” Frost asked, constricting his stomach as he did so.
“Well, the plant cost just under a billion, nine hundred ninety million as I recall. The investment credit on that is ten percent, or ninety-nine million. So, if Global has to pay Uncle Sam ninety-nine million, Maxwell has to pay Global ninety-nine million, which is income to Global for tax purposes. So Maxwell also has to pay Global enough additional to pay its taxes on the first ninety-nine million. All told, Reuben, with interest and penalties and everything else, we’re talking close to two hundred million dollars.”
“Keith, do you really think this will ever happen?” Frost asked.
“When all is said and done, I don’t. But it may take a trial and an appeal from the trial to protect Global—and ourselves.”
“Even if they made Global pay up, is it clear that we are at fault?”
“Of course not. But somebody is going to have to decide whether or not I am lying when I say I never saw the Maxwell memo,” Merritt said.
The combination of Merritt’s grim news and the Scotch made both men silent for more than a minute. Then Merritt blurted out, “Of course Graham Donovan’s death doesn’t help at all.”
“How do you mean?” Frost asked, alarmed and puzzled at this new tack in the conversation.
“Graham was the partner in charge of Maxwell. So when I had all the facts together I went to tell him about this last Tuesday morning. I must have been one of the last people to see him in his office before he died,” Merritt said, a desolate look on his face.
“You mean you think people are going to think you poisoned Graham?”
“Well, aren’t they, Reuben?” Merritt asked, his voice quavering. “The fact is, Graham was not very pleasant about the whole thing. There was an edge to his voice that made me think he thought somehow I had seen the Maxwell memo. I told him so and he denied it. But it was not a pleasant meeting. Once people know what we talked about, they’re sure to be suspicious.”
“But no one needs to know what you talked about, Keith,” Frost said.
“Oh, that’s easy to say, Reuben. What do you do when the police come around to question you? What do you say when they ask if you have any new leads, any new suspicions?”
“I don’t have any suspicions, Keith,” Frost said. “None at all. But right now it’s time to go home.”
As they waited for their check, Frost realized sadly that Merritt’s name would now have to be added to his own list of suspects. Had his intention been to divert attention to others? Or perhaps to get some pathetic reassurance when the others did not include his name? Frost sighed inwardly as he thought over this newest complication.
Merritt, who lived in Brooklyn Heights, and Frost hailed separate cabs after leaving Harry’s. As they parted, Frost put his hand on Merritt’s shoulder. “Keith, did you kill Graham?” he asked in a calm, steady voice.
Merritt smiled a sad smile. “No, Reuben, I didn’t,” he responded, also in a calm, if resigned, voice. “Killing Graham wouldn’t have solved my—the firm’s—problem.”
THREE INTERVIEWS
14
Despite the bombshells that had burst about him on Thursday, Frost slept soundly when he finally got to bed after leaving Keith Merritt and did not wake up until
nine o’clock Friday morning, an hour later than usual. He woke up relatively well rested, if slightly hung over from Thursday’s drinking with Merritt.
Cynthia had already left for ballet class when Frost got up. He was just as glad. She was a patient, shrewd and understanding woman, not an empty-headed showgirl; she had been a valued confidante over the years. But he could barely get the facts of recent events straight in his own mind, let alone sort them out with sufficient coherence to enable his wife to understand them.
Drinking the orange juice and coffee she had left for him, he quickly discarded the Times and reviewed Thursday’s events once again in his mind: the god-awful funeral service for Donovan; Doyle’s report of the laboratory findings; Detective Bautista; and then, just to complicate everything, Tyson’s irrational outburst at Fred Coxe and Merritt’s tax problem.
Frost also recalled Merritt’s suspect list, asterisks and all:
Grace Appleby*
Perry Griffith
Bruce Donovan
Roger Singer*
Since Tyson wasn’t around to berate him, Frost mentally added Tyson’s name. And, with a good deal more reluctance, Keith Merritt’s as well. Confronting this unpleasant reality, he broke off his speculating and left the apartment for the office.
Once he had arrived at Chase & Ward, Frost decided to call in Perry Griffith, in part to discuss the Frontier Utilities mortgage, but more importantly to look him over in a new light—as possible murder suspect.
Griffith was a source of wonderment to many at the firm. Since one could not be admitted to the bar in New York before age twenty-one, Griffith had to be at least twenty-eight years old. Yet he looked barely sixteen (within the past year he had been asked in a mid town bar for proof that he was of drinking age). A blue-eyed towhead, he had caused more than his share of sighs among the firm’s female employees—sighs because he was so youthfully handsome and sighs because it was known that he was happily married.
Griffith’s looks were deceiving, however. Many an adversary across the bargaining table, sure that the open-faced Griffith must be inexperienced, had ended up, if smart, with new respect for him, and if not smart, taken to the cleaners. He was both tough and stubborn—qualities that, when taken together with his appearance, formed a disconcerting combination.
Murder for Lunch Page 14
