*1 OWEN, MOORE, MANN, CO., KOOL, COFFEE & f/d/b/a MOORE, CO., and THOMAS O. THOMAS & v. COFFEY, and ROBERT BRUCE
L. COFFEY COLEMAN 99-cv-00058); Civil in No. 01-4052 (D.C. No. Appellants O. MOORE MOORE, OWEN, & and THOMAS THOMAS CO. v. BRUCE COFFEY COFFEY and ROBERT
L. COLEMAN 99-cv-00204); Civil No. (D.C. OWEN, O. MOORE MOORE, THOMAS & CO. and THOMAS v. * cv-00230); Civil (D.C. COFFEY No. ROBERT BRUCE MOORE, OWEN, KOOL, MANN, CO., COFFEE & f/d/b/a CO., No. 01-4066 Cross-Appellant THOMAS &
Nos. 01-4052/01-4066 Third Appeals for the Circuit United States Court 29, 2002 July *2 Christopher Associates, M. Hill (argued), M. Hill & Christopher
P.S.C., Frankfort, KY, Attorney Appellants. for Frost, LLC, (argued), Brown & Todd Lexington, Denise McClelland Weiss, Associates, Thomas, KY. A. A. Weiss & Jeffrey Jeffrey St. Mann, U.S.V.I., Kool, Attorneys Appellee/Cross-Appellant for Coffee & Co. Rosenbaum, P.S.C., Rosenbaum & (argued),
Leslie Rosenbaum Ky, Thomas OwenMoore. Lexington, Attorney Appellee AMBRO, GARTH, AMBRO, Circuit FUENTES and Circuit Judges. in Part and in Part.
Judge, Concurring Dissenting
OPINION OF THE COURT decades, This two contentious almost two dispute spanning — and countless filings, bankruptcy appeals counter-appeals—revolves Dock, around the sale of a called business Lake Cumberland State Inc. son, in 1985 L. Coleman (“LCSDI”) Coffey and his Robert Bruce Kool, Mann, Co., Coffey (together, “Coffeys”), to Coffee & Inc. (“Kool Mann”), which owned Thomas O. Moore principally (“Moore”). The substantive claims asserted are parties actually claim that them relatively simple: Kool Mann owes $5 balance million from sale remaining purchase price LCSDI, while Kool Mann contends it is to a entitled number of set- offs that balance because of against alleged by the misrepresentations as well as certain other deductions. It is the tortured procedural history of this matter which makes this exceedingly appeal —and unnecessarily complex. — before, alia, inter has gone this dispute
Since litigation began District of Kentucky Court for the Eastern the United States District Circuit, Court of the Virgin twice before the the Sixth twice before the numerous orders and opinions), Islands issued (which Islands, us, and once before the Third Court of the Virgin District summarize matter in more of this history Circuit. We procedural Mann that it has been 17 since Kool years detail below. Suffice it say LCSDI. agreed purchase here, those facts that bear on
For we have detailed only our purposes nature of this litigation our current In light protracted disposition.1 consumed, resources it has we have and the of time and length judicial it ourselves to determine the value of Coffeys’ proof taken upon $238,280.78. done though claim in to be We have so even inclined to remand to normal circumstances we have been might under a remand to the Court to recalculate the District Court for *3 of both and fairness— judicial efficiency In the interests damage figures. has to be interminable litigation and to terminate what appeared —we affirm will the District Court’s affirmance of the Bankruptcy and, fact of fraud for the reasons set forth in this opinion, findings Kool Mann to the with the that the amount owed ruling by conclude $238,280.78. We do so the fact in this Coffeys proceeding despite the District Court’s reversing we will be affirming part part However, in an effort to conclude this long October 2001 judgment. this we will not remand controversy, any portion appeal, standing decide the relevant we are but will rather segment reversing, even and direct that that value be value of the claim in this opinion entered Court. by LCSDI
I. Sale of
business
marina and houseboat rental
family-owned
LCSDI was a
Cumberland,
on Lake
It owned
Kentucky.
owned
of docks and
a number of
an extensive system
slips,
pontoon
operated
previously published
in a number of
The facts of this case have been well documented
Owen,
Moore,
See,
(6th
e.g.,
Coffey,
Thomas & Co. v.
Kool certain (such equipment Mann’s business consisted purchasing Kool trailers, and construction equipment) as computers, telephones, turn, Mann customers known as users. In them to various leasing which was as security against financing the lease assign payments would Under in the first place. used to equipment purchase utilize were enabled to Kool Mann’s investors purportedly arrangement, credits, tax take tax incentives and investment certain income at the and sell the expiration on the equipment depreciation equipment, this arrangement Kool Mann operated of the lease for profit. a number of years. for successfully Mann, 1985, Moore, the owner of Kool the fall of principal
In and VC. On December about LCSDI approached purchasing $5 a total of million 11, 1985, that Kool Mann would agreed pay Moore A stock of LCSDI.3 first outstanding payment for interest at $200,000 was due at and an additional closing, (plus later three months rate) (together, a 10% annum payable per balance was to be The remaining paid “down principal payment”). note, which five to an installment promissory contemplated pursuant and a final balloon installments of principal principal annual $3,250,000 due on for the remaining September payment interest to be with the installment payments note also provided paid *4 with a the interest rate. The were provided 0.5% above prime and a guaranty by interest in the assets of LCSDI security personal 31, take on December Moore. The was scheduled to closing place 2 Co, Moore, Owen, debtor, initially & named Thomas cross-appellant, The here the Kool, Mann, filing bankruptcy. changed prior Coffee & Co. but its name to 3 reasons, initially so that VC would contribute parties For tax structured sale purchase that Mann would then all the it owned to LCSDI and houseboats result, outstanding the sale of LCSDI would also capital stock of LCSDI. As originally by VC.
include the houseboats owned
422 30, with unaudited September The Kool Mann Coffeys provided the “financial 30, financial statements (together, and November certain concerning transactions realizing After statements”). statements, on the financial L. were not described accurately houseboats 20, on December 1985 (the wrote a letter to Moore Coffey Coleman statements are that “the financial Letter”) stating “December 1985 transactions. These accurate for the houseboat reasonally except [sic] wash-out and show a small corporation.” amounts will profit 31, December to a Purchase The sale was finalized on 1985 pursuant 31, “Purchase (the Agree- and Sale dated December Agreement in the Purchase Agreement The and warranties ment”). representations Letter, to reflect the existence of the December 1985 were modified stating 30, ... are The financial statements as of November
(e) financial and condition fairly correct complete represent noted, agreed by ... discussed Corporation except 20, to Tom Moore of December and evidenced a letter by parties 1985, is hereto attached and herein incorporated. which Moreover, December entered into a side letter dated parties tax savings they favorable whereby Coffeys agreed any treatment of the gains disposition received due to capital the final balloon “Tax would serve to reduce Savings”) houseboats (the “Tax (the Kool Mann on to be September payment paid Side Letter”). Savings
II.Proceedings Kentucky Litigation A. The sale, as to which would assume after the arose party
Shortly dispute LCSDI, totaling debts of approximately certain pre-existing debt fleet it owned (including million for the houseboat suit in Kool Mann filed In the fall of VC). held originally relief as to seeking declaratory assumption federal court in Kentucky a set-off against purchase price of debt issue and also sought fraud accounting for alleged misrepresentations LCSDI $4 on the million counterclaimed for judgment The Coffeys. suit in state also filed balance due on the price. purchase *5 That Moore, under his individually, personal guaranty. against court before and both were consolidated action was removed to federal court Forester, Court for the Eastern U.S. District the Honorable Karl S. District of Kentucky. of debt issue federal court bifurcated Kentucky assumption
The trial, After a six-day and fraud issue. from misrepresentation 31, had to assume that Kool Mann agreed Forester ruled on January LCSDI, $5 million for and that debt when it agreed pay the company’s the amount of the was not entitled to set-off therefore Kool Mann Moore, Owen, Thomas v. it owed. See money assumed debt against 31, 87-64, 8, 10, Jan. 1990). 14.1 (E.D. Ky. No. Coffey, slip op. ¶¶6, That was not ruling appealed. before while the fraud issue was still pending
On December Kool Mann filed for Kentucky, bankruptcy protection the district court Islands, it maintained certain offices. in the where Virgin purportedly its that he could not rule Kool Mann due to against pending Recognizing Moore on summary judgment against Forester entered bankruptcy, 11, 1991, of fraud and charge holding October Kool Mann’s rejecting for the balance owed to the Coffeys. that Moore was responsible reversed, a material of fact concerning The Sixth Circuit issue finding held that the obligation That court also alleged misrepresentations. could not be determined until the Moore on his guaranty personal ascertained, and ruled that if fraud amount due from Kool Mann was first found, liability were to be Moore’s personal on the part Moore, Owen, Thomas & under the would be See guaranty discharged. Cir. 1993). Co. v. F.2d 1448-50 (6th Coffey, Proceedings B. Initial Court noted, on December
As Kool Mann filed for bankruptcy protection Islands, and the The was made in the filing Virgin proceedings Gindin, William U.S. Court were Honorable assigned in the Islands. Judge, sitting by designation Virgin $6 of Claim in the filed a million Proof interest, the balance of seeking purchase price, proceedings, In Kool Mann to the amount objected fees. attorneys’ response, “claim and also (the objection”), claim in the fraud, mis- against Coffeys, alleging filed a separate complaint have had and set-off claim the against any may representation *6 Mann, fees and including attorneys’ damages (the against punitive Moore Kool Mann as a in the joined “adversary proceeding”). plaintiff void his on the guaranty to adversary proceeding seeking personal fraudulent inducement. ground
A motion for estimation of the Proof of Claim was filed Coffey’s under The 11 U.S.C. “Estimation of such 502(c) (the Hearing”).4 object § the establish estimated value of a creditor’s claim for proceeding Court purposes formulating reorganization plan. Bankruptcy conducted several but them because days hearings suspended of Robert in the intervening filing Coffey, Western District of before the Honorable Roberts. Kentucky Wendell Roberts, Gindin and Forester conferred and
Judges agreed most efficacious would be to resolve all issues way (including proceed forum, those still unresolved in the in one before Kentucky litigation) Gindin. Counsel for the and the Judge continued parties agreed, hearings 9, 1993, before Gindin in On June Gindin issued his Judge “June findings (the Findings”). 1993
There, Gindin decided that the ultimate claim was Coffey’s $26,915.78. First, he that it credence to Kool Mann’s claim had gave relied the fraudulent of the financial statements upon misrepresentations the of the sale of LCSDI. Coffeys during negotiation presented Kool Mann’s valuation Court valued Crediting expert, Bankruptcy $2,549,482, LCSDI’s “true” worth in absent 1985 misrepresentations Second, $2.45 million than the less roughly negotiated purchase price. $236,566.22 Court credited Kool Mann with pursuant Third, the Tax Side Letter. Court further reduced Savings claim the number of that Kool Mann Coffey’s payments principal had credited Kool made Gindin Mann prior dispute. Finally, with the debt assumed indebtedness of it (the million) payments had the sale. made on behalf of LCSDI after held that after all the Court total claim credits Coffeys’ $26,915.78. and deductions totaled
In Court entered a declaratory September of its June basis 1993 judgment adversary proceeding under 502(c) purpose states: “there shall be estimated for of allowance U.S.C. § which, claim, any fixing contingent unliquidated liquidation ... or or section be, may unduly delay the of the case.” as the case would administration result of as a guaranty his personal released Moore from Findings, inducements. fraudulent Court to the District Appeal C. First an Islands. In Virgin the District Court of
The Coffeys appealed the Honorable (the “July Opinion”), dated July Opinion by designation Court Fullam, Judge, sitting States District John United reversed District of Pennsylvania, from the Eastern Noting that court for further proceedings. the case to and remanded *7 than establishing has no effect other legal Hearing an Estimation in a that will be recognized of the claim amount approximate notice had been held that inadequate Fullam Judge reorganization, would of the Estimation Hearing that the results afforded to the Coffeys case was in the adversary also be binding proceeding. of the Coffeys’ for a reestimation Court remanded Bankruptcy on its merits. adversaiy a trial of the complaint claim and there. He noted that “inasmuch However, Fullam did not Judge stop event, it is any will be required appropriate further proceedings in the judge’s errors significant address what appear Kool, 17, Mann, 390-00017, at Jul. (D.V.I. slip op. In re No. analysis.” Court did not adequately stated that the Bankruptcy Fullam 1995). Judge on the negotiations, the effect of the time pressure parties’ consider on the fact that the too much emphasis that the Court had put that the He also cautioned senior was an accountant. Coffey made Forester by Judge little attention to the findings Court too paid Sixth Circuit. views Kentucky expressed Fullam, error,” according Judge complete A “more serious fraudulent alleged misrep- between absence of a “causal relationship records, hand, and on the one and inaccurate financial resentations concern about on the other.” Id. at 9. He expressed to the debtor damage it was “based Mann’s because expert used methodology little or no bearing relationship cash flow upon hypothetical projections Id. at 10. The to this business.” to the actual facts particular pertaining record, the is in- that “on this evidence court therefore concluded attributable to the Coffey’s the amount of damages sufficient to establish Id. at 10-11. misrepresentations.” Court should not
Moreover, noted that the Bankruptcy Fullam indebtedness and that Kool Kool Mann with the assumed have credited Mann was not entitled to the Tax Savings credit because the Tax Savings Side Letter that the credit would occur only when the contemplated first realized their tax “Since the debtor has not saving. yet paid there has been no tax and the purchase price, saving, debtor is not yet entitled to the credit.” Id.
D. First Appeal
Appeals
to the Court of
parties
Fullam’s decision. On
appealed
February
of this Court
panel
affirmed
Fullam’s decision
summarily
in its
Kool, Mann,
without
entirety,
See
&
opinion.
Co. v.
re
Coffey (In
Coffee
Kool, Mann,
&
On parties Court to proceeded claim, reestimate the Coffeys’ additional agreeing evidence to present An supplement record. order was issued pre-existing by Judge Gindin on June forth the setting to be followed and procedure stating Court would and determine the “adjudicate claim debtor’s objection thereto an thereby making estimation of Kool, the claim” Mann, 390-00017, In re unnecessary. No. order at 1 (Bankr. D.V.I. Jun. 1996). A motion for an immediate trial on the *8 however, adversary was denied. proceeding, Over the next several years, the Court issued three decisions relevant to this appeal.
1. The Bankruptcy Court’s March 1999 Findings Gindin issued his new with findings to the value of the regard claim in a March 1999 “March (the 1999 Opinion Findings”). Kool, Mann, In re See 233 (Bankr. B.R. 291 D.V.I. 1999). Once again fraud, finding Coffeys had committed Gindin listed seven instances of fraud and their related dollar specific amounts: 1. The overvaluation $330,000; of 33 houseboats for a total of 30, financials, 2. In the November of value of listing $429,607 houseboats as in when those boats did inventory exist; financials, of the value of listing
3. In the November exist; $40,190 did not when they in inventory motors financials, of overstating profits 4. In the November the sale recording $100,000 incorrectly as a result motors; purchase new purchase
5. Representation or show a would “wash” of old houseboats houseboats and sale resulted in a loss the transaction actually little when profit, $168,500; James submitted by Coffeys’ expert, in report
6. Disclosure
of boat motors
that costs of sales
“Graves Report”),
Graves (the
financials;
$58,000
were omitted from
amount of
that cash
he
testimony
represented
L. Coleman Coffey’s
7.
$188,848.
when it was only
per year,
flow was over
Court,
to the
Kool, Mann,
According
1. Coffey’s representation accordance GAAP, were not they kept with when accordance GAAP; of GAAP 1985 financials in the November 2. Violation disclosure No. 57 because no Standard Accounting Financial between VC and transactions was made of certain intercompany LCSDI; financials, crediting improper In the November the transaction Receivables” when
account of “Notes assets; of substantial sale actually *9 of sale due to the reporting of assets of business
4. Overstatement sheet, without a of the balance under the asset side of houseboats side; the liability reduction on corresponding 428 5. Breach of the that there were no in the representation changes statements, LCSDI’s financial
methodology maintaining that he LCSDI despite Coffey’s testimony changed way recorded houseboat transactions from the 1985 September financials; financials to the November 1985 6. he admission that breached the Coffey’s representation
financial statements did not include or any non-recurring income income; items of special that all of the Coffey’s testimony information concerning
overstatements, errors and changes accounting methodology was available to him prior closing.
Id. at 301-02. The court contention that the rejected Coffeys’ December 1985 Letter remedied each of these misrepresentations. in a cash Engaging “multiple flow advanced Kool Mann’s analysis” Court determined that the expert,5 Bankruptcy combined net effect of all of these caused than a mere misrepresentations more dollar-for-dollar reduction to the value of LCSDI. The court concluded that $2,288,167. inaccuracies amounted to valuing That value company $2.7 $5 resulted in more than a million reduction from the million purchase price. Court then addressed a number of what it deemed to matter,
be As issues. an initial the court “procedural” rejected it conducted a complaint trial on the merits improperly instead of an “Estimation that a has Hearing,” ruling bankruptcy judge wide discretion in how an estimation deciding hearing may conducted. methodology The cash flow used Court on remand in differed methodology applied original findings Although from it in its in 1993. both upon projections relied up of future cash flow to come with the actual value of methodology growth LCSDI in purported to utilize a constant rate (determined $188,848), of 7.5% of LCSDI’s actual 1985 cash flow to be and was present years. methodology, discounted for value over 15 The 1993 on the other hand, appeared projections upon speculative to use cash flow based estimations remand, activity. LCSDI’s future houseboat other business On Kool, Mann, In See re methodology. Court disclaimed use of 233 B.R. 305. The applied valuation method Court on remand is text, See opinion. described in more detail in Section VII of this infra.
Next, that Fullam’s Judge July found most of Judge Gindin areas of not him as it several merely expressed did bind Opinion to the testimony. According fraud evidence and “concern” regarding three Court, Court made opinion Fullam his District Judge Judge this Court in and which which were affirmed rulings that were to follow: obliged (1) was accordingly Gindin Hearing that the of the Estimation findings afforded notice inadequate that was Kool Mann adversary (2) on the binding proceeding, would LCSDI to a indebtedness of pre-existing not entitled credit for was not million and Kool Mann debt), (3) (assumption had received yet entitled to a Tax credit because Savings tax benefit. any issues, Court applied
As to “substantive” and that Kool satisfied each the elements law ruled Mann Kentucky Gindin, other among its fraud case against Coffeys. supporting then Mann’s for rejected punitive damages Kool things, request for interest. Coffeys’ rejected request pre-petition that due Coffeys’ Court held fraud, the time the sale and all elements of the value LCSDI at after discounted, had was actually fraud been misrepresentation amount, million, $1 $2,288,167. deducted the down- From this court Mann, and ruled the value of the made previously payment claim in million. An proceeding Coffeys’ 20, 1999, was filed as well reflecting foregoing Order on April under his obligations Moore from his individual relieving personal as it would be held under Coffeys’ because of the fraud guaranty Moore, Owen, Co., See, law. Thomas & F.2d Kentucky e.g., Cir. (6th 1993). Opinion 2. The Court’s November 1999 after the its in connection issued Shortly findings claim, filed a the value of the Kool Mann and Moore Coffeys’ the related judgment adversary proceeding, motion summary granted (the which the court on November “November 1999 There, raised in the Gindin ruled claims Opinion”). were identical those raised in valuing adversaiy proceeding claim, therefore, that, made in the March 1999 findings on the in the adversary had effect claims Findings preclusive proceeding Kool, under the doctrine of Mann, res See In re judicata. 390-00017, No. at 14 slip (Bankr. Moreover, D.V.I. Nov. op. 1999). Gindin *11 ruled that Moore was not although technically when the party earlier made, March 1999 were all Findings claims Moore involving were also reason precluded by of res judicata since his interests were identical to of those Kool Mann. id. See at 10-13. was entered in
Judgment in adversary proceeding favor of Kool Mann and Moore.
3. The 10, Bankruptcy Court’s October Opinion 2000 10, 2000, On October Court ruled on Bankruptcy Kool Mann’s motion to amend the court’s March 1999 “October Findings (the There, Opinion”). Gindin ruled Judge that Kool Mann was entitled to an additional $528,350.22. credit of
There were two for the grounds First, court’s in ruling. of the light court’s of the prior rejection for Coffeys’ request interest, pre-petition Gindin Judge ruled that interest prior made payments Kool in Maim in the amount of should be recharacterized as principal payments.
Second, the Court ruled that Bankruptcy because the received 1986, depreciation had, indeed, recapture they realized the Tax Savings under the Tax contemplated Side Savings Letter. Accordingly, Gindin Judge ruled that Kool Mann was entitled to a Tax credit Savings $236,566.22 of to that pursuant agreement.6
The Court, however, rejected Kool Mann’s arguments it was entitled to a credit for the indebtedness pre-existing LCSDI and of also its rejected contention that it was entitled to fees. attorneys’ was
Judgment entered on October an reflecting additional credit to Kool Mann in the $236,566.22. amounts of the value of the Consequently, claim in was reduced $759,816.78. The Bankruptcy Opinion Court’s October 2000 appears to contain a typographical error. point At one opinion, in that the court stated Savings that the Tax amount was $236,522. itself, Court later corrected applying proper Kool, $236,566.22 figure. Mann, 390-00017, See In re No. slip op. (Bankr. at 7 D.V.I. 2000). Oct. Appeal to District Court F. Second of the various orders Gindin cross-appealed
The parties again October District Islands. On Virgin Court Brotman, U.S. District Court the District Honorable Stanley issued designation, affirming an Jersey, sitting by opinion part New orders “October 2001 (the Gindin’s reversing Opinion”). part decision, Judge most of the Court’s Approving that the bulk of Judge with agreed Brotman dicta, merely and that it vacated July Fullam’s 1995 Opinion initial on findings grounds (i.e., procedural only (1) two additional substantive notice) holdings: inadequate made assumed Mann was not entitled to a set-off payments LCSDI; that Kool Mann was entitled to a set- (2) indebtedness event, *12 then that in “the any for Tax Brotman found Savings. Judge off to Court remand Fullam’s adequately responded Bankruptcy Kool, Mann, 99-00058, 99-00204, 00-00230, In slip comments.” re Nos. However, Brotman that the (D.V.I. at 14 Oct. ruled 2001). op. to his Savings Court erred Tax granting Bankruptcy respect and denied that credit Kool Mann. issue Brotman’s are set forth the District Court’s rulings judgment as
issued on October and can be summarized follows: succinctly 1. Court’s the Estimation Hearing decision combine Bankruptcy AFFIRMED;
and the of Kool Mann’s claim is adjudication Court’s of Coffeys, 2. fraud finding Bankruptcy of the actual value of LCSDI as a result that fraud calculating $2,288,167 AFFIRMED; is $1 Court’s of credit to Kool Mann for the
3. Bankruptcy grant AFFIRMED; million is downpayment 4. Court’s release of Moore of his under obligations Bankruptcy AFFIRMED; is personal guaranty Court’s of
5. denial Coffeys’ request pre-petition Bankruptcy AFFIRMED; interest is credit Mann
6. Court’s denial of to Kool for assumed Bankruptcy AFFIRMED; $1.213 is indebtedness in amount of million 7. denial Court’s of Bankruptcy punitive Kool Mann is damages
AFFIRMED; 8. Court’s of Bankruptcy grant in favor of summary judgment
Moore in the is adversary AFFIRMED on basis proceeding of collateral not res estoppel, judicata;7 9. Court’s Bankruptcy grant credit to Kool Mann in the amount $236,566.22 in tax REVERSED; savings Court’s grant credit to Kool Maim of
due to recharacterization of interest payments principal is AFFIRMED. payments Kool, Mann,
See In re 99-00058, 99-00204, Nos. 00-00203, judgment at 2-4 (D.V.I. Oct. 2001). Brotman Consequently, Judge ruled that the total balance due and owing Coffeys by Mann was $1,051,600.78.8
G. Appeal This
In this claim that appeal, the District Court erred in the following (1) respects: Court’s rulings on remand fraud, concerning the calculation of fraud damages its decision to an forgo Estimation violated Hearing our mandate affirming Judge Fullam’s July 1995 that the (2) Court’s Opinion; findings fraud were not record; in the supported (3) erroneous; calculation of damages (4) recharacterized improperly the 1986 interest payments principal. *13 Kool Mann the opposes that, contentions and argues further matter, as a threshold the are from precluded of their making any on arguments because failed to appeal they the challenge properly 7 parties agree only Both that preclusive Brotman addressed the effect of the March Moore, Findings the adversary proceeding 1999 as to not Kool Mann. judicata ruling Gindin’s res Opinion the November 1999 remains undisturbed as to Kool Mann. 8 Indeed, appears Judge it Brotman According rulings, made an error in math. to his own $996,383.00, $1,051,600.78. amount due to the should be Instead crediting recharacterizing of Kool Mann with principal, interest to $236,566.22 credit, mistakenly Brotman credited Savings it with for the Tax
which he ruled could not be off-set.
433 in the adversary judgment Court’s November 1999 Bankruptcy Moreover, the District Court’s Kool Mann cross-appeals proceeding. denial of credit for payments that Court’s Bankruptcy affirmed ruling LCSDI, of and the Mann on assumed indebtedness made to permit Court’s decision District Court’s reversal of Bankruptcy Savings Tax credit. Review
III.Standard of
matter,
as an
court in this
our
As the District Court sat
appellate
Fellheimer,
See
plenary.
of the District Court’s determination
review
Braverman,
Inc.,
57 F.3d
Technologies,
&
P.C. v. Charter
Eichen
determinations,
“In
court’s
1995).
reviewing
1223
Cir.
(3d
court.” Id. (citing
same standard of review as
district
we exercise the
Union,
v.
State
Credit
F.2d
Brown Pennsylvania
Employees
set
may
The
Court’s factual
not be
findings
Cir.
(3d
1988)).
Brown,
8013;
Rule
unless
are
erroneous.
they
clearly
aside
“It
of an
is the
(citation omitted).
responsibility
appellate
851 F.2d
factual
of the fact-finder unless
court to
the ultimate
determination
accept
evidentiary
either is
devoid minimum
that determination
completely
no
bears
rational
credibility
some hue
or
support displaying
data.” Hoots v. Pennsylvania,
to the
relationship
supportive evidentiary
“Furthermore,
(3d
1983) (citation omitted).
F.2d
Cir.
are to
due
findings
court’s factual
reviewing
give
the bankruptcy
that
the credibility
court to
first-hand
regard
judge
opportunity
Fellheimer,
Rule
IV.Waiver that in raise issues Kool Mann contends appeal made Court with only respect relating findings claim, their and fail challenge value of It in the reasons judgment adversary proceeding. November 1999 in the judgment adversary this failure means that any objection therefore, waived, and in the judgment has been proceeding turn, has effect on adversary proceeding, preclusive findings *14 value fraud the claim. Kool underlying Coffeys’ Consequently, the are Mann concludes that from the Coffeys estopped advancing in make this these in arguments they urge since result appeal arguments the claim valuation inconsistent with the entered in the judgment adversary proceeding. matter,
We an initial we the disagree. As conclude that did Coffeys fail not to the rendered judgment the challenge by the A number of the adversary Coffeys issues raised the proceeding. in their brief various made opening directly challenge findings the Court which form the of both the very value underpinning their claim and the merits of Kool Mann’s adversary For proceeding. instance, that the lower court’s fraud by arguing were findings clearly erroneous, we such a that the interpret challenge mean Coffeys believed that the findings of fraud both supporting one judgments—the made to the claim pursuant valuation the one made to the pursuant adversary proceeding erroneous. While clearly Coffeys could —were made have their intentions more the context of their arguments explicit, makes it clear reasonably they that merits challenged the of both judgments.
Moreover, in its advancing Mann confuses the failure argument, challenge of the March preclusive effect Findings with the adversary failure to proceeding challenge in the It judgment adversary itself. is true proceeding cannot—and do in this argue do appeal preclusion principles not— not between made in apply findings connection their claim valuation the merits underlying adversary proceedings. are, fact, issues involved in both same, one and the proceedings brief does not the res opening question judicata analysis conducted Court. See v. 8 F.3d Nagle Alspach, Cir. (3d an issue is either not in the 1993) (“When set forth statement issues or brief, in the presented pursued argument section of However, has abandoned and waived that issue appellant on appeal”). fact have their abandoned right challenge another, effect of binding judgment one does not mean that upon they lost the have the merits of both ability challenge judgments. this and turn reject claims argument remaining appeal.
V. Law of the Case on remand findings that the Court’s Bankruptcy The contend mandate doctrine our 1996 by ignoring the “law of case” violated v. Trust See Bankers July Fullam’s affirming Opinion. Judge remand, 1985) (“[On F.2d Cir. (3d Steel Corp., Bethlehem law with the mandate and the in accordance trial court must proceed the] First, argue on they of the case as established appeal.”). fraud damages of fraud and calculation of Court’s findings made holdings by Judge contradicted Findings
its March 1999 a was when noted that the evidence insufficient support Fullam he used Kool methodology and when he criticized the fraud finding Second, contend that LCSDI. valuing they Mann’s expert instruction Judge by failing violated Fullam’s Court remand. a Estimation on separate Hearing conduct Fraud Calculation of Findings The A. on Damages Fraud Remand July examination of the District Court’s 1995 Opinion, careful
Upon sole sole mandate therefore our conclude that Fullam’s Judge (and on Judge Findings was to vacate Gindin’s June 1996 mandate) trial on the merits. grounds Consequently, and to order new procedural concerning Fullam in his 1995 by Judge opinion the views expressed as merely should be read damages fraud calculation findings dicta. did Fullam held July only
In the 1995 Opinion, to be Hearing that the Estimation was not receive notice adequate vacated the he therefore adversary proceeding, combined with June 1993 Findings. Court’s initial directed to: was claim, value of the Coffey’s and reestablish an estimated
reconsider record with such evidentiary together basis of present The adversary as the may additional evidence parties present. other (or be trial on the merits such will remanded for proceeding may to). as consent disposition parties Kool, 390-00017, Mann, 1995). at 12 No. Jul. op. (D.V.I. In re slip that notice to the inadequate, Fullam decided Once he offered number of observations and comments on the evidence and other matters before Gindin. event,
Inasmuch further will be proceedings it is required any to address what errors in the appropriate appear significant bankruptcy judge’s analysis.
Id. at 7 (emphasis added).
Each of
Fullam’s
comments about the merits of the case was
and was
the
of
simply
not
to
actual
the
precatory
necessary
holding
case.
dicta,
these
are
Accordingly,
statements
considered
and are not
properly
Marsham,
See Government
binding.
the
Islands v.
F.3d
Virgin
114
of
statement, however,
(3d Cir. 2002) (“That
is dictum and is not
on
binding
this,
other,
or any
of this
panel
Court.”); Calhoun v. Yamaha Motor
216 F.3d
344 n.
Corp.,
(3d
2000)
Cir.
as
(“Insofar
this
determination was not necessary to either court’s ultimate holding,
however, it
is classified as
It
properly
dictum.
therefore does not possess
effect on us
binding
to the Taw of the
pursuant
case’ doctrine.”).
Therefore, the
errors” deemed to
been
“significant
have
made
by
concerning
sufficiency
fraud,
the evidence
causation, and
well
damages
as
Judge Fullam’s belief
Kool
—as
Mann was not entitled to an assumed indebtedness
or a
credit
Tax
credit—were not
Savings
on remand.
binding
Court was free to consider
“those issues
not
decision,”
or
expressly
implicitly disposed
byof
appellate
was
free to make
“thereby
order or direction in further
any
progress
case,
court,
not
inconsistent with
decision of the
as to
appellate
not
any
Trust,
settled
question
decision.” Bankers
B. The Estimation Court violated that the The also contend remand, on and by Estimation Hearing forgoing Fullam’s mandate and the objection, claim Hearing, Estimation combining effectively We disagree. into one proceeding. adversary proceeding issued, Court held the Bankruptcy After Fullam’s decision to decide the best with counsel conferences numerous telephone claim in value of the determining procedure Kool Mann adversary the merits of proceeding. determine all one or proceeding, consolidate issues into motion to filed or Mann’s claim only objection, to set a hearing alternatively, for immediate trial. to set the alternatively, adversary proceeding to consolidate Court ruled on motion pursuant There, Order, the Court Case dated June Management its stating with the claim go objection, determined to forward of claim in matter Coffeys’ proof debtor’s objection [t]he the remanded estimation proceeding be consolidated with will and determined in accordance to Rule Fed.R.Civ.P. 42(a) pursuant *17 3007;10 a of Rule as result 11 U.S.C. and 502(b)9 Bankruptcy § the the and determine adjudicate consolidation Court will thereto thereby making claim and the debtor’s Coffeys’ objection under 502(c) unnecessary. an of the claim estimation § Kool, 390-00017, at 1 Jun. Mann, re order D.V.I. (Bankr.
In No. claim, the the the Coffeys’ parties to valuation of 1996). regard With additional trial the and were to permitted present to a agreed papers already existing and the evidence briefs affidavits to through supplement the to further live right record. The waived present parties made, states, objection a claim is the 502(b) part: in relevant “if 9 11 U.S.C. [an] § court, in the of such claim lawful hearing, after notice and a shall determine amount currency filing petition, of the of shall of United States as of date claim in such amount.” allow such in objection claim shall be Rule “An allowance 3007 states: objection hearing thereon shall writing copy A with notice of filed. claimant, possession or in be or delivered to debtor debtor mailed otherwise hearing. objection to a claim is days prior to the If an and the trustee at least specified Rule it becomes an joined with a for relief of the kind demand adversary proceeding.” testimony waived the to further accordingly right cross-examine witnesses this matter. did
This not violate Fullam’s mandate. In procedure remanding Court, case Fullam required do two things: reconsider the value of the (1) Coffeys’ (2) claim and remand the adversary for trial. proceeding As to Fullam’s first (determination of the requirement Coffeys’ there was no that a claim), kind be requirement particular procedure value claim. In employed estimating Bittner v. Co., Borne Chemical 691 F.2d we noted that the (3d'Cir. 1983), Code was “as to silent the manner in which or contingent estimated,” are to claims be and that under the unliquidated authority of Court to estimate the value of claims under 11 U.S.C. court had 502(c), bankruptcy exclusive to direct the jurisdiction § “[t]he manner and the time in which such a claim to be or liquidated amount, estimated as to its and its decision should be to review subject on the only ground There, abuse of discretion.” Id. at 138. we rejected the stockholder’s argument that court had bankruptcy erred because it assessed the ultimate claims, merits rather than estimating their similar to the substantially argument here Coffeys. presented we wrote arewe persuaded Congress intended the Hearing] [Estimation undertaken procedure by the initially bankruptcy judge, using whatever method is suited best particular contingencies issue. ... In the method which a court has reviewing bankruptcy ascertained the value of a claim under Section an 502(c)(1), court reverse if the court appellate may only has abused its discretion. court must defer to the appellate congressional intent to accord wide latitude to the decisions of the [bankruptcy court]. *18 Indeed,
Id. at 135 added). we further noted “it (emphasis that rare conceivable that in and unusual cases or even trial arbitration a jury on all or some the of issues to obtain a may necessaiy reasonably accurate evaluation claims.” Id. Gindin’s decision to conduct a trial on the in connection
Judge papers with the claim with an Estimation was objection dispense Hearing not an abuse of discretion. the judicial economy From standpoint, Hearing an extraneous Estimation forgo Court’s decision to Bankruptcy there would be no need to sense since under makes 502(c) practical § the claims were Coffeys’ actually adjudicated claim once estimate the 502(b). and valued under § adversary the (that
As to Fullam’s second requirement that the the contend trial), be remanded for proceeding trial on the combining mandate Court violated this However, the the claim proceeding. with adversary objection proceeding with the adjudication was never combined actually adversary proceeding Indeed, the Order claim. Case Management the value of of the claim denied objection forth the setting procedure of June to immediate go to set a date for the adversary proceeding the motion claim trial, and the objection adversary proceeding that suggesting to be treated were separately.
Rather, the claim Court waited until the the Bankruptcy proceeding then summary judgment was entertained objection completed, to determine whether —as on the adversary proceeding motion papers on the merits was warranted. In motions—a trial summary judgment all Court determined that Opinion, November 1999 separate in the entering it from a result res judicata prevented principles that objection,11 different than claim adversary proceeding in favor summary Court entered judgment and therefore Mann and Moore. of Kool Court did violate conclude Estimation Hearing Fullam’s mandate dispensing in a summary
deciding adversary proceeding judgment proceeding. Findings VI. Fraud are not binding Since Fullam’s comments case, issue only concerning facts of this on remand was whether of fraudulent behavior findings below, we are satisfied that the were erroneous. As described they clearly supra, IV, challenged by determination is not As discussed earlier in Section appeal. in this *19 of made the the findings fraud Court and affirmed by by are District Court correct and the record.12 amply supported by The do not the the contest of law to parties Kentucky application that, law, merits of do this action. also not under They Kentucky dispute the must alleging (1) fraud five elements: a material party prove false; is known to false or misrepresentation (2) be made made be recklessly; with inducement to acted which is (3) (4) upon; Moore, relied (5) causes See Owen Thomas & v. upon; injury. Co. 1439, (6th 1993). 992 F.2d 1444 Cir. Coffey, Misrepresentations A. Material noted,
As the Court found previously numerous instances of made misrepresentations by negotiation of Coffeys during LCSDI, sale of to financial especially information that was respect to Kool Mann as of due provided part its diligence concerning cases, In some company. the value of the particular misrepresentations could be (1) $429,607 such as: the value of as quantified, houseboats exist; when did not they value of motors in (2) inventory exist; when they did overstatement of (3) by by profits incorrectly recording motors; sale of (4) omission purchase $58,000; costs of boat motor sales (5) credits to “Notes improper Receivables.” total amount of these aggregate quantifiable Kool, $1.4 Mann, was at least See In re misrepresentations million. 233 n. B.R. 305 10. The affidavit testimony adduced in combined with financial proceedings statements presented by to Kool Mann these conclusion that items were amply support to sale. inaccurately reported prior affirmed, findings Because the will of fraud People’s See personal will State guaranty. also affirm release of Moore from his Hill, Bank v. Ky. (Ky. 1925) (“It 275 S.W. is a well established surety guarantor rule of that if a or law creditor induces a to enter into the contract suretyship guaranty any or misrepresentation fraudulent concealment or Indeed, surety guarantor released.”). material or facts will be the Sixth very Kentucky Circuit expressed approval principle its when it reversed the Moore, Owen, See summary judgment against District Court’s Moore in Co., Thomas & (6th (“If fraudulently 1993) 992 F.2d Cir. Moore entering guaranty agreement, induced into he then is entitled to be released monetary from obligation.”). his substantial
Moreover, finding Gindin’s that number the record supported Judge statements made about the financial false statements were although were For example, of which Coffeys, many unquantifiable. that statements were warranted the financial Purchase Agreement Generally Accounting Principles accordance with Accepted prepared that the conceded a deposition L. Coleman Coffey (“GAAP”), with GAAP. See in accordance kept statements were not financial addition, the record supports finding In Purchase Agreement f5(e). there were no changes that closing, Coffeys represented that to prior statements, financial LCSDFs methodology maintaining made in the that he testimony conceding changed L. own Coffey’s Coleman despite transactions from the LCSDI recorded certain houseboat way to the November 1985 financials. 1985 financials September Moreover, he conceded that breached L. Coleman Coffey that the of the Purchase Agreement made in |5(e) representation or items any non-recurring financial statements did include special income. flow, L. Coffey cash Coleman also
Finally, in connection with to that cash flow was that he had told Moore prior closing conceded to Both Kool Mann and year. around per and lay testimony introduced evidence—in form expert —that was, fact, $500,000 in flow far less than LCSDFs cash material findings of misrepresentations in the record. Court were well supported B. of Fraud Knowledge to Gindin’s finding
There also sufficient evidence support Judge he L. Coleman testified that Coffey that the knew of their fraud. date, and closing access all of the correct information prior had has not disputed. formal a certified accountant been training his public Moreover, various determinations credibility Gindin made determined, as the and fact Coffey’s testimony, L. Coleman regarding do, that not credible in many finder is entitled his was testimony that were that was aware of the Coffey respects, misrepresentations Wats, Inc., v. made US F.3d closing. Scully being prior are of a (“credibility unique Cir. determinations (3d 2001) province fact finder”).
C. Rely Inducement to find, did, Gindin entitled to as he intended that Kool Mann rely many inaccuracies upon presented during at trial negotiations. testimony adduced view that L. supported $5 Coleman knew that in to obtain a order million Coffey purchase price, $500,000. he had to cash flow show of over The evidence also showed that a cash in that Coffey conveniently flow provided figure range, knowingly he the inaccurate provided financial statements which above, his flow cash As discussed supported range.
was entitled to find knew numerous Coffey misrepresentations inaccuracies the information to Kool prior providing Mann. *21 was it not erroneous for the Accordingly, clearly Court to Bankruptcy have found that intended for Kool to Coffey Mann his rely upon misrepresentations.
D. Reliance did, fact, Gindin was also find entitled to that Kool Mann rely the it upon agreed when LCSDI. misrepresentations purchase evidence demonstrates that Kool Mann calculated purchase its on price values and on financial figures presented the statements provided Kool Mann. a Moore testified that he needed cash flow of over to be able to the service debt he would incur as a result of purchase LCSDI and he that would not entered have into the transaction had he $500,000. known that flow pver cash was not This evidence sufficient to establish on the reliance of Kool Mann. part E. Injury Causation of there is little
Finally, doubt that record existence of supports Mann damages by Kool caused discussed misrepresentations above. Moore testified that his calculation price purchase based the financial L. by statements to him Coleman upon provided Moreover, the Coffey. record is with references to the replete amount and magnitude of various and their respective effects misrepresentations, and asset valuation cash flow. we will affirm the of fraud finding by Coffeys. Due
VII. to Fraud Damages Calculation of calculation of fraud damages the method of challenge The its Court in that method contending employed To fraud was incorrect. determine used to value LCSDI without fraud, the Mann as a result of magnitude injury the “true value” of LCSDI at sought Court to establish Butcher, Cir. 1991) F.2d 297 (3d the time of sale. See Sowell v. actions, are law fraud most plaintiffs damages ... common (“under calculated as the difference between the price paid commonly This “true value” value.’“). represented and the ‘true security security’s at the time the sale in 1985 without any the real worth of LCSDI inaccuracies, all of the fraudulent conduct thereby subsumed Coffeys. value,” the Court
In order to ascertain LCSDI’s “true LCSDI’s actual calculating of cash flow multiple analysis by utilized it over 15 cash flow without the misrepresentations projecting 18.5% value at a rate an growth present 7.5% years pre-determined a value of yielded discount factor. This calculation purportedly below, we $2,288,167. For the reasons set forth while approve LCSDI’s methodology employed by arriving LCSDI, value,” taking that the value of after into “true conclude Court, should be account all of fraud found the Bankruptcy $2,288,167. $1,766,631, to reflect a value of corrected *22 Flow A. LCSDI’s 1985 Cash testimony and Mann submitted expert
Both the Graves, actual cash flow. The James Coffeys’ LCSDI’s 1985 expert, $352,585. in was See Graves determined that free cash flow 1985 Report that he made two additional at 2. In Graves noted reaching figure, had not been disclosed at that time: downward which adjustments yet $29,000 to of a foot boat in a cost of sale increase of due sale 46 (1) 1985; sold in 1985 by understatement of cost of motors (2) $58,000. Graves’ was inflated figure artificially Gindin noted that net in from debt the amount long-term
because it included proceeds words, $173,000. In other Graves added difference between the amount LCSDI borrowed from creditors 1985 minus proceeds 444 LCSDI was to those back creditors netted required pay (which with one of Kool $173,000). Mann’s Thomas Agreeing experts, Millón, that net debt do not in cash flow see proceeds belong figures, Affidavit of Thomas Millón dated June at ¶18, $173,000 Court reduced Mr. Graves’ further figure to arrive at $179,585.
The Court also analyzed testimony exhibits of Kool Mann’s cash flow Robert Malinowski. from expert, Piggybacking Malinowski’s cash flow at the Estimation analysis presented Hearing (at which time he calculated LCSDI’s actual cash flow to be $246,848), Malinowski deducted from his amount of original cost of motors item disclosed on the Graves to arrive report $188,848. at a cash flow of See Affidavit of Robert Malinowski dated June 1996 at 5-7. that Noting both arrived at experts nearly flP same cash flow amount (after debt deducting long-term from proceeds Graves’ and also figure), did not observing dispute of Malinowski’s accuracy cash flow Gindin analysis, Judge applied $188,848 amount as LCSDI’s actual cash flow.13
The raise two objections to the First, calculation of cash flow. that the reduction they complain $173,000 in cash flow due to the inclusion of net debt long-term proceeds is, worst, disagreement among therefore cannot have been experts, caused fraud. proximately Accordingly, they argue the cash flow value used Gindin should be by Judge increased by $173,000. Court, fact,
We are not
as finder of
persuaded.
Hoots,
entitled to exclude net debt
from LCSDI’s cash flow.
proceeds
that cash flow was around to LCSDI’s record, this Court could have found that representation the is, that cash was unconditioned—that representation unqualified $500,000 to conditioned the need borrow flow was above was not upon amount. See Affidavit of Thomas more in order reach that money as a result artificially Millón at free cash flow is inflated (“the ¶18 $173,000 it year more each than borrowing repays”). business flow conclude that this inflation of cash is a finding that Accordingly, not erroneous on the state of this record. clearly result of fraud is in cash Second, the contend that the reduction flow sold was an costs related to motors in 1985 improper understated had disclosed this “understatement” been prior deduction because to a to the refer schedule attached closing. As proof, number of motors “not written listing Purchase Agreement paid” them, in inventory next to motors LCSDFs which representing some were and which off. fully paid sold Kool Mann were ultimately Coffeys, to the these motors were the motors related to According very turn, Mann, motors cost. Kool in claims that these are $58,000 reduction, subject different from those were motors could that an understated “cost of sold” in 1985 not be arguing at the inventory the same as motors LCSDFs end thing remaining fact, before finder of it Again, such an but argument may proper is decide. The reviewing not for us—a court—to believe Kool over the decision to Mann’s explanation and to ascribe fraud explanation, Coffeys, supported Indeed, record therefore not erroneous. there is clearly and is nothing the record to show disclosed debt certain motors is “unpaid” the same of motors was and which unreported “cost” sold which resulted $58,000. revenues by overinflated concluding we find that Gindin did not err in $188,848. actual cash flow LCSDFs Projection
B.
of Cash Flow
ascertained,
Once
LCSDFs 1985 cash flow was
Court
cash flow to certain
rates and discounts
applied
growth
projected
Millón,
Thomas
who the
methodology
Mann’s
expert,
Court found to be credible. The
use the
purported
*24
factors,
$188,848 and to
to it a number of
cash flow amount of
apply
an
rate of
and a
value discount
growth
annualized
7.5%
including
present
over 15
to Kool Mann’s
the rates and
According
of 18.5%
years.
expert,
time frame utilized were
standards in
like
industry
valuing
company
LCSDI, an assertion which was not
disputed
expert.
concluded that
actual
Using
methodology,
’
value of
all
discounting
LCSDI—after
for
of
fraud —was
$2,288,167
1985,
$2,711,833
$5
a reduction in value of
from the
Kool, Mann,
million
See In re
task of valuing company which take the use of such methods favor exchange, traded on public future performance. value of the company’s into account expected been, fact, somewhere cash had in Indeed, the record shows that if flow it $600,000 was), (as Coffeys’ represented range in the would have Court used methodology by Bankruptcy the cash flow $5,404,088, $4,816,318 consistent LCSDI somewhere between valued See Millón Aff. $5 parties. the million agreed upon with ¶6. decision to accept Gindin’s fact further only supports This in 1985. as a valid to value methodology way Millón LCSDI LCSDI C. The Value of that the “true noted, Court concluded already
As However, $2,288,167 a close examination of LCSDI was value” of the methodology employed record shows application of LCSDI a value Court should have yielded the D to Millon’s affidavit. Exhibit $1,766,631, as demonstrated would have returned course, this given discrepancy, In the normal to the Court for remand discrete issue District this are However, the fact that we light recalculation. Court for halt, to a we have be brought this should litigation convinced were damages figures manner in which the analyzed scrupulously conclude Brotman) affirmed (and by Judge reached Gindin by Judge $1,766,631 Court, fact, intended apply figure. Cash Flow of D starts with an Adjusted
In Exhibit summary, rough and an 18.5% annual rate growth present on a 7.5% adjusted Had the factor, analysis. with Gindin’s value each consistent the Exhibit D it would figures, followed through Indeed, $1,766,631 for LCSDI. a total value of have reached present flow on 1986, the of cash starting figure that for the year exhibit reveals *26 $188,848 value, rise to a value giving present a 15 was year analysis $173,482. of affidavit, has a bottom hand, of which the other Exhibit C Millon’s
On
$2,288,168,
although
Court
was adopted by
Bankruptcy
line
of
figure
disclaimed, and not used
were
rise to this
value
the details giving
present
instance, Exhibit C
Court. For
analysis, by
in its
which
(not $188,848)
a cash flow
of
figure
commences with
affidavit
attached to Mr. Millon’s
Exhibit A.I.
was derived from
However, in its
Joint
opinion,
437 of the
Appendix).
(appearing
page
to use the hypothetical
declined
Court expressly
the Bankruptcy
A.I., and
contained in Exhibit
in the analysis
endemic
projections
the cash flow
data
by
to use the historical
supplied
decided instead
Kool,
Indeed,
Mann,
The details D— matters had and fraudulent all of LCSDI after misrepresentations value relied $1,766,631 that the Bankruptcy deducted was been —reflects rates, but and value accepted present on these various percentages D, but of Exhibit C. With the record not of Exhibit bottom line valuation Court and the we are confident that in this posture, of LCSDI had to stem that the value readily agree District Court would chart, and should have been recorded as an Exhibit D analysis from so, as we $1,766,631. This being reading respective opinions read, intended them to be we conclude that the value believe the authors $1,766,631, and it is that the stock Kool Mann was by purchased the ultimate determining obligation which we have utilized figure to the Coffeys. Kool Mann
VIII. of Interest Recharacterization related, and as we have As the agreement provided, parties’ on the balance Mann had that interest would agreed paid remaining of LCSDI. In October and November of due on purchase price $330,000, interest of which Kool Mann made payments as a total interest (for returned by overpayment payment as interest continuously These were characterized $291,784). payments Court’s October 2000 At that until payments Opinion. time, Court—on a motion for reconsideration— those The recharacterized payments principal payments. the fraud committed
Court did so on the ground Thus, resulted in a reduction in the amount owed Kool Mann. amount due the was not or known could quantified principal sum. interest is be classed as an While only unliquidated prejudgment sum, on a interest on an allowed liquidated prejudgment unliquidated law, is, at the discretion of the court. Kentucky only sum under permitted Fulton, 817 S.W.2d (Ky. 1991). See Brown v. 901-02 App. of interest to was to reduce the of this recharacterization principal upshot $291,784. an additional claim *27 will affirm the Court’s recharacterization of interest We fraud, it into In the absence of is any payments principal payments. been contractually obligated that Kool Mann would have undisputed $291,784 in interest which was básed pay payments, upon amount. The is that in of the fraud remaining difficulty light principal LCSDI, the value of the amount of revaluation of corresponding now be calculated the same as the way, interest due cannot principal Indeed, become uncertain. true to calculate only way amount has contractual interest have been to re-amortize the installment would interest, to take into account the recalculated of principal
payments deductions for fraud had Kool Mann after due from far smaller principal been made. $291,784 could be considered of the the extent some portion
To Kool interest, that the we note of contractual payment —and we determine Mann, demonstrated how would for that matter —have not contractual could be considered if any, what portion, of the Coffeys’ amount in light interest based on a reconstituted principal judge law would Kentucky permit fraud. We also conclude been the contract at issue has permeated such interest where reject Middleton, 268 (Ky. 152 S.W.2d Ky. fraud. Middleton v. Cf. claim, allowance of an the case of 1941) (“in unliquidated App. the case”). or the court trying interest rests in the discretion of jury have been of the would In this a much smaller way, portion To the extent any to have been as interest. contractually obligated paid interest, amount could be considered prejudgment remaining such interest in deny well within its discretion to Court was toto, fraud on the of the See Coffeys. light many findings part Bethlehem, L.Ky. 887 S.W.2d 39:6 Church & Mullins v. Corp. or not to determination as whether 1992) (“the Summary (Ky. based interest an is upon award unliquidated prejudgment sum] [on foundation of equity justice.”). on the ultimate
Moreover, the could not interest expect due to them from Kool Mann’s we have settled on as being amount would, effect, inasmuch as such award any estate in bankruptcy available. See 7 generally interest which is not constitute post-petition (rev. 1129-97-98 1|ll29.04[4][b][i][C], pp. Bankruptcy, Collier solvent, the creditor is or ed. the debtor 1999) (“[U]nless 15th allowed oversecured, is not of a creditor’s post-petition part interest claim.”). Court’s recharacterization affirm the Bankruptcy will thereby reducing into payments,
of interest payments principal $291,784. an additional claim in of LCSDI IX.Assumed Indebtedness affirmance of the District Court’s Mann cross-appeals made in a credit for refusal to grant payments in the houseboat debt of LCSDI certain connection with pre-existing *28 $1,213,000. amount of Both the Court and the District Court relied in the decisions of the Kentucky litigation part upon Fullam’s June to conclude that 1995 Kool Mann was not Opinion entitled to this credit. While Fullam’s comments on this matter V.A., were dicta and therefore not Section binding (see supra), decision rendered Forester on the of debt issue in by Judge assumption 1990, which was never must be considered final. appealed,
In the litigation, Forester ruled that Kool Mann was Kentucky not entitled to a set-off it against indebtedness purchase price Moore, 87-64, assumed as of the business. Owen v. No. part Coffey, slip Indeed, Jan. (E.D. Ky. 1990). LCSDI’s op. purchasing ¶25 stock, assets, and not its Kool Mann just agreed pay particular price for LCSDI as a whole—its assets and liabilities. To credit Kool Mann with the it made this indebtedness now would conflict payments against with the court’s Kentucky decision. will not permit indebtedness credit.
X. Tax Savings Credit Kool Mann also the District Court’s which ruling cross-appeals reversed the of a Tax credit to grant Savings Mann to the Tax Side Letter. While the do Savings pursuant parties $236,566.22 received a Coffeys have tax benefit of dispute both the and Kool Mann had on agreed the amount of the savings, District Court refused to credit Kool Mann with this amount because Kool Mann had not made a final yet “balloon payment” Tax Side Letter.15 contemplated Savings noted, As agreed balance of the parties pay remaining over five annual installment purchase price payments plus $3,250,000 final balloon million payment September ($5 states, Savings entirety The Tax (emphasis added): Side Letter in its promise agreement This letter shall confirm our as sellers under our with [Kool Purchaser, of December payment reduce the balloon Mann] $4,000,000 “Payee” payable due and to us as under that certain note [Kool by any savings (including of December tax to us the partnership, Mann] Cruises) resulting gains Vacation capital ultimately from treatment accorded to the disposition partnership. of the boat assets of the Interest shall not be calculated on realized, payment but the balloon adjusted compensate this amount if shall final balance due then under the note. *29 $750,000 in installment minus $1 minus million down payment
price fraud, $236,566.22 the have been been would Had there no payments). $3,250,000 from the remaining deducted on September now, Side Letter. The Savings problem Tax pursuant payment can there be however, litigation, due to the and decades-long fraud offset, be which the Tax can Savings no final balloon against payment as the amount which other than the amount determined bankruptcy the Kool Mann now owes Coffeys. $1,766,631 value have as the
To determine that we figure, accepted $1 we thus far deducted from which have company after fraud $291,784 interest was million down after principal payments payment, recharacterized, made), no installment were not (since they payments (because no for assumed indebtedness of million payments These deductions leave Kentucky litigation). decisions rendered in Mann in owed to We Coffeys bankruptcy. final “balloon conclude that this now figure represents payment” made after the fraud and above be Kool Mann to result, referenced deductions have been accounted for. As properly $236,566.22 from Tax credit of must now also subtracted Savings $238,280.78 value, resulting after-fraud in Kool Mann owing in bankruptcy.
XI.Conclusion reasons, For the we will affirm the District Court’s October foregoing other to the calculation than judgment, respect connection, and Kool In obligation. claim Mann’s Coffeys’ be valued as we hold as follows: LCSDI must have explained, fraud, $2,288,167 as $1,766,631 as a result of the addition, we held. In will Court and the District Court which had reversed the Bankruptcy reverse District Court’s order and we will reinstate the Savings Court on the Tax issue credit in the Kool Mann an additional Court’s ruling thereby granting VIII, $236,566.22. Kool Mann As discussed Section supra, amount interest as a credit recharacterization of is also entitled to based $291,784. the amount principal claim in the Kool Mann the value of the Coffeys’ calculated as follows: will be
(cid:127) Value of LCSDI after $1,766,631 fraud: (cid:127) Credit -$1,000,000 for down made to payment Kool Mann: Coffeys by (cid:127) Credit for -$291,784 recharacterization of
interest as principal
(cid:127) Credit for on assumed payments -$ indebtedness of LCSDI:
(cid:127) -$236.566.22 Credit Tax Savings: -$1.528.350.22
Total amount of deductions Value of claim in
Bankruptcy: $238, 280.78 *30 We will therefore direct the District Court to remand this matter to the Court with the direction that the the record value of the claim in the Kool Mann to be bankruptcy $238,280.78.
DISSENT AMBRO, Circuit in Part Judge, in Concurring Part Dissenting Garth has written an excellent I opinion, though respectfully in disagree view, two In respects. my erred on the Bankruptcy Judge Kool, interest issue and in “prejudgment” Mann granting the tax savings credit. In his March 1999 opinion, decided both of Bankruptcy Judge these in the questions Coffeys’ favor. But in a supplemental opinion October he reversed issues, himself. On these two the Bankruptcy should have observed the old adage first instinct is your often the right one.
A. Prejudgment interest
Kool, Mann argues $291,784 that a payment that it tendered to the in October 1986 was a payment against on its principal note, which promissory should be set off against Coffeys’ bankruptcy maintain, claim. however, The Coffeys that this was an interest payment Kool, Mann owed them under the note. promissory The Bankruptcy Judge initially with the agreed and classified as payment However, interest. he had a subsequently of heart and decided change to credit the and reduce the against payment principal Coffeys’ claim by that amount. He this new justified outcome by relabeling in his that he had decided interest” noting
payment “prejudgment on interest not to grant Coffeys prejudgment March 1999 opinion claim. their bankruptcy because, law (which erred under Kentucky
The interest whether to issue), question grant prejudgment this governs (often sounding claims damages arises with regard unliquidated clearly not where contract disputes contractual tort), regard Farm Mut. Auto. Co. v. interest See State Ins. specific payments. requires Reeder, due 1988). Interest on (Ky. promissory 763 S.W.2d of the claim before debtor files for creditor’s bankruptcy note part like amount other just any prepetition debtor against on The decision award 502(b). required owed the note. U.S.C. § claim, is not a interest on the of a contractual valid payments portion Thus, the whole while cannot keep matter. discretionary it was on a interest because most of based fraudulent payment principal amount, due on the should be allowed to interest keep any they plainly purchase price. non-fraudulent portion compahy’s to calculate I would remand Bankruptcy Judge owed, note, how much would have been under promissory interest market valúe legitimate (which equals company’s $1,000,000 $1,766,631 down A remand for minus payment). resources, or as the would consume much time discrete purpose ¿ase. other of this reargue would not be permitted any aspect parties *31 out the by it is to of this issue ourselves dispose tossing While easier $291,784 that non- entire interest payment, portion represents there is could a sum of significant money, fraudulent interest inherent Unless are value to our correct outcomes. reaching prepared this ourselves, the have the to have to make the calculation Coffeys right Judge. issue resolved the Bankruptcy properly The Credit Savings B. Tax Fullam, Kool, that Mann was he Judge
On first appeal opined that it its with the agreement a credit pursuant not entitled to realized benefit tax any savings would receive the On a rather than an asset the deal as stock structuring purchase purchase. remand, ruled that he was constrained Gindin Judge initially it credit Kool, tax savings and denied Mann outcome his however, Gindin Judge changed Somewhat requested. inexplicably, Kool, mind in his October 2000 Mann the credit. On opinion granted Court, to the District Brotman reversed him on the basis appeal that his decision did with the comply original appeal Fullam. should (albeit We affirm decision for a different reason).1 Letter,
Under the of the Tax Side plain language Savings Maj. Op. n.15, Kool Mann is not entitled tax to a credit. The Side Letter savings $4 for a reduction of the “balloon provides million ... payment the final balance due then adjusted under note” for compensate tax “any to us ... from treatment savings resulting capital gains to the ultimately accorded of the boat assets of the disposition concluded that partnership.” (Emphasis added.) Bankruptcy Judge realized tax in 1986 due to savings “depreciation recapture.” is of course not Depreciation recapture treatment.2 To capital gains my there has not been a knowledge gains tax and thus Kool capital savings, Mann is not entitled to the tax credit. savings below, merits, my disagreement As can be agree seen is majority for I with the binding Fullam’s statements on this issue were not on the Court. Depreciation recapture taxpayer a capital depreciated. arises when sells a asset after it is Depreciation recapture the portion is of the amount realized from the sale of capital equal asset that is depreciation reported total deduction for the asset. Depreciation recapture subject ordinary gains to tax at income tax Capital rates. taxpayer capital occur when a taxpayer paid sells asset for more than what the *32 Generally, it. the difference in the taxpayer amount received for the sale of asset, capital paid by over the amount the taxpayer when the asset was purchased, subject capital gains capital gains, savings tax. With tax result imposed gain ordinary because rate of tax on the received is lower than income tax rates.