Opinion ID: 3012143
Heading Depth: 3
Heading Rank: 1

Heading: The Bankruptcy Court’s March 1999 Findings

Text: Judge Gindin issued his new findings with regard to the value of the Coffeys’ claim in a March 1999 Opinion (the March 1999 Findings). See In re Kool, Mann, 233 B.R. 291 (Bankr. D.V.I. 1999). Once again finding that the Coffeys had committed fraud, Gindin listed seven specific instances of fraud and their related dollar amounts: 1. The overvaluation of 33 houseboats for a total of $330,000; 2. In the November 30, 1985 financials, the listing of the value of houseboats as $429,607 in inventory when those boats did not exist; 3. In the November 30, 1985 financials, the listing of the value of motors in inventory as $40,190 when they did not exist; 4. In the November 30, 1985 financials, the overstating of profits by $100,000 as a result of incorrectly recording the sale and purchase of motors; 5. Representation by the Coffeys that the purchase of new houseboats and sale of old houseboats would wash or show a little profit, when the transaction actually resulted in a loss of $168,500; 6. Disclosure in a report submitted by Coffeys’ expert, James Graves (the Graves Report), that costs of sales of boat motors in the amount of $58,000 were omitted from the financials; and 7. L. Coleman Coffey’s testimony that he represented that cash flow was over $500,000 per year, when it was only $188,848. In re Kool, Mann, 233 B.R. at 301. According to the Bankruptcy Court, the aggregate dollar amount of these misrepresentations totaled roughly $1.487 million. Id. at 305 n.10. The Bankruptcy Court also found 7 additional instances of fraud which did not result in corresponding exact dollar amounts: 11 1. Coffey’s representation that the financial statements were kept in accordance with GAAP, when they were not kept in accordance with GAAP; 2. Violation in the November 30, 1985 financials of GAAP Financial Accounting Standard No. 57 because no disclosure was made of certain intercompany transactions between VC and LCSDI; 3. In the November 30, 1985 financials, improper crediting to the account of Notes Receivables when the transaction was actually a sale of substantial assets; 4. Overstatement of assets of business due to the reporting of sale of houseboats under the asset side of the balance sheet, without a corresponding reduction on the liability side; 5. Breach of the representation that there were no changes in the methodology of maintaining LCSDI’s financial statements, despite Coffey’s testimony that he changed the way LCSDI recorded houseboat transactions from the September 30, 1985 financials to the November 30, 1985 financials; 6. Coffey’s admission that he breached the representation that the financial statements did not include any non-recurring income or special items of income; and 7. Coffey’s testimony that all of the information concerning the overstatements, errors and changes in accounting methodology was available to him prior to closing. Id. at 301-02. The court rejected the Coffeys’ contention that the December 1985 Letter remedied each of these misrepresentations. Engaging in a multiple cash flow analysis advanced by Kool Mann’s expert,5 the Bankruptcy _________________________________________________________________ 5. The cash flow methodology used by the Bankruptcy Court on remand in 1999 differed from the methodology it applied in its original findings in 1993. Although both relied upon projections of future cash flow to 12 Court determined that the combined net effect of all of these misrepresentations caused more than a mere dollarfor-dollar reduction to the value of LCSDI. The court concluded that the inaccuracies amounted to valuing the company at $2,288,167. That value resulted in more than a $2.7 million reduction from the $5 million purchase price. The Bankruptcy Court then addressed a number of what it deemed to be procedural issues. As an initial matter, the court rejected the Coffeys’ complaint that it improperly conducted a trial on the merits instead of an Estimation Hearing, ruling that a bankruptcy judge has wide discretion in deciding how an estimation hearing may be conducted. Next, Judge Gindin found that most of Judge Fullam’s July 1995 Opinion did not bind him as it merely expressed several areas of concern regarding the fraud evidence and testimony. According to the Bankruptcy Court, Judge Fullam in his District Court opinion made three rulings which were affirmed by this Court in 1996, and which Judge Gindin was accordingly obliged to follow: (1) that the Coffeys were afforded inadequate notice that the findings of the Estimation Hearing would be binding on the adversary proceeding, (2) that Kool Mann was not entitled to a credit for the pre-existing indebtedness of LCSDI (assumption of the $1.213 million debt), and (3) that Kool Mann was not entitled to a Tax Savings credit because the Coffeys had not yet received any tax benefit. As to the substantive issues, the Bankruptcy Court applied Kentucky law and ruled that Kool Mann satisfied _________________________________________________________________ come up with the actual value of LCSDI in 1985, the 1999 methodology purported to utilize a constant growth rate of 7.5% of LCSDI’s actual 1985 cash flow (determined to be $188,848), and was discounted for present value over 15 years. The 1993 methodology, on the other hand, appeared to use cash flow projections based upon speculative estimations of LCSDI’s future houseboat and other business activity. On remand, the Bankruptcy Court disclaimed use of the 1993 methodology. See In re Kool, Mann, 233 B.R. 305. The valuation method applied by the Bankruptcy Court on remand is described in more detail in Section VII of this opinion. See text, infra. 13 each of the elements supporting its fraud case against the Coffeys. Judge Gindin, among other things, then rejected Kool Mann’s request for punitive damages and rejected the Coffeys’ request for pre-petition interest. Accordingly, the Bankruptcy Court held that due to the Coffeys’ fraud, the value of LCSDI at the time of the sale and after all elements of fraud and misrepresentation had been discounted, was actually $2,288,167. From this amount, the court deducted $1 million, the downpayment previously made by Kool Mann, and ruled that the value of the Coffeys’ claim in the bankruptcy proceeding was $1.288 million. An Order was filed on April 20, 1999, reflecting the foregoing as well as relieving Moore from his individual obligations under his personal guaranty because of the Coffeys’ fraud as it would be held under Kentucky law. See, e.g., Moore, Owen, Thomas & Co., 992 F.2d 1439, 1448 (6th Cir. 1993).