Opinion ID: 197524
Heading Depth: 3
Heading Rank: 3

Heading: Value of the Fleet Security Interest

Text: 20 The district court ruled, for good reason, that the methodology Mathias used to arrive at the $12,738,500 total valuation for the Anson assets was internally inconsistent and unreliable. First, on deposition in February 1996 Mathias had valued the Anson assets at only $10,238,000, roughly equal to the total indebtedness Anson owed Fleet. After Fleet moved for summary judgment, however, Mathias revised the valuation on Anson's assets upward by approximately $2.5 million--well above the total Fleet indebtedness. Thus, the moving target nature of the valuation alone provided ample reason for the district court to scrutinize the Mathias methodology with special skepticism. Against this backdrop, therefore, the deferential standard of review looms as a very high hurdle for Peters. We turn now to the principal factors which accounted for the increased valuation. 21
22 Mathias valued Anson's $5 million net operating loss (NOL) at approximately $1,267,000. Of course, an NOL carryforward may have potential value to the taxpayer (viz., Anson) if it can be used to offset future taxable income. 5 Mathias conceded, however, that his inclusion of the NOL carryforward as an Anson asset was inconsistent, since an NOL normally cannot be transferred, with certain exceptions inapplicable here (e.g., a change in the ownership of a corporate taxpayer through qualified stock acquisitions). Thus, the Anson NOL carryforward would have been valueless to a third-party purchaser at foreclosure. 23 Mathias, on the other hand, included the $1,267,000 NOL in tallying Anson assets on the theory that the Fleet foreclosure extinguished Anson's future right to utilize the NOL, thereby effectively destroying the asset. The Mathias thesis is beside the point, however, since the appraisal was designed to determine the value of Fleet's security interest in Anson's assets at the date of foreclosure (i.e., the value Fleet might reasonably expect to realize were the assets sold and applied to the Anson debt), not the value of the NOL while Anson continued to function as a going concern. Thus, Mathias effectively conceded that the value of the Fleet security interest in the NOL was zero. 24
25 Mathias proposed to testify that the keyman insurance policy Anson owned on the life of a former director was worth $1.2 million. The valuation was derived from a Fleet document assessing Fleet's collateral position, in which the $1.2 million figure reflected the net proceeds payable to the beneficiary (i.e., Fleet) at the death of the insured. 6 26 The district court correctly concluded that the Mathias appraisal was patently inflated. As previously noted, the only material consideration, for present purposes, was the policy's value at the time Fleet foreclosed in October 1993, when the insured had a life expectancy of seven years and the cash value was only $62,000. At the very most, therefore, an arm's-length purchaser would have paid an amount equal to $1.2 million, discounted to present value. 27 Indeed, pressed by the district court, Mathias conceded that he had not calculated present value, but then estimated it at somewhere in the vicinity of $800,000. Mathias likewise conceded that he had not taken into account the annual premium ($75,000) costs for maintaining the policy seven more years, totaling $525,000. Thus, Mathias effectively conceded that the policy might fetch only $275,000, some $925,000 below the proffered valuation. Absent any suggestion that accepted accounting principles would countenance such deficiencies, the district court acted well within its discretion in excluding the Mathias valuation. 28 As there has been no demonstration that the appraisal rest[ed] on a reliable [methodological] foundation, Bogosian, 104 F.3d at 477, 479, with respect to the net operating losses and the keyman insurance policy, the most optimistic valuation to which Mathias supportably might have testified was $10,271,500, see supra Section II.A.2--$356,500 less than the total Anson indebtedness to Fleet--even assuming all other property values ascribed by Mathias were reasonably reliable, such as intangible assets (e.g., goodwill, trade reputation, going-concern value, etc.) totaling $1,998,500, see Rev. Rul. 68-609, 1968-2 C.B. 327; the $2,648,000 valuation given Anson's inventory; and the $2,941,000 real estate valuation. 29