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

Heading: Sale of LCSDI

Text: LCSDI was a family-owned marina and houseboat rental business owned by the Coffeys on Lake Cumberland, Kentucky. It owned and operated an extensive system of docks and slips, a number of pontoon boats, and other boats which it rented to customers for use on Lake Cumberland. The boats were leased by LCSDI from Vacation Cruises (VC), a partnership also owned by the Coffeys. In 1986, VC owed about $700,000 to three regional banks in connection with the boats it owned. Kool Mann is an exceedingly complex leasing business.2 Primarily, Kool Mann’s business consisted of purchasing certain equipment (such as computers, telephones, trailers, and construction equipment) and leasing them to various customers known as users. In turn, Kool Mann would assign the lease payments as security against financing which was used to purchase the equipment in the first place. Under this arrangement, Kool Mann’s investors were _________________________________________________________________ 2. The debtor, here the cross-appellant, was initially named Moore, Owen, Thomas & Co, but changed its name to Kool, Mann, Coffee & Co. prior to filing bankruptcy. 4 purportedly enabled to utilize certain income tax incentives and investment tax credits, take depreciation on the equipment, and sell the equipment at the expiration of the lease for a profit. Kool Mann operated this arrangement successfully for a number of years. In the fall of 1985, Moore, the principal owner of Kool Mann, approached the Coffeys about purchasing LCSDI and VC. On December 11, 1985, Moore agreed that Kool Mann would pay a total of $5 million to the Coffeys for the outstanding stock of LCSDI.3 A first payment of $200,000 was due at closing, and an additional $800,000 (plus interest at a 10% per annum rate) was payable three months later (together, the down payment). The remaining principal balance was to be paid pursuant to an installment promissory note, which contemplated five annual installments of $150,000 principal and a final balloon principal payment for the remaining $3,250,000 due on September 30, 1991. The note also provided for interest to be paid with the installment payments at 0.5% above the prime interest rate. The Coffeys were provided with a security interest in the assets of LCSDI and a personal guaranty by Moore. The closing was scheduled to take place on December 31, 1985. The Coffeys provided Kool Mann with unaudited September 30, 1985 and November 30, 1985 financial statements (together, the financial statements). After realizing that transactions concerning certain houseboats were not accurately described on the financial statements, L. Coleman Coffey wrote a letter to Moore on December 20, 1985 (the December 1985 Letter) stating that[t]he financial statements are reasonally [sic] accurate except for the houseboat transactions. These amounts will wash-out and show a small profit for the corporation. The sale was finalized on December 31, 1985 pursuant to a Purchase and Sale Agreement dated December 31, 1985 _________________________________________________________________ 3. For tax reasons, the parties structured the sale so that VC would initially contribute the houseboats it owned to LCSDI and that Kool Mann would then purchase all the outstanding capital stock of LCSDI. As a result, the sale of LCSDI would also include the houseboats originally owned by VC. 5 (the Purchase Agreement). The representations and warranties in the Purchase Agreement were modified to reflect the existence of the December 1985 Letter, stating (e) The financial statements as of November 30, 1985 . . . are complete and correct and fairly represent the financial condition of the Corporation . . . except as noted, discussed and agreed by the parties and evidenced by a letter to Tom Moore of December 20, 1985, which is hereto attached and herein incorporated. Moreover, the parties entered into a side letter dated December 31, 1985, whereby the Coffeys agreed that any favorable tax savings they received due to the capital gains treatment of the disposition of the houseboats (theTax Savings) would serve to reduce the final balloon payment to be paid by Kool Mann on September 30, 1991 (theTax Savings Side Letter).