Court Opinion

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Opinions of the United
2002 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

7-29-2002

Kool Mann Coffee Co v. Coffey
Precedential or Non-Precedential: Precedential

Docket No. 01-4052

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Recommended Citation
"Kool Mann Coffee Co v. Coffey" (2002). 2002 Decisions. Paper 451.
http://digitalcommons.law.villanova.edu/thirdcircuit_2002/451

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PRECEDENTIAL

       Filed July 29, 2002

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 01-4052 / 01-4066

KOOL, MANN, COFFEE & CO., f/d/b/a MOORE, OWEN,
THOMAS & CO., and THOMAS O. MOORE,

v.

L. COLEMAN COFFEY and ROBERT BRUCE COFFEY,
       Appellants in No. 01-4052
(D.C. Civil No. 99-cv-00058)

MOORE, OWEN, THOMAS & CO. and
THOMAS O. MOORE

v.

L. COLEMAN COFFEY and ROBERT BRUCE COFFEY
(D.C. Civil No. 99-cv-00204)

MOORE, OWEN, THOMAS & CO. and
THOMAS O. MOORE

v.

ROBERT BRUCE COFFEY
(D.C. Civil No. 00 cv-00230)

*KOOL, MANN, COFFEE & CO., f/d/b/a
MOORE, OWEN, THOMAS & CO.,
       Cross-Appellant in No. 01-4066

On Appeal from the District Court of the Virgin Islands,
Division of St. Thomas and St. John
(D.C. Civ. Nos. 99-00058, 99-00204, 00-00230)
District Judge: Honorable Stanley S. Brotman,
United States District Court Judge for the
District of New Jersey, sitting by designation

Argued: Monday, May 13, 2002

Before: AMBRO, FUENTES and GARTH, Circuit Judg es

(Opinion Filed: July 29, 2002)

       Christopher M. Hill (argued)
       Christopher M. Hill & Associates,
        P.S.C.
       P.O. Box 4989
       Frankfort, KY 4060
       Attorney for Appellants

       Denise McClelland (argued)
       Frost, Brown & Todd LLC
       2700 Lexington Financial Center
       250 W. Main Street
       Lexington, KY 40507

       A. Jeffrey Weiss
       A. Jeffrey Weiss & Associates
       9618 Estate Thomas, Suite 1
       Tramway Building No. 2
       St. Thomas, U.S.V.I. 00802

       Attorneys for Appellee/
       Cross-Appellant Kool, Mann, Coffee
        & Co.

       Leslie Rosenbaum (argued)
       Rosenbaum & Rosenbaum, P.S.C.
       201 West Short Street, Suite 300
       Lexington, Ky 40507

       Attorney for Appellee
       Thomas Owen Moore

                                 2

OPINION OF THE COURT

GARTH, Circuit Judge:

This contentious dispute -- spanning almost two
decades, two bankruptcy filings, and countless appeals and
counter-appeals -- revolves around the sale of a business
called Lake Cumberland State Dock, Inc. ("LCSDI") in 1985
by L. Coleman Coffey and his son, Robert Bruce Coffey
(together, the "Coffeys"), to Kool, Mann, Coffee & Co., Inc.
("Kool Mann"), which is principally owned by Thomas O.
Moore ("Moore"). The substantive claims asserted by the
parties are actually relatively simple: the Coffeys claim that
Kool Mann owes them the balance remaining of the $5
million purchase price from the sale of LCSDI, while Kool
Mann contends that it is entitled to a number of set-offs
against that balance because of alleged misrepresentations
by the Coffeys as well as certain other deductions. It is the
tortured procedural history of this matter which makes this
appeal exceedingly -- and unnecessarily -- complex.

Since litigation began in 1986, this dispute has gone
before, inter alia, the United States District Court for the
Eastern District of Kentucky and the Sixth Circuit, twice
before the Bankruptcy Court of the Virgin Islands (which
issued numerous orders and opinions), twice before the
District Court of the Virgin Islands, and once before us, the
Third Circuit. We summarize the procedural history of this
matter in more detail below. Suffice it to say that it has
been 17 years since Kool Mann agreed to purchase LCSDI.
For our purposes here, we have detailed only those facts
that bear on our current disposition.1 In light of the
protracted nature of this litigation and the length of time
and judicial resources it has consumed, we have taken it
upon ourselves to determine the value of the Coffeys’ proof
_________________________________________________________________

1. The facts of this case have been well documented in a number of
previously published opinions. See, e.g. , Moore, Owen, Thomas & Co. v.
Coffey, 992 F.2d 1439 (6th Cir. 1993); Moore, Owen, Thomas & Co. v.
Coffey, 1991 WL 519627 (E.D Ky. Oct. 11, 1991); In re Kool, Mann,
Coffee & Co., 233 B.R. 291 (Bankr. D.N.J. 1999).

                                3

of claim in bankruptcy to be $238,280.78. We have done so
even though under normal circumstances we might have
been inclined to remand to the District Court for a remand
to the Bankruptcy Court to recalculate the damage figures.
In the interests of both judicial efficiency and fairness --
and to terminate what has appeared to be interminable
litigation -- we will affirm the District Court’s affirmance of
the Bankruptcy Court’s findings of fact of fraud and, for the
reasons set forth in this opinion, conclude with the ruling
that the amount owed by Kool Mann to the Coffeys in this
proceeding is $238,280.78. We do so despite the fact that
we will be affirming in part and reversing in part the
District Court’s October 2, 2001 judgment. However, in an
effort to conclude this long standing controversy, we will
not remand any portion of this appeal, even that segment
we are reversing, but will rather decide the relevant value
of the Coffeys’ claim in this opinion and direct that that
value be entered by the Bankruptcy Court.

I. Sale of LCSDI

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 (the"Tax
Savings") would serve to reduce the final balloon payment
to be paid by Kool Mann on September 30, 1991 (the"Tax
Savings Side Letter").

II. Proceedings

A. The Kentucky Litigation

Shortly after the sale, a dispute arose as to which party
would assume certain pre-existing debts of LCSDI, totaling
approximately $1.213 million for the houseboat fleet it
owned (including the $700,000 debt originally held by VC).
In the fall of 1986, Kool Mann filed suit in federal court in
Kentucky seeking declaratory relief as to the assumption of
debt issue and also sought a set-off against the purchase
price of LCSDI for alleged misrepresentations and
accounting fraud by the Coffeys. The Coffeys
counterclaimed for judgment on the $ 4 million balance due
on the purchase price. The Coffeys also filed suit in state
court against Moore, individually, under his personal
guaranty. That action was removed to federal court and
both were consolidated before the Honorable Karl S.
Forester, U.S. District Court Judge for the Eastern District
of Kentucky.

The Kentucky federal court bifurcated the assumption of
debt issue from the misrepresentation and fraud issue.

                                6

After a six-day trial, Judge Forester ruled on January 31,
1990 that Kool Mann had agreed to assume the company’s
debt when it agreed to pay $5 million for LCSDI, and that
therefore Kool Mann was not entitled to set-off the amount
of the assumed debt against the money it owed. See Moore,
Owen, Thomas v. Coffey, No. 87-64, slip op. atPP 6, 8, 10,
14.I (E.D. Ky. Jan. 31 1990). That ruling was not appealed.

On December 20, 1990, while the fraud issue was still
pending before the district court in Kentucky, Kool Mann
filed for bankruptcy protection in the Virgin Islands, where
it purportedly maintained certain offices. Recognizing that
he could not rule against Kool Mann due to its pending
bankruptcy, Judge Forester entered summary judgment
against Moore on October 11, 1991, rejecting Kool Mann’s
charge of fraud and holding that Moore was responsible for
the balance owed to the Coffeys.

The Sixth Circuit reversed, finding a material issue of fact
concerning the alleged misrepresentations. That court also
held that the obligation of Moore on his personal guaranty
could not be determined until the amount due from Kool
Mann was first ascertained, and ruled that if fraud on the
part of the Coffeys were to be found, Moore’s personal
liability under the guaranty would be discharged. See
Moore, Owen, Thomas & Co. v. Coffey, 992 F.2d 1439,
1448-50 (6th Cir. 1993).

B. Initial Bankruptcy Court Proceedings

As noted, Kool Mann filed for bankruptcy protection on
December 20, 1990. The filing was made in the Virgin
Islands, and the proceedings were assigned to the
Honorable William Gindin, U.S. Bankruptcy Court Judge,
sitting by designation in the Virgin Islands.

The Coffeys filed a $6 million Proof of Claim in the
bankruptcy proceedings, seeking the balance of the
purchase price, interest, and attorneys’ fees. In response,
Kool Mann objected to the amount of the Coffeys’ claim in
the Bankruptcy Court (the "claim objection"), and also filed
a separate complaint against the Coffeys, alleging fraud,
misrepresentation and set-off against any claim the Coffeys
may have had against Kool Mann, including attorneys’ fees

                                7

and punitive damages (the "adversary proceeding"). Moore
joined Kool Mann as a plaintiff in the adversary proceeding
seeking to void his personal guaranty on the ground of
fraudulent inducement.

A motion for estimation of the Coffey’s Proof of Claim was
filed under 11 U.S.C. S 502(c) (the "Estimation Hearing").4
The object of such a proceeding is to establish the
estimated value of a creditor’s claim for purposes of
formulating a reorganization plan. The Bankruptcy Court
conducted several days of hearings in 1992, but suspended
them because of the intervening bankruptcy filing of Robert
Coffey, in the Western District of Kentucky before the
Honorable Wendell Roberts.

Judges Roberts, Gindin and Forester conferred and
agreed that the most efficacious way to proceed would be to
resolve all issues (including those still unresolved in the
Kentucky litigation) in one forum, before Judge Gindin.
Counsel for the parties agreed, and the hearings continued
before Judge Gindin in 1992. On June 9, 1993, Judge
Gindin issued his findings (the "June 1993 Findings").

There, Judge Gindin decided that the Coffey’s ultimate
claim was $26,915.78. First, he gave credence to Kool
Mann’s claim that it had relied upon the fraudulent
misrepresentations of the financial statements presented by
the Coffeys during the negotiation of the sale of LCSDI.
Crediting Kool Mann’s valuation expert, the Bankruptcy
Court valued LCSDI’s "true" worth in 1985 absent
misrepresentations at $2,549,482, roughly $2.45 million
less than the negotiated purchase price. Second, the
Bankruptcy Court credited Kool Mann with $236,566.22
pursuant to the Tax Savings Side Letter. Third, the
Bankruptcy Court further reduced the Coffey’s claim by the
number of principal payments that Kool Mann had made
prior to the dispute. Finally, Judge Gindin credited Kool
Mann with the debt payments (the assumed indebtedness
of $1.213 million) it had made on behalf of LCSDI after the
_________________________________________________________________

4. 11 U.S.C. S 502(c) states: "[t]here shall be estimated for purpose of
allowance under this section . . . any contingent or unliquidated claim,
the fixing or liquidation of which, as the case may be, would unduly
delay the administration of the case."

                                8

sale. Accordingly, the Bankruptcy Court held that the
Coffeys’ total claim after all the credits and deductions
totaled $26,915.78.

In September 1993, the Bankruptcy Court entered a
declaratory judgment in the adversary proceeding on the
basis of its June 1993 Findings, and released Moore from
his personal guaranty as a result of the Coffeys’ fraudulent
inducements.

C. First Appeal to the District Court

The Coffeys appealed to the District Court of the Virgin
Islands. In an Opinion dated July 17, 1995 (the"July 1995
Opinion"), the Honorable John Fullam, United States
District Court Judge, sitting by designation from the
Eastern District of Pennsylvania, reversed the Bankruptcy
Court and remanded the case to that court for further
proceedings. Noting that an Estimation Hearing has no
legal effect other than establishing the approximate amount
of the claim that will be recognized in a reorganization,
Judge Fullam held that inadequate notice had been
afforded to the Coffeys that the results of the Estimation
Hearing would also be binding in the adversary proceeding.
Accordingly, the case was remanded to the Bankruptcy
Court for a reestimation of the Coffeys’ claim and a trial of
the adversary complaint on its merits.

However, Judge Fullam did not stop there. He noted that
"[i]nasmuch as further proceedings will be required in any
event, it is appropriate to address what appear to be
significant errors in the bankruptcy judge’s analysis." In re
Kool, Mann, No. 390-00017, slip op. at 7 (D.V.I. Jul. 17,
1995). Judge Fullam stated that the Bankruptcy Court did
not adequately consider the effect of the time pressure on
the parties’ negotiations, and that the Bankruptcy Court
had put too much emphasis on the fact that the senior
Coffey was an accountant. He also cautioned that the
Bankruptcy Court paid too little attention to the findings
made by Judge Forester in Kentucky and the views
expressed by the Sixth Circuit.

A "more serious error," according to Judge Fullam, was
the complete absence of a "causal relationship between the

                                9

alleged fraudulent misrepresentations and inaccurate
financial records, on the one hand, and damage to the
debtor on the other." Id. at 9. He expressed concern about
the methodology used by Kool Mann’s expert because it was
"based upon hypothetical cash flow projections bearing
little or no relationship to the actual facts pertaining to this
particular business." Id. at 10. The court therefore
concluded that "[o]n this record, the evidence is insufficient
to establish the amount of damages attributable to the
Coffey’s misrepresentations." Id. at 10-11.

Moreover, Judge Fullam noted that the Bankruptcy Court
should not have credited Kool Mann with the assumed
indebtedness and that Kool Mann was not entitled to the
Tax Savings credit because the Tax Savings Side Letter
contemplated that the credit would occur only when the
Coffeys first realized their tax saving. "Since the debtor has
not yet paid the purchase price, there has been no tax
saving, and the debtor is not yet entitled to the credit." Id.
at 12.

D. First Appeal to the Court of Appeals

The parties appealed Judge Fullam’s decision. On
February 29, 1996, a panel of this Court summarily
affirmed Judge Fullam’s decision in its entirety, without
opinion. See In re Kool, Mann, 79 F.3d 1138 (3d Cir. 1996).

E. Remand to the Bankruptcy Court

On remand, the parties proceeded in the Bankruptcy
Court to reestimate the Coffeys’ claim, agreeing to present
additional evidence to supplement the pre-existing record.
An order was issued by Judge Gindin on June 24, 1996
setting forth the procedure to be followed and stating that
the Bankruptcy Court would "adjudicate and determine the
Coffeys’ claim and the debtor’s objection thereto thereby
making an estimation of the claim" unnecessary. In re Kool,
Mann, No. 390-00017, order at 1 (Bankr. D.V.I. Jun. 24,
1996). A motion for an immediate trial on the adversary
proceeding, however, was denied.

Over the next several years, the Bankruptcy Court issued
three decisions relevant to this appeal.

                                10

1. The Bankruptcy Court’s March 1999 Findings

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 dollar-
for-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).

2. The Bankruptcy Court’s November 1999 Opinion

Shortly after the Bankruptcy Court issued its findings in
connection with the value of the Coffeys’ claim, Kool Mann
and Moore filed a motion for summary judgment in the
related adversary proceeding, which the court granted on
November 8, 1999 (the "November 1999 Opinion"). There,
Judge Gindin ruled that the claims raised in the adversary
proceeding were identical to those raised in valuing the
Coffeys’ claim, and that, therefore, the findings made in the
March 1999 Findings had preclusive effect on the claims in
the adversary proceeding under the doctrine of res judicata.
See In re Kool, Mann, No. 390-00017, slip op. at 14 (Bankr.
D.V.I. Nov. 8, 1999). Moreover, Judge Gindin ruled that
although Moore was not technically a party when the
earlier March 1999 Findings were made, all claims
involving Moore were also precluded by reason of res
judicata since his interests were identical to those of Kool
Mann. See id. at 10-13.

Judgment was entered in the adversary proceeding in
favor of Kool Mann and Moore.

                                14

3. The Bankruptcy Court’s October 10, 2000 Opinion

On October 10, 2000, the Bankruptcy Court ruled on
Kool Mann’s motion to amend the court’s March 1999
Findings (the "October 2000 Opinion"). There, Judge Gindin
ruled that Kool Mann was entitled to an additional credit of
$528,350.22.

There were two grounds for the court’s ruling. First, in
light of the court’s prior rejection of the Coffeys’ request for
pre-petition interest, Judge Gindin ruled that prior interest
payments made by Kool Mann in 1986 in the amount of
$291,784 should be recharacterized as principal payments.

Second, the Bankruptcy Court ruled that because the
Coffeys received a depreciation recapture in 1986, they had,
indeed, realized the Tax Savings contemplated under the
Tax Savings Side Letter. Accordingly, Judge Gindin ruled
that Kool Mann was entitled to a Tax Savings credit of
$236,566.22 pursuant to that agreement.6

The Bankruptcy Court, however, rejected Kool Mann’s
arguments that it was entitled to a credit for the pre-
existing indebtedness of LCSDI and also rejected its
contention that it was entitled to attorneys’ fees.

Judgment was entered on October 24, 2000 reflecting an
additional credit to Kool Mann in the amounts of $291,784
and $236,566.22. Consequently, the value of the Coffeys’
claim in bankruptcy was reduced to $759,816.78.

F. Second Appeal to District Court

The parties again cross-appealed the various orders of
Judge Gindin to the District Court of the Virgin Islands. On
October 2, 2001, the Honorable Stanley Brotman, U.S.
District Court Judge of the District of New Jersey, sitting by
designation, issued an opinion affirming in part and
_________________________________________________________________

6. The Bankruptcy Court’s October 2000 Opinion appears to contain a
typographical error. At one point in that opinion, the court stated that
the Tax Savings amount was $236,522. The Bankruptcy Court later
corrected itself, applying the proper $236,566.22 figure. See In re Kool,
Mann, No. 390-00017, slip op. at 7 (Bankr. D.V.I. Oct. 10, 2000).

                                15

reversing in part Judge Gindin’s orders (the "October 2001
Opinion").

Approving of most of the Bankruptcy Court’s decision,
Judge Brotman agreed with the Bankruptcy Court that the
bulk of Judge Fullam’s July 1995 Opinion was dicta, and
that it merely vacated the Bankruptcy Court’s initial
findings on procedural grounds (i.e., inadequate notice)
with only two additional substantive holdings: (1) that Kool
Mann was not entitled to a set-off for payments made on
assumed indebtedness of LCSDI; and (2) that Kool Mann
was not entitled to a set-off for Tax Savings. Judge Brotman
then found that in any event, "the Bankruptcy Court
adequately responded on remand to Judge Fullam’s
comments." In re Kool, Mann, Nos. 99-00058, 99-00204,
00-00230, slip op. at 14 (D.V.I. Oct. 2, 2001). However,
Judge Brotman ruled that the Bankruptcy Court erred with
respect to his granting of the Tax Savings issue and denied
that credit to Kool Mann.

Judge Brotman’s rulings are set forth in the District
Court’s judgment issued on October 2, 2001, and can be
succinctly summarized as follows:

       1. Bankruptcy Court’s decision to combine the
       Estimation Hearing and the adjudication of Kool
       Mann’s claim is AFFIRMED;

       2. Bankruptcy Court’s finding of fraud by the Coffeys,
       and calculating the actual value of LCSDI as a
       result of that fraud at $2,288,167 is AFFIRMED;

       3. Bankruptcy Court’s grant of credit to Kool Mann
       for the $1 million downpayment is AFFIRMED;

       4. Bankruptcy Court’s release of Moore of his
       obligations under the personal guaranty is
       AFFIRMED;

       5. Bankruptcy Court’s denial of Coffeys’ request for
       pre-petition interest is AFFIRMED;

       6. Bankruptcy Court’s denial of credit to Kool Mann
       for assumed indebtedness in the amount of $1.213
       million is AFFIRMED;

                                16

       7. Bankruptcy Court’s denial of punitive damages to
       Kool Mann is AFFIRMED;

       8. Bankruptcy Court’s grant of summary judgment in
       favor of Moore in the adversary proceeding is
       AFFIRMED on basis of collateral estoppel, not res
       judicata;7

       9. Bankruptcy Court’s grant of credit to Kool Mann in
       the amount of $236,566.22 in tax savings is
       REVERSED;

       10. Bankruptcy Court’s grant of credit to Kool Mann
       of $291,784 due to recharacterization of interest
       payments to principal payments is AFFIRMED.

See In re Kool, Mann, Nos. 99-00058, 99-00204, 00-00203,
judgment at 2-4 (D.V.I. Oct. 2, 2001). Consequently, Judge
Brotman ruled that the total balance due and owing to the
Coffeys by Kool Mann was $1,051,600.78.8

G. This Appeal

In this appeal, the Coffeys claim that the District Court
erred in the following respects: (1) that the Bankruptcy
Court’s rulings on remand concerning fraud, the
calculation of fraud damages and its decision to forgo an
Estimation Hearing violated our mandate affirming Judge
Fullam’s July 1995 Opinion; (2) that the Bankruptcy
Court’s findings of fraud were not supported in the record;
(3) that the Bankruptcy Court’s calculation of damages was
erroneous; and (4) that the Bankruptcy Court improperly
recharacterized the 1986 interest payments as principal.
_________________________________________________________________

7. Both parties agree that Judge Brotman only addressed the preclusive
effect of the March 1999 Findings on the adversary proceeding as to
Moore, not Kool Mann. Accordingly, Judge Gindin’s res judicata ruling in
the November 1999 Opinion remains undisturbed as to Kool Mann.

8. Indeed, it appears Judge Brotman made an error in math. According
to his own rulings, the amount due to the Coffeys should be
$996,383.00, not $1,051,600.78. Instead of crediting Kool Mann with
$291,784 for recharacterizing interest to principal, Judge Brotman
mistakenly credited it with $236,566.22 for the Tax Savings credit,
which he ruled could not be off-set.

                                17

Kool Mann opposes the Coffeys’ contentions and argues
further that, as a threshold matter, the Coffeys are
precluded from making any of their arguments on appeal
because they failed to challenge properly the Bankruptcy
Court’s November 1999 judgment in the adversary
proceeding. Moreover, Kool Mann cross-appeals the District
Court’s ruling that affirmed the Bankruptcy Court’s denial
of credit for payments made by Kool Mann on assumed
indebtedness of LCSDI, and the District Court’s reversal of
the Bankruptcy Court’s decision to permit the Tax Savings
credit.

III. Standard of Review

As the District Court sat as an appellate court in this
matter, our review of the District Court’s determination is
plenary. See Fellheimer, Eichen & Braverman, P.C. v.
Charter Technologies, Inc., 57 F.3d 1215, 1223 (3d Cir.
1995). "In reviewing the bankruptcy court’s determinations,
we exercise the same standard of review as the district
court." Id. (citing Brown v. Pennsylvania State Employees
Credit Union, 851 F.2d 81, 84 (3d Cir. 1988)). The
Bankruptcy Court’s factual findings may not be set aside
unless they are clearly erroneous. Bankruptcy Rule 8013;
Brown, 851 F.2d at 84 (citation omitted). "It is the
responsibility of an appellate court to accept the ultimate
factual determination of the fact-finder unless that
determination either is completely devoid of minimum
evidentiary support displaying some hue of credibility or
bears no rational relationship to the supportive evidentiary
data." Hoots v. Pennsylvania, 703 F.2d 722, 725 (3d Cir.
1983) (citation omitted). "Furthermore, in reviewing the
bankruptcy court’s factual findings we are to give due
regard to the opportunity of that court to judge first-hand
the credibility of witnesses." Fellheimer, 57 F.3d at 1223
(citing Bankruptcy Rule 8013) (internal quotation marks
omitted). The Bankruptcy Court’s legal determinations are
reviewed under a plenary standard, and its exercises of
discretion for abuse thereof. In re Engel, 124 F.3d 567, 571
(3d Cir. 1997).

                                18

IV. Waiver

Kool Mann contends that in this appeal the Coffeys raise
issues relating only to the findings made by the Bankruptcy
Court with respect to the value of their claim, and fail to
challenge the Bankruptcy Court’s November 1999 judgment
in the adversary proceeding. It reasons that this failure
means that any objection to the judgment in the adversary
proceeding has been waived, and that therefore, the
judgment in the adversary proceeding, in turn, has
preclusive effect on the findings of fraud underlying the
value of the Coffeys’ claim. Consequently, Kool Mann
concludes that the Coffeys are estopped from advancing the
arguments they make in this appeal since these arguments
urge a result in the claim valuation inconsistent with the
judgment entered in the adversary proceeding.

We disagree. As an initial matter, we conclude that the
Coffeys did not fail to challenge the judgment rendered by
the Bankruptcy Court in the adversary proceeding. A
number of the issues raised by the Coffeys in their opening
brief directly challenge various findings made by the
Bankruptcy Court which form the very underpinning of
both the value of their claim and the merits of Kool Mann’s
adversary proceeding. For instance, by arguing that the
lower court’s findings of fraud were clearly erroneous, we
interpret such a challenge to mean that the Coffeys believed
that the findings of fraud supporting both judgments-- the
one made pursuant to the claim valuation and the one
made pursuant to the adversary proceeding -- were clearly
erroneous. While the Coffeys could have made their
intentions more explicit, the context of their arguments
makes it reasonably clear that they challenged the merits of
both judgments.

Moreover, in advancing its argument, Kool Mann
confuses the failure of the Coffeys to challenge the
preclusive effect of the March 1999 Findings on the
adversary proceeding with the failure to challenge the
judgment in the adversary proceeding itself. It is true that
the Coffeys cannot -- and do not -- argue in this appeal
that preclusion principles do not apply between the findings
made in connection with their claim valuation and the
merits underlying the adversary proceedings. The issues

                                19

involved in both proceedings are, in fact, one and the same,
and the Coffeys’ opening brief does not question the res
judicata analysis conducted by the Bankruptcy Court. See
Nagle v. Alspach, 8 F.3d 141, 143 (3d Cir. 1993) ("When an
issue is either not set forth in the statement of issues
presented or not pursued in the argument section of the
brief, the appellant has abandoned and waived that issue
on appeal"). However, the fact that the Coffeys have
abandoned their right to challenge the binding effect of one
judgment upon another, does not mean that they have lost
the ability to challenge the merits of both judgments.

Accordingly, we reject this argument and turn to the
remaining claims in this appeal.

V. Law of the Case

The Coffeys contend that the Bankruptcy Court’s findings
on remand violated the "law of the case" doctrine by
ignoring our 1996 mandate affirming Judge Fullam’s July
1995 Opinion. See Bankers Trust v. Bethlehem Steel Corp.,
761 F.2d 943, 949 (3d Cir. 1985) ("[On remand, the] trial
court must proceed in accordance with the mandate and
the law of the case as established on appeal."). First, they
argue that the Bankruptcy Court’s findings of fraud and
calculation of fraud damages in its March 1999 Findings
contradicted the holdings made by Judge Fullam when he
noted that the evidence was insufficient to support a
finding of fraud and when he criticized the methodology
used by Kool Mann’s expert in valuing LCSDI. Second, they
contend that the Bankruptcy Court violated Judge Fullam’s
instruction by failing to conduct a separate Estimation
Hearing on remand.

A. The Bankruptcy Court’s Findings of Fraud and
Calculation of Fraud Damages on Remand

Upon careful examination of the District Court’s July
1995 Opinion, we conclude that Judge Fullam’s sole
mandate (and therefore our sole 1996 mandate) was to
vacate Judge Gindin’s June 1993 Findings on procedural
grounds and to order a new trial on the merits.
Consequently, the views expressed by Judge Fullam in his

                                20

1995 opinion concerning the findings of fraud and
calculation of damages should be read merely as dicta.

In the July 1995 Opinion, Judge Fullam held only that
the Coffeys did not receive adequate notice that the
Estimation Hearing was to be combined with the adversary
proceeding, and he therefore vacated the Bankruptcy
Court’s initial June 1993 Findings. The Bankruptcy Court
was directed to:

       reconsider and reestablish an estimated value of the
       Coffey’s claim, on the basis of the present evidentiary
       record together with such additional evidence as the
       parties may present. The adversary proceeding will be
       remanded for trial on the merits (or such other
       disposition as the parties may consent to).

In re Kool, Mann, No. 390-00017, slip op. at 12 (D.V.I. Jul.
17, 1995). Once Judge Fullam decided that notice to the
Coffeys’ was inadequate, he offered a number of
observations and comments on the evidence and other
matters before Judge Gindin.

       Inasmuch as further proceedings will be required in
       any event, it is appropriate to address what appear to
       be significant errors in the bankruptcy judge’s
       analysis.

Id. at 7 (emphasis added).

Each of Judge Fullam’s comments about the merits of
the case was simply precatory and was not necessary to the
actual holding of the case. Accordingly, these statements
are properly considered dicta, and are not binding. See
Government of the Virgin Islands v. Marsham, ___ F.3d ___,
2002 WL 1204957, at *4 (3d Cir. Jun. 5, 2002) ("That
statement, however, is dictum and is not binding on this, or
any other, panel of this Court."); Calhoun v. Yamaha Motor
Corp., 216 F.3d 338, 344 n. 9 (3d Cir. 2000) ("Insofar as
this determination was not necessary to either court’s
ultimate holding, however, it properly is classified as
dictum. It therefore does not possess a binding effect on us
pursuant to the ‘law of the case’ doctrine."). Therefore, the
"significant errors" deemed to have been made by the
Bankruptcy Court concerning the sufficiency of the

                                21

evidence of fraud, causation, and damages -- as well as
Judge Fullam’s belief that Kool Mann was not entitled to an
assumed indebtedness credit or a Tax Savings credit--
were not binding on remand.

Accordingly, the Bankruptcy Court was free to consider
"those issues not expressly or implicitly disposed of by the
appellate decision," and was "thereby free to make any
order or direction in further progress of the case, not
inconsistent with the decision of the appellate court, as to
any question not settled by the decision." Bankers Trust,
761 F.2d at 950 ("upon a reversal and remand for further
consistent proceedings, the case goes back to the trial court
and there stands for a new determination of the issues
presented as though they had not been determined before,
pursuant to the principles of law enunciated in the
appellate opinion") (emphasis added). Therefore, we
conclude that the Bankruptcy Court did not violate our
1996 mandate affirming Judge Fullam’s 1995 order when it
again found fraud by the Coffeys and entered a calculation
of claim damages in its March 1999 Findings.

B. The Estimation Hearing on Remand

The Coffeys also contend that the Bankruptcy Court
violated Judge Fullam’s mandate by forgoing the Estimation
Hearing on remand, and by effectively combining the
Estimation Hearing, claim objection, and the adversary
proceeding into one proceeding. We disagree.

After Judge Fullam’s decision was issued, the
Bankruptcy Court held numerous telephone conferences
with counsel to decide the best procedure for determining
the value of the Coffeys’ claim in bankruptcy and to
determine the merits of the adversary proceeding. Kool
Mann filed a motion to consolidate all issues into one
proceeding, or alternatively, to set a hearing only on Kool
Mann’s claim objection, or alternatively, to set the
adversary proceeding for immediate trial.

The Bankruptcy Court ruled on the motion to consolidate
pursuant to its Case Management Order, dated June 24,
1996. There, the Court determined to go forward with the
claim objection, stating that

                                22

       [t]he debtor’s objection to the Coffeys’ proof of claim in
       this matter will be consolidated with the remanded
       estimation proceeding pursuant to Rule 42(a)
       Fed.R.Civ.P. and determined in accordance with 11
       U.S.C. S 502(b)9 and Bankruptcy Rule 3007;10 as a
       result of this consolidation the Court will adjudicate
       and determine the Coffeys’ claim and the debtor’s
       objection thereto thereby making an estimation of the
       claim under S 502(c) unnecessary.

In re Kool, Mann, No. 390-00017, order at 1 (Bankr. D.V.I.
Jun. 24, 1996). With regard to the valuation of the Coffeys’
claim, the parties agreed to a trial on the papers and were
permitted to present additional evidence through briefs and
affidavits to supplement the already existing 1992 record.
The parties waived the right to present further live
testimony and accordingly waived the right to further cross-
examine witnesses in this matter.

This procedure did not violate Judge Fullam’s mandate.
In remanding the case to the Bankruptcy Court, Judge
Fullam required that the Bankruptcy Court do two things:
(1) reconsider the value of the Coffeys’ claim and (2) remand
the adversary proceeding for trial.

As to Judge Fullam’s first requirement (determination of
the Coffeys’ claim), there was no requirement that a
particular kind of procedure be employed in estimating the
value of the Coffeys’ claim. In Bittner v. Borne , 691 F.2d
134 (3d Cir. 1983), we noted that the Bankruptcy Code was
silent "as to the manner in which contingent or
_________________________________________________________________

9. 11 U.S.C. S 502(b) states, in relevant part: "if [an] objection to a claim
is made, the court, after notice and a hearing, shall determine the
amount of such claim in lawful currency of the United States as of the
date of the filing of the petition, and shall allow such claim in such
amount."

10. Bankruptcy Rule 3007 states: "An objection to the allowance of a
claim shall be in writing and filed. A copy of the objection with notice of
the hearing thereon shall be mailed or otherwise delivered to the
claimant, the debtor or debtor in possession and the trustee at least 30
days prior to the hearing. If an objection to a claim is joined with a
demand for relief of the kind specified in Rule 7001, it becomes an
adversary proceeding."

                                23

unliquidated claims are to be estimated," and that under
the authority of the Bankruptcy Court to estimate the value
of claims under 11 U.S.C. S 502(c), "[t]he bankruptcy court
ha[d] exclusive jurisdiction to direct the manner and the
time in which such a claim is to be liquidated or estimated
as to its amount, and its decision should be subject to
review only on the ground of abuse of discretion." Id. at
138. There, we rejected the stockholder’s argument that the
bankruptcy court had erred because it assessed the
ultimate merits rather than estimating their claims,
substantially similar to the argument presented here by the
Coffeys. Accordingly, we wrote that

       we are persuaded that Congress intended the
       [Estimation Hearing] procedure to be undertaken
       initially by the bankruptcy judge, using whatever
       method is best suited to the particular contingencies at
       issue. . . . In reviewing the method by which a
       bankruptcy court has ascertained the value of a claim
       under Section 502(c)(1), an appellate court may only
       reverse if the bankruptcy court has abused its
       discretion. The appellate court must defer to the
       congressional intent to accord wide latitude to the
       decisions of the [bankruptcy court].

Id. at 135 (emphasis added). Indeed, we further noted that
"[i]t is conceivable that in rare and unusual cases
arbitration or even a jury trial on all or some of the issues
may be necessary to obtain a reasonably accurate
evaluation of the claims." Id.

Judge Gindin’s decision to conduct a trial on the papers
in connection with the claim objection and dispense with
an Estimation Hearing was not an abuse of discretion.
From a judicial economy standpoint, the Bankruptcy
Court’s decision to forgo an extraneous Estimation Hearing
under S 502(c) makes practical sense since there would be
no need to estimate the Coffeys’ claim once the claims were
actually adjudicated and valued underS 502(b).

As to Judge Fullam’s second requirement (that the
adversary proceeding be remanded for trial), the Coffeys
contend that the Bankruptcy Court violated this mandate
by combining the trial on the adversary proceeding with the

                                24

claim objection proceeding. However, the adversary
proceeding was never actually combined with the
adjudication of the value of the Coffeys’ claim. Indeed, the
Case Management Order of June 24, 1996 setting forth the
procedure of the claim objection denied the motion to set a
date for the adversary proceeding to go to immediate trial,
suggesting that the claim objection and the adversary
proceeding were to be treated separately.

Rather, the Bankruptcy Court waited until the
proceeding on the claim objection was completed, and then
entertained summary judgment motion papers on the
adversary proceeding to determine whether -- as in all
summary judgment motions -- a trial on the merits was
warranted. In a separate November 1999 Opinion, the
Bankruptcy Court determined that the principles of res
judicata prevented it from entering a result in the adversary
proceeding that was different than that of the claim
objection,11 and therefore the Bankruptcy Court entered
summary judgment in favor of Kool Mann and Moore.

Accordingly, we conclude that the Bankruptcy Court did
not violate Judge Fullam’s mandate by dispensing with the
Estimation Hearing and deciding the adversary proceeding
in a summary judgment proceeding.

VI. Findings of Fraud

Since Judge Fullam’s comments in 1995 are not binding
as to the facts of this case, the only issue concerning the
Bankruptcy Court’s findings of fraudulent behavior by the
Coffeys on remand was whether they were clearly
erroneous. As described below, we are satisfied that the
findings of fraud made by the Bankruptcy Court and
affirmed by the District Court are correct and amply
supported by the record.12
_________________________________________________________________

11. As discussed earlier in Section IV, supra , that determination is not
challenged by the Coffeys in this appeal.

12. Because the Bankruptcy Court’s findings of fraud by the Coffeys will
be affirmed, we will also affirm the release of Moore from his personal
guaranty. See People’s State Bank v. Hill, 275 S.W. 694, 697 (Ky. 1925)
("It is a well established rule of law that if a creditor induces a surety or

                                25

The parties do not contest the application of Kentucky
law to the merits of this action. They also do not dispute
that, under Kentucky law, the party alleging fraud must
prove five elements: (1) a material misrepresentation that is
false; (2) is known to be false or made recklessly; (3) made
with inducement to be acted upon; (4) which is relied upon;
and (5) causes injury. See Moore, Owen Thomas & Co. v.
Coffey, 992 F.2d 1439, 1444 (6th Cir. 1993).

A. Material Misrepresentations

As previously noted, the Bankruptcy Court found
numerous instances of misrepresentations made by the
Coffeys during the negotiation of the sale of LCSDI,
especially with respect to financial information that was
provided to Kool Mann as part of its due diligence
concerning the company. In some cases, the value of the
particular misrepresentations could be quantified, such as:
(1) the value of houseboats as $429,607 when they did not
exist; (2) the value of motors in inventory as $40,190 when
they did not exist; (3) the overstatement of profits by
$100,000 by incorrectly recording the sale and purchase of
motors; (4) omission of costs of boat motor sales by
$58,000; and (5) improper credits to "Notes Receivables."
The aggregate total amount of these quantifiable
misrepresentations was at least $1.4 million. See In re Kool,
Mann, 233 B.R. 305 n. 10. The affidavit testimony adduced
in the bankruptcy proceedings combined with the financial
statements presented by the Coffeys to Kool Mann amply
support a conclusion that these items were inaccurately
reported prior to sale.
_________________________________________________________________

guarantor to enter into the contract of suretyship or guaranty by any
fraudulent concealment or misrepresentation of material facts that the
surety or guarantor will be released."). Indeed, the Sixth Circuit
expressed its approval of this very principle when it reversed the
Kentucky District Court’s summary judgment against Moore in 1993.
See Moore, Owen, Thomas & Co., 992 F.2d 1439, 1448 (6th Cir. 1993)
("If Moore was fraudulently induced into entering the guaranty
agreement, then he is entitled to be released from his substantial
monetary obligation.").

                                 26

Moreover, the record supported Judge Gindin’s finding
that a number of false statements were made about the
financial statements by the Coffeys, many of which were
unquantifiable. For example, although the Purchase
Agreement warranted that the financial statements were
prepared in accordance with Generally Accepted Accounting
Principles ("GAAP"), L. Coleman Coffey conceded in a
deposition that the financial statements were not kept in
accordance with GAAP. See Purchase Agreement at P5(e). In
addition, the record supports the finding that prior to
closing, the Coffeys represented that there were no changes
made in the methodology of maintaining LCSDI’s financial
statements, despite L. Coleman Coffey’s own testimony
conceding that he changed the way LCSDI recorded certain
houseboat transactions from the September 30, 1985
financials to the November 30, 1985 financials. Moreover,
L. Coleman Coffey conceded that he breached the
representation made in P 5(e) of the Purchase Agreement
that the financial statements did not include any non-
recurring or special items of income.

Finally, in connection with cash flow, L. Coleman Coffey
also conceded that he had told Moore prior to closing that
cash flow was around $500,000 to $600,000 per year. Both
Kool Mann and the Coffeys introduced evidence -- in the
form of expert and lay testimony -- that LCSDI’s cash flow
was, in fact, far less than $500,000 in 1985.

Accordingly, the findings of material misrepresentations
by the Bankruptcy Court were well supported in the record.

B. Knowledge of Fraud

There is also sufficient evidence to support Judge
Gindin’s finding that the Coffeys knew of their fraud. L.
Coleman Coffey testified that he had access to all of the
correct information prior to the closing date, and his formal
training as a certified public accountant has not been
disputed. Moreover, Judge Gindin made various credibility
determinations regarding L. Coleman Coffey’s testimony,
and determined, as the fact finder is entitled to do, that his
testimony was not credible in many respects, and that
Coffey was aware of the misrepresentations that were being

                                27

made prior to closing. Scully v. US Wats, Inc. , 238 F.3d
497, 506 (3d Cir. 2001) ("credibility determinations are the
unique province of a fact finder").

C. Inducement to Rely

Judge Gindin was entitled to find, as he did, that the
Coffeys intended that Kool Mann rely upon many
inaccuracies presented during negotiations. The testimony
adduced at trial supported the view that L. Coleman Coffey
knew that in order to obtain a $5 million purchase price, he
had to show a cash flow of over $500,000. The evidence
also showed that Coffey conveniently provided a cash flow
figure in that range, and that he knowingly provided the
inaccurate financial statements which supported his cash
flow range. As discussed above, the Bankruptcy Court was
entitled to find that Coffey knew of the numerous
misrepresentations and inaccuracies prior to providing the
information to Kool Mann. Accordingly, it was not clearly
erroneous for the Bankruptcy Court to have found that
Coffey intended for Kool Mann to rely upon his
misrepresentations.

D. Reliance

Judge Gindin was also entitled to find that Kool Mann
did, in fact, rely upon the misrepresentations when it
agreed to purchase LCSDI. The evidence demonstrates that
Kool Mann calculated its purchase price on values and
figures presented on the financial statements provided to
Kool Mann. Moore testified that he needed a cash flow of
over $500,000 to be able to service the debt he would incur
as a result of the purchase of LCSDI and that he would not
have entered into the transaction had he known that cash
flow was not over $500,000. This evidence is sufficient to
establish reliance on the part of Kool Mann.

E. Causation of Injury

Finally, there is little doubt that the record supports the
existence of damages to Kool Mann caused by the
misrepresentations discussed above. Moore testified that

                                28

his calculation of the purchase price was based upon the
financial statements provided to him by L. Coleman Coffey.
Moreover, the record is replete with references to the
amount and magnitude of various misrepresentations, and
their respective effects on asset valuation and cash flow.

Accordingly, we will affirm the Bankruptcy Court’s
finding of fraud by the Coffeys.

VII. Calculation of Damages Due to Fraud

The Coffeys challenge the method of calculation of fraud
damages employed by the Bankruptcy Court in 1999,
contending that its method used to value LCSDI without
fraud was incorrect. To determine the magnitude of the
injury to Kool Mann as a result of the Coffeys’ fraud, the
Bankruptcy Court sought to establish the "true value" of
LCSDI at the time of sale. See Sowell v. Butcher , 926 F.2d
289, 297 (3d Cir. 1991) ("under . . . common law fraud
actions, a plaintiff ’s damages are most commonly
calculated as the difference between the price paid for the
security and the security’s ‘true value.’ "). This "true value"
represented the real worth of LCSDI at the time of the sale
in 1985 without any inaccuracies, and thereby subsumed
all of the fraudulent conduct by the Coffeys.

In order to ascertain LCSDI’s "true value," the
Bankruptcy Court utilized a multiple of cash flow analysis
by calculating LCSDI’s actual 1985 cash flow without the
misrepresentations and projecting it over 15 years at a pre-
determined 7.5% growth rate and an 18.5% present value
discount factor. This calculation purportedly yielded a value
of $2,288,167. For the reasons set forth below, while we
approve of the methodology employed by the Bankruptcy
Court in arriving at LCSDI’s "true value," we conclude that
the value of LCSDI, after taking into account all of the
fraud found by the Bankruptcy Court, should be corrected
to reflect a value of $1,766,631, not $2,288,167.

A. LCSDI’s 1985 Cash Flow

Both the Coffeys and Kool Mann submitted expert
testimony on LCSDI’s actual 1985 cash flow. The Coffeys’

                                29
expert, James Graves, determined that free cash flow in
1985 was $352,585. See Graves Report at 2. In reaching
this figure, Graves noted that he made two additional
downward adjustments which had not yet been disclosed at
that time: (1) a cost of sale increase of $29,000 due to sale
of a 46 foot boat in 1985; and (2) understatement of the
cost of motors sold in 1985 by $58,000.

Judge Gindin noted that Graves’ figure was artificially
inflated because it included proceeds from net long-term
debt in the amount of $173,000. In other words, Graves
added the difference between the proceeds LCSDI borrowed
from creditors in 1985 minus the amount LCSDI was
required to pay back to those creditors in 1985 (which
netted to $173,000). Agreeing with one of Kool Mann’s
experts, Thomas Millon, that net debt proceeds do not
belong in cash flow figures, see Affidavit of Thomas Millon
dated June 27, 1996 at P 18, the Bankruptcy Court
reduced Mr. Graves’ figure further by $173,000 to arrive at
$179,585.

The Bankruptcy Court also analyzed the testimony and
exhibits of Kool Mann’s cash flow expert, Robert
Malinowski. Piggybacking from Malinowski’s cash flow
analysis presented at the Estimation Hearing in 1992 (at
which time he calculated LCSDI’s actual cash flow to be
$246,848), Malinowski deducted from his original amount
of $246,848 the $58,000 cost of motors item disclosed on
the Graves report to arrive at a cash flow of $188,848. See
Affidavit of Robert Malinowski dated June 27, 1996 at PP 5-
7. Noting that both experts arrived at nearly the same cash
flow amount (after deducting long-term debt proceeds from
Graves’ figure), and also observing that the Coffeys did not
dispute the accuracy of Malinowski’s cash flow analysis,
Judge Gindin applied the $188,848 amount as LCSDI’s
1985 actual cash flow.13

The Coffeys raise two objections to the Bankruptcy
Court’s calculation of cash flow. First, they complain that
_________________________________________________________________

13. It is noteworthy to recognize that though Judge Gindin used Kool
Mann’s cash flow figures, he actually used the higher of the two cash
flow determinations presented by Kool Mann and the Coffeys (after
deducting Graves’ figure for long-term debt proceeds).

                                30

the reduction of $173,000 in cash flow due to the inclusion
of net long-term debt proceeds is, at worst, a disagreement
among experts, and therefore cannot have been proximately
caused by the Coffeys’ fraud. Accordingly, they argue that
the cash flow value used by Judge Gindin should be
increased by $173,000.

We are not persuaded. The Bankruptcy Court, as finder
of fact, was entitled to exclude net debt proceeds from
LCSDI’s cash flow. Hoots, 703 F.2d at 725 ("It is the
responsibility of an appellate court to accept the ultimate
factual determination of the fact-finder unless that
determination either is completely devoid of minimum
evidentiary support displaying some hue of credibility or
bears no rational relationship to the supportive evidentiary
data."). As an initial matter, it is important to remember
that the Coffeys represented prior to closing that LCSDI’s
cash flow was around $500,000 to $600,000. On this
record, the Bankruptcy Court could have found that this
representation was unqualified and unconditioned-- that
is, the representation that cash flow was above $500,000
was not conditioned upon the need to borrow more money
in order to reach that amount. See Affidavit of Thomas
Millon at P 18 ("the free cash flow is artificially inflated as
a result of the business borrowing $173,000 more each
year than it repays"). Accordingly, we conclude that finding
that this inflation of cash flow is a result of fraud is not
clearly erroneous on the state of this record.

Second, the Coffeys contend that the $58,000 reduction
in cash flow for understated costs related to motors sold in
1985 was an improper deduction because this
"understatement" had been disclosed prior to closing. As
proof, the Coffeys refer to a schedule attached to the 1985
Purchase Agreement listing a number of motors with"not
paid" written next to some of them, representing motors in
LCSDI’s inventory which were ultimately sold to Kool Mann
and which were not fully paid off. According to the Coffeys,
these motors were the very motors related to the $58,000
cost. Kool Mann, in turn, claims that these motors are
different from those that were the subject of the $58,000
reduction, arguing that an understated "cost of motors
sold" in 1985 could not be the same thing as motors
remaining in LCSDI’s inventory at the end of 1985.

                                31

Again, such an argument may be proper before the finder
of fact, but it is not for us -- a reviewing court-- to decide.
The Bankruptcy Court’s decision to believe Kool Mann’s
explanation over the Coffeys’ explanation, and to ascribe
fraud to the Coffeys, is supported by this record and is
therefore not clearly erroneous. Indeed, there is nothing in
the record to show that the disclosed debt on certain
"unpaid" motors is the same "cost" of motors sold which
was unreported and which resulted in overinflated revenues
by $58,000.

Accordingly, we find that Judge Gindin did not err in
concluding that LCSDI’s actual cash flow was $188,848.

B. Projection of Cash Flow

Once LCSDI’s 1985 cash flow was ascertained, the
Bankruptcy Court applied the cash flow to certain growth
rates and discounts projected by Kool Mann’s methodology
expert, Thomas Millon, who the Bankruptcy Court found to
be credible. The Bankruptcy Court purported to use the
cash flow amount of $188,848 and to apply to it a number
of factors, including an annualized growth rate of 7.5% and
a present value discount of 18.5% over 15 years. According
to Kool Mann’s expert, the rates and time frame utilized
were industry standards in valuing a company like LCSDI,
an assertion which was not disputed by the Coffeys’ expert.
Using this methodology, the Bankruptcy Court concluded
that the actual value of LCSDI -- after discounting for all of
the Coffeys’ fraud -- was $2,288,167 in 1985, a reduction
in value of $2,711,833 from the $5 million purchase price.
See In re Kool, Mann, 233 B.R. at 307-08.14

The Coffeys argue that the cash flow methodology used
by the Bankruptcy Court is objectionable in that it is the
same methodology that was criticized by Judge Fullam in
his July 1995 Opinion. However, since we have already
concluded that that portion of Judge Fullam’s decision was
dictum, see Section V.A., supra , we reject the Coffeys’
objection to the Bankruptcy Court’s damage calculation.
_________________________________________________________________

14. As will be discussed in the next section, see Section VII.C., infra, we
conclude that the value of LCSDI in 1985 should be $1,766,631, not
$2,288,167.

                                32

In any event, we are satisfied that the Bankruptcy Court
did not err in its use of the cash flow methodology in this
particular case. A number of courts have commented on
the propriety of the discounted cash flow methodology for
certain valuation situations, particularly where valuing
stock and other securities of a company. See In re Valley-
Vulcan Mold Co., 2001 WL 224066, No. 99-4129 (6th Cir.
Feb. 26, 2001) (noting, with approval, that expert’s
"valuations were based on discounted cash-flow valuation,
a well-recognized methodology for determining a business’s
going concern values."); In the Matter of Genesis Health
Ventures, Inc., 266 B.R. 591, 613 (D. Del. 2001) (noting the
use of the discounted cash flow method as one method to
support value of an enterprise); In re Grant Broadcasting of
Philadelphia, Inc., 75 B.R. 819, 824 (E.D. Pa 1987) ("the
Debtors’ expert used a valuation method, the multiple of
cash flow method, which both parties’ experts agreed was
the most frequently used in the broadcast industry to
determine the value of stations."); see also Wilson v. Great
American Industries, Inc., 979 F.2d 924, 933 (2d Cir. 1992)
(approving of "capitalization of earnings method");
Burlington Northern Railroad Co. v. Bair, 815 F.Supp. 1223,
1229 (N.D. Iowa 1993) (approving the discounted cash flow
methodology as one of several available "methods of
arriving at true market value").

Other courts have criticized the use of cash flow
valuations in valuing companies, complaining of the
imprecision of such a methodology. But even those courts
have recognized its value in certain limited situations. See,
e.g., Metlyn Realty Corp. v. Esmark, Inc. , 763 F.2d 826,
835-36 (7th Cir. 1985) (noting that "[s]uch valuations are
highly sensitive to assumptions about the firm’s costs and
rate of growth," and that cash flow studies may not be "the
best way" to value a business, but "may be necessary when
there is no other way to find value"). Indeed, this Circuit
has stated previously that "the law does not command
mathematical preciseness from the evidence in finding
damages," and that "all that is required is that sufficient
facts . . . be introduced so that a court can arrive at an
intelligent estimate without speculation or conjecture."
Scully v. US Wats, Inc., 238 F.3d 497, 515 (3d Cir. 2001)
(internal quotations omitted); see also Jones & Laughlin

                                33

Steel Corp. v. Pfeifer, 462 U.S. 523, 552 (1983) ("We do not
suggest that the trial judge should embark on a search for
"delusive exactness." It is perfectly obvious that the most
detailed inquiry can at best produce an approximate result.
. . . But we are satisfied that whatever rate the District
Court may choose to discount the estimated stream of
future earnings, it must make a deliberate choice, rather
than assuming that it is bound by a rule of state law.").

The particular facts of this case, which involve the
extremely difficult task of valuing the stock of a company
which is privately owned and not traded on a public
exchange, favor the use of such methods which take into
account the expected value of the company’s future
performance. Indeed, the record shows that if cash flow had
been, in fact, somewhere in the $500,000 to $600,000
range (as the Coffeys’ represented it was), the cash flow
methodology used by the Bankruptcy Court would have
valued LCSDI somewhere between $4,816,318 to
$5,404,088, consistent with the $5 million agreed upon by
the parties. See Millon Aff. at P 6. This fact only further
supports Judge Gindin’s decision to accept the Millon
methodology as a valid way to value LCSDI in 1985.

C. The Value of LCSDI

As already noted, the Bankruptcy Court concluded that
the "true value" of LCSDI was $2,288,167 in 1985.
However, a close examination of the record shows that the
application of the methodology employed by the Bankruptcy
Court should have yielded a value of LCSDI as $1,766,631,
as demonstrated by Exhibit D to Millon’s affidavit.

In the normal course, given this discrepancy, we would
have returned this discrete issue to the District Court for
remand to the Bankruptcy Court for recalculation.
However, in light of the fact that we are convinced this
litigation should be brought to a halt, we have scrupulously
analyzed the manner in which the damages figures were
reached by Judge Gindin (and affirmed by Judge Brotman)
and conclude that the Bankruptcy Court, in fact, intended
to apply the $1,766,631 figure.

                                34
In rough summary, Exhibit D starts with an Adjusted
Cash Flow of $188,848 on a 7.5% adjusted annual growth
rate and an 18.5% present value factor, each consistent
with Judge Gindin’s analysis. Had the Bankruptcy Court
followed through with the Exhibit D figures, it would have
reached a total present value of $1,766,631 for LCSDI.
Indeed, this exhibit reveals that for the year 1986, the
starting figure of cash flow on a 15 year analysis was the
$188,848 value, giving rise to a present value of $173,482.

On the other hand, Exhibit C of Millon’s affidavit, which
has a bottom line figure of $2,288,168, was adopted by the
Bankruptcy Court although the details giving rise to this
present value were disclaimed, and not used in its analysis,
by the Bankruptcy Court. For instance, Exhibit C
commences with a cash flow figure of $215,018 (not
$188,848) which was derived from Exhibit A.I. attached to
Mr. Millon’s affidavit (appearing on page 437 of the Joint
Appendix). However, in its opinion, the Bankruptcy Court
expressly declined to use the hypothetical projections
endemic in the analysis contained in Exhibit A.I., and
decided instead to use the historical data supplied by the
cash flow analysis in Exhibit D. See In re Kool, Mann, 233
B.R. at 305. Indeed, the cash flow figures used in Mr.
Millon’s Exhibit C appear to be derived from the very
analyses that Judge Fullam criticized as being too
speculative in his July 1995 Opinion. In re Kool, Mann, No.
390-00017, slip op. at 10-11 (D.V.I. Jul. 17, 1995).

The details underlying the analysis in Exhibit D--
concluding that the value of LCSDI after all
misrepresentations and fraudulent matters had been
deducted was $1,766,631 -- reflects that the Bankruptcy
Court relied on these various percentages and present
value rates, but accepted the bottom line valuation not of
Exhibit D, but of Exhibit C. With the record in this posture,
we are confident that the Bankruptcy Court and the
District Court would readily agree that the value of LCSDI
had to stem from an Exhibit D analysis and chart, and
should have been recorded as $1,766,631. This being so,
and reading the respective opinions as we believe the
authors intended them to be read, we conclude that the
value of the stock purchased by Kool Mann was

                                35

$1,766,631, and it is that figure which we have utilized in
determining the ultimate obligation of Kool Mann to the
Coffeys.

VIII. Recharacterization of Interest

As the parties’ agreement provided, and as we have
related, Kool Mann had agreed that interest would be paid
on the remaining balance due on the purchase price of
LCSDI. In October and November of 1986, Kool Mann made
interest payments of $330,000, of which $38,216 was
returned by the Coffeys as overpayment (for a total interest
payment of $291,784). These payments were continuously
characterized as interest payments until the Bankruptcy
Court’s October 2000 Opinion. At that time, the
Bankruptcy Court -- on a motion for reconsideration --
recharacterized those payments as principal payments. The
Bankruptcy Court did so on the ground that the fraud
committed by the Coffeys resulted in a reduction in the
amount owed by Kool Mann. Thus, the principal amount
due the Coffeys was not quantified or known and could
only be classed as an unliquidated sum. While prejudgment
interest is allowed on a liquidated sum, prejudgment
interest on an unliquidated sum is, under Kentucky law,
permitted only at the discretion of the court. See Brown v.
Fulton, 817 S.W.2d 899, 901-02 (Ky. App. 1991). The
upshot of this recharacterization of interest to principal was
to reduce the Coffeys’ claim in bankruptcy by an additional
$291,784.

We will affirm the Bankruptcy Court’s recharacterization
of interest payments into principal payments. In the
absence of any fraud, it is undisputed that Kool Mann
would have been contractually obligated to pay the
$291,784 in interest payments, which was based upon the
remaining principal amount. The difficulty is that in light of
the fraud and corresponding revaluation of the value of
LCSDI, the amount of interest due cannot now be
calculated the same way, as the principal amount has
become uncertain. Indeed, the only true way to calculate
contractual interest would have been to re-amortize the
installment payments of principal and interest, recalculated

                                36

to take into account the far smaller principal due from Kool
Mann after deductions for fraud had been made.

To the extent some portion of the $291,784 could be
considered payment of contractual interest, we note that
the Coffeys -- and Kool Mann, for that matter-- have not
demonstrated how we would determine what portion, if any,
of the $291,784 could be considered contractual interest
based on a reconstituted principal amount in light of the
Coffeys’ fraud. We also conclude that Kentucky law would
permit a judge to reject such interest where the contract at
issue has been permeated with fraud. Cf. Middleton v.
Middleton, 152 S.W.2d 266, 268 (Ky. App. 1941) ("in the
case of an unliquidated claim, the allowance of interest
rests in the discretion of the jury or the court trying the
case").

In this way, a much smaller portion of the $291,784
would have been contractually obligated to have been paid
as interest. To the extent any remaining amount could be
considered prejudgment interest, the Bankruptcy Court was
well within its discretion to deny such interest in toto, in
light of the many findings of fraud on the part of the
Coffeys. See Church & Mullins Corp. v. Bethlehem , 887
S.W.2d 321, 325 (Ky. 1992) ("the determination as to
whether or not to award prejudgment interest [on an
unliquidated sum] is based upon the foundation of equity
and justice.").

Moreover, the Coffeys could not expect interest on the
ultimate amount we have settled on as being due to them
from Kool Mann’s estate in bankruptcy inasmuch as any
such award would, in effect, constitute post-petition
interest which is not generally available. See 7 Collier on
Bankruptcy, P 1129.04[4][b][i][C], pp. 1129-97-98 (rev. 15th
ed. 1999) ("[U]nless the debtor is solvent, or the creditor is
oversecured, post-petition interest is not part of a creditor’s
allowed claim.").

Accordingly, we will affirm the Bankruptcy Court’s
recharacterization of interest payments into principal
payments, thereby reducing the Coffeys’ claim in
bankruptcy by an additional $291,784.

                                37

IX. Assumed Indebtedness of LCSDI

Kool Mann cross-appeals the District Court’s affirmance
of the Bankruptcy Court’s refusal to grant a credit for
payments made in connection with certain pre-existing
houseboat debt of LCSDI in the amount of $1,213,000.
Both the Bankruptcy Court and the District Court relied in
part upon the decisions of the Kentucky litigation and
Judge Fullam’s June 1995 Opinion to conclude that Kool
Mann was not entitled to this credit. While Judge Fullam’s
comments on this matter were dicta and therefore not
binding (see Section V.A., supra), the decision rendered by
Judge Forester on the assumption of debt issue in 1990,
which was never appealed, must be considered final.

In the Kentucky litigation, Judge Forester ruled that Kool
Mann was not entitled to a set-off against the purchase
price for indebtedness it assumed as part of the business.
Moore, Owen v. Coffey, No. 87-64, slip op. at P 25 (E.D. Ky.
Jan. 31, 1990). Indeed, by purchasing LCSDI’s stock, and
not just its assets, Kool Mann agreed to pay a particular
price for LCSDI as a whole -- its assets and liabilities. To
credit Kool Mann with the payments it made against this
indebtedness now would conflict with the Kentucky court’s
decision. Accordingly, we will not permit the indebtedness
credit.

X. Tax Savings Credit

Kool Mann also cross-appeals the District Court’s ruling
which reversed the Bankruptcy Court’s grant of a Tax
Savings credit to Kool Mann pursuant to the Tax Savings
Side Letter. While the parties do not dispute that the
Coffeys have received a tax benefit of $236,566.22 and both
the Coffeys and Kool Mann had agreed on the amount of
the savings, the District Court refused to credit Kool Mann
with this amount because Kool Mann had not yet made a
final "balloon payment" as contemplated by the Tax Savings
Side Letter.15
_________________________________________________________________

15. The Tax Savings Side Letter states, in its entirety (emphasis added):

       This letter shall confirm our promise as sellers under our agreement
       with [Kool Mann] of December 31, 1985 the Purchaser, to reduce

                                38

As noted, the parties agreed to pay the remaining balance
of the purchase price over five annual installment payments
of $150,000 plus a final balloon payment on September 30,
1991 of $3,250,000 ($5 million price minus $1 million
down payment minus $750,000 in installment payments).
Had there been no fraud, the $236,566.22 would have been
deducted on September 30, 1991 from the remaining
$3,250,000 payment pursuant to the Tax Savings Side
Letter. The problem now, however, is that due to the fraud
and decades-long litigation, there can be no final balloon
payment against which the Tax Savings can be offset, other
than the amount determined in bankruptcy as the amount
which Kool Mann now owes the Coffeys.

To determine that figure, we have accepted $1,766,631 as
the value of the company after fraud from which we have
thus far deducted the $1 million down payment, $291,784
principal payments after interest was recharacterized, no
installment payments (since they were not made), and no
payments for assumed indebtedness of $1.213 million
(because of the decisions rendered in the Kentucky
litigation). These deductions leave $474,847 owed to the
Coffeys by Kool Mann in bankruptcy. We conclude that this
figure now represents the final "balloon payment" to be
made by Kool Mann to the Coffeys after the fraud and
above referenced deductions have been properly accounted
for. As a result, the Tax Savings credit of $236,566.22 must
now also be subtracted from the after-fraud value, resulting
in Kool Mann owing the Coffeys $238,280.78 in
bankruptcy.

XI. Conclusion

For the foregoing reasons, we will affirm the District
Court’s October 2, 2001 judgment, other than with respect
_________________________________________________________________

       the balloon payment of $4,000,000 due and payable to us as
       "Payee" under that certain note by [Kool Mann] of December 31,
       1985 by any tax savings to us (including the partnership, Vacation
       Cruises) resulting from capital gains treatment ultimately accorded
       to the disposition of the boat assets of the partnership. Interest shall
       not be calculated on this amount if realized, but the balloon
       payment shall be adjusted to compensate the final balance due then
       under the note.

                                39

to the calculation of the Coffeys’ claim and Kool Mann’s
obligation. In that connection, as we have explained, we
hold as follows: LCSDI must be valued as $1,766,631 as a
result of the Coffeys’ fraud, not $2,288,167 as the
Bankruptcy Court and the District Court held. In addition,
we will reverse the District Court’s order which had
reversed the Bankruptcy Court on the Tax Savings issue
and we will reinstate the Bankruptcy Court’s ruling thereby
granting Kool Mann an additional credit in the amount of
$236,566.22. As discussed in Section VIII, supra , Kool
Mann is also entitled to a credit based on the
recharacterization of interest as principal in the amount of
$291,784.

Accordingly, the value of the Coffeys’ claim in the Kool
Mann bankruptcy will be calculated as follows:

- Value of LCSDI after fraud:                             $1,766,631

- Credit for down payment
       made to the Coffeys by
       Kool Mann:                      -$1,000,000

- Credit for recharacterization
       of interest as principal        -$291,784

- Credit for payments on
       assumed indebtedness of
       LCSDI:                          -$       0

- Credit for Tax Savings:              -$   236,566.22
  Total amount of deductions                             -$1,528,3 50.22

  Value of Coffeys claim in
       Bankruptcy:                                          $ 238,280.78

We will therefore direct the District Court to remand this
matter to the Bankruptcy Court with the direction that the
Bankruptcy Court record the value of the Coffeys’ claim in
the Kool Mann bankruptcy to be $238,280.78.

                                  40

AMBRO, Circuit Judge, Concurring in Part and Dissenting in
Part:

Judge Garth has written an excellent opinion, though I
respectfully disagree in two respects. In my view, the
Bankruptcy Judge erred on the "prejudgment" interest
issue and in granting Kool, Mann the tax savings credit. In
his March 1999 opinion, the Bankruptcy Judge decided
both of these questions in the Coffeys’ favor. But in a
supplemental opinion in October 2000, he reversed himself.
On these two issues, the Bankruptcy Judge should have
observed the old adage that your first instinct is often the
right one.

A. Prejudgment interest

Kool, Mann argues that a payment of $291,784 that it
tendered to the Coffeys in October 1986 was a payment
against principal on its promissory note, which should be
set off against the Coffeys’ bankruptcy claim. The Coffeys
maintain, however, that this was an interest payment that
Kool, Mann owed them under the promissory note. The
Bankruptcy Judge initially agreed with the Coffeys and
classified the payment as interest. However, he
subsequently had a change of heart and decided to credit
the payment against principal and reduce the Coffeys’ claim
by that amount. He justified this new outcome by relabeling
the $291,784 payment as "prejudgment interest" and
noting that he had decided in his March 1999 opinion not
to grant the Coffeys prejudgment interest on their
bankruptcy claim.

The Bankruptcy Judge erred because, under Kentucky
law (which governs this issue), the question whether to
grant prejudgment interest arises with regard to
unliquidated damages claims (often sounding in tort), not
with regard to contractual disputes where the contract
clearly requires specific interest payments. See State Farm
Mut. Auto. Ins. Co. v. Reeder, 763 S.W.2d 116, 119 (Ky.
1988). Interest due on a promissory note before the debtor
files for bankruptcy is part of the creditor’s claim against
the debtor in bankruptcy just like any other prepetition
amount owed on the note. 11 U.S.C. S 502(b). The decision
to award required interest payments on the valid portion of

                                41

a contractual claim is not a discretionary matter. Thus,
while the Coffeys cannot keep the whole interest payment
because most of it was based on a fraudulent principal
amount, they should plainly be allowed to keep any interest
due on the non-fraudulent portion of the company’s
purchase price.

Accordingly, I would remand to the Bankruptcy Judge to
calculate how much interest would have been owed, under
the promissory note, on $766,631 (which equals the
company’s legitimate market value of $1,766,631 minus the
$1,000,000 down payment). A remand for this discrete
purpose would not consume much time or resources, as
the parties would not be permitted to reargue any other
aspect of this case. While it is easier to dispose of this issue
ourselves by tossing out the entire interest payment, the
portion of the $291,784 that represents non-fraudulent
interest could be a significant sum of money, and there is
inherent value to our reaching correct outcomes. Unless we
are prepared to make the calculation ourselves, the Coffeys
have the right to have this issue resolved properly by the
Bankruptcy Judge.

B. The Tax Savings Credit

On the first appeal to Judge Fullam, he opined that Kool,
Mann was not entitled to a credit pursuant to its agreement
with the Coffeys that it would receive the benefit of any tax
savings that the Coffeys realized by structuring the deal as
a stock purchase rather than an asset purchase. On
remand, Judge Gindin initially ruled that he was
constrained by this outcome and denied Kool, Mann the
$236,522 tax savings credit it requested. Somewhat
inexplicably, however, Judge Gindin changed his mind in
his October 2000 opinion and granted Kool, Mann the
credit. On appeal to the District Court, Judge Brotman
reversed him on the basis that his decision did not comply
with the original appeal to Judge Fullam. We should affirm
that decision (albeit for a different reason).1
_________________________________________________________________

1. As can be seen below, my disagreement is on the merits, for I agree
with the majority that Judge Fullam’s statements on this issue were not
binding on the Bankruptcy Court.

                                42

Under the plain language of the Tax Savings Side Letter,
Maj. Op. at n.15, Kool Mann is not entitled to a tax savings
credit. The Side Letter provides for a reduction of the
"balloon payment of $4 million . . . adjusted to compensate
the final balance due then under the note" for"any tax
savings to us . . . resulting from capital gains treatment
ultimately accorded to the disposition of the boat assets of
the partnership." (Emphasis added.) The Bankruptcy Judge
concluded that the Coffeys realized tax savings in 1986 due
to "depreciation recapture." Depreciation recapture is of
course not capital gains treatment.2 To my knowledge there
has not been a capital gains tax savings, and thus Kool
Mann is not entitled to the $236,522 tax savings credit.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit
_________________________________________________________________

2. Depreciation recapture arises when a taxpayer sells a capital asset
after it is depreciated. Depreciation recapture is the portion of the
amount realized from the sale of a capital asset that is equal to the total
depreciation deduction reported for the asset. Depreciation recapture is
subject to tax at ordinary income tax rates. Capital gains occur when a
taxpayer sells a capital asset for more than what the taxpayer paid for
it. Generally, the difference in the amount received by the taxpayer for
the sale of the capital asset, over the amount paid by the taxpayer when
the asset was purchased, is subject to capital gains tax. With capital
gains, tax savings result because the rate of tax imposed on the gain
received is lower than ordinary income tax rates.

                                43