In re Perry County Foods, Inc.

Decision Date02 September 2004
Docket NumberBankruptcy No. 96-03768-TRB-7.,Adversary No. 98-0006.
Citation313 B.R. 875
PartiesIn re PERRY COUNTY FOODS, INC., Debtor. James G. Henderson, Trustee, Plaintiff, v. A. Scott Andrews, Marvin P. Bush, Dwayne L. Shipley, Winston Capital Fund I, L.P., Winston Partners Group, L.P., Andrews-Bush, Inc., Perry County Pizza Company, LLC, d/b/a The Original Gourmet Pizza Company, Perry County Cookie Company, LLC d/b/a The Original Gourmet Cookie Company, Cardinal Consulting Services, Inc., Charles V. Chaffee, Karen J. Chaffee, Clifford W. Chaffee, and Kenneth R. Edelbrock, Defendants.
CourtU.S. Bankruptcy Court — Northern District of Alabama

Robert L. Shields, III, The Shields Law Firm, Birmingham, AL, for Debtor.

Memorandum Opinion On Andrews/Bush/Winston Defendants' Motion In Limine to Exclude Evidence and Deferral of Entry of Summary Judgment.

THOMAS B. BENNETT, Bankruptcy Judge.

I. Arabia to Helipolis, the Returns and a Flyover View. That Which is at Issue: Evidence or Not and the Reach of Generalizations.

Our legal system has compartmentalized evidence of what has occurred into categories. One is evidence not accorded recognition by courts due to (a)(i) a lack of a sufficient materiality and/or degree of relevancy, see, e.g., Fed.R.Evid. 401 and 402, (ii) incompetency, including privileges, see, e.g., Fed.R.Evid. 500, 600, 700, 800, 900, and 1000 series, (iii) procedure, see, e.g., Fed.R.Evid. 104 and 105, and (iv) hearsay, see, e.g., Fed.R.Evid. 800 series, or (b) extrinsic reasons, those outside the scope of the Federal Rules of Evidence, such as a constitutional or statutory reason, see, e.g., Fed.R.Evid. 402, or other exclusion basis, see Frederick Schauer, Profiles, Probabilities, and Stereotypes, Harvard University Press 131-54 (2003). The opposing is evidence which has been decided to be of the sort which assists, in a law recognized, permissible way, in the demonstration of the occurrence or not of what has transpired. This is the class of evidence which courts and legal commentators refer to as admissible. Admissible evidence is the antecedent to proving the existence of the two, indispensable parts of a claim enforceable in the federal courts of this country: an injury recognized by the law coupled with legally cognizable damages. Without a sufficient degree of evidence of the kind allowed under our jurisprudence to be used to prove both such an injury and damages, no lawsuit is sustainable. Part of what this Court has to do to resolve the legal disputes in this case is apply rules, the Federal Rules of Evidence, which are generalizations dividing the universal set of evidence into the subsets of admissible and inadmissible, along with case law developed generalizations on how these rules are to be implemented.

The evidentiary matters presented in this case compel an inquiry regarding the ability of the trustee of a bankruptcy estate to utilize certain testimony and a report to, at least in part, prove the infliction and extent of the financial harm to Perry County Foods, Inc. (hereinafter sometimes "Foods") supposedly caused by the defendants. More specifically, it is whether an accountant's testimony and the contents of his report proposed for use by Foods' Chapter 7 trustee at trial is of the needed legal character and quality to prove (a) damages arising from (i) contended fraudulent transfers under 11 U.S.C. § 548(a)(1)(A) & (B) and a preference count under 11 U.S.C. § 547(b) (2004) for both of which a recovery may be obtained under 11 U.S.C. § 550(a) (2004), (ii) asserted conversions of property, and (iii) an alleged conspiracy to accomplish the contended fraudulent transfers, one of the preferences, and the conversions, and (b) what is part of that which is required to prove a constructively fraudulent transfer, lack of reasonably equivalent value, under § 548(a)(1)(B)(i) of the Bankruptcy Code, 11 U.S.C. § 548(a)(1)(B)(i) (2004). By a motion in limine, the defendants, A. Scott Andrews, Marvin P. Bush, Dwayne L. Shipley, Winston Capital Fund I, L.P., Winston Partners Group, L.P., Andrews-Bush, Inc., Perry County Pizza Company, L.L.C. d/b/a The Original Gourmet Pizza Company, Perry County Cookie Company, L.L.C. d/b/a The Original Gourmet Cookie Company, and Cardinal Consulting Corporation (hereinafter collectively sometimes "the Andrews/Bush/Winston Defendants") along with Charles V. Chaffee, Karen J. Chaffee, Clifford W. Chaffee, and Kenneth R. Edelbrock (hereinafter collectively sometimes "the Chaffee/Edelbrock Defendants"), seek to exclude the expert's testimony and the contents of his report from the class which the law views as admissible evidence.

Several of the unique aspects of the trustee's case are his premising of the constructively fraudulent transfer cause of action on Foods' sale of all of its products to certain of the defendants and the methodology utilized to prove liability and damages. The trustee's accountant's testimony and the contents of his report contain another singular characteristic in the fraudulent transfer context: utilization of indirect evidence of the value of property asserted to have been transferred as a substitute for direct evidence of both the constructively fraudulent transfer claims and damages. For reasons demonstrated by testing of the accountant's report and testimony using microeconomic theory and its competitive market analytical tools added to the more standard, expert witness evidence admissibility rules and their case law implementations, the trustee's attempt to prove indirectly that which is usually demonstrated directly requires that the trustee's contended expert's testimony and the contents of the his report be deemed inadmissible evidence. Coupled with this ruling is another which is that the accountant proffered as an expert witness is not one for all of the purposes the trustee offers his testimony and report.

This Court's holding is not a per se rejection of use of indirect evidence to establish reasonably equivalent value or damages arising from a constructively fraudulent transfer. Rather and in some instances where done properly, indirect evidence may be admissible for each purpose. In this case, the indirect evidence simply does not meet the law's prerequisites for inclusion in the category called admissible evidence. In the terminology of one commentator, the testimony and report contain generalizations which are non-universal by definition or empirical evidence. They are also not within the classification of the subset of generalizations which are empirically accurate regarding the traits of the majority of the group or a subclass of members of a class compared to the class as a whole. These are the classifications of generalizations which meet a minimal degree of soundness to be relevant evidence. Unfortunately, the trustee's proffered accounting testimony and report fall into the category of spurious generalizations because the contents are empirically unsound and their conceptual foundations sit on unreliable bookkeeping. This proposed expert witness evidence is, therefore, irrelevant and inadmissible. See Frederick Schauer, Profiles, Probabilities, and Stereotypes, Harvard University Press 3-13 (2003).

Flowing from the determination that this evidence is to be relegated to the grouping denominated inadmissible is a further outcome. It is that summary judgment may be granted against the trustee on counts one, two, three, and six based on the striking of the trustee's proof of damages for the fraudulent transfer claims, one of the preference counts,1 the conversion, and the conspiracy claims leaving the trustee without legally competent evidence of the necessary damage component for maintaining these causes of action.2 Pending a status conference to ensure that the trustee has no substitute for the Hart report and testimony, entry of summary judgment is deferred.

II. The Iterations: The Palm Bird, Five Centuries, and Egypt: Ashes to Ashes, Dust to Dust, or Bjn to Phoinix to Fenix to Phenix to Phoenix.3

A. Initial Resurrections: Sale of All and Assumption of Some.

Foods has had a relatively short existence. Yet, the products which it provided were made by various predecessor and successor entities over a longer time frame. Indeed, the no less than four entities producing like products in the same manufacturing facilities evidence the phoenix-like existence of the pizza, cookie, and fundraising businesses each of these entities undertook. However and unlike the phoenix of Egyptian lore, consumption of Foods by bankruptcy foretold the beginning of the end of the string of resurrections. For not long after Foods' bankruptcy case filing in 1996, each of its terminal successors, Perry County Pizza Co., LLC, Perry County Cookie Co., LLC, Delicom Foods, Inc., and Perry County Fundraising, Inc. was unable to operate profitably and went out of business.

In the phoenix's legend as relayed by Herodotus, it had contacts with at least two locations. It lived in the Arabian desert for no less than five hundred years before its self-consumption by flames and on a subsequent birth the depositing of the former's ashes in another place, the Temple of the Sun in Heliopolis. Likewise, Foods had two primary geographic contacts. Although Foods had Birmingham, Alabama as the location of its corporate headquarters, the locus of its operations and many of the acts complained of by Foods' trustee occurred and/or revolved around its Ohio production, distribution, and sales activities. Over the course of its existence and in the choice of law usage of the word, Foods' pre-bankruptcy activities involved numerous and significant contacts with both Ohio and Alabama.

(1) Bjn to Phoinix — Cheese to Perry County Foods, Inc. # 1.

The first incarnation was in 1986 when four of the defendants in this adversary proceeding, Charles V. Chaffee, Karen J. Chaffee, Clifford W. Chaffee (hereinafter collectively...

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