In re Gourley v. Usery, 8
| Decision Date | 16 December 1999 |
| Docket Number | 8,99-6048 |
| Parties | In re: MARY BETH USERY, Debtor. EWING B. GOURLEY and CAROL L. GOURLEY, Plaintiffs-Appellants, v. MARY BETH USERY; STEVEN USERY; and MARK GARDNER, Defendants-Appellees. MARY BETH USERY; STEVEN USERY; MARK GARDNER, Trustee of the Shawn Usery Trust and the Stephanie Usery Trust; and WILLIAM HART, Trustee Under Certain Deeds of Trust, Plaintiffs - Appellees, v. EWING B. GOURLEY; CAROL L. GOURLEY; E.B.G. HEALTH CARE III, INC.; E.B.G. HEALTH CARE IV, INC.; HEALTH CARE RETIREMENT VILLAGE, INC.; and HEALTH CARE LAUNDRY SERVICES, INC., Defendants-Appellants.United States Bankruptcy Appellate Panel FOR THE EIGHTH CIRCUIT Submitted: |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Eighth Circuit |
Appeal from the United States Bankruptcy Court for the Western District of Missouri
Before WILLIAM A. HILL, SCOTT, and DREHER, Bankruptcy Judges.
Ewing and Carol Gourley ("Appellants") appeal from the order of the bankruptcy court1 calculating damages in their fraud case after remand from the Eighth Circuit Court of Appeals for a new trial limited solely to that issue. The facts of this case are set forth in the Eighth Circuit's opinion in Gourley v. Usery (In re Usery), 123 F.3d 1089 (8th Cir. 1997), and will be expanded below only to the extent necessary for the issues presently on appeal.
On May 1, 1989, Appellants purchased two nursing homes known as Northside Nursing Center ("Northside") and Ozark Nursing and Care Center ("Ozark") from Central Health Care Centers, Inc., which was owned by Appellees Mary Beth Usery, her then-husband Steve Usery, and a trust for the benefit of their children ("Appellees"). The terms of the transaction provided that the Appellants would pay a total of $8 million for the business. The Appellants agreed to assume debts of the business totaling $4,158,986.74 and signed a promissory note in favor of the Appellees for the remaining portion of the purchase price ($3,841,013.26). The Appellants agreed to the purchase on the representation that the cash flow for the 15 month period that included 1987, after service of existing debt, was approximately $1.2 million, or $960,000 annually. The Appellees further represented that, although complete financial records were not yet available, cash flow in 1988 was substantially the same as 1987. Appellants determined, based on these representations, that the cash flow would be sufficient to pay the current expenses, the assumed liabilities, and the promissory note, while still allowing them to earn a profit. Appellants were aware that, due to certain management problems, Northside was operating under a consent agreement with the state during part of 1988.
Due to cash flow problems with the business, the Appellants stopped making full payments on the promissory note and eventually began missing payments altogether. Because Mary Beth Usery depended on the income from the promissory note, she filed a Chapter 11 bankruptcy case on February 17, 1992. The Appellants, claiming that the Appellees had defrauded them in the sale of the business, filed an adversary proceeding to cancel the promissory note and determine the dischargeability of damages arising out of the fraud. The Appellees also filed an adversary proceeding seeking a judgment against the Appellants in the amount of the promissory note. The two adversary proceedings eventually were joined and tried before the Hon. Karen M. See.
At the end of the trial Judge See orally found that the Appellees had committed fraud in connection with the sale of the business. She found, in relevant part, that the Appellees had misrepresented the business's cash flow in 1988 as being substantially the same as the cash flow in 1987 when, in fact, it was significantly lower. She tentatively found that the damages at least equaled the amount of the promissory note. She later ordered entry of judgment for the Appellants. In her written opinion, she found that damages actually totaled $5,470,775.57. Benefit of the bargain damages, which Judge See defined as the difference between the actual value of the business and the price paid, totaled $2,697,000.26.2 In reaching this sum, she specifically adopted the valuation of the business by Appellants' expert, who concluded that the actual value was $5,175,000.00, based on the average cash flow for 1985, 1986, and 1988 divided by a capitalization rate of 16.9% for Ozark and 18.7% for Northside. She also agreed with the Appellants' expert that the cash flow for 1987 should not be included in the calculation because that year was atypical. After the damages were set off against the promissory note, judgment was entered in favor of the Appellants in the amount of $1,629,762.31.
Appellees appealed the decision to the United States District Court for the Western District of Missouri, which affirmed. Appellees then appealed to the Eighth Circuit Court of Appeals. The Eighth Circuit affirmed as to the liability of the Appellees, but found several errors with respect to the damages. Most importantly for the present appeal, the Court found that the bankruptcy court used an improper formula for calculating benefit of the bargain damages. Instead of the difference between the price paid and the actual value, the Eighth Circuit concluded that the proper measure of damages was the difference between the value of the business had it been as represented and the actual value. The Court remanded the case for a new trial on the issue of damages. The instructions specifically provided:
On remand, the Bankruptcy Court must determine the difference between the actual value of the nursing homes and the value of the homes as represented, using the same capitalization rate for each part of the equation. In other words, the court must use the same process to calculate both valuation figures, changing only the cash-flow numbers. Because valuation is a subjective art, we are unable to make a specific finding as to damages on appeal, but we note that each of the illustrative calculations we have undertaken, including the example presented in [Appellees'] reply brief, has yielded benefit-of-the-bargain damages of less than $600,000.
Gourley v. Usery, 123 F.3d 1089, 1095 (8th Cir. 1997). In its conclusion the Court further stated:
Because of several errors in the calculation of damages, a new trial limited to the issue of damages is required. The judgment of the District Court is affirmed as to liability and reversed as to damages, and the case is remanded with instructions to remand to the Bankruptcy Court for further proceedings in accordance with the opinion.
On remand, Judge See entered an order recalculating the damages without conducting a new trial. In this order, Judge See concluded that the value of the business as represented was $8.2 million, and the actual value was $5,919,983.00. Thus, she found benefit of the bargain damages totaled $2,280,017.00. After adding other damages that are not at issue on appeal, Judge See set off the sum against the promissory note. Because the outstanding amount of the promissory note exceeded the total damages, Judge See ordered entry of judgment in favor of the Appellees in the amount of $462,746.13.
After Judge See left the bench, the case was transferred to Hon. Arthur B. Federman, and the Appellees moved for a new trial on the issue of damages. Judge Federman granted the motion because no retrial had been held, which he found violated the Eighth Circuit's instructions on remand.3 In the order granting the motion for a new trial, the court stated:
[B]ased on the holding of the Eighth Circuit, the matters to be decided at the new trial have been carefully circumscribed. In the interest of fairness and judicial economy, this Court does not intend to admit evidence as to the factual findings previously made by Judge See and not disturbed on appeal.
The second trial was held on May 6, 1999. Each side called an expert witness to testify as to both the actual and represented value of the business. The Appellants' expert calculated the two values based solely on the actual and represented cash flow for 1988 and a capitalization rate of fourteen percent. After making adjustments to the actual value for what he described as suppressed nursing costs and laundry expenses, the expert concluded that the damages would total $7,363,765.00. The bankruptcy court rejected this expert's opinion as defying common sense because it rendered the business nearly valueless even though it continued to operate and had successfully refinanced its mortgage. The court observed that such a value would mean that the Appellees, as the sellers, should have paid the Appellants to purchase the business from them and assume the debt. It further found no justification for the adjustments made by the expert. Finally, the court also noted that the expert was not independent (he had previously done and continued to do other work for the Appellants) and was not an MAI appraiser.
Appellees called an MAI appraiser who specialized in appraising nursing homes. He figured the actual and represented value based on the average cash flow of the two nursing homes for 1985 through 1988. He weighted the figures to account for external circumstances for each year and determined the value based upon a capitalization rate of fifteen percent. This expert concluded that the Appellants suffered benefit of the bargain damages in the amount of $390,854.87. The following chart summarizes his opinion, which the bankruptcy court adopted as its calculation of damages.
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Stalnaker v. Allison (In re Tri-State Fin., LLC), BAP Nos. 14–6018
...whether the bankruptcy court exceeded our mandate is a question of law and is thus subject to de novo review. Gourley v. Usery (In re Usery), 242 B.R. 450, 456 (8th Cir. BAP 1999) (citation therein), aff'd 242 F.3d 378 (8th Cir.2000).When a case has been decided ... on appeal and remanded, ......