Opinion
Case No. 01-50545.
December 10, 2004
MEMORANDUM OPINION
I. Introduction
Bernard Katz, as liquidating supervisor (the "Liquidating Supervisor") under a confirmed plan in this Chapter 11 case, is before the court on the Motion for Estimation of Thomas-Related Claims Pursuant to Provision 7.4 of the Plan filed in this case on January 29, 2004 (Doc. 1723). The motion asks the court to estimate, for purposes of distribution, the claims (the "Thomas Claims") asserted by the R. David Thomas Trust U/A Dated 8/10/1997 (the "David Thomas Trust"), the Estate of R. David Thomas (the "David Thomas Estate"), and the Estates of R. David Thomas and I. Lorraine Thomas (the "David and Lorraine Thomas Estates"). These claims are the same amounts and arise from the same transactions as the claims that these parties have asserted in the related case of Wallace G. Wilkinson ("Mr. Wilkinson"), Case No. 01-50281, in this court. The question here is whether this debtor is liable, on the basis of fraud, for these sums that it neither borrowed nor guaranteed.
References to "Doc. ___" are references to the document number in the court's Case Management/Electronic Case Filing system. When a filing is divided into parts, the reference to the document number will be followed by a reference to the part number ("Part ___").
On May 25, 2004 the court entered an Order (Doc. 1779) determining that it would estimate the claims and would establish a summary procedure therefor. On June 18, 2004 the court entered an Order (Doc. 1786) scheduling an estimation hearing for October 27, 2004 and outlining the procedure. The procedure included the presentation of direct evidence by stipulation, affidavit, or deposition transcript, with the parties having an opportunity to cross-examine witnesses at the hearing. On July 23, 2004 the court entered an Order (Doc. 1803) resolving as follows two issues of law with respect to which the parties had requested a ruling in advance of the hearing:
IT IS HEREBY ORDERED THAT the Thomas claimants' claim under the Racketeer Influenced and Corrupt Practices Act is valueless and that any tort damages suffered by them may be allocated between and among them, the debtor, and third parties in accordance with the parties' relative fault. Accordingly, the scope of the evidentiary hearing scheduled for October 27, 2004 on the Motion for Estimation of Thomas-Related Claims Pursuant to Provision 7.4 of the Plan that Bernard Katz as liquidating supervisor filed in this case on January 29, 2004 is hereby limited to the Thomas claimants' claim for common law fraud and the liquidating supervisor's defenses thereto.
The hearing was conducted as scheduled, but the hearing consisted solely of argument in that neither party took advantage of the opportunity to cross-examine the opponent's witnesses.
The court has considered the admissible evidence and the briefs and arguments of counsel, and now estimates that the claims of the David Thomas Trust, the David Thomas Estate, and the David and Lorraine Thomas Estates (collectively, the "Thomas Claimants") for common law fraud have no value for the reasons set forth below. II. Evidentiary Objections A. Introduction
The Revised Second Amended Joint Consolidated Chapter 11 Plan of Liquidation [etc.] confirmed in this case on May 20, 2002 (the "Plan") authorized the court, after estimating a claim, to treat the estimated value as either the allowed amount of the claim or a maximum limitation on the claim. In light of the court's determination that the Thomas Claims have no value, it is not necessary to make an election regarding the treatment of the claims.
At the outset, the court must address the set of Objections of Bernard Katz, Liquidating Supervisor for Wallace's Bookstores, Inc., to Thomas Claimants' Proposed Documentary Evidence and Deposition Testimony that was filed on October 18, 2004 (Doc. 1842). After reviewing the objections and the Thomas Claimants' responses thereto (Doc. 1849) and hearing the arguments of counsel, the court will sustain the objections in part and overrule them in part.
The Thomas Claimants did not object to any evidence offered by the Liquidating Supervisor.
B. Conclusions and Unfounded Speculation
The bulk of the objections (nos. 2, 3, and 18) assert that portions of the affidavits and testimony of R.L. Richards ("Mr. Richards") should be excluded because they contain conclusions and unfounded speculation, rather than facts. Rule 43(e) of the Federal Rules of Civil Procedure, made applicable in bankruptcy cases by Rule 9017 of the Federal Rules of Bankruptcy Procedure, provides: "When a motion is based on facts not appearing of record the court may hear the matter on affidavits presented by the respective parties, but the court may direct that the matter be heard wholly or partly on oral testimony or depositions." Rule 43 does not prescribe the form of affidavits, but Rule 56(e) does and the court concludes that it is appropriate to apply the requirements of the latter provision because this claims estimation procedure is closely akin to a motion for summary judgment — particularly since neither party elected to present any "live" cross-examination of witnesses' whose testimony was presented by affidavit or deposition transcript.
These objections challenge the admissibility of Paragraphs 4-9 of the Affidavit of R.L. Richards that was filed on August 16, 2004 (Thomas Ex. 1) (Doc. 1807, Part 2, pp. 2-5) (the "First Richards Affidavit"), Pages 24-25 and 37-38 of the transcript of the Rule 2004 examination of Mr. Richards taken on July 30, 2003 (Thomas Ex. 2) (Doc. 1843, Part 2, pp. 20-21, 32-33) (the "Richards 2004 Transcript"), and Paragraphs 12 and 13 of the Affidavit of R.L. Richards that was filed on October 5, 2004 (Doc. 1813, Part 2, p. 3) (the "Second Richards Affidavit").
Rule 56(e) provides: "Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein." An affidavit does not comply with the rule unless it is "comprised of something more than `rumors, conclusory allegations and subjective beliefs.'" Chiles v. Cuyahoga Comm. College, 215 F.3d 1325 (Table), 2000 WL 687644, at *3 (6th Cir. 2000) (quoting Mitchell v. Toledo Hosp., 964 F.2d 577, 584-85 (6th Cir. 1992)); accord, e.g., Franks v. Ky. Sch. for the Deaf, 956 F. Supp. 741, 751 (E.D. Ky. 1996), aff'd, 142 F.3d 360 (6th Cir. 1998). Likewise, speculative statements may not be considered on a motion for summary judgment. E.g., Stagman v. Ryan, 176 F.3d 986, 995 (7th Cir. 1999); Thornhill Pub. Co. v. Gen. Tel. Elecs. Corp., 594 F.2d 730, 738 (9th Cir. 1979).
The court will now turn to the specific statements that the Liquidating Supervisor challenges. First Richards Affidavit Paragraph 4 (Doc. 1807, Part 2, p. 2). The latter part of this paragraph states that Wallace's Bookstores, Inc. (the "Debtor") participated in a Ponzi scheme and that R. David Thomas ("Mr. Thomas") would not have made or guaranteed loans to or for Mr. Wilkinson had he known the Debtor's true financial condition. The extent of the Debtor's participation in Mr. Wilkinson's course of business (whether or not properly characterized as a Ponzi scheme) must be shown by evidence of specific acts, not conclusions, so these statements will be excluded. Mr. Richards's opinion regarding Mr. Thomas's reliance can be considered, Fed.R.Evid. 701, but will be viewed in light of Mr. Thomas's own testimony with respect to that issue. Mr. Richards's statement regarding his own reliance will be given greater weight, to the extent that his (as opposed to Mr. Thomas's) reliance is pertinent to this matter.
First Richards Affidavit Paragraph 5 (Doc. 1807, Part 2, p. 2). This paragraph states that Mr. Wilkinson was speaking on behalf of the Debtor in making false representations to Mr. Thomas and Mr. Richards. Whether or not Mr. Wilkinson was acting within the scope of his agency must be shown by evidence of specific facts, not conclusions, so this statement will be excluded.
First Richards Affidavit Paragraph 6 (Doc. 1807, Part 2, p. 3). In this paragraph, Mr. Richards states that "he believed and understood that Wallace Wilkinson was speaking on behalf of Wallace's Bookstores, Inc., in making [certain statements] to me." The court will admit this statement to the extent that Mr. Richards's belief and understanding is relevant to the matters before the court but not, as explained above, to show that Mr. Wilkinson was in fact acting as agent for the Debtor. Again, the statement set forth in this paragraph regarding reliance will be admitted, but may not be given significant weight due to Mr. Thomas's own testimony.
First Richards Affidavit Paragraph 7 (Doc. 1807, Part 2, pp. 3-4). Statements regarding reliance will be admitted and statements regarding Mr. Wilkinson making representations as agent for the Debtor will be excluded for the reasons set forth above.
First Richards Affidavit Paragraph 8 (Doc. 1807, Part 2, p. 4). Conclusions that the Debtor "assisted and conspired" in Mr. Wilkinson's course of business will be excluded for the reason set forth above.
First Richards Affidavit Paragraph 9 (Doc. 1807, Part 2, pp. 4-5). Mr. Richards's opinion that Mr. Thomas relied on financial statements will be admitted. Conclusions regarding Mr. Wilkinson acting as agent for the Debtor, that his knowledge was imputed to the Debtor as a matter of law, and that the Debtor participated in the transactions in question will be excluded.
Richards 2004 Transcript Pages 24-25 (Doc. 1843, Part 2, pp. 20-21). In this passage, Mr. Richards again stated his belief regarding Mr. Wilkinson speaking on behalf of the Debtor. Those statements will be admitted, to the extent that Mr. Richards's belief is relevant. Richards 2004 Transcript Pages 37-38 (Doc. 1843, Part 2, pp. 32-33). In this passage, Mr. Richards stated his interpretation of Mr. Wilkinson answering the telephone in his office during business hours as an affirmative representation that statements made during the conversation are made in a business capacity. Again, to the extent that Mr. Richards's inference is relevant, it will be admitted. Second Richards Affidavit Paragraph 12 (Doc. 1813, Part 2, p. 3). Statements in this paragraph regarding Mr. Wilkinson acting as agent for the Debtor will be excluded.
The court notes that, even if it found that such an inference was reasonable, it is unclear that the "business" capacity in which Mr. Wilkinson was speaking was that of the Debtor, as the Liquidating Supervisor has introduced evidence that Mr. Wilkinson had other businesses and that his office was not located at the Debtor's business premises. ( See Aff. of Donald A. Schmiedt ¶¶ 7-9 (Doc. 1810, Part 2, pp. 43-44).)
Second Richards Affidavit Paragraph 13 (Doc. 1813, Part 2, p. 3). The statement in this paragraph regarding Mr. Wilkinson acting as agent for the Debtor will be excluded. Conclusions that Mr. Wilkinson and the Debtor knew that certain representations were false and that both intended that Mr. Thomas, I. Lorraine Thomas ("Ms. Thomas"), and Mr. Richards rely on the statements will be excluded as speculation. Statements regarding reliance by Mr. Thomas and Ms. Thomas will be admitted.
C. Depositions Unattended by Liquidating Supervisor or Debtor
Several other objections (nos. 7, 11, and 12) assert that certain deposition transcripts should be excluded because "[n]either WBI nor Katz had an opportunity to attend this deposition." This issue is governed by Rule 32(a) of the Federal Rules of Civil Procedure, made applicable in bankruptcy contested matters by Rules 9014(c) and 7032 of the Federal Rules of Bankruptcy Procedure. Rule 32 permits the use of depositions at a trial or upon the hearing of a motion by certain parties for certain purposes but only "against any party who was present or represented at the taking of the deposition or who had reasonable notice thereof." "The rule implies a principle of fairness requiring that the opposing party have the right or opportunity to be present at the deposition." Bobb v. Modern Prods., Inc., 648 F.2d 1051, 1055 (5th Cir. 1981). While it is true that the Liquidating Supervisor could compel the attendance of the witnesses at the hearing for cross-examination, "opportunity to observe demeanor is what in a large measure confers depth and meaning upon oath and crossexamination." Fed.R.Evid. 804 advisory committee's note. In any event, the rule allows of no exceptions. Accordingly, the transcripts of the depositions of Messrs. Cardin, Anderson, and Jeff Wilkinson and of Ms. Clarke will be excluded. D. Hearsay, Lack of Foundation, Lack of Cross-Examination
These objections challenge the admissibility of the transcripts of the depositions of Gary Cardin (Thomas Ex. 16) (Doc. 1843, Part 17, p. 15 — Part 18, p. 2), Lois Clarke (Thomas Exs. 17, 18) (Doc. 1843, Part 18, pp. 3-27, Part 18, p. 28 — Part 19, p. 6), Roger Anderson (Thomas Ex. 22) (Doc. 1843, Part 21, p. 46 — Part 22, p. 7), and Jeff Wilkinson (Thomas Ex. 23) (Doc. 1843, Part 22, pp. 8-14). The objections (nos. 5, 6, 8, 9, and 10) to the admission of the transcripts of the depositions of L.S. Conner, Wayne Bell, and Dawn Taylor were withdrawn in open court.
Rule 804(b)(1) of the Federal Rules of Evidence provides an exception to the hearsay rule for former testimony of unavailable witnesses, but only if "the party against whom the testimony is now offered, or, in a civil action or proceeding, a predecessor in interest, had an opportunity and similar motive to develop the testimony by direct, cross, or redirect examination."
Several objections (nos. 4, 13, 14, 15, 16, and 17) seek to exclude deposition transcripts, expert reports, and other exhibits "on the grounds of hearsay, lack of foundation, and the admission of the exhibit will deny Katz the right of cross examination of the author [or witness]." The objections will be overruled to the extent that they are based on the lack of a foundation, as "foundation" is a broad term and the Liquidating Supervisor does not explain what sort of foundation he contends should be laid. The objections will also be overruled to the extent that they are based on the denial of the right of cross-examination, because the Liquidating Supervisor could have compelled the individuals' attendance at the hearing to be crossexamined. However, with one exception, the documents are excluded by the hearsay rule.
These objections challenge the admissibility of the reports of Jane Ciancanelli (Thomas Ex. 11) (Doc. 1843, Part 5, p. 21 — Part 6, p. 80), R. Wayne Stratton (Thomas Ex. 27) (Doc. 1843, Part 23, pp. 6-12), and James Kauffman (Thomas Ex. 28) (Doc. 1843, Part 23, pp. 13-23), a letter from attorney Peter Antoszyk (Thomas Ex. 30) (Doc. 1843, Part 23, pp. 34-38), and memoranda by Kathy Gotlieb (Thomas Ex. 31) (Doc. 1843, Part 23, pp. 39-40) and Jennifer Westcott (Thomas Ex. 32) (Doc. 1843, Part 23, pp. 41-43). The objections (nos. 5, 6, 8, 9, and 10) to the admission of the transcripts of the depositions of L.S. Conner, Wayne Bell, and Dawn Taylor were withdrawn in open court. Because the transcripts have been excluded for the reasons stated in Part II.C. of this opinion, the court will not consider these objections as they relate to the Cardin, Clarke, Anderson, and Jeff Wilkinson deposition transcripts.
The reports, letter, and memoranda constitute hearsay: they are written assertions not made at the trial or hearing, offered in evidence to prove the truth of the matters asserted. Fed.R.Evid. 801(a)-(c). The documents are not prior statements by witnesses whose testimony has been offered by affidavit or deposition transcript, and the Thomas Claimants do not contend that the documents constitute admissions by party-opponents. Id. R. 801(d). Nor do the Thomas Claimants contend that any exception to the rule against hearsay is applicable. See id. R. 803, 804. Rather, they contend only that the court may take judicial notice of the documents because they have been filed with the court.
In this regard, the Thomas Claimants cite United States v. Doss, 563 F.2d 265, 269 n. 2 (6th Cir. 1977). However, in Doss, the Court of Appeals took judicial notice of testimony found in the record of a related appeal. The reports, letter, and memoranda in issue here do not constitute testimony under oath, which would be admissible under the procedure outlined by the court for this summary claims estimation process. Lynch v. Leis, 382 F.3d 642, 647-48 n. 5 (6th Cir. 2004), is also distinguishable because, there, judicial notice was taken of the court's own records, not a document merely filed with the court by a party. Likewise, Lyons v. Stovall, 188 F.3d 327, 332-33 n. 3 (6th Cir. 1999), does not control here because judicial notice was taken of a brief solely for the purpose of determining whether the party had made a certain argument, and was not admitted for the truth of the matter asserted. It is simply not the law, as the Thomas Claimants contend, that any document filed in any court is admissible for any purpose.
By analogy to a summary judgment proceeding, the only papers properly considered in this matter in lieu of direct testimony would be pleadings, depositions, answers to interrogatories, admissions, and affidavits. Fed.R.Civ.P. 56(c). None of the documents in question was attached to or authenticated by an affidavit and, with one exception, none was part of a deposition transcript.
Finally, the court notes that the submission of the documents without authenticating transcripts, affidavits, or stipulations contravenes the court's own order establishing the procedure for this summary claims estimation process. Paragraph 5 of that order (Doc. 1786, p. 3) provides in pertinent part:
All documentary evidence (including pleadings, discovery requests and responses, and other papers filed with the court) shall be authenticated by a paragraph of the joint stipulation or of an affidavit of a witness's direct testimony or by deposition testimony, and true and correct copies of all documents shall be attached to the joint stipulation, affidavit, or deposition transcript, as appropriate.
The Stratton and Kauffman reports, the Antoszyk letter, and the Gotlieb and Westcott memoranda will be excluded.
The Thomas Claimants assert, on the other hand, that the Ciancanelli report is an exhibit to the transcript of one of the depositions of Sharon Bromberg and that Ms. Bromberg relied on the report. However, the Ciancanelli report is not authenticated or adopted — or even mentioned — in the excerpts of the Bromberg transcripts that the Thomas Claimants designated for the court to consider in this matter, so this report must also be excluded.
E. Miscellaneous Objections 1. Relevance
The Liquidating Supervisor asserts a provisional objection (no. 1) to "all documentary evidence and deposition testimony designated by the Thomas Claimants on the grounds of relevancy and lack of foundation since it is impossible to determine at this time what testimony will be offered by the Thomas claimants in presentation of their case." The court will disregard all evidence that is not relevant to this matter.
The Liquidating Supervisor also objects (nos. 2 and 18) to statements in Mr. Richards's affidavits that relate to whether the activity in question took place via interstate telephone, interstate wire, or U.S. Mail. The court agrees that these statements are irrelevant in light of the court's previous ruling estimating the value of the Thomas Claimants' RICO claim at zero. In re Wallace's Bookstores, Inc., No. 01-50545, 2004 WL 2785274 (Bankr. E.D. Ky. July 23, 2004).
These objections challenge the admissibility of Paragraphs 6 and 9 of the First Richards Affidavit (Doc. 1807, Part 2, pp. 3, 4-5) and Paragraphs 13, 17, and 18 of the Second Richards Affidavit (Doc. 1813, Part 2, pp. 3-4, 5).
2. Additional Hearsay Objection
The Liquidating Supervisor also objects (no. 2) to Mr. Richards's reiteration of statements allegedly made by Mr. Wilkinson. In Paragraph 6 of the First Richards Affidavit (Doc. 1807, Part 2, p. 3), the affiant states: "Wallace Wilkinson told me that the $5,000,000 loan to him on January 2, 2001, was for use by Wallace's Bookstores, Inc. in connection with a book buy for Wallace's Bookstores, Inc., to establish a college bookstore at Middle Tennessee State College [ sic]." This statement is not hearsay, because it is not offered to prove its truth, i.e., that the loan would be used in connection with a book buy, but merely to prove the fact that the statement was made. The declarant — the person whose credibility would be tested by crossexamination — is the affiant, not Mr. Wilkinson. E.g., United States v. Gibson, 690 F.2d 697, 700 (9th Cir. 1982); United States v. McDonnel, 550 F.2d 1010, 1012 (5th Cir. 1977) (citing Anderson v. United States, 417 U.S. 211, 219-20, 94 S. Ct. 2253 (1974)). This objection will be overruled.
3. Contradictory Testimony
The Liquidating Supervisor also objects (no. 2) to Paragraph 9 of the First Richards Affidavit (Doc. 1807, Part 2, pp. 4-5) on the ground that its statements regarding reliance are "at odds with Thomas's own testimony." As indicated above, the statements are admissible but any inconsistency will be considered in adjudging the credibility of the statements and the weight to be given them.
III. Factual and Procedural Background
Prior to the commencement of this case, the Debtor was one of the nation's largest suppliers of new and used textbooks and college bookstore supplies throughout North America. (Joint Stips. ¶ 27 (Doc. 1814, p. 4).) As part of its business operations, the Debtor purchased used books from students at the end of each semester, creating periodic needs for cash. ( Id. ¶ 11 (Doc. 1814, p. 3).) At all times pertinent to this matter, Mr. Wilkinson was the majority and controlling shareholder, the chairman of the board of directors, and part of the management of the Debtor. ( Id. ¶¶ 5, 6 (Doc. 1814, p. 2).) Mr. Thomas was the well-known founder of the Wendy's restaurant chain, and was a business associate and personal friend of Mr. Wilkinson's. ( Id. ¶ 32 (Doc. 1814, p. 5).) Mr. Thomas was a minority shareholder in the Debtor ( Id. ¶ 49 (Doc. 1814, p. 7)), and was on the board of directors of eCampus.com and, along with family members, an investor in eCampus.com ( Id. ¶ 44 (Doc. 1814, p. 6)), another enterprise originated by Mr. Wilkinson. Mr. Thomas died on January 8, 2002, and Mr. Wilkinson died on July 5, 2002. ( Id. ¶¶ 32, 28 (Doc. 1814, p. 5).)
On October 8, 1993 Mr. Thomas began his business dealings with Mr. Wilkinson by purchasing an interest in a $3.5 million promissory note that had been issued by Mr. Wilkinson in favor of L.D. Gorman, and that note was repaid on time. ( Id. ¶ 3 (Doc. 1814, p. 2); First Richards Aff. ¶ 3 (Doc. 1807, Part 2, p. 1).) No investigation of Mr. Wilkinson was undertaken by or on behalf of Mr. Thomas in connection with that transaction. (Dep. of Richard L. Richards, at 71 (July 31, 2001) (Doc. 1843, Part 2, p. 81.) Over the next 6½ years, Mr. Thomas directly or indirectly made 38 loans, totaling approximately $78 million, to Mr. Wilkinson and all the loans were repaid in full. (First Richards Aff. ¶ 3 (Doc. 1807, Part 2, p. 1).) No evidence has been offered that any of the Thomas Claimants ever loaned this debtor any funds.
On November 30, 2000 Mr. Thomas and Ms. Thomas signed an agreement guaranteeing the repayment of a $25 million promissory note that Mr. Wilkinson had issued in favor of The United Company. The Debtor also guaranteed the note. (Joint Stips. ¶ 4 (Doc. 1814, p. 2).) The guaranty was signed at Mr. Wilkinson's request and contrary to Mr. Richards's advice. ( Id. ¶¶ 4, 42 (Doc. 1814, p. 2, 6); Dep. of Richard L. Richards, at 85 (July 31, 2001) (Doc. 1843, Part 2, p. 85); Dep. of Richard L. Richards, at 29-30 (July 30, 2003) (Doc. 1845, Part 5, pp. 7-8).) The proceeds of the loan were deposited into Mr. Wilkinson's imprest account but, the same day, the funds were transferred to an account of the Debtor's. (Joint Stips. ¶¶ 12-14 (Doc. 1814, p. 3).) The next day, a total of $15,250,000 was transferred from the Debtor's account to Mr. Wilkinson's personal account at the same financial institution. ( Id. ¶ 15 (Doc. 1814, p. 3).) Mr. Wilkinson performed his obligations to The United Company on time through the year 2000. ( Id. ¶ 18 (Doc. 1814, p. 3).)
Mr. Thomas and affiliated entities (the "Thomas Lenders") made other extensions of credit in the form of loans to Mr. Wilkinson during the period from July 2000 through January 2001. (Second Richards Aff. ¶¶ 2-10 (Doc. 1813, Part 2, pp. 1-2).) The Thomas Claimants (which term is used herein to include their predecessors in interest, the Thomas Lenders) never requested that the Debtor execute any promissory notes or written guaranties in connection with any of the loans, and the Debtor never passed any corporate resolutions authorizing the corporation to borrow any sums from the Thomas Claimants at any time pertinent to this matter. (Joint Stips. ¶¶ 34, 36 (Doc. 1814, p. 5).) The Thomas Claimants never requested or received copies of Mr. Wilkinson's or the Debtor's state or federal income tax returns ( Id. ¶ 37 (Doc. 1814, p. 5)), or Mr. Wilkinson's personal financial statement (audited or unaudited) ( id. ¶ 38 (Doc. 1814, p. 5)), and Mr. Thomas and Mr. Richards did not see a personal financial statement for Mr. Wilkinson until after Mr. Wilkinson filed a personal bankruptcy petition ( id. ¶ 46 (Doc. 1814, p. 6)). The United Company had requested and received Mr. Wilkinson's personal financial statement, and Mr. Thomas and Mr. Richards believed that an official of The United Company withheld information about Mr. Wilkinson's finances from Mr. Thomas. ( Id. ¶¶ 68, 70 (Doc. 1814, p. 9).) The Thomas Claimants did not have communications with any of the Debtor's principal management other than Mr. Wilkinson before the loans were made or the guaranty was executed. ( Id. ¶¶ 43, 7, 29, 30, 31 (Doc. 1814, pp. 6, 2, 5).)
Mr. Richards has testified that, at some point, Mr. Wilkinson told him that the proceeds of the $5 million loan made on January 2, 2001 were to be used to establish a college bookstore at Middle Tennessee State University. (First Richards Aff. ¶ 6 (Doc. 1807, Part 2, p. 3); Richards 2004 Tr., at 33-34 (Doc. 1843, Part 2, pp. 28-29).) However, on numerous occasions, Mr. Thomas and Mr. Richards were informed that the loans made to Mr. Wilkinson were general purpose loans. (Joint Stips. ¶ 35 (Doc. 1814, p. 5).) The Thomas Claimants never asked the Debtor to execute any security agreement with respect to the Debtor's assets to secure any of the loans or the guaranty and the Debtor never did so ( id. ¶¶ 39, 40 (Doc. 1814, p. 6)); and none of the promissory notes or other loan documents relating to the Thomas Claimants contains any language requiring the loan proceeds to be used for a specific purpose ( id. ¶ 41 (Doc. 1814, p. 6)). Rather, Mr. Richards testified that Mr. Wilkinson was consistently "very explicit in his discussions" that "the loans were general purpose loans." (Dep. of Richard L. Richards, at 30 (Mar. 4, 2003) (Doc. 1845, Part 4, p. 15); see id. at 31-32 (Doc. 1845, Part 4, pp. 16-17.) Mr. Richards continued:
He made a major point, the governor made a major point, regularly with us that the loans were general obligation loans.
. . . .
The only time that he ever made a direct representation to me was when we made our last loan, where he said, he named a school and whatever, and they are going to do this and this.
You knew the activity was there before, but he always said, don't forget this is general activity loans. It was like a mantra.
( Id. at 175 (Doc. 1864, p. 7).) The Thomas Claimants knew that the loans were not collateralized and allowed greater flexibility to Mr. Wilkinson (Joint Stips. ¶ 45 (Doc. 1814, p. 6)):
Q. Did you ever develop any idea or any theory of your own why the governor had this, as you call it, a mantra or a speech about such loans being for general purposes and not tied to particular book buys?
A. No, not at this time.
Q. Did you wonder why he would make those comments?
A. A little bit, but he wanted to have the flexibility to be able to put it in the particular business that he wanted to put it in.
Whether it was the bookstores or one bookstore or the other bookstore or however he wanted to do it, he didn't want you to be in his way.
It was like you're trusting me; here's the money; I'm going to put it where it's best served.
I don't know if it was a confirmation of the reality that you were loaning the money to him and he would put it where he wants to, how he would do it, without collateral or with collateral, to give him the ability to grow the business the way he wanted to without interference. It was that, I believe, what would have been my understanding of that.
(Dep. of Richard L. Richards, at 176-77 (Mar. 4, 2003) (Doc. 1864, pp. 8-9); see Richards 2004 Tr., at 38 (Doc. 1843, Part 2, p. 33).) The Thomas Lenders did not investigate the disposition of the proceeds of the loan to The United Company. (Dep. of R. David Thomas, at 49 (Oct. 9, 2001) (Doc. 1845, Part 2, p. 34).)
The Debtor sent audited and unaudited financial statements (Doc. 1865) to Mr. Thomas as a shareholder in the Debtor. Mr. Richards has testified that he had seen financial statements for 1995 through March 2000 by the time the United Company guaranty was signed. (Richards 2004 Tr., at 17-18 (Doc. 1843, Part 2, pp. 16-17); but see Dep. of Richard L. Richards, at 240 (Mar. 4, 2003) (Doc. 1844, Part 4, p. 53).) A representative of the Debtor's outside auditing firm has admitted that the financial statements were improperly prepared in numerous respects. (Joint Stips. ¶¶ 51-67 (Doc. 1814, pp. 7-8).) It appears that Mr. Richards reviewed the statements, but that Mr. Thomas and his family did not. (Dep. of R. David Thomas, at 104 (Oct. 9, 2001) (Doc. 1845, Part 2, pp. 45-46); Dep. of Richard L. Richards, at 237-38 (Mar. 4, 2003) (Doc. 1844, Part 4, pp. 51-52).) In the course of reviewing the statements, Mr. Richards noted "substantial" loans from the Debtor to Mr. Wilkinson. (Joint Stips. ¶ 47 (Doc. 1814, p. 6).) In evaluating investment opportunities, Mr. Thomas valued his personal relationships with and trust of the individuals to whom he was lending money above any financial data or due diligence. ( Id. ¶ 48 (Doc. 1814, p. 6).) The Thomas Claimants never contacted the Debtor's outside auditors to investigate or make inquiry into any of the financial statements. ( Id. ¶ 53 (Doc. 1814, p. 7).)
The Thomas Claimants also contend that Mr. Wilkinson made certain oral representations to a representative of the Thomas Lenders regarding the use of the loan proceeds and the solvency of the Debtor. The Thomas Claimants contend that those representations were made on behalf of the Debtor, based on Mr. Wilkinson's position of ownership and control of the Debtor:
A. When he was giving me the value of Wallace's Bookstores, Inc., he was the majority shareholder, he was the chairman, he was the absolute monarch and king of Wallace's Bookstores, and he was telling me how much it was worth. I believe he was telling me as the chairman, the majority shareholder, and the chief. . . .
. . . .
Q. Okay. He didn't say explicitly, "By the way, I am speaking for Wallace's Bookstores, Inc., and here is the situation"?
A. He didn't have to because he was the chairman, the majority shareholder, and the absolute monarch of that company over the years. So he did not every time we had a conversation, have to reintroduce himself and all his titles. There were no trumpets that blew when he told me — redefining his role. Absolutely he was telling me as the operator of Wallace's Bookstores.
. . . .
Q. . . . He didn't say, "I spoke for Wallace's Bookstores"; I think that is the assumption you made because of his position.
A. Absolutely, yes, that's correct.
(Dep. of Richard L. Richards, at 24-25 (July 30, 2003) (Doc. 1845, Part 5, pp. 5-6).)
On February 28, 2001, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, commencing this case. (Joint Stips. ¶ 23 (Doc. 1814, p. 4).) On March 18, 2002 the Debtor filed an objection to the allowance of the Thomas Claims. There are three Thomas Claims: in proof of claim no. 2711, the David Thomas Trust asserts a claim in the amount of $29,009,730.27, representing the principal and interest owing by Mr. Wilkinson on promissory notes issued to the claimant or its assignors; in proof of claim no. 2712, the David Thomas Estate asserts a claim in the amount of $8,053,242.54, representing the principal and interest owing by Mr. Wilkinson on promissory notes issued to the claimant's assignor; and, in proof of claim no. 2713 (as amended), the David and Lorraine Thomas Estates assert a claim in the amount of $16,000,000.00, representing the amount paid by the claimants in satisfaction of their obligations under a guaranty of an indebtedness of Mr. Wilkinson to a third party lender, The United Company. The proofs of claim limit interest to the amounts that accrued prior to the filing of an involuntary bankruptcy petition against Mr. Wilkinson. They do not take into account any payments received on the debts in question from other sources (such as Mr. Wilkinson's bankruptcy estate), but do not include legal expenses incurred in attempting to enforce those indebtednesses.
On May 20, 2002 the court confirmed the Plan that had been proposed by the creditors' committee on March 21, 2002. Section 7.4 of the Plan provides for the estimation of claims for distribution purposes.
IV. Discussion A. Introduction 1. Standard for Claims Estimation
As the court held in its Memorandum Opinion of May 25, 2004 (Doc. 1778), it is appropriate to evaluate the likelihood that the Thomas Claimants would prevail on the merits and apply that probability to the amount of damage. See Colo. Mountain Express, Inc. v. Aspen Limousine Serv., Inc. (In re Aspen Limousine Serv., Inc.), 193 B.R. 325, 339 (D. Colo. 1996); In re Windsor Plumbing Supply Co., 170 B.R. 503, 521-22 (Bankr. E.D.N.Y. 1994); In re Farley, Inc., 146 B.R. 748, 753 (Bankr. N.D. Ill. 1992). As explained in the Windsor Plumbing case:
In actually estimating the value of a claim, many courts have taken a binary approach; all or nothing. The party that carries its argument by a preponderance generally receives either a claim value of zero if the debtor prevails, or the full value of the claim if the claimant prevails. While such approach may be appropriate for a finder of fact, we do not believe that it is appropriate for a claim estimation proceeding. A trier of fact first determines which version is most probable and proceeds from there to determine an award in a fixed amount. An estimator of claims must take into account the likelihood that each party's version might or might not be accepted by a trier of fact. The estimated value of a claim is then the amount of the claim diminished by probability that it may be sustainable only in part or not at all.
The number of possible outcomes in this case ranges from a claim value of zero to the full amount demanded. The reason for the existence of such a variation in the possible outcomes is straight forward. While the magnitude of the plaintiff's loss may be fixed, liquidated and undisputed, the extent, if any, to which The [ sic] Debtors caused such loss or otherwise may be liable therefore [ sic] clearly is not. Where the extent of the liability is in question "[t]he jury enjoys substantial discretion in awarding damages within the range shown by the evidence."
In re Windsor Plumbing Supply Co., 170 B.R. at 521 (citations omitted). The court as "estimator of claims" in this case can determine with some certainty "the likelihood that each party's version might or might not be accepted by a trier of fact," since the court would serve as trier of fact were the Liquidating Supervisor's objection to the Thomas Claims to be fully litigated. Accordingly, again, the estimation of the Thomas Claims is, under the circumstances of this case, closely akin to a summary judgment procedure — particularly in light of the parties' decision to forgo the opportunity to present "live" cross-examination at the hearing on this matter.
2. Elements of Fraud
As the court held in its Memorandum Opinion of July 23, 2004 (Doc. 1802), Kentucky law controls the Thomas Claimants' fraud claims. The Kentucky Supreme Court has stated the elements of fraud as follows:
In a Kentucky action for fraud, the party claiming harm must establish six elements of fraud by clear and convincing evidence as follows: a) material representation b) which is false c) known to be false or made recklessly d) made with inducement to be acted upon e) acted in reliance thereon and f) causing injury.
United Parcel Serv. Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999) (citation omitted); accord, e.g., Anderson v. Wade, 33 Fed. Appx. 750, 756 (6th Cir. 2002). "Fraud may be established by evidence which is wholly circumstantial." Rickert, 996 S.W.2d at 468 (citations omitted).
The Thomas Claimants rely on Restatement (Second) of Torts Section 551 and a comment thereto for the proposition that a fiduciary relationship may also give rise to an obligation to disclose information, and assert that the Debtor was a fiduciary to Mr. Thomas as a guarantor and shareholder. First, the Thomas Claimants cite no Kentucky case adopting the Restatement provision. Rather, Kentucky law is to the following effect:
[W]hen parties deal at arm's length, when there is no relation of trust or confidence between them, and no representation or statement that would have a tendency to deceive or mislead, and there are no special circumstances imposing a duty to speak, mere silence or nondisclosure of facts within the superior knowledge of one of the parties will not amount to such fraud as would authorize a rescission of the contract, or justify a denial of relief thereon.
Addison v. Wilson, 37 S.W.2d 7, 12 (Ky. 1931). The Thomas Claimants have cited no Kentucky case holding that a guarantor-principal obligor relationship is one of "trust or confidence" giving rise to a duty to speak, and the court is aware of none. Second, Mr. Thomas was a guarantor for Mr. Wilkinson, not the Debtor, so any fiduciary obligations resulting from the principal-guarantor relationship would be owed by Mr. Wilkinson, not the Debtor. Moreover, the claims in question were not incurred by Mr. Thomas in his capacity as a shareholder in the Debtor.
B. Application of Elements to Facts 1. Financial Statements
The Thomas Claimants assert that the Debtor made misrepresentations in the form of false audited and unaudited financial statements for 1998-2000 indicating that the debtor was a "growing, profitable and successful business." It does appear that the Debtor did issue the financial statements and that they were inaccurate in numerous material respects. The audited statements were prepared by independent accountants, but were disseminated by the Debtor and were based on information provided by the Debtor, and the unaudited statements were prepared by the Debtor (albeit based in part on the erroneous and otherwise improper audited statements). In addition, the financial statements were issued and disseminated knowingly.
However, the financial statements were sent to Mr. Thomas (directly or through his representatives) in his capacity as a shareholder, not as a prospective lender, and there is no evidence that Mr. Wilkinson, acting as agent for the Debtor, incorporated or referred to the financial statements in connection with the loans or guaranty. The financials may have been intended to induce Mr. Thomas to retain his stock or forbear from taking action against the Debtor's management and thus may support a securities fraud claim or derivative suit, but there is no evidence that they were intended to induce extensions of credit. Put another way, Mr. Thomas qua shareholder cannot recover for injury suffered by Mr. Thomas qua lender. See Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 501 (5th Cir. 2000) (individual could not assert fraud claim in his capacity as option holder for misrepresentations made to him as member of board of directors); see also Walker v. Choate, 14 S.W.2d 406, 407 (Ky. 1929) (representations made to plaintiff in capacity as agent do not support claim of fraud by plaintiff in individual capacity). To the extent that Mr. Wilkinson provided the Debtor's financial statements to Mr. Thomas as an inducement to obtain credit or made reference to the financials in that regard ( see Richards 2004 Tr., at 34 (Doc. 1843, Part 2, p. 29)), it was Mr. Wilkinson — not the Debtor — that used the financial statements to induce the loans to Mr. Wilkinson and the guaranty of Mr. Wilkinson's debt to The United Company. By providing the financials to Mr. Thomas as shareholder, there simply is no evidence that the Debtor intended to induce reliance by him as lender; and to the extent that the financial statements were used to induce the extensions of credit, they constitute representations by Mr. Wilkinson, not the Debtor.
The record does indicate that financial statements were provided to The United Company and were prepared, in general, to provide to creditors, but does not support a finding that financials were furnished to the Thomas Lenders in any capacity other than Mr. Thomas's capacity as a shareholder.
Mr. Richards's affidavits state that the loans and guaranty would not have been made had the false representations not been made. There does not, however, appear to be clear and convincing evidence that Mr. Thomas relied on any financial statements in extending credit to Mr. Wilkinson. Rather, the record indicates that the loans were made in reliance on Mr. Wilkinson's perceived creditworthiness, integrity, and reputation, not the financial condition of the debtor. For example, Mr. Richards testified:
Dave's method of investing was knowing the person who he was investing with. The numbers were well down the line. It was wanting to know and trust the person he was investing with.
. . .
[H]e liked the activity and investing and being in business with his friends. He enjoyed that as much as anything. He wanted to make money doing that, but it was the enjoyment he got from doing business with people that he knew and trusted.
(Dep. of Richard L. Richards, at 36, 38 (Mar. 4, 2003) (Doc. 1845, Part 4, pp. 19, 21.) Mr. Thomas himself confirmed this method of operations:
Q. Did you ever do any investigation to see if Mr. Wilkinson was telling you the truth?
A. Had no reason to do that. And the reason why — let me tell you one reason, was that people that had been around him for a long time, and I have to use Jim McGlothlin, Bryant, Milo Bryant, L.D. Gorman, who are the people, you know, who have been friends of his, known him for a long time, had no reservations about him.
Said he was honest. Been the former governor of Kentucky. Because he was a democrat there was nothing held against him. But the people — the bottom line was that people around him like him. And probably the ones that — there is probably some in Kentucky that didn't like him, but I don't think he wasn't a big majority, but he was — he was liked.
Q. And that is the reason you didn't do any further investigation of his financial affairs; is that right?
A. Right. Because I thought that these people knew what they was doing. . . .
(Dep. of R. David Thomas, at 113-14 (taken Oct. 9, 2001) (Doc. 1843, Part 6, pp. 91-92).) The lack of reliance is further demonstrated by the fact that the financial statements purport to reflect the condition of one company in which Mr. Wilkinson held stock, while Mr. Thomas neither requested nor received any information about other aspects of Mr. Wilkinson's financial affairs (other assets, liabilities, cash flow, etc.); although Kentucky courts generally do not require that reliance be "reasonable," to make a decision regarding the extension of many millions of dollars of credit to a borrower based solely on the value of one of his investments would be so unreasonable as to undermine Mr. Richards's conclusory affidavits on the issue.
There is at least one Kentucky intermediate appellate court decision holding that the reliance must be "justified . . . in the exercise of common prudence and diligence," Selke v. Stewart, 86 S.W.2d 83, 87 (Ky.Ct.App. 1935), and a panel of the Sixth Circuit has followed this holding in an unreported decision, Wells v. Huish Detergents, Inc., 19 Fed. Appx. 168, 177 (6th Cir. 2001).
The Thomas Claimants have failed to carry their burden of proving by clear and convincing evidence that the Debtor issued the false financial statements with intent to induce reliance thereon by the Thomas Lenders in their capacity as prospective lenders, and that they did in fact rely on the financial statements in deciding to extend credit to Mr. Wilkinson. Accordingly, the Thomas Claims are valueless to the extent they are based on the false financial statements.
2. Oral Representations
The Thomas Claimants also assert that representations were made orally by Mr. Wilkinson, in his corporate capacity on behalf of the Debtor, to the effect that (a) the proceeds of the $5 million loan made on January 2, 2001, would be used to establish a book store operation at Middle Tennessee State University or another Tennessee college, (b) all loan proceeds would be used by the debtor to purchase new and used books, and (c) the debtor was highly solvent and prosperous. Even assuming that the Thomas Claimants can carry their burden of proving that Mr. Wilkinson did in fact make these statements, there is no evidence in the record that he did so within the scope of his agency for the Debtor. Mr. Thomas made the loans and other extensions of credit to Mr. Wilkinson, not the Debtor. While Mr. Wilkinson may have made representations about the Debtor to Mr. Thomas or his representatives, there is no evidence — notwithstanding Mr. Richards's testimony that he believed Mr. Wilkinson was speaking on behalf of the corporation — that Mr. Wilkinson made the representations on the Debtor's behalf rather than on behalf of himself as the prospective borrower.
The mere fact that Mr. Wilkinson was a director and officer of the Debtor's is not sufficient. A corporation can act only through its agents, e.g., Caretenders, Inc. v. Commonwealth, 821 S.W.2d 83, 86 (Ky. 1991). A corporation is liable for fraud only if "the agent or servant at the time of the commission of the felony or fraud was acting within the scope of his employment, and that the misconduct naturally connects itself with the service or duty being performed for or in the name of the master or employer." Ray's Adm'rs v. Bank of Kentucky 73 Ky. (10 Bush) 344, 1874 WL 7224, at *5 (1874). Although some or all of the loans received by Mr. Wilkinson may have found their way into the coffers of the Debtor, the funds were lent to Mr. Wilkinson, not the Debtor, so it may be presumed that all representations were made by Mr. Wilkinson individually for the purpose of inducing extensions of credit to him. The Thomas Claimants have offered no evidence to rebut that presumption. See Pippenger v. McQuik's Oilube, Inc., 854 F. Supp. 1411, 1422 (S.D. Ind. 1994) (corporation is not liable for securities fraud committed by majority shareholder to induce minority shareholder to sell stock to majority shareholder). The Thomas Lenders chose to make loans to Mr. Wilkinson in his individual capacity, and may not now be heard to contend that representations made by Mr. Wilkinson to induce the loans were not made by him in his individual capacity.
Moreover, the statements regarding the use of the loan proceeds do not constitute representations at all, but were mere promises. It is clear under Kentucky law that "fraud cannot be predicated upon statements which are promissory in their nature when made and which relate to future actions or conduct." Mario's Pizzeria, Inc. v. Fed. Sign Signal Corp., 379 S.W.2d 736, 740 (Ky. 1964) (quoting 3 AM. JUR. Fraud Deceit § 38); accord, e.g., Church v. Eastham, 331 S.W.2d 718, 719 (Ky. 1960) (quoting Livermore v. Middlesborough Town-Lands Co., 50 S.W. 6, 13 (Ky. 1899)); Res-Care, Inc. v. Omega Healthcare Investors, Inc., 187 F. Supp. 2d 714, 717 (W.D. Ky. 2001). The only exception to this principle is where the promises were made with no intention of carrying them out. E.g., Major v. Christian County Livestock Market, Inc., 300 S.W.2d 246, 249 (Ky. 1957). A panel of the Sixth Circuit has summarized these principles as follows:
[F]or a misrepresentation to be fraudulent, it must relate to a present or a pre-existing fact; a promise or statement of future intent is, as a general rule, not actionable. However, if the statement of intent or promise of future action is made with no intention to perform in order to induce another to perform, a cause of action for fraud may be maintained.
Joseph v. Shamrock Coal Co., 125 F.3d 855 (Table), 1997 WL 618797, at *3 (6th Cir. 1997) (citing Brooks v. Williams, 268 S.W.2d 650, 652 (Ky. 1954); Schroerlucke v. Hall, 249 S.W.2d 130, 131 (Ky. 1952); Evola Realty Co. v. Westerfield, 251 S.W.2d 298, 300-01 (Ky. 1952)); accord, e.g., Moore, Owen, Thomas Co. v. Coffey, 992 F.2d 1439, 1448 (6th Cir. 1993). The Thomas Claimants have presented no evidence that Mr. Wilkinson, at the time he made promises regarding the use of the loan proceeds, intended to use the funds other than as promised. Thus, the statements regarding the use of the funds would not give rise to liability even if the Thomas Claimants had carried their burden of proving that the statements were made on behalf of the Debtor. See Beneficial Fin. Co. v. Lambert (In re Lambert), 21 B.R. 23, 27-28 (Bankr. E.D. Mich. 1980) (court concluded that borrower's statement that he would use portion of loan proceeds to satisfy another indebtedness did not constitute representation in absence of evidence that borrower did not intend to pay debt from advance at time promise was made).
The court in Lambert also pointed out that the lender could have protected itself by disbursing the funds directly to the other creditor, In re Lambert, 21 B.R. at 28, just as the Thomas Lenders could have protected themselves by including restrictions on the use of the funds in the loan documents or instituting controls on the disbursement and use of the loan proceeds.
The Thomas Claimants have failed to carry their burden of proving by clear and convincing evidence that the Debtor made any oral misrepresentations. It follows that the Debtor could not have made such statements knowingly or recklessly or with intent to induce reliance and that the Thomas Lenders could not have relied on any representations by the Debtor in extending credit to Mr. Wilkinson. Accordingly, the Thomas Claims are valueless to the extent they are based on Mr. Wilkinson's oral representations. 3. Injury
Since the court has determined that the probability of the Thomas Claimants' success in establishing the Debtor's liability for fraud is zero, the court need not determine the amount of damages or apply the probability of liability thereto: zero percent of any amount of damages is zero. Nevertheless, the court concludes that the Thomas Claimants have not satisfied their burden of proving the extent of their injury.
"One induced by fraudulent representations to enter into a contract is entitled to recover as damages, not only what he actually parted with, but benefits of the bargain." Investors Heritage Life Ins. Co. v. Colson, 717 S.W.2d 840, 841 (Ky.Ct.App. 1986) (citing Dempsey v. Marshall, 344 S.W.2d 606 (Ky. 1961)). The measure of damages for fraudulent inducement of a loan is (1) principal and interest, less (2) the present value of the loan at time of trial, less (3) payments already received on the loan. FDIC v. W.R. Grace Co., 877 F.2d 614, 623 (7th Cir. 1989); see First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 768 (2d Cir. 1994) (payments on fraudulently induced loan must be deducted in determining damages). But see City Bank v. Ramage, 72 Cal. Rptr. 273, 286 (Cal.Ct.App. 1968) (citations omitted) ("There is authority that, in an action for fraud and deceit, the payee of a note may recover judgment for the full amount of the loan from one not the maker of the note, whose fraud has induced the making of the loan without attempting to recover on the note and without regard to what might possibly have been recoverable on the note.").
The Thomas Claimants have presented their computations of the principal and interest on the loans and the payment made on the guaranty, but these figures are insufficient because the Thomas Claimants received distributions in Mr. Wilkinson's bankruptcy case and could conceivably receive additional distributions in that case. The Thomas Claimants assert that the total amount of the distributions is exceeded by the attorney's fees (the notes including "attorney's fee" provisions), but do not offer any specifics regarding the distributions or the attorney's fees (including a breakdown of the collections received and attorney's fees incurred by each claimant on account of each debt). Accordingly, even if there was some probability that the Thomas Claimants could prove liability for fraud, they have not carried their burden of proving the amount of damages resulting from the fraud.
C. Comparative Fault
Again, since the court has determined that the probability of the Thomas Claimants' success in establishing that the Debtor is liable for fraud is zero, the court need not determine the extent to which the fault for any loss resulting from the fraud is attributable to persons other than the Debtor. Nevertheless, the court concludes that the Debtor's allocable share of the fault would be minimal.
Under Kentucky's comparative fault statute, the court must determine "the percentage of the total fault . . . that is allocated to each claimant," considering "both the nature of the conduct of each party at fault and the extent of the causal relation between the conduct and the damages claimed." K.R.S. § 411.182(1)(b), (2). The perentage of fault allocated to the claimant is then deducted from the damages to arrive at the amount of the judgment. Id. § 411.182(1)(b), (3). Here, Mr. Thomas was at least as much at fault as the Debtor. Indeed, the combined fault of Mr. Thomas, Mr. Wilkinson, and the outside auditors who prepared the financial statements would certainly exceed the fault that would be allocable to the Debtor had the Thomas Claimants proven that the financial statements were issued to induce extensions of credit or that oral misrepresentations were made by Mr. Wilkinson on behalf of the Debtor rather than on his own behalf.
The statute expressly requires the consideration of fault allocated to persons who have been released from liability. K.R.S. § 411.182(1)(b), (4).
The Thomas Lenders' fault arises from facts including (i) their failure to investigate Mr. Wilkinson's financial condition, (ii) their failure to include loan document provisions specifying the use of the funds, (iii) their failure to require a guaranty by the Debtor, (iv) their failure to require the Debtor to pledge collateral for the loans and guaranty, and (v) their failure to "police" the use of the loan proceeds. The Thomas Claimants say they were defrauded because they relied on misrepresentations as to the Debtor's financial condition, yet they did not take any action to put the Debtor or its assets "on the hook," electing to take Mr. Wilkinson's word that he would put the funds into the Debtor (or other entities) and use them to buy books. The Thomas Claimants' loss resulted, more than anything, from Mr. Thomas's way of doing business, lending huge sums of money based primarily on his personal relationships with the borrowers. The decision to conduct business in that manner has consequences and, under the comparative fault statute, Mr. Thomas may not be relieved of those consequences.
V. Conclusion
Mr. Thomas trusted Mr. Wilkinson and others who "liked" Mr. Wilkinson. As a result, Mr. Thomas caused the Thomas Lenders to extend many millions of dollars to Mr. Wilkinson individually, with the expectation — perhaps resulting from Mr. Wilkinson's promises and representations — that the funds would be prudently expended in one of Mr. Wilkinson's book ventures and in hopes of reaping a high rate of return. The Thomas Lenders did not investigate the financial condition of their borrower and took no steps to assure that the funds would be used as promised. To the extent that they relied on the financial condition of one of Mr. Wilkinson's enterprises, as represented by him and/or in the Debtor's financial statements that had come into Mr. Thomas's hands as a shareholder in the Debtor, the Thomas Lenders took no action to make the Debtor or its assets legally answerable for the repayment of the credit. It is only after their trust in Mr. Wilkinson proved to be unfounded that the Thomas Claimants undertook to devise a theory for seeking to recover their loss from the Debtor, as well as Mr. Wilkinson. Clearly, the claimants have valid claims against the Wilkinson estate for the sums loaned to and guaranteed for Mr. Wilkinson, but they have not proven valid claims against this Debtor. For the reasons set forth above, their theory for holding the Debtor liable for Mr. Wilkinson's debts lacks merit.
Accordingly, the court will enter a separate order effecting the evidentiary rulings set forth in Part II of this opinion and estimating the value of the Thomas Claims at zero.
ORDER
Consistent with the Memorandum Opinion this day entered, IT IS HEREBY ORDERED that the Objections of Bernard Katz, Liquidating Supervisor for Wallace's Bookstores, Inc., to Thomas Claimants' Proposed Documentary Evidence and Deposition Testimony filed in this case October 18, 2004 is sustained in part and overruled in part as delineated on Pages 3-13 of the Memorandum Opinion, which are incorporated herein by reference. It is further ORDERED that the Motion for Estimation of Thomas-Related Claims Pursuant to Provision 7.4 of the Plan filed on January 29, 2004 is sustained, and the claims asserted by the R. David Thomas Trust U/A Dated 8/10/1997, the Estate of R. David Thomas, and the Estates of R. David Thomas and I. Lorraine Thomas in proof of claim nos. 2711, 2712, and 2713 (as amended) are estimated to have no value for purposes of distribution.
This is a final order.