Fox v. Koplik et al

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
__________________________________________
)
In re: 	) 	Chapter 11
)
PERRY H. KOPLIK & SONS, INC., 	) 	Case No. 02-40648 (REG)
)
Debtor. 	)
__________________________________________)
)
MICHAEL S. FOX, as Litigation Trustee of 	)
PERRY H. KOPLIK & SONS, INC., 	)
) 	Adversary Proceeding
Plaintiff, 	) 	No. 04-02490 (REG)
)
against 	)
)
MICHAEL KOPLIK 	)
and ALVIN SIEGEL, 	)
)
Defendants. 	)
__________________________________________)
BENCH DECISION ON MOTIONS TO STRIKE
LAY WITNESS TRIAL TESTIMONY
APPEARANCES:
SATTERLEE, STEPHENS, BURKE & BURKE LLP
Counsel for Plaintiff
230 Park Avenue
New York, New York 10169
By: 	Christopher R. Belmonte, Esq.
Pamela A. Bosswick, Esq.
SEWARD & KISSEL LLP
Counsel for Defendants
One Battery Park Plaza
New York, New York 10004
By: 	Ronald L. Cohen, Esq.
Walter A. Naeder, Esq.
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SANFORD P. ROSEN & ASSOCIATES, P.C.
Counsel for Defendants
747 Third Avenue
New York, New York 10017
By: 	Sanford P. Rosen, Esq.
BEFORE: 	HON. ROBERT E. GERBER
UNITED STATES BANKRUPTCY JUDGE
In this adversary proceeding under the umbrella of the confirmed chapter 11 case
of Debtor Perry Koplik & Sons, the plaintiff Litigation Trustee charges former insiders of
the Debtor with breach of fiduciary duty. In the trial of the action, the Litigation Trustee
has submitted the direct testimony affidavit 1 of Barry Kasoff, a Certified Turnaround
Professional and Certified Public Accountant, who studied the Debtor’s affairs,
including, inter alia, the insiders’ activities. In his direct affidavit, Mr. Kasoff has
described his perceptions of the defendants’ acts and, in more than a few instances, his
subjective views with respect to those acts, based on a combination of his review of the
acts and his training and experience in business and accounting matters. But he hasn’t
been offered as an expert under Fed.R.Evid. 702, nor has the plaintiff complied with
Fed.R.Civ.P. 26 requirements for expert disclosures.
The defendants move to strike portions of the direct testimony as impermissible
lay witness opinion testimony. Their motion is granted in part and denied in part, as
described in the accompanying table. My conclusions of law and bases for the exercise
of my discretion follow.
Fed.R.Evid. 701(a) provides, in relevant part:
1 	Under the Court’s case management order, direct testimony in the trial has been submitted by
affidavit, with cross-examination and subsequent testimony to proceed live.
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If the witness is not testifying as an expert, the
witness’ testimony in the form of opinions or
inferences is limited to those opinions or inferences
which are (a) rationally based on the perception of
the witness, (b) helpful to a clear understanding of
the witness’ testimony or the determination of a fact
in issue, and (c) not based on scientific, technical, or
other specialized knowledge within the scope of
Rule 702.
As usual, I start with textual analysis. Under Fed.R.Evid. 701, lay opinion
testimony is permissible if, but only if, the three subsections of Rule 701(a) are satisfied.
I note in that connection, however, that while subsections (a) and (b) are stated
affirmatively, subsection (c) is articulated in the negative.2 That means, as a practical
matter, that lay opinion testimony is permissible if subsections (a) and (b) are satisfied,
and if the testimony isn’t then excluded by reason of the effect of subsection (c).
The Second Circuit has twice spoken to this issue, in Bank of China v. NBM LLC,
359 F.3d 171 (2d Cir. 2004), and United States v. Rigas, 490 F.3d 208 (2d Cir. 2007), in
each case involving a fact pattern similar to that here, where an individual conducted an
investigation of matters that preceded his arrival on the scene, and then testified about
what he found.
In Bank of China, the Circuit held that the admission of lay opinion testimony that
was based on a combination of a lay witness’s observations and his knowledge of
business custom and the business community’s understanding of certain kinds of
transactions and business concepts was an abuse of discretion. Admission of that
testimony was held to be error because it wasn’t based entirely on the witness’s
2 	Rule 701 was amended in 2000, at which time the original language was divided by the lettered
subdivisions that now appear in the Rule, and the material that is now in subdivision (c) was added.
See Mueller and Kirkpatrick, Federal Evidence, § 7:1 (2007). Thus it now explicitly bars the admission
of lay opinions that are “based on scientific, technical, or other specialized knowledge within the scope
of Rule 702.” Rule 701(c).
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perceptions. The district court abused its discretion to the extent it admitted the
testimony based on the witness’s experience and specialized knowledge in international
banking. See 359 F.3d at 181.
The Bank of China court explained that “Subsection (c) of Rule 701, which was
amended in 2000, explicitly bars the admission of lay opinions that are ‘based on
scientific, technical, or other specialized knowledge within the scope of Rule 702.’” Id.,
quoting Fed.R.Evid. 701(c). Testimony admitted pursuant to Rule 701 must be
“rationally based on the perception of the witness.” Id., quoting Fed.R.Evid. 701(a).
Thus, to the extent that the testimony was based on the perceptions of the witness,
it was admissible, but to the extent that it was based on specialized knowledge, as
contrasted to personal observation, it was inadmissible. See id. The Circuit clarified:
To some extent, [the investigating witness] Huang’s
testimony was based on his perceptions. As a Bank
of China employee, Huang was assigned to
investigate defendants’ activities at the tail-end of
their scheme and after Bank of China stopped doing
business with them. Huang's senior role at the Bank
and his years of experience in international banking
made him particularly well-suited to undertake such
an investigation and was likely a factor in the
Bank’s decision to assign the task to him. The fact
that Huang has specialized knowledge, or that he
carried out the investigation because of that
knowledge, did not preclude him from testifying
pursuant to Rule 701, so long as the testimony was
based on the investigation and reflected his
investigatory findings and conclusions, and was not
rooted exclusively in his expertise in international
banking. “Such opinion testimony is admitted not
because of experience, training or specialized
knowledge within the realm of an expert, but
because of the particularized knowledge that the
witness has by virtue of his [ ] position in the
business.”
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Id., quoting Fed.R.Evid. 701 advisory committee’s note (emphasis added). 3
Thus, to the extent the investigating witness Huang’s testimony was grounded in
the investigation he undertook in his role as a Bank of China employee, it was admissible
pursuant to Rule 701 of the Federal Rules of Evidence because it was based on his
perceptions. But to the extent that the testimony was not based on his perceptions, it was
inadmissible.
Similarly, in Rigas, the Circuit affirmed criminal convictions after a trial in which
Judge Sand of the district court had permitted the introduction of testimony by Robert
DiBella, a forensic accountant retained by Adelphia’s new management to examine
Adelphia’s books and records, and to investigate transactions that had been entered into
while Adelphia was operating under the Rigases’ watch. Citing Bank of China, the Rigas
court found the testimony admissible, as it was based on witness perception, and did not
materially involve specialized knowledge with respect to the particular issues on which
he was testifying. That was so even though the Second Circuit’s decision at least implied
(and this Court from its firsthand knowledge knows) that Mr. DiBella’s witness
3 	I’m aware that the Bank of China court stated that testimony involving personal perception with
the benefit of professional expertise was permissible so long as it wasn’t “rooted exclusively” in
the witness’s professional expertise (there, in international banking). That could be read as
suggesting that a peppercorn of personal perception would permit a great deal of lay opinion
testimony, circumventing the safeguards of Fed.R.Evid. 702 and Fed.R.Civ.P. 26. I think it is
truer to the language and spirit of Bank of China to try to separate the testimony based on
perception from that based on opinion on an answer-by-answer basis (and individually within each
answer, to the extent necessary), and in the exercise of my discretion, I will be permitting
testimony only to the extent that any aspect of a larger body of testimony embodies, in material
part, witness perception. See Bank of China, 359 F.3d at 181 (noting purpose of Rule 701(c) “to
eliminate the risk that the reliability requirements set forth in Rule 702 will be evaded through the
simple expedient of proffering an expert in lay witness clothing”).
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perception—i.e., his ability to observe—was materially assisted by his accounting
expertise.4
Each of Bank of China and Rigas involved circumstances, like those here, where
an individual wasn’t personally involved in the events that were the principal focus of his
testimony, and instead involved the testimony based on participation in an investigation
of events that predated the witness’s appearance on the scene. Rigas is particularly
relevant, because it involved a situation, very similar to the one we have here, where a
skilled accounting professional studied what happened before he arrived, and explained
in testimony what he had discovered. That was permissible, as reflecting witness
perception.
Significantly, however, in neither Bank of China nor Rigas did the Circuit endorse
the admission of testimony as to the witness’s views as to whether what the witness had
perceived was wrongful, or as to what should have been done under the circumstances.
In support of contentions that all of the challenged testimony should be stricken,
the defendants cite three other cases, all from outside the Second Circuit. See JGR, Inc.
v. Thomasville Furniture Indus., 370 F.3d. 519 (6th Cir. 2004); DIJO, Inc. v. Hilton
Hotels Corp., 351 F.3d 679 (5th Cir. 2003); Autoforge, Inc. v. Am. Axle & Mfg., Inc.,
2008 U.S. Dist. LEXIS 755 (W.D. Pa. Jan. 4, 2008). None of these, of course, could
trump a Second Circuit decision on point. And in any event, they are nowhere as closely
4 	My understanding of the Second Circuit’s ruling in Rigas is assisted by my personal knowledge,
as a consequence of Adelphia’s bankruptcy case having been before me, and matters as to which I
can take judicial notice. I know that Mr. DiBella had accounting expertise, because I heard
testimony by Mr. DiBella, on distinct, but related, issues, myself. But Mr. DiBella’s testimony in
the criminal case was in material respects based on what he observed, and did not go to issues
where his accounting expertise, other than his ability to explain what he saw, was material to the
issues on which he was testifying. Mr. DiBella testified on matters invoking his accounting
expertise to a considerably greater degree in the Adelphia bankruptcy case, without objection by
any party.
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similar to the facts we have here, and to the extent they are relevant at all, they support
the nuanced standard articulated by the Second Circuit in Bank of China and Rigas.
None involved the testimony of a trained financial professional who had studied financial
transactions and reported on what he saw.
Instead, each involved testimony on lost profits and/or the value of a business—
areas where an outsider’s personal perception would often be modest at best, and that
traditionally would involve testimony of bona fide experts, except in cases where the
actual owner of the business might have the requisite personal perception. See JGR,
370 F.3d at 524, 526 (CPA and lawyer testifying about lost profits and business value
relied on information primarily obtained from plaintiff’s principal); DIJO, 351 F.3d at
685 (testifying financial consultant “had little significant actual knowledge about DIJO
and its operations;” contrasting ability of “business owners or officers to testify based on
particularized knowledge derived from their position”) (emphasis in original); Autoforge,
2008 U.S. Dist. LEXIS 755 at *19-*20 (relying on circuit court holdings that “persons
outside of a business, including attorneys and financial consultants,” who were not able
to establish the requisite foundation of personal knowledge, “may not offer a lay opinion
as to value or project lost profits of a business”) (citing JGR and DIJO).
With those principles in mind, the Court will permit lay opinion testimony that
reflects the perceptions of the witness Mr. Kasoff as to what happened (including, inter
alia, what the defendants did)—even if Mr. Kasoff was aided in forming his perceptions
by an ability, aided by his training and experience, to understand what he saw. But to the
extent Mr. Kasoff seeks to testify not with respect to his perceptions, but rather with
respect to views as to (a) whether what he perceived was right or wrong; (b) what should
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have been done; (c) what is customary in business practice; or (d) what his training and
experience tell him about appropriate conduct in these cases, the testimony will be
excluded.
My rulings with respect to the particular aspects of the Kasoff testimony that were
the subject of the lay opinion evidence objections appear on the attached Table A to this
Decision.
SO ORDERED.
Dated: New York, New York 	s/ Robert E. Gerber
February 19, 2008 	United States Bankruptcy Judge
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Table A
Rulings on Testimony In Issue
¶ # 	Testimony in Issue 	Ruling
9 “Debtor had serious issues relating to its equity and
clearly was in the zone of insolvency,” Objection sustained.
20
“Koplik and Siegel knew or should have known by
virtue of their positions at the Debtor of the terms
of the RCF and the Trade Credit Insurance Policy.
Siegel was responsible to the Bank for reporting
about the Debtor's compliance with the various
RCF covenants, and Michael Kelly, who reported
directly to Siegel, was responsible for compliance
with the Trade Credit Insurance Policy.”
First sentence: objection
sustained. Second
sentence: objection
overruled.
21
“Beginning in 1997, the Debtor was experiencing
financial difficulty and continued to do so through
2001. As the Debtor's financial situation began to
deteriorate, it inexplicably took on extraordinary
credit risks, in the form of advances, loans and
other unreasonable trade and non-trade extensions
of credit, that were disproportionate to its equity
position. Such problems began to appear after Perry
H. Koplik, the Debtor's founder, became less
involved in the management of the Debtor with the
defendants taking over more active roles.”
First and third sentences:
objection overruled.
Second sentence:
objection sustained.
22
“In fact, one of the key factors contributing to the
Debtor's financial breakdown was the absence of
any objective decision-making process. Any system
of internal controls employed by the Debtor was
overridden routinely by defendants as the key
executives involved in all key financial aspects of
the Debtor. Since the Debtor's internal control
processes, if any, were subject to defendants'
override, an environment existed that allowed
transactions to occur without sufficient regard for
level of risk, having considerable detrimental
consequences to the Debtor's business.
…
I believe that the Debtor did not have, implement or
utilize any credit policy manuals as a guide to
extend credit, loans, advances and/or other financial
accommodations made to third-parties.”
Objection overruled.
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¶ # 	Testimony in Issue 	Ruling
23
“Examples of transactions entered into by the
Debtor under defendants' management in the
absence of any objective decision-making process
include: the extension of approximately $27 million
of total debt to ATC which included funding ATC's
payroll on an emergency basis, the extension of
non-trade credit that was not supported by proper
loan documentation and clearly in violation of the
RCF, the reduction of accounts receivable in
exchange for uninspected, and possibly non-
existent, inventory, the holding of post-dated
checks, which bounced and were re-deposited and
bounced again, the extension of additional credit to
ATC when it was delinquent on existing
receivables, and the extension of non-trade credit
and/or investment in International Supply and
Agency, Ltd. and Samoa Pacific Cellulose, LLC.
Thus, despite having less than $10 million of equity
a part of which was illiquid, the Debtor entered into
several transactions, the majority of which were
with ATC, which put the Company's viability at
severe risk.”
Objection overruled.
24
“Without a doubt, defendants knew that ATC was
experiencing severe liquidity problems. ATC's
grave liquidity issues were largely the result of its
funding the acquisition of long term assets with
short term liabilities.”
First sentence: objection
was previously sustained
for testifying as to
another’s state of mind,
and is not saved by calling
this lay opinion. Second
sentence: objection
overruled.
24 	“Despite such knowledge,”
Objection was previously
sustained for testifying as
to another’s state of mind,
and is not saved by calling
this lay opinion.
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¶ # 	Testimony in Issue 	Ruling
24
“Despite being aware of ATC's financial distress,
defendants had Debtor advance approximately $27
million to the now bankrupt ATC with knowledge
that a significant portion of those advances would
be events of default under the RCF and not covered
by the Trade Credit Insurance Policy. To extend an
amount of trade and non-trade credit to one
customer, which amount was three times the
Debtor's equity, and which jeopardized its
relationship with the Bank, exemplifies the
defendants' complete lack of credit-risk assessment
in connection with the Debtor's business
operations.”
First sentence portions
(“Despite being aware”
and “with knowledge
that”): objections were
previously sustained for
testifying as to another’s
state of mind, and are not
saved by calling this lay
opinion. First sentence
remainder: objection
overruled. Second
sentence: objection
sustained.
25
“These loans violated the terms of the RCF and
were not covered by the Trade Credit Insurance
Policy; thereby endangering the Debtor's working
capital.”
Objection overruled.
27
“despite ATC's delinquent and/or nonexistent
payments to the Debtor. The Debtor essentially
served as a financier for ATC, providing millions
of dollars of financing for ATC's production
without any guarantee of payment by Kimberly
Clark who only agreed to the arrangement for the
month of March, 2001.”
Objection overruled.
28
“Defendants heedlessly exposed the Debtor to
unwarranted risk by continuing to finance
production after the end of March and by
depending upon ATC's relationship with Kimberly
Clark to support the invoices. As defendants should
have expected, ATC bounced checks that it issued
to Kimberly Clark for the pulp purchases, resulting
in Kimberly Clark's offsetting its pulp receivables
against tissue payables owed to ATC.”
Objection to “heedlessly”
and “As defendants should
have expected suspected”
sustained. Remainder of
quoted testimony:
objection overruled.
30
“Defendants provided ATC with the foregoing
financing in complete disregard that such actions
with ATC and Kimberly Clark violated the RCF
and were not covered under the Trade Credit
Insurance Policy. Given the bounced checks and
the continued requests for advances, defendants by
March of 2001 were well aware of ATC' s fiscal
crisis. Yet, ignoring these red flags, the Debtor
continued to extend trade and non-trade credit to
ATC.”
Objection to “in complete
disregard,” “were well
aware,” and “ignoring
these red flags” sustained.
Remainder of quoted
testimony: objection
overruled.
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¶ # 	Testimony in Issue 	Ruling
31
“[the Ponderosa advance constituted an event of
default under the RCF,] endangering the Debtor's
entire business operations.”
Objection overruled.
32
“The Ponderosa advance was made in the absence of
any objective decision making process on the part
of defendants for the following reasons: (a)
defendants knowingly engaged in the transaction
without the benefit of appropriate loan
documentation; (b) defendants extended to ATC an
amount equal to approximately one-quarter of its
equity at a time when ATC was long overdue on
receivables; (c) defendants' actions violated Bank
covenants causing a breach under the RCF, putting
its working capital and the Debtor as a going-
concern at risk; and (d) defendants did not seek
advice from, or discuss with, Debtor's counsel or
accountants the consequences of such actions.”
Objection to “knowingly”
sustained. Remainder of
quoted testimony:
objection overruled.
36
“Since ATC had ongoing cash-flow difficulties and
defendants knew that the Debtor needed to keep
ATC's trade accounts receivable balance below the
$15 million limit of the Trade Credit Insurance
Policy, defendants negotiated an arrangement to
reduce ATC's accounts receivable in exchange for
approximately $3,776,941 of inventory of finished
goods from Ampad, an ATC affiliate.”
Objection to “defendants
knew” sustained.
Remainder of quoted
testimony: objection
overruled.
37
“It is my belief that this arrangement was, in fact,
an illusory transaction, designed to keep the
receivables below the Trade Credit Insurance
Policy's limit. The use of the Ampad inventory to
reduce ATC's accounts receivable balances is
another example of defendants embarking on a
transaction without any aforethought or regard for
risk.”
Objection sustained.
38
“Defendants improperly characterized APP's
accounts receivable as eligible in the Debtor's
borrowing base certificates for August and
September of 2001. The Debtor continued to extend
credit to ATC despite the latter's clearly
demonstrated inability to pay and questionable
viability.
…
endangering the Debtor’s own existence.”
First sentence: objection
sustained. Second
sentence and third
sentence fragment:
objection overruled.
42
“Each of these unpaid, non-trade extensions of
credit in its own right constitutes an event of
default under the RCF.”
Objection overruled.
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¶ # 	Testimony in Issue 	Ruling
43
“In short, defendants caused the Debtor to engage in
numerous high risk transactions by extending
approximately $8.5 million of non-trade credit to
ATC for the latter's purchase or funding of various
under performing mills without the benefit of
obtaining any supporting loan documentation or
consulting with Debtor's attorneys. If known by the
Bank, such breaches of the RCF would have
resulted in the acceleration or refinancing of the
loan or the restructuring and/or liquidation of the
Debtor's business. Thus, each and every non-trade
extension of credit put the Debtor's working capital
and, consequently, the Debtor's viability at risk.”
First and third sentences:
objection overruled.
Second sentence:
objection sustained.
44
“No reasonable person would believe that putting
the Debtor's business at risk was worth the unlikely
benefit of transacting business with ATC. Indeed, it
is questionable whether defendants conducted any
type of assessment of the high risks associated with
the non-trade credit transactions with ATC, and, to
the best of my knowledge, no document exists
evidencing such assessment or analysis.”
First sentence: objection
sustained. Second
sentence, portion stating
“and, to the best of my
knowledge, no document
exists evidencing such
assessment or analysis”:
objection overruled.
Remainder of sentence:
objection sustained.
45
“Likewise, defendants' reliance on ATC's proposed
bond offering was given without the benefit of any
objective decision-making process or advice from
professionals. Defendants did not analyze the
financial statements supporting the bond issue.
Instead, defendants somehow claim to have relied
upon the prospectus and alleged due diligence
conducted by UBS Warburg, despite knowing that
ATC's true financial condition was not accurately
depicted therein, in part, because defendants failed
to disclose the extraordinary loan transactions
outlined above. The Debtor's history shows that,
after ATC's prior bond offering in 1999, the
Debtor's business with ATC declined even though
ATC had the cash flow to engage in such business.”
Third sentence: objection
sustained. Remainder of
testimony in this
paragraph: objection
overruled.
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¶ # 	Testimony in Issue 	Ruling
46
“As the years progressed and the Debtor's financial
condition deteriorated, it became increasingly more
reliant on ATC as a customer. Defendants' reliance,
however, was disproportionate with the actual
amount of revenue produced by ATC. In 1998-
1999, the revenue generated by sales to ATC
represented approximately 13%-14% of the total
revenue of the Debtor. However, in 2000, the
revenue generated by sales to ATC dropped to
approximately 7% of the Debtor's total revenue,
and, while sales to ATC picked up in 2001, to equal
approximately 10% of the Debtor's total revenue,
those sales were a function of ATC's difficulty in
obtaining credit from other companies. Moreover,
the Debtor was not receiving the cash generated
from those sales in 2001 since almost all of the
sales in 2001 to ATC were on credit. The Debtor
sold approximately $28 million to ATC in 2001 but
collected only a few million dollars for those sales
on a net basis during that same time period.”
Second sentence:
objection sustained.
Remainder of testimony in
this paragraph: objection
overruled.
48
“The Debtor unnecessarily continued to enter into
high risk transactions and to extend unjustifiable
amounts of credit to ATC despite defendants'
knowledge of ATC's illiquidity. Such illiquidity
was clearly evident by February of 2001,
…
The Debtor's receivables from ATC were not being
paid in a timely manner. Days-sales-outstanding
skyrocketed to 120 days in February of 2001 and
were not paid in cash. The Debtor chose to re-age
or extend the credit terms to ATC on those
receivables from 30 days to 60 days and then to 90
days all in violation of the Trade Insurance Credit
Policy. By April, ATC could not even cover its
own checks and bounced approximately $4 million
in checks to the Debtor between May and June of
2001.”
First and second
sentences: objection
sustained. Remainder of
quoted language in this
paragraph: objection
overruled.
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¶ # 	Testimony in Issue 	Ruling
49
“In short, the Debtor was extending credit beyond
that which a reasonable business person would
extend under terms that no reasonable business
person would have extended to ATC. To extend
such an extraordinary amount of trade and non-
trade credit to a customer while jeopardizing its
banking relationship is not prudent business.
…
As a result, Koplik, without the benefit of any
objective analysis, outside legal or accounting
advice, or Board of Directors' input, extended
additional credit to ATC for trade and non-trade
transactions until ATC's bond offering could
theoretically be completed.”
First and second
sentences: objection
sustained. Third sentence:
objection overruled.
50 “In addition to the extraordinary transactions
entered into with ATC,” Objection overruled.
55
“The transaction with Samoa both violated the RCF
and generated a significant loss to the Debtor.
Again, no legal advice was sought in connection
with the alleged loans, and, consequently, no
rational decision-making process was employed.”
Objection overruled.
58
“Somewhat suspiciously, only after RST
questioned the loan,
…
The memo written by Siegel is inconsistent with the
Debtor's audited financial statements for the years
1996 through 2000, for which Siegel was
responsible, since such documents show the loan as
an asset without any offsetting liability. Notably,
this loan was in addition to the base salary paid to
Siegel in the amount of $300,000. It is my belief
that such salary was excessive given that the
majority of Siegel's services were performed from
his home in Florida away from the Debtor's actual
daily business operations.”
First sentence: objection
sustained. Second and
third sentences: objection
overruled. Fourth
sentence: objection to
portion “It is my belief
that such salary was
excessive” sustained, but
objection to remainder
overruled.
59
“To the best of my knowledge and given the
exorbitant salaries already received by defendants,
the Debtor did not receive fair consideration and/or
reasonably equivalent value in exchange for the
Transfers.”
Objection sustained.
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¶ # 	Testimony in Issue 	Ruling
61
“The Debtor violated the RCF and/or entered into
transactions not covered by the Trade Credit
Insurance Policy by, among other things, funding
ATC's various acquisitions of mills such as the
Ponderosa, Keiffer Paper and Shelby mills, funding
the production of goods for sale to Kimberly Clark,
extending certain working capital loans to ATC,
providing loans, advances and/or excessive
compensation to the Debtor's officers and
employees and their relatives, advancing funds with
respect to Willendra and his company and Samoa,
borrowing against ineligible accounts receivable and
improperly applying payments to reduce ATC's
accounts receivable rather than APP's accounts
receivable.”
Objection overruled.
66
“Since each of these transactions, in and of itself,
violated the RCF and constituted events of default
thereunder, the Bank was entitled to accelerate the
indebtedness of the Debtor due under the RCF.
Accordingly, the Debtor essentially was rendered
insolvent upon its first unauthorized transaction
with ATC. Simply put, without the ability to access
funding or working capital, the Debtor could not
meet its obligations to others.”
Objection overruled.
04-02490-reg Doc 101 Filed 02/19/08 Entered 02/19/08 14:40:37 Main Document
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¶ # 	Testimony in Issue 	Ruling
67
“Moreover, it was completely irrational for the
defendants to believe that the Debtor could recover
under the Trade Credit Insurance Policy, when, in
violation of such policy, the Debtor allowed the
days-sales-outstanding to get inordinately high and
then reached an agreement, without the insurance
carrier's knowledge or consent, with ATC to re-age
its receivables from 30 to 60 to 90 days. The
Debtor also accepted payment for such receivables
in inventory without even inspecting the same
solely for the purpose of reducing the ATC
receivables to within the policy's limits and
improperly reduced ATC's receivables instead of
those belonging to the true party in interest.”
First sentence: objection
sustained with respect to
“it was completely
irrational for the
defendants to believe that
the Debtor could recover
under the Trade Credit
Insurance policy,” and
overruled with respect to
“in violation of such
policy, the Debtor allowed
the days-sales-outstanding
to get inordinately high
and then reached an
agreement, without the
insurance carrier's
knowledge or consent,
with ATC to re-age its
receivables from 30 to 60
to 90 days.” Second
sentence: objection
overruled.
68
“In addition, the Debtor withheld information
regarding ATC's true financial condition. ATC's
bounced checks, its inability to fund its own
payroll, and its wholesale dependence on ATC's
bond offering are huge red flags which should have
put the defendants on notice to take steps to limit its
exposure to ATC in a proper fashion. The Trade
Credit Insurance Policy is not a guaranty for any
loss irrespective of defendants' actions. When
defendants became aware of these red flags, they
had an obligation to take steps to reduce the
Debtor's exposure to ATC or run the risk that the
insurance company would not cover such
obligations. Defendants illogically chose to accept
that risk. Under these circumstances, no rational
person would believe that the Trade Credit
Insurance Policy would cover the extraordinary
amount of credit extended to ATC, and defendants'
reliance on the same as a safety net is completely
unjustifiable.”
Objection sustained.
04-02490-reg Doc 101 Filed 02/19/08 Entered 02/19/08 14:40:37 Main Document
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¶ # 	Testimony in Issue 	Ruling
68 n.1
“Similarly, defendants clearly could not rely on the
guarantees issued by Mehdi Gabayzadeh, former
CEO of ATC, and Super American Tissue, an ATC
affiliate, to recover the sums owed by ATC since
defendants neither evaluated the credit worthiness of
the guarantors and their respective assets nor
requested any security with respect to the same.”
Portion “defendants
neither evaluated the
creditworthiness of the
guarantors and their
respective assets nor
requested any security
with respect to same”:
objection overruled.
Remainder of quoted
sentence: objection
sustained.
69
“Over the course of those three days, RSI reviewed
the Debtor's assets, liabilities, and equity and
concluded by October 28, 2001, that the Debtor
was in the zone of insolvency.”
Objection overruled.
70
“Based on this further analysis, it grew clear that
the Debtor became insolvent between March and
June of 2001.
…
Moreover, the Debtor clearly was in violation of
the RCF at that time and, without the ability to have
funding from the Bank, would have no working
capital, rendering it insolvent.”
Objection overruled.
04-02490-reg Doc 101 Filed 02/19/08 Entered 02/19/08 14:40:37 Main Document
Pg 18 of 18