Clarifying Rule 701’s Limits, Rejecting Ratification-by-Tax-Return, and Allowing Equity Setoff in Corporate Wind-Downs

Case: All American Black Car Service, Inc. v. Gondal (consolidated appeals Nos. 24-1981 & 24-1982)
Court: United States Court of Appeals for the Fourth Circuit
Date: October 15, 2025
Disposition: Affirmed (unpublished)

Note on precedential status: This is an unpublished decision and is not binding precedent in the Fourth Circuit. It nonetheless provides persuasive guidance on several recurring issues in business breakups and bankruptcy adversary proceedings, including the scope of lay opinion testimony under Evidence Rule 701, the elements of corporate ratification, the consequences of inadequate briefing on appeal, and the availability of an equity setoff when winding up a closely held corporation.

Introduction

This appeal arises from the dissolution and partial revival of a closely held limousine company and the ensuing Chapter 11 adversary proceeding. The majority shareholder, Sohail Cheema, and the two minority shareholders, Jamshaid Gondal and Mohammad Sheiryar, agreed in September 2022 to wind up the corporation by liquidating its fleet, paying debts, and escrowing residual funds pending a final agreement. Gondal and Sheiryar sold most of the fleet, paid existing debts, but then kept the remaining funds—approximately $228,000—instead of placing the money into escrow.

After the company entered Chapter 11, All American Black Car Service, Inc. (the debtor and plaintiff) sued Gondal and Sheiryar (defendants) to recover the funds and to obtain lost-profit damages. At a bench trial in the bankruptcy court, defendants admitted they kept the money but raised affirmative defenses, including an offset for purported unpaid wages and ratification based on the corporation’s 2022 tax return. The bankruptcy court rejected those defenses, awarded the company a conversion judgment reduced by a 49% equity setoff, and denied lost profits. The district court affirmed. The Fourth Circuit now affirms as well.

Key questions addressed:

  • Whether testimony about “market” wage rates sourced from online salary aggregators is admissible as lay opinion under Federal Rule of Evidence 701.
  • Whether a corporation ratifies minority shareholders’ unauthorized self-distribution by reporting those amounts as distributions on a tax return.
  • Whether the debtor adequately preserved a challenge to the denial of lost profits on appeal.
  • Whether minority equity holders are entitled to a setoff reflecting their pro rata ownership share when the parties agreed to wind up and had paid corporate debts, despite their conversion of the escrow-bound funds.

Summary of the Opinion

The Fourth Circuit affirmed across the board. Its core holdings are:

  • Excluding Sheiryar’s testimony about an “appropriate hourly rate” was not an abuse of discretion. The proposed testimony relied on third-party websites (e.g., ZipRecruiter) and was not based on his personal knowledge; it was expert-style “market determination,” not permissible lay opinion under Rule 701.
  • Rejecting the ratification defense was not clearly erroneous. The corporation received no benefit from the minority shareholders’ self-distribution and repudiated the conduct quickly by filing suit. A tax return’s characterization did not amount to ratification under these facts.
  • The debtor waived its challenge to the denial of lost profits by inadequately briefing the issue under Federal Rule of Appellate Procedure 28(a)(8)(A).
  • Allowing a 49% equity setoff against the conversion judgment was proper. Under Va. Code Ann. § 13.1-745(A), once debts are settled in dissolution, residual assets are distributed pro rata to shareholders. The parties had already completed asset liquidation and debt payment, entitling defendants to their proportionate share. The setoff issue was tried without unfair surprise, and a late-raised statutory challenge was not preserved.

Analysis

Precedents and Authorities Cited

  • Smith v. Devine, 126 F.4th 331, 341 (4th Cir. 2025): Reiterates the standard of review when a court of appeals reviews a district court sitting in review of a bankruptcy court—legal conclusions de novo, factual findings for clear error, and discretionary decisions for abuse of discretion.
  • Copley v. United States, 959 F.3d 118, 121 (4th Cir. 2020): Quoted for the same standards of review framework applied to bankruptcy appeals.
  • Lord & Taylor, LLC v. White Flint, L.P., 849 F.3d 567, 575 (4th Cir. 2017): Clarifies that lay opinion testimony must arise from a witness’s personal knowledge or firsthand perception, not from second-hand compilations or market analyses.
  • Eriline Co. S.A. v. Johnson, 440 F.3d 648, 653 n.7 (4th Cir. 2006): Establishes that conclusory, unsupported statements are inadequate to preserve issues on appeal under Rule 28(a)(8)(A).
  • Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc., 380 F.3d 200, 205 n.3 (4th Cir. 2004): An affirmative defense is not waived if tried by consent absent unfair surprise or prejudice.
  • Va. Code Ann. § 13.1-745(A) (2019): Governs corporate dissolution activities, including the distribution of remaining assets among shareholders according to their interests after debts are settled.
  • Dexter-Portland Cement Co. v. Acme Supply Co., 147 Va. 758 (1926): Articulates a Virginia setoff principle—that setoff may be available when arising “dehors” (outside) the transaction sued on and is liquidated. The Fourth Circuit declined to consider a new argument under Dexter-Portland that had not been raised below.

Legal Reasoning and Issue-by-Issue Discussion

1) Exclusion of “Market Rate” Wage Testimony (Rule 701)

What defendants tried to do: To support an unpaid wages offset exceeding the converted funds, Sheiryar testified to his hours worked (2020–2022) and attempted to introduce a chart of acceptable hourly rates for similar work drawn from online sources like ZipRecruiter.

Why the bankruptcy court excluded it: The court characterized the testimony as a “market determination” derived from third-party sources. Because it did not stem from Sheiryar’s personal knowledge or firsthand perception, it was not admissible as a lay opinion under Rule 701.

Fourth Circuit’s holding: No abuse of discretion. Citing Lord & Taylor, the court emphasized that lay opinion must arise from personal knowledge. Here, the proffer was essentially expert-style valuation without expert qualification or methodology. Without other competent evidence of an hourly rate, defendants failed to carry their burden on an unpaid wages offset. The district court also noted that uncorroborated testimony alone would be insufficient to sustain an unpaid wages claim in any event.

Takeaway: Parties cannot smuggle expert “market” opinions through a lay witness by relying on internet salary data. If you want to establish a market wage or rate, disclose and qualify an expert or lay an adequate foundation linking the opinion to the witness’s own firsthand experience and knowledge.

2) Ratification by Tax Return Reporting

Defense theory: Defendants argued that the corporation ratified their keeping of the residual funds because the 2022 tax return reported those amounts as distributions to them.

Why the bankruptcy court rejected ratification: The court found Cheema’s use of the word “ratify” on tax filings did not reflect an intent to waive the corporation’s rights, particularly given his limited familiarity with the legal meaning of “ratify.” More importantly, the corporation did not receive any benefit from defendants’ self-distribution and promptly repudiated the act by suing for return of the funds within weeks of learning of it.

Fourth Circuit’s holding: No clear error. Ratification requires knowledge of material facts and conduct evidencing assent. The record reflected repudiation, not assent, and no benefit to the corporation from the unauthorized distribution.

Takeaway: Tax characterizations do not automatically ratify corporate actions. Courts will look for genuine assent, benefit, and consistency with ratification, not linguistic happenstance on a tax form—especially where the corporation promptly sues to claw back the funds.

3) Lost Profit Damages: Waiver on Appeal

Bankruptcy court: Denied lost profits for lack of proof to a reasonable degree of certainty.

District court: Affirmed; additionally noted that defendants could not be liable for lost profits where all shareholders had agreed to wind up the company and only Cheema later attempted to revive it.

Fourth Circuit: The debtor’s appellate briefing contained only two conclusory sentences without record or legal citations. Under FRAP 28(a)(8)(A) and Eriline, that was inadequate. The issue was treated as waived and not addressed on the merits.

Takeaway: Even potentially meritorious damages arguments are forfeited by inadequate briefing. On appeal, parties must supply record citations, legal authorities, and reasoned argument.

4) Equity Setoff Despite Conversion of Funds

Context: All shareholders agreed to wind up. Defendants sold most of the fleet, paid company debts, and then failed to escrow the remaining funds. The bankruptcy court found conversion but allowed a setoff equal to defendants’ 49% equity interest, yielding a final judgment of $116,504.76 (reflecting a 49% reduction consistent with their pro rata share).

Statutory anchor: Va. Code Ann. § 13.1-745(A) authorizes distributing remaining assets among shareholders according to their interests once debts are paid in dissolution.

Fourth Circuit’s reasoning:

  • On the merits: Because the parties had already liquidated assets and paid debts, Virginia law entitled defendants to their pro rata share of the residual funds. The setoff reflected that entitlement, notwithstanding their tortious conversion of escrow-bound funds.
  • Pleading point: The setoff defense was tried by the parties without objection. Under Patten, the absence of unfair surprise or prejudice means the defense was not waived by any pleading deficiency.
  • Preservation: The debtor’s late reliance on Dexter-Portland to resist setoff was not raised below, so the Fourth Circuit declined to consider it.

Takeaway: In a consensual corporate wind-up, once debts are paid, shareholders retain their pro rata claim to residual assets, which can operate as an equitable setoff even when a shareholder has wrongfully taken the funds. Counsel must timely object to, and brief, any legal constraints on setoff or risk forfeiture.

Impact and Practical Implications

For closely held corporations winding down

  • Shareholders who wear multiple hats (owner, officer, employee) must respect formalities like escrow commitments. Breaches risk conversion liability.
  • Nonetheless, courts can equitably recognize the shareholder’s pro rata equity claim to residual assets via setoff, reflecting state dissolution law, even if the shareholder initially misappropriated escrow-bound funds.
  • Tax return line items are not reliable substitutes for board or shareholder actions. Corporate ratification requires intent and benefit; prompt repudiation forecloses ratification.

For bankruptcy litigators

  • In adversary proceedings involving dissolved or dissolving entities, state-law dissolution rules can inform equitable setoff after debts have been paid.
  • If pressing for lost profits (especially following a wind-down), be prepared to satisfy the “reasonable certainty” standard and to address causation where the business revival is unilateral.

For evidentiary strategy

  • Do not rely on internet salary surveys as lay testimony. If valuing labor or establishing market rates, consider a qualified expert or lay a proper foundation that ties the opinion to personal knowledge within Rule 701’s limits.
  • Uncorroborated testimony about unpaid wages—especially rate—will likely be insufficient where business records or contracts are lacking.

For appellate practice

  • Preserve issues with developed argument, record citations, and legal authorities. Conclusory assertions risk waiver under FRAP 28(a)(8)(A).
  • Affirmative defenses not pleaded can still be litigated if tried by consent without unfair surprise. Object early if you intend to contest them.
  • Do not raise new legal theories (e.g., statutory limitations on setoff) for the first time on appeal.

Complex Concepts Simplified

  • Lay Opinion vs. Expert Opinion (Rule 701 vs. Rule 702): Lay witnesses can offer opinions only if based on their own perceptions and helpful to understanding their testimony. Opinions that rely on specialized knowledge, market analyses, or third-party compilations generally require expert qualification.
  • Ratification: A principal (here, the corporation) can adopt and be bound by an agent’s unauthorized act if it knows the material facts, receives or retains benefits, and manifests intent to affirm the act. Quick repudiation by filing suit undercuts ratification.
  • Setoff: A defendant reduces the plaintiff’s claim by an amount the plaintiff owes the defendant arising out of a qualifying, typically separate, obligation. In the corporate dissolution context, where debts are paid, shareholders’ pro rata entitlement to residual assets can support setoff against a conversion award. Whether a setoff is available may depend on state law and litigation posture (and on timely preservation of objections).
  • Conversion: A tort involving wrongful dominion or control over another’s property, inconsistent with the owner’s rights. Here, keeping funds that were required to be placed in escrow supported conversion liability.
  • Standards of Review: The court reviews legal questions de novo (fresh look), factual findings for clear error (definite and firm conviction of mistake), and discretionary rulings (like evidence admission) for abuse of discretion (outside the range of reasonable choices).
  • Waiver under FRAP 28(a)(8)(A): Appellants must present arguments with reasons, authorities, and record citations. Bare assertions are insufficient; inadequately briefed issues are treated as waived.
  • Virginia corporate dissolution (Va. Code Ann. § 13.1-745(A)): After paying or making provision for debts, a dissolving corporation distributes remaining assets to shareholders according to their interests.
  • “Dehors the transaction” (Dexter-Portland): A phrase indicating a setoff that arises outside the transaction sued upon, often requiring a liquidated sum. The Fourth Circuit did not decide that issue here because it was not preserved.

Conclusion

Although unpublished, the Fourth Circuit’s decision provides clear, practical guidance in four areas. First, Rule 701 cannot be used to introduce expert-like “market” opinions about wages sourced from online aggregators. Second, corporate ratification requires intent and benefit; tax return characterizations do not control where the corporation promptly repudiates the conduct. Third, appellate courts will not rescue under-briefed issues: lost-profit claims must be preserved with robust argument and citations. Fourth, in a consensual wind-down after debts are satisfied, minority shareholders retain a pro rata claim to residual assets—supporting an equitable setoff against a conversion judgment, even if they breached interim escrow obligations.

The opinion will be persuasive in business divorce and bankruptcy litigation involving closely held corporations where owner-employees seek to justify unilateral payments, attempt to establish compensation via non-expert evidence, or face conversion claims after a failed escrow. It underscores the importance of procedural rigor—both in preserving and presenting defenses and in appellate briefing—and the court’s willingness to harmonize equitable remedies with statutory dissolution frameworks.