IN RE BOLIN COMPANY, LLC (Conn. 9-22-2010)

ditors. Rather, she now stands as disadvantaged as any other creditor. The Trustee has failed to prove the first and second elements required for equitable subordination.

Furthermore, in a case where equitable subordination is to be applied against a "non-insider" or non-fiduciary party, equitable subordination is reserved for "egregious conduct," such as fraud, spoliation, or overreaching. Schubert v. Lucent Techs. (In re Winstar Commc'ns, Inc.), 554 F.3d 382, 412 (3d Cir. 2009); Estes v. N D Props. (In re N D Props.), 799 F.2d 726, 731 (11th Cir. 1986); In re 80 Nassau Assocs., 169 B.R. at 838-39 (Bankr. S.D.N.Y. 1994). Courts have rarely, if ever, found conduct by a non-insider to rise to this "egregious" level. See In re 80 Nassau Assocs., 169 B.R. at 839 ("The cases that enunciate the `gross and egregious' or similar standard uniformly fail to find conduct that meets the standard, and deny equitable subordination."). And those courts that have equitably subordinated a non-insider or non-fiduciary's claim have found that the claimant "committed some breach of an existing, legally recognized duty arising under contract, tort or some other area of law." Id. at 40. Equitable subordination based on a claimant's tortious conduct has been limited to "fraud, misrepresentation, estoppel or similar conduct that justifies the intervention of equity." Id.

As explained previously, Ogden was not a member or manager of Bolin but was merely a lender to the store. She was not a Bolin "insider" or fiduciary. As a result, equitable subordination would be appropriate only if her conduct was egregious, on par with fraud or spoliation. The Trustee has succeeded in proving that Ogden acted intentionally when she and Howey returned consigned jewelry to vendors and customers. But the plaintiff has not proved that Ogden returned the items with the intent to harm Bolin or otherwise act to the store's detriment. On the contrary, the evidence at trial shows that Ogden and Howey returned the consigned jewelry in part to protect Bolin's interests; Ogden was partly motivated to prevent Ulanoff from fraudulently and illegally hocking more jewelry that Bolin did not own. Returning consigned items arguably would deny Ulanoff the opportunity to put the store's and creditors' interests in even more jeopardy. Ogden's conduct, therefore, does not rise to the level of fraud, spoliation, misrepresentation, or any other tort that would warrant an equitable remedy.

Because Ogden, a creditor to Bolin, did not advantage herself relative to other creditors and did not commit an egregious act on par with fraud or spoliation, equitable subordination is not an appropriate remedy in this case. I now turn to the damages to which the Trustee is entitled on the tortious interference cause of action.

II. Damages

The Trustee succeeded on his tortious interference claim and proved that Ogden is liable for damages she caused by returning inventory to vendors and customers during the week of July 30, 2004. Ogden, however, argues that the Trustee did not meet his burden of proof with respect to damages because the evidence shows that Bolin was already insolvent by July 30, 2004 and the store would have closed even without Ogden's actions. Contrary to the defendant's characterization, however, the Trustee did not set out to prove that Ogden harmed Bolin by singlehandedly causing the store to dissolve. Instead, the Trustee argues that Ogden was responsible for the particular manner of closing that Bolin experienced. Ogden was responsible for the fact that Bolin had to sell its assets in a fire sale and lost revenue that it would have commanded had it wound down in an orderly fashion. The Trustee has proven that Ogden was the proximate cause of the rushed sale; it was because of her return of consigned jewelry that the store had to file for sudden bankruptcy and sell its assets at distressed prices.

Ogden, therefore, is liable for the additional amount that Ulanoff would have obtained had she sold the business or been able to orderly liquidate Bolin's assets. Those damages are equal to the value of Bolin in July 2004, just before Ogden and Howey took actions that led to the store's permanent closing, less any amount that the Trustee has already made and is likely to make from the sale of Bolin's inventory in its current bankruptcy. At trial, the Trustee testified that this latter value was approximately $140,000.

The Trustee's problem in this case, as the defendant has argued, is proving the amount Bolin was worth before July 30, 2004. Proof of damages in a tortious interference claim does not have to be precise; the plaintiff must only establish the loss it sustained to a "reasonable certainty." Beverly Hills Concepts, Inc. v. Schatz and Schatz, Ribicoff and Kotkin, 717 A.2d 724, 734 (Conn. 1998). Although evidence of Bolin's accounts may be the most preferable way to tally the extent of harm that Ogden caused, other less quantitative sources, such as testimony by Ulanoff and the opinions of both sides' experts, may be considered as well. See Conrad v. Erickson, 675 A.2d 906, 908 (Conn. App. Ct. 1996) (holding that trial court did not abuse discretion when considering plaintiff's affidavit estimating lost profits on basis of professional "experience and knowledge"). Damages, therefore, need not be mathematical or confined to the contents of Bolin's ledgers. But evidence supporting a damages determination, such as an expert's opinion regarding Bolin's value at the time of its closing, must be reasonable. Beverly Hills Concepts, 717 A.2d at 736.

Kenneth Pia, the Trustee's expert, and John Kramer, Ogden's expert, proposed two premises of value for Bolin: the value of the store's income and the value of its assets. The income premise of value measures the value of Bolin as a going concern. That is the present value of the store as an extant business, and incorporates a discounted value of the future income that the store can be expected to earn, based on the store's projected growth and the risk that the business will become insolvent or close. Alternatively, Bolin's value can be measured by its net assets, which examines what the business would command in the hypothetical event that it liquidated all of its assets in an immediate, orderly fashion. That valuation does not consider the future viability of the company but only examines the company's current assets relative to its current liabilities. Although an asset valuation relies on fewer assumptions than a going concern valuation, it is not the preferred method for assessing the business's value; both experts initially intended to rely on Bolin's asset value only as a check or comparison against the income values they derived.

Pia and Kramer both agreed that, at the end of July 2004, Bolin was insolvent and the store's net equity was zero. (Ex. 1024.) In other words, it is unrealistic to assume that any buyer would have bought Ulanoff's stake in the company because Bolin's total assets were smaller than its liabilities. The store's value was in its inventory, which it could unload in an orderly liquidation, and not in its continued existence as a retailing business. The net asset approach, therefore, is the appropriate way to evaluate the company's worth, especially when one considers that the plaintiff's theory of damages is to determine the amount of money Bolin could have reasonably been expected to earn had it been able to sell its assets in an orderly process.

The experts for the Trustee and Ogden relied on Bolin's internal financial records to determine the ongoing-concern and asset values for the company. Pia and Kramer valued Bolin's total assets as of July 22, 2004 at slightly more than $1.5 million; their two total asset values differ by approximately $20,000, a relatively immaterial amount. (Ex. 1024.) Based on Bolin's electronic inventory system, both experts also agreed that Bolin's owned jewelry on July 22, 2004 was worth, at cost, between $1.2 and $1.3 million, and that the current asset value — which reflects the sum of the store's inventory, accounts receivable, and undeposited funds — was around $1.4 million. ( Id.) Pia and Kramer recognized that if the internal records were inaccurate, then their assessments of the company's worth would be inaccurate, too. Pia believed the records to be sufficiently accurate to rely upon; Kramer, however, doubted their soundness and opined that they were likely overstated.

Pia concluded that the market value of invested capital for Bolin's assets — in other words, the fair market value of its total assets less its current liabilities — was $928,498. That was based on current assets totaling $1,576,150 and current liabilities totaling $647,652. (Ex. 528 at 7-8.) Kramer, however, did not provide a net asset value. In his view, performing an orderly liquidation valuation would have been pointless because the store's liabilities were clearly in excess of what Bolin could have received in exchange for its assets. Based on the totals in his expert report, however, in which he estimated that Bolin had $1,556,529 in total assets and $894,374 in current liabilities (ex. 541 at 18-19), Kramer would have produced a net asset value of $662,155 for the store. The difference between Pia's and Kramer's valuations stems principally from the difference in their calculations of Bolin's current liabilities. Kramer estimated that Bolin owed approximately $312,000 in pawn debts, while Pia thought the debt was about $189,000. (Compare Ex. 528 at 8, with Ex. 541 at 19.) In addition, Kramer added accrued interest from Bolin's long-term debt to Bolin's current liabilities, which he valued at approximately $139,000. (Ex. 541 at 19.)

The experts thus disagree with each other in several important ways. First, they disagree whether to incorporate Bolin's total liabilities — in particular, whether to include Bolin's long-term, interest-bearing debt, especially the secured debt that Bolin owed to Sylvia Ulanoff, Sally Ogden, and the various pawnbrokers. Pia, the Trustee's expert, opined that only current liabilities, such as moneys owed in accounts receivable, should be included in the calculations; but Kramer, Ogden's expert, asserted that all of Bolin's secured debt, such as the loans from Ulanoff, Ogden, and the pawnbrokers, should be included as well. Put differently, Pia believed that long-term, interest-bearing debt did not affect the value of Bolin's net asset value, while Kramer believed that those liabilities were important because they affected the store's equity. That is, in Kramer's view a potential buyer of Bolin could not obtain the assets of the store without also assuming Bolin's debt obligations, so they had to be included in a calculation of the store's total worth.

Kramer's analysis is inapposite to the Trustee's theory of damages, however. The Trustee is claiming that Ogden's tortious interference caused Bolin's immediate bankruptcy and deprived the company of the opportunity to wind down and sell its assets in an orderly fashion. That is captured in Bolin's net asset value. The Trustee is not arguing that Ogden deprived Ulanoff of the opportunity to bundle Bolin's assets and liabilities together and sell her equity in the store. But, by insisting that all of Bolin's debts be included, that is what Kramer measured. Because Kramer's valuation approach is not consistent with the Trustee's theory of damages, I do not find his damages determination persuasive. Instead, I find that the Trustee's proposed net asset value — essentially, the difference between Bolin's total assets and its current liabilities — is the appropriate way to value Bolin and determine the damages Ogden owes the plaintiff.

The second point of contention concerns the underlying numbers used to compute Bolin's income and asset values. Primarily, the problem is valuing Bolin's store-owned jewelry. Kramer was very skeptical of Bolin's figures and believed that records of the store's inventory were overstated. Pia, however, was more sanguine about the reliability of the store's records and his conclusions concerning Bolin's inventory value. Undoubtedly, there are significant problems in Bolin's records. As described above, there are discrepancies between the value reported in the store's electronic inventory system and the value reported in the store's physical inventory totals. The evidence submitted at trial showed Bolin's records were likely incorrect and I agree with Kramer that the inventory values were likely overstated. Therefore, I do not accept Bolin's records for the store's owned jewelry, which was between $1.2 and $1.3 million.

The most persuasive piece of evidence concerning the value of Bolin's owned jewelry were Santiago's and Dubiago's analysis of the store's sale records. For 2003, Dubiago concluded from Santiago's bookkeeping that the store had $721,236.98 in Bolin-owned inventory, even though the store's electronic inventory system reported more than $1.3 million in owned jewelry. That figure can reasonably be assumed to be higher by mid-2004 on the basis of testimony that Bolin's inventory grew every year. How much higher that total should be is unclear because the evidence presented at trial about the store's growth rate is sketchy. The piece of evidence that is most compelling is Pia's report, which states that Bolin reported $1.8 million in sales in 2003 and was projected to have sales of approximately $2 million in 2004. (Ex. 528 at 6.) Assuming that the growth rate for the store's inventory was parallel, and Bolin was expected to increase its owned inventory by 10 percent, then Bolin owned approximately $800,000 in jewelry at the time of its closing. The gap between this approximate value of store-owned jewelry and the amount listed in Bolin's electronic inventory system is consistent with the gap that Dubiago observed in 2003 between the store's accounting records and its electronic inventory system. I therefore find that Bolin held approximately $800,000 in owned jewelry at the time of its closing on July 30, 2004, a difference of $439,386 from Pia's figures. ( See Ex. 528 at 7 (estimating inventory to be worth $1,239,386).) Substituting $800,000 for the store's inventory value produces a total asset value of $1,136,754, based on Pia's tabulation. (See id. (estimating total assets of $1,576,150).)

The parties are in disagreement about the value of the store's current liabilities, too, because they have submitted different values for the short-term loans Bolin owed to pawnbrokers. I find the number submitted by Ogden better documented and more persuasive, and conclude that the total amount Bolin owed for the items it pawned was $311,861. On the other hand, contrary to Kramer, I do not include the interest owed on Bolin's long-term debt in calculating Bolin's current liability value; that interest should be included as a long-term liability not subtracted in the net asset value determination. Substituting Kramer's calculation for Bolin's short-term pawn liabilities and taking Pia's other current liability values (see Ex. 528 at 8), I find that Bolin's total current liabilities as of July 30, 2004 were $770,470.

With total assets of $1,136,754 and current liabilities of $770,470, Bolin had a net asset value of approximately $366,000 at the time of its closing. The final damages amount is equal to the net asset value less that amount that the Trustee has already raised and can expect to raise by liquidating Bolin's assets. According to Michael Daly's testimony, that latter value was approximately $140,000. The final damages amount that Ogden owes to the plaintiff, therefore, is $226,000.

I conclude that $226,000 is the reasonable amount that Bolin could have expected to earn from an orderly liquidation of its assets. That amount takes into account the total assets in Bolin's possession as of July 2004, and adjusts for the overstatement of the store-owned jewelry reported in Bolin's electronic inventory system. It also takes into account the store's current liabilities, including the value of its pawn debt, pawn interest, and fees.

III. Conclusion

For the reasons stated above, I find Sally Ogden liable for tortiously interfering with the business relations of Bolin Company, LLC. Her deliberate actions to return consigned jewelry to third parties caused the collapse of Bolin and deprived its owner of the opportunity to wind down its business and perform an orderly liquidation. This resulted in damages to the store in the form of lost revenues from an orderly liquidation of its assets totaling $226,000.

Sally Ogden, therefore, must pay $226,000 in damages to Ronald Chorches, Trustee of the Estate of Bolin Company, LLC. The clerk shall enter judgment and close the file.

It is so ordered.

Dated at Bridgeport, Connecticut, this 22nd day of September 2010.