Wee v. Yangzhou Putian Shoemaking Co. (In re Unimex Corp.), 2024
“An expert’s report on debtor’s insolvency was excluded under Fed. R. Evid. 702 because the expert’s 50 percent discount of inventory value was a flawed assumption given that the debtor was not being liquidated, was not on it’s deathbed, but instead was a going concern.”
This matter related to the motion by the defendant, Yangzhou Putian Shoemaking Co. Ltd., to strike expert report and prohibit opinion testimony. The plaintiff, Wee, as trustee for Unimex Corp., opposed the defendant’s motion.54 Yangzhou was Unimex’s primary or sole supplier of footwear. Unimex filed for bankruptcy under Chapter 11, Nov. 16, 2016. Wee was appointed trustee. On April 5, 2021, the court confirmed a plan of reorganization that allowed Unimex to continue to operate as a going concern. “YPS agreed to withdraw its proof of claim, in the amount of $792,222.45, which caused the return to the creditors to be approximately 11% on their claims.”
In January 2016, Yangzhou and Unimex entered into a stock redemption agreement. Under the stock redemption agreement, Unimex agreed to redeem 8,000 shares of common stock in exchange for a payout of $475,000.00. The actual payment schedule can be found in Table 2 of the opinion.
Stryker’s report.
Wee proffered Charles H. Stryker, CFA, as her solvency expert, without objection by Yangzhou. Stryker performed a balance sheet solvency test of Unimex on or near the dates of the transfers using the fair value standard. He defined fair value as “the amount at which the aggregate assets of the company would change hands between a willing buyer and a willing seller, within a commercially reasonable period of time, each having reasonable knowledge of the relevant facts, neither being under any compulsion to act, with equity to both.”
The statements of equity, original to the company, and as adjusted by Stryker, were as follows:
December 31, 2016, Adjusted Balance Sheet:
Debtor’s Stated Equity: $404,152.21
Equity as Adjusted: ($265,647.64)
January 10, 2017, Adjusted Balance Sheet:
Debtor’s Stated Equity: $410.120.48
Equity as Adjusted: ($247,057.52)
February 22, 2017, Adjusted Balance Sheet:
Debtor’s Stated Equity: $456,719.49
Equity as Adjusted: ($228,936.34)
Stryker made three adjustments to arrive at his adjusted equity: (1) subtraction of $140,000 as a contingent liability for Unimex’s debt to Falcon Path; (2) use of the debtor’s inventory reports instead of what was reported on the balance sheets; (3) a 50% discount on inventory “to reflect liquidation value of the inventory.”
The Jian adversary proceeding.
The trustee filed an adversary proceeding against Jian (the 100% owner of Yangzhou). In April 2024, the court approved the proposed settlement. Stryker was the expert for the trustee and was received by the court as competent and reliable.
Solvency.
The burden of proof on insolvency was on the trustee. “The Trustee agrees that she needs to prove insolvency both on the date that the parties entered into the stock redemption agreement (January 1, 2016), and the dates of the three Transfers.” Stryker was engaged to give the insolvency opinion (“A debtor is insolvent, within the meaning of Code § 55-81, when he has insufficient property to pay all his debts.”).
FRE and Daubert.
The court here recited the four requirements for a witness to be qualified under FRE 702. The court also emphasized that the standard to be applied to was a preponderance, i.e., more likely than not. “Under Rule 702, expert testimony must be both reliable, and must ‘fit,’ or assist the trier of fact on one or more disputed issues in the case.” The court also noted the gatekeeping function of the court. The 4th Circuit held that a trial court “must satisfy itself that the proffered testimony is relevant to the issue at hand, for that is a precondition to admissibility” and that “the trial judge must determine whether the testimony has ‘a reliable basis in the knowledge and experience of the relevant discipline.’”
The court turned to the two critical adjustments in the Stryker report.
The Falcon Path contingent liability.
Falcon Path was awarded a judgment for over $400,000 for delivery of nonconforming goods. Yangzhou argued Stryker did not do a probability analysis. However, the court determined that the $140,000 contingent liability was reasonable at all three transfer dates. This can be challenged on cross-examination.
The 50% discount of the inventory’s value.
Yangzhou took issue with the 50% reduction in inventory “to reflect liquidation value of the inventory after the reduction to reflect the inventory report.” The court agreed this was a flawed assumption. Unimex was not being liquidated and always had been a going concern. Unimex was still selling shoes to this day. Additionally, Stryker provided no substantiation for the 50% discount rate. The use of the 50% rate was “ipse dixit” (“something asserted but not proved”). The court will, therefore, grant the defendant’s Daubert motion. In the case of all three of the transfers, the 50% adjustment caused the equity to be negative, i.e., without that adjustment, there was positive equity.
The court will exclude Stryker’s testimony on Unimex’s alleged insolvency.
54Weiwei Jian owned Unimex 100%, and Jian’s parents owned Yangzhou.