NewYorkCourtofAppealsIn a controversial ruling last year in Congel v Malfitano, the Appellate Division, Second Department, affirmed and modified in part a post-trial judgment against a former 3.08% partner in a general partnership that owns an interest in a large shopping mall, and who unilaterally gave notice of dissolution, finding that

  • the partnership had a definite term and was not at-will for purposes of voluntary dissolution under Partnership Law § 62 (1) (b) based on the partnership agreement’s provisions authorizing dissolution by majority vote, notwithstanding a 2013 ruling by the Court of Appeals (New York’s highest court) in Gelman v Buehler holding that “definite term” as used in the statute is durational and “refers to an identifiable terminate date” requiring “a specific or even a reasonably certain termination date”;
  • the former partner’s unilateral notice of dissolution therefore was wrongful; and
  • having wrongfully dissolved the partnership and upon the continuation of its business by the other partners, under Partnership Law § 69 (2) (c) (II) the amount to be paid to the former partner for the value of his interest properly reflected a 15% reduction for the partnership’s goodwill value, a 35% marketability discount, a whopping 66% minority discount, and a further deduction for damages consisting of the other partners’ litigation expenses over $1.8 million including statutory interest.

The Appellate Division’s decision, which I wrote about here, and the former partner’s subsequent application for leave to appeal to the Court of Appeals, which you can read here, reveal, to say the least, a remarkable result: the former partner, whose partnership interest had a stipulated topline value over $4.8 million, ended up with a judgment against him and in favor of the other partners for over $900,000.

But the story’s not over. Last week, the Court of Appeals issued an order granting the former’s partner’s motion for leave to appeal. Sometime later this year, the Court of Appeals will hear argument in its magnificent courtroom pictured above and issue a decision in the Congel case which likely will have important ramifications for partnership law whatever the outcome. Continue Reading Court of Appeals to Decide Controversial Partnership Dissolution Case

BarberYet another voice, that of Greg Barber, CFA, of Barber Analytics in San Francisco, has joined the growing debate in business valuation and legal circles over the controversial application of the discount for lack of marketability in New York statutory fair value proceedings involving dissenting shareholder appraisals and elective buy-outs of minority shareholders in dissolution cases.

Greg is a corporate valuation expert who focuses on valuations for statutory and mediated minority shareholder buyouts. Greg published a thought-provoking article in the October 2016 New York State Bar Association Journal entitled Marketability Discounts in New York Statutory Fair Value Determinations in which he critically analyzes the leading New York appellate decisions applying the marketability discount in fair value cases — namely, Blake, Seagroatt, and Beway — and highlights what he argues are the “misunderstandings, miscommunications, and inconsistences” entangling the discussion among appraisers, attorneys, and the courts. A copy of Greg’s article is available on his website here.

I followed up Greg’s article with an interview of him for my Business Divorce Roundtable podcast, a link to which appears at the bottom of this post.

Continue Reading Marketability Discount Revisited: Interview With Greg Barber

BDR

If you liked Part One of my Business Divorce Roundtable podcast interview of Chris Mercer on the subject of the marketability discount in statutory fair value appraisal proceedings, you’ll definitely enjoy Part Two which is now available on a bunch of podcast directories including iTunes, Stitcher, Soundcloud, or your favorite RSS reader. Better yet, you can listen to it by clicking here. And if you haven’t yet listened to Part One, click here.

The marketability discount has played an outsized role in New York fair value proceedings under Sections 623 and 1118 of the Business Corporation Law, and has taken on new shades of controversy in recent years as some judges and business appraisers have questioned its theoretical, empirical, and equitable foundations when valuing the shares of dissenting or oppressed minority stockholders in closely held companies.

It also has its defenders, but Chris Mercer is not one them. Chris has taken a very public and vocal stand against application of the marketability discount in fair value cases. In Part Two of my interview, Chris talks about cases in which he has served as expert witness at trial advocating a zero percent marketability discount, including the Giaimo, Chiu, and AriZona Iced Tea cases.

If you like the podcast, please don’t forget to subscribe on iTunes or your other podcast manager.

I’ve got exciting news for all you business divorce junkies: Now you can get your fix of the latest news in the world of business divorce via my new podcast. It’s called the Business Divorce Roundtable and it’s currently available on iTunes and Soundcloud.

Let me first tell you what the podcast is not. It’s not an audio rendition of this blog; you won’t hear me reading my weekly posts which will continue as they have for the last 8+ years analyzing the latest business divorce case law and statutory developments.

Rather, the podcast will feature in-depth interviews with top professionals in the field of business divorce from the legal, academic and business evaluation communities. Below you’ll find a link to a two-minute preview in which I describe my plans for the podcast. Please give it a listen!

Below you’ll also find a link to the podcast’s premiere episode, Part 1 of a 2-part interview with leading business appraiser Chris Mercer on the discount for lack of marketability in fair value proceedings, a topic that has generated much controversy of late in New York case law and business valuation circles, and concerning which Chris has been at the forefront as testifying expert in key appraisal contests including the AriZona Iced Tea case. It’s a highly informative interview on an issue of great importance to any business owner, expert, or advisor involved in a business valuation exercise in or out of court.

And don’t forget, if you like what you hear and don’t want to miss future episodes, please be sure to subscribe to Business Divorce Roundtable on iTunes, Soundcloud, or your favorite RSS reader. Also, your reviews and feedback are greatly appreciated.

Continue Reading Announcing the Business Divorce Roundtable Podcast

66discountTalk about playing your cards wrong.

A partner with a 3.08% interest worth $4.85 million in a partnership that owns a major shopping mall likely will walk away with only a few hundred thousand dollars after a court decision finding that he wrongfully dissolved the partnership and deducting from the value of his interest the other partners’ damages including legal fees, a 15% discount for goodwill, a 35% marketability discount, and a whopping 66% minority discount.

Last week’s decision by the Brooklyn-based Appellate Division, Second Department, in Congel v Malfitano, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], rejected the partner’s appeal from the trial court’s determination of wrongful dissolution and also upheld its valuation determination with one major exception: the appellate court held that the trial court erred by failing to apply a minority discount and that it should have applied a 66% minority discount based on the “credible” expert testimony “supported by the record.”

The defendant partner’s fateful decision took place in 2006, when he sent his fellow partners a written notice unilaterally electing to dissolve the partnership due to what he described as a “fundamental breakdown in the relationship between and among us as partners.” The other partners quickly responded with a damages lawsuit claiming that he had wrongfully dissolved in violation of the partnership agreement in an effort to force the partnership to buy out his interest at a steep premium. The defendant, arguing that the partnership was at-will and of indefinite duration, denied wrongful dissolution and counterclaimed for his full, pro rata share of the partnership’s value upon dissolution. Continue Reading Partner Who Wrongfully Dissolved Partnership Hit With Whopping 66% Minority Discount


SSTMy late grandfather, Samuel S. Tripp, had a remarkable career in the law spanning almost 70 years. He was admitted to the bar in 1928 after graduating from NYU School of Law. As a second year lawyer in private practice he argued his first appeal in the New York Court of Appeals when Benjamin Cardozo was its Chief Judge. In 1937 he became Chief Law Assistant of the Queens County Supreme Court, a position he held until retirement in 1973 after which he joined Farrell Fritz where he served as counsel to the firm and mentor to many for more than 20 years. He was President of the Queens County Bar Association, Vice President of the New York State Bar Association, and author of a leading treatise on New York practice. He was fastidious about everything he did. He had an amazing memory. He was the ultimate lawyer’s lawyer.

During his years at Farrell Fritz, from time to time Sam served as court-appointed Referee to hear and report in litigated matters. In 1982, he was appointed Referee in a corporate dissolution case involving a family-owned insurance agency to hear and report on the “fair value” of the petitioner’s 25% stock interest following the majority owner’s election to purchase in lieu of dissolution. The buy-out statute, § 1118 of the Business Corporation Law, had been enacted only three years before and there was virtually no case precedent construing the statute’s undefined “fair value” standard. Continue Reading The Birthing of New York’s Marketability Discount in Fair Value Cases: A Family Affair

PlanetOne of my favorite quotes from the realm of business valuation is found in a Delaware Chancery Court decision about 20 years ago in which, commenting on the vast disparity between the appraisals offered by two opposing experts — that for the seller making wildly optimistic assumptions about the subject firm’s business prospects while that for the buyer predicting doom and gloom — the court quipped, “In sum, one report is submitted by Dr. Pangloss, and the other by Mr. Scrooge.”

Dr. Pangloss and Mr. Scrooge were at it again in a decision handed down last week by Westchester Commercial Division Justice Alan D. Scheinkman, determining the fair value of a minority interest in two limited liability companies that, as franchisees, own and operate almost three dozen Planet Fitness health clubs in the New York City metro area and also own exclusive rights to develop additional clubs in New York and parts of Southern California.

The case is Verghetta v Lawlor, 2016 NY Slip Op 30423(U) [Sup Ct Westchester County Mar. 9, 2016]. The opening paragraph of Justice Scheinkman’s 33-page post-trial decision aptly sets the stage for the fair-value drama that follows, starring dueling appraisals over two thousand percent apart:

This Court is called upon to determine the value of two corporate entities for purposes of permitting the buy-out of a minority shareholder. It is not surprising, and rather in the nature of things, that the parties have a significant disagreement as to the value of the enterprise. The would-be seller relies on a valuation report that places the value of both corporations at over $162 million and the seller’s share at over $53 million. The would-be buyers rely on a valuation report that values one entity at $6.2 million, the other at $208,000, for a total for the two of approximately $6.4 million, and with the buyer’s share of the total being approximately $2.2 million. The Court must resolve the difference.

Continue Reading Threading the Fair-Value Needle: Court Finds Major Flaws in Both Sides’ Appraisals in Arriving at Its Own Value

DiscountOn the heels of last week’s post titled The DLOM Debate Heats Up, a timely new ruling by a New Jersey intermediate appellate court adds yet another interesting twist to the application of the discount for lack of marketability in fair value proceedings involving dissenting shareholder appraisals and oppressed minority shareholder buyouts.

New Jersey courts have a more restrictive approach to DLOM in fair value contests than New York courts, generally reserving it for “extraordinary circumstances” involving inequitable or coercive conduct by the seller. This latest New Jersey ruling doesn’t make new law but, to this observer at least, its application and quantification of DLOM seem equally if not more reliant on legal doctrine and, in particular, free-floating equity considerations than on empirically-based appraisal theory and methodology.

The New Jersey Appellate Division’s unpublished decision in Wisniewski v Walsh, 2015 N.J. Super. Unpub. LEXIS 3001 [App. Div. Dec. 24, 2015], caps an astonishing 20-year litigation saga involving a family-owned trucking business taken over from the founding father by three siblings, one of whom sued the other two under New Jersey’s oppressed shareholder statute. In 2000 the trial judge ruled that the petitioner himself was the oppressor and ordered him to sell his one-third interest to the company or his siblings for fair value to be determined by the court. Continue Reading Court Applies 25% Marketability Discount Despite “Strong Indicators of Liquidity”

fair valueThe discount for lack of marketability (DLOM) is one of the most hotly debated and heavily litigated issues in New York fair value proceedings involving dissenting shareholder appraisals and oppressed minority shareholder buyouts.

A new note in the DLOM debate is sounded in an article by Gilbert E. Matthews, CFA, Senior Managing Director and Chairman of Sutter Securities, published in this month’s Business Valuation Update with the provocative title, “NY’s Unfair Application of Shareholder-Level Marketability Discounts.” The article’s thrust is that New York law is singularly out of step with predominant fair value jurisprudence excluding DLOM in statutory fair value proceedings. (BV Update subscribers can access the article here; non-subscribers can obtain a copy by email request to Mr. Matthews at gil@suttersf.com.)

For those not familiar with valuation discounts, the International Glossary of Business Valuation Terms defines DLOM as “an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability” where marketability in turn is defined as “the ability to quickly convert property to cash at minimal cost.” It is not to be confused with the minority discount a/k/a discount for lack of control (DLOC) defined as “an amount or percentage deducted from the pro rata share of value of 100% of an equity interest in a business to reflect the absence of some or all of the powers of control.” Continue Reading The DLOM Debate Heats Up

DLOMI recently had a fair value appraisal hearing at which the opposing business valuation expert’s report and testimony in support of his proposed percentage discount for lack of marketability (DLOM) relied heavily on the percentages used in a number of reported court decisions in other cases. The reported cases were selected and supplied to the expert by the retaining counsel. The expert made no effort to draw meaningful comparison between the facts and circumstances concerning the subject company and the companies involved in the other cases. Indeed, some of the decisions in the other cases shed little if any light on the factors or methodology underlying the DLOM accepted by the court.

Should business appraisers rely on case precedent in determining discounts?

Not according to the IRS, one of whose many jobs is to review and sometimes challenge the marketability (and other) discounts reflected in estate and gift tax returns valuing interests in family limited partnerships and other closely held business entities.

In 2009, the IRS issued for its own internal use a 111-page paper called Discount for Lack of Marketability Job Aid for IRS Valuation Professionals (available online here). The DLOM Job Aid subsequently went public and serves as an important resource for business appraisers and lawyers involved in business valuation matters in which the applicable standard and level of value warrant consideration of a marketability discount. As regular readers of this blog know, DLOM often can be the single most contentious issue in fair value proceedings in the New York courts resulting from dissenting and oppressed minority shareholder lawsuits.

The DLOM Job Aid’s Executive Summary describes its overall purpose thusly: Continue Reading Should Business Appraisers Rely on Case Precedent for Discounts?