Viewers of Saturday Night Live in the late 1970’s remember Gilda Radner’s frumpy, hard-of-hearing character, Emily Litella, who gave misguided, agitated responses to TV editorials.  At the end of each sketch, after being told by Chevy Chase or Jane Curtin that she had misheard a critical word in the editorial, rendering moot her hilarious thesis, Litella would look straight into the camera and reply meekly, “Never mind.”  It became a catchphrase of the times.

I thought of Ms. Litella’s catchphrase when I read the Appellate Division, Second Department’s important decision last week affirming the trial court’s key stock valuation rulings, in Matter of Murphy (United States Dredging Corp.), 74 AD3d 815, 2010 NY Slip Op 04794 (2d Dept June 1, 2010).  Essentially, without even acknowledging it was doing so, the appellate court overruled 15 years of its own precedents, and aligned itself with contrary rulings by the other Appellate Divisions, by deciding that the discount for lack of marketability may be applied to the corporation’s entire enterprise value and not just its good will value.  (Read here and here my August 2008 and June 2009 articles on the inter-departmental split of authority.)

The trial judge in Murphy, Nassau County Commercial Division Justice Ira B. Warshawsky, over the minority shareholders’ objection, had applied a 15% discount for lack of marketability against the subject holding corporation’s entire enterprise value which consisted primarily of its ownership of several triple-net-leased real properties.  In so doing, he implicitly rejected theoretically binding Second Department precedent (the Whalen and Cinque cases) holding that the discount for lack of marketability is applicable only to the company’s good will value, and instead sided with the First Department’s contrary ruling in Hall v. King where the discount was applied to the entire enterprise value.  (What was implicit in Murphy became explicit in Justice Warshawsky’s later decision in the Jamaica Acquisition case where he openly agreed with Hall v. King.  This later case, which I wrote about here, settled prior to appeal.) 

In upholding Justice Warshawsky’s marketability discount ruling in Murphy, the Second Department cited Hall v. King with nary a mention of Whalen and Cinque or even acknowledging the prior split of authority.  Here’s the key passage from the opinion:  

In this case, the Supreme Court properly applied a lack of marketability discount of 15%, on the ground that the Corporation was a close corporation. Further, contrary to the petitioners’ contention, the law does not limit the application of a lack of marketability discount to the goodwill of a corporation in all instances (see Matter of Brooklyn Home Dialysis Training Ctr., 293 AD2d 747; Hall v King, 265 AD2d 244, 245; Lehman v Piontkowski, 203 AD2d 257, 259; Matter of Raskin v Walter Karl, Inc., 129 AD2d 642, 644; Matter of Joy Wholesale Sundries, 125 AD2d 310; Matter of Fleischer, 107 AD2d 97; Matter of Blake v Blake Agency, 107 AD2d at 149; see also Hall v King, 177 Misc 2d 126, 134). Moreover, this case presents no factual circumstances under which such a limitation is appropriate.

Notice how the above passage does not create a categorical rule.  Rather, it leaves for case-by-case determination, based on the specific facts presented, whether the marketability discount should apply to the entire enterprise value or should be limited to good will.  In any event, so ends with a whimper what had been the most controversial, open issue in stock valuation proceedings under the fair value standard used in oppressed minority shareholder and dissenting shareholder buyout proceedings.

But wait, there’s more.  The Murphy appeals court also upheld Justice Warshawsky’s approximately $3 million discount for built-in gains tax (“BIG”) using a present value computation of future taxes assuming that the corporation held its real property investments for 19 years.  (Read here my July 2008 analysis of the trial court’s BIG decision.)  The corporation argued for a 100% discount of the entire $11.6 million BIG tax, in line with prevailing authorities in the gift and estate tax area which presume a total liquidation of assets as of the valuation date.  The appeals court disagreed, finding adequate support in the record for the lengthy holding period.  The court also distinguished the First Department’s approval of a 100% BIG deduction in the matrimonial valuation case, Wechsler v. Wechsler (58 AD3d 62), on the ground that, in that case, the defendant husband “‘necessarily will have to sell’ at least some of the assets of his corporation every year.”

I’ll close with a few other, miscellaneous notes of interest from the Second Department’s Murphy ruling:

  • The appeals court found inappropriate the trial court’s inclusion of a $2 million liability for officer pensions, which the corporation’s Board adopted about six weeks after the valuation date although it had been under discussion for some time before the valuation date.  The court rejected the corporation’s reliance on dissenting shareholder valuation cases decided under Section 623(h)(4) of the Business Corporation Law, pointing out that, unlike Section 1118 governing buyout of oppressed minority shareholders, the statute expressly permits consideration of post-merger factors.
  • The appeals court agreed with the trial court’s determination of about $6.5 million working capital, but it found a 10% expected rate of return excessive, and directed the lower court to recalculate the income value using a 6.7% rate based on testimony of the corporation’s appraiser and president.
  • The lower court awarded pre-judgment interest at the statutory rate of 9% from the valuation date, except for an 11-month period (starting 60 days after conclusion of trial through the date of decision directing entry of judgment) at the rate of 5%.  The appeals court directed that, upon remand, the lower court make findings of fact in support of its use of the reduced rate “and, if warranted, the application of a different interest rate for that period of time.”
  • The Second Department’s opinion, at the outset of its legal analysis, mentions the “fair value” standard under Section 1118 and then adds, “[t]he terms ‘fair value’ and ‘fair market value’ are used interchangeably,” citing to the following passage in the New York Court of Appeals’ 1991 opinion in Matter of Seagroatt:

Business Corporation Law § 1118 offers no definition of fair value and no criteria by which a court is to determine price or other terms of the purchase (see also, Business Corporation Law § 623). Rather, fair market value, being a question of fact, will depend upon the circumstances of each case; there is no single formula for mechanical application.  [Emphasis added.]

In my opinion, it was dicta in Seagroatt, it’s dicta in Murphy, and it’s misuse of terminology in both.  Read here my December 2007 article on the difference between FV and FMV.