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

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

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

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

The question is, will the Zelouf case prove to be an outlier or the beginning of a sea change in the way New York courts view the marketability discount in fair value proceedings?

Last October I wrote about Zelouf Int’l Corp. v Zelouf, an important post-trial decision in which, among other significant rulings, Manhattan Commercial Division Justice Shirley Werner Kornreich refused to apply a discount for lack of marketability (DLOM) in a statutory fair value proceeding triggered by a cash-out merger of a family-owned business.

Justice Kornreich found the risk of illiquidity associated with the company “more theoretical than real,” explaining there was little or no likelihood the controlling shareholders would sell the company, i.e, themselves would incur illiquidity risk upon sale. Imposing DLOM in valuing the dissenting shareholder’s stake, therefore, would be tantamount to levying a prohibited discount for lack of control a/k/a minority discount.

Within weeks of the decision, both sides filed motions for reargument seeking to vacate or modify various aspects of the court’s rulings including its rejection of any DLOM. In her decision dated December 22, 2014, Justice Kornreich adhered to her prior DLOM ruling but also saw fit to revisit and expand upon her reasons for doing so, given what she described as “New York’s contentious DLOM jurisprudence and the persuasive opinions of the academic community and non-New York courts.” Continue Reading Court’s Rejection of Marketability Discount in Zelouf Case Guided by Fairness, Not “Formalistic and Buzzwordy Principles”

A company’s financial statements constitute the core data used by business appraisers to value shareholder equity in statutory appraisal proceedings triggered by dissolution petitions brought by oppressed minority shareholders.

In my experience, most small and medium sized closely held businesses do not have audited financial statements but instead rely on their outside accountant to prepare either a compilation or review report which merely compiles management’s financial reports without any probing whatsoever (compilation) or employs a limited analysis of the company’s accounting practices and other factors but without any data testing as would be done in an audit (review).

When using the income and market approaches to value a business, appraisers engaged as expert trial witnesses routinely make “normalizing” adjustments to the income statement (a/k/a Profit & Loss statement or “P&L”) before applying a capitalization rate or market value ratios. For instance, the appraiser will eliminate extraordinary gains or losses, or may adjust officer/owner compensation to reflect reasonable compensation rates based on generally accepted industry surveys.

But beyond standard normalization, an expert appraiser using non-audited statements must determine whether the underlying income, expense, asset and liability data provided by management are reliable to a reasonable degree. Otherwise it’s GIGO — garbage in, garbage out.

That’s where forensic accounting comes in, as nicely illustrated in a recent case decided by Queens County Commercial Division Justice Orin R. Kitzes in Matter of Adelstein (Finest Food Distributing Co. N.Y., Inc., 2011 NY Slip Op 33256(U) (Sup Ct Queens County Nov. 3, 2011).

Continue Reading Forensic Accounting Helps Wins the Day in Oppressed Shareholder Stock Valuation Proceeding

The rules for the two most important valuation discounts in New York statutory “fair value” (FV) proceedings, such as shareholder oppression and dissenting shareholder cases, are well established:  the discount for lack of marketability (DLOM) is in; the minority discount a/k/a discount for lack of control (DLOC) is out.  DLOM applies because it reflects the additional time and risk of selling even a controlling, nonmarketable interest in a closely held business as compared to publicly traded shares.  In contrast, the reasoning goes, if DLOC were applied in FV proceedings the majority shareholders would receive a windfall that would encourage squeeze-out and unfairly deprive minority shareholders of their proportionate interest in the venture as a going concern.

As I’ve previously written here and here, the exclusion of DLOC in FV appraisals is the principal distinguishing feature from the “fair market value” (FMV) standard used in matrimonial, gift and estate tax matters where, premised on a hypothetical arm’s-length transaction under which neither buyer nor seller is under any compulsion to buy or sell, both discounts generally apply.  The two discounts, individually and certainly when combined, can substantially reduce the value of an interest in a closely held business entity.

Along comes an interesting court decision by a Manhattan judge that adds a new twist to the FV/FMV discount dichotomy, holding that neither discount should apply in measuring damages due for breach of an agreement to give the plaintiff a 10% equity interest in specified real properties owned by the defendant through a series of closely held entities.  The unreported decision is Cole v. Macklowe, Memorandum Decision, Index No. 604784/99 (Sup Ct NY County Sept. 25, 2010).

Continue Reading Court Rejects Minority and Marketability Discounts in Assessing Damages for Breach of Equity Participation Agreement