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

This is the second installment of a two-part examination of a recent post-trial decision by Queens County Supreme Court Justice Allan B. Weiss in Chiu v. Chiu, a decade-long fight between two brothers over the ownership of commercial realty in Long Island City purchased in 1999 for use as a warehouse for a business separately owned by one of the brothers. Last week’s post analyzed the court’s ruling, based on some old tax returns and subsequent advances deemed to be capital contributions, that the percentage ownership split of the title-holding LLC is 90/10. This second post looks at the court’s valuation of the 10% member’s interest triggered by his withdrawal from the LLC.


In Chiu v. Chiu (read decision here), after deciding that brothers Man Choi Chiu (MCC) and Winston Chiu (WC) held 90% and 10% membership interests, respectively, in the single asset realty company known as 42-52 Northern Boulevard, LLC (the “LLC”), Justice Weiss’s next task was to calculate the “fair value” of WC’s 10% interest as of February 9, 2008, the date on which WC withdrew from the LLC pursuant to LLC Law §509.

Justice Weiss initially observes that the LLC Law “does not define ‘fair value,’ and the parties have not called the court’s attention to any cases which discuss the term in connection with a limited liability company.” He then proceeds to interpret fair value “as used in connection with other business forms,” i.e., by reference primarily to fair value case law involving stock buy-outs and dissenting shareholder appraisals under New York’s Business Corporation Law.

MCC and WC each offered the testimony of two experts — a real estate appraiser and a business appraiser — to value WC’s membership interest. In an unusual twist, MCC’s real estate appraiser (representing the buyer) valued the property $200,000 higher than WC’s real estate appraiser (representing the seller), with the former arriving at a figure of $13.7 million versus the latter’s $13.5 million.

Continue Reading Court Rejects Marketability Discount in LLC Fair Value Case

An epic corporate governance and stock valuation battle between rival siblings, fighting over a Manhattan real estate portfolio worth upwards of $100 million, generated an important ruling last week by New York County Supreme Court Justice Marcy S. Friedman.  Justice Friedman’s decision in Matter of Giaimo (EGA Associates, Inc.), 2011 NY Slip Op 50714(U) (Sup Ct NY County Apr. 25, 2011), and the underlying, 184-page Report & Recommendation by Special Referee Louis Crespo dated June 30, 2010, are must reading for business appraisers, attorneys and owners of closely held real estate holding corporations who are involved in, or who are contemplating bringing or defending against, a “fair value” proceeding under New York’s minority shareholder oppression or dissenting shareholder statutes.

In the end, after both sides essentially accepted Referee Crespo’s net asset valuation of the 19 real properties owned by two Subchapter “C” corporations, the valuation controversy boiled down to two issues presented to Justice Friedman.  First, did Referee Crespo properly adopt what he dubbed the “Murphy Discount” (I’ll explain below) in requiring the deduction of the present value of taxes on built-in capital gains (BIG)?  Justice Friedman answered “yes.”  Second, did Referee Crespo properly exclude a separate discount of the companies’ shares for lack of marketability (DLOM)?  Although she disagreed with Referee Crespo’s reasoning, Justice Friedman again answered “yes.”

Giaimo involves two corporations, abbreviated as EGA and FAV, owned more or less in equal one-third shares by siblings Edward, Robert and Janet.  Together the corporations owned 18 residential apartment buildings (mostly walk-up tenements) and one undeveloped land parcel located mostly in Manhattan’s Upper East Side.  Edward died in March 2007.  His will provided for division of his shares equally between Robert and Janet, however Janet produced an assignment to her of one EGA share made by Edward two weeks before his death, giving her majority control of that company.  Robert brought a lawsuit challenging the assignment as a violation of the corporation’s right of first refusal endorsed on the back of the stock certificates.

Continue Reading Court Rejects Marketability Discount, Applies “Murphy Discount” for Built-In Gains, in Determining Fair Value of Shares in Real Estate Holding Corporations

A federal appeals court once remarked that “the valuation of a closely held company is an inexact science”, adding, “some might say an art” (Okerlund v. U.S., 365 F3d 1044 [Fed. Cir. 2004]).  Looking at the gallery of New York valuation law, the artist must be Jackson Pollack.

By that I mean, the valuation rules seem like a hodgepodge when one compares the different settings in which interests in closely held companies are valued by the New York courts, including dissenting shareholder appraisals and oppressed minority shareholder buyouts under the Business Corporation Law, accounting proceedings under the Partnership Law, and equitable distribution proceedings under the Domestic Relations Law.  This holds especially true with respect to valuation discounts, as highlighted in a recent appellate decision concerning a fractured partnership in a case called Vick v. Albert, 47 AD3d 482 [1st Dept 2008] (read decision here).

Vick involved a nasty family feud that spawned multiple litigations and arbitration lasting almost a decade.  Beginning in 1975, Susan Vick and her brother, Richard Albert, co-owned a number of investment real properties in New York City.  Some of the properties they owned as tenants in common, others were owned by partnerships in which Vick, Albert and others held partnership interests.  Vick died in 1999, leaving her interests to her two children.  About eight months after their mother’s death, the children sued their uncle and others seeking, among other things, a partition of certain properties and a dissolution and accounting with respect to various partnerships.  The complaint alleged that the uncle took exclusive control of the partnerships’ books, records, properties and assets; that he misappropriated certain assets including rental income for his own benefit; and that he failed to wind up the partnerships’ affairs after his sister died and failed to provide a final accounting for each of the partnerships.  (The appellate court’s decision unfortunately recites very few facts.  More can be learned from the prior lower court decisions, two of which from 2001 and 2004 can be viewed here and here.)

Continue Reading Court Refuses to Apply Marketability and Minority Discounts in Valuing Deceased Partner’s Interest