Kristen S. Coffey, The Daily Record Newswire
I recently came across a few business valuation court cases that I thought were worth mentioning. While some are basic, the points to come from these cases are salient to valuation analysts and pertinent to attorneys.
In Alexander v. Alexander, 2013 Mich. App. LEXIS 1490 (Sept. 10, 2013), at trial, the principal issues were the determination of the equity risk premium and, ultimately, the capitalization rate. In this divorce case, both sides came up with very different values even though both used the capitalization of net income approach. The judge decided to appoint a third appraiser because the parties' valuation expert failed to support their approaches.
It was noted that neither attorney used direct or cross-examination to tease out the reasons for the experts' different choices. Since no explanation was given for either capitalization rate, the appeals court had a difficult time reviewing the case because the husband's attorney had failed to build up a good trial record on which to challenge the lower court. Specifically, neither the attorney nor the expert had attached the "Ibbotson Yearbook"page (today it is aDuff & Phelpspublication) in support of their capitalization rate. As a result, there was very little for the appellate court to say.
This case highlights the obvious fact that the valuation analyst needs to support in his report all of the issues that may come up to a judge.
In Manpower, Inc. v. Insurance Company of PA., LLC 2013 US App. LEXIX 20959 (Oct. 16, 2013), the plaintiff had claimed losses for the collapse of its office building in Paris. The defendant's insurance company contested the claims.
The district court excluded the plaintiff's expert under Daubert even though it approved of his methodology; it simply disapproved of the data he relied on in his analysis. The Seventh Circuit found it went too far. Even though the court, as a gatekeeper, has leeway in determining reliability; it is not unlimited.
The appellate court said, "Reliability, however, is a primary question of the validity of the methodology employed by an expert, not the quality of the data used in applying the methodology or the conclusion produced." This decision speaks directly to the reason and boundaries of the application of Daubert. Boundaries reduce the risk of protracted litigation.
In the bankruptcy case In re Civic Partners Sioux City, LLC 2013 Bankr. LEXIS 4225 (Oct. 7, 2013), the court's decision was based on whose expert was right as to the appropriate cash flow projections and why.
The case centered on a failed development project. The debtor developer tried to push down a third version of its reorganization plan under the Bankruptcy Code's cram down provisions. Creditors objected that the plan was not feasible because it was based on an improperly low valuation of a building complex that made up most of the collateral that secured the bank's claim; it did not provide for enough money to pay the secured claim.
Here, the debtor and its expert ran into cash flow-related problems in their analysis and argument. Not only did the debtor's expert and the debtor not agree on or properly handle the lease value in the analysis, the analysis also failed to include adequate maintenance and repair costs along with other variables. While this is primarily a real estate valuation case, the takeaway is that, if a DCF analysis is used, it should be supportable in its assumptions and need to be well explained to the court.
Court cases are great reference tools for a valuation analyst and attorneys. It is important to remember that they represent a sample of judges' "current" thinking with regard to valuation principles and standards, valuation methodology and a variety of other valuation topics and issues.
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Kristin S. Coffey, CVA, MBA, is the director of Business Valuation Services with Mengel, Metzger, Barr & Co. LLP. She can be reached at kcoffey@mmb-co.com.
Published: Mon, Oct 05, 2015
