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Malpractice Case for Alleged Incorrect Valuation of Gifts of Stock Proceeds

November 18, 2022

In this highlighted Business Valuation Resources (BVR) case report, an attorney was denied a summary judgment in a malpractice case concerning a previous valuation prepared for estate planning purposes. The primary issue related to the attorney’s valuation of stock of a family business that was gifted to two of the four children of the decedent. While an “equalization payment” was made to each of the two remaining children, one of these two sued the attorney for both breach of fiduciary duty and for undervaluing the stock gifted, resulting in an underpaid equalization payment.

This is relevant because even though the IRS did not challenge the gift value, the court indicates that one of the daughters of the decedent is not precluded from alleging that the attorney owed her a duty of care. A main takeaway is that it appears that the attorney did not advise the decedent adequately that the gift valuation had limited use for non-tax purposes; as such, this resulted in equalization payments to the beneficiaries that did not receive gifted stock that were well below what the daughter perceived the fair market value of the gifted stock to be.

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Estate Attorney Is Denied a Summary Judgment for Alleged Incorrect Valuation of Gifts of Stock—Malpractice Case Proceeds

Sullivan v Loden, 2022 U.S. Dist. LEXIS 81293; 2022 WL 1409567 (May 4, 2022)

Plaintiff Colleen Sullivan is the daughter of the decedent, Joanna Sullivan, matriarch of the Foodland Supermarket family business. Colleen asserted a claim of legal malpractice against Joanna’s estate planning attorney, defendant Elliot Loden, arising from a 2011-12 valuation of Foodland stock in the course of his work for Joanna. Loden moved for summary judgment on the malpractice claim. Loden also asserted Colleen was collaterally estopped from asserting her claim because the IRS “thrice” accepted Loden’s valuation.

Summary judgment as to Count I was denied because there was a material question as to whether Loden did owe a duty of care to Colleen as an intended beneficiary. Collateral estoppel also did not apply since Colleen was not a party to any IRS acceptance of the Loden valuation.

The summary judgment claim as to Count I was denied.

Facts and Background

Joanna transferred assets to her four children via gift and bequest. Since 2001, only Jenai and Kitty of the four Sullivan children have been involved in the family businesses. In late 2011 and early 2012, Joanna transferred her 221 common shares of Foodland stock equally to Jenai and Kitty. Joanna filed gift tax returns for the gifts for both years, for which Loden performed two appraisals of Foodland stock. The appraisals resulted in reported gifts of $679,350 to each daughter. The IRS made no changes to the filings on the gifts.

Joanna died on Sept. 2, 2015, leaving an estate of approximately $192 million. The will provided substantially for an equal division of her assets to the four children with a carve-out of $1 million cash bequests to Colleen and Patrick to equalize the gifts of stock made to Jenai and Kitty. Loden was named personal representative of the estate. Neither the IRS nor the Hawaii Department of Taxation made adjustments to the estate.

Colleen expressed concern that her mother’s testamentary intent was frustrated by faulty legal advice and pursued corrective action. Colleen challenged the value of the gifts the appraisals assigned. Colleen asserted that Joanna intended to treat the four children “more or less equally” and that Joanna relied on the appraisals in determining her equalizing payments to the other two children. Colleen claimed that Loden’s appraisals far undervalued the stock gifts to Jenai and Kitty. She asked Loden to obtain a corrected valuation.

Loden denied Colleen’s request for a special administrator and defended the efficacy of his appraisals, contending he had no “conflict of interest.” He also denied that Joanna relied on the appraisals in making the equalization payments to Colleen and Patrick. On remand, the probate court appointed Mark Murakami, Esq., as special administrator. On Feb. 1, 2022, Murakami issued his report indicating that the appraisals were not performed according to applicable standards, including USPAP. They were, therefore, unreliable and not trustworthy. Murakami did not order a new appraisal because of the cost and the supposition that one side or the other (or both) would oppose the result.

“Nonetheless, he stated that a reliable valuation would be material to Colleen’s malpractice claim:

If [Joanna’s] intent was to pay less gift/estate tax, then her intent was fulfilled, but perhaps at the cost of equal treatment of her children. If her intent was equal division to her children, then that intent may not have been effectuated, but the [sic] I, and the Court, cannot know without a reliable valuation.”

Colleen asserted a cause of action against Loden for legal malpractice. On March 5, 2021, Colleen initiated this claim of legal malpractice. She claims Loden shirked his duty either to value the stock correctly or to advise Joanna of the limited utility of the appraisals for nontax purposes. She brings her claims for both contract and negligence theories.

Loden moved for summary judgment on the malpractice claim, contending that Colleen lacked standing because he owed her no duty of care as a nonclient. On Feb. 20, 2022, Loden filed this motion for summary judgment. Loden contended that the appraisals were strictly for IRS purposes and not advice to allocate assets among her children. Loden asserted the appraisals were not intended for Colleen and that there was no proof that Joanna relied on them in allocating assets to her children. Loden also asserted that collateral estoppel barred Colleen’s claim because the IRS accepted them three times.

There was at least a genuine issue of material fact as to whether Loden owed Colleen a duty, precluding summary judgment on standing. In determining a duty of care, six factors should be considered, according to the Hawaii Supreme Court in Blair. These factors were listed in the opinion. Here, Loden had not carried his burden of showing that the six factors weighed against Loden having a duty of care to Colleen. “Much of the Blair analysis here depends on whether Colleen was an intended beneficiary of the Appraisals. There is no doubt that she was.” The appraisals were important to all four children because the evidence showed that Joanna intended to treat all four children equally. The record also showed that Loden knew of Joanna’s wish to treat all children equally in the estate. The court went through each of the six factors to show how they apply to Loden’s potential duty of care in this case.

The court also determined that there was no collateral estoppel regarding the appraisals since there was no connection between the IRS and Colleen.

Editor’s note: By implication, this case contains valuation issues regarding potential conflict of interest, compliance with business valuation standards, and the valuation competency of, in this case, the attorney preparing the “Appraisals.” He does not appear to have any training or accreditations in the area of business valuation.

Dan Rosio Partner, Valuation Services

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