Skip to content

Hundreds of cases are settled by our courts every day and it can be hard to keep up with the latest rulings. In this quarter’s newsletter, KSM’s Litigation & Disputes team has pulled together some interesting case summaries that obtained a meaningful result in the context of economic damages. Read on to see what’s happened recently.

If you require the perspective of an expert in commercial damages, we’d love to discuss how KSM can help. Please contact a member of our team or complete this form.

In This Issue:

Court Denies a Partial Motion by Defendant to Dismiss Claims of Unjust Enrichment and Tortious Interference With Business Relations

Aureus Holdings, LLC v. Kubient, Inc., 2021 Del. Super. LEXIS 535, 2021 WL 3465050 (Aug. 6, 2021)

The Superior Court of Delaware decided this civil action. The case involved claims regarding a failure to enter into an asset purchase agreement. “Plaintiff Aureus Holdings d/b/a Lo70s (‘Lo70s’) alleges that Defendant Kubient Inc. (‘Kubient’) breached a Binding Letter of Intent (‘LOI’) by failing to move towards executing the APA and failing to negotiate in good faith. Lo70s also alleges that Kubient unjustly enriched themselves and tortiously interfered with Lo70s business relations.” This specific hearing involved a partial motion to dismiss Lo70s’ claims of unjust enrichment and tortious interference. For reasons described below, the court denied the motion.

Background. Lo70s is a Nevada LLC that specializes in advertising and lead generation. It pled that it has a strong reputation and a strong network of connections that allows it to keep up with the market. Kubient is a Delaware corporation headquartered in New York City. It is also involved in advertising technology.

Kubient, desiring an IPO, wished to acquire Lo70s. “On March 1, 2019, Kubient and Lo70s entered into the LOI. Kubient and Lo70s also agreed to create the APA under which Kubient would acquire substantially all of Lo70s’ assets.” In the LOI, the parties agreed to prepare the asset purchase agreement (APA). “The LOI’s term, referred to as the ‘Exclusivity Period,’ ran from March 1, 2019 to December 31, 2019.”

After executing the LOI, Lo70s assisted Kubient with the integration of its assets into Kubient and aided Kubient with its marketing. “Kubient specifically requested that Lo70s focus on accounts related to Fidelity Media, which was newly acquired by Kubient.” Kubient kept all revenues related to Fidelity. Kubient directed Lo70s’ employees to work on behalf of Kubient and to develop Kubient relationships.

The parties integrated their businesses after signing the LOI in many ways as set out in the amended complaint. “Kubient limited Lo70s from contacting Lo70s’ customers and opportunities and directed communications with those customers to Kubient.” Kubient purportedly moved Lo70s’ entire infrastructure to its own systems.

Kubient does not draft or execute the APA. Kubient represented to Lo70s that it was actively working to consummate the transaction. On Nov. 6, 2019, Kubient represented that it would pay $500,000 cash at closing of the APA plus some Kubient stock at the IPO date. “On November 7, 2019, Kubient reneged on the deal. Kubient represented that it would instead pay Lo70s’ $200,000 in cash and no stock at its eventual IPO. Lo70s rejected that offer because of the previous day’s communication.”

Parties contentions.
Kubient’s contentions. Kubient argued that the unjust enrichment claim and the tortious interference claim should be dismissed because the LOI governed remedies. Kubient also contended that Lo70s failed to state a claim for tortious interference.

Lo70s contentions. Lo70s contended the unjust enrichment claim should survive because Kubient unjustly enriched itself with extracontractual activities. “Lo70s also states that the unjust enrichment claim is permissible as a claim pled in the alternative from the contract claims.”

Discussion. “First, Lo70s alleges that it enriched Kubient because Lo70s helped Kubient integrate Lo70s’ assets into Kubient and generally worked for Kubient’s benefit, including turning over every single customer to Kubient.” Additionally, Kubient impoverished Lo70s on Kubient’s instructions; Lo70s abandoned the business and turned it over to Kubient; Kubient does not argue that its conduct was justified; and, finally, there was no remedy because the LOI had no mechanism for Lo70s to recover its damages.

The LOI did not comprehensively govern the relationship between Lo70s and Kubient. The LOI did not apportion work or allocate cost. The LOI acted to Kubient’s benefit per Lo70s. Thus, the LOI did not preclude an unjust enrichment claim.

Proper plea for tortious interference by Lo70s. Lo70s alleged that it “was highly profitable and known for its efficiency in the [arbitrage] market.” To meet the intentional interference prong of tortious interference, the plaintiff must prove that the “defendant’s interference with the plaintiff’s business opportunity was intentional and wrongful or improper.” Lo70s contended that Kubient was not acting within its contractual rights. “[O]n Kubient’s instructions, Lo70s … completely abandoned its arbitrage business, turned over every single one of its customers to Kubient.… Kubient had de facto completed the acquisition of Lo70s’ assets.” Lo70s alleged facts supporting a reasonable inference that Kubient’s conduct proximately caused its damages.

The court also noted that the economic loss doctrine does not automatically bar interference claims. The LOI only imposed duties to the parties entering an APA. The LOI was silent as to pre-APA finalization business. “Therefore, Kubient’s alleged tortious conduct did not violate any duty imposed by the LOI and the economic loss doctrine does not bar Lo70s’ tortious interference claim.”

Conclusion. The court denied the motion to dismiss. The motion met the tests of sufficiency of the amended complaint. Lo70s had sufficiently pled the two claims that it made.

California Court of Appeal Allows a Discount for Lack of Control in the Buyout of 25% Interests in an LLC

Cheng v. Coastal Lb Assocs., 2021 Cal. App. Unpub. LEXIS 5655 *; 2021 WL 3909726 (Sept. 1, 2021)

This action concerns the purchase of minority interests in a California LLC. Four siblings of the Cheng family equally owned the LLC, Clary Associates LLC (Clary). Bernice Cheng is the plaintiff and appellant. She challenged the trial court’s (TC) order confirming a majority appraisers’ award valuing the parties respective 25% interests in the LLC at a discounted fair market value (FMV) of $623,979. The appellate court (AC) affirmed the TC ‘s order.

Background. Appellant filed an action, in October 2017, for involuntary dissolution of Clary under Section 17707.03 of the California Code (Code). The respondents moved to purchase appellant’s interest in lieu of dissolution, as allowed under the code. “The parties stipulated that ‘[t]he term ‘fair market value’ shall be defined as commonly understood in the appraisal industry, California statutes, and precedents which have applied Corp. Code 17707.03.’” The TC appointed the three experts noted above as appraisers. The LLC’s sole asset was an industrial warehouse that was appraised, in March 2018, at $3 million. Each appraiser reached a different conclusion of value, and the respondents filed a motion asking the TC to instruct the appraisers to see whether they could arrive at a consensus appraisal. The TC granted that motion. The appraisers submitted a final report on Aug. 20, 2019, agreeing on a “net asset value” of $831,973 for a 25% interest in the LLC as of Oct. 20, 2017. The appraisers also agreed that the FMV standard required consideration of discounts and applied a 27% discount for lack of control (DLOC), arriving at a value $623,979.

Appellant filed a third amended complaint (TAC) on Oct. 15, 2019, asking for dissolution on a number of grounds including mismanagement and conflicts of interest. On Nov. 12, 2019, the TC confirmed the appraisers’ discounted FMV of a 25% interest at $623,979, less $2,025 for appraisal fees for a net value of $621,9545. Appellant filed this appeal on Jan. 8, 2020.

Contentions on appeal:

  1. TC’s order to instruct the appraisers to confer and reach a consensus on the FMV did not comply with the statutory procedures in the code;
  2. The consensus valuation incorrectly discounted the value of the LLC interests, arguing that discounts are not allowed under Code section 2000, and the same should be applied to Code section 17707.03; and
  3. The valuation confirmed did account for appellant’s mismanagement allegations.

Discussion. Under Code section 17707.03(c), the other members can avoid dissolution by purchasing for cash at FMV the interests of the members initiating the dissolution proceeding. If the parties cannot agree to a value then, “[t]he court shall appoint three disinterested appraisers to appraise the fair market value of the membership interests owned by the moving parties, and shall make an order referring the matter to the appraisers so appointed for the purpose of ascertaining that value…. The award of the appraisers or a majority of them, when confirmed by the court, shall be final and conclusive upon all parties.”

The appraisers award did not bind the TC, but the TC’s valuation order was appealable. The AC did review de novo the appellant’s challenge to the TC’s order to the appraisers to attempt to arrive at a consensus opinion of value.

Alleged failure to follow statutory procedures. Code section 17707.03 did not prohibit the TC from ordering the appraisers to get together and attempt to arrive at a consensus value. Nothing in the statutory language required the TC to make a de novo determination of value in the absence of consensus value of the appraisers.

Case authority as to the buyout procedures of Code section 17707.03 was sparse, so courts have looked to cases applying Section 2000 (which relates to corporation dissolutions). Those cases did not support the argument that the TC was required to make a de novo determination of value. The TC in this case did not determine that any of the three appraisals were erroneous, and thus the TC was not required to determine a value de novo. “In Brown, the trial court’s order appointing the appraisers expressly stated that if the appraisers were unable to agree, ‘they shall petition the court for instruction.’”

Allegedly erroneous determination of FMV.

Minority interest discount. The appraisal award did not improperly discount the FMV of the LLC interests. The stipulated order entered into defined FMV as the term is commonly understood in the appraisal industry and in precedents under Code section 17707.03. A majority of the appraisers agreed that the FMV standard required consideration of discounts and that 27% was a reasonable discount to be applied to the LLC interests. The discounts were consistent with the FMV principles the parties agreed to in the stipulation and are further supported by evidence of two of the appraisers who provided both discounts and support thereof in the reports and analyses. The AC also rejected an argument by the plaintiff that a prior trust dispute between the parties had any relevance. That case did not concern the buyout of LLC interests.

Further, the AC determined that the valuation standard under Code section 2000 did not apply in this case. Even though Code section 2000 prohibited discounts, it did not apply to Code section 17707.03 since the law under that latter section was clear and not ambiguous and it applied the FMV standard, which allowed consideration of discounts. “The commonly accepted definition of ‘fair market value’ under California law is the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties have reasonable knowledge of the relevant facts.” Code section 2000 requires “fair value” and not FMV, and California courts have distinguished between the two. “The difference in the statutory language evidences a difference in legislative intent.”

Mismanagement allegations. No direct claims of mismanagement were made in the TAC, and they were not made in the joint stipulation previously entered into. There were no mismanagement claims to be considered in the buyout valuation.

Disposition. “The order confirming the majority appraisal award and setting a final buyout price of $621,954 for each 25 percent interest in the LLC is affirmed. Respondents are awarded their costs on appeal.”

Court Issues Partial Summary Judgment in Favor of Party Alleging Breach of Contract

Paganelli v. Lovelace, 2021 U.S. Dist. LEXIS 185373 *; 2021 WL 4439753 (Sept. 28, 2021)

This matter was before the court on the defendant’s motion for partial summary judgement. The court granted the motion.


Parties’ agreement. The defendant, and counterclaimant, Richard Lovelace was an estimator and project manager for Safe Environmental Corp. (the Company). He eventually became a vice president but was not involved in the finances of the Company. The Company is an asbestos and lead paint remediation company.

Anthony Paganelli, the owner of the Company, approached Lovelace about buying the Company in 2009. The Company’s accountant prepared a stock purchase agreement. Lovelace would purchase 100% of the shares of the Company from Paganelli for $3 million over 10 years and a salary to Paganelli of $150,000 for as long as any of the $3 million is outstanding.

Paganelli’s alleged breaches of the agreement. Paganelli used as much as $484,606.79 in Company funds for personal purposes. “Except for three payments on Paganelli’s home loan, all of these transactions were recorded as Company business expenses.” Lovelace argued that these personal payments breached the representations Paganelli made in the agreement in many ways, including the representation that the financial statements did not conform to the books and records prepared in the ordinary course of business. Lovelace’s expert also opined that the financial statements Paganelli provided did not fairly show the financial condition of the Company. For example, some jobs were noted as being 100% complete when they were not, thus increasing the reported revenues of the Company. Expert Kolodziej also noted that the financial statements did not conform to GAAP. “Kolodziej found that the 2008 year-end financial statements created in May 2009 changed materially from the numbers included in the Business Valuation Report created in February 2009, and revealed a net income decrease of over $600,000.”

Lovelace also argued that “Paganelli violated Section 3.7 of the Agreement, which promised that since December 31, 2008, the Company has operated ‘in the ordinary course and consistent with past practice.’” Lovelace argued Paganelli violated Section 3.7 in two ways: (1) the Company took on debt in order to fund shareholder distributions in the year of sale; and (2) union liabilities for underfunding of the pension plan were not disclosed.

Procedural history. Paganelli’s amended complaint alleged three counts: breach of contract, complaint for accounting, and a breach of promissory note. Lovelace filed a counterclaim alleging breach of contract and fraud. Lovelace “now moves” for summary judgement on Paganelli’s claims and on the liability question of his breach of contract counterclaim.

Analysis. Paganelli argued that Lovelace’s affidavit contradicted his deposition testimony but did not offer any support for this argument. Paganelli’s request to strike Lovelace’s affidavit was denied.

Breach of contract. Both parties claimed the other was liable for breaching the contract. Here, there was no dispute that Lovelace prematurely ceased performance under the contract. The question was whether Paganelli committed the first material breach. If so, his claims against Lovelace failed as a matter of law. “Because Lovelace seeks summary judgment on a claim as to which he will bear the ultimate burden of proof (his breach of contract counterclaim), he must have laid out the elements of the claim; identified the facts which satisfy those elements; and demonstrated that the record is so one-sided as to rule out the prospect of a finding in favor of Paganelli.” Lovelace has met this burden and has shown that Paganelli’s breaches were material. “The evidence further demonstrates that: Paganelli’s actions were willful; that Lovelace can be adequately compensated by damages in his favor; and that the likelihood of cure by Paganelli is very small.”

Paganelli argued that Lovelace failed to exercise due diligence prior to entering into the agreement but did not present any authority for that position. The Indiana Supreme Court had long held that there was no duty to investigate where there was an express warranty.

The evidence showed that Paganelli committed the first material breach, thus Lovelace was entitled to judgment on Paganelli’s claims as well as on his own breach of contract counterclaim.

The defendant’s motion for partial summary judgement was granted, and the case was referred to the magistrate judge for settlement purposes.

District Court Rules ‘Decisively’ Against the DOL in an ESOP Overvaluation Case

Walsh v. Bowers, 2021 U.S. Dist. LEXIS 177184 (Sept. 17, 2021)

Defendants Brian Bowers and Dexter Kubota owned all the stock in an engineering firm, Bowers & Kubota Consulting Inc. They created an ESOP to which they sold all of their stock for $40 million. The government sued, alleging that they had violated ERISA by manipulating data so that the ESOP paid more than fair market value (FMV) for the stock. The US District Court—Hawaii determined that no ERISA violation had been established.

Part of the government’s case is based on a nonbinding indication of interest by a private company to purchase the company for what the government says was $15 million. The court noted that the amount failed to account for the cash and debt on the balance sheet. When adjusting for those amounts, the “value” would have been $29 million. However, no transaction was ever agreed to, so, “[t]he indication of interest ends up having little relevance to the fair market value of the Company.”

Government expert Steven J. Sherman valued the business at $26.9 million, but the court noted that his valuation “rests on errors,” and the court was not persuaded by it.

The government did not show that the company was worth less than $40 million nor did it show that Bowers and Kubota breached any fiduciary duty nor were liable for any prohibited transactions. Thus, the court ruled in favor of Bowers and Kubota and against the government.

Findings of Fact.

A. Overview. On Dec. 14, 2012, Bowers and Kubota (B/K) sold all of the company’s shares to the ESOP for $40 million. The transaction was financed with a 25-year loan from both Bowers and Kubota at 7% interest. Upon the sale, B/K ceased to be owners and became employees. The government contended that the sale for $40 million violated ERISA. “Before trial, the Government settled its claims against Saakvitne, the original trustee of the ESOP, and against the Saakvitne Law Corporation.” The government made five claims as follows:

  1. B/K failed to discharge fiduciary duties properly;
  2. B/K were liable for breaches of fiduciary duties of other fiduciaries;
  3. B/K engaged in prohibited transactions between a plan and a party in interest;
  4. B/K engaged in prohibited transactions with the company’s ESOP; and
  5. B/K knowingly participated in a transaction prohibited under ERISA.

B. The company. The company was a Hawaii corporation that provided architectural and engineering and construction management services. Bowers bought 100% of the company in 1997. Kubota joined the company in 1988. Ultimately, both Bowers and Kubota put their shares in their respective trusts for their own benefit.

C. Financials and valuations. Both revenues and EBITDA were calculated for a number of years prior to the sale and estimated for 2012, the year of the sale. Libra Valuation Advisors (LVA) valued the business as of the date of the sale. LVA had calculated the actual EBITDA at $7,050,000. The government’s expert, Steven J. Sherman (Sherman), calculated an adjusted EBITDA projection for 2012 of $4.9 million, more in line with historical amounts. In November 2012, B/K estimated revenues for 2013 to 2017 based on known contracts and their experience.

D. Initial discussions with URS. Between 2008 and 2012, B/K had considered selling the company to others in company management, to a private party, or to an ESOP. B/K had discussions with URS, which then issued a nonbinding letter of interest indicating its willingness to consider a purchase of the company for $15 million plus or minus the cash and debt of the company. URS indicated it had done “very little” due diligence before issuing the letter of interest. These addbacks would have brought the value of the company to about $29 million or $30 million. No agreement with URS was ever reached. The court found this nonbinding indication of interest had little relevance to this matter.

The company hired Gary Kuba, CPA/ABV(Kuba), of GMK to prepare “a limited report for internal use only.” Kuba expressed concern about the reasonableness of the company’s projection because it represented a significant increase over the company’s previous performance. Sherman echoed this concern during the trial. Ultimately, GMK and Kuba submitted a value of $39.7 million. The company sent the Kuba valuation to URS even though it was not done for that purpose. Shortly thereafter, URS and the company terminated negotiations.

E. The decision to form an ESOP. Kuba recommended to Bowers that they should hire Gregory M. Hansen, a Honolulu attorney with significant experience in ESOPs. In response to a question from Hansen, B/K answered that they hoped to get $40 million for the company. Hansen conveyed that the purchase price could not exceed the FMV of the company. In the fall of 2012, B/K decided they would form an ESOP, and they desired to get the ESOP formed and the transaction done by the end of 2012 to obtain certain tax advantages.

F. LVA appraisal of the company. In October 2012, Kuba told the company he no longer wanted to work on the valuation because he had become “uncomfortable with the structure of the transaction.” This might have related to the transaction at that time being a minority interest with some preferred stock. And Kuba had previously been uncomfortable with the projections. Hansen recommended the company engage LVA and its lead valuation expert, Greg Kniesel, to perform the valuation. LVA sent an engagement letter on Oct. 20, 2012, agreeing to provide a preliminary FMV analysis by Nov. 12, 2012, and a final by Dec. 31, 2012. The preliminary value fell between $37.090 million and $41.620 million.

G. Hiring Saakvitne as the trustee. On Nov. 21, 2012, a meeting was held wherein Hansen “highly recommended” that the ESOP engage Nicholas L. Saakvitne and his law firm as the trustee for the ESOP. Saakvitne was very experienced in ESOPs and highly qualified to be a trustee. Hansen informed Saakvitne that the transaction was likely a $12 million preferred stock transaction with a “slight chance” it would switch to a $40 million 100% transaction. Hansen said he was leaving town on Dec. 19, 2012, and the transaction would have to occur before that date. “Hansen told Saakvitne that he had asked Kniesel to revise LVA’s engagement letter to run directly to the ESOP trustee.” On Nov. 21, 2012, the company and Saakvitne entered into an ESOP plan fiduciary agreement. On Dec. 11, 2012, B/K, in their capacities as officers of the company, adopted the ESOP.

H. Negotiating the sale to the ESOP. The 100% sale was proposed at $41 million to be financed with seller financing at 10% interest over 20 years. The counteroffer from Saakvitne was $39 million over 25 years at 6% interest. Ultimately, the price was set at $40 million with a loan at 7% over 25 years. The negotiating by Saakvitne saved the ESOP millions of dollars. B/K understood the deal could not close at more than FMV.

The government expressed concern that the deal closed and the amount that B/K had initially asked for. However, Saakvitne had the LVA valuation in hand that indicated the company was worth “at least” $40 million.

I. Saakvitne did due diligence prior to closing. LVA was hired even though Saakvitne had complete discretion to hire any competent appraiser. LVA executed a new engagement letter with Saakvitne as trustee. “The engagement letter signed by Saakvitne now stated that LVA prepare an analysis concerning the fair market value of the Company’s stock and addressing whether the price the ESOP was paying for the stock was greater than its fair market value, whether the terms of a loan were at least as favorable to the ESOP as a comparable loan from an arm’s length negotiation, and whether any sale was fair to the ESOP from a financial point of view.” On Dec. 14, 2012, LVA concluded that the FMV of the company exceeded the purchase price of $40 million. It also opined that the loan was favorable to the ESOP and that the transaction was fair from a financial point of view to the ESOP.

The government’s expert, Mark Johnson, expressed concern that Saakvitne had rushed the process by spending only 30.1 hours on his due diligence. Johnson also believed that Kniesel did not qualify as an independent appraiser due to his prior work for B/K. Defense’s expert Gregory K. Brown did not agree with Johnson’s assertions.

It is the government that must prove Saakvitne’s failings. The government did not carry its burden regarding Saakvitne. However, the court wished to examine further the issue of whether LVA was independent as an appraiser.

LVA’s valuation dated Dec. 14, 2012. LVA used the guideline public company method ($44.59 million), the industry acquisitions method (aka comparable company transactions method) ($42.25 million), and the DCF method ($40.39 million). Under the DCF, LVA determined the value in the normal DCF way and then added a 30% premium for control to arrive at their final value. Although the government considered the valuation to be flawed in part because it used the projected EBITDA of $9.24 million, the court believed LVA did not use the projected EBITDA because it tax affected the cash flows in arriving at a value. It is not clear from the opinion as to what earnings were tax affected. LVA weighted the three methods with DCF receiving twice the weight of the other two methods for a combined 100% control value of $41.01 million. Adding $5.328 million of excess cash, LVA arrived at a final value of $47.24 million and then deducted a discount for lack of marketability of $7.09 million for a total value of the company of $40.15 million, or $40.15 per share.

The government’s expert, Sherman, believed the appropriate EBITDA would have been $4.849 million, which would have yielded values of $21.821 million, under the GPCM, and $26.670 million, under the “merged or acquired company analysis.” Defense expert, Ian C. Rusk, “says that the Company had actually achieved similar earnings. Because the Company’s earnings were trending upward in 2012 and because of a backlog of contracts, Rusk says the projections were not inaccurate.” The court noted that Sherman should have taken into account the special circumstances that Rusk noted, and, therefore, Sherman’s EBITDA was unreliable.

Post-transaction valuations of the company.

LVA’s 2013 valuation. This valuation some two weeks after the transaction had adjustments for the debt incurred in the transaction and LVA and did not use the DCF method it used for the transaction. This valuation also had to take into account the market of the company with the debt burden. This valuation did not assist the court in determining the value at the date of the transaction.

Steven J. Sherman. The court qualified Sherman, a CPA with over 30 years of experience, to provide a valuation of the company as of Dec. 14, 2012, and an analysis of the LVA valuation. Sherman valued the company on Dec. 14, 2012, at $32.197 million, and then deducted $2.994 million for the ESOP’s “limited control.” The court determined that “Sherman significantly and unreasonably undervalued the Company.”

First, Sherman appeared to have ignored USPAP. Defense expert Kenneth Pia stated that “[a]pplication of USPAP was mandatory.” This failure resulted in “substantial errors” in Sherman’s analysis, according to Pia. These were outlined in the opinion and related primarily to the lack of a meeting with management.

Pia also criticized Sherman’s “limited control” discount as relating to issues that arose subsequent to the transaction. Pia noted that, when applying the AICPA business valuation standards, “the valuation analyst should consider only circumstances existing at the valuation date and events occurring up to the valuation date.”

Sherman also failed to account properly for subconsultant fees. This error as well as the limited control adjustment amounted to an undervaluation by Sherman of $13.515 million. Sherman’s valuation adjusted for this amount would be $40.415 million. Sherman did not credibly undermine LVA’s valuation.

Kenneth J. Pia. The court qualified Pia to provide an independent valuation of the company as of Dec. 14, 2012, and to review LVA’s valuation and fairness opinions. “Pia opined that the fair market value of the Company on December 14, 2012, was $43.20 million, or $43.20 per share.” He further opined that Kniesel’s (i.e., LVA’s) conclusions of the FMV range were within a reasonable range. Pia was helpful in evaluating Sherman’s opinion. In light of Pia’s valuation and his defense of LVA’s opinion, the court found that the $40 million does not exceed the FMV of the Company.

Ian C. Rusk. The court qualified Rusk, a business appraiser, as a defense expert to provide opinions as to the FMV of the company as of Dec. 14, 2012. Rusk testified that the value of the company as of Dec. 14, 2012, on a nonmarketable control basis, was $43.05 million, or $43.05 per share after a deduction for the risk that the stock could be diluted. The court found Rusk’s testimony helpful as to some of the financial aspects of the company.

The sale price did not exceed the FMV of the company on Dec. 14, 2012. The court summarized the evidence as to the value at the transaction date, including the problems with the Sherman valuation, which the court noted contained notable errors. “Taking into account all of the evidence presented, this court finds that the Company was not sold for more than fair market value.”

Conclusions of law. Defense offered arguments as to the statute of limitations that was discussed in the opinion but was not necessarily relevant since the court decided that the purchase price did not exceed the FMV of the stock. The government also asserted that B/K breached their fiduciary duties, and the court addressed each of the fiduciary duties complaints.

First, the government asserted that B/K breached their fiduciary duty by sending LVA inflated revenue projections for 2012. The court noted that the government failed its burden of proof in that matter. The government further asserted that B/K sent LVA inflated revenue projections for 2013 to 2017. In the finding of facts, the court noted that the actual revenue growth was between 10% and 14% so that the projections actually understated actual growth.

The government also asserted that B/K breached their fiduciary duties by relying on LVA’s preliminary and fairness opinion. The record did not establish that breach.

The government asserted that B/K breached their fiduciary duty by causing the ESOP to purchase the stock of the company for more than the FMV of the stock. The court found that the stock was not purchased for more than the FMV.

The government asserted that B/K breached their limited fiduciary duty to monitor Saakvitne after he was appointed the ESOP’s trustee and fiduciary. The government did not prove this assertion by the preponderance of the evidence.

“Paragraphs 40 to 43 of the Complaint assert that Bowers and Kubota are liable for breaches of fiduciary duties by others.” Included was the assertion that Bowers and Kubota were responsible for the fiduciary breaches of each other. The government assertions here relied mainly on the prior arguments of providing false financial projections. However, the evidence undercut the government’s assertions in this regard.

The government also asserted that B/K engaged in prohibited transactions under ERISA. The court noted that the section in the complaint was inapplicable if there was adequate consideration in a sale to an ESOP. The government had the burden of proving that the transaction would be prohibited. However, the court determined that the sale to the ESOP was for adequate consideration. “As already set forth above, because the Government fails to prove that Bowers and Kubota violated any provision of ERISA with respect to the sale of the Company to the ESOP, they have no liability.”

The defendants have asserted that the statute of limitations barred the government’s claims. However, the defendants have not met their burden of proof with respect to this defense.

Conclusion. “Based on the above findings and conclusions, this court rules that the remaining Defendants … did not violate any provision of ERISA with respect to the sale of the Company to the Company’s ESOP. Accordingly, the Clerk of Court is directed to enter judgment in favor of the remaining Defendants and against the Government and to close this case.”



Jay Cunningham Director, Litigation & Dispute Services

Financial Damage
Expert Opinions

Financial damage calculations can vary widely. Learn about two approaches experts use to arrive at quantification-of-damages opinions.

Download the Guide