Litigation & Disputes Bulletin: Q3 2022
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.
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In This Issue:
- In Siblings Ownership Dispute, Court Decides No Oppression and No Sums Owed by the Plaintiff, Determines the Value of the Plaintiff’s 25% Interest
- The Nebraska District Court’s Determination of the Value of a Husband’s Business Is Affirmed—Appraisers Used Acceptable Valuation Methodology
- U.S. District Court Denies Motions to Exclude Experts but Grants Motions to Exclude Lay Witnesses ‘Expert’ Testimony
In Siblings Ownership Dispute, Court Decides No Oppression and No Sums Owed by the Plaintiff, Determines the Value of the Plaintiff’s 25% Interest
Gavrielidis v. 80 Seaview Ave., LLC, 2020 Conn. Super. LEXIS 1302; 2020 WL 6781239 (Aug. 28, 2020)
The opinion provided here is a post-trial memorandum of decision. The matter was a dispute between the plaintiff, Andreas Gavrielidis and his three siblings. Together, the four siblings own six restaurant LLCs that operate and own the land in Norwalk, Conn. Andreas commenced the action in May 2018, claiming that his siblings had treated him unfairly and owed him substantial sums. The litigation resulted in a stipulation between the parties. “[T]he sibling defendants agreed to buy Andreas out, with the value of his twenty-five percent holdings being determined by the court.” The sole issue before the court was the fair market value of the plaintiff’s 25% interest in the six LLCs. The court was authorized to account for the impact on value related to the wrongful conduct of the individual defendants. The court determined the fair market value of the LLCs to be $617,159.
The court further found that the plaintiff had not established wrongful conduct on the part of the sibling defendants sufficient to adjust the value. The parties were unable to agree on the fair market value of the LLCs, and thus it was up to the court to determine the fair market value of the LLCs and the terms of payment.
The court went through the history of the formation of the LLCs and the purchases of properties. The court noted that Carol Gavrielidis (Carol), a sibling defendant, acted as the comptroller (sic) of the LLCs and was responsible for many of the financial matters for the LLCs. Carol was generally not compensated for the services she performed and generally did not receive distributions as an owner except in small amounts to cover taxes. Carol and Chris have used their home equity lines of credit to keep the restaurants solvent and operating during the slow winter months.
The companies compensated siblings Mike and Chris for worked performed. In the early years, Andreas would help close the restaurants and was given a paycheck for his work. Andreas desired to operate his own restaurant and developed one at 88 Washington Street. “Andreas acknowledged that the funding for the 88 Washington Street property was provided by the Harbor Lights and Overton’s businesses. All four siblings were responsible for the mortgage debt on 88 Washington, LLC.” During 2007 and 2008, the ownership of the LLCs and properties was consolidated, resulting in all four siblings being 25% members of all of the LLCs. Some new operating agreements were also executed in 2009, and Andreas became the primary manager of the Rouge Wine Bar from 2008 to 2012.
Andreas contended that his signature was forged on some of the operating agreements, but the court did not find that such was the case. The family accountant testified that he observed problems and disagreements between Mike, Chris, and Carol on the one hand and Andreas on the other hand. The siblings reached agreements that allowed Andreas to run Overton LLC (one of the owned LLCs) while the other three siblings operated the other LLCs. Their agreement allowed each party to keep the profits from the restaurants operated.
“Carol testified that there were incidents in or about 2014, in which Andreas did not deposit the funds from Overton’s to pay the mortgage on the property, and an incident in which Andreas struck their mother. As a result, the sibling defendants sought legal counsel.” Other similar acts of anger and/or physical violence by Andreas occurred.
In February 2018, the three siblings expelled Andreas from the five active LLCs. Andreas commenced his lawsuit in May 2018. Andreas had underreported the revenues of Overton, which he managed, for 2017 and perhaps prior years. This would result in additional taxes of approximately $42,000 Andreas owed the companies.
Proof of value.
Plaintiff’s evidence. The parties agree that the Rouge Wine Bar LLC was no longer operating and had no value. Linda Capello, a Norwalk realtor, testified as to the estimated values of the real property at issue. “Ms. Capello did not support her estimates with a discussion of comparable properties or an analysis of what fair market value could be generated by income from the properties.” Andreas tendered his own opinion as to the values of the LLCs. His total values amounted to $2,154,000.
Real estate values. The defendants engaged Michael McGuire, a commercial real estate consultant and valuator, to value three properties. He opined as to an aggregate value of $2,430,000 for the three properties, not taking into account the debt on the three properties, and using the income and sales comparison approaches for each property. “Mr. McGuire’s conclusions using the income approach and the sales comparison approach were similar, which provided him additional confidence in his conclusions.”
Valuation of fair market value of the LLCs. John Kramer, CPA, prepared reports as to the fair market value of the LLCs on behalf of the defendants. Fair market value was the standard set forth in the documents for the LLCs. Kramer noted that the main difference in the fair market value standard and the fair value standard is that the fair market value standard typically allows discounts for minority interests while FV does not. For the three real estate LLCs, Kramer took the McGuire values, subtracted debt on the properties, and added back cash and any other assets. He determined an aggregate value of $1,930,000 for these three LLCs. Kramer explained that, since Andreas’ interests are minority interests (25% for each LLC), a DLOC of 6.87% and a DLOM of 15% were appropriate for each LLC. Kramer used closed-end real estate funds for the DLOC and restricted stock and pre-IPO studies to determine his DLOM. He determined an aggregate value for the three real estate LLCs’ 25% interests as $383,000.
Kramer prepared a separate report for the three operating restaurant LLCs. He utilized as one method the capitalization of cash flows method to determine the values, normalizing estimated cash flows for compensation of owners and lease rates to market rates for those LLCs. He also prepared a value under the market comparable transactions method but did not utilize this approach and method in his final opinion. The two approaches and methods arrived at similar values.
“Mr. Kramer’s ultimate opinions of the adjusted value of Andreas’s 25% membership interests in each of the six defendant limited liability companies, are as follows:
- “80 Seaview Avenue, LLC—$87,000;
- “82 Seaview Avenue, LLC—$231,000;
- “88 Washington Street, LLC—$65,000;
- “Harbor Lights, LLC—$61,000;
- “Overton’s, LLC—$28,000;
- “Rouge Wine Bar, LLC—$0,
“For a total of $472,000.”
Discussion. In summary, Andreas claimed a value of $2,154,000, and the defendants claimed they are worth $472,000. The primary differences relate to the calculation of the value of the real estate, application of a DLOC and a DLOM, and any adjustment for the defendants’ alleged bad conduct. It was clear that fair value would not include discounts for lack of control or lack of marketability.
The plaintiff relied on his personal belief of value at trial. While that is admissible, the trier of fact determined the weight to be accorded such testimony. Andreas possessed no substantial experience in real estate, and his expert, Capello, did not explain her valuation methodology and did not support her values. Andreas’ valuation of the operating restaurants was also unsupported. The defendants presented valuations from qualified real estate and business valuation professionals. The defendants’ valuations recognized the debt (mortgages) on each property, whereas Andreas’ valuations did not. The court ruled that the debt should be considered. “As a result, based on the facts as found, the court largely adopts the evaluations of defendants’ experts.”
Adjustments to fair market value standard. The court can make adjustments to the defendants’ valuations even though it rejected the plaintiff’s valuations. “Under the facts of this case, the court finds that no lack of control discount is appropriate because the buyers are Andreas’s siblings, who control the rest of the companies’ equity.”
The application of a DLOM was also problematic in this case. By virtue of the stipulation and order in this case, the defendants were obligated to purchase Andreas’ membership interests. The court did not accept the DLOM in this case.
The Nebraska District Court’s Determination of the Value of a Husband’s Business Is Affirmed—Appraisers Used Acceptable Valuation Methodology
Cain v Cain, 2022 Neb. App. LEXIS 18 *; 2022 WL 287918 (Feb. 1, 2022)
Paul Cain, appellant, asserted that the district court erred in its valuation of his 50% interest in Absolute Roofing Omaha LLC (Absolute). He also challenged an award of alimony and attorney’s fees, which are not the subject of this digest. The appellate court affirmed the valuation.
Paul and Lindsey (appellee) were married in 2005. In 2014, Paul and two other individuals formed Absolute. The parties separated in 2018, and Lindsey filed for dissolution in 2018. After settling most issues, the matters remaining for the district court were the valuation of Paul’s 50% interest in Absolute and the issues of alimony and attorney’s fees.
Lindsey’s expert, Matthew Stadler (Stadler), valued Paul’s business interest in Absolute to be worth $2,525,000, to which he provided an alternative value at trial of $1,830,500. Paul’s expert, Aaron Pryor, valued the interest at $494,000.
Valuation of Absolute Roofing. Paul owned 50% of Absolute along with Keith Gregerson (50%), who was not a party to this action.
Stadler valuation. Stadler was a CPA and had performed about 500 business valuations. Per Stadler, business valuation was a forward-looking discipline. Stadler explained to the district court how the process of a capitalization of earnings methodology works. The district court noted that Stadler revised his value before issuing a final report. “In applying the income approach, Stadler accounted for the various expenses incurred by Absolute Roofing to estimate an approximation of its ‘after tax cash flow.’” Stadler noted that he brought management fees back into income (as did Pryor) and then accounted for Paul’s and Keith’s compensation and related taxes and benefits as a separate expense for Absolute. Stadler added distributions in excess of actual salary back in determining the after-tax cash flows. Stadler also excluded a bad debt expense of $295,539 from 2018 as a nonoperating and “probably” nonrecurring expense. He also excluded a 2018 charitable contribution as being discretionary. Stadler used an average of cash flows from 2016, 2017, and 2018, weighted equally. He excluded 2014 and 2015 as being revenue levels that would not recur.
He calculated an undiscounted value of the 50% interest as $6,253,521. He further included a DLOC of 5% and a DLOM of 15% for a final value of $5,050,000, or a 50% value of $2,525,000. He made a further adjustment before trial for “nonowner wages” for an adjusted value of Paul’s interest at $1,830,500.
Pryor valuation. Pryor was not a CPA but a business valuation expert. He was a CFA and an ASA. His valuation “relied heavily on the earnings approach”. Pryor also emphasized the forward-looking nature of a business valuation. Pryor also normalized the “earnings.” Pryor also used an asset approach and a market approach, comparable transactions method, as sanity checks.
Pryor used the cash flows from 2014 to 2018 for his income approach. Pryor also added back the management fees and deducted compensation for the two owners. His compensation amounts for the two owners was significantly higher than the amounts Stadler utilized. Pryor also included the bad debt and charitable contribution Stadler added back. Pryor used all five years in determining his future cash-flow estimates, weighting the current years more heavily than the prior years. His cash-flow estimate was significantly lower than Stadler’s, and his capitalization rate was significantly higher than Stadler’s.
Pryor estimated the prediscount value of Absolute at $1,471,204. He applied a 5% DLOC but a 20% DLOM. Pryor valued Absolute at $988,000 with Paul’s 50% interest being $494,000.
No abuse of discretion. The district court determined the value of Paul’s interest at $1,830,000, indicating the district court’s acceptance of Stadler’s alternative value. The appellate court reviewed the district court’s valuation of Paul’s interest as to whether it was an abuse of discretion. This assigned error was a matter of conflicting expert opinions. An appellate court can give weight to the fact that the district court judge heard and observed the witnesses and accepted one version of the facts rather than another.
Paul argued that the district court accepted Stadler’s opinion without critical analysis of his calculations and methodology. Paul laid out five differences between the valuations. The appellate court noted that “his arguments are ultimately challenges to the weight and credibility given by the district court to each expert’s respective report and testimony.” Both experts testified and were cross-examined extensively. “The record also offers no indication that either expert failed to adhere to accepted business valuation standards and practices or of any foundational flaw in the parties’ respective valuations.” The appellate court noted that the differences in the two valuations reflected differences in “professional judgment.” The district court found Stadler’s valuation was more credible. It was not the appellate court’s role to second-guess the district court’s determinations of weight and credibility. The appellate court found that the district court did not abuse its discretion. The value of Paul’s interest in Absolute was $1,830,000.
U.S. District Court Denies Motions to Exclude Experts but Grants Motions to Exclude Lay Witnesses ‘Expert’ Testimony
Auto Konnect, LLC. v BMW of North America, LLC, 2022 U.S. Dist. LEXIS 42345 (March 9, 2022)
The plaintiff, Auto Konnect LLC, and the defendant, BMW of North America LLC, were parties to two service provider agreements that expired on Dec. 31, 2018. Prior to expiration of the service provider agreements, BMW of North America directly hired all 38 of Auto Konnect’s field workforce without obtaining authorization and failing to pay replacement costs and expenses consistent with Section 12 of the parties’ service provider agreements.
In January 2021, the US District Court of Michigan entered partial summary judgment in favor of the plaintiff as to liability for breach of contract and further denied the defendants’ motion for summary judgment.
Five motions were now before the district court as follows:
- The defendants’ motion to exclude Auto Konnect’s industry expert. (Denied);
- The plaintiff’s motion in limine to preclude BMW of North America from presenting expert testimony from lay witnesses. (Granted);
- The defendants’ motion to exclude testimony of Auto Konnect’s owner as an expert. (Granted);
- The defendants’ motion to exclude Auto Konnect’s damages expert. (Denied); and
- The plaintiff’s Daubert motion to exclude specific expert testimony from the defendant’s expert. (Granted in part).
Factual background. In 2016, the parties entered into two service provider agreements concerning a pair of programs. A portion of the service provider agreements dealt with the hiring of Auto Konnect’s employees by BMW of North America and providing for expenses and fees relating to replacement of the employees. “Defendant claims that sometime in late 2017 or early 2018, BMWNA began discussions about insourcing some of its external workforce. However, around the same time Defendant was considering insourcing all of its external employees, it also asked Plaintiff to provide a quote to expand Defendant’s RPT program.”
In September 2018, BMW of North America sent a letter to external vendors including Auto Konnect that it planned to offer internal BMW of North America positions to some of their employees. On Oct. 18, 2018, despite Auto Konnect’s cease and desist order, BMW of North America hired all 38 of Auto Konnect’s employees servicing the service provider agreements. The plaintiff asserted that, with proper notice, it would have replaced all 38 workers, while the defendants asserted that Auto Konnect never replaced the workers, and, therefore, nothing was owed.
Standard of review. The district court must determine whether the testimony met three requirements:
- The expert must be qualified;
- The testimony proffered was relevant and will assist the trier of fact; and
- The testimony was reliable in that it was based on scientific, technical, or other specialized knowledge. Fed. R. Evid. 702.
Defendant’s motion to exclude plaintiff’s automotive expert. BMW of North America argued that Auto Konnect’s expert, Frank Ferrara, was not qualified to testify on the customs and practices of the automobile industry and asked that he be excluded.
Ferrara intended to offer four opinions:
- Practices did not generally permit OEMs to directly hire suppliers’ employees without permission and compensation as required by the service provider agreements;
- BMW of North America’s actions in terminating the contract and related actions were beyond the bounds of reasonableness;
- Had BMW of North America given nine months’ notice, as is custom, then Auto Konnect would have been able to find another OEM to work with; and
- “[I]t is likely BMWNA obtained a significant increase in profits from accessories sales and increased vehicle sales due to the SPAs.”
The court concluded that Ferrara was qualified to testify regarding industry customs and practices. He had over 40 years of experience in the automotive industry. BMW of North America challenged his experience as not being correct experience, but the court believed it was the correct experience. BMW of North America also argued that Ferrara’s opinions were not relevant or reliable. The court said BMW of North America mischaracterized Ferrara’s testimony and report. The court said BMW of North America’s complaints are suitable for cross-examination. “Ferrara’s report explains OEM and third-party vendor relationships based on his industry experience.… His testimony is relevant to Auto Konnect’s covenant of good faith and fair dealing claim.”
The court denied BMW of North America’s motion to exclude Ferrara.
Plaintiff’s motion in limine to preclude BMW of North America from presenting expert opinion testimony from lay witnesses. Plaintiff moved to exclude BMW of North America’s employees from testifying as expert witnesses on automotive customs and practices. While the employees may testify as to their own personal knowledge of BMW of North America’s customs and practices, they may not testify as to general automotive customs and practices outside of BMW of North America.
The court granted the plaintiff’s motion in limine.
Motion to exclude Richard Ross as an expert witness. Richard Ross was an owner of Auto Konnect and intended to offer the following opinions:
- Automotive customs and practices did not allow an OEM to poach its customers workforce;
- Auto Konnect would likely have found another OEM customer for its programs and services given sufficient notice; and
- “OEMs’ external vendors like AK’s field force program increase customer satisfaction, increase accessory and vehicle sales and reduces costs, therefore, OEMs like BMWNA benefit from AK’s programs in that way.”
BMW of North America argued Ross was not qualified and his opinions were not relevant nor reliable. Here, the court determined that Ross’ testimony was properly excluded under Daubert. Ross may testify as to facts and his own experience at Auto Konnect, but he was disqualified as an expert.
Motion to exclude the plaintiff’s damages expert. BMW of North America moved to exclude testimony of Alexander Clemons, who had offered three opinions regarding Auto Konnect’s damages:
- A determination of the expenses Auto Konnect would have incurred as a result of the destruction of Auto Konnect’s entire field force program. $3.8 million to $5.5 million;
- As an alternative, the net PV of Auto Konnect’s field force program if they are not able to mitigate; and
- “$22 million to $26 million as the amount BMWNA saw in profits as a result of its breaches if the jury determines AK is entitled [*16] to disgorgement of BMWNA’s profits.”
BMW of North America asserts Clemons was not qualified to give these opinions as he was not a CPA and held no certifications in business valuation. The court noted that Clemons had a JD and an MBA and had 12 years of experience in determining damages in litigation. “He has supplied expert services in damages calculations for six cases and assisted with the calculation of economic damages in another 26 cases.” Therefore, his education and experience qualified him to testify. BMW of North America also argued that, even if Clemons were qualified, his testimony was not relevant and reliable. The court disagreed, noting that it was permissible for Clemons to rely on data supplied by Auto Konnect. Clemons testimony went to the weight rather than the admissibility.
It was also not impermissible for Clemons to rely on Auto Konnect’s net income and using it to derive his projections of income. The fact that Clemons did not rely on any standards was not relevant, and BMW of North America did not cite any authority for this position. Clemons used a DCF analysis to determine the amount of damages and had shown support for that position. BMW of North America’s own expert agreed that a DCF was an appropriate methodology for determining the damages. The defendant’s motion to exclude the plaintiff’s damages expert was denied.
The plaintiff’s Daubert motion to exclude certain specific expert testimony from the defendant’s damages expert. Auto Konnect sought to exclude the defendant’s damages expert, Brent McCade, from testifying as to certain of his opinions. Auto Konnect also sought to exclude McCade from offering any opinions on what actions BMW of North America would have taken had it not hired Auto Konnect’s 38 employees.
McCade was an ASA and a CVA and was the Business Valuation Practice Leader for a large regional accounting firm, having 25 years of experience in business valuation and economic damages. The defendant intended to rely on McCade as a rebuttal expert to Clemons’ DCF valuation damages analysis. The court found that McCade was qualified by specialized knowledge and business valuation experience to give the opinions he proffered. The plaintiff’s arguments went to the weight and not the admissibility.
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