Defendant challenges valuation expert over relying on defendant’s own data

BVWireIssue #130-1
July 10, 2013

Can a defendant credibly attack a damages expert for basing his analysis on the defendant’s own projections? This was the key issue on appeal in a recent case in which a minority owner sued the majority owner for breach of fiduciary duty and received a $28.2 million award.

The parties had formed several companies to buy and develop real estate, but bitter strife led to the minority owner’s ouster and, in mid-March 2007, the dissolution of the jointly owned entities. The plaintiff (the ousted partner) retained an expert with extensive experience in valuing real estate similar to that at issue to compute his interest in the companies’ income-producing properties as of March 2007. He adopted figures, including the capitalization rate, net operating income, and stabilized values, from the defendant’s investor summary schedule, which went to equity investors and lenders to secure funding, after assuring himself that the defendant “was doing the methodology the same way that I would.” For his calculation, he used the “direct capitalization” method to determine the stabilized income for the various properties.

The defendant offered a rebuttal expert who, by his own admission, had never done a direct capitalization valuation. He said he also relied on the internal projections and investor summary schedules “as being accurate.” In his Daubert challenge, the defendant contended the plaintiff’s expert used the projections as the present value when they reflected future values. The plaintiff’s expert called this characterization “a lack of understanding of what I did,” explaining he started with the stabilized values and adjusted them for certain factors.” The stabilized values, he said, “are prepared as if the property were stabilized in the first quarter of 2007. That’s what those values represent.” The trial court denied the defendant’s motion to exclude the testimony.

Nothing but a hope. On appeal, the defendant reframed the issue, contending that the trial court’s decision was in error because the expert’s analysis was based on unreliable foundational data. The appellate court agreed and struck down the award. The defendant’s attempt to discredit his own data “would lack credibility, if those projections are otherwise reliable.” But, the appeals court continued, here the plaintiff failed to show that the stabilized values the defendant put on the properties were anything more than hopes for future values. “Such hopes do not establish a reliable damages model.” The decision provoked a strong dissent. Find a comprehensive discussion of Citrin Holdings, LLC v. Minnis, 2013 Tex. App. LEXIS 5723 (May 9, 2013) and the court’s opinion in the August Business Valuation Update and at BVLaw.

Learn more. This case, along with other recent and important cases, will be discussed on July 10 during a webinar, Quarterly Case Update: A One Hour Briefing. Featuring BVR legal editor Sylvia Golden and expert appraiser James Alerding (Alerding Consulting), this program will highlight what recent judicial decisions mean for the practice and presentation of business appraisal for legal purposes.

Please let us know if you have any comments about this article or enhancements you would like to see.