Mixing lost profits and lost business value for damages calculation

BVWireIssue #151-4
April 22, 2015

Most jurisdictions allow plaintiffs to claim either lost profits or lost business value to avoid double recovery. Therefore, the valuation analyst either does a damages analysis or a business valuation. But this separation is no longer so strict, as some recent cases illustrate.

Case No. 1: “In a New York case involving a restaurant, the plaintiff claimed harm to the corporation and himself because of the siphoning off of cash during the years he worked there,” explained Sylvia Golden, BVR’s legal editor during a recent webinar. He also tried to claim harm to himself because he never got a distribution of profits. The court said whatever profits were siphoned off belonged to the corporation. But, when all was said and done, the court decided to add the diverted profits (including interest) to the valuation of the business to derive a buyout price for the plaintiff.

“I believe the court took two components and added them together,” observes Jim Alerding (Alerding Consulting LLC), who also spoke at the webinar. “One component was the plaintiff’s share of the unreported income. Since the income was unreported and apparently not modified in determining the value of the business, it needed to be added to the amount necessary to make the plaintiff whole in terms of receiving his fair value.” The case is Cortes v. 3A N. Park Ave Rest Corp., 2014 N.Y. Misc. LEXIS 4693 (Oct. 28, 2014) (Slip Op).

Case No. 2: In another case, one that involved the expropriation of a Baton Rouge, La., donut shop, the analysts essentially did a business valuation, but the calculation had a damages component, according to Golden. The company’s valuator, in particular, insisted that the owner was entitled “to the value of the owner’s pecuniary position in the business enterprise on the date of taking plus any additional compensation necessary to the full extent of his or her losses." Therefore, he added full owner compensation to the cash flow determined based on tax information.

“In this case, I believe that the valuators on both sides to some extent mixed loss of value and damages principles in arriving at their damages,” says Alerding. “Since both sides did this I believe the court did not pick up on it and allowed the mixed methodologies as a measure of damages.” The case is City of Baton Rouge v. Jay’s Donuts, Inc., 2014 La. App. Unpub. LEXIS 722 (Dec. 17, 2014).

To listen to an archived version of the webinar, BVLaw Case Update: A One Hour Briefing, click here. Also, digests and full opinions of both cases are available at BVLaw.

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