Larchick v. Pollock, 2021 Ariz. App. Unpub. LEXIS 895; 2021 WL 3929954 (Sept. 2, 2021)
Recently, as reported in the BVWire, a court in Arizona rejected the use of a calculation report, but an appellate court ruled it was wrong to do that and sent the case back to the lower court. The trial court excluded the evidence of a business valuation expert because he had submitted a calculation of value report and was then asked to testify to it. The expert self-admitted that he would not testify to a calculation of value and had explained in his engagement letter that, if he had to testify, a valuation engagement would be required. Despite the exclusion by the trial court and the self-admission of the inadequacy of a calculation of value for testimony purposes, the appellate court nevertheless ruled that a calculation of value is not unacceptable per se. The case has been remanded in part to determine whether the calculation of value met the requirements of Arizona Rule 702 for allowable evidence.
A scattering of cases over the past few years have accepted calculations of value into evidence and, in some of those cases, the calculated value is the value the court accepted. The Larchick v. Pollock case is the first one I have seen where the witness himself has said he would not testify to a calculated value and the court (appellate court, in this case) said “not so fast.” It remains to be seen whether on remand the calculated value will be accepted or not, but one thing is clear: The courts do not have to follow any standards that the witness might be required to follow or believes they might be required to follow. To be fair, the AICPA Business Valuation Standards do not prohibit the use of a calculated value in litigation, but they do say that “[a] calculation engagement does not include all of the procedures required in a valuation engagement, as that term is defined in the SSVS. Had a valuation engagement been performed, the results might have been different."
Even though the witness himself had expressed that he believed his calculated value was not appropriate for testimony, saying it is not the type of report “I would require,” and even though his engagement letter required the client to upgrade to a conclusion of value, the witness might still be required to testify to the court on remand as to his calculated value. The appellate court made it clear that the remand was not to allow the calculated value to be admitted, but rather to provide the husband as the proponent of the evidence an opportunity to have it evaluated under the rules of evidence. According to the court, “[t]he ‘calculation of value’ evidence may well have been questionable and, even if admissible, vulnerable to effective cross-examination, but it was not automatically inadmissible.”
It will be interesting to see what happens in the remand. Considering that the witness himself does not believe that his calculation is worthy of testimony, how good a witness will he be for his client? Regardless, calculations seem to be gaining traction in the courts as an acceptable form of valuation. Will this trend end up diluting the efficacy of valuations in litigation? Stay tuned.