Defendant Challenges Valuation Expert Over Relying on Defendant’s Own Data
Citrin Holdings, LLC v. Minnis, 2013 Tex. App. LEXIS 5723 (May 9, 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. To arrive at his valuation, the expert appraiser (after satisfying himself as to the reasonability of the amounts) adopted the amounts that the defendant provided to its investors and lenders, including the capitalization rate, net operating income and stabilized values. 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 prepared a direct capitalization valuation. He said he also relied on the internal projections and investor summary schedules “as being accurate.”
In the defendant’s Daubert challenge of the plaintiff’s expert, the defendant contended the plaintiff’s expert used the projections incorrectly. The defendant claimed that the expert used the data as the present value when the data was intended to reflect future values. The plaintiff’s expert called this characterization “a lack of understanding of what I did,” explaining that 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.
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 data created by the defendant and provided to its investors and lenders. The appellate court agreed and struck down the award. The decision provoked a strong dissent.
Blindly relying on data prepared by those adverse to your interests cannot be a substitute for valuations based on sound evidence. Valuations of financial interests are prophesies of the future – and like all prophesies they are subjective. At Rosenfarb LLC we produce well supported, well-reasoned and well communicated appraisals that withstand the rigors of litigation. We are a firm of forensic accounting and valuation experts. We understand business, have keen insights and always connect the dots. We understand the litigation process. We frame the issues simply and in alignment with the litigation strategy. We use logic to support our opinions, while creating compelling stories. We are sincere, professional and credible. We are accounting experts with legal acumen.
