Valuation disputes arise in many contexts. Whether a legal dispute over a business dissolution or equitable distribution disagreement in a divorce proceeding – alternative dispute resolution (ADR) is an expeditious and cost-effective way of the reaching a common ground.
Some of the most contentious legal disputes that confront attorneys center on valuation of property that is the subject of competing claims. Avoiding coming to grips with detailed valuation issues, and the concomitant need for expert testimony, by putting the property up for sale, and letting the market determine the value, is often not possible, or not feasible, or simply undesirable to one or more of the parties. There may be no market, or only a limited one, or it may not be possible to establish a protocol to assure that a sale is fair, and the best price obtained. The parties may disagree as to an appropriate listing or asking price. Even if a sale is in hand, there may be resistance to concluding the deal on the ground that the price does not represent true value or that the sales process was tainted in some fashion. What this all means is that in many instances an agreement needs to be arrived at, or a determination made, as to what the value of the property actually is.
Divorce Proceedings
Valuation disputes often arise in divorce cases where even if the separating spouses agree on what constitutes marital property subject to equitable distribution, they vehemently disagree as to the value of their holdings, whether residential real estate, commercial real estate, businesses, and investment properties. Equitable distribution issues become more complicated where the property in question is separate property and the non-titled spouse seeks an award on account of claimed appreciation in the value of the property since the marriage. In many cases, it is necessary to set the value of multiple items of property at multiple points in time. For example, where a spouse was gifted an interest in a business during marriage, with the value of the gift being separate property, it is critical to know the value of the gift at the time it was given as well as the value of the gifted interest at the time of commencement of the action at time of trial.
Business Dissolution
Valuation questions are just as central in business dissolution cases, sometimes aptly called business divorces, in which shareholders or partners seek to end their relationships, sometimes through an in-kind distribution of business assets or through a pay-out by one partner for the interest of another. In these cases, the standard by which value is measured differs, depending upon the nature of the dispute. Fair market value reflects that a willing buyer would pay in cash to a willing seller. But if the property is not readily saleable, a discount for lack of marketability may be appropriate. Where a minority business interest is sought to be purchased, a more amorphous term – fair value – becomes the measuring point.
Valuation issues also arise where a party seeks to exercise an option to purchase or lease property. It is not uncommon for a lease to give a tenant the right to purchase the property at a value to be determined or to extend or renew a lease at a rent to be determined. Valuation questions crop up in estate matters as well.
Resolving dissolution disputes through ADR
Alternative dispute resolution mechanisms, principally mediation and arbitration, provide effective means for resolving valuation questions. Coming to an agreement on values, or having values determined by a neutral process, will assist the parties in resolving the remaining points in contention. Mediation and arbitration offer many advantages in helping the parties arrive at determinations of value.
In the judicial setting, the parties' dispute will be resolved by a randomly assigned judge, while in an alternate dispute forum, the parties can select the neutral who will handle their matter. This is important because some judges, particularly those new to the bench or new to commercial or matrimonial disputes, may not have a strong background in valuation techniques. It is incumbent upon the neutral, whether mediating or arbitrating, to have a firm grasp of the reports furnished by the valuation experts and have the ability to discern the strengths and weaknesses of the competing positions. Thus, it is a distinct advantage to be able to select a neutral who has significant experience in valuation methodologies.
In choosing a neutral, the parties may assure themselves that the neutral has the time available to devote to their matter. Busy judges, with dozens (if not hundreds) of cases on their dockets, may not have the time, in advance of trial, to properly digest lengthy expert reports and reflect on the divergent opinions reflected in those reports. In contrast, the selected neutral will be free to thoroughly examine the valuation reports and gain a full and complete understanding of the positions and viewpoints of the respective experts.
ADR offers confidentiality, flexibility
Valuation issues often require analysis of confidential business information. Valuation of commercial real estate may necessitate analysis of the property's leases, rent roll, and costs. Valuation of a business likewise entails review of the intimate details of the income and expenses of the business. While the parties may be able to stipulate that business data exchanged in discovery will remain confidential, New York's strong presumption of public access to court hearings and records may mean that documents filed with the court in motion practice or during the trial will be subject to public inspection. The court's decision, with references to business information, will also be public. In contrast, mediation and arbitration are entirely private and confidential data can be exchanged and used without public access.
Significantly, the parties are generally free to shape the ADR process to fit their needs, a flexibility which is generally absent from the structured nature of judicial proceedings. In mediation, the neutral may meet jointly or separately with counsel to candidly discuss the merit of the parties' position; this is not always the case in the judicial setting as counsel may be wary of settlement discussions being superintended by the judge who will hear the case. In mediation, the parties may have their experts standing by to consult with counsel or even join directly in a discussion as to how to bridge the differences in opinion.
The parties also have flexibility in how to frame the alternate dispute resolution process. They could refer just the valuation issues to the neutral, leaving the other issues in abeyance. In making that referral, the parties could agree to have the neutral render an advisory opinion or issue a binding decision. In this regard, the New York CPLR permits the court in all civil cases except matrimonial actions to appoint a neutral selected by the parties to serve as referee and to direct the neutral to render a report for consideration by the court. The parties may agree to have the neutral determine the valuation issues, with the neutral's determination being subject to appellate review.
Counsel who are dealing with a valuation dispute should seriously consider the use of alternative dispute resolution; indeed, pursuant to new court rules, the assigned judge may encourage counsel to use ADR to resolve some or all of the issues in the case. Counsel should prepare for that discussion by giving thought to whether mediation or arbitration would be advisable and the names of neutrals who may be proposed for selection.
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Reprinted with permission from the August 8, 2022 edition of the NEW YORK LAW JOURNAL © 2022 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or [email protected]
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Hon. Alan D. Scheinkman (Ret.) is a member of NAM's (National Arbitration and Mediation) Hearing Officer Panel. He is the former Presiding Justice of the Second Judicial Department of The New York State Supreme Court, Appellate Division, where he heard appeals in a wide variety of complex litigation matters that included business disputes, labor and employment partnerships, landlord and tenant, commercial foreclosure cases, business receiverships, business torts, matrimonial and family law, trusts and estates, defamation, land use and construction, health law and wage and hour cases. Judge Scheinkman was voted the #1 Arbitrator in the 2021 New York Law Journal "Best of" survey. He is available to arbitrate and mediate cases nationwide.
For any questions or comments, please contact Jacqueline I. Silvey, Esq. / NAM General Counsel, via email at [email protected] or at 646-737-1414 ext. 128.
