Another wrinkle in the Brundle ESOP case

Although the district and appellate courts in the landmark Brundle ESOP case ruled years ago against the trustee, Wilmington Trust, litigation related to the case is not over. A current lawsuit pits former allies, the trustee and ESOP appraiser, against each other. Recently, a district court ruled in favor of Wilmington’s claim for contribution.

In 2013, the owners of a private security firm, Costellis, sold their shares in the company to an ESOP in what a financial advisor called “a more advanced 100% structure” that would allow the owners to retain some control over the company. Constellis hired Wilmington Trust to serve as independent trustee representing the interests of the ESOP. Wilmington hired Stout Risius Ross (Stout) as ESOP appraiser. Both firms had extensive ESOP experience. In 2015, a former employee and participant in the ESOP (Tim Brundle) sued the trustee, alleging it violated its fiduciary duties to the ESOP by causing the latter to overpay for company stock.

The Brundle case was litigated in the eastern district of Virginia. The federal district court found the trustee liable for a nearly $30 million loss to the ESOP. Among other things, the court concluded the trustee failed to adequately scrutinize the ESOP appraiser’s valuation, which, the court said, included numerous defects and red flags. The court said Wilmington’s reliance on the Stout valuation was not “reasonably justified.” In a key decision, the 4th Circuit Court of Appeals affirmed the district court’s liability and damages rulings.

Trustee pays but wants contribution: Wilmington paid the $30 million judgment but has subsequently tried to recover from Stout some or all of the money. Wilmington, based on the district court’s findings as to the defects in the valuation report, sued Stout, alleging breach of contract and negligence and asking for contribution. In response, Stout filed a motion to dismiss the claims. The instant action is in the southern district of New York.

The court adjudicating this case agreed with Stout that the statute of limitations had run out on Wilmington’s breach of contract and negligence claims. However, the court sided with Wilmington regarding the contribution claim. Stout tried to argue this state law claim was preempted by federal law, specifically ERISA, “because that claim seeks to recover on a judgment for breach of ERISA-imposed fiduciary duties.”

In contrast, the court found, “ERISA does not bar Wilmington’s contribution claim against a non-fiduciary [Stout] merely because the judgment for which Wilmington seeks recovery is based on an ERISA violation.” Citing 2nd Circuit case law that has said Congress did not intend for ERISA to “completely immunize non-fiduciary plan advisors from damages claims,” the court allowed the case to proceed on Wilmington’s claim for contribution.

“[A] holding that ERISA preempts Wilmington’s contribution claim would immunize Stout from liability for breaching its common law duties,” the court said.

The case is Wilmington Trust N.A. v. Stout Risius Ross, Inc., 2021 U.S. Dist. LEXIS 54961; 2021 WL 1110040.

Magnifique! Takeaways from the CBV
Congress 2021

The work the Chartered Business Valuators Institute (CBV Institute) does as Canada’s valuation professional organization (VPO) and standard-setter is amazing, and the sessions at its CBV Congress 2021 June 16-18 represented best-in-class global learning. BVWire was pleased to attend its Congress, and here are a few very interesting and useful takeaways:

• Keynote speaker Dr. Aswath Damodaran (New York University Stern School of Business) said the lessons you learn during a crisis such as COVID-19 are the most important lessons you can learn in valuation (one being “don’t give up on fundamentals”);

• Calculation report or a full valuation? Valuers in Canada have a third option that falls in between the two;

• The “limited critique” is a type of report generally used in disputes and litigation to identify the main disagreements between the opposing experts; guidance has been issued on a framework of thinking regarding the impact of climate change on valuations;

• Market volatility is not going away any time soon, but the big worry is inflation (if it stays, we’re “in big trouble”);

• One of the big red flags in financial models in Excel is hidden rows and columns, a “very bad and dangerous practice” (better to use grouping);

• When using visuals, don’t get fancy—keep it simple (e.g., for fonts, Calibri or Arial are good choices);

• Recent court cases in Canada reveal that the manner in which you present your opinion is equally as important as what is actually included in your opinion; and

• A judge said he has a much better view of the expert witness in a virtual trial, so facial expressions become much more visible than from the bench.

The first day of the conference was devoted to business valuation, the second day examined the world of litigation, and the third was devoted to recent trends in M&A. A recap with more details will be in the August issue of Business Valuation Update.

Still time to catch some sessions at the
NACVA conference

Today is an off-day for the 2021 Business Valuation and Financial Litigation Hybrid and Virtual Super Conference, but there are a lot of sessions tomorrow and Friday that you can attend virtually on an à la carte basis. There are two days of a track on best practices as well as sessions covering goodwill, discounts for lack of marketability, valuing real estate developers, fast-food franchises, CPA firms, lost profits, damages, two Hardball With Hitchner sessions, and much more. The conference is brought to you by the National Association of Certified Valuators and Analysts (NACVA).

Four questions you must always ask about PFI

There are many things to consider when evaluating prospective financial information (PFI), and much of it can be boiled down to four questions you should be asking, according to the just-released BVR Guide to Management Projections and Business Valuation: Analysis and Case Law:

1. Does the forecast correspond to internal budgets (or external forecasts by stock analysts)?
   
   
2. Is the current forecast consistent with previous forecasts?
   
   
3. Do the assumptions in the forecast appear reasonable in relation to historical performance?
   
   
4. Do the assumptions in the forecast appear reasonable in relation to performance of guideline companies or assets?

Of course, a lot of work is involved in answering these questions, and the guide can help. It is a collection of articles from BVR’s cache of “greatest hits” written by some of the top thought leaders in the profession that discuss a variety of elements, issues, and techniques practitioners should consider when utilizing management projections. Plus, the guide includes close to 100 digests that analyze court decisions involving projections and forecasts (the full court opinions are also available to buyers of the guide).

Note: You already have this new resource in your BV library if you are a subscriber to the Digital Library or BVResearch Pro.

Call for papers: New Stark regs and
healthcare valuation

We here at BVR are putting together a special report on the revised definition of fair market value (FMV) for the Stark regulations. Part of this report will feature interpretations and assessments of the new regulations for valuation practices and analysis. To that end, BVR is seeking paper proposals for the following areas:

Topics for All Valuation Disciplines: BV, CV, M&E, and
Real Estate

1. What are the implications for valuation practice of CMS’ finding that Congress intended the definition of Stark general market value to be consistent with “the concepts and principles of the valuation community”?
   
   
2. What is the valuation impact of CMS adding the phrase “of the subject transaction” to the various new regulatory definitions of fair market value (general, equipment rental, and the rental value of office space)?
   
   
3. How should CMS’ comment that fair market value is “buyer neutral” impact valuation analysis and practices of the healthcare valuation community?
   
   
4. CMS states that the agency is willing to accept “any commercially reasonable” valuation method for Stark FMV compliance purposes. What is a commercially reasonable valuation method? How does this standard relate to the valuation body of knowledge and generally accepted valuation principles and methods?
   
   
5. CMS reaffirmed that the definition of general market value precludes reliance on market data from parties in a position to refer or generate business for each other. How should this guidance be applied in Stark FMV valuation work?
   
   
6. What are the implications for valuation analysis and practices in light of CMS’ comments about practice losses in its discussion of both fair market value and commercial reasonableness?

Topics for Compensation Valuation

1. How should CMS’ comment about precluded reliance on market data from parties in a position to refer or generate business for each other affect the use of physician compensation survey data?
   
   
2. What valuation guidance can and/or should be taken from CMS’ three compensation examples involving survey data and FMV (orthopedic surgeon, family medicine doctor, and a cardiothoracic surgeon)?
   
   
3. What is the valuation impact of the new valuation date standard of “at the time the parties enter into the service arrangement” in the revised general market value definition for services?

If you are interested in submitting a paper for the special report, please respond by July 8 to tim@tshealthcon.com with a paper proposal. The proposal should include a description of the paper’s topic and the key points addressed, along with a short bio of the author(s). First drafts of the papers are due by August 10. There is no minimum or maximum word count for a submission, but papers will need to meet certain writing guidelines in order to be accepted for publication.

Reminder: Please take a survey about company-specific risk

BVWire is pleased to present a survey by The Appraisal Foundation’s Business Valuation Resources Panel’s Work Group on Company-Specific Risk Premia to understand how valuation practitioners address such premia within their valuations. While the work group’s focus is financial reporting, input from other practice areas is welcome and encouraged. Your input will help to prepare more formal guidance relating to the subjective area of cost of capital. All responses will be confidential. To take the survey, click here. Thank you in advance for participating!

New book on intangibles and transfer pricing

How do you value intangibles in line with the arm’s-length principle that is required internationally for transfer pricing purposes? That’s the central question addressed by
Intangibles in the World of Transfer Pricing: Identifying—Valuing—Implementing, a new book edited by four Deloitte partners who are leading transfer pricing and valuation experts in Europe. Published by Springer International Publishing, the hardcover version has 733 pages in 46 chapters (including 20 country-specific chapters) that cover all different aspects and details of the treatment of intangible assets in transfer pricing.

A sad note ...

We were shocked and saddened to learn that Madam Liu Ping passed away on June 5. During her long career in asset appraisals and business valuation, she served as Secretary General of the China Appraisal Society (CAS), was on the board of the International Valuation Standards Council (IVSC), was vice chair of the International Association of Certified Valuation Specialists (IACVS). “During our years of working with her, she demonstrated the utmost professionalism and contributed tremendously to the practical body of knowledge for all of us participating on the world stage in the accounting and valuation fields,” the IACVS said in a statement. We had the great pleasure of meeting Madame Liu, and we offer our deepest condolences to her family and her many colleagues and friends.

BV movers . . .

People: Awards and honors bestowed by the CBV Institute, Canada’s valuation professional organization (VPO) for 2021: Life Member: Tom P. Muir, FCPA, FCA, FCBV (Muir Investments Ltd.); Fellows: Bob Boulton, CPA, CA, FCBV (CBV Institute) and Patrick Coady, FCPA, FCA, FCBV (KPMG); Top CBV Under 40: Louise Poole, CPA, CA, CBV, CFF (Davis Martindale); Ambassador of the Year: Ron Martindale, BASc., CPA, CA, LPA, CBV, CFF (Davis Martindale); Scholastic Achievement Award: Rachel Lee, CPA, CBV (EY); Highest mark on MQE: Marissa Barry, CPA, CBV (EY); Second highest marks on the MQE: Michael Ruta, CPA, CA, CBV (Grant Thornton LLP), Alex Stern, CPA, CBV (EY), Pier-Olivier Tremblay CPA, CA, EEE (Mallette); Third-highest marks on the MQE: Stephanie Labrecque, CPA, CFA (MNP), and Adam Owczar, CPA, CBV (Canada Life Assurance).

Firms: Seattle-based Moss Adams LLP boosts its agribusiness practice by adding Ryan & McDonald LLP of Salinas, Calif., a firm that provides tax and accounting services throughout the California central coast, with in-depth expertise in food and agribusiness and other industries; the deal brings 16 professionals into the firm … San Francisco-based SD Mayer & Associates is adding TNT Inc. CPAs of Redwood City, Calif., a firm that provides tax, accounting, consulting, and advisory services to professionally managed businesses and high-net-worth individuals throughout Silicon Valley … Atlanta-based Mauldin & Jenkins is adding Athens, Ala.-based CDPA, a firm that provides tax, financial planning and reporting, and consulting services to individuals, fiduciaries, commercial businesses, and other organizations … Mount Pleasant, S.C.-based McCay Kiddy has changed its name to Veris, The Proactive CPA; the name Veris is a mashup of two Latin words: verum (true/truth) and visum (wisdom/insight).

Please send your professional and firm news to us at editor@bvresources.com.

CPE events

• Federal Tax Litigation, Expert Witnesses, and the IRS. June 29, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Michael Gregory (Michael Gregory Consulting). CPE Credits: 2.0.

A former IRS manager will address key rules for federal expert witnesses, valuation issues with the IRS, identify key recent BV federal cases, and reveal what to expect in 2022.

• Practical Applications of DLOM: Methods and Data (Part 1). June 30, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Pasquale Rafanelli (Empire Valuation Consultants). CPE Credits: 2.0.

Learn the pros and cons of the methods for estimating a discount for lack of marketability (DLOM) and how to apply and support them. Part 2 will present a case study.