This is the fourth and likely the last post in this series discussing Beway v. Friedman. This is perhaps the leading appellate level case in New York discussing the judicial interpretation of statutory fair value in that state. The first three posts are linked below.
- Beway Provides Conflicting Guidance re Statutory Fair Value in New York.
- New York Statutory Fair Value: Trying to Make Sense of Beway.
- Beway and Giaimo: Is New York Headed in the Right Direction?
In this post, rather than talking about the specifics of cases, we look only at the conclusions of statutory fair value cases regarding marketability discounts. Based on the initial review, there is an apparent difference in the treatment of asset holding entities and operating companies by New York courts. The first look examines conclusions of marketability discounts in statutory fair value cases since 1985 for asset holding companies and operating companies.
Since there is sometimes a difference in treatment regarding marketability discounts between the three judicial departments of the New York Court of Appeals, we have also looked at concluded marketability discounts by department.
Finally, we have looked at concluded marketability discounts over time to discern any trends that might be identified.
We searched for all statutory fair value cases in New York since 1985 and found 31 cases at the appellate and trial levels. This analysis includes 32 concluded marketability discounts because one case reached marketability discounts for two separate companies. If we have missed any cases, it is an unintentional oversight. If we are informed of additional cases, we will, of course, include them in the analysis.
So what have New York courts concluded regarding marketability discounts in statutory fair value cases? You may be surprised, but with a small number of recent notable exceptions, the trend seems to be in the direction of 0%. That will surprise a number of readers, but let’s let the numbers speak for themselves.
Asset Holding Entities: Trial and Appellate Levels
First Department Cases
We identified twelve cases in which New York courts have determined marketability discounts for asset holding companies in statutory fair value cases. The cases are summarized in the figure below.
There are seven First Department asset holding entity cases. The first case in the figure is Beway, which we have discussed in this series of posts. Following Beway, there were three First Department cases where the concluded marketability discounts were 0%. Two of these cases were appellate level, and one was a trial decision that was apparently not appealed.
The Giaimo decision (2011 for the trial and 2012 for the appeal) reversed that trend, finding for a 16% marketability discount as discussed in the prior post. Other than suggesting that there are significant costs associated with the liquidation of an asset holding company, there was little guidance regarding why the 16% discount was appropriate. I testified before a Special Referee in Giaimo. As noted earlier, the Special Referee and the Supreme Court held for 0% marketability discounts. I wrote about Giaimo on this blog here.
Following Giaimo, the First Department Court of Appeals concluded that the appropriate marketability discount in the 2017 Levine v. Seven Pines L.P. matter was 25%. The Company’s expert argued for a 12% minority interest discount and a 25% marketability discount. The Court of Appeals rejected the minority interest discount and affirmed the 25% marketability discount in a two sentence comment:
…petitioner’s expert did not discount the value of the Trust’s interest for lack of marketability, while respondent’s expert did. In the past, we have applied discounts for lack of marketability (DLOM) to real estate holding companies (Matter of Giaimo v Vitale, 101 AD3d 523, 523-525 [1st Dept 2012], lv denied 21 NY3d 865 ).
Citing Giaimo from 2011-12, which allowed a 16% marketability discount at the appellate level, the First Department Court of Appeals allowed a 25% marketability discount to stand in 2017. The Court of Appeals in both Giaimo and Levine v. Seven Pines apparently ignored or did not consider two precedent First Department cases with 0% marketability discounts: Matter of Williamson (2002) and Vick v. Albert (2008).
In Vick v. Albert, the Court of Appeals stated: “The unavailability of the discounts is particularly apt here, where the business consists of nothing more than ownership of real estate.” That was precisely the case in Giaimo and in every determination of fair value in statutory fair value cases in New York.
Again, there is no rationale for the marketability discount of 16% other than a reference to Giaimo, which justified that discount based on an unrealistic build-up of costs of liquidation of asset holding entities.
Stepping back, the most frequently concluded marketability discount in the First Department is 0%. The average discount has been 11%, and the median discount is 16%.
Second Department Cases
There have been five Second Department asset holding company cases since 1995, of which the first three are appellate decisions and the most recent two are trial court decisions.
The concluded marketability discounts in all five cases were all 0%.
I testified in the Man Choi Chiu v. Chiu matter as well as in the Kassab v. Kassab matter.
Looking at the twelve asset holding company cases as a group, it is interesting to note that the overall average discount for the cases is 7%. Both the median and the mode (the most frequent observation) are 0%
We identified no Third Department asset holding company cases involving fair value determinations.
Operating Companies: Trial and Appellate Levels
We identified twenty cases in which the fair value of operating companies was the subject. Two of these are dated cases from the First Department. The Second Department has been more active and more current, with fourteen cases between 1985 and 2020. The Third Department has four cases dating back to the 1990s.
First Department Cases
The two First Department cases date from the mid-to-late 1990s. The 1995 decision was a Supreme Court decision which found for a 25% marketability discount. The more recent case, Hall v. King, was a 1995 appellate level case that also found for a 25% marketability discount.
Second Department Cases
There have been fourteen Second Department cases involving fair value determinations of operating companies. There were two appellate level cases in 1985, and both concluded with 25% marketability discounts.
The next two concluded marketability discounts were 10% each in appellate level cases in 1986 and 1987. In 1991, in the Matter of Seagroat Floral Co., The Second Department Court of Appeals concluded that the marketability discount should be 0%. (The Third Department Court of Appeals also concluded that a marketability discount of 0% was appropriate in the Matter of Walt’s Submarine Sandwiches in 1991.) These were the first two 0% marketability discounts in New York, and they were to be followed by more, as we will see.
Since Seagroat, there have been four additional 0% appellate cases in the Second Department. There have also been two appellate level cases with 25% marketability discounts (1994 and 2002) and one Supreme Court case with the same 25% DLOM. That third case was Ferolito v. AriZona Beverages, a 2014 trial court decision.
I testified in the AriZona matter, which has been described as the largest (fair value) corporate divorce in New York History. I testified that the appropriate marketability discount should be 0%, but the trial court concluded that the discount should be 25%. I wrote about the ArriZona matter on this blog here and here. There had been considerable interest from larger, publicly traded companies in the purchase of AriZona. I did not use those “offers” as a valuation method, but rather as support for the fact that AriZona was “marketable.” The court’s conclusion was what it was.
The two most recent Second Department appellate level cases, Ruggiero v. Ruggiero (2016) and Magarik v. Kraus USA (2020), found for marketability discounts of 0% and 5%, respectively.
The average discount in Department 2 cases is 11%, while the median is 8%. The sample of cases is actually bi-modal, with five conclusions at 25% and five conclusions at 0%.
Third Department Cases
There have been four Third Department fair value cases for operating companies, all of which date to the 1990s. Three were appellate level decisions with marketability discounts of 0%, 0%, and 14%. The most recent case was a trial level matter where the marketability discount was also 0%.
The average marketability discount for the Third Department is 4%, while both the median and the mode are 0%.
Summary for Operating Company Cases
The overall average marketability discount for the twenty fair value cases involving operating companies is 12%, with the median being 10%. The mode for the group is 0%.
Further Discussion of New York Fair Value Cases
Looking at Concluded Discounts
We can make a number of observations from the analysis of New York fair value cases and their concluded marketability discounts.
- Asset holding companies tend to receive relatively lower marketability discounts than do operating companies.
- The First Department has reached higher marketability discounts, on average, than the Second or Third Departments.
- After the 21% marketability discount in Beway, there were three asset holding company cases in the First Department finding for 0% marketability discounts. Then, out of nowhere (to me), the Appellate Court ruled for a 16% marketability discount in Giaimo (see the discussion above). Subsequent First Department asset holding company cases appear to be influenced by the conclusion in Giaimo.
- All five Second Department cases involving asset holding entities have concluded with 0% marketability discounts.
- There are no recent First Department cases involving operating companies. The two on record date to the 1990s and both held for 25% marketability discounts.
- The Second Department has been most active in hearing operating company cases, with fourteen cases since 1985. As noted above, there are five cases with 0% marketability discounts, and five cases with 25% marketability discounts. Nine of the fourteen concluded marketability discounts were either 0%, 5%, or 10%, or fairly low relative to the five higher 25% conclusions.
- While the Third Department operating company cases are dated, their marketability discount conclusions have been low, with three at 0% and one at 15%.
- The court in AriZona concluded that the marketability discount should be 25% in part because of the belief that such discounts were “fairly standard” for cases like AriZona. The analysis thus far would suggest that there is no “fairly standard” marketability discount for New York fair value cases.
In the next figure, we look only at the concluded marketability discounts in New York fair value cases themselves, regardless of whether the cases were appellate level or trial level, and regardless of department. The results are, as I suggested in previous posts, interesting.
We have been discussing marketability discounts from 31 New York fair value cases, but there are 32 conclusions regarding marketability discounts. In the Matter of Quill v. Cathedral, there were two companies and two separate marketability discounts.
The concluded marketability discounts are shown in the first column. The appellate, trial and total cases discounts are shown in the next three columns. The last column shows the percentage of total cases that the conclusions at each noted discount level represent. Observations from this figure include:
- Conclusions of marketability discounts of 0% represent half of all discounts (and the same for appellate level and trial level discounts).
- Conclusions with discounts of 25% represent a fourth of all discounts (25% for appellate, trial, and total cases).
- The remaining discount levels (5%, 10%, 15%, 16%, and 21%) represent the remaining quarter of all discounts.
The idea that marketability discounts of 25% are fairly standard in New York fair value cases is simply not correct. There are twice as many 0% discounts than 25% discounts, and fully 75% of all discounts are less than or substantially less than 25%.
Looking at Concluded Discounts by Department Over Time
Having examined the actual marketability discounts in New York fair value cases, we turn to a look at any trends in discounts over time by the judicial department. This last figure summarizes the findings of this analysis.
The overall trend in concluded marketability discounts is generally downward. We make a number of observations about the figure and its underlying data.
- The all-in average has generally declined since our first fair value case in 1985. The average marketability discount was 17.5% prior to 1990, 10.1% in the decade to 2000, 4.2% in the decade to 2010, and 8.4% to the present.
- In the decade to 2000, the average marketability discount for Department 1 was 23.7%. That average included the 21% discount in Beway, and two additional discounts of 25% each.
- Interestingly, the average marketability discount in the three First Department cases was 0% in the decade to 2010. Giaimo in 2011 reversed the 0% average of the prior decade with a concluded marketability discount of 16%. The Giaimo decision went against the grain of two appellate level cases in the prior decade. This was interesting and seemed out of the blue from my perspective as a participant in Giaimo. Read my further comments in the prior post. Two additional First Department cases had discounts of 16% and 25%, respectively, so the overall average for the most current period is 19.0%. In all, there were nine First Department Cases.
- The Second Department has been considerably more active in the fair value arena, with a total of 19 cases over the period of analysis. The Second Department has seen a significant drop in concluded marketability discounts. The average discount prior to 1990 was 17.5%. This dropped to 6.3% in the decade to 2000. There was a slight increase in the average in the decade to 2010 to 8.3% based on two 0% discounts and one 25% marketability discount. The average marketability discount for the most current period is 4.4% based on eight cases. Of the eight concluded marketability discounts, five were 0%, two were 5%, and one was 25%. The 25% discount was in the AriZona Supreme Court Second Department case, in which I testified. As with Giaimo, I was surprised at the conclusion in AriZona. Despite its substantial financial success, the AriZona experts attempted to portrayed a company with declining margins and earnings and a prospective inability to meet a large judgment. The court may have been concerned regarding this potential. Nevertheless, the AriZona decision was an outlier in the Second Department in the most recent decade.
- The Third Department has had no reported statutory fair value cases since the late 1990s. Interestingly, one Third Department case in which I was going to testify in early 2019 settled after opening arguments at an 11% discount to my conclusion of fair value. I wrote about that matter with permission here, in a lengthy post that provided a significant analysis of Beway and other New York precedent cases.
The prior figure showed marketability discounts by the judicial department over time. The overall average marketability discount for the 32 New York fair value cases since 1985 is 8.5%. The overall average marketability discount for the seventeen cases since 2000 is 6.9%., including the recent higher First Department discounts (and the two 25% discounts in the Second Department since 2000). Excluding the three recent First Department discounts, the average marketability discount (all departments) since 2000 is 4.3%, as seen in the next figure.
Since 2000, of the seventeen, concluded marketability discounts in New York fair value cases, ten have been for 0%, and two have been for 5%. This means that some 70% of the concluded marketability discounts have been 5% or less. Only five concluded marketability discounts have been higher, with two at 16% and three at 25%.
Based on this review of Beway and the analysis of marketability discounts in New York fair value cases, it should be clear that, on balance, New York courts seem to be finding for lower marketability discounts over time. This was a First Department and Second Department phenomenon until the period after 2010. It continued with the Second Department through the most recent period. The exception is the First Department, where the Appellate Court in Giaimo reversed the Special Referee (0%) and the Supreme Court (0%) and concluded, without remand, that the marketability discount should be 16%.
The logic for the Appellate Court’s 16% marketability discount was based on the expenses of selling an asset holding company over and above the underlying real estate. That logic is flawed from business perspectives, and will not withstand logical scrutiny. The implied expenses of selling two asset holding entities with attractive Manhattan rental properties with a combined net asset value of just under $100 million are on the order of $15 million. That conclusion simply makes no economic sense.
If the actual expenses of liquidating real estate asset holding companies were anywhere on the order of 16%, no rational actor would place real estate into LLCs, partnerships, or S corporations (or C corporations). The fact that there are likely hundreds of thousands (or more) of real estate holding entities renders this conclusion illogical.
Bucking the downward trend, the First Department concluded with two more discounts of 16% and 25%, respectively, for an overall average of 19% for the period since 2000.
The prior figure showed marketability discounts by the judicial department over time. The overall average marketability discount for New York fair value cases since 1985 has been 8.5%. The overall average marketability discount since 2000 is 6.9%. Excluding the three recent First Department discounts, the average marketability discount (all departments) since 2000 is 4.3%.
These results will likely surprise many readers and, perhaps, judges, who seem to have the perception that all marketability discounts in New York fair value cases are large. They are not. And they are trending to 0%, the level of marketability discount found in statutory fair value matters in the majority of other jurisdictions in the United States.
When we cut through the clutter, it appears that New York courts are headed in the right direction in their determinations of marketability discounts in statutory fair value.
As always, please comment on this post below or to me personally.