Are Fraudulent Business Valuations Acceptable in King County Superior Court? As New Evidence Becomes Available Should It Be Considered?

Would you buy a product for more than it's worth? For example, would you pay $250,000 for a home that is valued at $100,000? No. Would you buy a home at a value that is eight months old if its current market value is much lower? No. People do not willingly buy for less than an item is currently worth. What valuations should our Court systems be applying for businesses?

Would you buy a company for $4.4 million if it was only worth $700,000? No. Would you pay $700,000 for a company with $2.5 million in uncertain debt? No. Is it legal and fair for a Washington Court to force you to pay $4.4 million for a company that you do not want based on valuations that are 8 months old in a declining market when the current valuation is less than $700,000? No, but it has happened in my case and is unfair, unjust and inequitable.

According to the Washington State Family Law Deskbook there are many issues to consider in valuation of property. Three legal standards listed in the Deskbook (page 31-1) are:

1)      valuation date

2)      fair market value is generally used

3)      discretion of the Court over conflicting values

Valuation Date

“The primary consideration is whether the valuation is stale. A six-month old real estate appraisal may be acceptable in a stagnant real estate market, but not in a market that is red hot.[1]” In both red hot and declining markets, values change significantly in a short period making older appraisals less accurate and potentially unreliable. This seems understandable.

Oddly, in case #20-306035, the Court overlooked this primary consideration for a business valuation. The Court used two stale and incorrect business valuations from August 2022 over a fair market value December 2022 valuation in the March 2023 trial. From August 2022 to March 2023, the market for businesses was very volatile due to high inflation and interest rates, economic uncertainty and geopolitical events. These factors led to material swings in private company valuations, especially when fair-value calculations relied on public market inputs like discount rates and comparable public company multiples. In this case, the two stale August 2022 business valuations of $4.4 million (Case Exhibit 6) and $2.890,000 (Case Exhibit 528) were used by the Court even though they did not include professional standards including: required calculations for accurate market conditions, actual company financials, business comps and booked contingent liabilities. How are stale business valuations that are not performed to professional standards acceptable, when a current valuation exists that has been used for distributing company stock?

The most egregious valuation by McDaniel Group, LLC of $4.4 million was verbally objected to during trial because it was stale, but the Court overruled the objection and permitted the valuation into evidence over objection. Have legal standards changed? Is it now equitable to knowingly base business valuation on stale valuations? Since the report was not drafted until January 2023, it should have included company data through December 2022, not just financial statements as of August 2021 (Exhibit 6, page 4). The McDaniel report also claimed to have considered fundamental factors to valuation including prior sales of securities, health and longevity of owners and key management and market prices of comparable corporations, but it did not (Exhibit 6, page 6). The report itself states “users of this report are cautioned not to rely on the findings contained in this report for subsequent valuation dates.” Yet, the Court relied on the 8-month-old valuation.

Only a limited review of the McDaniel valuation was possible prior to the trial because attorney Matthew Cooper had not provided the valuation’s report by the trial’s December 2024 discovery deadline. Case Exhibit 6, page 3, shows that the report was not drafted until January 30, 2023, let alone provided in discovery. Since attorney Matthew Cooper withheld the report in discovery, time was not available to depose Mr. McDaniel or review his workpapers. Limited review of the valuation allowed prior to trial showed the valuation seriously flawed due not including a $2.5 million liability, projecting 4 months of income/expense information rather than using available actual financial data and incorrect market projections of growth into perpetuity when the company was known to be declining. These flaws made the valuation work product of the McDaniel Group highly inaccurate at best and a serious misrepresentation of value.

After trial, a CPA found that professional standards from an accounting perspective were not followed and an independent valuation review by Trugman Valuation, “The certified lead in business valuation expertise,” found the McDaniel Group summary valuation report and testimony, collectively referred to as “The MG Report” improperly applied its valuation approach to business valuation, contained growth assumptions that lack support and are inconsistent with historic growth trends and fails to define even the standard of value and source of the definition as required by professional valuation standards[2]. The McDaniel Group was asked to correct its valuation and update it with the Court, and chose not to do so. By overruling objection to admitting a stale valuation and refusing to the reconsider the valuations used, the Court in this case did not follow what is published in Washington State’s Family Law Handbook as a primary consideration, instead the Court relied on two valuations more than 8 months old in a declining market.

The court findings state: “In considering the valuation of Navazon, Inc., the valuation provided by Carta Valuations, LLC is the most recent valuation[3]”. Its valuation date was December 31, 2022 and it was a fair market value (Case Exhibit 414) consistent with the definition of fair market value in Internal Revenue Ruling 59-60 and included a fair value of $7.14 which expert Mr. Kessler testified was the appropriate standard for a dissolution. Contrary to finding fault or questioning the method employed by Carta as the Court findings assert, Mr. Kessler in fact noted that Carta’s value of $7.14 on page 6 of its report would be the appropriate value in a dissolution. The Court misinterpreted Mr. Kessler’s testimony. Mr. Kessler did not question the method employed by Carta, instead he acknowledged that the Carta report had both a fair market value and a fair value, depending on which the Court would like to use and stated the fair value of $7.14 so the Court would know that Carta’s report included both a fair value and a fair market value. See Testimony of Steven Kessler, March 8, 2023, at 3:12. Mr. Kessler testified that Carta was familiar with the value of Navazon and the basis of its valuations over time, and its December 31, 2022 was more current than an August 2022 valuation in terms of market fluctuations. See Testimony of Steven Kessler, March 8, 2023, at 3:11. Expert Kessler also testified Carta’s valuations were used to issue the company’s stock and were stringent because they’re for IRS purposes, so Carta valuations are put to a lot of scrutiny. And, if any of the $2.3 million in liabilities becomes due, then it would bankrupt Navazon. See Testimony of Steven Kessler, March 8, 2023, at 3:14. Mr. Kessler further noted that every year Navazon has progressively gotten smaller and smaller. Business operations have been deteriorating from August 2022 to $741,000 at end of the year with full year results, which is very concerning with increasing payroll costs and declining revenues. See Testimony of Steven Kessler, March 8, 2023, at 3:14-3:15.

What should be done when fraudulent valuations mislead a Court decision and greatly harm a person? What should be done when legal standards are not followed? This article details a fraudulent valuation in King County Superior Court case #20-3-06035.  By sharing the details of this fraud, it is hoped that it will be corrected by the experts involved and the Court. The case is pending the Washington Supreme Court now.

The McDaniel Group was asked to correct its valuation and update it with the Court, and has to February 9, 2025 not taken the opportunity to update the Court with an accurate valuation that meets professional valuation standards.

Questions

1. Are valuation professionals accountable for presenting accurate valuations to courts?

2. Do Judges have an obligation use accurate valuations that present fair market value?

3. When fraudulent valuations are relied upon as evidence what should be done?

4. When new evidence shows valuations are fraudulent, how is the damage caused reversed?

[1] Washington State Family Law Deskbook page 31-5, paragraph 4, sentence 2.

[2] Trugman Appraisal Review of the Report of Navazon, Inc. Prepared by McDaniel Group, LLC, page 3

[3] See Exhibit 414, page 3