• August 7, 2019
There Will Be Blood

The lawsuit of Chargo v. Gurstel Law Firm, P.C. fka Gurstel Chargo P.A., a law firm break-up, settled earlier this year on the threshold of trial.

The break-up appears to have been bitter and hard-fought. One might even go so far as to call it bloody.

The settlement is non-public but, from the linked trial brief and a look at the case’s docket, we speculate that about half of the dollar amount in dispute (maybe more?) went to the lawyers’ lawyers and the lawyers’ experts in the lawsuit. See here at p. 28 (“[T]he Firm has incurred hundreds of thousands of dollars in legal fees while Plaintiff gained an extra $2,925 [by contesting the Firm’s original valuation].”); here at p. 31 (arguing that Chargo’s payout under the firm shareholder agreement should be $153,698.12) ; here at p. 36 (arguing that Chargo should get about $315,000 for his share in a building purchased by the owners for the law firm).

That’s unfortunate. While the case may have been a sad and painful waste of time and money for the parties, maybe the rest of us can profit from what the case tells us about business appraisals.

Years ago, we discussed that no appraisal can ever be “right,” exactly. Appraisals are inevitably estimates or approximations. But they can (and sometimes clearly are) “wrong.”

The Gurstel law firm, like all law firms, had in place a procedure for when a co-owner leaves the law firm. The Gurstel firm’s procedure included an appraisal, a counter-appraisal, if desired by the counterparty, and a “tie-breaker” appraisal if the first two appraisals are dramatically different and require reconciliation. The “tie-breaker” appraiser would be chosen by the first two appraisers and the tie-breaker’s appraisal, it was agreed, would result in the definitive and binding valuation.

We note that the Firm’s appraiser appraised Mr. Chargo’s share of the law firm at $323,400. Here at p. 12. Mr. Chargo’s appraisal expert gave a “rough estimate” of the value of Mr. Chargo’s share of the firm of $1,988,391.37. (Are we the only ones who find it absurd that a “rough estimate” should be down to the penny?) Here at p. 16. This striking deviation in appraised values triggered the “tie-breaker” appraiser, whose appraisal of the value of Mr. Chargo’s share was $326,325. Here at p. 18. In other words, the Firm’s appraisal and the tie-breaker appraisal varied by less than 1%. Neither can be said to be right, exactly, but Mr. Chargo’s expert’s “rough estimate” appraisal would definitely appear to have been wrong.

This may be our final word on a subject that to some will seem too obvious to discuss: appraisal methodology is legitimate and science-based. It is not “junk science.” It is not “speculation” or “entirely subjective.” On the other hand, as in any discipline that requires nuance and judgment, in any discipline that defies precision, variables can be manipulated, levers can be pushed, and, at times, they are — excessively and improperly.

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