Rosenthal v. Erber, 2023

Ted Rosenthal and Jeffrey Erber each owned 50% of 87th Street Optical Corp. Erber ran the store, Jeffrey’s Manhattan Eyeland, while Rosenthal was a passive investor. Rosenthal filed a petition for dissolution on Feb. 3, 2021. Erber elected to purchase Rosenthal’s interest based on its fair value as of Feb. 2, 2021. The court held a fair value hearing to determine “what a willing purchaser in an arm’s length transaction would offer for [Rosenthal’s] interest in the company as an operating business.” (Matter of Seagroatt Floral Co.) (“Fair value requires that the dissenting stockholder be paid for his or her proportionate interest in a going concern, that is, the intrinsic value of the shareholder’s economic interest in the corporate enterprise.”)

The court began with the disputed amount of rent by 87th Street Optical Corp. owed at the valuation date. Rosenthal asserted it was $95,576, while Erber asserted an amount of $384,498. The court found that the amount owed was $95,576. The court also agreed with Rosenthal that the books and records of 87th Street Optical Corp. were unreliable. Erber had complete control and could have explained discrepancies if he wanted to but did not.

The court largely agreed with the valuation approach of Rosenthal’s expert and found him to be a credible witness. The court did disagree with certain aspects of his report. “[W]hile the court does not credit the affirmative report of Erber’s expert, some of the critiques in his rebuttal report were persuasive.” An equal weighting of Rosenthal’s expert’s report was reasonable, but the valuation was somewhat inflated. The growth rates for the DCF and capitalization of earnings methods were too optimistic, and many of the companies used in the GPCM were not that comparable. “[T]he court finds that an across-the-board 20% reduction to these valuations should fairly account for these aggressive assumptions.” The court also found a multiple of 2.7 for the guideline transactions method was too high, and the companies selected were not sufficiently similar to 87th Street Optical Corp. The court applied a more conservative multiple of 2.0.

“These reductions result in an equally weighted average of $496,606. After applying the remaining three adjustments (adding cash and cash equivalents of $82,786, subtracting the $95,576 in rent owed to the landlord, and subtracting the SBA EIDL long-term debt of $150,000), the fair value of the Company is reduced to $333,816.” A modest adjustment of $50,000 was applied to account for the fact that Erber will likely retire in a few years and thus some of his customers will be lost (i.e., loss of personal goodwill). “This results in a fair value of $283,816.”

The court was unpersuaded by the methodology of Eber’s expert’s report, and his cross examination reinforced that conclusion. Rosenthal’s expert was more helpful, where Eber’s expert appeared to have been hired to proffer an opinion to defeat Rosenthal’s claims.

“Indeed, that Erber’s expert could conclude based on the record evidence that the Company was worth $0 significantly undermines his credibility. The notion that the Company is worthless is belied by the significant value Erber continues to derive from it.”

Eber failed to provide all of the financial records to his expert. His expert relied only on the tax returns and not on its QuickBooks or financial statements. “It is troubling that an expert would purport to render a serious opinion on the Company’s value based only on its tax returns, knowing his client could easily have given him a more complete set of records.” His expert noted that his analysis was predicated on the information in the tax returns being accurate and that he was not verifying it. This statement is inaccurate as the tax returns are inconsistent with the financial records.

The court thus found that the fair value was $283,816. Thus, Erber was to pay Rosenthal $141,908 plus prejudgment interest at the statutory 9% rate.