Booth Computers (Booth) was established in the late 1970’s by Robert Cohen and later assigned to his three children, Claudia, Michael, and James, in equal shares. Booth was a 45% limited partner in another partnership that owned an oceanfront estate in Palm Beach, Florida, in addition to two warehouse buildings. The fair market value of the real estate holdings at date of death was estimated by appraisers in excess of $40 million and Booth’s 45% ownership interest was worth approximately $18 million, before considering any discounts. Claudia and James Cohen each held a 50% ownership interest in the partnership at date of death.
The buyout provision of Booth Computers, drafted in the late 1970’s, specified the following:
Each of the Partners has considered the various factors entering into the valuation of the Partnership and has considered the value of its tangible and intangible assets and the value of any goodwill which may be present. With the foregoing in mind, each of the Partners has determined that the full and true value of the Partnership is equal to its net worth plus the sum of FIFTY THOUSAND ($50,000.00) DOLLARS. The term "net worth" has been determined to be net book value as shown on the most recent Partnership financial statement at the end of the month ending with or immediately preceding the date of valuation;
Claudia Cohen passed away on June 15, 2007. Under the buyout agreement, the estate’s 50% interest in the partnership was calculated at $178,000. The estate filed suit claiming the term “net book value” is sufficiently ambiguous to encompass fair market value.
The judge noted that the buyout provision had been invoked once before, in 1998, after the death of their brother, Michael, one of the other partners. The buyout at that time was calculated in the same manner and amounted to an entity value of only $98,000. Further, the judge noted the disparity between book value and fair value, but stated the controlling factor is the language of the partnership agreement. The judge noted that the agreement specifically states the term “net worth” is to be net book value.
On appeal, the decision supporting the buyout at net book value was affirmed. In support of his conclusion, the judge observed:
I find that the actual historical treatment of value by Booth over the years comports with the plain language of the buyout provisions: no reference to actual, market value, but rather consistent reference to standard business practices applicable to this business and most business – value pegged to book value, which, in turn, reflects costs, does not reflect increases or decreases in asset values, but does change depending upon whether additional contributions are made and/or withdrawals or distributions taken.
This is another reminder to review your buy-sell agreement annually. We are able to assist you to ensure that the valuation provision in your agreement provides the outcome you desire.
Contact us today to review your buy-sell agreement.
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