Before offering an appraisal in a valuation dispute, Prof. Nancy Rapoport told ABI that it’s “best to shred the opinion before anyone else sees it. If there are flaws in private, those flaws will be enormous in public.”
And so was in a trial where Bankruptcy Judge Christopher D. Jaime of Sacramento, Calif., was valuing a golf and country club. He rejected the appraisal by the lender’s expert because it “contravene[d] economic realities,” making it so “overly optimistic and unrealistic” that it was “inherently unreliable and its value conclusion not credible.”
The debtor was a not-for-profit golf and country club that had been in operation since 1918. The lender filed a secured claim for about $8.2 million. Judge Jaime held a trial to value the property for chapter 11 plan purposes and, in the process, determine how much of the bank’s claim would be secured and how much unsecured.
The debtor and the bank both had appraisers who were qualified to deliver expert opinions on value. The experts both agreed that continued operation as a golf and country club was the highest and best use. They also agreed that income capitalization should be given the most weight.
The debtor’s expert’s appraisal came up with a value of about $4 million.
Before turning to the bank’s appraisal, Judge Jaime recited Ninth Circuit law about the latitude given trial courts in arriving at value. For almost 40 years, he said that the Ninth Circuit has given trial courts “broad discretion” on valuation. The Ninth Circuit Bankruptcy Appellate panel even said that a bankruptcy court has discretion to reject an appraisal entirely.
In his May 15 opinion, Judge Jaime paraphrased the Ninth Circuit for saying that a trial court was justified in rejecting “valuation evidence in its entirety because cumulative errors rendered the valuation analysis and value conclusion too flawed to be reliable.”
The bank’s appraiser valued the club and course at about $8 million. Picking apart the appraisal, Judge Jaime said that the lender’s expert saw $1 million in deferred maintenance. Once maintenance was performed, the appraiser projected that the club would have 430 members.
Judge Jaime said that the testimony “contravenes economic reality” because the bank’s appraiser did not account for the fact that performing deferred maintenance would require special assessments on members that, in turn, would depress rather than increase membership.
A projected increase in membership, Judge Jaime said, was the “fundamental premise” in the bank’s appraisal. By not accounting for depressed membership, he said that the appraisal was “overly optimistic and unrealistic.”
The flaw, Judge Jaime said, “renders the entirety of the [bank’s appraisal] inherently unreliable and its value conclusion not credible. And in addition to the other flaws discussed below, that warrants rejection of the [bank’s appraisal] in its entirety.”
There was more. During the pandemic, the club had received more than $1 million in nonrecurring Covid revenue. The bank’s appraiser erred, Judge Jaime said, by having mistakenly believed that the revenue was from golf operations.
The mistake, Judge Jaime said, “weighs negatively on [the bank’s appraiser’s] credibility . . . [and] also strips the [bank’s appraisal] of all weight and renders it subject to rejection as inherently unreliable with a value conclusion that is not credible.”
Finally, Judge Jaime found that the bank’s appraiser had underestimated expenses. For the golf course, the bank’s expert pegged the cost of upkeep at $800,000. However, Judge Jaime said that $800,000 was the cost of course maintenance 20 years ago. To estimate that expenses would defy inflation and return to what they were 20 years earlier was “not credible” and “not realistic.”
Finding that the bank’s appraisal was “too flawed to be realistic or credible,” Judge Jaime rejected the bank’s valuation testimony “in its entirety,” leaving the debtor’s appraisal as “the only reliable, credible, probative, and persuasive evidence of the Golf Club’s value.” He therefore valued the club at about $4 million.
Scholarly Commentary
When hiring an appraiser, Prof. Rapoport recommends inquiring as to whether the expert’s opinions have ever been excluded or discounted. Second, she suggested that at least one experienced lawyer “should try to take the opinion apart,” to avoid having the flaws revealed for the first time in the courtroom.
Prof. Rapoport is a UNLV Distinguished Professor and the Garman Turner Gordon Professor of Law at the University of Nevada, Las Vegas William S. Boyd School of Law.
Before offering an appraisal in a valuation dispute, Prof. Nancy Rapoport told ABI that it’s “best to shred the opinion before anyone else sees it. If there are flaws in private, those flaws will be enormous in public.”
And so it was in a trial where Bankruptcy Judge Christopher D. Jaime of Sacramento, Calif., was valuing a golf and country club. He rejected the appraisal by the lender’s expert because it “contravene[d] economic realities,” making it so “overly optimistic and unrealistic” that it was “inherently unreliable and its value conclusion not credible.”
The debtor was a not-for-profit golf and country club that had been in operation since 1918. The lender filed a secured claim for about $8.2 million. Judge Jaime held a trial to value the property for chapter 11 plan purposes and, in the process, determine how much of the bank’s claim would be secured and how much unsecured.