Raskin v. Walter Karl, Inc.

• Decision Date: 13 April 1987
• Citation: 514 N.Y.S.2d 120,129 A.D.2d 642
• Parties: In the Matter of Alvin S. RASKIN, Respondent-Appellant, v. WALTER KARL, INC., et al., Appellants-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 120

514 N.Y.S.2d 120

129 A.D.2d 642

In the Matter of Alvin S. RASKIN, Respondent-Appellant, v. WALTER KARL, INC., et al., Appellants-Respondents.

Supreme Court, Appellate Division,

Second Department.

April 13, 1987.

Rosenman, Colin, Freund, Lewis & Cohen, New York City (Lawrence R. Eno, Robert E. Smith and Jody R. Krisiloff, of counsel), for appellants-respondents.

Patterson, Belknap, Webb & Tyler, New York City (David W. Dykhouse, Robert P. LoBue and Stuart Wachs, of counsel), for respondent-appellant.

Before MOLLEN, P.J., and MANGANO, KOOPER and SPATT, JJ.

MEMORANDUM BY THE COURT.

In a proceeding pursuant to Business Corporation Law § 1104-a to dissolve four closely-held corporations, where the corporations have elected to buy out the petitioner pursuant to Business Corporation Law § 1118, the four corporations appeal, and the petitioner cross-appeals, as limited by their respective briefs, from so much of a judgment of the Supreme Court, Westchester County (Zeck, J.H.O.), dated December 28, 1984, as determined the aggregate fair value of the petitioner's shares in the four corporations as of January 16, 1983, to be $804,253.20.

Presiding Justice Mollen has been substituted for the late Justice Gibbons (see, 22 NYCRR 670.2[c] ).

ORDERED that the judgment is modified, on the law and the facts, by decreasing the sum in the second decretal paragraph from $804,253.20 to $723,827.88; as so modified, the judgment is affirmed, without costs or disbursements, and the matter is remitted to the Supreme Court, Westchester County, for the entry of an appropriate amended judgment.

The petitioner was an officer, director and minority shareholder in four connected corporations (the named appellants-respondents herein) which operate a mailing list brokerage business. This appeal and cross appeal focus on the correctness of the determination of the fair value of the petitioner's shares.

The parties and their experts agreed that the proper valuation method for these companies was the going-concern investment-value approach wherein one multiplies the corporations' annual earnings (adjusted to reflect the true corporate income) by an appropriate price-earnings rate (see e.g., Matter of Blake v. Blake Agency, 107 A.D.2d 139, 147, 486 N.Y.S.2d 341, appeal denied 65 N.Y.2d 609, 494 N.Y.S.2d 1028, 484 N.E.2d 671; Haynsworth, Valuation of Business Interests, 33 Mercer L.Rev. 457; cf., Matter of Endicott-Johnson Corp. v. Bade, 37 N.Y.2d 585, 587, 376 N.Y.S.2d 103, 338 N.E.2d 614). The parties disagreed as to (1) the proper adjustments to corporate income, (2) the proper earnings multiplier, and (3) whether a discount for lack of marketability should be applied.

In order to truly reflect the companies' earning power, the net income is adjusted by eliminating from the corporate expenses a portion of the officer-shareholders' salaries that is considered excess compensation. Payment is often made in this form, instead of in the form of dividends, in order to lower the taxable income of the corporation (see, Matter of Blake v. Blake Agency, supra; In re Delinko [Sunshine Temporary Off. Personnel], NYLJ, Oct. 7, 1982, p. 6, col. 5 [Alexander, J.] ). The petitioner questions the trial court's adoption of the adjusted salary figures proposed by the companies' expert, arguing, inter alia, that the figures were not supported by admissible evidence. It is true that an expert may not base an opinion solely upon out-of-court material where that material is not available to the opposing party or the court for examination and is not subject even indirectly to cross-examination (see, People v. Sugden, 35 N.Y.2d 453, 459, 363 N.Y.S.2d 923, 323 N.E.2d 169). The companies' expert here said he relied primarily on two studies which were never made part of the record and which were never a subject of cross-examination by the petitioner. Therefore, they could not form the sole basis for the Judicial Hearing Officer's conclusion. However, there was other evidence in the record upon which the trial court could base its conclusion. This included a study by The Research Institute of America, Inc. (hereinafter RIA), and the salary of a former executive for one of the companies, who was not a shareholder and whose salary was therefore not inflated by disguised dividends. The RIA study, inter alia, set forth median salaries and the salaries of the most highly-paid 10% of executives, for various categories of corporations, as well as median and high executive compensation as a per cent of total revenue for similar categories. In addition, the record contains considerable testimony as to the companies'...