Trial Court Determines Damages Without Trial

In this highlighted Business Valuation Resources (BVR) case report, a transaction subsequent to the breach of contract date was used to determine the market price of the subject company, which was then used in the final damages calculation. The transaction value was extremely low, which resulted in the defendant owing the upper limit amount in damages.

This case was unusual for its use of a “paper trial” and that a primary factor in determining damages included a transaction occurring after the breach date and with minority – instead of control – shares. The court did not agree with the defendant’s specialist’s claim that the subject company had significant operating value. Instead, it used a transaction following the breach date, which showed that the subject company had a heavy debt load, ran at an operating deficit, and required significant capital expenditures to operate.

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New York Trial Court Determines Damages Without a Trial and Uses Subsequent Transaction to Determine the Amount

Quattro Parent LLC v. Rakib, 2022 N.Y. Misc. LEXIS 260; 2022 NY Slip Op 30190(U) (Jan. 14, 2022)

The plaintiff, Quattro Parent LLC (Quattro), moved for a summary judgment on damages in a breach of contract case. The court had already decided that the defendant was liable for damages, so the only remaining question before the Supreme Court of New York, New York County, was the amount of damages. “The sole issue is the value of plaintiff’s shares, if any, on November 15, 2015, when defendant Zaki Rakib refused to proceed to close the deal to purchase shares of Quattro for $7.5 million. Any such value will be deducted from the $7.5 million that defendant owes to plaintiff.”

The defendant demanded an in-person trial, insisting that he had a right to cross-examine the plaintiff’s witness at trial. The plaintiff countered that damages could be established on paper as there were no issues of fact necessitating a trial. Noting that the plaintiff’s motion solved a problem caused by COVID-19, the motion to determine damages without a trial was granted. The court further noted that the plaintiff’s motion was not a motion for summary judgment. It was a “dispositive motion,” but the court treated it as a motion for summary judgment. “Defendant has no right to cross examine witnesses at trial unless there is an issue of material fact.”

The measure of damages was the difference in the price between what the defendant promised to be pay and the value of those shares at the time of the breach.

The plaintiff’s expert, Joshua Ho-Walker, was a member of the plaintiff’s board, Quantum Strategic Partners. “Part of Ho-Walker’s job was to manage and value the Quattro investment.” Walker was educated and experienced in investments. He was not an experienced valuation analyst. Walker explained that his primary method of valuation of Quattro was the discounted cash flow method. The plaintiff’s investors, including the defendant, invested almost $150 million in the plaintiff. The plaintiff’s plan projected profits by the end of 2015. By the summer of 2014, the plaintiff, needing more funding, was unable to attract additional investors, including investment banks.

The plaintiff had a heavy debt load, accounts payable, and capital expenditures. By June 2015, the plaintiff was running a monthly operating deficit, which was contrary to its plan. Brazil had a recession in 2015 that eliminated any prospective market for Quattro’s shares. In June 2015, the board noted that it would take an investment of $75 million to $100 million just to break even. The defendant attended that meeting. In June 2015, Rakib made an ultimate offer of $7.5 million for a 55% interest in Quattro. On Sept. 30, 2015, Soros (primary investor) wrote their investment in Quattro to zero. “Quattro eventually received an offer that would have required its original shareholders to provide additional funding and assume certain contingent liabilities of the company.” Based on this, Walker determined the fair market value of the shares at zero. In December 2016, three minor shares of Quattro sold for “a penny; not a penny per share.”

The defendant objected, saying that Walker was a “paid witness.” This can only be determined at trial, and Walker did not provide any calculations, schedules, or support for his determination.

The defendant offered Michael Garibaldi, CPA/ABV/CFF, who has significant experience testifying in New York courts as to business valuation and forensics. “Garibaldi states that he was asked to provide an opinion on whether plaintiff was worth more than $7.5 million on November 15, 2015 and demands to do so at a trial.” Garibaldi opined that the plaintiff’s discounted future earnings would be $14,482,372, making the defendant’s 59% interest worth $12,970,779. (Editor’s note: The $14 million would be capitalized and then multiplied by 59% in order to arrive at the $12.9 million  amount.) The plaintiff objected to Garibaldi’s opinion as being based on outdated marketing information and suggested investment of $109 million and realization of massive revenues to obtain the cash flows Garibaldi used. None of that ever happened. The plaintiff repeatedly testified under oath to this court that the plaintiff’s shares were worthless absent financing of at least $75 million. “It was only after I learned (after the Transaction Agreement was executed) that the Spectrum Rights were virtually worthless that the investment contemplated by the Transaction Agreement transformed from ‘risky’ to futile.’”

The court decided that the best indication of “market price” was the one penny paid for 1.1 million shares in December 2016, a date that was subsequent to the breach date. The court also credited the Walker testimony, which was contemporaneous, and the Soros write-down of value in September 2015. Both were prior to the breach date.

Plaintiff’s motion for summary judgement was granted, and damages were determined to be $7,499,900 plus interest.

This case was unusual for its use of a paper trial and for the fact that a primary factor in determining damages included a transaction occurring after the breach date and with minority, instead of control, shares.