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BYRD v. BYRD-TN Divorce Case Regarding Which Expert Can Testify, Impartiality Under Rule 706, Consequences of Not Cooperating and Proper Business Valuation Methods

January 19, 2023

JAMES FRANKLIN BYRD v. VALERIE FINLEY BYRD v. BYRD BROTHERS, LLC, ET AL.
In the Court of Appeals of TN at Jackson
Assigned on Briefs April 19, 2022
No. W2021-00926-COA-R3-CV
Filed 10.31.2022

TN Divorce Case Regarding Which Expert Can Testify, Impartiality Under Rule 706, Consequences of Not Cooperating and Proper Business Valuation Methods

As the trial Judge Bob Weiss put it, “the games have to stop” and “this was very much a case of hiding the ball, and that was the problem.”

This Tennessee divorce case involved a 34 year marriage. Almost immediately after filing, Wife and her attorneys encountered difficulty in obtaining information from Husband through discovery. At the time of trial, Husband and his brother owned and operated two McDonald’s franchises in favorable locations in Shelby County, TN.

The divorce trial was held over the course of four days in October 2019. The first expert witness called at trial by Wife was Mike Pascal, JD, CVA, an associate of Robert Vance, CPA, ABV, CFF, CVA, CFP and an employee of Vance’s firm, Forensic & Valuation Services, PLC (“FVS”). Pascal testified that FVS had valued approximately sixty-five McDonald’s restaurant franchises in the past two years, with all of those being located in the Memphis and Mid- South area.

Complex Deception

Husband was repeatedly untruthful about his business holdings, expenses and bank accounts until confronted with contrary proof. He identified only five bank accounts in his discovery responses, but when presented with bank statements bearing his name, Husband admitted that his name was listed on about a dozen additional bank accounts at various banks. He acknowledged that the bank statements showed that three of the business interests brought in $7.2 million in 2016. He admitted that the records also showed transfers totaling over $250,000 to a certain female, whom he identified as his business partner’s girlfriend.

A hearing was held in 2017 before a divorce referee regarding pendente lite support. Prior to the hearing, Husband and Wife both submitted statements of their monthly expenses and income. Husband listed a monthly “net income” of $17,060, which, he said, “includes draws from and personal expenses paid by two McDonald’s Restaurants.” He also listed exactly $17,060 in monthly expenses. Specifically, he listed over thirty general categories of expenses that his McDonald’s restaurants were paying for virtually all of the personal expenses on his behalf, including his house note, haircuts, student loans for their daughters, a car for their daughters, etc.
Given the “complexity of the business dealings,” wife’s counsel argued that “we need as part of our attorney’s fees the money to hire Mr. Rob Vance, . . . forensic CPA [owner of Forensic & Valuation Services, PLC], to be able to make sense of this.” Wife filed a “Motion to Appoint Rob Vance as Forensic Accountant and to Hold Husband Responsible for the Fees Incurred.” The motion did not cite any legal authority for the request which ultimately proved to be important. Instead, it detailed Wife’s efforts to obtain information from Husband through discovery and his repeated failures to comply. Wife noted that Husband’s tax returns were unreliable, showing only $18,000 in income in 2015 while he admitted his restaurants paid $17,000 per month in personal expenses for him. Wife said that it would be extremely difficult if not impossible for her attorney to determine what else Husband was concealing without having specialized training.

Wife submitted an affidavit prepared by me (Vance), which stated that I had found “a magnitude of information which was concealed by [Husband].” I stated that the collected information thus far showed sixteen bank accounts “with millions of dollars being transferred in from unknown sources and millions transferred out to unknown destinations.” The affidavit also stated that Husband’s tax returns did not “parallel the volume of transactions evidenced in the sixteen bank accounts.” After a hearing, the court granted Wife’s motion to hire me.

Husband’s Personal Financial Statement Value

The trial court noted that Wife’s counsel had received a personal financial statement from a bank in response to a subpoena and that Husband had initially denied signing it. The court found that Husband finally admitted to signing the document after Wife’s counsel took the deposition of the bank officer and hired a handwriting expert to prove that it was his signature. The trial court acknowledged that Husband’s employee, Janelle Carter, attempted to dispute the accuracy of the financial statement at trial by testifying that she and another employee prepared it, signed it with a rubber stamp, and only showed it to Husband after she had completed it.

The court found that “[t]he fact that Ms. Carter continued to perpetuate the falsehood that she prepared the financial statement despite Husband’s admission, casts all of her testimony as untrustworthy.” On the personal financial statement, Husband had valued his two McDonald’s restaurants at a combined value of $4,099,282 when applying for a loan from a bank on January 25, 2018. The court noted that this financial statement valued the marital estate at $4,759,872. The trial court found that “Husband’s failure to cooperate in providing information made identifying and valuing assets in this case more difficult.”

Trial Court’s Finding for the Restaurant Values

Regarding the value of the restaurants, the trial court noted that Pascal and FVS had recently valued sixty-five McDonald’s franchises on another matter and used that industry and proprietary knowledge in forming his opinions of the parties’ two McDonald’s franchises. His experience valuing other McDonald’s gave him a base of knowledge that McDonald’s Corporate would typically value a store based upon a net cash flow multiplier, usually 4.75, however he was unable to use this cash flow method, due to Husband running personal expenses through the business and the fact that Husband was not forthcoming with necessary information.

Pascal testified that these two McDonald’s stores were in well-established areas which would help with the cash flow of the stores and to a reasonable degree of certainty the value of the two restaurants was $4,100,000 excluding any debt obligation which was consistent with the Husband’s valuation on his personal financial statement. The trial court ruled that the most reliable evidence of the values of the two McDonald’s franchises comes from Husband’s financial statement and Mr. Pascal’s testimony validating the values in Husband’s financial statements; therefore, valued the two McDonald’s restaurants at a combined value of $4,099,282.

The Appeal

Less than a month after the divorce decree was entered, Husband filed a “Motion for New Trial.” He argued that a new trial was warranted for four reasons which were essentially the same as four of the nine issues he presented on appeal. The four reasons dealt with the valuation expert, methods and dates as follows:
1. Outdated Information - Whether the trial court erred when it entered the Final Decree of Divorce nearly 1.5 years after the trial in this matter whereby not valuing the assets at a point in time close enough to the entry of the Final Decree of Divorce;
4. Expert Substitution - Whether the trial court erred when it allowed the substitution and testimony at trial of Mike Pascal in place of the court appointed expert Rob Vance;
5. Expert Impartiality - Whether the court appointed expert appointed under rule 706 owed a duty of impartiality; and
6. Improper Valuation Method - Whether the trial court erred when it used an improper valuation method of Husband’s restaurants.

The four reasons for a new trial were also presented on appeal along with five other issues. The article focuses on the four listed above.

Outdated Information

The trial judge warned Husband that “the games have to stop” and said that it was ridiculous for Wife’s counsel to continue “turning over rocks” to find information when Husband could simply produce it himself. The trial judge found it “absolutely baffling” that Husband could manage multiple businesses but could not produce documents in a timely manner. He stated that he was “really just at a loss” and that he could not find any of the testimony from Husband credible.

Pascal testified that Husband did not comply with the portion of the trial court’s order directing him to cooperate with the investigation of his businesses and income. He explained, “Information we received was only half the information at times. Half the time periods we had trouble. We even had trouble reading some of the information. It was not legible. It was non-responsive. It was outdated.” Pascal said that there were numerous deficiency lists prepared and sent to Wife’s counsel, which were then forwarded to Husband’s counsel. He said that Husband never turned over any books for the companies that were in a normal, legible, or useful condition.

The tax returns that were received did not account for the personal expenses being paid by Husband’s various businesses. Pascal said that payments of personal expenses are typically seen in a company’s records as a loan to a shareholder or a distribution or draw [i.e., compensation], but he did not see any such records in the information he was provided, nor did he see anything else to indicate that the payments should not have been reported as income. Thus, he opined that Husband’s income tax returns were not consistent with the amount of income he was able to trace to Husband. Pascal acknowledged that $17,000 per month in personal expenses would, standing alone, equate to an income of over $200,000 annually. However, he testified that Husband’s personal expenses were also being paid by other businesses. In sum, Pascal said that due to the lack of information he received, he was unable to definitively identify Husband’s income, but the “bare minimum” would be $17,000 per month.

The appellate court disagreed with Husband’s contention that the trial court impermissibly utilized “outdated” information at the time of trial. The trial court repeatedly emphasized that Husband’s failure to cooperate in providing information made valuing the assets more difficult. Husband could not consistently refuse to produce information and then complain on appeal that the trial court failed to use the most recent figures. See Wilson v. Wilson, No. M2002-02286-COA-R3-CV, 2003 WL 22238953, at *3 (Tenn. Ct. App. Sept. 30, 2003) (finding a valuation date was “timely under the circumstances” when the husband “failed to deliver any financial information beyond that date despite an order from the trial court requiring further production,” so on appeal, he was “precluded from asserting a premature valuation when such valuation [was] a product of his own doing”).

Although Pascal did obtain some information from Husband’s accountant, Husband repeatedly argued at trial that Wife’s counsel or Pascal should have utilized a signed information release to request even more information from the accountant after Husband failed to provide it. The trial judge did not buy this argument, emphasizing that Husband not only had access to the information, but the accountant testified that he provided the information directly to Husband on a monthly basis. The trial judge said,

“And if [Husband] had sat there and said, here are all my monthly cash flows for the last three years and he hand delivered all those to Mr. Vance’s office and Mr. Vance said, I’m not dealing with those, I want to just look at the 65 other stores that I looked at, I’m going to ignore that information, thank you very much [Husband], but I’m going to use this to line my bird cage, then I’d be right there with you. But he didn’t do that. And that’s not the testimony and that’s not the proof.”

Expert Substitution and Expert Impartiality Under Rule 706

Once again, the first expert witness called at trial by Wife was Pascal. Husband’s counsel stated, “We’ve already stipulated before we got here that he’s an expert. No need to voir dire him.” Pascal then explained that he was employed by the company owned by Vance, and he identified the order the trial court had entered regarding Vance. At that point, Husband’s counsel objected to any further testimony from Pascal. He argued that the trial court had “appointed” only Vance, not his associates. Wife’s counsel questioned how Husband’s counsel was objecting to Pascal given that he had already stipulated prior to trial that he was an expert. The trial judge then overruled the objection to Pascal’s testimony and said that the firm enters into engagements and that they issue opinions and reports “as the firm.” Pascal testified that he and Vance had worked together on this case, just as they do in all cases. When asked why he was testifying rather than Vance, he explained that he was the primary analyst on this case, his hourly rate was less than Vance’s rate, and Husband had still not paid everything owed to date.

The question for the appellate court was whether the trial court erred when it allowed the substitution and testimony at trial of Mike Pascal in place of the “court appointed” expert Rob Vance The second issue he presented was “[w]hether the court appointed expert appointed under Tennessee Rule of Evidence 706 owed a duty of impartiality.” Husband’s arguments, however, presuppose that I (Vance) was appointed pursuant to Rule 706. That Rule allows a court to appoint its own expert witness agreed upon by the parties, but in appropriate cases, the court may appoint expert witnesses of its own selection. The witness must consent to the appointment, be compensated appropriately and shall be subject to cross-examination by each party. As the trial court succinctly stated in its order denying the motion for new trial, “Robert Vance was a retained expert by Wife, [and] counsel for Wife sought relief from the Court to require Husband to pay for the necessity of retaining the expert.” The appellate court’s review of the record supported this conclusion.

The appellate court acknowledge that the trial court’s order did state that Vance was “appointed as a forensic accountant,” but it is clear from the remainder of the record that I was Wife’s retained expert and not appointed pursuant to Rule 706. In fact, Husband cited to numerous facts in his motion for new trial and in his brief on appeal which, he claimed, clearly demonstrated that Vance and Pascal were advocates for Wife throughout this proceeding. He argued, “From the moment Rob Vance was first mentioned in a Motion before the trial court, he had aligned himself with Wife, becoming an advocate for her cause” although I reject the use of the word “advocate”.

Husband argued that it was clear from my initial affidavit that I had already been “working with Wife’s counsel.” The appellate court stated that is precisely the point. It was clear all along that Vance and Pascal were Wife’s retained experts. The appellate court found no indication that the trial court appointed me to serve as a Rule 706 expert which was never mentioned by anyone until Husband retained new counsel after the final decree was entered and filed a motion for new trial. The appellate court rejected Husband’s argument that the court violated Rule 706 by allowing Pascal to testify in place of Vance and for the same reason rejected Husband’s argument that Vance, Pascal, and the FVS firm “violated a duty of impartiality” owed under Rule 706.

Improper Valuation Method

Pascal testified that he looked at all three of the main approaches to valuation: market, income and asset. Ultimately, he found it appropriate to utilize the guideline transaction method of the market approach for the McDonald’s franchises at issue. He testified that he encountered difficulty in applying an income approach to Husband’s franchises (which was the McDonald’s Corporate method) since he ran at least $17,000 per month of personal expenses through the stores and those expenses were not being expensed as compensation to him. Pascal said he never got a list of all those personal expenses and that one cannot determine the real net cash flow of a store’s operations under those circumstances as those expenses would have to be added back. He also said he was unable to verify the expenses listed on Husband’s income and expense statement and declined to simply accept them “at face value.”

Husband argued that the trial court erroneously adopted Pascal’s market approach to valuing the restaurants when that is not a valuation method typically used to value a closely held corporation. He also complained that Pascal utilized data from sixty-five other franchises instead of his own and relied on the 2018 personal financial statement. Husband contends that information about his stores “was available” to Pascal if he had simply pursued it through other avenues, as he could have compiled information from his monthly income and expense statement or used the release to gather more information from his accountant. Husband argued that market-based approaches to valuation generally are not appropriate for closely held corporations like his McDonald’s franchises and claimed that the preferred method would have been to use a capitalization of income approach such as in Bertuca v. Bertuca, No. M2006-00852-COA-R3-CV, 2007 WL 3379668, at *5-7 (Tenn. Ct. App. Nov. 14, 2007). This contention is of course not correct in that the market approach should always be considered in the valuation of a closely held corporation and utilized if comparable sales and other data can be obtained.

In the case at bar, it was Husband who failed to provide the information necessary to utilize a different approach. Pascal testified that he considered the market, income and asset approaches. He readily acknowledged that “[i]f [Husband] had provided us the information that we requested, we could have done this in a couple of different ways.” However, he said that “[Husband] prohibited us from using any other method to determine the value.” As the trial court stated in its order denying Husband’s motion for new trial, “[a]s a result of Husband failing to provide the necessary information as to the [net] cash flow of the business, doing a cash flow valuation was not possible.”

Using the guideline transaction method of the market approach utilized a multiplier with the gross income versus the net income or net cash flow. A multiplier with the net cash flow could not be used since the net cash flow could not be determined due to the inability to identify the personal expenses. Pascal and Vance took data from comparable stores into consideration in order to ascertain the value of Husband’s stores. It also took Husband’s expenses “out of the equation.” Pascal explained that, based on his past experience with other McDonald’s franchises, he was aware of the proprietary method that McDonald’s Corporation and its franchise operators used to value individual franchises. This formula took into account the store’s cash flow, interest expense, an allowance for general and administrative expenses, a 4.75 cash flow multiplier, and long-term liabilities. Pascal said he applied the same formula used by McDonald’s Corporation and supplied information either from Husband’s reported financial information or comparable Mid-South stores. For instance, he said that he did not have any current financial information from Husband for the current cash flow of his McDonald’s stores, so he took the information from the database of sixty-five stores and determined how much revenue those stores had over the past three years in order to derive a gross revenue multiplier versus the net cash flow multiplier.

Pascal considered the numbers from the two McDonald’s franchises Husband had sold in 2014 and compared them to the average database revenue multiplier. In addition, he used some 2015 figures but added an adjustment or growth factor to reach a reasonable value as of the time of trial of $4,011,000. Based on his overall investigation and gross revenue analysis, Pascal believed that the value of $4,099,282 (i.e., approximately $2.0 million per store) Husband listed on his financial statement was a reasonable value for his two franchises at the time of trial. For comparison, he testified that the average value of the sixty-five stores he had valued was approximately $2.0 million per store which compared to the valuation he placed on Husband’s franchises.

Husband criticized the decision to rely on the value he placed on the franchises his financial statement from the previous year, a similar approach was used in Powell v. Powell, 124 S.W.3d at 105, where a trial court considered not only expert testimony as to the valuation of a business but also financial statements the husband had submitted to financial institutions. Note: I (Vance) was also the expert in the Powell case. On appeal, Mr. Powell claimed that his financial statements were inaccurate and had “overstated” the value of his business. The appellate did not buy Powell’s argument either.

Given the limited financial information available in the case and the expert testimony of Pascal, the appellate court discerned no reversible error in the trial court’s use of a market based approach or its consideration of Husband’s financial statement. The trial court’s valuation was within the range of evidence submitted at trial, and the evidence did not preponderate against it. Therefore, the appellate court affirmed the trial court’s valuation.