Timely Expert Reports Are Critical to Discovery

Valuation professionals and other technical experts usually provide a written report to help attorneys, judges and juries understand their opinions.

A comprehensive written report conveys the analyses performed by an expert and provides support for the assumptions underlying his or her conclusion. It's instrumental in helping the attorneys draft direct and cross-examination questions — as well as in deciding whether to pursue litigation or settle before going to trial.

When one side withholds an expert's report until the last minute, it can impair discovery, leading to confusion, delays and added costs. In a recent divorce case, the Court of Special Appeals of Maryland excluded an expert's valuation opinion for a "substantial" violation of the disclosure requirements under state law. (Iman Salkini v. Jay Salkini, Ct. of Special Appeals of Md., No. 92, April 5, 2017)

Discovery Failures Warrant Sanctions

In Salkini, the most significant asset in the couple's marital estate was the husband's interest in a small telecommunications business. From 2011 to 2013, the business had one key customer: the federal government. The loss of a 2014 contract led to financial hardship, causing the husband to take out a $1 million line of credit to finance the couple's personal expenses. In January 2015, the couple separated, and eventually the wife filed for divorce.

The court issued a scheduling order under Maryland law that set a timeline for completing discovery. Although the wife provided the name of her valuation expert by the required deadline, she didn't give the husband a copy of her expert's business valuation report until the day before trial.

Rather than expect the husband to evaluate the expert's report for the first time at trial, the court considered two options: delay the trial or exclude the expert's testimony. When making this determination, the court evaluated the following factors.

  • Was the disclosure violation "technical or substantial?"
  • How close was the ultimate disclosure to the deadline under the scheduling order?
  • What caused the discovery failure?
  • What was the "degree of prejudice" between the parties offering and opposing the evidence?
  • Could any prejudice be eliminated by postponing the trial date?
  • Was a continuance desirable?

Rather than delay the divorce proceeding, the trial court decided to exclude the expert's direct testimony. However, the court allowed the wife's expert to provide rebuttal testimony on the opinion set forth by the husband's expert. The Court of Special Appeals upheld the trial court's sanctions.

It's Fair to Share During Discovery

State laws and legal precedent often vary from jurisdiction to jurisdiction. It's important to understand that discovery failures can lead to delays, exclusions and other sanctions in all types of cases.

In general, judges have significant discretion in applying sanctions for discovery failures, especially violations that are considered to be willful or substantial. To help ensure your expert's opinion is admissible, know the deadlines that are set during discovery and submit reports accordingly.

Also remember that comprehensive written reports may not always be necessary. When it's permitted by law, there may be strategic reasons or resource constraints that could persuade an expert to provide only a calculation, limited report or oral testimony during trial. Contact your expert for more information.

Valuation Issues Remain

The Salkini case is far from over.

It was remanded to the trial court to explain why the wife was awarded $300,000 from the property distribution. The appellate court was unable to determine how the trial court expected the parties to distribute the couple's biggest asset (the husband's telecommunication business) or whether the value of the business was already factored into the wife's settlement award. The appellate court opinion does clarify some valuation issues, however.

First, although the business had been started before the couple got married, the husband failed to meet his burden to establish the premarital value of the business. So, the court included the entire business value in the marital estate. If he had met the burden of proof, the court may have included in the marital estate only the appreciation in value during the marriage.

Based on the appellate court's opinion, it appears that the trial court valued the business at $2.1 million, assuming the husband would repay his $1 million line of credit to the business (with interest). So, in effect, the value of the business was roughly $1.1 million. That conclusion was based on:

1. The report submitted into evidence by the husband's expert,

2. Testimony provided by the husband's expert during trial, and

3. Rebuttal testimony from the wife's expert.

The husband's expert opined that the husband generated 75% of the company's business "through his connections and his personal style of doing business." This statement implies that the court may have allocated some of the business's value to his personal goodwill. In Maryland, personal goodwill is generally excluded from marital estates, particularly if it's already factored into the owner-spouse's child support and alimony payments.

In this case, the trial court awarded the wife $2,090 a month in child support and $6,500 a month in alimony, based on the husband's annual income of roughly $210,000. The appellate court was unable to ascertain, however, whether the trial court specifically considered this issue in its settlement award.


LOUIS J. CERCONE, JR., CPA, CFE, CFF, ABV, ASA, CVA
lcercone@briscon.com

Lou is the Managing Director of Brisbane Consulting Group in charge of business valuations, forensic accounting, and litigation support services. He has extensive valuation experience and has served as a financial consultant and expert to attorneys in the economic aspects of matrimonial dissolution. He has been engaged in several forensic accounting cases and has served the judiciary as a court appointed expert and receiver for financially troubled companies. He has testified as an expert witness in State Supreme Court and Federal Court. Lou has also been engaged in the quantification of lost income in determining business interruption claims for insurance adjusters.