The 2011 New Jersey appellate court case of Estate of Cohen v. Booth Computers is the perfect bad example that should scare the * out of every owner of a valuable business that is owned by multiple owners. I try and try to explain to my clients with valuable businesses how important a properly drafted and funded Buy Sell Agreement is to their loved ones, but more often than not people fail to address today the reality that they will die in the future.
When people go into business together or invest in valuable real estate together their most important document is a Buy Sell Agreement signed by all of the owners. This is true regardless of the type of business, i.e., a corporation, a limited liability company, or a limited partnership. For more read my article called “A Multi-Member LLC’s Most Important Document.”
The Estate of Cohen is the best example to illustrate the following Buy Sell Agreement facts of life:
- The owners of the business must read and understand the language in their Buy Sell Agreement. Words have meanings and economic consequences. Parties to a Buy Sell Agreement should go over the agreement line by line and word by word with the attorney for the company and their attorney and make sure they understand how the Buy Sell Agreement will work after a triggering event.
- The most important provision is the language that defines how the value of an interest to be bought and sold will be determined. A great amount of thought and effort must go into the valuation definition language.
- Regardless of the language in the Buy Sell Agreement, the owners of the company must, absolutely must, review the agreement not less than every two years (annually would be better) and revise it if necessary.
Had Claudia Cohen known of and followed the above advice her heirs probably would have been $11 million richer. Unfortunately for Ms.Cohen’s heirs, her Buy Sell Agreement is what nationally know business appraiser Christopher Mercer calls a “ticking time bomb.” Is your company’s Buy Sell Agreement a ticking time bomb? If you don’t know the answer to that question you probably need to take action and get an answer. Read “Your Buy-Sell Agreement: Ticking Time Bomb or Reasonable Resolution?“
Facts of the Estate of Cohen Case
Booth Company was a partnership created by the father of its two partners, Claudia and James Cohen when Claudia was 27 and James was 19. The kids were given a partnership agreement and asked to sign it, which they did without legal counsel. Apparently the kids/partners never modified the Partnership Agreement despite the fact they had no input in its creation decades before Claudia’s death.
The Partnership Agreement contained a mandatory buy out provision on the death of a partner. Claudia died in 2007. The Partnership Agreement contained the following language as to how to value the Partnership after the death of a partner:
“the full and true value of the Partnership is equal to its net worth plus the sum of FIFTY THOUSAND ($50,000.00) DOLLARS. The term “net worth” has been determined to be net book value as shown on the most recent Partnership financial statement at the end of the month ending with or immediately preceding the date of valuation.”
Although the Partnership was valued at $45,000,000 at the time of Claudia’s death and her share of the Partnership would have been equal to $11,526,162 if the value definition had been fair market value, both the trial court and the appellate court ruled that because the net book value of the Partnership was $128,000, Claudia’s heirs were entitled to only $178,000 ($128,000 book value plus $50,000). Claudia made an $11 million dollar boo boo, but never knew it. Claudia’s loved ones paid the price for her laziness and procrastination.
The partners should have had periodical reviews of their Buy Sell Agreement, including a current appraisal performed by an experienced appraisal company like Mercer Capital. He they done so before Claudia’s death I am sure both partners would have revised their Buy Sell Agreement to make it fair for each partner because each of them would not have wanted their loved ones to suffer the lost of millions of dollars if the partner were to be the first partner to die.
Lessons of the Estate of Cohen
If you have a valuable company that you own with other people and you want to protect your loved ones you must do the following immediately before it is too late:
1. Email or print and mail a copy of this article to all of the owners of your business.
2. Cause your company to hire an experienced Buy Sell Agreement attorney to prepare or revise a Buy Sell Agreement for your company. Each owner should be represented by his or her separate legal counsel.
3. Go over the Buy Sell Agreement word by word and discuss every issue among the owners and decide as a group how to address each issue in the Buy Sell Agreement.
4. Be prepared to send hours and a lot of attorneys fees because the stakes for your loved ones are high and you only get one chance to make the agreement work. I have a Buy Sell Agreement audit checklist that contains 61 major issues that the owners must address and decide how to handle. I plan on spending a lot of time meeting with the owners and drafting the Buy Sell Agreement so that it actually will work as designed. Many of these issues can be quickly agreed to and disposed of, but some will take some thought and negotiations by the owners to decide as a group how the issues are to be handled. For an example of this type of issue read “Treatment of Life Insurance Proceeds in Valuation” which illustrates the two ways a company can own life insurance and the choice of which method makes a $3 million difference to the heirs and the surviving owner.
5. Hire Mercer Capital to value the company now so each owner can know now how much his or her heirs would actually receive if the owner were to die.
Questions? Call me, Richard Keyt, at 602-906-4953, ext. 1 or send an email message to me at email@example.com
P.S. For another case involving the Estate of Cohen and James Cohen see the 2009 case of Estate of Claudia Cohen v. Robert Cohen and James Cohen. This case involves Claudia’s then 18 year old daughter Samantha Perelman and her father Ronald O. Perelman (a multi-billionaire and Claudia’s ex-husband). The granddaughter sought to set aside transfers of property made by her grandfather Robert Cohen to her uncle James Cohen. The lawsuit was funded with money from Claudia’s estate valued in 2009 at $60 million. In 2008 Robert Cohen sold one asset of his Hudson company for $600 million. The granddaughter sued her grandfather for more millions even though her grandfather amended his estate planning documents after the lawsuit was filed to leave the ungrateful granddaughter millions. The court states that Samantha is the beneficiary of tens of millions of dollars of life insurance on Robert’s life and tens of millions of dollars on a second to die life insurance policy on the lives of Claudia and James. Robert’s estate plan also leaves Samantha a fully furnished New York City apartment and a 30.5 carat diamond ring. The court dismissed all of Samantha’s claims, but did allow Robert’s counter claim for $10 million he loaned to Claudia’s estate to proceed to trial. Maybe $11 million was just too small for Claudia to care about. If your loved ones have too much money and wouldn’t miss the value of your interest in a company going to somebody else then you can live with a Buy Sell Agreement that is a ticking time bomb or no Buy Sell Agreement.
This case gets more interesting because the court “ordered two law firms to pay $1.96 million in legal fees after sanctioning them for filing frivolous litigation they pursued on behalf of billionaire Ronald Perelman. Superior Court Judge Ellen Koblitz imposed the fees on Paul Weiss Rifkin Wharton & Garrison LLP of New York and Lowenstein Sandler PC of Roseland, New Jersey. Koblitz ruled the firms filed a frivolous amended complaint for the estate of Perelman’s late wife, Claudia Cohen, in seeking hundreds of millions of dollars from her father, Robert Cohen, and brother James Cohen.”
One story said “This litigation has generated close to $15,000,000 in fees for defense counsel, who estimate that plaintiffs’ counsel fees must be considerably higher, given that they utilized the services of approximately twice as many lawyers and a higher percentage of New York (higher billing) counsel.”