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The Value Of A Proper And Timely Expert Valuation Reports

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  • Posted on: Jun 8 2018

There are numerous situations in which the value of real estate becomes an issue in litigation – condemnation proceedings, tax certiorari proceedings and calculating deficiency judgments in foreclosure proceedings – to name a few.  Sometimes, when the value of a particular property is at issue, a recent “arm’s length” sale of that same property provides the best assessment of its value.  “Although value and price are not necessarily synonymous, the rule has evolved that the purchase price set in the course of an arm’s length transaction of recent vintage, if not explained away as abnormal in any fashion, is evidence of the ‘highest rank’ to determine the true value of the property at the time.”  (Plaza Hotel Associates v. Wellington Associates, Inc., 37 N.Y.2d 273 (1975).)

Frequently, however, there is not a recent sale of the very property that requires valuation.  Sometimes there is a recent sale of the subject property, but the sale price is not truly reflective of market value.  This circumstance can arise where, for example, the property was sold: at a judicial sale; by a seller under pressure to sell; to a buyer with a special need for that exact piece of property.

In such circumstances, courts can determine the value of real property by the reports and/or testimony of expert real estate appraisers.  “New York case law is clear that expert appraisal evidence is the method for proving the value of real property in litigation.” NexBank, SSB v. Soffer (Sup. Ct. May 18, 2018) (“NexBank 2018”).  NexBank 2018 makes plain the importance of appraisal evidence in litigation involving real estate valuation, as well as the importance of timely making expert disclosure.

The underlying facts and circumstances related to NexBank 2018 are long and tortured; involving litigation and appeals in numerous related actions in New York and Nevada.  Some necessary facts are set forth in the NexBank court’s Decision and Order dated October 18, 2017 (“NexBank 2017”) Simply, Turnberry/Centra Sub, LLC (“Turnberry”) borrowed $475 million to purchase a shopping center in Las Vegas.  Jeffrey and Jacquelyn Soffer are principals of Turnberry.  To secure the loan, in part, Jeffrey and Jacquelyn delivered personal guaranties to the lender (the “Guaranties”).  When the underlying loan was not repaid at maturity, the lender “began the process of foreclosing on the deed of trust, and taking title to the property.”  (See NexBank 2017.) The property was sold for $276.5 million at a non-judicial foreclosure sale to TSLV LLC, an entity affiliated with several entities that purchased a controlling share of the underlying debt on the secondary market.  (See NexBank 2017.) Just prior to the sale, however, Jeffrey and Turnberry commenced an action in Nevada “to enforce what he alleged to be a binding commitment by the Lenders to restructure the [l]oan [(the “Restructure Action”)].”  (See NexBank 2017)  In the context of the Restructure Action, Jeffrey recorded a lis pendens and otherwise sought specific performance remedies that affected title to the property.  (See NexBank 2017.)

In 2013, NexBank, SSB v. Soffer, was commenced in the Supreme Court, New York County, to collect on the Guaranties.  The amount of damages due under the Guaranties increased if the Guarantors voluntarily encumbered the property, and the lis pendens filed in, and some of the relief sought by, the Nevada Action were determined to have done just that (the “Encumbrances”).

Accordingly, one element of damages due to the lender under the Guaranties is the difference between the $527 million unencumbered value of the property at the relevant date and the value on that date as encumbered by the Encumbrances.  The lender argued that the encumbered value of the property was the $276.5 million paid by TSLV LLC at the foreclosure sale. (See NexBank 2017.)  The court, however, rejected the lender’s analysis and, in so doing, expressed numerous concerns about that sale being an “arm’s length” transaction.  (See NexBank 2017.)

The court set a July 20, 2016 deadline for filing expert reports and the lender filed its Note of Issue on November 11, 2016.  Prior to both of those dates, the lender failed to serve an expert report.  Instead, it made the decision to rely on the foreclosure sale price as its measure of market value on the relevant date.  However, on December 8, 2017, the lender moved by Order to Show Cause for “leave to supplement its expert disclosure.”  By NexBank 2018, the court denied the motion.

The court recognized: that it has broad powers to supervise disclosure and control its dockets; and, the importance of enforcing fact and expert discovery deadlines.  The court also noted that “Commercial Division Rule 13 requires a plaintiff who intends to call an expert at trial to submit a report after the close of fact discovery, but before the filing of a Note of Issue. See 22 NYCRR §202.70.  ‘Expert disclosure provided after [the filing of the Note of Issue] without good cause will be precluded from use at trial.’ Id.”  (See NexBank 2018 (emphasis in original).)

In exercising its discretion to deny the lender’s application to file new expert reports “more than a year after the deadline”, the court noted that “this court and others in the Commercial Division have precluded expert reports served well after the court ordered deadline”; a practice approved by the Appellate Division. (See NexBank 2018.)

In finding that “good cause” was not proffered “to justify [the] service of late expert reports,” the court stated:

The facts, record evidence, and the parties’ legal theories were clearly established prior to the filing of the Note of Issue.  Plaintiff made the calculated decision to attempt to prove damages exclusively through its credit bid and the unencumbered value of the property….  “In fact, [plaintiff] instead has argued extensively in this action that expert testimony would be unreliable and inappropriate.  [Plaintiff] instead has argued that its lay witness testimony and documentary evidence is sufficient to prove its damages and in fact is a better, more reliable method of proof than expert testimony.

(See NexBank 2018 (citations and footnote omitted).)

After noting that case law and NexBank 2017 made plain that “expert testimony was required to prove the Property’s encumbered value”, the court stated:

It is simply implausible to believe that plaintiff and its counsel, who are extremely sophisticated, were unaware of this rule.  Instead, for strategic reasons, they chose not to rely on expert testimony.  Now that the court has squarely rejected that approach, plaintiff seeks a second bite at the apple and proffers new expert reports.  Plaintiff cites no commercial case in which such a tactic was approved or found to constitute good cause.  This court sees no reason to permit parties to preview the court’s view of their trial strategy at summary judgment, and then abandon that strategy if the court signals that it is unlikely to prevail.  To hold otherwise would severely prejudice defendants.  Summary judgment is an exercise in issue spotting for trial.  It is not, for the unsuccessful movant, an opportunity to reformulate its case.

Plaintiff’s stark pivot in its proposed proof is simply too great to permit at this late stage….To force the defendants to now counter these new expert opinions, which require further rebuttal reports and depositions, is extremely prejudicial on the eve of trial.  Under these circumstances, it is simply too late for plaintiff to deviate from the course it has charted.

(See NexBank 2018 (citations and footnote omitted).)

TAKEAWAY

Early on in litigation, consideration should be given to whether there is a need for expert disclosure.  Further, litigants should not assume that disclosure deadlines will routinely be extended.

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