Buy-Sell at Book Value – When FMV Was 60 Times Greater
When a buy-sell agreement does not
reflect the economic reality of the underlying assets, the results
can be catastrophic
A New Jersey man, Robert Cohen, set up an income-producing limited
partnership, Booth Computers (Booth), on behalf of his three grown
children. In keeping with its closely held nature, the Booth
partnership agreement provided that, on a partner’s divorce or
death, the remaining partners “shall” repurchase the
divorced/deceased partner’s shares at the “true value” of the
partnership – defined as “net book value” based on the most recent
financial statement – plus $50,000.
On May 26, 1978, a partnership known as HCMJ Realty Ltd (HCMJ) was
formed, with Booth obtaining a 45% limited partnership interest. On
September 1, 1978, Periodical Distributors of Florida, Inc.
(Periodical), conveyed to HCMJ its ownership of a Palm Beach,
Florida, oceanfront estate that Periodical had purchased for
$750,000 in 1976.
In 1997, one of the siblings died, and the partnership paid the
estate $34,503 for the decedent’s one-third interest, based on the
In 2007, the second of the three siblings passed away. Booth’s
assets at the time of her death included cash, two commercial
warehouse buildings in Egg Harbor, New Jersey, and its limited
partnership interest in HCMJ.
The net book value of Booth on the date of death was $305,617.
However, the value of the Florida property (owned by HCMJ, in which
Booth had a 45% interest) had appreciated, from $750,000 in the late
1970s to $45 million. The estate’s expert estimated that the fair
market value of Booth’s net assets was approximately $23 million,
based on the valuation of the Florida property at $45 million and of
the two New Jersey properties at $2.8 million.
Based on the buyout provision contained in the partnership
agreement, the estate was paid $177,809. The estate challenged the
amount of the payment, arguing in a court proceeding that, given the
gross disparity between fair market value and net book value, any
other interpretation was unconscionable and voided the buy-sell
At trial, Booth presented a financial expert who concluded that the
$177,800 purchase price accurately reflected one-half of the
partnership’s true value as defined by the partnership agreement
(namely, net book value plus $50,000). The expert also testified
that the partnership’s books should not have reflected the fair
market value of the Florida property, because the Tax Code and
generally accepted accounting principles (GAAP) require investment
property to be recorded at cost.
The trial court agreed, finding that the partnership had always
booked its assets at cost rather than market value. This historic
treatment comported with the "plain language" of the partnership
agreement, which clearly pegged the buy-out price to book value (as
it did when the first sibling died in 1997). Under these facts, the
trial court held that there was nothing "inherently offensive" in
the buyout formula and ruled for the partnership.
The estate appealed, and the appellate court upheld the trial
"We recognize the disparity between net book value and fair market
value,” the appellate court observed, yet the disparity, alone, was
not was not sufficient to “shock the judicial conscious.” In
affirming the buyout at net book value, the court ruled that the
controlling factor was the language of the partnership agreement,
which the court found to be clear and consistent with standard
definitions of book value.
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