CPA expert witness’s business valuation admissible in wife’s fraudulent asset transfer case

Case:

Teresa Hipple v. SCIX, et al., No. 12–1256, U.S. District Court Eastern District Pennsylvania; Aug. 13, 2014

Background:

Defendant Clement Hipple founded SCIX in 1999 to market and sell Steel Seal, an automotive-repair product used to seal blown head gaskets. On January 1, 2001, Clement Hipple transferred his “membership interest” in SCIX to his son, Brian Hipple, for one dollar.

Clement Hipple married plaintiff Teresa Hipple in March 2001. In 2002, SCIX executed two judgment notes payable to Teresa Hipple for $350,000 loans. SCIX made similar notes to Clement Hipple and another of his businesses. In 2010, the Hipples were divorced, and a county court issued a writ of execution on one of the judgment notes payable to Teresa Hipple. She received $53,000. Nineteen days later, Brian Hipple signed a $210,000 promissory note to his father, in consideration of substantial credit extended to SCIX. The collateral was all of SCIX’s business assets. A few days later, Clement Hipple demanded full repayment of the promissory note. And a few days later, Clement Hipple took possession of all of SCIX’s assets in fulfillment of the loan.

Teresa Hipple filed a lawsuit alleging fraudulent conversion of the assets.

CPA Expert Witness:

Plaintiff’s CPA expert witness, Wayne Geisser, is a certified public accountant. He concluded that a reasonably equivalent value for the transfer of SCIX’s assets as of October 13, 2010 would be approximately $1.8 million. His methodology included determining the sellers discretionary earnings (SDE), and, using the sale of comparable businesses, determined that their value averaged 2.92 times their annual SDE. He thus multiplied the average SDE of SCIX and Steel Pro by 2.92 to arrive at the company’s value.

Defendants sought to exclude the testimony because it failed the fit and reliability components of Daubert v. Merrell Dow Pharm, Inc. (509 U.S. 579, 590–91, 113 S.Ct. 2786, 125 L.Ed.2d 469 [1993]).

Admissibility of CPA Expert Witness:

In a memorandum opinion, Judge Jan E. DuBois of the U.S. District Court for the Eastern District of Pennsylvania found the testimony admissible.

“The Court rejects defendants’ argument and concludes that the proposed testimony of Mr. Geisser is admissible. Both a Calculation of Value and Opinion of Value are engagements approved of by the American Institute of Certified Public Accountants,” the judge said.

Geisser conducted his analysis based on limited available information, and his assumptions and methodology are clear. Thus, the judge said, the appropriate weight to afford his proposed testimony will be determined by the court after cross-examination during trial.

The judge also denied both parties’ motions for summary judgment.