Summary of Issue
Attorneys representing multiple family members involved in litigation against each other contacted our office to request assistance with accounting. The accounting issues involved were complex and all parties had come to understand that they needed forensic accounting expertise. With the court’s approval, all parties and their legal representatives agreed to retain Arxis as the case expert to see if that might facilitate a resolution.
Why the Request?
Several pieces of real estate were involved in a dispute where the family members had equal ownership interests in all the property. There were no partnership or operating agreements. Unfortunately, there were, as a result, several different expectations of what should have happened as well as different versions of what had happened over several decades. The one undisputed fact was that all properties were owned equally, even though not all family members controlled or even had access to all the properties. The problem was that over many years the properties were, at various times, rentals or the primary residence of extended family members. For properties converted to residences, there was the demand for rent or other compensation for lost income to the other owners. For rental properties, there was a demand for full accounting of rent income, expenses, and the disposition of cash profits.
Current deed, debt, and occupancy data was initially reviewed. It was immediately apparent that the recorded property deeds did not reflect the ownership intent of the parties; there were significant reimbursement claims by at least two of family members; and nobody had accounting records that were relevant, complete, or reliable to allow for a full accounting. Further, after several conference calls, it was clear that most of the family members had no interest in the cost and effort involved to obtain those records.
Extensive time was spent understanding each party’s claims and discussing the documents needed to substantiate the claim. For example, significant improvements and repairs had been done by individual family members to maintain and increase the value of properties. They each did it with the expectation that since all the family benefited, there would be reimbursement. However, as is typical in informal real estate partnerships, there are a lot of assets but very little cash to repay partner loans and reimburse expenses. The family members came to understand that, in the absence of documented evidence, the court was likely to order the sale of all the properties with an equal division of the proceeds. Because of the family legacy represented by the real estate, nobody wanted this to happen. Still, it was an effort to maintain the involvement of the family members needed to resolve the dispute.
As a result of these divergent expectations, inadequate top-level management and incomplete accounting processes, it became obvious that there would not be a basis for reliable accounting. In many situations, this would indicate that the next step would be extensive litigation to remedy the situation.
However, in order to jump-start a dying attempt to resolve the disputes, Arxis proposed a different and creative approach to resolving the dispute through our experienced involvement. A spreadsheet was prepared that projected the financial results of selling all the properties. In other words, the analysis answered the question of what would happen in a coordinated liquidation of all the properties should the court make such an order. Current values of the properties were used based on appraisals. All known reimbursement claims were included in the calculation (including notes indicating which were supported by documents, and those that were unsubstantiated) with the result showing how much cash each partner would be due, or owed.
The liquidation projection was panned by the litigants since none of them wanted to liquidate the properties. However, the family members and their legal representatives met to attempt a settlement and the liquidation spreadsheet became the template used to accomplish a settlement. The individual family members agreed to divide the properties between them. Once that division was decided, the calculations on the liquidation spreadsheet were used to calculate cash due to/from each family member. The result was that none of the properties were sold, each of the family members obtained ownership of the property(s) they wanted, and equalization payments were calculated.
Extraordinary litigation costs, as well as months of heart-wrenching personal time for each of the family members, were avoided by the pre-trial settlement in this case. It turned out that projecting the economic results of a court ordering the sale of all the properties was the linchpin that finally motivated that settlement.