Court-Appointed or Jointly Retained Financial Experts

Overview

To explain how the joint expert accomplishes the foregoing goals, the following issues are addressed:

• The difference between the two manners of retention for a joint expert: jointly retained or court-appointed.
• When and why the joint expert is retained.
• Retention and clarification of scope.
• Interaction with the parties, attorneys and the court.
• The process:
• Initial conference;
• Preliminary analysis;
• Financial investigation;
• Preliminary report;
• Formal report;
• Disagreement with the joint expert;
• Settlement conferences; and
• Trial.

Expert's Role

Differences Between a Court-Appointed and a Jointly
Retained Expert

The difference between the court-appointed financial expert and the jointly retained expert is that the court-appointed expert has the imprimatur of the court, while the agreed-upon expert often has to rely on his or her goodwill with the litigants and attorneys. The support of the court assists the court-appointed expert to do his or her job and get paid. Theoretically there should be little difference between a jointly agreed-upon expert and a court-appointed expert. Both can, and do, provide the same service to the litigants, attorneys and court. There is a third variation on the appointment of an expert when the court has the parties agree on an expert as opposed to appointing an expert without the parties consent. Many courts prefer this method of expert selection. Specifically, the judge asks the parties to select an expert or may offer several choices from whom the parties can select.

The joint expert is, therefore:

• Appointed by the court (This is the traditional court-appointed expert, in which the court appoints the expert with or without input from the litigants and their attorneys);
• Agreed to by the parties (i.e., neutral). (The attorneys mutually select an expert without the participation of the court.);
• Appointed by the court with the consent of the parties. (The attorneys agree upon an expert whom the court appoints in a consent order.).

When and Why the Joint Expert Is Retained

The two most common situations in which the court appoints an expert are as follows:

To render his or her opinion on income, cash flow, business value, etc. Normally, this appointment is made at the start of discovery. In cases where unreported income or the amount of income is an issue, the joint expert will be better able to deal with these issues for the reasons described herein. Furthermore, where it is not economical or virtually impossible to gather the documentation to present a case at trial, the joint expert will be more cost-effective.

Some courts expect the court-appointed expert to opine on or
mediate divergent opinions rendered by the privately retained experts.

This article focuses on the first situation, the expert who is retained to render his or her own opinion.

Retention and Clarification of Scope

Selecting a Business Appraiser

Integrity is the most important quality for an appraiser. He/she must determine the value of an asset based upon the unique facts and circumstances of the case while taking pains to be unemotional and objective in all interactions to avoid the appearance of bias. There are also many certifications for business appraisers that denote strong qualifications. These include: the (ASA) Accredited Senior Appraiser with the American Society of Appraisers; the (CBA) Certified Business Appraiser with the Institute of Business Appraisers; the (ABV) Accredited in Business Valuation with the American Institute of Certified Public Experts; the (CVA) Certified Valuation Analyst with the National Association of Certified Valuation Analysts; and the (CFA) Chartered Financial Analyst with the Association for Investment Management and Research. The key to true expertise is a combination of qualifications, expertise, integrity, strong character, and the willingness to take a stand on value.

Retainer Letters

The importance of a retainer letter is different for the agreed-upon expert as compared to the court-appointed expert. When court-appointed, some experts do not use formal engagement letters. They believe the court order defines the purpose of their retention and the court controls the collection of fees. As a result, they simply forward a letter advising the litigants that they have been appointed by the court to perform a specific function and informing the litigants of their hourly rates for this service. For instance, the New Jersey court rules state that “The court shall establish the scope of the expert's assignment in the order of appointment.” 5:3.3 (d); therefore, a court-appointed expert should look to the court order for guidance. Notwithstanding the existence of a court order, however, it is good practice to have the parties sign a retainer letter defining the assignment in accordance with the court order.

An agreed-upon expert should define his or her assignment with the attorneys, and memorialize this agreement in an engagement letter.

If a party or attorney asks a joint expert to perform additional services, the expert should ensure that both sides agree the additional work is warranted. The expert should confirm his or her understanding of the expanded scope of the engagement in writing. (Failure to confirm verbal instruction in writing can lead to the accusation that the expert is working at the direction of one side and is, therefore, not neutral. This can also lead to a fee dispute, if one or both parties believe the expert has gone beyond the agreed scope of retention). It should be pointed out that court-appointed experts are neither immune from fee disputes nor from accusations of malpractice. The joint expert should seek the assistance of the court in clarifying his or her role when the parties or their counsel cannot agree on expanding the scope of the expert. This is beneficial to the expert in that it removes the decision-making process from the expert to the court, thereby mitigating the chances that the necessity of the work can be challenged at a later date. Further, the expanded role of the expert will be documented in a court order.

The court-appointed expert may have to render an opinion with which neither party is happy. When that occurs, the litigants may not want to pay the expert. In this situation, the court can be of assistance in the collection of fees. As a result, being court-appointed can be a great benefit in the collection of fees because judges are reluctant to assist in collection if the expert is not appointed by the court. Sometimes, even if the expert is court-appointed, the court may be reluctant to order payment. According to the New Jersey court rules, the court may direct who shall pay the cost of such expert appraisal or report 5:3-3 (i). However, an agreed-upon expert depends primarily on the goodwill of attorneys and litigants to obtain payment. This goodwill may be nonexistent simply because the expert has done his job and produced a report with which neither side agrees. The situation may be further complicated if one or both of the attorneys who agreed to retain the independent expert are no longer in the case.

Interaction with the Parties, Attorneys and the Court

Parties and Attorneys

Interaction with the parties is an important and sensitive issue. The means of communication should be established at the outset of the engagement. As a general rule, the independent expert should only speak with the parties in the presence of their attorneys. There are, of course, situations when the expert can speak directly to the parties, for example when gathering data. The expert must have sufficient contact with both sides so that they understand that he/she is listening to their concerns. At the same time, the expert cannot appear to favor one side. A joint expert must not only act and think neutrally, he/ she must maintain the appearance of neutrality. Here are some of the procedures I follow.

I do not believe that all parties must be present for every communication, i.e., telephone calls or conferences. However, I do not believe information should be held in confidence unless there is a compelling reason to do so. (For example, if an attorney advises me in confidence that he is moving for an ex parte order to open a safe deposit box, and asks that I hold this information in confidence for several days, I would consider that a compelling reason.)

When writing a letter, I always copy both sides and insist that adversaries be copied on all correspondence to me.

I do not provide negotiating or litigation strategy assistance to either side. This is clearly the role of the retained expert as opposed to the joint expert.

If I am asked to provide tax calculations or other work that appears to be beyond the scope for which I am retained, I refer to the court order and/or retainer letter. If it requires modification, I try to obtain such. The work may be worthwhile or necessary. Regardless, I make sure that the attorneys are in agreement or that I am specifically directed by the court to perform these services and/or notify both parties of any modifications to the retainer letter.

Very often, one attorney will want me to assist him further in his goals. However noble these goals, I resist this temptation. For example, the non-earning spouse may want you to prepare an income analysis so that he/she can apply for a pendente lite support order. Without the acquiescence of both attorneys, I do not prepare such a report if it is not included in the agreed scope.

In the same manner, I have a policy of not signing certifications or affidavits for either party to obtain discovery, assist at a motion, etc. My policy is that I will respond if the judge asks me. Obviously, once the report is issued, the parties may use the findings in the course of litigation.

The Court

The joint expert should not communicate with the court except in the presence of both attorneys. New Jersey has a specific rule to deal with this issue. The New Jersey Court Rules state in pertinent part:

The expert shall not communicate with the court except upon prior notice to the parties and their attorneys who shall be afforded an opportunity to be present and to be heard during any such communication between the expert and the court. A request for communication with the court may be informally conveyed by the expert by letter or telephonic means, where after further communications with the court, which may be conducted informally by conference or conference call, shall be done only with the participation of the parties and their counsel. [5:3-3 (e)].

The joint expert should abide by this rule.

The Process

After defining the issues to be addressed, the expert should gather all relevant information, conduct the necessary interviews, analyze the data provided and formulate an opinion on the issues.

Depending on the nature of the case, the joint expert may be asked to address many different issues. For simplicity, I will present the data-gathering procedures that would normally be followed to determine the income of the owner of a closely held business and to value that business. More often than not, the
expert, regardless of who has engaged him or her, will find that the parties have significantly different perceptions of their personal finances, the business' finances or both. Allegations of improper financial conduct of one party to a divorce by the other are commonplace. For purposes of illustration, I will assume that the non-business-owner believes there is unreported income (cash), perquisites (these are personal expenses paid by the business and charged as business expenses) and a high value to the business. On the other hand, I will assume that the business-owner asserts there is no unreported income, no perquisites and a low value to the business. This section also includes suggested methods to shorten discovery, limit contention, control costs and facilitate settlement.

Initial Conference

I begin work on the case immediately after being notified that I have been appointed by the court, or upon receiving both a signed retainer agreement and a retainer check. My first step is to obtain and review business and personal tax returns to gain a basic understanding of the parties' business and personal finances. I then either request a meeting with the attorneys or speak with them on the phone to discuss the scope of work to be performed. Furthermore, if not already established, the cost should be discussed at the meeting. This is an important meeting, which should be held with each side separately. It should be attended by the parties and the attorneys. The independent expert should use this conference to set the tone, establish independence, and explain the benefits of cooperation and the procedures to be followed. Generally, it behooves the expert to meet with the non'business-owning spouse first to obtain his or her insights into unreported income, perquisites and business value. It is also a good time to learn of any issues of specific concern to the non'business-owning spouse. Then, in the conference with the owner spouse, the expert can begin to address these issues as well as the owner's understanding of income, profitability, competition etc., among myriad other items.

Preliminary Analysis

The expert should request all documents in writing and should consider including deadlines for submittal that will expedite the process. The extent to which the requested documents do not exist should be confirmed in writing. The expert should request tax returns and all other financial statements needed to perform an analytical review of the business. The expert can also include an invitation to submit whatever documents the parties consider relevant and develop a policy for sharing the documents. This review, coupled with the interviews of the parties, a visit to the business premises (which can be done when interviewing the owner spouse), an analysis of the industry in which the business functions and an analysis of the overall economy may allow the formulation of a preliminary opinion of value. After interviewing the parties and the preliminary review of documents, the expert may be in a position to draw a preliminary conclusion of value, especially if the business has minimal value. This may be an optimum time to resolve the matter before costs begin to escalate.

After completion of this preliminary analysis, the parties and their attorneys may enter into settlement discussions or limit the scope of the expert's work. If the case cannot be resolved at this time, the expert can discuss the costs of performing a detailed investigation of the books and records of the company and the preparation of a formal report. Throughout this process, the parties and attorneys should be educated as to the costs of continued discovery and of a detailed financial investigation. With this information, they will be able to make an educated cost/benefit analysis of whether they should continue with the discovery process.

If the expert has warned the parties that it may not be beneficial to continue the investigation in light of the cost as compared to the expected findings, he/she should consider putting this advice in writing. Lastly, if the parties decide to go forward, the expert must undertake further financial investigation necessary to prepare his report.

Financial Investigation

Whether privately or jointly retained, the expert should perform a financial investigation to gather the information necessary to support his or her opinion. If he/she will testify in court, he/she must have sufficient, relevant evidence upon which to base his or her opinion. A major purpose of the investigation will be to normalize the income in order to determine the ongoing income of the business-owner and the value of the business. This involves removing perquisites and identifying unreported income, non-recurring or one-time sales or expenses, etc. Because of the detailed nature of this work, it is the most time consuming and costly aspect of the job. In a litigious environment, it can become extremely contentious. In fact, the cost of performing the financial investigation may outweigh the potential benefits to be received by the spouse, either in the form of equitable distribution or support. Costs can escalate if records are unavailable, incomplete, destroyed or fraudulent ' which may require the expert to perform extensive analysis or reconstruction. In the same manner, if the business-owner refuses to provide the necessary records, time and fees will be expended to obtain records.

The process is further complicated because the expert must address allegations and beliefs of the parties. For instance, very often the non'business-owner asserts that there is significant unreported income and perquisites that revenues will increase and/or that expenses will remain the same or decrease. On the other hand, the business-owner may assert that there is no unreported income, no perquisites or that revenues will decrease while expenses will increase. These opinions, however unsupported, must be addressed. The jointly retained expert is in a unique position to speak with both parties and their attorneys and evaluate their opinions. While the final report of the joint expert is subject to the same scrutiny as the report of a retained expert, he/she is in the unique position to suggest that the parties stipulate to levels of expense or income rather than perform a time-consuming detailed investigation. For instance, rather than document every credit card charge, the parties could agree on an amount that is deemed personal. The expert is also able to suggest that allegations of unreported income and perquisites are not material in light of the effect on the owner's income or the business value and suggest that no further investigation be undertaken.

In the case of the court-appointed experts, the courts will assist the expert in obtaining information. As stated in the New Jersey court rules,

(e) Investigation by experts. Any expert appointed by the court shall be permitted to conduct an investigation independently to obtain information reasonable and necessary to complete his or her report from any source, and may make contact directly with any party from whom information is sought within the scope of the order of appointment ' .

(c) Economic experts “may further order any person or entity to produce documents or to make available for inspection any information or property, which is not privileged, that the court determines is necessary to aid the expert in rendering an opinion.”

As one proceeds through the financial investigation, the joint expert should look for ways to shorten discovery, control costs, make the case less contentious and facilitate settlement; however, he must always remember that he needs to document his report fully with sufficient relevant evidence if he is going to testify in court.

Preliminary Report

After the joint expert has completed the financial investigation and reached a conclusion of income and value, an excellent technique for settlement is to bring the parties together and present the preliminary findings to each party concurrently. This is best done without a formal report, but with financial schedules of income and verbal explanation. Some judges direct that schedules be prepared in the case management order. Others direct that a formal report be written. The schedules should include an analysis of the owner's income and calculations of value. For instance, the expert might present the business value using different approaches (cost, income and market) and different methods (capitalization of earnings, discounted cash flow). It is a good practice to present each of these areas as a range of value as opposed to a single number. At this meeting, the expert should obtain input from the parties, attorneys and their retained experts both on the conclusion of value and as to the underlying facts upon which the conclusion is based. Also, presenting the information at the same time helps eliminate any perceived bias because one party has heard the information first and structures a roadmap for issues that need to be addressed before a final conclusion of valuation be reached. Moreover, it may be possible to resolve some or all financial aspects of the case at such a meeting.

Another technique is to circulate a preliminary written valuation for comment. The comment period should be set to a certain date to expedite the process, and comment submission should be in writing so it can be copied to the opposing party for fairness and to allow for a commentary response period with a deadline. It is a good policy to use a range of value rather than one specific value. If one party thinks a particular item is incorrect, or a theory is improper, the expert can explain the rationale for a change in value. This is more easily done if the result of the change is still within the range presented. However, if a single conclusion of value is provided and the expert changes that conclusion based upon information provided by one party, the other party may feel the joint expert is being “bullied” by the other side. In addition, even if it is impossible to resolve the case at this time, the joint expert's report will be stronger after having considered criticism from both sides.

Formal Report

If the expert is unable to settle the case at this time, he/she should prepare a formal report, which is fully documented and ready for trial. Remember, typically the reason an expert is retained is to opine on an issue before the court. Consequently, the joint expert must guard against focusing on settlement to the detriment of preparing his or her report for trial. It may be vital to address major issues raised during the comment period and thoroughly outline the reason for final decisions. Nevertheless, after presentation of this report, the parties may be willing to discuss settlement.

Disagreement with the Joint Expert

Should the parties disagree with the joint expert, they have the right to retain their own expert. The New Jersey Court Rules state: “neither party shall be bound by the report of the expert” (5:3-3 (d)). (I have been in cases where the parties have agreed to be bound by the findings of the independent expert.) There are instances where both sides may disagree with the joint expert's report. As explained in the New Jersey Court Rules, the court-appointed expert is subject to the rigors of cross-examination and the parties may retain their own expert if they disagree with the court's expert:

(f) Use of Evidence. An expert appointed by the court shall be subject to the same examination as a privately retained expert and the court shall not entertain any presumption in favor of the appointed expert's findings. Any finding or report by an expert appointed by the court may be entered into evidence upon the court's own motion or the motion of any party in a manner consistent with the rules of evidence, subject to cross-examination by the parties.

(g) Use of Private Experts. Nothing in this rule shall be construed to preclude the parties from retaining their own experts, either before or after the appointment of an expert by the court, upon the same or similar issues. (5:3-3 (h)).

When the parties retain an expert to review all work performed by a joint expert, the situation need not be adversarial. In fact, one of the litigants may need to have a second opinion before he/ she is willing to agree to the joint expert's findings.

Settlement Conferences

There are opportunities to facilitate settlement at any time after the expert completes his/her preliminary analysis. Then, as the expert moves through his or her financial investigation, there will be further opportunities discuss settlement. An advantage of discussing settlement at earlier times, is that the parties are not as invested in their own positions and they have not invested as much money into the case. Nevertheless, settlement conferences often take place at the courthouse with the parties and the joint expert or at depositions or trial. During all of these times, the joint expert is in a unique position to help facilitate settlement. The parties may also ask the expert formally to mediate or arbitrate all financial aspects or certain financial aspects of the case.

Trial

If a settlement cannot be reached, the case will proceed to trial where the expert must be ready to testify. However, many cases settle at the courthouse, and the joint expert can still be a vehicle of settlement during the trial.

Conclusion

The joint expert is in a unique position to assist the court, attorneys and parties to shorten discovery, make the case less contentious, control costs and facilitate settlement. Moreover, because he/she is “in the middle,” he/she is also in an excellent position to gather all relevant information to support his conclusion. Retained experts often face more difficulties in gathering information. If the expert is retained to render an opinion, he/she must gather the information needed to support their opinion and spend the time required to render a thoughtful opinion and prepare a report. Thus, while the joint expert can facilitate settlement, the court, parties and attorneys must cooperate with the expert if he/she is to be successful.

William J. Morrison is president of Morrison & Company. He is a CPA licensed in New Jersey and Florida and has over 25 years of experience as an investigator and accountant. Mr. Morrison is Accredited in Business Valuation (ABV) and is a Diplomate of the American Board of Forensic Accounting (DABFA).

Financial experts are generally used in matrimonial matters to identify, value and help in the distribution of marital assets and also opine on issues such as income, cash flow, tax consequences or marital liabilities. Financial experts (experts) are usually retained in matrimonial matters in one of three ways: privately (hired by either the Plaintiff or Defendant), jointly (consensually by the Plaintiff and Defendant) or through court appointment. For simplicity, the court-appointed expert and the jointly retained expert will both be referred to as a “joint expert.” The expert retained by a litigant will be referred to as a “retained” expert.

Are there differences in the level of service and conclusions if a financial expert is privately retained, jointly retained or appointed by a court? Ideally, the manner in which the expert is retained should have no bearing on the work performed or opinions reached because, regardless of who retains the expert, the work should be performed independently and with objectivity. That, however, is not always the case, and there can be significant procedural and work flow issues, depending on how the expert is retained. Throughout this article, the New Jersey Court Rules are cited by way of example.

The major differences between the privately retained expert and the joint expert or court-appointed expert are as follows:

• The privately retained expert can assist the parties and their attorneys by providing tax and accounting advice and assistance at negotiations.

The neutral expert can assist the court, attorneys and parties to:

• Shorten discovery;
• Make the case less contentious;
• Control costs; and
• Facilitate settlement.

In a number of states, the current trend is often to use jointly retained or court-appointed financial experts because of the belief that this method will save time and money, alleviate stress, and increase the odds of a mutually successful outcome. This article is intended to explain the ways in which experts serving in a joint capacity in matrimonial matters are retained and the services they can provide.

Overview

To explain how the joint expert accomplishes the foregoing goals, the following issues are addressed:

• The difference between the two manners of retention for a joint expert: jointly retained or court-appointed.
• When and why the joint expert is retained.
• Retention and clarification of scope.
• Interaction with the parties, attorneys and the court.
• The process:
• Initial conference;
• Preliminary analysis;
• Financial investigation;
• Preliminary report;
• Formal report;
• Disagreement with the joint expert;
• Settlement conferences; and
• Trial.

Expert's Role

Differences Between a Court-Appointed and a Jointly
Retained Expert

The difference between the court-appointed financial expert and the jointly retained expert is that the court-appointed expert has the imprimatur of the court, while the agreed-upon expert often has to rely on his or her goodwill with the litigants and attorneys. The support of the court assists the court-appointed expert to do his or her job and get paid. Theoretically there should be little difference between a jointly agreed-upon expert and a court-appointed expert. Both can, and do, provide the same service to the litigants, attorneys and court. There is a third variation on the appointment of an expert when the court has the parties agree on an expert as opposed to appointing an expert without the parties consent. Many courts prefer this method of expert selection. Specifically, the judge asks the parties to select an expert or may offer several choices from whom the parties can select.

The joint expert is, therefore:

• Appointed by the court (This is the traditional court-appointed expert, in which the court appoints the expert with or without input from the litigants and their attorneys);
• Agreed to by the parties (i.e., neutral). (The attorneys mutually select an expert without the participation of the court.);
• Appointed by the court with the consent of the parties. (The attorneys agree upon an expert whom the court appoints in a consent order.).

When and Why the Joint Expert Is Retained

The two most common situations in which the court appoints an expert are as follows:

To render his or her opinion on income, cash flow, business value, etc. Normally, this appointment is made at the start of discovery. In cases where unreported income or the amount of income is an issue, the joint expert will be better able to deal with these issues for the reasons described herein. Furthermore, where it is not economical or virtually impossible to gather the documentation to present a case at trial, the joint expert will be more cost-effective.

Some courts expect the court-appointed expert to opine on or
mediate divergent opinions rendered by the privately retained experts.

This article focuses on the first situation, the expert who is retained to render his or her own opinion.

Retention and Clarification of Scope

Selecting a Business Appraiser

Integrity is the most important quality for an appraiser. He/she must determine the value of an asset based upon the unique facts and circumstances of the case while taking pains to be unemotional and objective in all interactions to avoid the appearance of bias. There are also many certifications for business appraisers that denote strong qualifications. These include: the (ASA) Accredited Senior Appraiser with the American Society of Appraisers; the (CBA) Certified Business Appraiser with the Institute of Business Appraisers; the (ABV) Accredited in Business Valuation with the American Institute of Certified Public Experts; the (CVA) Certified Valuation Analyst with the National Association of Certified Valuation Analysts; and the (CFA) Chartered Financial Analyst with the Association for Investment Management and Research. The key to true expertise is a combination of qualifications, expertise, integrity, strong character, and the willingness to take a stand on value.

Retainer Letters

The importance of a retainer letter is different for the agreed-upon expert as compared to the court-appointed expert. When court-appointed, some experts do not use formal engagement letters. They believe the court order defines the purpose of their retention and the court controls the collection of fees. As a result, they simply forward a letter advising the litigants that they have been appointed by the court to perform a specific function and informing the litigants of their hourly rates for this service. For instance, the New Jersey court rules state that “The court shall establish the scope of the expert's assignment in the order of appointment.” 5:3.3 (d); therefore, a court-appointed expert should look to the court order for guidance. Notwithstanding the existence of a court order, however, it is good practice to have the parties sign a retainer letter defining the assignment in accordance with the court order.

An agreed-upon expert should define his or her assignment with the attorneys, and memorialize this agreement in an engagement letter.

If a party or attorney asks a joint expert to perform additional services, the expert should ensure that both sides agree the additional work is warranted. The expert should confirm his or her understanding of the expanded scope of the engagement in writing. (Failure to confirm verbal instruction in writing can lead to the accusation that the expert is working at the direction of one side and is, therefore, not neutral. This can also lead to a fee dispute, if one or both parties believe the expert has gone beyond the agreed scope of retention). It should be pointed out that court-appointed experts are neither immune from fee disputes nor from accusations of malpractice. The joint expert should seek the assistance of the court in clarifying his or her role when the parties or their counsel cannot agree on expanding the scope of the expert. This is beneficial to the expert in that it removes the decision-making process from the expert to the court, thereby mitigating the chances that the necessity of the work can be challenged at a later date. Further, the expanded role of the expert will be documented in a court order.

The court-appointed expert may have to render an opinion with which neither party is happy. When that occurs, the litigants may not want to pay the expert. In this situation, the court can be of assistance in the collection of fees. As a result, being court-appointed can be a great benefit in the collection of fees because judges are reluctant to assist in collection if the expert is not appointed by the court. Sometimes, even if the expert is court-appointed, the court may be reluctant to order payment. According to the New Jersey court rules, the court may direct who shall pay the cost of such expert appraisal or report 5:3-3 (i). However, an agreed-upon expert depends primarily on the goodwill of attorneys and litigants to obtain payment. This goodwill may be nonexistent simply because the expert has done his job and produced a report with which neither side agrees. The situation may be further complicated if one or both of the attorneys who agreed to retain the independent expert are no longer in the case.

Interaction with the Parties, Attorneys and the Court

Parties and Attorneys

Interaction with the parties is an important and sensitive issue. The means of communication should be established at the outset of the engagement. As a general rule, the independent expert should only speak with the parties in the presence of their attorneys. There are, of course, situations when the expert can speak directly to the parties, for example when gathering data. The expert must have sufficient contact with both sides so that they understand that he/she is listening to their concerns. At the same time, the expert cannot appear to favor one side. A joint expert must not only act and think neutrally, he/ she must maintain the appearance of neutrality. Here are some of the procedures I follow.

I do not believe that all parties must be present for every communication, i.e., telephone calls or conferences. However, I do not believe information should be held in confidence unless there is a compelling reason to do so. (For example, if an attorney advises me in confidence that he is moving for an ex parte order to open a safe deposit box, and asks that I hold this information in confidence for several days, I would consider that a compelling reason.)

When writing a letter, I always copy both sides and insist that adversaries be copied on all correspondence to me.

I do not provide negotiating or litigation strategy assistance to either side. This is clearly the role of the retained expert as opposed to the joint expert.

If I am asked to provide tax calculations or other work that appears to be beyond the scope for which I am retained, I refer to the court order and/or retainer letter. If it requires modification, I try to obtain such. The work may be worthwhile or necessary. Regardless, I make sure that the attorneys are in agreement or that I am specifically directed by the court to perform these services and/or notify both parties of any modifications to the retainer letter.

Very often, one attorney will want me to assist him further in his goals. However noble these goals, I resist this temptation. For example, the non-earning spouse may want you to prepare an income analysis so that he/she can apply for a pendente lite support order. Without the acquiescence of both attorneys, I do not prepare such a report if it is not included in the agreed scope.

In the same manner, I have a policy of not signing certifications or affidavits for either party to obtain discovery, assist at a motion, etc. My policy is that I will respond if the judge asks me. Obviously, once the report is issued, the parties may use the findings in the course of litigation.

The Court

The joint expert should not communicate with the court except in the presence of both attorneys. New Jersey has a specific rule to deal with this issue. The New Jersey Court Rules state in pertinent part:

The expert shall not communicate with the court except upon prior notice to the parties and their attorneys who shall be afforded an opportunity to be present and to be heard during any such communication between the expert and the court. A request for communication with the court may be informally conveyed by the expert by letter or telephonic means, where after further communications with the court, which may be conducted informally by conference or conference call, shall be done only with the participation of the parties and their counsel. [5:3-3 (e)].

The joint expert should abide by this rule.

The Process

After defining the issues to be addressed, the expert should gather all relevant information, conduct the necessary interviews, analyze the data provided and formulate an opinion on the issues.

Depending on the nature of the case, the joint expert may be asked to address many different issues. For simplicity, I will present the data-gathering procedures that would normally be followed to determine the income of the owner of a closely held business and to value that business. More often than not, the
expert, regardless of who has engaged him or her, will find that the parties have significantly different perceptions of their personal finances, the business' finances or both. Allegations of improper financial conduct of one party to a divorce by the other are commonplace. For purposes of illustration, I will assume that the non-business-owner believes there is unreported income (cash), perquisites (these are personal expenses paid by the business and charged as business expenses) and a high value to the business. On the other hand, I will assume that the business-owner asserts there is no unreported income, no perquisites and a low value to the business. This section also includes suggested methods to shorten discovery, limit contention, control costs and facilitate settlement.

Initial Conference

I begin work on the case immediately after being notified that I have been appointed by the court, or upon receiving both a signed retainer agreement and a retainer check. My first step is to obtain and review business and personal tax returns to gain a basic understanding of the parties' business and personal finances. I then either request a meeting with the attorneys or speak with them on the phone to discuss the scope of work to be performed. Furthermore, if not already established, the cost should be discussed at the meeting. This is an important meeting, which should be held with each side separately. It should be attended by the parties and the attorneys. The independent expert should use this conference to set the tone, establish independence, and explain the benefits of cooperation and the procedures to be followed. Generally, it behooves the expert to meet with the non'business-owning spouse first to obtain his or her insights into unreported income, perquisites and business value. It is also a good time to learn of any issues of specific concern to the non'business-owning spouse. Then, in the conference with the owner spouse, the expert can begin to address these issues as well as the owner's understanding of income, profitability, competition etc., among myriad other items.

Preliminary Analysis

The expert should request all documents in writing and should consider including deadlines for submittal that will expedite the process. The extent to which the requested documents do not exist should be confirmed in writing. The expert should request tax returns and all other financial statements needed to perform an analytical review of the business. The expert can also include an invitation to submit whatever documents the parties consider relevant and develop a policy for sharing the documents. This review, coupled with the interviews of the parties, a visit to the business premises (which can be done when interviewing the owner spouse), an analysis of the industry in which the business functions and an analysis of the overall economy may allow the formulation of a preliminary opinion of value. After interviewing the parties and the preliminary review of documents, the expert may be in a position to draw a preliminary conclusion of value, especially if the business has minimal value. This may be an optimum time to resolve the matter before costs begin to escalate.

After completion of this preliminary analysis, the parties and their attorneys may enter into settlement discussions or limit the scope of the expert's work. If the case cannot be resolved at this time, the expert can discuss the costs of performing a detailed investigation of the books and records of the company and the preparation of a formal report. Throughout this process, the parties and attorneys should be educated as to the costs of continued discovery and of a detailed financial investigation. With this information, they will be able to make an educated cost/benefit analysis of whether they should continue with the discovery process.

If the expert has warned the parties that it may not be beneficial to continue the investigation in light of the cost as compared to the expected findings, he/she should consider putting this advice in writing. Lastly, if the parties decide to go forward, the expert must undertake further financial investigation necessary to prepare his report.

Financial Investigation

Whether privately or jointly retained, the expert should perform a financial investigation to gather the information necessary to support his or her opinion. If he/she will testify in court, he/she must have sufficient, relevant evidence upon which to base his or her opinion. A major purpose of the investigation will be to normalize the income in order to determine the ongoing income of the business-owner and the value of the business. This involves removing perquisites and identifying unreported income, non-recurring or one-time sales or expenses, etc. Because of the detailed nature of this work, it is the most time consuming and costly aspect of the job. In a litigious environment, it can become extremely contentious. In fact, the cost of performing the financial investigation may outweigh the potential benefits to be received by the spouse, either in the form of equitable distribution or support. Costs can escalate if records are unavailable, incomplete, destroyed or fraudulent ' which may require the expert to perform extensive analysis or reconstruction. In the same manner, if the business-owner refuses to provide the necessary records, time and fees will be expended to obtain records.

The process is further complicated because the expert must address allegations and beliefs of the parties. For instance, very often the non'business-owner asserts that there is significant unreported income and perquisites that revenues will increase and/or that expenses will remain the same or decrease. On the other hand, the business-owner may assert that there is no unreported income, no perquisites or that revenues will decrease while expenses will increase. These opinions, however unsupported, must be addressed. The jointly retained expert is in a unique position to speak with both parties and their attorneys and evaluate their opinions. While the final report of the joint expert is subject to the same scrutiny as the report of a retained expert, he/she is in the unique position to suggest that the parties stipulate to levels of expense or income rather than perform a time-consuming detailed investigation. For instance, rather than document every credit card charge, the parties could agree on an amount that is deemed personal. The expert is also able to suggest that allegations of unreported income and perquisites are not material in light of the effect on the owner's income or the business value and suggest that no further investigation be undertaken.

In the case of the court-appointed experts, the courts will assist the expert in obtaining information. As stated in the New Jersey court rules,

(e) Investigation by experts. Any expert appointed by the court shall be permitted to conduct an investigation independently to obtain information reasonable and necessary to complete his or her report from any source, and may make contact directly with any party from whom information is sought within the scope of the order of appointment ' .

(c) Economic experts “may further order any person or entity to produce documents or to make available for inspection any information or property, which is not privileged, that the court determines is necessary to aid the expert in rendering an opinion.”

As one proceeds through the financial investigation, the joint expert should look for ways to shorten discovery, control costs, make the case less contentious and facilitate settlement; however, he must always remember that he needs to document his report fully with sufficient relevant evidence if he is going to testify in court.

Preliminary Report

After the joint expert has completed the financial investigation and reached a conclusion of income and value, an excellent technique for settlement is to bring the parties together and present the preliminary findings to each party concurrently. This is best done without a formal report, but with financial schedules of income and verbal explanation. Some judges direct that schedules be prepared in the case management order. Others direct that a formal report be written. The schedules should include an analysis of the owner's income and calculations of value. For instance, the expert might present the business value using different approaches (cost, income and market) and different methods (capitalization of earnings, discounted cash flow). It is a good practice to present each of these areas as a range of value as opposed to a single number. At this meeting, the expert should obtain input from the parties, attorneys and their retained experts both on the conclusion of value and as to the underlying facts upon which the conclusion is based. Also, presenting the information at the same time helps eliminate any perceived bias because one party has heard the information first and structures a roadmap for issues that need to be addressed before a final conclusion of valuation be reached. Moreover, it may be possible to resolve some or all financial aspects of the case at such a meeting.

Another technique is to circulate a preliminary written valuation for comment. The comment period should be set to a certain date to expedite the process, and comment submission should be in writing so it can be copied to the opposing party for fairness and to allow for a commentary response period with a deadline. It is a good policy to use a range of value rather than one specific value. If one party thinks a particular item is incorrect, or a theory is improper, the expert can explain the rationale for a change in value. This is more easily done if the result of the change is still within the range presented. However, if a single conclusion of value is provided and the expert changes that conclusion based upon information provided by one party, the other party may feel the joint expert is being “bullied” by the other side. In addition, even if it is impossible to resolve the case at this time, the joint expert's report will be stronger after having considered criticism from both sides.

Formal Report

If the expert is unable to settle the case at this time, he/she should prepare a formal report, which is fully documented and ready for trial. Remember, typically the reason an expert is retained is to opine on an issue before the court. Consequently, the joint expert must guard against focusing on settlement to the detriment of preparing his or her report for trial. It may be vital to address major issues raised during the comment period and thoroughly outline the reason for final decisions. Nevertheless, after presentation of this report, the parties may be willing to discuss settlement.

Disagreement with the Joint Expert

Should the parties disagree with the joint expert, they have the right to retain their own expert. The New Jersey Court Rules state: “neither party shall be bound by the report of the expert” (5:3-3 (d)). (I have been in cases where the parties have agreed to be bound by the findings of the independent expert.) There are instances where both sides may disagree with the joint expert's report. As explained in the New Jersey Court Rules, the court-appointed expert is subject to the rigors of cross-examination and the parties may retain their own expert if they disagree with the court's expert:

(f) Use of Evidence. An expert appointed by the court shall be subject to the same examination as a privately retained expert and the court shall not entertain any presumption in favor of the appointed expert's findings. Any finding or report by an expert appointed by the court may be entered into evidence upon the court's own motion or the motion of any party in a manner consistent with the rules of evidence, subject to cross-examination by the parties.

(g) Use of Private Experts. Nothing in this rule shall be construed to preclude the parties from retaining their own experts, either before or after the appointment of an expert by the court, upon the same or similar issues. (5:3-3 (h)).

When the parties retain an expert to review all work performed by a joint expert, the situation need not be adversarial. In fact, one of the litigants may need to have a second opinion before he/ she is willing to agree to the joint expert's findings.

Settlement Conferences

There are opportunities to facilitate settlement at any time after the expert completes his/her preliminary analysis. Then, as the expert moves through his or her financial investigation, there will be further opportunities discuss settlement. An advantage of discussing settlement at earlier times, is that the parties are not as invested in their own positions and they have not invested as much money into the case. Nevertheless, settlement conferences often take place at the courthouse with the parties and the joint expert or at depositions or trial. During all of these times, the joint expert is in a unique position to help facilitate settlement. The parties may also ask the expert formally to mediate or arbitrate all financial aspects or certain financial aspects of the case.

Trial

If a settlement cannot be reached, the case will proceed to trial where the expert must be ready to testify. However, many cases settle at the courthouse, and the joint expert can still be a vehicle of settlement during the trial.

Conclusion

The joint expert is in a unique position to assist the court, attorneys and parties to shorten discovery, make the case less contentious, control costs and facilitate settlement. Moreover, because he/she is “in the middle,” he/she is also in an excellent position to gather all relevant information to support his conclusion. Retained experts often face more difficulties in gathering information. If the expert is retained to render an opinion, he/she must gather the information needed to support their opinion and spend the time required to render a thoughtful opinion and prepare a report. Thus, while the joint expert can facilitate settlement, the court, parties and attorneys must cooperate with the expert if he/she is to be successful.

William J. Morrison is president of Morrison & Company. He is a CPA licensed in New Jersey and Florida and has over 25 years of experience as an investigator and accountant. Mr. Morrison is Accredited in Business Valuation (ABV) and is a Diplomate of the American Board of Forensic Accounting (DABFA).