Long-Standing Feud Over Valuation of Corporate Assets Rages On

December 30, 2010 | Erin Herbold

In this case, the owner of a corporation sold at sheriff’s sale sought to have the sale set aside, arguing that the sale was unfairly and fraudulently conducted- namely that there was no just appraisal by disinterested parties and that the property sold for a “grossly inadequate price” in violation of Iowa Code §626.93. This is not the first time the Iowa appellate courts have dealt with these parties. This feud stems from hostility between the prior owner of a corporation operating hog lots in Jasper and Lucas counties and the purchaser of the property at tax-sale auction after the corporation failed to pay property taxes. In a prior suit, the buyer argued that the owner of the corporation improperly removed certain fixtures from the Jasper County property and the Iowa Supreme Court agreed, ordering damages against the owner. Since that time, there have been several other issues between the parties. 

The current suit deals with the sheriff’s sale of the corporation’s main asset- real estate in Lucas County. Here, the sheriff published notice of a sale of the property on a set date. Iowa Code §626.93 requires that three appraisals of the asset be delivered to the sheriff prior to sale. Of course, all of the appraisals differed on the value of the residual stock of the corporation and the value of the land in light of the former owner’s bankruptcy proceedings.  Finally, the three appraisers came to a consensus and agreed with the appraisal done by a certified CPA hired by the sheriff. 

At the sheriff’s sale, the highest bid on the property was only $110,000- well below the appraisers’ evaluation of the property’s worth. The parties who bid at auction testified that they were “apprehensive” and “nervous” that the property had so many issues that they didn’t want to offer too much for the property. They claimed that they were “warned” by the highest bidder that there would be many problems with obtaining good title to the parcel. The highest bidder ended up with the property and the prior owner immediately alleged deceit, fraud and collusion at the sheriff’s sale. 

At trial, the court sided with the defendants and dismissed the prior owner’s allegations with regard to the sheriff’s sale. The prior owner sought review by the Iowa Supreme Court. The appellate court spent most of its time dealing with the issue of whether the sheriff’s sale was illegal or invalid. In Iowa, a sheriff’s sale may be set aside by the court if the price obtained is “grossly inadequate” to the point of being unfair or oppressive.  Further, there must also be a “just appraisal” of the property prior to the sale by “two disinterested householders of the neighborhood, one of whom shall be chosen by the execution debtor and the other by the plaintiff.” If they cannot agree then they are to choose another disinterested appraiser to assist them in coming to a consensus on the value of the property. The Iowa Code requires that the property shall not be sold for less than 2/3’s of the agreed upon valuation, unless at the time of the sale no bid is received for 2/3’s or more. In that case, the property may be sold for ½ of the appraised value. 

On the discounting for potential capital gains issue, the court discussed federal court precedent with regard to corporate valuations. Prior to 1986, corporate valuations did not consider capital gains taxes because the taxes could be avoided. However, recent case law has shifted that approach. The Second Circuit Court of Appeals has concluded that capital gains tax liability should be considered, because a hypothetical willing buyer would have to take tax consequences into account when making a sound valuation of the property. The Fifth and Eleventh Circuits have also adopted this precedent.  The prior owner argued that considering capital gains liability to reduce personal property value does not consider the potential use of a 1031 exchange, whereby capital gains may be deferred in “certain circumstances where property is exchanged for property of ‘like kind.’” However, according to an IRS fact sheet regarding 1031 exchanges (FS-2008-18) the IRS noted that a 1031 exchange as a postponement of paying tax on gain, not a forgiveness of gain. According to the IRS, “When the replacement property is ultimately sold… the original deferred gain… is subject to tax.” Thus, the Iowa Supreme Court concluded that the trial court properly dismissed this argument and the property did receive a “just valuation” with consideration for discounting for potential capital gains tax liability. 

The prior owner also argued that the appraisers were not “householders” in Lucas County. However, the appellate court was quick to point out that the appraisal was of all corporate assets and the assets of the corporation were not limited to Lucas County. The appraisers lived and worked in Iowa and, thus, are qualified to appraise the property in this case. 
As to the potential misconduct by parties at auction, the Supreme Court examined the conduct at the sale. They have the power to invalidate judicial sales if there is “fraud, unfairness or mistake in the conduct of the sale… or… the price brought at the sale was so grossly inadequate as to shock the conscience of the court.” Here, the Iowa Supreme Court held that there may have been inappropriate behavior at the auction by way of one bidder influencing another regarding the clarity of title to the property that may have affected the selling price and remanded the case to the trial court on that issue alone. The court stated that the law “will not tolerate any influences likely to prevent competition at a judicial sale.” Every debtor, according to the court, should have the chance for a fair sale and full price. As to all other issues, the appellate court affirmed the trial court’s findings. Daniels v. Holtz, et al., 794 N.W.2d 813 (Iowa Sup. Ct. 2010)