Sullivan v. Loden – Estate Planning Attorney Sued for Undervaluing Family Business

A recent case illustrates what can happen when a business valuation is prepared by an attorney rather than a qualified valuation professional. In Sullivan v. Loden, one of the owner’s children sued the attorney for malpractice. The disgruntled heir alleged that she received less than her fair share of the estate because her siblings had previously received gifts of stock that were undervalued. Here are the details.

Background

The decedent was the matriarch of a family business that operated a chain of grocery stores in Hawaii. Two of her four adult children worked for the family business.

In late 2011 and early 2012, the mother transferred her stock in equal shares to the two children who worked for the family business. For gift tax purposes, the mother’s estate planning attorney valued the stock, resulting in gifts of roughly $680,000 each.

Post-Death Drama

The mother died in 2015, leaving an estate worth around $192 million. Her estate plan called for her estate to be divided equally among her four children, except that the children who didn’t participate in the business were specifically entitled to cash bequests of $1 million each.

One heir asserted that those bequests were equalizing payments meant to offset the stock gifts to her siblings who worked for the family business. She argued that, had her mother known the true value of the stock, the payments would have been larger.

The disgruntled heir asked the attorney, who was also the estate’s personal representative, to obtain a corrected valuation. After he refused, she petitioned the probate court, which appointed a special administrator to evaluate the valuations. The administrator found that they weren’t “performed according to applicable standards” and were “therefore unreliable.”

Malpractice Claim

The disgruntled heir sued her deceased mother’s attorney for malpractice in federal court. The attorney moved for summary judgment on two grounds:

1. He owed no duty of care to the heir, who wasn’t his client, and
2. The heir was collaterally estopped from bringing her claim because the IRS had “thrice ‘accepted’ his valuation.”

The U.S. District Court for the District of Hawaii denied summary judgment on both grounds. First, the question of whether the attorney owed the heir a duty of care as an intended beneficiary of the valuation at least raised a genuine issue of material fact. Second, collateral estoppel didn’t apply because the heir wasn’t a party to the IRS proceedings on the valuation.

Critical Takeaway

Attorneys may be tempted to perform valuations for their estate planning clients to save time or money. This court’s ruling highlights the importance of using a qualified, independent valuation professional to appraise gifts of closely held stock.