Jim Lange developed and presented this course at a Business Valuation Learning Institute seminar sponsored by the National Association of Certified Valuation Analysts. Legal research, a critical component of an effective business valuation, is often neglected in the valuation process. The course helped valuation experts understand the importance of legal research and the steps which should be taken to include legal research in their valuations.
Please note that the overheads referred to in this course would have required too much space on our web site; however, a copy of the overheads are available upon request to James Lange & Associates.
I. The Importance of Legal Research in a Business Valuation
A. Education and experience are among the necessary qualities to become a successful valuation professional. This education and experience incorporate the areas of accounting, taxation, investment analysis, and general financial matters. Additionally, the competent valuator must also be educated in federal and state law, which often defines property, the standard of value, valuation dates, acceptable methods of valuation, and discounts or premiums that may apply. State law becomes not only important, but also essential, when dealing with valuations in divorce cases. A valuation report that does not take state law into consideration has limited value to the intended audience, particularly a court. There are differences between states about what must be valued, when it must be valued, how it must be valued, and even who has the duty to perform the valuation. The importance of legal research in business valuation becomes a critical factor.
The standards to be used in a business valuation are often ambiguous, particularly in marital dissolutions, where the largest marital asset is often a closely held business. The valuator's knowledge of the appropriate standard is critical to the success of the attorney and his client who are relying on the valuator’s expertise. It is also critical for credibility with the court that the valuator’s report be consistent with existing state law.
B. Examples of Differences Between States
1. What is Martial Property?
a. Some states provide for an equitable distribution of all property owned by either party at the time of dissolution, whereas other states exclude property owned prior to marriage or make exceptions if the property was acquired in a particular fashion.
b. Appreciation of separate property owned prior to marriage is treated as community property in some states but remains separate property in others. For example, in Pennsylvania, the increase in value of a closely held corporation owned by the husband prior to marriage, which occurred during marriage, was held to be martial property. Pascoe v. Pascoe, 11 Fam. L. Rptr. 1091 (Pa. Comm. Pls. Alleg. Co. 1984). The court explained that its holding was based on the Pennsylvania Divorce Code's full recognition of the noneconomic contributions of a spouse to a marriage and also drew support from the fact that, as the owner of a closely held corporation, the husband had control over whether the earnings would be distributed or remain in the corporation. Id.
In Maryland, however, a court held that an increase in the value of the husband's nonmarital stock in his family's closely held corporation was not marital property. McNaughton v. McNaughton, 74 Md. App. 490, 538 A.2d 1193 (1988). The court reasoned that the husband operated the business with his father and brother, and there was no evidence of what portion of the appreciation was attributable to the husband. Id. What the Maryland court would have done with facts in Pascoe is unclear.
c. The determination of what is marital property can be very important from a valuator’s standpoint. For example, I was recently involved in a divorce valuation. The husband owned 50 percent of a company prior to his marriage. During the marriage he acquired the other 50 percent of the company. Under Pennsylvania law, any increase in the value of 50 percent of the company between the date of marriage and the date of separation was considered marital property. Moreover, the current value of the other 50 percent of the company as of the date of the equitable distribution hearing was considered marital property. Therefore, because of Pennsylvania’s definition of marital property, I had to value the company as of the date of marriage, as of the date of separation, and as of the date of the equitable distribution hearing.
2. Goodwill---Goodwill is an asset which is difficult to value because some courts find its existence and others deny it for the same type of business. In Florida, the exclusive method of valuing goodwill in a professional corporation is to determine the fair market value of the business and then reduce it by the value of the assets. In Colorado, however, an important consideration in determining goodwill is whether the husband's business had value to him above and beyond the tangible value of the assets rather than what a buyer would pay for it. In Pennsylvania, there are two types of goodwill: business goodwill and personal goodwill. Business goodwill is a marital asset whereas personal goodwill is not a marital asset subject to equitable distribution.
3. Another area in which courts are not in agreement is the date when property is to be valued in a divorce. Some courts take the position that decisions regarding the time of valuation are largely within the discretion of the trial court, while other jurisdictions hold that property should be valued when the divorce is granted. Pennsylvania courts generally use the date of distribution, although the trial court has considerable discretion in the matter.
C. Accordingly, the only way to determine the correct position held by a specific state is through research of the state’s statutes and case law.
II. Sources of the Law {overhead 1}
A. To conduct legal research in a methodical and efficient manner, understanding the structure of government and legal research sources is important since each body of law is formed and collected separately.
1. The legislative branch of government creates statutory law by passing bills which become law when signed by the executive. The statutory law is formed in two collections: (1) the session laws, which collect statutes by their date of enactment, and (2) statutory codes, which assemble statutes according to their subject matter. At the federal level, the statutory law is found in the United States Code. In Pennsylvania, the statutes can be found in either the Pennsylvania Consolidated Statutes or the Purdon's Pennsylvania Consolidated Statutes Annotated. I recommend Purdon’s Annotated because, in addition to the actual statutory law, there is also annotations and discussions of the law.
2. Administrative law is created by federal and state agencies in the form of rules, regulations, and orders. These are also collected either in chronological order in administrative registers or by subject matter in administrative codes.
An example of an administrative authority is Revenue Ruling 59-60 issued by the Treasury Department. Revenue Ruling 59-60, as you know, outlines and reviews the approaches, methods, and factors to be considered in valuing the capital stock of closely held corporations for estate and gift tax purposes. Revenue Rulings, however, unlike final Treasury Regulations, do not have the force of law. Instead, they merely state the IRS's position and are internally binding on the Service. The IRS regularly publishes Revenue Rulings in the Internal Revenue Bulletin, which is published weekly and then compiled semiannually into the Cumulative Bulletin. The proper citation is Revenue Ruling 59-60, 1959-1 C.B. 237.
3. Finally, the judiciary makes common law, which is judge-made law found in court decisions. The common law is important because it describes how the statutes have been interpreted and applied by the judges. If statutes do not exist in a given area, then case law will control. For centuries the English common law developed but became unwieldy, not only in the area of property law, but also for criminal law. Napoleon was probably the greatest force in identifying common law by including it in the Napoleonic Code. In Pennsylvania today, all of the criminal laws can be found in statutory form. The judicial interpretations of statutes, in effect, has the force of law. Therefore, statutory research must also include a search for interpretative case law. Court decisions are also collected chronologically and by subject matter.
B. Effective research also requires an understanding of the structure of the court system. There are two distinct systems of courts: state systems and the Federal system. {overhead 2 - structure of the Courts} The structure of each system is important to understand because a decision of the highest court, and even an intermediate level court, is binding on the lower courts. The Federal court system and many state systems are divided into three different levels: a trial level, an intermediate level, and a final appellate level. In addition, there are specialized courts such as the United States Tax Court.
1. Trial courts are courts of general jurisdiction, which determine the facts, the applicable law, and the outcome of the dispute. Jurisdiction is the power to hear a case, rule on it, and make the ruling have the force of law. At the Federal level, the trial courts are called U.S. District Courts. Each state has at least one District Court, with the larger states receiving additional ones depending on the population, case load, and geographic difficulties. Pennsylvania has three Federal District Courts: a western district, a middle district, and an eastern district. In Pennsylvania's state court system, the trial court is known as the Court of Common Pleas.
2. Intermediate appellate courts review the application of the relevant points of law to the facts as found by the trial court to determine if the law was correctly applied. In rare cases, the appellate courts can re-evaluate or re-determine findings of fact made at the trial court. Since the intermediate courts rarely after a trial court’s fining of facts, it is critical to present the relevant facts to the trial court the first time and not on appeal.
At the Federal level, intermediate courts are known as the U.S. Court of Appeals. {overhead 3} There are 13 Federal Courts of Appeals, each covering a particular jurisdiction known as a circuit. Pennsylvania, along with New Jersey, Delaware, and Puerto Rico, is in the Third Circuit. Different circuits may have different interpretations of the same law. If that happens you effectively have different rules depending in which circuit you are located. The U.S. Supreme Court will often hear cases where there is a "split in the circuit." In Pennsylvania's state system, the intermediate court is known as the Superior Court. However, there is also a Commonwealth Court which hears appeals involving state agencies.
3. The final appellate court in the Federal system is the Supreme Court of the United States. Generally, the U.S. Supreme Court hears appeals from the decisions of the U.S. Circuit Courts or from the highest court in a state if a federal question is involved. The Supreme Court has complete discretionary control over what cases it will hear and decide, known as a grant of certiorari. You will often see "cert. denied" at the end of a citation. That means the Supreme Court chose not to hear that case. In Pennsylvania, the highest court is also called the Supreme Court, which also has discretionary review, except in capital punishment cases.
4. A court’s title in each state may be different. For example, in New York, the highest court is known as the Court of Appeals and in Massachusetts, it is called the Supreme Judicial Court. In addition, some states may only have two levels, a trial and an appellate court. Regardless of the names and the different levels, the courts perform essentially the same functions at both the state and federal level.
III. Finding the Law
A. Primary/Secondary and Mandatory/Persuasive Authority---In finding the law, the researcher's ultimate goal is to locate mandatory and primary authorities. Primary authorities consist of the law itself, expressed in constitutions, statutes, court decisions, and administrative regulations and decisions. Other sources of law--such as law review articles and treatises--are secondary sources. When conducting legal research it is also important to distinguish between mandatory authorities and persuasive authorities. {overhead 4} Mandatory authorities are those such as statutes or decisions of the highest court of a given jurisdiction which must be followed by all lower courts in that jurisdiction. Persuasive authorities, on the other hand, offer guidance but need not be followed For example, a decision by the highest court in Ohio (the Supreme Court) might be regarded as persuasive by a court in Pennsylvania when it considers a similar kind of issue or case, but it would not bind the Pennsylvania court. In finding the law, the researcher's ultimate goal is to locate mandatory, primary authorities such as a statute or decision of the state's highest court relevant to your case.
One point to note is that the U.S. Supreme Court is the only federal court whose decisions on points of federal law are mandatory on state courts. Interpretations of federal law made by U.S. Courts of Appeals or U.S. District Courts operate only as persuasive authority to state courts.
B. Citations---To find the applicable law, a researcher must be able to read a citation. Citations play an essential role in legal research because they identify and tell the reader where to find a legal authority such as a statute, court decision, or reference materials such as a law review article. Below are examples of the proper citation forms for the various sources of law: cases, statutes, and administrative regulations.
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Citation Examples: {Show as overhead 5}
1. Jackson v. Metropolitan Edison Co., 348 F. Supp. 954 (M.D. Pa. 1972), aff'd, 483 F.2d 754 (3d Cir. 1973), aff'd, 419 U.S. 345 (1974).
2. Jackson v. Metropolitan Edison Co., 348 F. Supp. 954, 955, 957-58 (M.D. Pa. 1972).
3. 29 U.S.C. § 1001 (1976).
4. Employee Retirement Income Security Act, Pub. L. No. 93-406, 88 Stat. 829 (1974).
5. 11 C.F.R. § 100.3 (1982).
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The first example tells the reader that a decision in the case of Jackson v. Metropolitan Edison Co. is reported in volume 348 of the Federal Supplement case reporter, beginning on page 954 of that volume. This decision was issued by the Middle District Court of Pennsylvania in 1972. The District Court's decision was affirmed on review by the U.S. Court of Appeals for the Third Circuit. The Third Circuit's decision was issued in 1973 and is reported in volume 483 of the Federal Reporter Second Series, beginning on page 754 of that volume. The Third Circuit's decision was reviewed and affirmed by the United States Supreme Court, whose decision was issued in 1974 and published in volume 419 of the United States Reports, beginning on page 345 in that volume.
Note that the parenthetical information after the citation to "419 U.S. 345" does not include the name of the court issuing the decision because the United States Supreme Court is the only court whose decisions are published in the case reporter "United States Reports."
The United States Reports, Federal Supplement, and Federal Reporter are all case reporters. Case reporters compile court decisions chronologically by date of issuance. There are state reporters, regional reporters, and separate reporters for each level of the federal court system. Court decisions are arranged by topic in case digests, which essentially serve as an index to the case reporters.
In the second example, mentioned above, the first number after the Federal Supplement case reporter is the page number on which the decision begins. The subsequent numbers are the particular pages to which the writer of the citation is referring in the decision.
The third example is a statutory citation. The citation refers the reader to section 1001, Title 29 of the 1976 edition of the United States Code. Citation to the U.S.C. is the preferred source; however, statutes can also be cited to the Statutes at Large as shown in example four.
Example four, a citation to the Statutes at Large contains the name of the act, the public law or chapter number, the volume of the Statutes at Large which is abbreviated as "Stat.", the page on which the cited statute begins, and the year the statute was enacted.
The fifth citation is an example of a federal administrative rule or regulation, which appears in the Code of Federal Regulations ("C.F.R."). The citation refers to section 100.3 in Title 11 of the 1982 edition of the C.F.R. The Code is recompiled every year, so it is especially important to note the edition of the Code being cited.
Generally, as a researcher, you must be able to extract the minimal information necessary to find the source (e.g., the name of the reporter, the volume, and page numbers where the case appears). When the research is finally compiled and the written material begins, proper citation is important. Proper citation adds to a professional appearance and creates an impression that the writer who meticulously follows citation rules probably also conducts thorough legal research and engages in careful analysis. Thus, proper citation may enhance persuasiveness.
C. Techniques for Finding the Law
There are many different ways to find relevant cases and statutes, but where you start your research will depend on what you already know. For example, if you know of a case or statute on point, you would begin your research by retrieving those sources. Frequently, however, you have to research a legal issue that is not familiar to you.
To demonstrate how the various sources of law can be used, we will work through an example as if we are not familiar with the issue. The hypothetical issue will be valuing property for a client who is going through the process of a divorce.
To begin researching an issue, secondary sources such as legal encyclopedias, treatises, and hornbooks can be used to obtain background information on the issue. ("Hornbooks" generally refer to treatises written for students or legal researchers). A legal encyclopedia will summarize the rules of law for hundreds of legal subjects but will not provide any critical analysis of the law. The hornbooks and treatises, however, present scholarly analysis of the law and will often express strong opinions about the current state of the law and how it should develop. In fact, some influential treatises have shaped the law's development because of the author's expertise or insight.
To begin our research, the Summary of Pennsylvania Jurisprudence 2d Series, a legal encyclopedia published by the Lawyers Cooperative, was used to become familiar with the law in that area. There are other encyclopedias to choose from, such as the Pennsylvania Legal Encyclopedia published by West Publishing. As with any encyclopedia, the research is started by reviewing the general index for descriptive words related to the issue. {overhead 6} As you can see from the overhead, the topic "Marital Property Rights and Equitable Distribution" appears in the index and will direct us to the appropriate volume. "Generally, Fam L. @ 5:29 - 5:81" refers to the Family Law volume and sections 5:29 - 5:81. {Overhead 7} More specifically, there is also a sub-topic on value and valuation that will help direct us to relevant cases.
Using the Family Law volume of the Summary of Pennsylvania Jurisprudence 2d Series, we can read the sections referred to in the index. The sections can direct us to cases and statutes which may be relevant to our issue. {overhead 8} For example, this section on what constitutes marital property specifically refers to Pennsylvania Consolidated Statute § 3501 (in footnote 45), which defines marital property. In addition, in summarizing the law, the sections refer to cases which have interpreted and applied the statutes. {overhead 9} For example, this section shows how "property acquired" (which is the actual language used in the statute) has been interpreted by the courts in Diamond v. Diamond and McGinley v. McGinley (footnotes 49 and 50, respectively). The judiciary interpretation is very important because many statutes contain ambiguous language.
Before we are finished with the encyclopedia, we must check the "pocket part," which is a paperbound pamphlet inserted into the hardbound volume that is used for keeping the volume up-to-date. Many other legal resources also use pocket parts or supplements to provide current information. The pocket part shows both amendments to statutes and recent cases that have been decided since the hardbound volume was published. Each new pocket part cumulates the previous pocket part until the publisher issues a new hardbound volume. Eventually, I suspect this will be a historical quirk when these encyclopedias will be available on CD ROMs.
{overhead 10} This is a sample page from a pocket part and it shows that there is a 1995 decision by the Pennsylvania Superior Court concerning the valuation date to be used. It is extremely important to check the pocket parts so that you do not waste time reading materials that have been superseded and you do not want to base your work on law which is no longer binding.
At this point, we now have some statutes and cases to review. The encyclopedia referred to various statutes, but the same statutes could have been found by checking the index to the relevant set of codified statutes for descriptive words related to our issue. It is preferable to use an annotated set of statutes--such as the Purdon's Pennsylvania Consolidated Statutes Annotated--because the annotated set of statutes also provides a summary of cases which interpret and apply the statute. The unannotated Consolidated Statutes do not provide case summaries.
{overhead 11} This is the statute defining marital property as presented in Purdon's Pennsylvania Consolidated Statutes Annotated. This statute was referenced in the encyclopedia but could also have been found by using the index to the statute. {overhead 12} At the end of this section of the statutes, Library References and Notes of Decisions are provided.
Under Library References, "Divorce key 252.3(1)" refers to the topic of divorce in the West Pennsylvania Digest 2d Series and the key number 252.3(1) is a sub-topic under divorce. The digest will summarize cases interpreting this topic. It also has its own Descriptive Word Index to search. In a digest, remember, the decisions are arranged by topic, not chronologically as in a case reporter. "C.J.S." is a reference to another encyclopedia called Corpus Juris Secundum, and "Westlaw Topic No. 134" could be used if doing computer research using the Westlaw database.
Following the Library References are Notes of Decisions, which also provide a summary of interpretative cases similar to the digest referred to in the Library References. {overhead 13} {overhead 14} This is the page from the digest; note the topic and key number. The researcher can then review the interpretative cases provided in the annotated set of statutes and in the digest, noting the ones that are relevant. For example, if the issue involved is valuing the goodwill of a business, the researcher would want to retrieve the Butler v. Butler case found in volume 663 of the Atlantic Reporter 2d Series beginning at page 148.
Thus, if you begin your research knowing that a statute is on point, the annotated set of statutes will provide case summaries interpreting the statute and reference other resources. However, to ensure the thoroughness of your research, a descriptive word search of the appropriate digests and statutes should still be done as there may be other relevant statutes and cases.
Sometimes, beginning your research may start by knowing a case which is on point. From that case, you will be able to locate other cases dealing with the same issue. For example, if we begin our research knowing that the Butler v. Butler decision is related to your problem, then that case can be retrieved from the appropriate case reporter and the headnotes can be used to locate related cases. {overhead 15 - two pages} The headnotes allow for easy movement between case reporters and digests of a single publisher. The first headnote, "Divorce key number 287," refers to the topic of divorce and sub-topic 287 in the digest published by West. The case summaries in the digest can then be used to find other relevant cases which can be retrieved from their appropriate reporters.
Furthermore, the headnotes are also assigned consecutive numbers that act as an internal indexing system for the contents of that case only. The headnotes summarize materials found in the opinion. As you read through the case, you will find bracketed numbers at the beginning of various paragraphs which correspond to the number of the headnote. Headnotes are a helpful summary of what is in the opinion; however, they should not be used as a substitute for actually reading the case. First, the headnotes may fail to catch an important nuance as they are prepared by the publisher and not the court that wrote the opinion. Second, even if the headnotes do accurately summarize the points of law contained in the case, the precise factual context of a case may bear significantly on the legal application of the law. Therefore, always read the case. Publishers of non-West case reporters and digests use a similar indexing system but in their publications, the functional equivalent of a key number is called a "section number" or "paragraph number." If the publisher of the case reporter and digest are not the same, then the headnotes and key numbers of the digest will not correspond to the reporter.
Another way to locate additional cases from a known case is to Shepardize the case in the appropriate Shepard's Citations. Shepardizing provides the researcher with an analysis of the treatment of a case by subsequent cases. It is the most widely used method of updating the law and is an essential step in legal research. In addition, it can be done for cases, statutes, and other legal authorities such as law reviews.
Although Shepardizing provides a rough guide about the treatment of a case, it may not convey an important nuance. For example, the Shepard's Citations may indicate that a case has been overruled, but it will not necessarily reflect whether the case was overruled on a point relevant to your particular issue.
{overhead 16} This is a sample Shepard's Citation page. If we started our research knowing of the Hodge case and that it was located in volume 520 of the Atlantic Reporter beginning on page 15, then the case should be Shepardized. To Shepardize the case, you must use the appropriate citation set; there are different citation sets for each reporter. Once you have the correct citation set for your reporter (the Atlantic Reporter for the Hodge case), look for the volume number containing your case and then find the number of the beginning page of the case. Under the case that you are Shepardizing you will find the citations for other cases which have referred to it.
It is also very important to check other Shepard volumes which may contain your case and the cumulative supplements which update the main volumes. For example, a Shepard citation set may have two volumes, one covering cases decided from 1898 through 1971 and the other volume covering cases 1972 to present. If you were Shepardizing a case decided in 1968, then both the first and second volumes must be used. On the other hand, if you were Shepardizing a case decided in 1975, then only the second volume would be needed.
Under Hodge {on the overhead}, 1986 is the year of the decision. The following parenthetical citation is a parallel citation, which is a verbatim report of the same decision in a different source. The same decision is often reported in different sources. The code letter next to the citations in the table indicates how the citing authority relates to the case Shepardized. The "s" means that it is the same case, although at a different stage of the proceeding; "e" means that the court is interpreting your case in a significant way; and "j" means that your case is cited in the dissenting opinion.
{overhead 17 - two pages} The table of "Abbreviations and Analysis," which explains the code letters, can be found in the front of each volume. As you can see, the code analysis is very useful since it tells you, among other things, if a case has been overruled, limited in its application, or criticized in some way--in effect, that your case may no longer be significant although not expressly overruled.
D. Other Approaches to Finding the Law
1. Words and Phrases---If the research problem turns on the legal definition of a term, then you can go directly to a publication called "Words and Phrases." This resource contains words and phrases that courts have defined for legal purposes in the context of particular decisions. Words and Phrases lists the terms alphabetically, along with citations to federal and state cases that have construed or interpreted them.
{overhead 18} This is a sample page from a Word and Phrase volume that is part of the West Pennsylvania Digest. If the legal issue concerns the meaning of "fair market value," then this Words and Phrases volume provides a list of cases in our jurisdiction that have interpreted the term.
2. Computerized Legal Research - Another way to conduct research is through the use of a computerized legal research service such as Lexis (a service of Mead Data Corp.) or Westlaw (a service of West Publishing). With each service, computerized research begins with a database, which can consist of the full text of federal and state cases, statutes, administrative regulations and rulings, and other legal authorities.
To do a search, the researcher chooses a database and then inputs descriptive words, phrases, or citations. The computer searches the chosen database and produces the results. However, only Westlaw provides the headnotes at the beginning of the cases. Although computers can offer invaluable research assistance, they are very expensive. Consequently, you still need to know and understand the essential steps involved in legal research.
IV. Conclusion
The business valuation professional is often called upon to provide expertise in many civil litigation proceedings. Various regulatory, statutory, and judicial influences either make a business valuation necessary or desirable. To provide the competent advice expected, a business valuation professional must be familiar with the valuation methodology accepted by the courts that will adjudicate a specific case. Furthermore, since the laws constantly change and also vary among the jurisdictions, the business valuation professional must be capable of conducting legal research to ensure that the methodology accepted by the court is used in the valuation process.
V. Recommended Books
Two useful books on how to conduct legal research are "The Legal Research Manual" written by Christopher Wren and Jill Robinson Wren and "The Process of Legal Research: Successful Strategies" written by Christina L. Kunz et al. In addition, "The Bluebook - A Uniform System of Citation" is another helpful book that contains, among other things, the technical rules about citation form.
