Legal Update: December 2024

Freedman Normand Friedland LLP v. Cyrulnik—On the Valuation of Contingency Fee Cases and Qualifying as a Fee Expert

When there is a consistent and predictable stream of cash flows or a history of royalties for licensed intellectual property, the valuation professional is most comfortable. In the following case, the court addressed admissibility of a valuation expert who was attempting to value an alleged interest in a law firm’s contingent fee cases—the epitome of uncertainty. The article discusses this court decision.

The business valuation profession thrives on certainty and predictability. When there is a consistent and predictable stream of cash flows or a history of royalties for licensed intellectual property, the valuation professional is most comfortable. In Freedman Normand Friedland LLP v. Cyrulnik, 2024 U.S. Dist. LEXIS 88096 (S.D.N.Y. May 15, 2024), the court addressed admissibility of a valuation expert who was attempting to value an alleged interest in a law firm’s contingent fee cases—the epitome of uncertainty.

Background[1]

Defendant Cyrulnik had been a partner of Boies Schiller Flexner LLP (BSF) since graduating law school in 2004. In the summer of 2019, two former BSF partners left BSF to form their own firm[2] focused on cryptocurrency and other specialized practice areas. During the summer and fall of 2019, the former BSF partners encouraged Cyrulink to join them. Following extensive negotiations, they succeeded. In December 2019, the three “name” partners and three other attorneys, executed a memorandum of understanding (MOU) forming the Firm. The MOU gave Cyrulnik the largest share of equity among the partners (27%), a specific share of fees from certain “high-upside contingency” cases the firm was working on, and a 25% interest in the cryptocurrency tokens that a technology startup client was using to pay its legal fees. The MOU provided that a founding partner, like Cyrulnik, could only be terminated for “cause” but did not specify any forfeiture of compensation or assets due a partner upon such involuntary removal.

On February 12, 2021, five of the partners met without notice to Cyrulnik and the seventh equity partner who had a working relationship with Cyrulnik. Two days later, they notified Cyrulnik that he had been removed for cause. Discussions on the disposition of the various assets and revenue streams to which Cyrulnik claimed an interest failed, and on February 27, 2021, the Firm sued Cyrulnik seeking declaratory judgment that his termination conformed to the provisions of the MOU. On March 9, 2021, Cyrulnik counterclaimed, adding the individual partners as defendants, claiming that the termination violated the MOU and seeking damages.

In support of his claims for damages, Cyrulnik intended to testify as a lay witness regarding the value of his interest in the firm and offered an expert witness to value Cyrulnik’s claim for a share of expected fees in contingency cases.[3] The Firm moved to preclude damages testimony for each of these witnesses.

Court Findings

The court initially addressed the proposed expert testimony, who Cyrulnik had proffered to value Cyrulnik’s interest in fees anticipated from four specific cases. The expert “has extensive credentials in finance, accounting, and the valuation of companies. But, [he] lacks any legal training and has never placed a valuation on a lawsuit. This lack of experience might not disqualify Jenkins from rendering an opinion if his valuation expertise could be reliably applied to the valuation of lawsuits, but his expert report demonstrates that he has failed to do that.”[4]

The fees expert identified a 10-factor test that is typically used for evaluating a group of contingency matters but, he conceded, he lacked sufficient data to apply that test to the Firm’s portfolio of contingency matters. Instead, he “came up with his own test for evaluating [four] individual contingency matters for which he cites no support.”[5] That method used estimates of the likely amount of recovery and probability of success in each of the four cases. The four cases were:

Case	Jurisdiction	Year Filed	Description
Apothio	E.D. Cal.	2020	Challenge to state entering property and destroying marijuana plants
Tether	S.D.N.Y.	2019	Cryptocurrency dispute
Scurtis	Florida	2014	No description available
Kleiman	S.D. Fla.	2018	Alleged cryptocurrency fraud

For example, the fees expert estimated that damages in Apothio were $1 billion based on an allegation in the complaint and the probability of success in the case was 20%. “But there is no indication that Jenkins has any expertise to evaluate the merits of the case or the actual chance of recovery.”[6] Similarly, the fees expert determined that damages in the Tether case would be $850,000,000, and that Cyrulnik was entitled to $3,298,000 as his share of the Firm’s expected fee. The Firm, however, had been removed as lead counsel in the case and was no longer involved in the litigation. In the Scurtis case, the fees expert determined, without any identified basis, that damages would be $50,000,000 and the likelihood of success was 50%. Therefore, according to the fees expert, Cyrulnik was entitled to $740,000, but the Scurtis case had already settled with no payment, and therefore, no fees for the Firm.

While the court did not fault the concept of damages based on probability adjusted recovery, the fees expert, a non-attorney, non-litigator with no expertise in the specific areas being litigated, lacked a basis to opine on either of the two inputs to that methodology.

Turning to the challenge to Cyrulnik’s proposed testimony regarding the value of his equity interest in the Firm, the plaintiffs challenged that he lacked the expertise to value a business interest and, in any event, the Firm was too new to establish a value. The court disregarded these objections, finding that courts routinely permit owners with personal knowledge of a business’s operations and finances to testify about its value. Cyrulnik was intimately involved in the extensive discussions leading to the formation of the Firm and the provisions of the MOU regarding partner compensation. He also served on the committees that monitored the business operations and decided which contingency cases to accept. “This would plainly provide Cyrulnik with the necessary personal knowledge to testify as a lay witness about the value of the business and its contingency cases.”[7]

Conclusions

A key issue in determining whether an expert can testify as to the value of damages is not just the expert’s training and experience in performing valuations, but whether the expert has competent, reliable evidence to support the analysis. That evidence can come either from information obtained through discovery, reliable outside sources or, if the expert has the requisite experience, the expert’s personal knowledge. Lacking that, the expert’s testimony will be precluded.

A business owner, on the other hand, may be able to testify as a lay witness regarding the value of a business or its assets even without valuation training or certifications if the owner has direct personal knowledge of the business’s operations and finances.

[1] The May 2024 ruling focused solely on the motions in limine relating to admissibility of alleged damages testimony. The factual background of this dispute was taken from the court’s earlier ruling on cross motions for summary judgment reported in Roche Freedman LLP v. Cyrulnik, 703 F.Supp.3d 404, 2023 U.S. Dist. LEXIS 209967 (S.D.N.Y November 24, 2023).

[2] Over the course of the litigation, the new law firm’s name varied from Roche Cyrulnik Freeman LLP to Roche Freedman LLP to Freedman Normand Friedland LLP, as partners joined and left the practice. For purposes of simplicity, the plaintiff will be referred to as the “Firm.”

[3] Cyrulnik also identified an expert to value his share of the tokens. The Firm’s opposition to his testimony related to the valuation date the expert used (Cyrulnik’s termination date). The Firm claimed that the valuation date should have been when it received the tokens in October 2020. Coincidentally, the value of the tokens increased substantially between October 2020 and February 2021. The court concluded that the Firm’s objections went to the weight of the expert’s testimony, not admissibility.

[4] 2024 U.S. Dist. LEXIS 88096 at *7 (internal record references omitted).

[5] Ibid. at *8.

[6] Ibid. at *9.

[7] Ibid. at *12, citing Jo v. JPMC Specialty Mortgage, LLC, 369 F.Supp. 3d 511, 518 (W.D. N.Y. 2019).

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Michael J. Molder, JD, CPA, CFE, CVA, MAFF, applies 30 years of experience as a Certified Public Accountant and litigator to help investigate and analyze cases with complex financial and economic implications. He has acted as both counsel and accounting expert in pending and threatened litigation as well as participating in internal investigations of financial misconduct. As a litigator, Mr. Molder helped co-counsel understand complex financial and accounting issues in dozens of cases. In 2006, Mr. Molder returned to public accounting applying his unique skills to forensic engagements. He has also performed valuations of business interests in a wide variety of industries.

Mr. Molder has served as a valuation expert for both plaintiffs and defendants in commercial litigation matters and owner and non-owner spouses in matrimonial dissolutions. He has participated in the valuations of businesses in a wide variety of industries, including: food service, wholesale and retail distribution, literary development and production, healthcare, manufacturing, and real estate development.

Mr. Molder has also investigated and valued damages in a wide variety of litigation contexts ranging from breach of contract claims to personal injury cases, and from employment disputes to civil fraud. He has consulted on many matters which have not involved the issuance of a report for litigation or resulted in deposition or trial testimony. Accordingly, the identity of these matters is protected by attorney client privilege.

Mr. Molder has also lectured widely on a variety of accounting and litigation related topics including business valuation, financial investigations in divorce proceedings, accountant ethics, financial statement manipulation and “earnings management.”

Mr. Molder can be contacted at (610) 208-3169 or by e-mail to Molder@lawandaccounting.com.