A problem of valuationin a legal context

Law & Valuation

Alan Palmiter

Spring 2005

Ladies and gentlemen of the jury:

You have heard the evidence and have found defendant United Airlines negligent in the death of William Nollenberger, the husband and father of the plaintiffs in this action.

You now face the task of assessing compensation in the case. As attorney for the plaintiffs, let me review the damages evidence for you.

William Nollenberger(1950-2004)

William's life expectancy 25 years

William’s current earnings $60,000

Anticipated annual earnings increases 3%

Years would have continued earning 15 years

Current “cost of money”

• Inflation 1.5%

• US Treasury bonds 4.0%

• Private annuity contracts 6.0%

• High-risk financing 18.0%

Based on this evidence, you are to determine the general damages suffered by his family that resulted from the death of William Nollenberger by reason of the negligence of United Airlines.

As jury, you may take into account all relevant factors to ensure just and fair compensation to the plaintiffs.

Verdict Instructions

If you find defendant United Airlines was negligent in the crash of Flight 049, return a verdict for the plaintiffs.

If so, state the amount of general damages to which the plaintiffs are entitled.

William's life expectancy 25 years

William’s current earnings $60,000

Anticipated annual earnings increases 3%

Years would have continued earning 15 years

Current “cost of money”

• Inflation 1.5%

• US Treasury bonds 4.0%

• Private annuity contracts 6.0%

• High-risk financing 18.0%

Actual “special interrogatories”

1. What was the life expectancy of William?2. How long would William have continued to earn if he

had not died? How much?3. How much would William N. have gotten after

retirement from his government pension?4. What percentage of William's earnings would have been

paid for William's personal expenses? for taxes?5. How much were the services of William N. worth to his

family? To compute PV of services, what will annual inflation be during William's life expectancy?

6. In figuring the value today, how much do you discount money in the future?

7. How much would the family pay in taxes on award?

Nollenberger v. United Air Lines216 F. Supp 734 (SD Calif 1963)

vacated 335 F2d 279 (9th Cir 1964)

Additional factors decided by jury in the case:• Taxes decrease earnings, family’s award• Personal expenses decrease net earnings• Personal services increase family’s net returns• Retirement (pension) earnings• Discount rates vary – earnings, pension, services

Trial court methodology

Earnings(increasing)

Net earnings

Taxes Present value(net earnings)Personal

expenses

Discount

Services(increasing)

Pension (flat)

Present value(services)

Present value(pension)

Discount

Discount+

+

=

Total PVJudgmentTax adjustment

Nollenberger v. United Air Lines

Is calculation of damages? • Matter of law (for judge)• Matter of fact (for jury)

Can legal system perform this task?

Nollenberger v. United Air Lines216 F. Supp 734 (SD Calif 1963)

vacated 335 F2d 379 (9th Cir 1964)

Jury award: $573,255 • Special interrogatories

• General verdict

Trial judge: $858,510• Finds special interrogatories inconsistent with general verdict

• Enters judgment using special interrogatories

Appeals court: $573,255• Concludes jury may have considered factors beyond special interrogatories

• Vacates judgment, remands for judgment based on general verdict

Contexts for legal valuation

• Litigation: personal injury, prejudgment interest, equitable distribution

• Business: corporate appraisal, buyouts, bankruptcy, board decision-making, patent infringement

• Taxation: minority interests, estate tax, inter-firm transfers

• Administrative: value of life, frozen embryos, expropriation, property takings

• Criminal law: death penalty, stolen art

“Blind leading the blind”

Peter Bruegel (Flemish 1568)

Legitimacy of legal valuationin litigation?

• Decision-makers– Judge: trained in interpreting texts, judging human

dynamics, focusing on process– Jury: excellent in interpreting evidence, identifying

falsehoods, reflecting community values– Lawyers: same training as judges

• Experts– Paid by parties: subject to examination by other party– “Battle of experts: rules of evidence allow accepted

methodologies of profession