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Contents
SC&H Business Valuation & Support Leaders 
Michael J. Young, 
Nathan E. DiNatale,
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Valuations Insights, July, 2010 Could your Non-Competes be Challenged as "Fraudulent Transfers?" IGF Insurance Co. v. Continental Casualty Co., 2009 WL 4016608 (S.D. Ind.); and IGF Insurance Co. v. Continental Casualty Co., 2009 WL 3415139 (S.D. Ind.) In the first of these cases, the federal district court considered whether a wealthy Indiana businessman and his family used non-competition agreements to divert nearly $32 million from the sale of their company to subsidiaries. The second opinion decided a Daubert challenge for the expert who valued the non-competes. A crop reinsurance conglomerate. In 1998, the Symons family caused a wholly-owned subsidiary, IGF Insurance Company (IGF), to buy two lines of crop reinsurance business from Continental Casualty Co. (CCC). For two years, the parties shared the profits of the combined company, but after an extended drought drained IGF's reserves, CCC exercised its option to claim the entire purchase price. Unable to pay the full amount, IGF sold its insurance assets to a competitor for $40.5 million, but took only $16.5 million of the proceeds. Two non-operating subsidiaries received a total of $9 million for covenants not to compete and third received $15 million for a reinsurance agreement. Notably, the purchaser paid $1.1 million in retention and non-compete agreements to key IGF personnel, but paid a mere $1.00 to individual Symons family members because they posed no competitive threat. In 2001, IGF sued Continental Casualty for breach of contract and other claims; CCC countersued, claiming the Symons family used the non-compete payments to fraudulently transfer assets to their subsidiaries. CCC's expert considered the value to the buyer with and without the non-competes. He concluded the $9 million was part of the purchase price, largely because, under a four-factor test, the IGF subsidiaries had no 1) business experience, 2) industry expertise, 3) customer relationships, or 4) ability to compete in the crop reinsurance business. In contrast, an opposing expert for the Symons family and the subsidiaries (the counter-defendants) testified that IGF's sale value ranged from negative $20.5 million to negative $11.5 million. But according to the court, this negative appraisal ignored the company's book of business and the "economic reality" that a seller would rather terminate a business rather than pay someone "to take it off his hands." The expert also derived key financial inputs from telephone conversations with IGF personnel and took his discount rate from a conversation with an investment banker. Without any independent verification, his opinion was "irrelevant and unreliable," the court ruled, and gave it no weight. Ultimately, the court agreed with CCC's expert regarding the corporate non-compete agreements, finding that the $9 million payment to the subsidiaries constituted fraudulent transfers. It also found the $15 million reinsurance agreement "substantially overpriced," and voided additional payments to individual Symons family members totaling $23 million. Daubert challenge notes lack of methodology for valuing non-competes. In the court's second opinion, the counter-defendants first attacked the credentials, but the court quickly qualified the expert based on his "extensive experience as an auditor and a forensic accountant." That he lacked experience valuing non-competes and had never valued a book of insurance business went to the weight and credibility of his testimony and not its overall admissibility. The counter-defendants also challenged the expert's "with and without" methodology and his "four-factor" test. He should have determined the independent fair market value of each agreement, they claimed, and then compared these to the sale payments. The expert defended his approach, explaining that he did not need to calculate the precise value of the non-compete and consulting agreements because, based on his experience as well as the facts of this case, their value was de minimus. Although authority on valuing non-competes was sparse, he relied on articles from another accounting firm as well as an AICPA treatise Based on this testimony, his methodology and use of materials "frequently relied on by experts in his field," the court admitted the expert's opinion under Daubert.
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