– Joseph Joubert (1754 – 1824)
In my last blog post, I wrote about “
Dutch Auctions and Texas Shoot-Outs” as a way to resolve disputes between joint owners of a business or tenants in common of real property. Under that method, each party submits to the mediator one blind bid at which they are willing to buy or sell their one-half interest in the property. The mediator opens both proposals, and the high bidder (the winner) buys out the low bidder’s (the loser) one-half interest at the price set by the low bid.
Here is an equally effective, but perhaps more painful, method of untying joint owners. I read about it in an
article by
Manie Spoelstra. If this method is already incorporated into a contract, you may hear it referred to as a “Savoy clause”, or even a “Russian Roulette clause”. In this post, I will call it the “Savoy method”.
In the hypothetical case I described previously about the estranged siblings who find themselves as the co-owners of a house they inherited from a parent, there will be no contract establishing a way of untying the siblings’ relationship to the property. That does not mean, however, that the parties cannot agree through mediation to use the Savoy method in mediating their real estate “divorce”.
As with a Dutch auction, the Savoy method will only work if both parties are able to buy the other party’s interest and willing to sell their own. As Professor Spoelstra explains it, one co-owner will offer to sell his interest in the property or business to the other owner at a set price, say $1 million. The other co-owner must decide whether to accept or reject the offer. If she accepts, she buys out her co-owner’s interest for $1 million. But if she rejects the offer to purchase, then she
must
offer to sell her interest to her co-owner at the same $1 million price, and her co-owner
must
accept.
Professor Spoelstra calls the Savoy method both “brilliant and ruthless”. I suggest he is right on both counts. As with the Dutch auction, the mediator or facilitator never suggests a number. The parties base their offers on their own opinions of value and subjective desires for buying or selling. Nobody gains from either overbidding or underbidding, and therefore it makes no difference which party proposes the number. In other words, if the business or property has a fair market value of $2 million, the offeror likely has no reason to offer to purchase a one-half interest for $400,000, because the risk is too great that the offeree will accept. Conversely, the offeror would be unwise to offer $3 million for a one-half interest in a $2 million business, because the offeree would likely reject the offer, thereby requiring her to tender the same offer to her co-owner, who must now pay an inflated price that he set himself.
There is, of course an incentive to underbid if the offeror is in dire straits and in need of cash. If such is the case, the Savoy method is probably inappropriate, and the mediator should be leery of proposing it. This is so because, as stated above, its use assumes the ability of either party to buy out the interest of the other. On the other hand, the offeror may underbid for completely non-economic reasons, such as a subjective desire to sever all ties with the other person. In this situation, the offeree may get an economic windfall by accepting the artificially low offer. Yet it would not be inappropriate for the mediator to suggest the Savoy method, because considerations other than money would be driving the bid.
The Savoy method, like its cousin the Dutch auction, is designed for a specific subset of cases. The technique can be dangerous because of the potential for one party to miscalculate value, but it is beneficial (and perhaps also dangerous) because of the swiftness with which it brings finality to a dispute. Put the Savoy method in your mediator’s toolbox, and like a fine wine, save it for just the right occasion.
Michael S. Orfinger is a principal mediator at the firm of Upchurch, Watson, White and Max. For more information, visit Michael S. Orfinger's biography.
