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R.D. Clark & Sons, Inc. v. Clark

Court of Appeals of Connecticut

December 10, 2019

R.D. CLARK & SONS, INC., ET AL.
v.
JAMES CLARK ET AL.

          Argued September 9, 2019

         Procedural History

         Action seeking damages for, inter alia, breach of fiduciary duty, and for other relief, brought to the Superior Court in the judicial district of Hartford, where the named defendant filed a counterclaim seeking, inter alia, dissolution of the named plaintiff corporation; thereafter, the named plaintiff elected to purchase the named defendant's stock in the named plaintiff at fair value; subsequently, the plaintiffs withdrew their complaint; thereafter, the named defendant filed a second amended counterclaim; subsequently, the matter was tried to the court, Hon. Joseph M. Shortall, judge trial referee; judgment determining the fair value of the named defendant's shares in the named plaintiff and establishing terms of payment; thereafter, the court awarded the named defendant attorney's fees and expenses, and the plaintiffs appealed to this court and the named defendant filed a cross appeal; subsequently, the defendant Carolyn Manchester et al. withdrew their claims on appeal. Affirmed.

          Richard P. Weinstein, with whom, on the brief, was Sarah Lingerheld, for the appellant-cross appellee (named plaintiff).

          Jack G. Steigelfest, with whom was Christopher M. Harrington, for the appellee-cross appellant (named defendant).

          DiPentima, C. J., and Devlin and Sullivan, Js.

          OPINION

          DEVLIN, J.

         In this case involving the buyout of minority shares of a closely held corporation, the plaintiff, R.D. Clark & Sons, Inc. (corporation), [1] appeals, and the defendant James Clark[2] cross appeals, from the judgment of the trial court determining the fair value of those shares, establishing the terms of payment for the purchase of those shares, and awarding attorney's fees to the defendant. On appeal, the corporation asserts that the trial court erred in determining the value of the defendant's shares by (1) not tax affecting the corporation's earnings in analyzing its valuation, (2) not applying a minority discount to the value of the defendant's shares, and awarding the defendant attorney's and expert witness fees and costs, on the ground that the defendant suffered minority oppression at the hands of the plaintiffs, (3) not applying a marketability discount to the value of the defendant's shares, and (4) incorrectly accounting for a certain loan due to the corporation from the defendant and ordering that certain sums be paid to the defendant within thirty days of the date of judgment. On cross appeal, the defendant claims that the court erred by not awarding him attorney's fees in the amount of one third of the value of his shares in the corporation in accordance with the retainer agreement that he had signed with his counsel. We affirm the judgment of the trial court.

         The following factual and procedural history is relevant to the issues on appeal. Since 1984, the corporation, which was founded by Robert D. Clark, the late father of the individual parties, who are all siblings, has operated as a specialty freight trucking business, transporting primarily gasoline, kerosene and water. Robert D. Clark owned one third of the shares of the corporation, and John Clark and the defendant also each owned one third. When Robert D. Clark died in May, 2011, Carolyn Manchester assumed his shares of the corporation. The three siblings served as officers and directors of the corporation, and managed the operations of the corporation until they had a falling out later in 2011, and the defendant was terminated from his position as a driver and occasional dispatcher. The defendant resigned from his positions as an officer and director of the corporation in February, 2012.

         On April 2, 2014, the plaintiffs commenced the underlying action against the defendant and Smart Choice. In their five count complaint, the plaintiffs alleged, inter alia, that the defendant, after being terminated from his employment with the corporation in 2011, improperly utilized certain proprietary information to start a new business, Smart Choice, and undermined the corporation's business operations.

         On September 19, 2014, the defendant and Smart Choice filed an answer and special defenses, and the defendant, alone, filed a five count counterclaim seeking, inter alia, dissolution of the corporation pursuant to General Statutes § 33-896 (a), [3] on the ground that the individual plaintiffs had engaged in illegal, oppressive and/or fraudulent conduct to his detriment.

         On November 21, 2014, the corporation elected, in lieu of dissolution, to purchase the defendant's shares in it at the fair value of those shares, pursuant to General Statutes § 33-900.[4]

         On February 24, 2016, the plaintiffs withdrew their complaint against the defendant and Smart Choice. Also on that date, the defendant filed a second amended counterclaim alleging that the corporation had a practice for many years of providing shareholders with funds to pay the federal income tax liabilities incurred by them as a result of the pass-through of the corporation's profits to them, but that the defendant had not received any such payments from the corporation for the years 2012, 2013 and 2014, although he remained a shareholder of the corporation. The defendant claimed that said conduct by the plaintiffs was oppressive.

         The parties were unable to reach an agreement as to the fair value of the defendant's shares in the corporation and the terms of the corporation's purchase of them, so those issues were presented to the court for determination. After a trial spanning several days in December, 2015, and February, 2016, the court issued a memorandum of decision on August 30, 2016, determining that (1) as of December 31, 2014, [5] the value of the corporation was $3, 708, 413, and the fair value of the defendant's shares of the corporation was $1, 236, 138, and (2) because the corporation, through the actions of its majority shareholders, engaged in oppressive conduct toward the defendant, the value of the defendant's interest in the corporation was not subject to a minority discount. The court further ordered that it would hold another hearing on the issues of whether there were extraordinary circumstances to justify the application of a marketability discount to the value of the defendant's shares, the terms according to which the corporation would purchase those shares, and whether the defendant was entitled to an award of reasonable attorney's and expert witness fees and expenses.

         On September 8, 2016, the corporation filed a motion for reargument and reconsideration. On October 24, 2016, the court issued a memorandum of decision granting in part and denying in part that motion, determining that, upon reconsideration, the value of the corporation as of December 31, 2014, was $2, 356, 719, and the fair value of the defendant's shares in the corporation was $785, 573.

         On December 30, 2016, following another evidentiary hearing, the trial court issued a memorandum of decision determining, inter alia, that the value of the defendant's shares of the corporation should not be reduced by a marketability discount, the defendant was entitled to statutory attorney's and expert witness fees and expenses pursuant to § 33-900 (e), [6] and the defendant was not entitled to prejudgment interest, but was entitled to postjudgment interest.

         On June 19, 2017, the trial court issued a memorandum of decision, following another hearing held on April 27, 2017, rendering judgment against the corporation and in favor of the defendant, holding that the defendant was entitled to a total sum of $983, 028.09, including statutory attorney's fees and expert witness fees and expenses. The court also found that the defendant was entitled to postjudgment interest at the rate of 2.25 percent. The court ordered the corporation to pay $87, 653 to the defendant within thirty days and, further, to pay $8339.29 per month to the defendant for a period of ten years, and to maintain a performance bond to secure payment of the judgment. The court also dismissed the defendant's counterclaim seeking a dissolution of the corporation.

         On June 28, 2017, the corporation filed a motion for reconsideration limited to the portions of the trial court's June 19, 2017 decision requiring it to pay $87, 653 to the defendant within thirty days and ordering it to obtain a performance bond. The court held an evidentiary hearing on these issues on August 24, 2017. On September 14, 2017, the court issued a memorandum of decision declining to modify its order that the corporation pay $87, 653 to the defendant within thirty days. The court, however, vacated its order requiring the corporation to obtain a performance bond, but ordered that the corporation satisfy its monthly installments on the first of each month and that it be assessed a late charge if it did not timely satsisfy that obligation.

         The corporation appeals from the judgment of the trial court determining the value of the defendant's shares and its award of attorney's and expert witness fees and expenses to the defendant. The defendant does not quarrel with the trial court's determination of the value of his interest in the corporation, but challenges, by way of cross appeal, the court's decision not to award attorney's fees in the amount of one third of the value of his interest in the corporation pursuant to the contingency fee agreement that he had signed with his counsel.

         I

         APPEAL

         Because all of the claims raised by the corporation on appeal stem from the valuation of the defendant's shares in it, we begin by setting forth the following general applicable legal principles. As noted herein, the corporation elected to purchase the defendant's shares at the fair value of those shares pursuant to § 33-900 (a). Section 33-900 (d) provides that, if the parties are unable to reach an agreement as to the fair value of the shares, the court shall determine the fair value of them as of the day before the date on which the petition was filed or as of such other date as the court deems appropriate under the circumstances.

         “Fair value'' is not defined in § 33-900. It is, however, defined in a separate provision of the Connecticut Business Corporation Act, which encompasses General Statutes §§ 33-600 to 33-998. General Statutes § 33-855 (3)[7]provides in relevant part: ‘‘ ‘Fair value' means the value of the corporation's shares determined . . . (B) using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, and (C) without discounting for lack of marketability or minority status . . . .'' This definition is identical to the definition of ‘‘fair value'' contained in its counterpart under § 13.01 (4) of the American Bar Association's Model Business Corporation Act.[8] Given this definition, it seems evident that neither a minority discount nor a marketability discount would apply to the determination of the fair value of shares that are being purchased by a corporation, versus being sold on the market. This position is supported by the widely accepted principle that ‘‘fair value'' is not synonymous with ‘‘fair market value.'' See, e.g., Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353, 363 (Colo. 2003); Brynwood Co. v. Schweisberger, 393 Ill.App.3d 339, 353, 913 N.E.2d 150 (2009); Franks v. Franks, Court of Appeals of Michigan, Docket No. 343290, N.W.2d, 2019 WL 4648446, *15 (Mich. App. September 24, 2019); Balsamides v. Protameen Chemicals, Inc., supra, 160 N.J. 374-77; Columbia Management Co. v. Wyss, 94 Or.App. 195, 202-206, 765 P.2d 207 (1988); HMO-W, Inc. v. SSM Health Care System, 234 Wis.2d 707, 717-23, 611 N.W.2d 250 (2000). Accordingly, most courts disfavor the application of minority or marketability discounts in situations such as the one presented in this case. Connecticut has no appellate authority on this issue.

         Here, the trial court did not make a pronouncement regarding the allowance or prohibition of minority or marketability discounts as a matter of law. Rather, the trial court presumed the propriety of their application, but declined to apply either given the facts presented in this case. We thus limit our analysis to the holdings of the trial court and the corporation's specific challenges to them.

         There is no appellate authority mandating that a particular methodology be employed in determining fair value when a corporation elects to buy out a minority shareholder in lieu of dissolution. It is, however, well settled that ‘‘valuation is a factual determination. In assessing the value of . . . property . . . the trier arrives at [its] own conclusions by weighing the opinions of the appraisers, the claims of the parties, and [its] own general knowledge of the elements going to establish value, and then employs the most appropriate method of determining valuation. . . . The trial court has the right to accept so much of the testimony of the experts and the recognized appraisal methods which they employed as [it] finds applicable; [its] determination is reviewable only if [it] misapplies, overlooks, or gives a wrong or improper effect to any test or consideration which it was [its] duty to regard. . . . In determining whether the trial court reasonably could have concluded as it did on the basis of the evidence before it, we will give every reasonable presumption in favor of the correctness of [its] action.'' (Citation omitted; internal quotation marks omitted.) Siracusa v. Siracusa, 30 Conn.App. 560, 568-69, 621 A.2d 309 (1993). ‘‘The trial court's findings are binding upon this court unless they are clearly erroneous in light of the evidence and the pleadings in the record as a whole. . . . A finding of fact is clearly erroneous when there is no evidence in the record to support it . . . or when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. . . . Therefore, to conclude that the trial court abused its discretion, we must find that the court either incorrectly applied the law or could not reasonably conclude as it did.'' (Internal quotation marks omitted.) Britto v. Britto, 166 Conn.App. 240, 245-46, 141 A.3d 907 (2016).

         The methodology used by the trial court in this case, as well as the parties' expert witnesses, to determine the value of the corporation as a going concern as of December 31, 2014, was (1) to make a projection of future cash flow, (2) to make adjustments to normalize this cash flow and (3) to apply a capitalization rate to arrive at a value for the business. Both parties presented expert testimony in support of their respective positions. The trial court expressly considered the various opinions of both expert witnesses, but, for the most part, agreed with the valuation methods and calculations utilized by the corporation's expert witness.

         Despite the multitude of factors considered by the trial court in calculating the fair value of the defendant's shares in the corporation, and the complexity of those calculations, the corporation challenges the trial court's valuation on only three grounds. The corporation claims that the trial court erred by (1) not tax affecting the corporation's earnings in connection with its cash flow valuation analysis, (2) not making a downward adjustment in the value of the defendant's shares because the defendant was a minority shareholder, and (3) not making a downward adjustment in the value of the defendant's shares because of the limited marketability of shares in a closely held ...


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