[Shareholder Oppression] Shareholder Oppression buyout remedy affirmed in New...
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Eric Fryar
May 29, 2009, 5:03:24 PM5/29/09
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Lund v. Krass Snow & Schmutter, P.C., --- N.Y.S.2d ----, 2009 N.Y. Slip Op. 03996, 2009 WL 1406312 (N.Y.A.D. 1 Dept., May 21, 2009) [Download copy--pdf]
An intermediate appellate court in New York has affirmed a judgment in favor of the plaintiff in a shareholder oppression case. The lawsuit was among attorneys who were shareholders in a law firm professional corporation. The trial court found that the defendants were guilty of oppressive actions based primarily upon “the uncompensated disgorgement of petitioner’s 39% equity interest in the firm during his last year as a member.” The trial court awarded the plaintiff $569,010, representing a fair value of his equity interest in the law firm as of the date that the lawsuit was filed. The trial court also awarded the plaintiff prejudgment interest at a rate of 9% from the date that the lawsuit was filed. The appellate court affirmed the judgment but held that one of the assets included in the valuation was not a firm asset and remanded the matter for recalculation of the value without that asset.
Although there is very little legal analysis in the appellate court’s opinion, the description the trial court’s reasoning process, and the appellate court’s apparent approval of that process, sheds some light on the practical mechanics of a shareholder oppression case.
First, the opinion makes clear that the finding of fair value was based on testimony provided by the plaintiff’s valuation expert. Valuation for purposes of a forced buyout remedy in a shareholder oppression case is done through the adversary process. The appellate court comments that the defendants elected not to submit their own appraisal.
Second, the plaintiff’s expert’s appraisal, on which the trial court based its award, used a “cost/assets analysis” to arrive at a value. The court does not discuss the propriety of this particular appraisal analysis. Usually, and especially in a service company like a law firm, a plaintiff in a shareholder oppression case would want to use a going concern value based on the future stream of earnings. One would think that most law firms and similar professional service corporations would not have significant assets in the firm on which a valuation might be based. The opinion gives no clue as to why this appraisal method was chosen, but one would expect that, under the particular circumstances of this case, it gave the best results of the plaintiff, and the defendants did not offer an alternative. What is apparent from the opinion, however, is that neither the trial court nor the appellate court assumed that any particular valuation method was necessarily correct in a shareholder oppression case. Rather, he appraisal method, just like the appraisal values, are subject to proof based on the particular facts of each case.
Third, the appraisal value was determined as of the date that the lawsuit was filed. The correct valuation date is always a tricky issue in a shareholder oppression case, particularly when the value of the company is rapidly increasing or decreasing or when a part of the pattern of oppressive conduct resulted in a diminution of the value of the corporation over time. Because the court is acting as the court of equity in fashioning a remedy, from a legal standpoint, the court can determine a valuation date based on particular equities of the case. However, that is of little help to a lawyer trying to assemble evidence to prove his case. Some date will have to be chosen for the expert report long before the court will have an opportunity to determine the correct date. In Hollis v. Hill, 232 F.3d 460 (5th Cir. 2000), the Fifth Circuit grappled with the issue of a “retroactive buyout order.” In that case, the trial court had accepted the plaintiff’s argument that the valuation date should be immediately prior to the time that the pattern of oppressive conduct began. The problem was that the value of the corporation was rapidly decreasing because the market for its product was rapidly disappearing. That market condition was the very cause of the strife between shareholders. The Fifth Circuit accepted the defendant’s argument on appeal that the trial court’s reasoning unjustly enriched the plaintiff by placing 100% of the consequences of bad market conditions on the defendant. However, the court also rejected the defendant’s position that the correct valuation date should have been immediately before trial, at which time the corporation was essentially worthless. That court held that the presumptive date should be the date on which the lawsuit was filed, subject to adjustment by the trial court if necessary to do equity. The trial court and the appellate court in Matter of Lund also assumed that the correct valuation date was the day that the lawsuit was filed. The appellate court apparently used a voluntary buy-out under §1118 as the model for the forced buyout remedy. The appellate court noted that it was proper, in determining valuation, to include as part of the assets of the firm a sum of cash that had already been earmarked for bonus compensation to employees and was paid out within a month after the filing of the petition.
Fourth, the appellate court approved the trial court’s imposition of 9% pre-judgment interest on the amount of the award from the date that the lawsuit was filed—again based on §1118 as a model.
Finally, another open question that has not really been dealt with by the courts is whether an award to the plaintiff for the fair value of his shares in a shareholder oppression case is an award of damages that must be collected through the execution of the judgment or is an injunction ordering the defendant to pay that amount of money, which can be enforced through the contempt power of the court. The appellate opinion did not clarify that issue, but it did hold that on remand the judgment must provide that the defendants’ obligation to pay the judgment award is conditioned upon the plaintiff’s formal release of his equity interest in the firm—that sounds a lot more like an injunction than an award of monetary damages.
Eric Fryar
www.FryarLawFirm.com www.ShareholderOppression.com
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Posted By Eric Fryar to Shareholder Oppression at 5/29/2009 03:56:00 PM
An intermediate appellate court in New York has affirmed a judgment in favor of the plaintiff in a shareholder oppression case. The lawsuit was among attorneys who were shareholders in a law firm professional corporation. The trial court found that the defendants were guilty of oppressive actions based primarily upon “the uncompensated disgorgement of petitioner’s 39% equity interest in the firm during his last year as a member.” The trial court awarded the plaintiff $569,010, representing a fair value of his equity interest in the law firm as of the date that the lawsuit was filed. The trial court also awarded the plaintiff prejudgment interest at a rate of 9% from the date that the lawsuit was filed. The appellate court affirmed the judgment but held that one of the assets included in the valuation was not a firm asset and remanded the matter for recalculation of the value without that asset.
Although there is very little legal analysis in the appellate court’s opinion, the description the trial court’s reasoning process, and the appellate court’s apparent approval of that process, sheds some light on the practical mechanics of a shareholder oppression case.
First, the opinion makes clear that the finding of fair value was based on testimony provided by the plaintiff’s valuation expert. Valuation for purposes of a forced buyout remedy in a shareholder oppression case is done through the adversary process. The appellate court comments that the defendants elected not to submit their own appraisal.
Second, the plaintiff’s expert’s appraisal, on which the trial court based its award, used a “cost/assets analysis” to arrive at a value. The court does not discuss the propriety of this particular appraisal analysis. Usually, and especially in a service company like a law firm, a plaintiff in a shareholder oppression case would want to use a going concern value based on the future stream of earnings. One would think that most law firms and similar professional service corporations would not have significant assets in the firm on which a valuation might be based. The opinion gives no clue as to why this appraisal method was chosen, but one would expect that, under the particular circumstances of this case, it gave the best results of the plaintiff, and the defendants did not offer an alternative. What is apparent from the opinion, however, is that neither the trial court nor the appellate court assumed that any particular valuation method was necessarily correct in a shareholder oppression case. Rather, he appraisal method, just like the appraisal values, are subject to proof based on the particular facts of each case.
Third, the appraisal value was determined as of the date that the lawsuit was filed. The correct valuation date is always a tricky issue in a shareholder oppression case, particularly when the value of the company is rapidly increasing or decreasing or when a part of the pattern of oppressive conduct resulted in a diminution of the value of the corporation over time. Because the court is acting as the court of equity in fashioning a remedy, from a legal standpoint, the court can determine a valuation date based on particular equities of the case. However, that is of little help to a lawyer trying to assemble evidence to prove his case. Some date will have to be chosen for the expert report long before the court will have an opportunity to determine the correct date. In Hollis v. Hill, 232 F.3d 460 (5th Cir. 2000), the Fifth Circuit grappled with the issue of a “retroactive buyout order.” In that case, the trial court had accepted the plaintiff’s argument that the valuation date should be immediately prior to the time that the pattern of oppressive conduct began. The problem was that the value of the corporation was rapidly decreasing because the market for its product was rapidly disappearing. That market condition was the very cause of the strife between shareholders. The Fifth Circuit accepted the defendant’s argument on appeal that the trial court’s reasoning unjustly enriched the plaintiff by placing 100% of the consequences of bad market conditions on the defendant. However, the court also rejected the defendant’s position that the correct valuation date should have been immediately before trial, at which time the corporation was essentially worthless. That court held that the presumptive date should be the date on which the lawsuit was filed, subject to adjustment by the trial court if necessary to do equity. The trial court and the appellate court in Matter of Lund also assumed that the correct valuation date was the day that the lawsuit was filed. The appellate court apparently used a voluntary buy-out under §1118 as the model for the forced buyout remedy. The appellate court noted that it was proper, in determining valuation, to include as part of the assets of the firm a sum of cash that had already been earmarked for bonus compensation to employees and was paid out within a month after the filing of the petition.
Fourth, the appellate court approved the trial court’s imposition of 9% pre-judgment interest on the amount of the award from the date that the lawsuit was filed—again based on §1118 as a model.
Finally, another open question that has not really been dealt with by the courts is whether an award to the plaintiff for the fair value of his shares in a shareholder oppression case is an award of damages that must be collected through the execution of the judgment or is an injunction ordering the defendant to pay that amount of money, which can be enforced through the contempt power of the court. The appellate opinion did not clarify that issue, but it did hold that on remand the judgment must provide that the defendants’ obligation to pay the judgment award is conditioned upon the plaintiff’s formal release of his equity interest in the firm—that sounds a lot more like an injunction than an award of monetary damages.
Eric Fryar
www.FryarLawFirm.com www.ShareholderOppression.com
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Posted By Eric Fryar to Shareholder Oppression at 5/29/2009 03:56:00 PM
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