Froelich v. Senior Campus Living LLC , 355 F.3d 802 ( 2004 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
BRIAN P. FROELICH, 
Plaintiff-Appellee,
v.
SENIOR CAMPUS LIVING LLC,
Defendant-Appellant,
and  No. 02-2305
JOHN C. ERICKSON; NANCY ERICKSON;
SCL, INC.; ERICKSON RESOURCE
TRUST; SCL CONSTRUCTION, INC.;
SUBCO, INC.; SENIOR CAMPUS LIVING
HOLDINGS LLC,
Defendants.

Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Paul W. Grimm, Magistrate Judge.
(CA-98-694-L)
Argued: October 31, 2003
Decided: January 22, 2004
Before MICHAEL, MOTZ, and TRAXLER, Circuit Judges.
Affirmed by published opinion. Judge Motz wrote the opinion, in
which Judge Michael and Judge Traxler joined.
COUNSEL
ARGUED: James David Mathias, PIPER RUDNICK, L.L.P., Balti-
more, Maryland, for Appellant. Michael John Collins, THOMAS &
2 FROELICH v. SENIOR CAMPUS LIVING
LIBOWITZ, P.A., Baltimore, Maryland, for Appellee. ON BRIEF:
John R. Wellschlager, PIPER RUDNICK, L.L.P., Baltimore, Mary-
land, for Appellant.
OPINION
DIANA GRIBBON MOTZ, Circuit Judge:
This diversity case involves a challenge to the valuation of a lim-
ited liability company as determined by the statutory appraisal proce-
dure provided under Maryland law. A member of the company, who
objected to a reclassification of membership interests and squeeze-out
merger that eliminated his interest in the company, exercised his right
to have a statutory appraisal resolve the fair value of that interest
immediately prior to the reclassification. The district court accord-
ingly appointed a panel of three appraisers, who determined the value
of the interest as of the day the company’s members voted to approve
the reclassification. The company contends a court must adjust the
valuation of that appraisal panel “downward” or order a new appraisal
because (1) the objecting interest holder assertedly presented to the
appraisers evidence and arguments that conflicted with earlier rulings
of the district court and (2) the appraisers improperly included in their
valuation appreciation resulting from the contested reclassification.
The magistrate judge, who presided over the appraisal proceedings
with the agreement of the parties, rejected these arguments and
entered judgment for the member on the basis of the court-appointed
appraisers’ valuation of the company. For the reasons that follow, we
affirm.
I.
This appeal grows out of a dispute between Senior Campus Living,
LLC (“SCL”), a developer of large, campus-style retirement commu-
nities, and one of its former employees and interest holders Brian
Froelich. SCL owns a number of operating retirement communities
and several future projects in various stages of development.
One future project regarded as critical by SCL in the fall of 1997
was Greenspring Village in Springfield, Virginia. Equitable Real
FROELICH v. SENIOR CAMPUS LIVING 3
Estate Investment Management, Inc. (“Equitable”) had agreed to pro-
vide $26 million in mezzanine financing for Greenspring if SCL first
obtained $55 million in construction financing. By September 1997,
SCL had obtained a $55 million construction loan from Mercantile-
Safe Deposit & Trust Company, but only on the condition that SCL
founder John Erickson — who still had substantial financial interests
in SCL despite selling the firm to Froelich and others in a leveraged
buy-out in 1996 — personally guarantee the loan. Erickson agreed to
provide the guarantee, and Equitable then scheduled the closing for
the Greenspring financing for October 3, 1997.
On October 1, 1997, however, the SCL Board voted to remove
Froelich from his position as Chief Executive Officer of the company
and replace him with Erickson. As a result, Equitable decided to post-
pone the Greenspring closing. Equitable subsequently notified SCL
that it would require an additional $35 million in personal guarantees
from Erickson to assuage its concerns about SCL’s financial condi-
tion.
Erickson told the SCL Board that he would provide personal guar-
antees for the additional $35 million if the Board reclassified its mem-
bership interests (both preferred and common) into a single class of
common interests, with the reclassification to be based upon the fair
market value of the company determined by an independent appraisal.
Under the previous classification of membership interests (resulting
from the 1996 leveraged buy-out), Erickson had preferred interests in
the company worth about $160 million (including accrued and unpaid
interest). In addition, Froelich and Erickson’s brother, Michael Erick-
son, had subordinate preferred interests with assigned values of $8
million and $4 million, respectively. The common interests in the
company were allotted among John Erickson (30%), Michael Erick-
son (26%), Froelich (26%), and thirteen other SCL employees (34%).
These subordinate preferred and common interests only had value
to the extent the company was worth more than the value of Erick-
son’s senior preferred interests, i.e., $160 million. Thus, if the Board
acted on Erickson’s proposal to reclassify the company’s preferred
and common interests into a single class of common interests based
on the company’s fair market value, Erickson would end up with vir-
4 FROELICH v. SENIOR CAMPUS LIVING
tually all of the common stock of SCL if the appraisal valued the
company at less than $160 million.
After forming independent committees to negotiate with Erickson
regarding his proposal, explore available alternatives to Erickson’s
offer, and confer with Equitable regarding the Greenspring closing,
the SCL Board unanimously voted to recommend to the members that
they accept Erickson’s reclassification proposal. By November 5,
1997, fifteen of sixteen members had approved the proposal, with
only Froelich dissenting. On November 6, 1997, after Erickson sup-
plied the additional $35 million in guarantees, SCL, in Erickson’s
words, “completed the signing and execution of all documents with
Mercantile and Equitable for the $80 million project financing for
[the] Greenspring [project].”
In December 1997, SCL retained Coopers & Lybrand, LLP
(“Coopers”) to perform an independent appraisal valuing the com-
pany as of the November 5, 1997 reclassification. Coopers valued
SCL at $155 million. This valuation included an appraisal of $6.325
million for the Greenspring project. The SCL Board accepted Coo-
pers’ valuation in January 1998. Because Coopers appraised the com-
pany at less than the value of Erickson’s preferred interests (i.e., $160
million), the reclassification resulted in Erickson holding 99.9% of
the new common interests and left Froelich with $1.50 after a
squeeze-out merger in February 1998 eliminated his remaining inter-
est.
Shortly after the squeeze-out merger, Froelich filed a fourteen
count complaint against SCL, Erickson, and others in federal court.
Froelich alleged, inter alia, breach of fiduciary duty, asserting that
Erickson had disparaged SCL to potential investors (thereby thwart-
ing SCL’s ability to obtain capital) in order to regain control over
SCL and had devalued and engaged in self-dealing with respect to
Froelich’s preferred and common interests. Froelich also alleged
fraud, claiming that Erickson and the SCL Board had agreed, at the
time of the 1996 leveraged buy-out of SCL, that Erickson would
relinquish authority to run SCL and not disparage SCL, when in fact
they knew that Erickson would not honor this agreement. In addition,
Froelich asserted rights to severance pay and to a statutory appraisal
FROELICH v. SENIOR CAMPUS LIVING 5
(the latter of which had allegedly been triggered by the November 5,
1997 reclassification and subsequent squeeze-out merger).
Judge Benson Legg granted summary judgment to SCL on all alle-
gations of fraud and breach of fiduciary duty. See Froelich v. Erick-
son, 96 F. Supp. 2d 507, 511 (D. Md. 2000). However, Judge Legg
granted summary judgment to Froelich with respect to his claim for
severance pay and his demand for a statutory appraisal. Id. at 511. As
to the latter, the judge concluded that “Froelich is entitled to appraisal
rights” and that appraisers would be appointed to value Froelich’s
interest in SCL “as of November 5, 1997, which is just prior to the
reclassification.” Id. at 511, 528. In an unpublished opinion, we
affirmed in all respects the judgment entered by Judge Legg. Froelich
v. Senior Campus Living, LLC, No. L-98-694, 2001 WL 256080 (4th
Cir. Mar. 15, 2001).
Judge Legg then followed the procedures set forth in Md. Code
Ann., Corps. & Ass’ns § 3-210(a) (1999) and appointed three disin-
terested appraisers, whom SCL and Froelich had recommended, to
value SCL as of November 5, 1997. The appraisers appointed to per-
form the valuation were Patrick O. Ring, Joseph T. Gardemal, and
Robert A. Frank. Patrick O. Ring, the panel chairman, received an
MBA in financing from Wharton, worked as a bank officer for almost
twenty years, wrote over thirty articles on business valuation and
other financial subjects, and since 1992 had worked with the Baker-
Meekins Company, Inc., a business valuation company. Joseph T.
Gardemal, another panel member, was certified as a public accoun-
tant, fraud examiner, valuation panelist, and government financial
manager, and had worked in a number of accounting firms on busi-
ness valuation and related financial matters and was currently work-
ing with Capital Analysis Group, a financial consulting firm, in which
he was responsible for business valuation and litigation support.
Finally, Robert A. Frank was a chartered financial analyst, who had
worked as a managing director of a real estate securities research
group and was currently serving as the managing director of InCap
Group, Inc.
The parties agreed that Magistrate Judge Paul W. Grimm would
preside over the appraisal proceedings. The parties submitted two
bound volumes of exhibits and deposition excerpts to the three
6 FROELICH v. SENIOR CAMPUS LIVING
appraisers, who heard testimony from witnesses for three days in
March 2002. The appraisers considered evidence that included a letter
dated December 22, 1997, from an SCL Board Member to Coopers
stating that SCL “has been unable to secure financing to further
develop the ‘Future Projects’ [including Greenspring],” despite the
fact that as of the November 5, 1997 valuation date, arrangements for
financing the Greenspring project were in place (except for provision
of $35 million in personal guarantees from Erickson) and that SCL
actually closed on the Greenspring project on November 6, 1997. The
appraisers also heard testimony from Coopers officials indicating that
Coopers had relied on these representations in its appraisal. Addition-
ally, an Equitable official testified that Equitable might have been
willing to close on the Greenspring deal without Erickson’s $35 mil-
lion guarantee as long as the full $55 million in construction financing
was in place. Froelich also presented the appraisers with evidence
regarding the willingness of other financial institutions to invest in
SCL.
After considering this and other evidence, the appraisers heard
closing arguments and received lengthy memoranda from the parties.
On June 17, 2002, the panel issued majority and minority reports; all
three appraisers determined that the value of SCL as of November 5,
1997, was $176 million, which was $21 million higher than Coopers’
$155 million valuation.
Two members of the panel, Ring and Gardemal, issued a thirty-
four page majority report, which used two separate valuation methods
to value SCL at $176 million. Ring and Gardemal’s first method ana-
lyzed the approaches used in the three appraisal reports submitted to
the panel (the Coopers report, as well as two additional reports — one
commissioned by each of the parties), and then determined which
approach arrived at the most reasonable conclusion as to the fair value
of each SCL property. In this lead analysis, Ring and Gardemal
adopted the $34 million valuation of the Greenspring project calcu-
lated by Froelich’s appraiser, Thomas Nagle of Valuation Counselors,
rather than Coopers’ $6.325 million valuation of Greenspring or the
$20.94 million valuation advanced by the expert commissioned by
SCL. Ring and Gardemal also adopted Nagle’s valuations for all of
SCL’s current projects (which were generally lower that those offered
by Coopers), and adopted estimates significantly lower than Nagle’s
FROELICH v. SENIOR CAMPUS LIVING 7
for SCL’s other future projects. Thus, the majority panelists’ higher
appraisal for Greenspring largely explains why their $176 million
total valuation of SCL significantly exceeded Coopers’ $155 million
total valuation.1
To “test the validity” of the $176 million total valuation based on
their lead analysis, Ring and Gardemal conducted an alternative inde-
pendent valuation analysis, which used cash flow projections pro-
vided by SCL management. This alternative valuation confirmed the
$176 million value they had reached in the lead analysis. Further, the
third member of the panel, Robert Frank, filed an eighteen-page sepa-
rate report, in which he employed still a different valuation method
to arrive at an identical total value for SCL of $176 million as of
November 5, 1997.
Both SCL and Froelich filed objections seeking modification of the
appraisal assessment. Judge Grimm heard extensive oral argument,
and then, in a thorough and persuasive oral opinion, denied the objec-
tions and adopted the appraisal panel’s unanimous conclusion that the
value of SCL as of November 5, 1997, was $176 million. Judge
Grimm concluded that SCL had not shown that any part of the Green-
spring valuation conflicted with “Judge Legg’s ruling that the deci-
sion of the board of directors fell within the protection of the business
judgment rule,” nor had it presented evidence sufficient to convince
him that the panel had erroneously included value created by the
reclassification by failing to adjust for Erickson’s $35 million in per-
sonal guarantees. Further, Judge Grimm held that even if he had
found the majority’s lead analysis to be defective, he would have sim-
ply adopted the majority’s alternative analysis or Frank’s minority
report as his own valuation, and that this would have “correct[ed] the
error.” Judge Grimm entered final judgment in favor of Froelich in
the amount of about $11.2 million, representing the value of his inter-
est in SCL on November 5, 1997, and pre-judgment interest.
SCL noted a timely appeal; Froelich does not cross appeal.
1
The majority panelists’ lower appraisal for most of SCL’s other future
projects meant that their estimate for the total value of SCL was $72 mil-
lion lower than Nagle’s $248 million assessment.
8 FROELICH v. SENIOR CAMPUS LIVING
II.
The Maryland General Assembly first authorized corporate consol-
idations and mergers in 1868. See Roselle Park Trust Co. v. Ward
Baking Corp., 9 A.2d 228, 231 (Md. 1939). Four decades later, in
1908, the General Assembly enacted legislation providing a stock-
holder objecting to a consolidation, merger, or sale of all corporate
assets the right to demand fair value for his interests, as determined
by a statutory appraisal. See Warren v. Baltimore Transit Co., 154
A.2d 796, 798 (Md. 1959); Am. Gen. Corp. v. Camp, 190 A. 225, 227
(Md. 1937). This legislation was intended to overcome the problem,
which had “proved in the past a disadvantage to the other stockhold-
ers,” of objecting stockholders blocking mergers or consolidations
arguably beneficial to the corporation, “and, at the same time, to pro-
tect” fully the property rights of the objecting stockholder. Am. Gen.
Corp., 190 A. at 227.
Thus for almost a century, Maryland has provided by statute that:
(1) “by compliance with prescribed conditions and procedure” one
Maryland corporation can be consolidated with, or merged into,
another, or sell substantially all of its assets, with the approval of less
than all of the stockholders, id., but (2) stockholders objecting to the
consolidation, merger, or sale of substantially all corporate assets,
upon satisfaction of certain conditions, have the absolute statutory
“right to demand and receive payment of the fair value of the stock-
holder’s stock from the successor,” Md. Code Ann., Corps. & Assn’s
§ 3-202(a) (1999).2 See Md. Code Ann., Corps. & Assn’s §§ 3-101 et
seq. (1999). See generally, J.J. Hanks, Jr., Maryland Corporation Law
§ 10.1-10-8 at 329-43 (1990 and 2002 supp.) (hereinafter “Hanks”);
B. Manning, The Stockholders Appraisal Remedy: An Essay for
Frank Coker, 72 Yale L.J. 223 (1962).
2
Md. Code Ann., Corps. & Assn’s § 4A-705 (1999) confers on “[a]
member of a limited liability company objecting to a merger of the lim-
ited liability company” the “same rights with respect to the member’s
interest in the limited liability company as a stockholder of a Maryland
corporation who objects has with respect to the stockholder’s stock
under” Md. Code Ann., Corps. & Assn’s §§ 3-202 et seq. (1999).
FROELICH v. SENIOR CAMPUS LIVING 9
The Maryland General Corporation Law directs that this “fair
value” is to be determined by an appraisal performed by three court-
appointed “disinterested appraisers.” Md. Code Ann. Corps. & Assn’s
§ 3-210(a) (1999). The statute sets forth the valuation date, providing
that, with exceptions inapplicable here, “fair value is determined as
of the close of business . . . on the day the stockholders voted on the
transaction objected to” (which the parties agree is November 5, 1997
in this case). § 3-202(b)(1)(ii). The statute further provides that, again
with inapplicable exceptions, “fair value may not include any appreci-
ation or depreciation which directly or indirectly results from the
transaction objected to or from its proposal.” § 3-202(b)(2). It also
sets forth in some detail the procedure to be followed in obtaining a
statutory determination of "fair value," including the time in which an
objecting stockholder can exercise his appraisal right, the required
notices, and the content of the petition for appraisal. See §§ 3-203 to
3-208. Finally, the statute provides that the court shall, after consider-
ation of the appraisers’ report and on motion of any party, “enter an
order which . . . [c]onfirms, modifies, or rejects it.” § 3-211(a)(1).
The Maryland General Corporation Law does not, however, further
define or describe “fair value.”3 Nor does it set forth the standard a
court should employ in reviewing the appraisers’ determination of
“fair value.” Moreover, notwithstanding the venerable history of the
Maryland statutory appraisal right, few cases have discussed the
meaning of “fair value” or the role of courts in reviewing the statutory
appraisers’ resolution of that question. In those few cases, however,
Maryland’s high court has provided some helpful guidance.
The court has recognized that each corporation poses a “particular”
valuation problem and noted “the manifold possibilities and difficul-
ties of the problem, and the impracticability of the statement of any
rule of uniform application as to the factors of fair value.” Am. Gen.
Corp., 190 A. at 229. The court has also pointed out that “[t]he real
objective is to ascertain the actual worth of that which the dissenter
3
State appraisal statutes “variously” provide a dissenting stockholder
is entitled to “market value,” “fair value,” “value” or “fair cash value.”
H.G. Henn, Law of Corporations § 349 at 1002 (3d ed. 1983). Mary-
land’s high court has noted that these “terms are considered synony-
mous.” Warren, 154 A.2d at 799.
10 FROELICH v. SENIOR CAMPUS LIVING
loses because of his unwillingness to go along with the controlling
stockholders, that is, to indemnify him.” Warren, 154 A.2d at 799.
Thus, although the value of the dissenting stockholder’s stock “should
not be affected by a corporate change in which he refused to partici-
pate,” Am. Gen. Corp., 190 A. at 228, the corporation should, unless
in liquidation, be valued “by assuming that [it] will continue as a
going concern” and “by appraising all material factors and elements
that affect value. . . .” Warren, 154 A.2d at 799; see Hanks, § 10.6
at 340. Accordingly, “that the corporation may not offer [stockhold-
ers] more than the market value does not mean that the appraisers are
so limited.” Burke v. Fid. Trust Co., 96 A.2d 254, 259 (Md. 1953).
Given the complexity and idiosyncracies of the valuation of a dis-
senting stockholder’s interest, it is hardly surprising that the Maryland
courts have concluded that the role of the judiciary in an appraisal
proceeding is “limited.” Warren, 154 A.2d at 800. In recognition that
“[t]he questions involved are rather economic than legal in character,”
courts are to “give great weight to the findings of the appraisers.” Id.
(internal quotation marks omitted). Thus, the standard for judicial
review of an appraisal panel’s determination of fair value is extremely
deferential:
The presumption is that their award is correct, and effect
will be given to their determination unless it appear by clear
and satisfactory evidence that the award was, by reason of
some material and prejudicial error of law, in conduct or of
fact, not the fair value of the stock, without regard to any
depreciation or appreciation thereof in consequence of the
merger or consolidation.
Am. Gen. Corp., 190 A. at 230; accord Warren, 154 A.2d at 800; see
also Burke, 96 A.2d at 259.
With these principles in mind, we turn to SCL’s two challenges
regarding the statutory appraisal in this case.
III.
SCL initially contends that Judge Grimm erred in permitting
Froelich to present certain evidence and arguments to the appraisal
FROELICH v. SENIOR CAMPUS LIVING 11
panel that “directly contradict[ ] the prior, binding judicial rulings of
Judge Legg and this Court.” Brief of Appellant at 4. Specifically, SCL
complains that Judge Grimm ignored Judge Legg’s prior rulings in
permitting Froelich to offer evidence and argument that Coopers’
November 5, 1997 appraisal was flawed because Coopers did not
receive accurate and complete information from Erickson and SCL
officials on which to base its appraisal. Id. at 23. The company asserts
that Froelich’s submissions regarding the Cooper appraisal directly
conflict with Judge Legg’s rejection of Froelich’s fraud and breach of
fiduciary duty claims against SCL and Erickson and Judge Legg’s
finding that “the decisions of the [SCL] Board are protected by the
business judgment rule.” Froelich, 96 F. Supp. 2d at 527.
SCL’s argument rests on a misunderstanding of Judge Legg’s ini-
tial findings, the statutory appraisal process, and the deference
accorded a trial court’s rulings as to the propriety of legal argument
and the admissibility of evidence.
First, Judge Legg never addressed most of the grounds on which
SCL objects to Froelich’s evidence and argument. For example, in
granting summary judgment to Erickson and SCL on Froelich’s fraud
counts, Judge Legg understandably addressed only Froelich’s relevant
allegations, i.e., that Erickson and the SCL Board had fraudulently
represented to Froelich in the 1996 leveraged buy-out of SCL that
Erickson would relinquish authority to run SCL and not make dispar-
aging remarks about the company when they knew he had no inten-
tion of honoring this agreement. Froelich, 96 F. Supp. 2d. at 522-23.
Similarly, in granting Erickson summary judgment on Froelich’s
breach of fiduciary duty claim, Judge Legg only rejected Froelich’s
contention that “Erickson usurped a corporate opportunity by retaking
control of the company and its profitability,” finding “no credible evi-
dence that Erickson created [a financial] crisis” or that the SCL Board
did not actually view Erickson’s proposal as the best alternative for
the company. Id. at 526-27. Nowhere in these rulings, or his rulings
on Froelich’s other counts, did Judge Legg even discuss SCL’s provi-
sion of information to Coopers.
Certainly, Judge Legg never determined the factual accuracy of the
financing information SCL submitted to Coopers. Contrary to SCL’s
suggestions, Judge Legg’s ruling that the business judgment rule pro-
12 FROELICH v. SENIOR CAMPUS LIVING
tected the SCL Board does not equate to a finding that the Board’s
decisions were correct. The business judgment rule simply requires
courts to defer to the decisions of corporate boards unless a challenger
produces evidence establishing that the directors acted fraudulently or
in bad faith, NAACP v. Golding, 679 A.2d 554, 559 (Md. 1996), or
with gross or culpable negligence, Parish v. Maryland & Virginia
Milk Producers Ass’n, 242 A.2d 512, 540 (Md. 1968); see Md. Code
Ann., Corps. & Assn’s § 2-405.1 (1999) (codifying standard of care
required of corporate directors); see also Hanks, § 6.8 at 179-83
(2000 supp.). Under the business judgment rule, “[a]ll that is
required” of directors is that they “act reasonably and in good faith
in carrying out their duties”; they “are not expected to be incapable
of error.” NAACP, 679 A.2d at 559 (emphasis added) (internal quota-
tion marks and citation omitted).4
We recognize that Froelich’s arguments that Erickson or other SCL
officials withheld relevant information from Coopers resulting in fatal
flaws in Coopers’ valuation may be in some tension with Judge
Legg’s rejection of Froelich’s fraud and breach of fiduciary duty
claims. But that tension does not constitute an irreconcilable conflict.
Judge Legg found Froelich entitled to a statutory appraisal at the very
same time he rejected Froelich’s fraud and fiduciary duty claims.
Moreover, Judge Legg explicitly recognized that Froelich’s likelihood
of success before the appraisers depended upon his ability to prove to
them “that the Coopers and Lybrand appraisal was flawed.” Froelich,
96 F. Supp. 2d at 528 n.25. This entirely accords with the long-
established view of the Maryland Court of Appeals that, without any
proof of fraud, majority and minority stockholders may hold a “wide
variance in opinion” as to the value of a corporation, necessitating a
statutory appraisal. See Homer v. Crown Cork & Seal Co., 141 A.
425, 432 (Md. 1928); accord Lerner v. Lerner, 511 A.2d 501, 506
(Md. 1986); see also Walk v. Baltimore & Ohio R.R., 847 F.2d 1100,
1107 (4th Cir. 1988) (noting, in the course of applying Maryland law,
that “allegations of ‘fraud’ are often nothing more than disagreements
about methods of valuation, which are more appropriately resolved in
4
SCL points to no authority suggesting that the business judgment rule
applies to statutory appraisals, such that appraisers must similarly defer
to a board’s conclusions. Such a requirement would, of course, undercut
the very purpose of having an independent statutory appraisal.
FROELICH v. SENIOR CAMPUS LIVING 13
the statutory appraisal proceeding”), vacated on other grounds by 492
U.S. 914 (1989).
Indeed, the very purpose of the statutory appraisal in this case —
to value the company to determine the fair value of Froelich’s interest
as of November 5, 1997 — virtually required the appraisers to con-
sider all evidence as to any shortcomings in the Coopers appraisal.
Section 3-202(a) directs statutory appraisers to determine the “fair
value” of a stockholder’s interest in the corporation; in doing so, the
appraisers must consider “all material factors and elements that affect
value.” Warren, 154 A.2d at 799 (emphasis added). Because Coopers
valued SCL at less than $160 million as of November 5, the reclassifi-
cation of the company approved on that date resulted in a total elimi-
nation of Froelich’s interest. The validity of the Coopers appraisal,
therefore, certainly constituted a “material factor[ ] affect[ing] [the]
value” of Froelich’s interest, which, under Warren, the statutory
appraisers were required to consider.
Finally, SCL’s argument completely ignores the operative standard
of review when examining rulings challenging legal arguments as
improper or evidence as inadmissible, under which we will vacate a
judgment only if the trial court abused its discretion. See Rowland v.
Am. Gen. Fin., Inc., 340 F.3d 187, 194 (4th Cir. 2003); Arnold v. E.
Air Lines, Inc., 681 F.2d 186, 194-95 (4th Cir. 1982). Because of a
trial judge’s “superior vantage point” we defer to him or her in such
matters even in jury trials, see, e.g., Arnold, 681 F.2d at 197, when
any improper argument or inadmissible evidence could mislead lay
people. This deference seems all the more appropriate in statutory
appraisal proceedings in which three sophisticated business people
determine the primarily economic question of corporate value. See
Warren, 154 A.2d at 800-01.
Our close review of the record here reveals no abuse of discretion.
Rather, Froelich presented the appraisers with a very substantial
amount of appropriate evidence and argument supporting his conten-
tion that the Coopers appraisal lacked validity. Accordingly, contrary
to SCL’s contentions, it was well within the district court’s discretion
to find that any fragments of improper argument or inadmissible evi-
dence did not “unfairly prejudic[e]” the company. Brief of Appellant
at 16. Indeed, we note that Judge Grimm’s patient superintending of
14 FROELICH v. SENIOR CAMPUS LIVING
numerous documents and complicated testimony and his scrupulous
consideration of the parties’ legal contentions before, during, and
after the appraisal hearings evidence the utmost care, rather than any
abuse of discretion.
IV.
SCL also contends that we must reject the statutory appraisal
because it includes appreciation in value resulting from the very
reclassification of SCL stock to which Froelich objected. As noted
above, the Maryland General Corporation Law expressly prohibits
appraisers from including in their “fair value” determination “any
appreciation . . . which directly or indirectly results from the transac-
tion objected to or from its proposal.” § 3-202(b)(2) (emphasis
added).
According to SCL, the November 5 reclassification was needed to
obtain Erickson’s agreement to pledge guarantees of $35 million,
which in turn were needed to secure the $80 million in financing com-
mitments for the November 6 closing on the Greenspring project.
Therefore, in the company’s view, any value evidenced by the $80
million closing necessarily derived from the $35 million in guarantees
that “result[ed] from” the reclassification and so should not have been
considered by the appraisers in determining SCL’s fair value as of
November 5.
Unquestionably, Ring and Gardemal did consider the $80 million,
November 6 financing of Greenspring in their lead analysis; they
explained that they viewed “SCL’s November 6, 1997, closing on the
Springfield financing” as “a subsequent event that provides evidence
of value that existed as of the [November 5] valuation date.” How-
ever, SCL has not presented “clear and satisfactory evidence” that, in
so considering the November 6 closing, the appraisers necessarily
incorporated value resulting from the reclassification in violation of
§ 3-202(b)(2). Warren, 154 A.2d at 800 (quoting Am. Gen. Corp., 190
A. at 230).
To start, the mere fact that the appraisers took into account an
event that occurred subsequent to the November 5 valuation date and
the reclassification does not, in and of itself, violate § 3-202(b)(2).
FROELICH v. SENIOR CAMPUS LIVING 15
Indeed, SCL itself acknowledges that “an event occurring subsequent
to the valuation date may be considered in hindsight as evidence of
value that likewise existed as of the valuation date, even if the subse-
quent event was not foreseeable on the valuation date.” Brief of
Appellant at 32.
Moreover, the evidence in the record does not compel the conclu-
sion that approving the reclassification in exchange for Erickson’s
$35 million in guarantees was in fact the only way to close on the
financing for Greenspring, as opposed to one option among several
that might fall within the discretion of the SCL Board under the busi-
ness judgment rule. That is, the evidence does not show that declining
to approve the reclassification would have precluded SCL from mov-
ing forward on the Greenspring project. The record shows that most
of the financing for Greenspring was in place well before the reclassi-
fication was even proposed. Further, Froelich presented evidence that
numerous investors were willing to invest in SCL; he also presented
the testimony of an Equitable official who suggested that Equitable
might have been willing to close on the Greenspring deal without the
guarantees. Indeed, even SCL’s own expert opined that SCL “could
have obtained the financing for one Future Project absent John Erick-
son’s financial support.” In light of this evidence, the appraisers were
justified in their conclusion that “[w]ith $134.4 million in equity
value [for current SCL projects] at the valuation date, the assumption
that $80 million in financing commitments would be available for at
least one new project in 1998 is entirely reasonable.”5
Operating under this legitimate assumption, the appraisers were
certainly free to conclude that approving the reclassification in
exchange for the $35 million in guarantees was, at most, merely one
5
SCL argues that if the $134 million in equity were suddenly encum-
bered with the liability of the $80 million in financing for Greenspring
without the guarantees, its value would have to be adjusted downward
(making it impossible to escape the need to make an adjustment down-
ward for the guarantees). But Froelich notes that a hypothetical outside
buyer — whose perspective the panel must adopt in its valuation —
would not necessarily have to immediately siphon off $65 million in
equity, as Erickson planned to do, upon the sale of one of SCL’s projects,
and that this would make up for any extra encumbrance on the equity.
16 FROELICH v. SENIOR CAMPUS LIVING
option among several for providing the final bit of financing needed
to close on the Greenspring deal, and not an indispensable step, the
absence of which would have prevented any closing from occurring.
Thus, the appraisers could reasonably look to the November 6 closing
for evidence of the Greenspring project’s financeability (and hence
value) on November 5, as long as they subtracted whatever they
assessed the value or cost of that final bit of financing (in this case,
the value of the $35 million guarantees) to be, from the perspective
of a hypothetical outside investor. The fact that Gardemal and Ring
state that they took the November 6 closing only as evidence that SCL
had “substantially all of the required financing in place,” (emphasis
added) — not all of the financing in place — suggests that the
appraisers did, indeed, subtract those elements of the financing
(namely the $35 million in personal guarantees) that actually resulted
from the reclassification.
True, Ring and Gardemal never explained in their lead analysis
exactly how they accounted for the additional value of the $35 million
in guarantees in their valuation. However, given the “presumption
. . . that [the appraisers’] award is correct,” we cannot take the mere
absence of an explicit explanation as “clear and satisfactory evidence”
that the majority panelists failed to consider (and properly discount
any value added by) the guarantees. Warren, 154 A.2d at 800 (quot-
ing Am. Gen. Corp., 190 A. at 230). This is particularly so given that
the record not only reveals the appraisal panel’s awareness and con-
cern about the guarantees (both in their review of the facts involving
these guarantees in their report, and in the questions they posed about
the guarantees during the appraisal hearing), but also suggests a num-
ber of ways in which they could have engaged in the analysis and
reached the result that they did, yet still afforded proper treatment to
the guarantees.
For one, if, as just suggested, Ring and Gardemal concluded that
SCL’s equity sufficed to finance Greenspring and that the $35 million
in guarantees were therefore not actually necessary, they may well
have determined that the guarantees did not significantly affect the
value of SCL as of the November 5 valuation date, from the perspec-
tive of a hypothetical outside investor.
Alternatively, Ring and Gardemal could have reasoned that they
did make a significant downward adjustment in value to take into
FROELICH v. SENIOR CAMPUS LIVING 17
account the guarantees by adopting Nagle’s valuation for Greenspring
and for all of SCL’s current projects. Nagle testified that he accounted
for the value of the guarantees in his total estimate of SCL’s value by,
as SCL itself recognizes, “adding one percentage point to his discount
rates on all SCL assets, across the board.” Nagle estimated this
increase in the discount rate had a total impact of a $17 million down-
ward adjustment, which he testified would “more than offset the pro-
vision of a guarantee.” By adopting Nagle’s valuation of Greenspring
and all current projects, then, Ring and Gardemal subsumed a large
proportion of Nagle’s $17 million downward adjustment in their $176
million appraisal. While they did not adopt all of Nagle’s valuations
(they adopted valuations for the remaining projects that totaled $56
million less than Nagle’s), the appraisers certainly did not have to
incorporate the entirety of Nagle’s estimate of the value of the guar-
antees, which Nagle himself suggested was generous.
Finally, even if we were to conclude that the statutory appraisers
erroneously failed to consider the $35 million in additional guarantees
in their lead analysis, which we do not, we could simply adopt, as our
own valuation, the majority report’s alternative analysis or the minor-
ity report’s analysis, both of which came to an identical valuation of
$176 million. SCL has advanced no substantive challenge to the
approaches used in either the alternative or minority analysis.6 We
note that Frank’s report, in particular, specifically states that he
accounted for SCL’s need for “outside financing in the form of a $35
million guarantee,” by “heavily discount[ing] the Greenspring proj-
ect” and adopting a discount rate of 33.1%, nearly as large as that
used by Coopers.
6
SCL simply argues that we cannot adopt Ring and Gardemal’s alter-
native analysis because they intended it to be only a “test,” and that we
cannot adopt Frank’s minority report because Md. Code Ann., Corps. &
Assn’s § 3-210(b) states that the “conclusion of the majority as to the fair
value of the stock” shall be filed with the court. See Reply Brief of
Appellant at 22-24. Those arguments are totally unpersuasive. Section 3-
211(b)(2)(ii) empowers a court reviewing the appraisers’ fair value
assessment to substitute its own valuation in place of the appraisers’ if
it rejects the appraisers’ award. Therefore, nothing would prevent us
from adopting, as our own, the alternative valuation or Frank’s valuation.
18 FROELICH v. SENIOR CAMPUS LIVING
Thus, SCL’s second challenge to the statutory appraisal fares no
better than its first.
V.
For all of these reasons, the judgment of the magistrate judge is
AFFIRMED.