Cheng v. Coastal LB Associates CA2/2 ( 2021 )


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  • Filed 9/1/21 Cheng v. Coastal LB Associates CA2/2
    NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
    California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
    not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has
    not been certified for publication or ordered published for purposes of rule 8.1115.
    IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
    SECOND APPELLATE DISTRICT
    DIVISION TWO
    BERNICE CHENG,                                             B303519
    Plaintiff and Appellant,                          (Los Angeles County
    Super. Ct. No. BC680509)
    v.
    COASTAL LB ASSOCIATES et
    al.,
    Defendants and
    Respondents.
    APPEAL from an order of the Superior Court of Los
    Angeles County, Dennis Landin, Judge. Affirmed.
    Robert D. Feighner for Plaintiff and Appellant.
    Einwechter & Hyatt and John P. Einwechter for
    Defendants and Respondents.
    ******
    This action concerns the purchase of minority interests in a
    California limited liability company pursuant to Corporations
    Code section 17707.03, subdivision (c).1 The subject limited
    liability company, Clary Associates, LLC (the LLC), is owned
    equally by siblings Bernice Cheng (appellant), Arlene Cheng
    (Arlene), Caroline Cheng Jones (Caroline), and Diana Cheng
    (Diana).2 Appellant challenges the trial court’s order confirming
    a majority appraisers’ award valuing the parties’ respective 25
    percent interests in the LLC at a discounted fair market value of
    $623,979 and setting a final buyout price of $621,954.
    We affirm the trial court’s order.
    BACKGROUND
    Involuntary dissolution action and election pursuant to
    section 17707.03
    Appellant filed an action for involuntary dissolution of the
    LLC in October 2017. Respondents moved for an order staying
    the dissolution action and electing to purchase appellant’s and
    Arlene’s interests in the LLC pursuant to section 17707.03. The
    parties thereafter stipulated to an order staying the dissolution
    action and appointing three appraisers to determine the fair
    market value of their respective 25 percent interests in the LLC
    “using generally accepted appraisal and reporting methods and
    standards” under section 17707.03. The parties stipulated that
    “[t]he term ‘fair market value’ shall be defined as commonly
    1       All further statutory references are to the Corporations
    Code.
    2     Because the parties share the same surname, we refer to
    them by their first names to avoid confusion. Caroline and Diana
    are referred to collectively as respondents.
    2
    understood in the appraisal industry, California statutes, and
    precedents which have applied Corp. Code 17707.03.” The
    parties further stipulated that “[t]he award of the appraisers, or a
    majority of them when confirmed by the court, shall be final and
    conclusive upon all parties, pursuant to § 17707.03(c)(3).” The
    parties’ stipulation also stated: “Arlene and Bernice have not
    alleged any direct or derivative claims for damages against any
    defendant in this case.[3] Arlene and Bernice reserve the right to
    assert such claims in the future if any evidence supporting such
    allegations comes to light, to the extent permitted by existing
    law, and to seek a lifting of the stay to the extent permitted by
    existing law. Caroline and Diana reserve the right to oppose any
    such requests.”
    Pursuant to the parties’ stipulation, the trial court
    appointed John Thomson, Gazelle Wichner, and Laurence
    Sommer as appraisers. At the time of the appraisal, the LLC’s
    sole asset was a single-story industrial warehouse located in San
    Gabriel, California. The building, which was appraised at $3
    million in March 2018, was occupied by a single tenant whose
    five-year lease term was set to expire sometime in 2021. The
    three appraisers worked separately on their initial individual
    valuation reports, and each reached a different valuation.4
    3     Appellant’s first amended complaint (FAC), the operative
    pleading at the time the parties entered into the stipulation,
    asserted causes of action for dissolution and partition only. As
    the basis for dissolution, the FAC alleged, among other grounds,
    mismanagement of the property owned by the LLC and
    respondents’ “persistent and pervasive fraud, mismanagement
    and/or abuse of authority.”
    4     Thomson calculated a value of $3,252,791 and applied a 31
    percent discount, for a fair market value of $561,000. Wichner
    3
    Respondents filed a motion asking the trial court to
    instruct the appraisers to determine whether they could agree on
    a consensus valuation. Appellant opposed the motion. The trial
    court granted respondents’ motion and instructed the appraisers
    to review their respective reports, confer with each other, and
    submit their joint conclusions as to the fair market value of the
    LLC interests.
    The appraisers submitted a joint final report on August 20,
    2019. In their joint report, the appraisers unanimously agreed on
    a net asset value of $831,973 for a 25 percent interest in the LLC
    as of October 20, 2017. The report stated that a majority of the
    appraisers agreed that the fair market value standard required
    consideration of discounts and “the value should be $623,979
    after the application of a 27% discount applicable to a minority
    interest in the Clary Associates, LLC.”
    Respondents moved to confirm the appraisers’ valuation on
    September 4, 2019. Appellant opposed the motion.
    The parties then stipulated to an order allowing appellant
    to file a third amended complaint (TAC) in the stayed dissolution
    action.5 The TAC, filed on October 15, 2019, and the operative
    calculated a value of $3,040,000 and applied a 23 percent
    discount, for a fair market value of $610,000. Sommer calculated
    a value of $906,973 and concluded no discount was warranted.
    5      Appellant filed a second amended complaint on July 17,
    2019, asserting new derivative causes of action for
    mismanagement and breach of fiduciary duty. Respondents
    notified appellant of their intent to demur on the grounds that
    the new derivative causes of action failed to allege statutory
    prerequisites for derivative actions and failed to allege sufficient
    facts to constitute any claims for mismanagement or breach of
    fiduciary duty. Appellant agreed to withdraw the derivative
    4
    pleading at the time of the LLC buyout, asserts causes of action
    for dissolution of the LLC, partition, and an accounting. As
    grounds for dissolution, the TAC alleges, among other grounds,
    mismanagement and conflicts of interest by respondents.
    On November 12, 2019, the trial court confirmed the
    appraisers’ discounted fair market valuation of a 25 percent
    interest in the LLC at $623,979. Pursuant to an agreement by
    the parties, the trial court ordered an additional deduction of
    $2,025 for reimbursement of appraisal fees and set a final buyout
    price of $621,954 for a 25 percent interest in the LLC. The trial
    court ordered respondents to prepare the necessary documents
    and to tender payment to complete the purchase of appellant’s
    and Arlene’s respective LLC interests by January 31, 2020.
    Appellant filed this appeal on January 8, 2020.
    CONTENTIONS ON APPEAL
    Appellant raises the following contentions on appeal:
    I. The trial court’s order instructing the appraisers to
    review each other’s reports, confer with one another, and reach a
    consensus on the fair market valuation did not comply with the
    statutory procedures set forth in section 17707.03. That statute,
    appellant maintains, required the trial court either to confirm
    one of the three valuations initially submitted by the appraisers
    or to make a de novo determination of the fair market value of
    the LLC interests.
    II. The consensus valuation confirmed by the trial court
    improperly discounted the fair market value of the LLC interests.
    claims, and respondents stipulated to allow the filing of the TAC
    without any direct or derivative claims of mismanagement or
    breach of fiduciary duty.
    5
    Such discounts are disallowed under section 2000, which governs
    the buyout of shareholder interests in closely held corporations,
    and appellant argues that discounts should similarly be
    disallowed under section 17707.03.
    III. The valuation confirmed by the trial court improperly
    failed to account for appellant’s mismanagement allegations.
    DISCUSSION
    I.     Applicable law and standard of review
    Section 17707.03, subdivision (a), authorizes any member
    of a limited liability company to file an action to dissolve the
    limited liability company in certain specified circumstances. The
    statutory grounds for dissolution include “[t]he management of
    the limited liability company is deadlocked or subject to internal
    dissension” (§ 17707.03, subd. (b)(4)), and “[t]hose in control of
    the limited liability company have been guilty of, or have
    knowingly countenanced, persistent and pervasive fraud,
    mismanagement, or abuse of authority” (§ 17707.03, subd. (b)(5)).
    In any action for judicial dissolution, the other members of
    the limited liability company may avoid the dissolution by
    purchasing for cash the fair market value of the interests owned
    by the members initiating the dissolution proceeding.
    (§ 17707.03, subd. (c)(1).) If the parties are unable to agree on a
    value, then “[t]he court shall appoint three disinterested
    appraisers to appraise the fair market value of the membership
    interests owned by the moving parties, and shall make an order
    referring the matter to the appraisers so appointed for the
    purpose of ascertaining that value. . . . The award of the
    appraisers or a majority of them, when confirmed by the court,
    6
    shall be final and conclusive upon all parties.” (§ 17707.03, subd.
    (c)(3).)
    The appraisers’ award does not bind the trial court. The
    court may select among conflicting appraiser opinions or decide
    the matter de novo. (Dickson v. Rehmke (2008) 
    164 Cal.App.4th 469
    , 475 (Dickson).) The trial court’s valuation order is
    appealable. (§ 17707.03, subd. (c)(3); Dickson, at p. 476.) We
    review the trial court’s valuation order under the substantial
    evidence standard. (Dickson, at p. 477.) We review de novo
    appellant’s challenge to the trial court’s statutory authority to
    order the appraisers to meet and confer and attempt to reach a
    consensus valuation. (See Mart v. Severson (2002) 
    95 Cal.App.4th 521
    , 530 [trial court’s interpretation of statutory
    standard for valuation subject to de novo review]; City of Desert
    Hot Springs v. Valenti (2019) 
    43 Cal.App.5th 788
    , 793
    [determination of proper scope of trial court’s authority under
    statute is a matter of statutory construction subject to de novo
    review].)
    II.     Alleged failure to follow statutory procedures
    A.    Section 17707.03 does not prohibit the trial
    court from ordering the appraisers to meet and
    confer and does not require the trial court to
    make a de novo determination of value
    The trial court’s order instructing the appraisers to review
    each other’s reports, confer with one another, and attempt to
    reach a consensus valuation did not contravene the statutory
    procedures set forth in section 17707.03. The statute provides in
    pertinent part:
    “The court shall appoint three disinterested
    appraisers to appraise the fair market value of the
    membership interests owned by the moving parties,
    7
    and shall make an order referring the matter to the
    appraisers so appointed for the purpose of
    ascertaining that value. The order shall prescribe
    the time and manner of producing evidence, if
    evidence is required. The award of the appraisers or
    a majority of them, when confirmed by the court,
    shall be final and conclusive upon all parties.”
    (§ 17707.03, subd. (c)(3).)
    Nothing in the statutory language prohibits or restricts the trial
    court’s authority to order the appraisers, if unable initially to
    reach a majority consensus on valuation, to confer further with
    each other to determine whether such a consensus can be
    achieved. Similarly, nothing in the statutory language requires
    the trial court to make a de novo determination of value in the
    absence of a consensus valuation determined by a majority of the
    appraisers.
    B.    Case authority does not require the trial court
    to make a de novo determination of value
    Case authority interpreting and applying the buyout
    procedures of section 17707.03 is sparse. Absent such authority,
    courts have looked to cases applying section 2000, which
    prescribes similar buyout procedures to avoid dissolution of a
    closely held corporation.6 (Dickson, supra, 164 Cal.App.4th at
    6     Section 2000 provides that shareholders representing 50
    percent or more of the voting power of a closely held corporation
    may avoid the dissolution of the corporation by purchasing at fair
    value the shares owned by those initiating the dissolution
    proceeding. (§ 2000, subd. (a).) The statute sets forth a
    procedure similar to that in section 17707.03 for the court to
    appoint three disinterested appraisers to ascertain fair value.
    Section 2000 similarly provides that “[t]he award of the
    8
    pp. 474-475.) Cases decided under section 2000 do not support
    appellant’s argument that the trial court was required to make a
    de novo determination of value.
    The court in Brown v. Allied Corrugated Box Co. (1979) 
    91 Cal.App.3d 477
     (Brown) expressly rejected appellant’s position in
    the context of a shareholder buyout under section 2000: “We find
    absolutely no merit in plaintiffs’ contention that a trial court
    faced with highly conflicting appraisal reports is obligated to
    make a de novo determination of value. Plaintiffs’ authority for
    this proposition, Venables v. Credential Ins. Agency, Inc. [(1956)]
    
    140 Cal.App.2d 724
    , says no such thing. Rather, the court in that
    case merely held that if the trial court becomes convinced that an
    appraisal award is erroneous, then it becomes the duty of the
    court to examine the matter de novo.” (Brown, at p. 491.)
    In accord with Brown, the section 2000 cases appellant
    cites conclude that a de novo determination of value is required
    only when the trial court finds the appraisers’ award to be
    erroneous or incorrect. (Cotton v. Expo Power Systems, Inc.
    (2009) 
    170 Cal.App.4th 1371
    , 1376 (Cotton) [“[I]f the court
    concludes that the appraisers’ award is incorrect, rather than
    confirm the award, the court must examine the matter de novo
    and fix the correct value.”]; Brown, supra, 91 Cal.App.3d at
    p. 489; Venables v. Credential Ins. Agency, Inc., supra, 140
    Cal.App.2d at p. 727 (Venables).)7 The trial court in this case did
    appraisers or of a majority of them, when confirmed by the court,
    shall be final and conclusive upon all parties.” (§ 2000, subd. (c).)
    7     Brown and Venables involved shareholder buyouts under
    former sections 4658 and 4659, predecessor statutes to section
    2000. (See Legis. Com. com., Deering’s Ann. Code Corp. Code,
    § 2000 (2009) pp. 432-433.)
    9
    not find any of the three appraisal valuations to be erroneous. A
    de novo determination of value accordingly was not required.
    Brown, supra, 
    91 Cal.App.3d 477
     also contradicts
    appellant’s claim that the trial court lacked authority to order the
    appraisers, after submitting their initial reports, to meet and
    confer and attempt to reach a consensus valuation. In Brown,
    the trial court’s order appointing the appraisers expressly stated
    that if the appraisers were unable to agree, “‘they shall petition
    the court for instruction.’” (Id. at p. 491.)
    III. Allegedly erroneous determination of fair market
    value
    A.     Minority interest discount
    1.    The valuation discount was not improper
    The appraisal award did not improperly discount the fair
    market value of the LLC interests. The stipulated order
    appellant entered into defines fair market value as that term is
    “commonly understood in the appraisal industry, California
    statutes, and precedents which have applied Corp. Code
    § 17707.03.” A majority of the appraisers agreed that the fair
    market value standard requires consideration of discounts and
    that a 27 percent discount should be applied to the 25 percent
    LLC interests. Wichner and Thomson explained in their
    individual reports that a commonly accepted definition of fair
    market value is set forth in IRS Revenue Ruling 59-60 as “the
    price at which the property would change hands between a
    willing buyer and a willing seller when the former is not under
    any compulsion to buy and the latter is not under any compulsion
    to sell, both parties having reasonable knowledge of the relevant
    facts.” (Rev. Rul. 59-60, 1959-
    1 C.B. 237
    .) That same definition
    has been applied by courts in California. (See, e.g., Rappaport v.
    10
    Gelfand (2011) 
    197 Cal.App.4th 1213
    , 1228 [buyout of limited
    partnership interest]; see also Metropolitan Water Dist. of So.
    California v. Campus Crusade for Christ, Inc. (2007) 
    41 Cal.4th 954
    , 965 [eminent domain]; In re Marriage of Hewitson (1983)
    
    142 Cal.App.3d 874
    , 882, fn. 7 [stock valuation in marriage
    dissolution]; People v. Romanowski (2017) 
    2 Cal.5th 903
    , 914-915
    [value of property in theft offenses]; Mola Development Corp. v.
    Orange County Assessment Appeals Bd. (2000) 
    80 Cal.App.4th 309
    , 321-322 [valuation for real property tax assessment
    purposes].)
    Wichner stated in her report that Revenue Ruling 59-60
    requires discounts to be considered when valuing fractional
    interests. She explained that a lack of control discount “is
    applicable for minority interests, which are interests of less than
    50% in a given asset or entity” and that “[m]inority, non-
    controlling interests in real estate holding companies have
    historically sold at a discount in comparison to their prorata
    share due primarily to lack of control and lack of marketability.”
    Wichner further explained that another reason for discounting
    the minority LLC interests was the general unavailability of
    conventional financing for partial real estate interests.
    Wichner based her discount analysis on sales of real estate
    limited partnership interests in the secondary market. Thomson
    based his discount analysis on valuation principles applied to
    specialized closed end funds holding real estate assets and
    valuation studies involving restricted stock transactions.
    The 27 percent discount applied by a majority of the
    appraisers and confirmed by the trial court is consistent with
    commonly understood fair market valuation principles stipulated
    11
    to by the parties. It is also supported by substantial evidence,
    consisting of Wichner’s and Thomson’s reports and analyses.8
    We disregard appellant’s argument that a ruling in a prior,
    wholly separate trust dispute between the parties has any
    relevance to the valuation analysis and the discount applied in
    this case. The prior case did not concern the buyout of LLC
    membership interests under section 17707.03 or the valuation of
    those interests. It accordingly has no relevance to the issues
    presented here.
    2.     The valuation standard prescribed under
    section 2000 does not apply
    Appellant contends the valuation standards prescribed for
    shareholder buyouts under section 2000 should apply to LLC
    membership purchases under section 17707.03. Section 2000,
    which governs shareholder purchases initiated to avoid
    dissolution of a closely held corporation, “does not permit a lack
    of control discount when determining the fair value of a minority
    shareholder interest.” (Goles v. Sawhney (2016) 
    5 Cal.App.5th 1014
    , 1019; see Ronald v. 4-C’s Electronic Packaging, Inc. (1985)
    
    168 Cal.App.3d 290
    , 298-299; Brown, supra, 91 Cal.App.3d at
    p. 486.) Appellant claims such discounts should similarly be
    disallowed here.
    Appellant’s position contravenes ordinary principles of
    statutory construction. When construing a statute, a court need
    only consider other statutes or case law applying other statutes if
    8     One appellate court has suggested that a trial court’s
    decision to apply a minority discount is within the scope of its
    discretionary authority. (Maughan v. Correia (2012) 
    210 Cal.App.4th 507
    , 523 [“the court’s choice to apply a minority
    discount at all may involve an exercise of its discretion”].)
    12
    the plain language of the statute at issue is unclear. (Hoechst
    Celanese Corp. v. Franchise Tax Bd. (2001) 
    25 Cal.4th 508
    , 519.)
    That is not the case here. Section 17707.03 plainly states that
    members may avoid dissolution of a limited liability company by
    purchasing at “fair market value” the membership interests of
    those seeking dissolution. The commonly accepted definition of
    “fair market value” under California law is the price at which the
    property would change hands between a willing buyer and a
    willing seller when the former is not under any compulsion to buy
    and the latter is not under any compulsion to sell, and both
    parties have reasonable knowledge of the relevant facts.
    (Rappaport v. Gelfand, supra, 197 Cal.App.4th at p. 1228; see
    Metropolitan Water Dist. of So. California v. Campus Crusade for
    Christ, Inc., supra, 41 Cal.4th at p. 965; In re Marriage of
    Hewitson, supra, 142 Cal.App.3d at p. 882, fn. 7; People v.
    Romanowski, supra, 2 Cal.5th at pp. 914-915; Mola Development
    Corp. v. Orange Assessment Appeals Bd., supra, 80 Cal.App.4th
    at pp. 321-322.) Fair market value includes discounts reflected in
    the market. (See Miller, Discounts and Buyouts in Minority
    Investor LLC Valuation Disputes Involving Oppression or Divorce
    (2011) 13 U.Pa. J. Bus. L. 607, 611 (hereafter Miller) [“‘fair
    market value’ would be the owner’s proportionate interest in the
    corporation multiplied by the value of the corporation, plus or
    minus any premiums or discounts that would be reflected in the
    market”]; see also Moll, Shareholder Oppression and “Fair
    Value”: of Discounts, Dates, and Dastardly Deeds in the Close
    Corporation (2004) 
    54 Duke L.J. 293
     [discussing difference
    between “fair value” and “fair market value” in close corporation
    dissolutions].)
    13
    Section 2000, in contrast, specifies that shareholders
    seeking to avoid dissolution of closely held corporation must
    purchase at “fair value” the shares of those seeking dissolution.”
    “Fair value” is defined in section 2000 as “the liquidation value as
    of the valuation date but taking into account the possibility, if
    any, of sale of the entire busines as a going concern in a
    liquidation.” (§ 2000, subd. (a); accord, Mart v. Severson, supra,
    95 Cal.App.4th at p. 526.) Fair value “does not consider market-
    related factors that could affect value in the particular hands of a
    specific owner. Instead, ‘fair value’ considers only ‘the
    proportionate interest in a going concern.’” (Miller, supra, 13
    U.Pa. J. Bus. L. at p. 611; see Brown, supra, 91 Cal.App.3d at
    p. 486; Estate of Rowell (1955) 
    132 Cal.App.2d 421
    , 429.)
    The difference in the statutory language evidences a
    difference in legislative intent. “‘“When the Legislature uses
    materially different language in statutory provisions addressing
    the same subject or related subjects, the normal inference is that
    the Legislature intended a difference in meaning.”’” (American
    Coatings Assn. v. South Coast Air Quality Management Dist.
    (2012) 
    54 Cal.4th 446
    , 463, quoting People ex rel. Lockyer v. R.J.
    Reynolds Tobacco Co. (2005) 
    37 Cal.4th 707
    , 717.) Had the
    Legislature intended to apply a “fair value” standard to
    purchases of membership interests under section 17707.03, it
    would have done so expressly in the statutory language.
    “Fair value,” as defined in section 2000, does not apply to
    purchases of limited liability membership interests under section
    17707.03.
    B.    Mismanagement allegations
    Appellant’s operative TAC asserts no direct or derivative
    claims of mismanagement. Appellant confirmed in the parties’
    14
    joint stipulation and order that she has “not alleged any direct or
    derivative claims for damages against any defendant in this case”
    and that “there are no grounds for any direct or derivative claims
    for damages asserted against any defendant in this matter.”
    The TAC alleges mismanagement and conflicts of interest
    solely as grounds for dissolution of the LLC. The dissolution
    action was stayed pursuant to section 17707.03 and the parties’
    stipulated order. (§ 17707.03, subd. (c).) There were accordingly
    no claims of mismanagement to be accounted for in the buyout
    valuation.
    Appellant’s counsel claimed during oral argument that
    appellant asserted mismanagement claims independent of the
    dissolution proceeding, in her cause of action in the TAC for
    failure to produce LLC records, and these claims should have
    been valued in the appraisal award. To the extent those claims
    were not stayed pursuant to section 17707.03, they were excluded
    from the appraisers’ valuation by the parties’ joint stipulation
    that no direct or derivative claims for damages were being
    asserted against respondents.
    Cotton, supra, 
    170 Cal.App.4th 1371
     and Brown, supra, 
    91 Cal.App.3d 477
    , on which appellant relies, are distinguishable.
    Cotton involved reversal of a valuation order under section 2000
    because the valuation failed to consider a pending derivative
    action for breach of fiduciary duty. (Cotton, at p. 1380.) Brown
    similarly involved a valuation that failed to consider the impact
    of a pending wrongful death action against the corporation.
    (Brown, at pp. 482, 490-491.) Here, there were no pending
    actions for the appraisers or the trial court to consider.
    Jara v. Suprema Meats, Inc. (2004) 
    121 Cal.App.4th 1238
    ,
    which appellant also cites, is inapposite. The court in that case
    15
    simply held that an individual shareholder has standing to assert
    a direct cause of action for breach of fiduciary duty against the
    majority shareholders and is not limited to a derivative action.
    (Id. at pp. 1257-1260.) Appellant here has asserted no direct or
    derivative claims of mismanagement.
    DISPOSITION
    The order confirming the majority appraisal award and
    setting a final buyout price of $621,954 for each 25 percent
    interest in the LLC is affirmed. Respondents are awarded their
    costs on appeal.
    ___________________________
    CHAVEZ, J.
    We concur:
    _______________________________
    ASHMANN-GERST, Acting P. J.
    _______________________________
    HOFFSTADT, J.
    16
    

Document Info

Docket Number: B303519

Filed Date: 9/1/2021

Precedential Status: Non-Precedential

Modified Date: 9/1/2021