Layman v. Layman

Steele Hays, Justice.

The only issue before us is whether the chancellor’s approval of a report by a special master fixing the value of a partial interest in stock is clearly erroneous.

This is the second appeal by Carol Ann Layman. The facts are more fully stated in Layman v. Layman, 292 Ark. 539, 731 S.W.2d 771 (1987). In the first appeal we reversed the chancellor’s finding that the appreciated value of stock in Layman’s, Incorporated, attributable to the time, effort and skill of Joe Layman, appellee, was not marital property within the meaning of Ark. Code Ann. § 9-12-315 (1987). We remanded with instructions to the chancellor to “determine the present fair market value of the stock in Layman’s, Incorporated, reduced by the fair market value of the stock at the time of acquisition. The difference should be treated as marital property.” Layman v. Layman, 292 Ark. 539, 543, 731 S.W.2d 771, pg. 774 (1987).

On remand, Mrs. Layman offered expert testimony that the enhanced value of the stock was $521,000, whereas an expert called by Mr. Layman testified to an enhanced value of $15,360. Confronted with that disparity, the chancellor appointed a special master, who submitted a report valuing the appreciation at $25,760, an amount the chancellor subsequently accepted. On appeal, the appellant argues that the chancellor erred in accepting the special master’s appraisal. We cannot sustain the contention.

I

The difficulty in calculating the “fair market” value of the appellee’s stock is that the stock is issued by a closely held family corporation. The chancellor found that the value of the entire corporation had increased $800,000 in net value. The articles of incorporation specifically state that the increased value of the corporation should be shared by those holding the common stock. The special master included in his report that “the $800,000 increase in value of the corporation, as determined by the court would, absent special considerations, be completely allocable to the common shares.” Joe Layman owns 100, or one-half, of the common shares, and his brother Gene Layman owns the remaining 100 shares of common stock. The appellant argues that the increased fair market value of Joe Layman’s stock should be one-half of $800,000, or $400,000. Furthermore, the appellant claims at least $200,000 as marital property.

In assessing the fair market value of the shares, the special master considered the nature of the corporation, namely, a closely held family corporation. To receive value from their stockholdings, the shareholders may either upon liquidation receive proceeds, or alternatively, the stockholders may sell their stock. The special master noted that the difference in these two options focuses on control of the corporation; a vote to liquidate by the corporate board must precede the act of distributing the assets. And because Mr. W. L. Layman, father of the appellee, retains voting control of 93.57 % of all stock entitled to vote, he alone can prevent the common stock from receiving the benefits of any increase in the value to the corporation.

The special master recognized the significance of W.L. Layman’s voting control on the fair market value of the stock in estimating the value of Joe Layman’s 100 shares of common stock. Therefore, the master attempted to establish a value for the appellee’s stock based upon a sale of the stock. The master then concluded that a willing buyer of the stock of the corporation must purchase both the common stock and Class A preferred stock in order to obtain effective control of the corporation. Hence, the net increase in value of the corporation, $800,000, must be apportioned between the Class A preferred shares and the common stock, pro rata. The appellee’s stock then increased by the fair market value of 3.22 %¹ of $800,000, or $25,760. Of this $25,760 increase, the appellant receives $12,880 as marital property. It should be noted that even Mrs. Layman’s expert conceded that because of the way the corporation was structured, there was no market for the stock because, “You are not going to find a willing buyer. I don’t think you could sell it for the true definition of fair market value.” Under the facts of this case we cannot say the report of the special master or the chancellor’s findings were erroneous.

While we note the dissent’s reference to authority outside our jurisdiction, we are not persuaded by their reasoning. Stewart v. D.J. Stewart & Company, 36 Ill. App. 3rd 848, 346 N.E.2d 475 (1976), involves a dissenting minority shareholder’s appraisal action and sheds no light on the valuation of stock in closely held corporations for marital property distribution purposes. Likewise, Palmer v. Chamberlin, 191 F.2d 532 (5th Cir. 1951), concerns the legality of a bylaw restricting the transfer of corporate shares. In Palmer, the price of shares was determined according to a formula prescribed in a company bylaw and the issue of valuation is not discussed.

The dissent focuses entirely upon the fact that the common shares are supposed to receive all the benefits from the growth of the corporation, yet overlooks the fact that the common shares exercise only 6.4% of voting control. The dissent states that the case of Olsher v. Olsher, 78 Ill. App. 3d 627, 397 N.E.2d 488 (1979), was decided under a marital property law similar to ours. Despite the similarity in marital property laws, the issues on appeal are quite different. The Illinois court held that without evidence of the respective values of the various items of marital property, including the four shares of Foremost Sales Promotion, Inc., it was impossible to divide the marital property in “just proportion.” The court recognized that the shareholders of a closely held corporation do realize value from stock ownership in that they have certain rights of control or future profits. The Illinois court, just as the special master, recognized that the value of the shares in a closely held corporation would be a balance between these two elements.

II

Appellee maintains the case must be affirmed under ARCP Rule 53(e)(2), and while we have chosen to deal with the merits of appellant’s argument, we concede that the failure to comply with Rule 53 is an additional ground for affirmance. Rule 53(e)(2) reads in part:

The court shall accept the master’s findings of fact unless clearly erroneous. Within 20 days after being served with notice of the filing of the report, any party may serve written objections thereto upon the other parties. Application to the court for action upon the report and upon objections thereto shall be by motion and upon notice as prescribed in Rule 6(c).

This provision makes acceptance of the master’s report mandatory unless clearly erroneous. Moreover, the rule provides the parties with the opportunity to present objections. Here, the special master presented his report to the court on September 26, 1988, and on the same day the chancellor granted approval. Linder the rule the parties may object to the report within twenty days after being served with notice of the filing. Since the appellant received no notice of the filing of the master’s report, nor any opportunity to object, the appellant properly filed a motion to set aside the report because it failed to comply with ARCP Rule 53.

On October 11, 1988, the chancellor set aside the September 26, 1988, order approving the special master’s report and gave the parties twenty days to file written objections or exceptions to the report. On November 23,1988, no objections or exceptions having been filed, the chancellor approved and accepted the special master’s report. On appeal, the appellant presents substantive objections to the special master’s report for the first time. In Dashko v. Oil Fields Corp., 174 Ark. 1067, 298 S.W. 351 (1927), this court interpreted statutes similar to Rule 53 [Ark. Stat. Ann. § 27-1812 and § 27-1814 (Repl. 1962)] to mean that exceptions to the report of a master made for the first time on appeal will not be considered. Patterson Dental Co. v. Brazil, 14 Ark. App. 291, 688 S.W.2d 310 (1985). We have long held that the appellate court will not review the ruling or order of the trial court unless the party makes known to the trial court the action he desires the court to take or his objection to the action of the court and his grounds therefor. Daniels v. Cravens, 297 Ark. 388, 761 S.W.2d 942 (1988). Hence, the appellant should have filed written exceptions to the master’s report in compliance with Rule 53 in order to preserve the argument on appeal.

AFFIRMED.

Glaze, J., concurs. Purtle, J., and Newbern, J., dissent.

1 The 3.22% represents the appellee’s voting stock percentage.