Shaffer, K. v. Visaggio's, Inc.

J-A12039-15
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
KEITH A. SHAFFER, IN THE SUPERIOR COURT OF
PENNSYLVANIA
Appellee
v.
VISAGGIO’S, INC.,
Appellant No. 1959 MDA 2014
Appeal from the Order entered October 20, 2014,
in the Court of Common Pleas of Cumberland County,
Civil Division, at No(s): 2009-02122
BEFORE: BOWES, DONOHUE, and ALLEN, JJ.
MEMORANDUM BY ALLEN, J.: FILED JULY 29, 2015
Visaggio’s, Inc., (“Appellant”), appeals from the trial court’s order
adopting the appraiser’s report and recommendations regarding the value of
Appellant’s business and of the 25% share of stock belonging to dissenting
stockholder, Keith Shaffer, (“Shaffer”). We affirm.
In its order adopting the report and recommendations from Appraiser
William A. Duncan, (“Appraiser Duncan”), the trial court set forth the
following background relative to this action:
[Appellant] was a corporation incorporated under the laws
of Pennsylvania in 1980. At formation, [Appellant] had three
shareholders: Rosemary Lumadue who held 25% of
[Appellant’s] shares, William Lumadue who held 25% of
[Appellant’s] shares, [hereinafter “the Lumadues,”] and
[Shaffer], who held 50% of [Appellant’s] shares. In 1981,
[Shaffer] sold half of his interest in [Appellant] to the Lumadues,
thereby resulting in [the Lumadues] holding 37.5% each and
[Shaffer] holding 25% of [Appellant]. In 1981, due to
disagreements between the Lumadues and [Shaffer], [Shaffer]
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ended participation in the business, but retained his 25%
ownership interest. The situation remained as it was until 2008,
when [Shaffer] was notified of an impending shareholder's
meeting to consider a merger of [Appellant] with and into
Visaggio's Acquisition, Inc. (Acquisition) [hereinafter collectively
“Appellant”]. [Shaffer] received a proxy statement, which he
returned indicating that he would be voting against the merger.
A meeting was held in 2008 and the merger was approved.
Pursuant to 15 Pa.C.S.A. § 1575, a notice was mailed to
[Shaffer] informing him that as a dissenting shareholder he is
entitled to demand payment for the fair value of his stock.
[Shaffer] made such a demand, to which [Appellant] estimated
[Shaffer’s] ownership interest to have a fair value of $35,000.
[Shaffer] refused the offer, believing his shares to be worth
$500,000, which was subsequently refused by [Appellant].
[Shaffer] then filed the instant action under 15 Pa.C.S.A. § 1579
on April 17, 2009.
At the time of merger, [Appellant’s] real property consisted
of 5 acres of land and other improvements such as the
restaurant, hotel, garage, and banquet facilities. The hotel was
not franchised and lacked various amenities as well as
connection to water and sewer services. The restaurant had
various pieces of equipment related to the business. An action
having been filed under 15 Pa.C.S.A. § 1579, this court
appointed the services of a statutorily-permitted appraiser[,
Appraiser Duncan,] to conduct the valuation of [Appellant].
Following the filing of cross pre-hearing memoranda, hearings
before [Appraiser Duncan], and consideration of post-hearing
memoranda, [Appraiser Duncan] filed his report on November 1,
2010. [Shaffer] then filed an appeal from the report of the
appraiser, citing both factual and legal errors. [Thereafter,
Appellant] filed their exceptions to the report of [Appraiser
Duncan], also alleging both factual and legal errors.
Subsequently, it was determined that a preliminary objection in
the form of insufficient service remained outstanding, raising the
question of whether the Court had jurisdiction over the matter.
We sustained the preliminary objection.
Following proper service, the parties stipulated that the
actions of the Court until that point, assigning an appraiser who
held hearings and filed a report, would stand as the record
rather than repeat the process which would only further delay
the matter and increase costs. In summation, [Appraiser
Duncan] has heard the evidence and filed his report and both
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parties have filed their exceptions and/or appeal arguing against
the adoption of the report. The Court must now determine
whether the report should be adopted or, in the alternative,
whether it should adopt one of the parties’ valuation or its own
valuation.
[] [Appraiser Duncan’s] findings are exceptionally simple
to declare. [Appraiser Duncan] found that [Appellant’s] real
estate valuation totaled $1,800,000, less a debt of $1,600,000,
while the business equipment totaled $325,000. This
determination included the following for the real estate
valuation, "[t]he hotel rooms and liquor license should be
considered but not to the extent promoted by [Shaffer’s]
appraiser for the reasons presented by the Lumadues [sic] [who
highlighted that the comparable sales used by Shaffer’s
appraiser involved franchised hotels with upgraded amenities
and accommodations]." [Appraiser Duncan’s Report at 3].
Further, the Appraiser indicated that for the equipment value,
"insurance coverages were considered together with the
Appraiser’s view of the premises. The equipment is used, readily
available, not unique and in some cases, very dated." Id. The
total valuation of [Appellant] at the time of merger was therefore
$525,000, making [Shaffer’s] 25% share worth $131,250.
[] Neither party … wishes the Court to adopt [Appraiser
Duncan’s] Report as it was presented. To that end, [Appellant]
continues to maintain that the value of the corporation based on
the going concern as of the date of merger was $0 due to the
value of the property, standing debt, back pay [of $1,300,000]
owed to [the Lumadues] upon demand, and unpaid pension fund
for non-shareholder management employees, [John Lumadue
and William Lumadue, Jr., hereinafter “the Lumadue children,”]
which have not been claimed in approximately three decades].
This would indicate that [Shaffer’s] 25% share would also be $0.
[Shaffer], meanwhile, argues that the value of the
corporation should either be $799,461 or "between $3,000,000
and $5,000,000" based on admissions by a representative of
[Appellant]. ([Shaffer’s Exceptions] at 2). This would provide
[Shaffer’s] 25% share as either $199,865 or $750,000 to
$1,250,000, respectively.
[] [Appellant] additionally claims that [Appraiser Duncan]
failed to consider both the pension fund and back pay. However,
[Appraiser Duncan] noted that the back pay did not appear
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under [Appellant’s] reports until 2007, only one year prior to the
merger proposal. Obviously the Appraiser considered this
evidence; however it is equally clear that he did not believe it to
be substantial enough to integrate into his calculations.
[Appraiser Duncan] stated he used the insurance values as
the basis and then his own observations that the equipment was
"used, readily available, not unique and in some cases, very
dated," to reduce the value appropriately. We are satisfied that
the value of the restaurant equipment is based on competent
evidence.
In the alternative, [Shaffer] is asserting that the Appraiser
failed to properly accept [Appellant’s] admission that the
business is worth between $3,000,000 and $5,000,000.
[Shaffer] would have us determine the value of a company
based on the wishful thinking of the president of the corporation
to the exclusion of all of the testimony provided by both parties’
expert witnesses and [Appraiser Duncan’s] conclusion. We will
not do so. Instead, we note that the conclusions of [Appraiser
Duncan] bear a reasonable relationship to the values established
by the parties’ experts and is clearly supported by substantial
evidence.
For the foregoing reasons, [Appraiser Duncan’s] Report is
adopted. The value of [Appellant] at the time of merger is
deemed to be $525,000, with [Shaffer’s] 25% interest having a
value of $131,250.
Trial Court Opinion, 10/20/14, at 1-7 (some citations to the record omitted).
Appellant timely appealed from the trial court’s order adopting
Appraiser Duncan’s report and recommendations. The trial court did not
direct compliance with Pa.R.A.P. 1925.
Appellant presents two issues for our review:
A. Did the trial court err by adopting [Appraiser Duncan’s]
Report without substantial evidence, where [Appraiser Duncan’s]
conclusion that [Appellant’s] business equipment had a value of
$325,000 was unsupported by the record?
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B. Did the trial court err by adopting [Appraiser Duncan’s]
Report without substantial evidence, where [Appraiser Duncan’s]
failure to consider the authorized but unpaid wages to [the
Lumadues] and the unfunded pension obligation to [the
Lumadue children] was unsupported by the record?
Appellant’s Brief at 2. Appellant’s issues concern the trial court’s adoption of
Appraiser Duncan’s report and recommendations. We will address them
together.
In Pennsylvania, under 15 Pa.C.S.A. § 1579, a stockholder dissenting
to a merger may demand a valuation of the fair value of his share of stocks
at the time of the merger as follows:
§ 1579. Valuation proceedings generally
(a) General rule.--Within 60 days after the latest of:
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under section
1575 (relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to section 1578
(relating to estimate by dissenter of fair value of shares); if any
demands for payment remain unsettled, the business
corporation may file in court an application for relief requesting
that the fair value of the shares be determined by the court.
(b) Mandatory joinder of dissenters.--All dissenters,
wherever residing, whose demands have not been settled shall
be made parties to the proceeding as in an action against their
shares. A copy of the application shall be served on each such
dissenter. If a dissenter is a nonresident, the copy may be
served on him in the manner provided or prescribed by or
pursuant to 42 Pa.C.S. Ch. 53 (relating to bases of jurisdiction
and interstate and international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court
shall be plenary and exclusive. The court may appoint an
appraiser to receive evidence and recommend a decision
on the issue of fair value. The appraiser shall have such
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power and authority as may be specified in the order of
appointment or in any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a
party shall be entitled to recover the amount by which the
fair value of his shares is found to exceed the amount, if
any, previously remitted, plus interest.
(e) Effect of corporation’s failure to file application.--If the
corporation fails to file an application as provided in subsection
(a), any dissenter who made a demand and who has not already
settled his claim against the corporation may do so in the name
of the corporation at any time within 30 days after the expiration
of the 60-day period. If a dissenter does not file an application
within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation’s estimate of the fair
value of the shares and no more, and may bring an action to
recover any amount not previously remitted.
15 Pa.C.S.A. § 1579 (a) – (e) (emphasis supplied).
In deciding whether to accept an appraiser’s report and
recommendations regarding the value of a dissenting stockholder’s stocks
pursuant to 15 Pa.C.S.A. § 1579, a trial court must preliminarily find that
the appraiser’s report and recommendations are supported by competent
and substantial evidence, and having found that it is, a trial court’s adoption
of an appraiser’s report and recommendations will not be disturbed absent
an abuse of discretion. In re Watt & Shand, 304 A.2d 694, 697 (Pa.
1973).
We have observed that “substantial evidence is more than a scintilla.
It means such relevant evidence as a reasonable mind might accept as
adequate to support a conclusion.” In re Glosser Bros., Inc., 555 A.2d
129, 132 (Pa. Super. 1989) (internal citation omitted). In “reject[ing] [an]
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appellant's request that we make an independent determination as to the
fair value of her shares,” we have reiterated that “‘[t]his [C]ourt does not sit
as a trier of issues of fact expecting to be persuaded that one or the other
side is more credible. That is only a task for the trial court and we would
never invade that area of the judicial process.’” Id. citing Appeal of
Connor, 283 A.2d 279, 280 (Pa. 1971).
Instantly, Appellant maintains that the trial court erred in adopting
Appraiser Duncan’s recommendation that Appellant’s business equipment
had a value of $325,000 dollars rather than the zero value which Appellant
had ascribed to the business equipment. Appellant posits that “[Appraiser]
Duncan’s view of the Property (like the information on insurance coverage)
was not and could not be a part of the record in this matter, as it occurred
almost two months after the record closed and was not a basis to value that
equipment.” Appellant’s Brief at 17 (emphasis in original omitted). We
disagree.
Initially, we find that Appellant waived this claim of error by failing to
object, at the earliest opportunity, to Appraiser Duncan’s request for a site
visit and for Appellant’s insurance policies. We have explained:
Our Supreme Court has frequently stressed the necessity
of raising claims at the earliest opportunity, i.e., during
the trial or hearing, so that alleged errors can be corrected
promptly, thus eliminating the possibility that an appellate
court will be required to expend time and energy reviewing
claims on which no trial ruling has been made.
Mazlo v. Kaufman, 93 A.2d 968, 969 (Pa. Super. 2002). Thus,
as a general rule, assuming there is an opportunity to do so,
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claims that have not been raised during trial may not be raised
for the first time on appeal. Id. See also Jahanshahi v. Centura
Development Co., Inc., 816 A.2d 1179, 1189 (Pa. Super. 2003)
(stating same).
Wilson v. Transport Corporation, 889 A.2d at 568, 573 (Pa. Super. 2005)
(emphasis in original).
On June 1, 2009, the trial court ordered the appointment of Appraiser
Duncan to hear Shaffer’s petition, an appointment which received no
objection from either party. See Order, 6/1/09, at 1. The lack of objection
was not surprising, given Appraiser Duncan’s noted familiarity with various
expert witnesses in the case, such that he indicated that “qualifying certain
witnesses in detail will not be necessary.” N.T., 1/13/10, at 5 and 56; N.T.,
6/4/10, at 305. Appraiser Duncan expressed that he had “been involved
with various businesses,” was the “chair of the [B]oard of [R]eview for
[Cumberland] [C]ounty,” and “usually … serves as an auditor.” N.T.,
1/13/10, at 22 and 56; N.T., 6/4/10, at 305. Appraiser Duncan observed
that “most auditors in Cumberland County kind of follow my format” in
preparing reports. N.T., 6/4/10, at 305.
Appraiser Duncan heard testimony on January 13-14, 2010, and on
June 4, 2010. On July 7, 2010, Appraiser Duncan scheduled an inspection of
Appellant’s business. On July 27, 2010, Appraiser Duncan viewed
Appellant’s business in the presence of all counsel. The record is wholly
devoid of any evidence that Appellant’s counsel ever objected to Appraiser
Duncan’s request for a site visit or for Appellant’s insurance policies
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contemporaneously with these events. Likewise, at the time of the
foregoing requests and events, Appellant’s counsel failed to assert that
Appraiser Duncan’s requests were impermissibly dehors a closed record.
Indeed, Appellant does not cite to any document setting forth such a timely
objection seeking to thwart Appraiser Duncan’s visit or his receipt of the
insurance policies. While Appellant asserts that he “raised and preserved
the issue” of Appraiser Duncan’s “incorrect valuation of [Appellant’s]
equipment” in its November 30, 2010 Exceptions to the Report of Appraiser,
(Appellant’s Brief at 10), Appellant disregards that this challenge was raised
four months following the foregoing requests, which was not Appellant’s
earliest opportunity to object. Appellant’s failure to object at the earliest
opportunity effects waiver of this claim of error.
Even absent waiver, we reject Appellant’s contention that the record
was closed when Appraiser Duncan visited Appellant, or when he requested
and reviewed Appellant’s insurance coverage. Appraiser Duncan specifically
advised the parties at the beginning of the multi-day proceedings, that he
would continue to review the materials regarding the action following the
conclusion of oral testimony. N.T., 1/13/10, at 9 (“I was appointed in June
[2009] and because of lengthy discovery I haven’t finished my job yet, but
I’d like to conclude it as quickly as possible.”). After testimony concluded on
June 4, 2010, Appraiser Duncan reiterated the active status of the action
following the hearing. Specifically, he advised the parties, “I can tell you
from listening to the testimony that each side is well lawyered but that the
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conclusion will not be what you are seeking and the conclusion will not be
what you’re offering, but beyond that I will continue to review these
statements and financials.” N.T., 6/4/14, at 398. Consonant with Appraiser
Duncan’s ongoing review, within weeks of the June 4, 2010 proceedings,
Appraiser Duncan requested, and without objection conducted, a visit to
Appellant in the presence of all counsel, following which he requested, and
likewise received without protestation, Appellant’s insurance policies. In
fact, Appraiser Duncan observed that the “value provided to the casualty
insurer of … $642,000 for [Appellant’s] business personal property,” was
within “the insurance documents submitted post-hearing,” rather than
dehors the record. Appraiser Duncan’s Report, 11/1/10, at 13 (emphasis
supplied). Accordingly, we reject Appellant’s contention that the evidentiary
record was closed, such that Appraiser Duncan’s visit to Appellant, and his
request, receipt, and review of Appellant’s insurance policies was dehors the
record.
Additionally, we are mindful that the trial court’s adoption of Appraiser
Duncan’s report and recommendations arising from the foregoing evidence
falls within the trial court’s sound discretion as the ultimate arbiter of the
admissibility of evidence. We have expressed:
When we review a trial court’s ruling on admission of
evidence, we must acknowledge that decisions on admissibility
are within the sound discretion of the trial court and will not be
overturned absent an abuse of discretion or misapplication of
law. Spino, supra at 734 (citing Rogers v. Johnson & Johnson
Products, Inc., 401 Pa.Super. 430, 585 A.2d 1004, 1007
(1990)). In addition, for a ruling on evidence to constitute
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reversible error, it must have been harmful or prejudicial to the
complaining party. Aldridge v. Edmunds, 561 Pa. 323, 333, 750
A.2d 292, 298 (2000); Pittsburgh Construction Co. v. Griffith,
834 A.2d 572, 585 (Pa. Super. 2003), appeal denied, 578 Pa.
701, 852 A.2d 313 (2004); Spino, supra at 735.
Hutchinson v. Penske Truck Leasing Co., 876 A.2d 978, 984 (Pa. Super.
2005). We have explained:
Judicial discretion requires action in conformity with law on
facts and circumstances before the trial court after hearing
and consideration. Consequently, the court abuses its
discretion if, in resolving the issue for decision, it
misapplies the law or exercises its discretion in a manner
lacking reason. Similarly, the trial court abuses its
discretion if it does not follow legal procedure.
Miller v. Sacred Heart Hosp., 753 A.2d 829, 832 (Pa. Super.
2000) (internal citations omitted).
“Where the discretion exercised by the trial court is
challenged on appeal, the party bringing the challenge
bears a heavy burden.” Paden v. Baker Concrete Constr.,
Inc., 540 Pa. 409, [412,] 658 A.2d 341, 343 (1995)
(citation omitted).
[I]t is not sufficient to persuade the appellate court that it
might have reached a different conclusion if ... charged
with the duty imposed on the court below; it is necessary
to go further and show an abuse of the discretionary
power. An abuse of discretion is not merely an error of
judgment, but if in reaching a conclusion the law is
overridden or misapplied, or the judgment exercised is
manifestly unreasonable, or the result of partiality,
prejudice, bias or ill-will, as shown by the evidence or the
record, discretion is abused.
Id. (internal quotations and citations omitted).
Bartlett v. Bradford Publishing, Inc., 885 A.2d 562, 566 (Pa.
Super. 2005).
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Lineberger v. Wyeth, 894 A.2d 141, 146 9Pa. Super. 2006) (internal
citations omitted).
Moreover, within the context of business valuations, we have
observed:
[Our] Supreme Court instructed that fair value is to be construed
as going concern value, as contrasted with liquidation value.
The court noted that there is a potentially endless list of factors
that are considered relevant to this value. The “going concern”
concept of fair value in a dissenting shareholders’ appraisal
proceeding and the many individual factors comprising it were
aptly described by the Delaware Supreme Court in Tri–
Continental Corp. v. Battye, Del., 74 A.2d 71, 76 (1950):
The basic concept of value under the appraisal is that the
stockholder is entitled to be paid for that which has been
taken from him, viz., his proportionate interest in a going
concern. By value of the stockholder’s proportionate
interest in the corporate enterprise is meant the true or
intrinsic value of his stock which has been taken by the
merger. In determining what figure represents this true or
intrinsic value, the appraiser and the courts must take into
consideration all factors and elements which might
reasonably enter into the fixing of value. Thus, market
value, asset value, dividends, earning prospects, the
nature of the enterprise and any other facts which were
known or which could be ascertained as of the date of the
merger and which throw any light on future prospects of
the merged corporation are not only pertinent to any
inquiry as to the value of the dissenting stockholders’
interest, but must be considered by the agency fixing the
value.
Id. at 72.
[Our Supreme Court] court noted that courts had properly
distilled all of these factors into three principal valuation
methods, i.e. (1) net asset value; (2) actual market value; and
(3) investment value. The court defined these valuation
methods as follows:
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Net Asset Value is the share which the stock represents in
the value of the net assets of the corporation. Such assets
include every kind of property and value, whether realty or
personalty, tangible and intangible, including good will and
the corporation’s value as a going concern.
Investment Value is an estimate of present worth in light
of past, present and prospective financial records of the
company and is obtained by capitalizing earnings. There
are two basic steps in the capitalization process:
calculation of a representative annual earnings figure, and
choice of a capitalization ratio which reflects the stability
and predictability of earnings of the particular corporation.
Market Value refers to the price at which the stock was
selling on the market prior to the action which is objected
to, disregarding any change in price due to the action.
O'Connor, 452 Pa. at 292–93 n. 7, 304 A.2d at 698 n. 7.
However, we do not read the O'Connor opinion as limiting
a trial court to a consideration of only these three valuation
methods. Id. at 291–92, 304 A.2d at 697–98. Financial analysis
has become increasingly complex with the passage of time. New
methods of valuing investments have been developed and are
generally accepted in the financial community as being reliable.
In recognition of this fact, other jurisdictions that previously
restricted a trial court to the foregoing three valuation methods
have now expanded the types of valuation information that may
be considered in a stock valuation proceeding. For example, in
Weinberger v. UOP, Inc., 457 A.2d 701 (Del.1983), the Supreme
Court of Delaware, known for its expertise in these matters,
directed that Delaware courts would no longer be bound to use
only the traditional “Delaware block” or weighted average
approach to valuation. [] The Weinberger court found this
approach too restrictive and directed that courts henceforth use
a “more liberal approach [which] must include proof of value by
any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible
in court....” Id. at 712–13.
In re Glosser Bros., 555 A.2d at 133-134.
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Here, the trial court did not err in determining that the evidence on
which Appraiser Duncan relied in valuing Appellant’s business equipment
was competent and substantial. The parties’ real estate experts visited
Appellant. N.T., 1/13/10, at 62; N.T., 6/4/10, at 346. The condition of the
property, including its business equipment, was raised during the
proceedings. Significantly, Appellant’s own counsel emphasized during his
opening statement to Appraiser Duncan that the site’s condition was one of
“the significant points that I think you’re going to hear in the dispute about
value.” N.T., 1/13/10, at 17. Specifically, Appellant’s counsel stated that
Appraiser Duncan would “hear a lot about the overall condition of the
property. The property is substantially old.” Id. at 18.
Appraiser Duncan directly questioned Shaffer’s real estate valuation
expert, Mr. William Rothman, following Mr. Rothman’s direct and cross-
examination by the parties. Id. at 89. Appraiser Duncan confirmed that, in
opining that Appellant’s real estate had a value of $1,900,000.00, Mr.
Rothman had “assigned no value to furniture and fixtures throughout the
structures[.]” Id. Appraiser Duncan specifically queried, “[s]o if I were to
come into these structures, everything vacant, it would be 1.9 [million
dollars], no tables, no chairs, no kitchen equipment?” Id. Mr. Rothman
agreed, and stated, “[r]eal estate only, yes, just the four walls.” Id. On re-
direct examination, Mr. Rothman confirmed that he had not assigned a value
to Appellant’s “liquor license … furniture, fixtures and equipment” in order
“to stay within the same constraints as in a prior appraisal done by
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[Appellant’s] appraiser.” Id. at 90-91. While the parties confined their real
estate appraisal reports to non-fixtures and non-equipment items, it does
not follow based on the jurisprudence above, that Appraiser Duncan, who
was tasked to “make a recommendation to the [trial] court as to the value of
[Shaffer’s] stock,” was confined accordingly in evaluating Appellant’s
business.
Moreover, Appellant’s business equipment was an asset listed on
Appellant’s balance sheets, and was discussed by the parties’ accounting
experts. Appellant’s accountants, Greenwalt & Company, prepared the
financial statements which were relied on by Appellant’s accounting expert,
Mr. William Boles. Greenwalt & Company’s Accountant’s Report indicated
that they had “compiled the accompanying balance sheets of [Appellant] as
of December 31, 2008 and 2007.” Accountant’s Report, 5/19/09, at 1. The
enclosed balance sheets for “December 31, 2008 and 2007” listed
Appellant’s “Assets,” and included $505,537 for “Equipment” for 2008 and
for 2007, respectively. Id. at 2. In the “Summary of Significant Accounting
Policies,” the Accountant’s Report explained that “[p]roperty and equipment
are presented at cost, and depreciated on the straight-line method based on
the following estimated useful lives … Equipment … 10 to 15 years. Items
sold or retired are removed from cost and accumulated depreciation and any
resulting gains or losses are recognized in current operations.” Id. at 8. A
March 6, 2008 Accountant’s Report enclosed balance sheets for “December
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31, 2007 and 2006,” and listed Equipment at $505,537 and at $503,913,
respectively, for 2007 and 2006. Accountant’s Report, 3/6/08, at 2.
Additionally, in his opening statement, Appellant’s counsel remarked
that Appraiser Duncan would “hear that in – at the end of 2007 there were
some marketable securities held by the company, $111,[747] of marketable
securities. You will also hear that by the date of the merger those
securities had been liquidated and had been rolled into the
operations of the company either for equipment or to continue
operations during the economic downturn that was taking place in 2008 of
which we are all painfully aware.” Id. at 19 (emphasis supplied).
Appellant’s treatment of the marketable securities was raised by Mr.
William Boles, Appellant’s accounting expert, in his report, (“Boles’ report”).
The Boles’ report’s treatment of the marketable securities was challenged by
Shaffer’s accounting expert, Mr. James Smeltzer. Id. at 100. Mr. Smeltzer
observed that the Boles’ report did not include the $111,747 marketable
securities in valuing Appellant. Mr. Smeltzer testified that “[i]f you look at
[Appellant’s] December [20]07 financial statements, they indicate that there
were investments in the corporation of $111,747. My conclusion was,
looking at the financial statements, that the asset should be added as a
nonoperating asset,” to Appellant’s value. Id. Mr. Smeltzer explained that
“[o]ne of the components in valuation, which is also included in the Boles’
report, is that nonoperating assets of a business need to be evaluated if it is
not contributing to the profitability of the company.” Mr. Smeltzer testified
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that “quite frankly, I think that asset of [$]111,747 at December 31st, 2007
needs to be added to the value of the company to determine not only the
operating value of the company but assets that are not involved with the
operation, which in my opinion this—investments and securities was that
kind of asset.” Id. at 101.
Mr. Smeltzer further testified that “the [$111,747] was borrowed
money. So we know the debt is reflective in the balance sheet. In other
words, everybody is taking the debt number out, but if we ignore that asset
that’s sitting on the books at that particular point in time from a value
standpoint, it was assets held for investments, which is what it says on the
statement. It clearly should be added – reducing – I look at it as a reduction
of the debt outstanding at that time.” N.T., 6/4/10, at 393.
Mr. Boles rebutted Mr. Smeltzer’s position and testified as follows:
Well, in my original report, you know, we did consider
those numbers[.] And at the time of interview with the
Lumadues, we asked a question about those investments and
they told us that those funds were there until they could get
their renovations and new equipment in place and that they
were going to be expended. So I knew that that was really not
excess accumulated earnings or any excess asset of any sort.
In our normal business valuations when we have
excess earnings, we carve them out just as Mr. Smeltzer
did, and tack them onto the total value, but in this case
since we knew that the amounts were required, and from
our tour of the property I saw that they were required,
you know, in all respects of the business, that I excluded
those numbers and that’s why I believe Mr. Smeltzer’s
adjustment [of adding the $111,747 to Appellant’s value]
is incorrect.
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And as – and subsequently I found out that, by looking at
the December 31st, 2008 financial statements, those assets – or
the cash and investments were already gone and spent on
improvements so that they were no longer in existence at the
date of the merger.
Id. at 366-367 (emphasis added). As recognized by the trial court,
following Appraiser Duncan’s visit to Appellant, Appraiser Duncan found that
the equipment was “used, readily available, not unique and in some cases,
very dated.” Trial Court Opinion, 10/20/14, at 6-7. The trial court observed
that Appraiser Duncan did not include the $111,747 in Appellant’s value, (id.
at 5), which is consonant with Appellant’s treatment of the marketable
securities.
Appellant’s equipment was further referenced by Mr. Boles in two of
the three approaches he used to value Appellant. Mr. Boles’ “valuation
efforts” included “the income approach and the market approach,” as well as
“asset approach.” Id. at 352. In describing the asset approach, Mr. Boles
testified:
Mr. Boles: What we did there was we said, okay, I’m going to –
in a company like this let’s take the value of the assets in the
business or in the corporation and we said, okay, what are the
assets. It’s the tangible assets. The most important tangible
assets is [sic] the real estate and we have a real estate appraisal
for that.
We also have the value of the furniture, fixtures, and
equipment and inventory and we have that number from
the financial statements of the business. And on top of that
we said what are the other assets of the business and we said,
well, there is – you know, this is an ongoing concern. There
should be some goodwill involved there, some entity or
organization goodwill.
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And we did a calculation of that and added those factors
up and came up to a value before all the other – the deferred
compensation [of the Lumadue children] and before the
authorized but unpaid compensation [of the Lumadues,] of
191,555, but after application of [the deferred compensation and
authorized and unpaid compensation] — the net value was zero.
Id. at 353 (emphasis added).
As recognized by Mr. Smeltzer, the Boles’ report referenced Appellant’s
business equipment in the market approach valuation method, prior to
applying the unpaid wage claims to ultimately reduce Appellant’s value to
zero. Mr. Smoltzer explained that in using the market approach valuation
method, Mr. Boles “t[ook] the weighted average of revenue, sales[.]” N.T.,
1/13/10, at 105. Mr. Boles “refer[red] to Pratt’s stats[,] which is an analysis
of sales transactions[,] and conclude[d] that … 34 percent of gross sales is
an indicator of what a restaurant operation’s value would be, which would
include the operating assets, which is property—which is equipment plus
any goodwill and conclude[d] the value was $487,714 [dollars].” Id. at
106 (emphasis supplied). Mr. Smeltzer testified that, as to goodwill, Mr.
Boles “came down with a value of about $6,586 for the intangible goodwill in
this business.” Id. at 107.
Appraiser Duncan had a valid and reasonable basis to examine the
issue of Appellant’s equipment, and substantial and competent record
evidence from which to derive the equipment’s value. Appellant listed the
equipment on its balance sheets. Appellant’s counsel in his opening
statement, and via Mr. Boles’ report and opinion, argued that $111,747 of
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marketable securities had been liquidated at least in part for “equipment”
and should be omitted from Appellant’s value. Appellant’s equipment was
referenced in some of the methods used to value Appellant. Moreover,
Appellant’s equipment was listed within Appellant’s insurance policies, which
we do not find were impermissibly secured from dehors a closed record,
especially since Appellant failed to object in a timely manner.
We reject Appellant’s argument that Appraiser Duncan’s impressions
from the site visit or from his review of the insurance policies were
inadmissible evidence considered in his valuation of Shaffer’s stock, and that
his consideration of Appellant’s insurance policies was “not proper.”
Appellant’s Brief at 16. Appellant’s pinpoint citations challenging Appraiser
Duncan’s consideration of Appellant’s insurance policies are contextually
inapposite to this scenario concerning the valuation of a dissenting
shareholder’s stock pursuant to 15 Pa.C.S.A. § 1579. See Appellant’s Brief
at 16-17, citing Estate of Franklin v. Commissioner of Internal
Revenue, 64 T.C. 752, 768 (U.S. Tax Ct. 1975) and Kane v. State Farm
Fire Ins. & Cas. Co., 841 A.2d 1038, 1045 (Pa. Super. 2003). Moreover, a
plain reading of the cited portions of the foregoing authorities reflects that
they do not stand for Appellant’s proposition that it was legally improper for
Appraiser Duncan to consider Appellant’s insurance policies. Id.
By contrast, our Supreme Court has expressed:
[I]t should be observed that while the term ‘fair value’ is
hardly self-executing in its clarity, the object of an appraisal
proceeding is to determine the value of the dissenter’s shares on
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a going concern basis. In determining what figure
represents this true or intrinsic value, consideration must
be given to all factors and elements which reasonably
might enter into the fixing of value.
In re Watt, 304 A.2d at 697-698 (internal citations and footnote omitted)
(emphasis supplied); see also In re Glosser Bros., 555 A.2d at 139
(affirming the trial court’s admission of challenged expert testimony, and
recognizing that “particularly … in the context of a valuation proceeding[,]
the [trial] court needs a broad variety of information relating to the true
value of the stock at issue”). Likewise, we have determined:
“For evidence to be admissible, it must be competent and
relevant. Evidence is competent if it is material to the issue to
be determined at trial. Evidence is relevant if it tends to prove
or disprove a material fact.” American Future Systems, Inc. v.
BBB, 872 A.2d 1202, 1212 (Pa. Super. 2005). See Pa.R.E., Rule
401 (“Relevant evidence” means evidence having any tendency
to make the existence of any fact that is of consequence to the
determination of the action more probable or less probable than
it would be without the evidence.”) “Relevant evidence is
admissible if its probative value outweighs its prejudicial impact.
The trial court's rulings regarding the relevancy of evidence will
not be overturned absent an abuse of discretion.” American
Future Systems, Inc., 872 A.2d at 1212. “A party suffers
prejudice when the trial court's error could have affected the
verdict.” Gaudio v. Ford Motor Co., 976 A.2d 524, 535 (Pa.
Super. 2009).
***
We reiterate that a trial court has broad discretion with
regard to the admissibility of evidence, and is not required to
exclude all evidence that may be detrimental to a party’s case.
See Pittsburgh Const. Co. v. Griffith, 834 A.2d 572, 585 (Pa.
Super. 2003). Such rulings on the admission of evidence will not
be overturned by this Court absent a conclusion that the law has
been overridden or misapplied, or the judgment exercised is
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manifestly unreasonable, or the result of partiality, prejudice,
bias or ill-will, as shown by the evidence or the record. Stumpf
[v. Nye, 950 A.2d 1032-1035-1036 (Pa. Super. 2008)].
Schuenemann v. Dreemz, LLC, 34 A.3d 94, 101 (Pa. Super. 2011).
Here, based on our review of the record, we find that the evidence
adduced by Appraiser Duncan was relevant, admissible, competent and
substantial. We therefore agree with the trial court’s determination that “the
conclusions of [Appraiser Duncan] bear a reasonable relationship to the
value established by the parties’ experts and is clearly supported by
substantial evidence.” Trial Court Opinion, 10/20/14, at 7. We further
concur with the trial court’s observation that “we need not conclude that
[Appraiser Duncan] was correct to a mathematical certainty. Instead, the
only determination that needs to be made is whether [Appraiser Duncan’s]
Report is supported by substantial and competent evidence[.]” Id. at 5.
Finding that it is, we affirm the trial court’s order adopting Appraiser
Duncan’s report and recommendations valuing Appellant’s business
equipment at $325,000.
Appellant further argues:
In determining [Appellant’s] share value, [Appraiser]
Duncan refused to consider the unpaid wages due and owing to
[the Lumadues]. [Appellant’s] financial statements specifically
state that the corporation owes the Lumadues approximately
$1,300,000 in [accrued but] unpaid wages. [Shaffer] bore the
burden of proving the salaries were unreasonable, but he offered
no evidence or reason why the salaries were unreasonable.
Therefore, [Shaffer] failed as a matter of law to carry his burden
of proof, and [Appraiser] Duncan’s failure to include the
authorized but unpaid wages in his determination of the value of
[Shaffer’s] shares was not supported by competent and
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substantial evidence. The trial court erred in adopting
[Appraiser Duncan’s] report in this respect.
[Appraiser] Duncan also refused to consider [Appellant’s]
unfunded pension obligation in his determination of [Appellant’s]
share value. The evidence established that as of the November
5, 2008 merger date, [Appellant] had a $560,000 unfunded
pension obligation to its non-shareholder management
employees, John Lumadue and William Lumadue, Jr., [the
Lumadue children]. The unfunded pension obligation is a legal
obligation of [Appellant] and it must be included in the valuation.
[Shaffer’s] business valuation expert did not disagree that this
obligation has to be considered in valuing the stock. [Appraiser]
Duncan’s refusal to consider the pension obligation was contrary
to law and the uncontradicted evidence. The trial court should
not have adopted [Appraiser Duncan’s] report in this respect.
Appellant’s Brief at 12-13. Based on our review of the record, we disagree.
Appraiser Duncan directly examined Mr. Boles as follows:
Appraiser Duncan: Now you’ve talked about this accrued liability
of salaries [for the Lumadues] and the unfunded and unqualified
benefit to [the Lumadue children] which totals close to $1.8
million, is that correct?
Mr. Boles: That’s right.
Appraiser Duncan: Now, if you were advising either the owners
or the employees as to the probability that they would get this
money with the current operating condition of the company,
what would you advise them?
Mr. Boles: Well, in my experience I’ve found that we don’t know
what real estate values are going to go. We don’t know, you
know, what is going to happen with the business. And based
upon that, I would say that for their own personal planning I
would discount those numbers substantially.
Appraiser Duncan: You wouldn’t count on them, would you?
Mr. Boles: No, I would not.
N.T., 6/4/10, at 367-368.
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Mr. Boles acknowledged on cross-examination that the financial
statements that he relied upon in valuing Appellant’s business “were not”
audited financial statements. Id. at 369. Mr. Boles confirmed that “in the
doing the financial statements, the accountant [who prepared the financial
statements] compiled information that was from the representation of
management[.]” Id. at 370. Mr. Boles further confirmed that “in [his]
valuation process [he] did not turn back the clock and do any audited
financial statements[,]” and that “for a large part of [his] appraisal and
valuation process [he] has relied on the statement of management[.]” Id.
Mr. Boles acknowledged that he did not “include [his conclusion of the
unfunded, nonqualified deferred compensation claim of the Lumadue
children] in the schedules” of his original report. Id. at 373. He conceded
that either “in 2007 or 2006 … somewhere in the more recent years”, was
“the first time that the authorized but unpaid salaries [for the Lumadues]
were quantified” in Appellant’s financial statements. Id. at 374. Mr. Boles
did not recall “ever seeing the unfunded deferred compensation [for the
Lumadue children] quantified in any financial statement.” Id. Mr. Boles
denied that there “exist[ed] money [at the time of the merger] to pay the
accrued but unpaid salaries [of the Lumadues.]” Id. at 375. He “doubt[ed]”
that “[t]he corporation could have borrowed money” to pay the Lumadues “if
the Lumadues would have demanded the corporation pay” the accrued but
unpaid salaries. Id. at 375-376. Mr. Boles further denied that at the time
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of the merger “the corporation [was] in a financial position to pay the …
deferred compensation” of the Lumadue children. Id. at 376.
Mr. Smeltzer opined that the foregoing wage liabilities “are
approximately 147 percent higher on the accrued wage schedule than what
is reasonable for an operating business of this nature.” N.T., 1/13/10, at
119. Mr. Smeltzer concluded that “the salary authorization was higher than
market when it was established and quite frankly I think based on the data
that I would have done, which is similar to what [Mr.] Boles for reasonable
comp[ensation] is, the comp[ensation] that’s being accrued currently is well
beyond reasonable comp[ensation] levels.” Id. at 120. Mr. Smeltzer
testified that “the fact that we are dealing with an extended period of time
here, from 1981 to 2010, a considerable period of time, I think 28, 29 years,
I think that overstatement of compensation to a great degree led to that
accrual.” Id. at 121. Mr. Smeltzer further testified that “based on the facts
of the [Boles’ report] I reviewed, the valuation valuating the reasonable
comp[ensation], the accrual of compensation … it appears to me that the
accrual is quite frankly excess compensation and not reasonable to be paid
by a corporation of this size.” Id. at 122. Mr. Smeltzer stated that if
Appellant “would have been paying that comp[ensation] since 1981, the
corporation would have been close to two million dollars in deficit. So those
salaries were never – in my opinion there was no expectation of them being
paid based on the numbers I’ve seen.” Id. Mr. Smeltzer confirmed that he
“excluded [the wage claims] from [his] computation” of Appellant’s value
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“because there was no expectation or there should be no expectation” of the
wage claims being paid “because they are excessive[.]” Id. at 122-123.
Mr. Smeltzer further testified that “the fact that they were excessive based
on the analysis [of] the industry led me to the conclusion that the liability
was … almost like a freeze out of a minority shareholder, we’re going to
create a liability that’s going to accumulate to a certain number that makes
the minority shareholder’s value worthless.” Id. at 123. Mr. Smeltzer
opined, “there’s no rational reason that the corporation would have entered
into that kind of [wage] agreement based on the trend of earnings the
company experienced.” Id.
Accordingly, despite Appellant’s contentions to the contrary, there
was substantial and competent evidence of record to support Appraiser
Duncan’s exclusion of the unpaid wage claims for the Lumadues and their
children, such that we discern no trial court error in adopting Appraiser
Duncan’s report and recommendations, which excluded the unpaid wage
claims. See In re Spang Industries, Inc., 535 A.2d 86, 90-91 (Pa. Super.
1987) (although remanding for an adjustment to the trial court’s
computations, the trial court’s order was affirmed “in all respects,” including
where “the [trial] court, within its discretion, drew proper conclusions based
on the evidence presented [that] [t]here was more than sufficient evidence
to sustain the trial court's conclusion that this was a “squeeze out merger”
and that [appellant] was a dynamic going concern which understated its
assets and overstated its liabilities in preparation for the merger). We are
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mindful that Appellant’s argument would require us to impermissibly reweigh
the evidence adduced in this action, and to reassess from a cold record the
credibility of the witnesses who testified before Appraiser Duncan in favor of,
and against, the inclusion of these wage claims in valuing Shaffer’s stock.
Appellant’s argument would have us ignore Appraiser Duncan’s conclusion,
following the examination of the witnesses and presentation of evidence,
that the wage claim was “an obvious attempt to deprive Shaffer as to the
value of his Twenty-Five Percent (25%) interest.” Appraiser Duncan’s
Report, 11/1/10, at 15. We cannot do so. Brown v. Progressive
Insurance Co., 860 A.2d 493, 497 (Pa. Super. 2004) (internal citation
omitted) (“Concerning questions of credibility and weight accorded evidence
at trial, we will not substitute our judgment for that of the finder of fact.”).
Discerning no error or abuse of discretion by the trial court, we affirm
the trial court’s order adopting Appraiser Duncan’s report and
recommendations.
Order affirmed.
Judge Bowes concurs in the result and Judge Donohue files a
Dissenting Memorandum.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 7/29/2015
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