Sentinel C3 v. Chris Hunt, et ux

FILED
AUGUST 15,2013
In the Office ofthe Clerk of Court
WA State Court of Appeals, Division III
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION THREE
SENTINELC3, INC., a Washington ) No. 30553-8-111
Corporation, ) consolidated with 30592-9-111;
) 30837-5-111; 30881-2-111
Respondent, )
)
v. ) PUBLISHED OPINION
)
CHRIS J. HUNT, an individual and the )
marital community, if any, comprised of )
CHRIS l. HUNT and CARMEN HUNT; )
MICHAEL BLOOD, an individual and the )
marital community, if any, comprised of )
MICHAEL BLOOD and JANAE )
BLOOD, )
)
Appellants. )
KORSMO, C.l. - Dissenting shareholders appeal from rulings at summary
judgment that valued their shares in accordance with the corporation's offer and imposed
penalties and attorney fees for intransigence. We reverse and remand for further
proceedings.
FACTS
SentinelC3 (Sentinel) is a closely held corporation that facilitates transactions
between health care providers and medical equipment suppliers. It began in 2003 as an
No. 30553-8-III consolidated with 30592-9-III;
30837-5-111; 30881-2-111
SentinelC3 v. Hunt
Idaho corporation, but became a Washington corporation in 2010. Its activities that year
triggered the actions that resulted in this appeal.
At that time, the biggest single shareholder in the corporation was Chris Hunt with
1,000,000 shares, approximately 22 percent of the corporation's 4,500,000 total shares.
Four members of the Owens family owned 3,000,000 shares, while Michael Blood and
Ken Moore each owned 250,000 shares (approximately 5.5 percent). Sentinel attempted
.1
,
1
to buyout Mr. Hunt that April. Its expert, James Kukull, using the corporation's value on
1
f
December 31, 2009, valued the shares at $107,200 when using a "minority,
J
l
i
nonmarketable basis" or at $195,200 on a "control, marketable basis." Mr. Kukull
explained that a "control, marketable basis" valuation was the same as "fair value" under
i
'I
the dissenters' rights statute. The company offered the lower value; Mr. Hunt declined to
sell.
! On October 8, 2010, the company became a Washington corporation. At the same
i
i time, it proposed a reverse stock split of 1.5 million to one; those with less than one new
,
l
,
1
share were required to sell their stock. The shareholders voted 5 to 2, with Mr. Hunt and
2
j
I
i
l
No. 30553·8·111 consolidated with 30592-9-111;
30837·5-111; 30881·2·111
SentinelC3 v. Hunt
1
Mr. Blood dissenting, to adopt the reverse stock split on October 28, 2010. After forcing
out the two dissenters, the remaining shareholders instituted a forward stock split that
issued them the same number of shares of the new stock as they used to own.
Sentinel paid Mr. Hunt $195,200.00 plus interest in accordance with the greater
valuation Mr. Kukull had previously made and paid Mr. Blood $48,956.60 plus interest.
Both Hunt and Blood believed Mr. Kukull's valuation to be out of date. Each made
counteroffers to Sentinel based on a valuation from an undisclosed professional,
subsequently determined to be C&H Group.2 Hunt revised his valuation upwards 20
percent based on the belief that a buy-out of Sentinel was imminent. Blood's valuation
was revised upwards based on his view that there were only approximately 3,000,000
shares of Sentinel (rather than the original 4,500,000 shares) because of an alleged
agreement for the company to buy the stock of some of the other shareholders. Kukull
expressed the view that because of falling earnings before taxes, Sentinel's value had not
significantly changed since his original valuation despite an increase in sales.
1 Although both the Blood and Hunt marital communities are parties to this action,
we will refer to them in the singular for convenience.
2 Both men declined to produce the documents supporting the new valuation on
the basis that C&H was only a consulting expert.
3
No. 30553-8-111 consolidated with 30592-9-111;
30837-5-111; 30881-2-111
SentinelC3 v. Hunt
Sentinel instituted an action January 31, 2011, in the Spokane County Superior
Court to establish the fair value of the dissenting shares in accordance with RCW
23B.13.300. Discovery ensued; Mr. Hunt requested that Sentinel provide business
records, contracts, and marketing plans going back five years. Sentinel objected on the
basis that the records were irrelevant to the valuation process, but agreed to disclose if a
protective order could be worked out. 3 Sentinel filed a proposed protective order on
August 5,2011, and filed a motion for summary judgment four days later. The trial court
granted the protective order on September 7. A few weeks later Hunt disclosed Jerry
4
Hecker as his expert witness and also filed an answer to the summary judgment motion.
Counsel for Mr. Hunt filed a declaration on October 18,2011, with Mr. Hecker's
valuation report attached; Mr. Hecker, however, had not certified his report.
The trial court heard the summary judgment motion on October 21. The court
found that Hecker's valuation was not admissible through counsel's declaration and
excluded it while noting that it presented genuine issues of fact that would have defeated
summary judgment. Both Hunt and Blood had submitted their own affidavits that took
3 Sentinel indicated a fear that Mr. Hunt might use the information to compete
with it.
Blood has proceeded pro se while Hunt has been represented by counsel
4
throughout the action.
4
No. 30553-8-II1 consolidated with 30592-9-III;
30837-5-111; 30881-2-111
SentinelC3 v. Hunt
issue with some ofKukull's work and referenced their own original demands. The court
granted summary judgment and later awarded Sentinel its attorney fees and costs under
RCW 23B.13.310.
The dissenters sought reconsideration and Mr. Hunt submitted an admissible copy
of Mr. Hecker's report. The court denied reconsideration, commenting only that there
was "not sufficient cause shown to alter" its decision. Both Hunt and Blood timely
appealed after the denial of reconsideration.
The court subsequently entered a judgment in Sentinel's behalf for attorney fees
and costs. Once again, the dissenters individually appealed to this court. The four
matters were consolidated.
ANALYSIS
This appeal challenges the court's valuation ruling at summary judgment, the
decision to exclude Hecker's valuation, and the award of attorney fees without
appropriate findings. We agree with the challenges to the valuation and the attorney fee
award; those two matters are discussed in that order. In light of our disposition, we do
not address the exclusion of the valuation.
5
No. 30553~8~III
consolidated with 30592~9~III;
30837-5~III; 30881-2-II1
SentinelC3 v. Hunt
Summary judgment rulings are reviewed de novo since an appellate court sits in
the same position as the trial court. Hubbard v. Spokane County, 146 Wn.2d 699, 706­
07,50 P.3d 602 (2002). Summary judgment is proper when, after viewing the evidence
in a light most favorable to the opposing party, there are no issues of material fact and the
moving party is entitled to judgment as a matter of law. Trimble v. Wash. State Univ.,
140 Wn.2d 88, 93, 993 P.2d 259 (2000). All facts and reasonable inferences are
construed in the light most favorable to the nonmoving party. Id. Summary judgment
should be granted if reasonable persons could reach but one conclusion based on all of
the evidence. Id.Valuation ofDissenters' Shares
The parties strenuously debate the propriety of resolving a dissenters' rights
valuation case at summary judgment, with the appellants contending that the trial court's
obligations under the valuation statute necessitate weighing of evidence and preclude
resolution at summary judgment. We need not go that far because we conclude that the
appellants did establish material questions of fact that precluded summary judgment.
6
No. 30553-8-III consolidated with 30592-9-III;
30837-5-III; 30881-2-III
SentinelC3 v. Hunt
In a dissenters' rights action, a corporation is required to petition a court to
determine the "fair value of the shares and accrued interest." RCW 23B.13.300(1). "Fair
value," in tum, is defined as
the value of the shares immediately before the effective date of the
corporate action to which the dissenter objects, excluding any appreciation
or depreciation in anticipation of the corporate action unless exclusion
would be inequitable.
RCW 23B.l3.010(3). These standards are part of the current Washington Business
Corporation Act, Title 23B RCW, adopted by LAWS OF 1989, ch. 165.
Prior to the adoption of the current provisions, the former corporations act had
required that the trial court "shall, by its decree, determine the value of the shares" held
by the dissenters. § 3803-41 Rem. Supp. 1949 (quoted in In re Nw. Greyhound Lines, 41
Wn.2d 672,677,251 P.2d 607 (1952».5 Noting that the legislature had not developed a
definition of "value," Greyhound defined it as a word that
contemplates a consideration of all the facts and circumstances pertinent to
a particular case in an effort to arrive at a fair and reasonable compromise
or arbitration which may in some degree be lacking in mathematical
exactness or certitude.
41 Wn.2d at 680.
5 This provision subsequently was codified at former RCW 23.01.450(1) and
former RCW 23A.24.040.
7
No. 30553-8-II1 consolidated with 30592-9-III;
30837-5-111; 30881-2-111
SentinelC3 v. Hunt
The legislature in 1965 changed the statute to reflect the need to give "fair value"
rather than "value" to the minority shares. LAWS OF 1965, ch. 53 § 83 (repealing LAWS
OF 1949, ch. 188). In adopting the current Business Corporation Act in 1989, the
legislature noted that the term "fair value" "leaves untouched the accumulated case law."
SENATE JOURNAL, 51st Leg., 2nd Spec. Sess., at 2977-3112 (Wash. 1989) (reprinting the
Comments on the Washington Business Corporation Act prepared by the Corporate Act
Revision Committee of the Washington State Bar Association, §13.01). Since "value"
and "fair value" mean the same, our courts have continued to apply Greyhound to the
valuation of dissenters' shares. E.g., Matthew G. Norton Co. v. Smyth, 112 Wn. App.
865,874,51 PJd 159 (2002); Robblee v. Robblee, 68 Wn. App. 69, 77-78, 841 P.2d
1289 (1992).
At the time of Greyhound, the statutory scheme required the trial court to appoint
an appraiser to value the stock. 41 Wn.2d at 676 (citing § 3803-41, Rem. Supp. 1949).
The appraiser's valuation was not dispositive; the trial court was to review the valuation
de novo. ld. at 683,685. Our current statute permits, but does not require, the court to
appoint one or more appraisers to assist it. RCW 23B.13JOO(5). The court has "plenary
and exclusive" jurisdiction over the case. ld. The modem statute "retains the concept of
8
I
I
f
I
No. 30553-8-II1 consolidated with 30592-9-III;
30837-5-III; 30881-2-111
SentinelC3 v. Hunt
judicial appraisal as the ultimate means of determining fair value." SENATE JOURNAL,
51st Leg., 2nd Spec. Sess., at 3092-3093 (Wash. 1989) (reprinting the Comments on the
Washington Business Corporation Act prepared by the Corporate Act Revision
Committee of the Washington State Bar Association, §13.30).
We believe this statutory arrangement thus retains the obligation of the trial judge
to undertake a de novo review of the evidence and not uncritically accept the appraiser's
report. In this respect the obligation is similar to that imposed in other areas. E.g.,
Richey & Gilbert Co. v. Nw. Natural Gas Corp., 16 Wn.2d 631, 649-50,134 P.2d 444(1943) ('" And, while great weight should always be given to the opinions of those
familiar with the subject, they are not to be blindly received, but are to be intelligently
examined by the jury in the light of their own general knowledge.'" (quoting Head v.
Hargrave, 105 U.S. 45, 49,26 L. Ed. 1028 (1881)); In re Marriage a/Pilant, 42 Wn.
App. 173,178, 709 P.2d 1241 (1985) (court rejected the testimony of the sole expert on a
pension valuation issue: "A court is not required to accept the opinion testimony of
experts solely because of their special knowledge; rather, the court decides an issue upon
its own fair judgment, assisted by the testimony of experts."); Suther v. Suther, 28 Wn.
9No. 30553-8-II1 consolidated with 30592-9-III;
30837-5-III; 30881-2-III
SentinelC3 v. Hunt
App. 838, 627 P.2d 110 (1981) (court in dissolution proceeding properly valued stock
differently than experts).
With this background, we now address the issues presented by the summary
judgment ruling. First, the dissenters argue that in light of the court's obligation to find
fair value, the court could never resolve a dissenters' rights case at summary judgment
because the court must weigh the testimony and determine whether to accept the expert's
valuation, actions that are contrary to the standards of a summary judgment hearing. As
a categorical matter, we reject the argument while acknowledging that it has some force.
This court previously has permitted summary judgment on valuation procedures in a
dissenters' rights case. See Matthew G. Norton Co., 112 Wn. App. 865 (partial summary
judgment). We can envision valuation fact patterns that would be subject to summary
judgment. For instance, if competing experts agreed on the corporation's fair value, but
one of them improperly applied a discount that our courts have already rejected, we could
see a trial judge accepting the agreed-upon valuation for the corporation since the fact of
valuation was not in dispute. The trial court would also, however, have been free to
reject the valuation altogether.
10
No. 30553-8-II1 consolidated with 30592-9-III;
30837-5-III; 30881-2-III
SentinelC3 v. Hunt
Nonetheless, the trial court's duty to find fair value and not blindly accept the
expert's opinion has some play in this summary judgment and informs the court on
whether a material question of fact exists. Mr. Blood's affidavit, his settlement demand,
and interrogatory answers were all put before the court at summary judgment. In them,
he explained that the experts he and Mr. Hunt had consulted had evaluated the company
at $0.4267 cents per share. He then valued his stock at an even higher rate due to the
belief that the company had an agreement to buy nearly one-quarter of its shares back
from some of the other stockholders. Mr. Hunt similarly used the consulting expert's
valuation as the basis for his request before increasing it due to the belief that a sale was
in the offing.
We believe these facts established a genuine issue of material fact that went to the
court's duty in this case to determine the fair value of the stock. The court was given a
valuation of 42 cents per share attributed to an expert that conflicted with Kukuil's
valuation of 19 cents per share. Although it constituted hearsay and was set forth without
the reasoning supporting the valuation, this unchallenged evidence still suggested that
Kukull's valuation was not the sole calculation before the court. The court had a duty
under the statute to consider all of that information in making its determination of fair
11
No. 30553-8-III consolidated with 30592-9-III;
30837-5-III; 30881-2-II1
SentinelC3 v. Hunt
value. Given the evidentiary support for Kukull's work, it was reasonable for the court to
be persuaded by that valuation. Nonetheless, under these facts, that determination
required the court to consider the dissenters' evidence. While it was understandably
rejected, the weighing of that evidence at summary judgment was improper and needed to
be done at trial. 6
The dissenters' valuations, even without the evidence from their trial expert
Hecker, raised a question of fact under the court's statutory duty in this area. The
conflicting evidence did not allow the court to determine fair value at summary judgment.
Accordingly, we reverse the summary judgment order and remand for further
proceedings.
Attorney Fees
In light of our reversal of the summary judgment ruling, the award of attorney fees
necessarily falls. The award also failed on its merits.
6 The parties do not address, and we do not consider, whether moving the
company from Idaho to Washington changed its tax burdens or other costs in a manner
that would have impacted the valuation of the corporation. The change was effective
prior to the reverse stock split and thus was a relevant consideration, although the record
does not indicate if the change had any significance.
12
No. 30553-8-III consolidated with 30592-9-III;
30837-5-III; 30881-2-III
SentinelC3 v. Hunt
RCW 23B.13.310 governs the award of costs and attorney fees in these actions,
which provides:
(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court
shall assess the costs against the corporation, except that the court may
assess the costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under RCW
23B.13 .280.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements ofRCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
Subsections (1) and (2) set forth the general principles at issue in this action. The
corporation will normally bear the costs, including those of appraisal, unless the court
finds that some of the dissenters acted "arbitrarily, vexatiously, or not in good faith" with
respect to the payment demand. RCW 23B.13.310(1). The court can award attorney
13
No. 30553-8-III consolidated with 30592-9-III;
30837-5-III; 30881-2-III
SentinelC3 v. Hunt
fees, as well as expert fees, against the corporation if it does not substantially comply
with the statute's dissenters' rights processes. RCW 23B.l3.31 0(2)(a). The court can
assess attorney and expert fees against any party that acts "arbitrarily, vexatiously, or not
in good faith" under the statute. RCW 23B.13.31 0(2)(b). The amount of the award of
attorney and expert fees must be "equitable." RCW 23B.l3.310(2).
RCW 23B.13.31O appears directed toward intransigence and unreasonable
behavior. The legislature expressed the intent of this provision:
Proposed section 13.31 provides that generally the costs of the
appraisal proceeding should be assessed against the corporation. But the
court is authorized to assess these costs, in whole or in part, against the
dissenters if it concludes they acted arbitrarily, vexatiously, or not in good
faith in making the Proposed section 13.28 demand for additional payment.
Similarly, counsel fees may be charged against the corporation or against
dissenters upon a finding of a failure to comply in good faith with the
requirements of this chapter. Individual dissenters, in turn, can be called
upon to pay counsel fees for other dissenters if the court finds that the
services were of substantial benefit to the other dissenters.
The purpose of these grants of discretion with respect to costs and
counsel fees is to increase the incentives of both sides to proceed in good
faith under this chapter to attempt to resolve their disagreement without the
need of a formal judicial appraisal of the value of shares.
SENATE JOURNAL, 51 st Leg., 2nd Spec. Sess., at 3093 (Wash. 1989) (reprinting the
Comments on the Washington Business Corporation Act prepared by the Corporate Act
Revision Committee of the Washington State Bar Association, §13.31).
14
No. 30553-8-III consolidated with 30592-9-III;
30837-5-III; 30881-2-III
SentinelC3 v. Hunt
In a pair of opinions on the same case, the Washington Supreme Court recently
dealt with the virtually identical fee provisions ofRCW 25.15.480 that govern limited
7
liability companies. It stated the standards of review in the first opinion: an award under
the statute is not mandatory, but is discretionary with the trial court and is reviewed on
appeal for abuse of that discretion. Humphrey Indus. v. Clay St. Assocs., 170 Wn.2d 495,
506-07,242 P.3d 846 (2010) (Humphrey I). In the second opinion, the court clarified its
holding in the first case with respect to the behavior and standards governing fee awards ..
As provided in the statute, fees are available only if a party acted "arbitrarily,
vexatiously, and not in good faith." Humphrey Indus. v. Clay St. Assocs., 176 Wn.2d
662, 670,295 P.3d 231 (2013) (Humphrey II). The court also clarified that the
dissenters' actions of declining the corporation's offer and submitting an excessive
valuation did not violate the statutory standard. Id.Neither Humphrey I nor Humphrey II addresses the trial court's obligations in
addressing a fee request. We believe that consistent with the standards in other attorney
fee award situations, the trial court is obligated to enter findings of fact and conclusions
The events in this case, including the appellate briefing, occurred between the
7
two Humphrey opinions, so the trial court and the parties did not have the benefit of
Humphrey II.
15
No. 30553-8-III consolidated with 30592-9-III;
30837-5-III; 30881-2-II1
SentinelC3 v. Hunt
of law that support its detennination that a party acted "arbitrarily, vexatiously, or not in
good faith" under the statute. See generally, Mahler v. Szucs, 135 Wn.2d 398, 435, 957
P.2d 632 (1998) (requiring trial court to apply lodestar formula and enter written findings
to facilitate review). The failure to enter appropriate findings will nonnally result in a
remand. Id.Application of these principles to this case requires that we reverse the attorney
fee award. The absence of a record explaining the basis for the fee award at minimum
would require a remand. Id. However, in light of Humphrey II, nothing in the record of
this case supports a detennination of arbitrary, vexatious, or bad faith litigation. The
dissenters did not accept Sentinel's valuation and, instead, sought their own which they
then used as the basis for their counterproposals. Litigation ensued when Sentinel did not
accept the counterproposals. The record does not suggest that either side instigated the
litigation by behaving improperly, nor does it show that either side engaged in litigation
conduct that would trigger fees under the statute.
Sentinel argues that the failure to admit Hecker's report (or any expert opinion) at
the summary judgment hearing justified the award. For two reasons, it did not. First, the
failure to admit evidence is not the same as a failure to obtain a valuation. At worst,
16
No. 30553·8-111 consolidated with 30592-9·111;
30837·5·111; 30881·2-111
SentinelC3 v. Hunt
assuming some sort of duty even existed, the failure to properly authenticate the report
only hurt the dissenters and was negligence, not intransigence or arbitrary conduct. 8 The
dissenters had evidence to support their position and had made the evidence known to
Sentinel, but they simply did not present it in admissible fonn at the hearing.
Second, even if the dissenters had behaved vexatiously at the summary judgment
hearing, such action would not have retroactively made the entire proceedings arbitrary
or vexatious. An award of fees to address vexatious behavior is proper under the statute.
Nothing in the statute should be read, however, to shift the entire costs of the litigation to
one party just because of a late stumble in the proceedings. Instead, we read the statute
as attempting to discourage bad faith and arbitrary behavior by providing a remedy to the
nonoffending party for all costs associated with the bad behavior. Properly and perfectly
conducted pretrial litigation does not become vexatious merely because of arbitrary
conduct during the ensuing trial. As noted in the legislative history, arbitrary or
vexatious behavior that triggers litigation may properly shift the cost of the entire case
because it causes the ensuing litigation. However, the remedy for later occurring
8 It appears that the problem arose in the rush to get the report completed and filed
before the summary judgment hearing. With the benefit of hindsight, it would have been
better to have continued the hearing, but the failure to do so was not arbitrary conduct
that harmed Sentinel.
17
No. 30553-8-II1 consolidated with 30592-9-III;
30837-5-III; 30881-2-III
SentinelC3 v. Hunt
improper behavior should only reach the consequences of the offending conduct; it does
not address earlier proper conduct.
F or the reasons noted, the award of attorney fees is reversed. Both parties seek
attorney fees for this appeal. We exercise our discretion under the statute to decline their
requests. Appellants, as prevailing parties, are entitled to solely their statutory costs and
fees in this action. RAP 14.1, et seq.
Reversed and remanded.
>~c~ Korsmo, C.J.
b
WE CONCUR:
18