Peterson v. Jackson

• Decision Date: 14 April 2011
• Docket Number: No. 20090710–CA.,20090710–CA.
• Citation: 253 P.3d 1096,680 Utah Adv. Rep. 10,2011 UT App 113
• Parties: Jack W. PETERSON, Plaintiff, Appellee, and Cross-appellant,v.D. Scott JACKSON; Alan D. Allred; and Peterson Allred Jackson, P.C., Defendants, Appellants, and Cross-appellees.
• Court: Utah Court of Appeals

253 P.3d 1096

680 Utah Adv. Rep. 10

2011 UT App 113

Jack W. PETERSON, Plaintiff, Appellee, and Cross-appellant,

v.D. Scott JACKSON; Alan D. Allred; and Peterson Allred Jackson, P.C., Defendants, Appellants, and Cross-appellees.

No. 20090710–CA.

Court of Appeals of Utah.

April 14, 2011.

James C. Jenkins and Jeremy S. Raymond, Logan, for Appellee and Cross-appellant.Mark B. Hancey, Providence; and Gary N. Anderson and Brian G. Cannell, Logan, for Appellants and Cross-appellees.Before Judges McHUGH, VOROS, and ROTH.

OPINION

VOROS, Judge:

¶ 1 This case involves the valuation of a public accounting firm for purposes of a purchase in lieu of dissolution. The departing shareholder's shares were valued at $505,625 by his expert and at $224,639 by the remaining shareholders' expert. The trial court determined a “fair value” of $459,000. Both sides appeal. We affirm.

BACKGROUND

¶ 2 Jack W. Peterson, Alan D. Allred, and D. Scott Jackson were the sole shareholders in Peterson Allred Jackson, a certified public accounting firm (“the Company”). Peterson and Allred founded the firm in 1984. In 2001, Jackson, who was working at the CPA firm of Jackson Downs, joined the firm. Peterson owned 36.37% of the shares of the Company; Allred and Jackson owned the remainder.

¶ 3 In 2006, conflicts developed among the partners about the management of the firm. Ultimately, Peterson alleged that Allred and Jackson attempted to “freeze out, terminate, and destroy [Peterson's] equity, employment, management, and investment expectation.” Peterson filed for dissolution. Allred and Jackson individually and on behalf of the Company (collectively, “PAJ”) elected to purchase Peterson's shares in lieu of dissolution under Utah Code Ann. § 16–10a–1434 (Supp.2010).

¶ 4 Because the parties could not reach an agreement on fair value, the case went to trial. The trial court was thus required to “determine the fair value of the petitioning shareholder's shares ... as of any ... date the court determines to be appropriate.” Id. The parties and the trial court agreed that the date for establishing fair value of Peterson's shares would be December 31, 2006. To determine fair value, Peterson and PAJ each retained experts. Peterson retained Brad Townsend; PAJ retained Tyler Bowles. Each expert considered the fair value of the Company under three valuation approaches: the income approach, the market approach, and the asset approach. ¹ Townsend also used rules-of-thumb approaches “developed by observing the actual transaction price as a multiple of financial indicators such as net revenue, earnings, and cash flow.”

¶ 5 Townsend subdivided the income approach into the capitalized net income approach, under which he concluded the fair value of the Company was $724,366, and the capitalized cash flow approach, under which he concluded the fair value of the Company was $744,409. Townsend determined that, under the market and rules-of-thumb approaches, the fair value of the Company was between $1,098,094 and $1,963,581. And Townsend determined that under the asset approach, the fair value of the Company was $375,019. Townsend then weighted these various approaches. He accorded 20% weight to the capitalized net income approach, 20% to the capitalized cash flow approach, 60% to the market and rules-of- thumb approaches, and 0% to the asset approach. Using this weighting, Townsend concluded that the Company's fair value was $1,263,086. Townsend thus valued Peterson's 36.37% share at $459,000. Townsend also concluded that, as of December 31, 2006, the Company held $128,196 in undistributed cash and that Peterson's share of that cash was $46,625. Thus, Townsend ultimately valued Peterson's share of the Company at $505,625.

¶ 6 Bowles used the same general valuation approaches, but adjusted each calculation for personal goodwill. Bowles determined that the fair value of the Company under the income approach was $581,084, under the market approach was $712,556, and under the asset approach was $617,649. Bowles then determined that the asset approach was the “most applicable method.” Accordingly, he valued Peterson's 36.37% share of the Company at $224,639.

¶ 7 At trial, the court also heard evidence concerning the 2001 transaction in which Jackson became a shareholder in the Company. Jackson's former firm, Jackson Downs, merged with the Company. Jackson “bought in” to the Company by executing three non-interest-bearing promissory notes. Jackson's buy-in price was calculated using a formula based on gross sales and percentage of stock. Applying the same formula to Peterson's shares in the Company in 2006 yielded a value of $517,763.17.

¶ 8 The trial court issued a thirteen-page memorandum decision on April 17, 2009 (the April 17 Memorandum Decision). In it, the trial court adopted Townsend's valuation:

The Court heard two very different opinions ... from two very qualified individuals. Yet, in the end there was over a 50% difference in value between the two. The natural inclination is to take a Solomon approach and split the difference. However, the Court has not done this. To do so would negate both expert opinions and require the Court to pick a number out of thin air.

The trial court noted that, under Utah case law, “the three most recognized and relevant elements of fair value for stock valuation purposes are asset value, market value, and investment value,” see Hogle v. Zinetics Med., Inc., 2002 UT 121, ¶ 18, 63 P.3d 80; that, of these, the investment value has been traditionally favored, see Oakridge Energy, Inc. v. Clifton, 937 P.2d 130, 133 (Utah 1997); and that, unless the company is being liquidated, the asset approach “ ‘is the least reliable,’ ” see Bingham Consolidation Co. v. Groesbeck, 2004 UT App 434, ¶ 19, 105 P.3d 365 (quoting Oakridge, 937 P.2d at 133). The trial court thus rejected Bowles's valuation, which was based solely on the asset approach.

¶ 9 The trial court then turned to Townsend's report. The court noted that Townsend considered all three valuation techniques recognized in case law and that the report “offer[ed] a reasonable and educated explanation for making the assumptions [it] did.” The court also commented on the Jackson buy-in formula and the $517,763.17 valuation it yielded. The court stated that while this number “did not provide definitive valuation guidance,” the court would use it “as a guidepost in its decision.” The trial court concluded that the value of Peterson's share of the Company was $459,000. This was Townsend's estimate, excluding any portion of the Company's undistributed cash. The trial court did not award Peterson any of the undistributed cash. Despite accepting Townsend's report on valuation, the trial court concluded that it “could not find [or] determine what [Townsend's] subsequent value would be had the excess cash been included and the Court was not willing to speculate.” The trial court entered judgment on May 6, 2009 (the May 6 Judgment).

¶ 10 Both sides filed postjudgment motions. Peterson sought to correct several minor errors. PAJ sought to amend “the court's findings pertaining to the court's calculated value of [Jackson]'s 2001 buy-in and the subsequent findings that flow therefrom—most significantly the fair value of [Peterson]'s shares.” PAJ also sought seven additional findings regarding valuation. The trial court issued a twelve-page amended memorandum decision on July 20, 2009 (the July 20 Memorandum Decision) and a subsequent amended Judgment on August 6, 2009 (the August 6 Judgment). The court denied all the motions and let stand its decision that the fair value of Peterson's shares was $459,000. The court denied attorney fees, costs, and damages. PAJ appeals; Peterson cross-appeals.

ISSUES AND STANDARDS OF REVIEW

¶ 11 PAJ first contends that the trial court's findings concerning the fair value of the Company were inadequate. “[Q]uestions about the legal adequacy of findings of fact and the legal accuracy of the trial court's statements present issues of law, which we review for correctness.” Wall v. Wall, 2007 UT App 61, ¶ 7, 157 P.3d 341 (internal quotation marks omitted). “While the ultimate determination of fair value of stock is a question of fact, the determination of whether a given fact or circumstance is relevant to fair value under [state law] is a question of law which we review de novo.” Hogle v. Zinetics Med., Inc., 2002 UT 121, ¶ 10, 63 P.3d 80 (alteration in original) (internal quotation marks omitted). Further, “choice of valuation methods is a question of law.” Id. ¶ 19.

¶ 12 PAJ next contends that the trial court erred by including each shareholder's personal goodwill in reaching its fair value determination. As with the previous issue, “the determination of whether a given fact or circumstance is relevant to fair value under [state law] is a question of law which we review de novo.” Id. ¶ 10 (alteration in original) (internal quotation marks omitted).

¶ 13 Finally, PAJ contends that the trial court made a mathematical error when it relied on an incorrect calculation of Jackson's buy-in price. PAJ asks us to order the trial court to correct this determination as a clerical error under rule 60(a) of the Utah Rules of Civil Procedure. See Utah R. Civ. P. 60(a). “[T]he interpretation of a rule of procedure is a question of law that we review for correctness.” Brown v. Glover, 2000 UT 89, ¶ 15, 16 P.3d 540.

¶ 14 On cross-appeal, Peterson contends that the trial court erred by failing to award Peterson 36.37% of the “excess cash” on hand on December 31, 2006. “Findings of fact ... shall not be set aside unless clearly erroneous.” Utah R. Civ. P. 52(a); see also Lefavi v. Bertoch, 2000 UT App 5, ¶ 16, 994 P.2d 817.

¶ 15 Peterson next contends that the trial court erred in not awarding him prejudgment interest at the statutory rate of ten percent per year. Generally, “[t]he trial court's award of prejudgment interest, and the amount thereof, present[ ] a question of...