Brooks v. Brooks Furniture Mfgrs. Inc., No. 2009-CA-000200-MR

• Decision Date: 29 October 2010
• Docket Number: No. 2009-CA-000200-MR,2009-CA-000280-MR.
• Citation: 325 S.W.3d 904
• Parties: J. Hilton BROOKS, III, M.D., Appellant/Cross-Appellee, v. BROOKS FURNITURE MFGRS., INC., Appellee/Cross-Appellant.
• Court: Kentucky Court of Appeals

325 S.W.3d 904

J. Hilton BROOKS, III, M.D., Appellant/Cross-Appellee,

v.BROOKS FURNITURE MFGRS., INC., Appellee/Cross-Appellant.

Nos. 2009-CA-000200-MR, 2009-CA-000280-MR.

Court of Appeals of Kentucky.

Oct. 29, 2010.

COPYRIGHT MATERIAL OMITTED.

Philip E. Wilson (argued), Lexington, KY, for appellant/cross-appellee.

Ridley M. Sandidge, Jr. (argued), Louisville, KY, for appellee/cross-appellant.

Before THE FULL COURT SITTING EN BANC.

OPINION

THOMPSON, Judge:

J. Hilton Brooks, III, M.D., dissented from a November 30, 2004, merger of Brooks Furniture Mfgrs., Inc., a closely-held family corporation, into BFI Inc., a Tennessee corporation, and demanded payment for his shares. After the issue regarding Hilton's demand for payment remained unresolved, Brooks Furniture petitioned the Bell Circuit Court to determine the fair value of Hilton's shares plus accrued interest as provided in KRS 271B.13-300.

The issues presented concern: (1) the net asset book value of the corporation; (2) the application of a marketability discount and a minority shareholder discount to the valuation; (3) the interest due Hilton; (4) the failure to assess attorney's fees and expenses against Brooks Furniture; (5) the denial of discovery regarding post-merger stock ownership; and (6) the trial court's denial of Hilton's motion for summary judgment. The specificities presented by Hilton's appeal and Brooks Furniture's cross-appeal will be addressed individually.

FACTUAL OVERVIEW

Brooks Furniture was formed in 1954 and, although in 1956 the corporation's operations were moved to Tennessee, it remained a Kentucky corporation. In 1964, Jerry Brooks, Hilton's father, purchased the 339 total outstanding shares and became the sole shareholder.

In the late 1970's, Jerry gifted shares of Brooks Furniture stock to members of his immediate family as follows: his son, Michael Brooks, 81.94 shares; Hilton, 35.70 shares; his daughter, Rebecca Nix, 32.25 shares; and his wife, Geraldine Brooks, 23 shares. Jerry retained 166.11 shares.

In 1986, primarily as the result of the sale of a glider rocker line, Brooks Furniture enjoyed financial success which continued until 1996, when profits began declining.

On October 21, 2004, when profits remained in decline, the board of directors voted to merge Brooks Furniture into a new corporation, BFI, Inc. Under the planned merger, shareholders of Brooks Furniture would receive one share of BFI, Inc. in exchange for every eighty shares of Brooks Furniture stock. No fractional shares were to be issued. Consistent with a “squeeze-out” merger, any shareholders holding less than eighty shares of Brooks Furniture would receive a cash payment for their shares. As a result, Jerry and Michael would be the sole shareholders in the new corporation. Hilton, Rebecca, and Geraldine would receive cash for their shares.

On October 26, 2004, Hilton responded to the proposed merger with a notice of intent to demand payment as a dissenter pursuant to KRS 271B.13-210. The planned merger was approved on November 1, 2004. On December 10, 2004, Hilton demanded payment for his shares.

Based on an appraisal performed by Mercer Capital Management for gift planning purposes, at the time of the merger, the shares were valued at $10,600 per share. Although Hilton objected to the use of the valuation, on February 10, 2005, Brooks Furniture paid Hilton $378,420 based on $10,600 per share value. Interest on the amount was paid to Hilton at four percent in the amount of $3,027.31.

On March 9, 2005, Hilton demanded payment for his 35.70 shares in the amount of $1,364,009, or $38,207.53 per share, plus nine percent interest. In response, Brooks Furniture again requested a second appraisal from Mercer Capital.

Because Brooks Furniture had sixty days after receiving Hilton's demand for payment to file an action for judicial appraisal, the present complaint was filed by Brooks Furniture on May 5, 2005, prior to its receipt of the second Mercer Capital appraisal. KRS 271B.13-300(1). When the second appraisal was received, the price per share increased from $10,600 to $15,800 per share. Brooks Furniture immediately paid Hilton an additional $185,640, plus additional interest at the rate of four percent from November 30, 2004. Hilton continued to contest the accuracy of the appraisal.

Unable to reach an agreement with Hilton as to the value of Brooks Furniture, Brooks Furniture obtained a third appraisal from Lattimore, Black, Morgan and Cain (LBMC). Using an effective date of valuation as November 30, 2004, and the asset accumulation method, David Clinton Wood of LBMC determined the fair value. In doing so, he defined “fair value” as the “determination of the value of a going concern (i.e., the whole corporation) without the application of discounts or premiums typically applied to a specific security interest of the corporation being valued.” The report specifically stated that no consideration was given for “discounts for lack of control and marketability” to the specific interest being valued. However, based on certain marketability factors, he discounted the adjusted net book value of assets by thirty percent.

Pursuant to the LBMC report, the value per share increased to $17,663.86 for a value of $630,600. Brooks Furniture immediately paid Hilton an additional $66,540 for his 35.70 shares, plus additional interest at four percent in the amount of $2,524.

Dissatisfied with the payment, Hilton retained Hooper Cornell, P.L.C. (HC) to prepare a valuation report of Brooks Furniture as of November 30, 2004. Keith Pinkerton of HC prepared the report and also used the asset accumulation method but valued Hilton's interest at $1,100,000 or $30,812.32 per share. He declined to discount the value and opined that any discounts would be inappropriate due to assets held by Brooks Furniture regardless of the method used for valuation.

With the case unresolved, the court held a bench trial after which it found the fair value of Hilton's shares to be $862,369, or $24,156 per share, and awarded five percent interest. Subsequently, the court heard evidence regarding Hilton's claims for attorney and expert witness fees and expenses, which it ultimately denied.

STANDARD OF REVIEW APPLICABLE TO FINDINGS OF FACT

The issues presented by the appeal and cross-appeal regarding the valuation of Brooks Furniture's net assets and liabilities are factual. To avoid redundancy, we recite our standard of review applicable to the seven points in contention.

Our civil rules provide that findings of fact “shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses.” CR 52.01. Findings of fact are not clearly erroneous if those findings are supported by substantial evidence. Faulkner Drilling Co. Inc. v. Gross, 943 S.W.2d 634, 638 (Ky.App.1997). Substantial evidence is that which a “reasonable mind would accept as adequate to support a conclusion....” Moore v. Asente, 110 S.W.3d 336, 354 (Ky.2003). Although the evidence may be conflicting, this fact alone is insufficient to warrant a reversal of the trial court's findings. Id.

BROOKS FURNITURE'S NET ASSET BOOK VALUE

The sole published case in this jurisdiction regarding the dissenters' rights statute is Ford v. Courier-Journal Job Printing Co., 639 S.W.2d 553 (Ky.App.1982). In Ford, after the minority shareholders voted against the sale of the closely-held corporation, the corporation filed an action requesting that the court determine the value of the dissenters' shares. Id. at 554. Recognizing that the question of the definition of “fair value” was one of first impression in this jurisdiction, the court approved the interpretation as expressed by the Maine Supreme Court in In re Valuation of Common Stock of Libby, McNeill & Libby, 406 A.2d 54, 60 (Me.1979), and concluded:

That case states that the consensus among jurisdictions with statutes patterned after the Model Business Corporation Act, § 81, which Act was the basis of KRS 271A.405, is that three elements or approaches must be considered, and that the weight to be given to each element depends on the circumstances of each individual case. These elements are (1) the market value approach; (2) the earnings or investment approach; and (3) the net asset approach.

Ford, 639 S.W.2d at 555 (emphasis original).

The parties agree that the trial court properly used the net asset method of valuation. Their initial disagreement concerns the trial court's adjustments to the value of assets and liabilities of Brooks Furniture, which is attributable to six factors: (1) the book value of Brooks Furniture; (2) the value of furniture, fixtures, and equipment; (3) a suspended bonus payable to Jerry; (4) excessive compensation allegedly paid to Jerry and Michael; (5) Jerry's and Michael's deferred compensation; and (6) environmental remedial costs.

1. Hilton alleges that the trial court undervalued the reported book value by $76,881. He relies on the HC (Wood) valuation that was based on actual financial statements. The trial court relied on the LBMC (Pinkerton) valuation.

Because Brooks Furniture prepared bi-monthly detailed financial statements, Wood averaged the October and December 2004 statements. When the numbers became available as of November 30, 2004, he revised the valuation and concluded that the statement of November 30, 2004, would produce a number of less than $4,000. Concluding that the amount was de minimus in the context of the pending litigation, he did not alter his original valuation.

Based on Wood's testimony, the trial court concluded that the actual book value impacted by the revised fair value estimate of Brooks Furniture was $4,000, not the $76,881 calculated by Pinkerton. Based on the evidence presented, we decline to usurp the discretion afforded the trial court.

2. Hilton complains that the trial court erroneously accepted LBMC's valuation of furniture,...