Brown v. Arp and Hammond Hardware Co.

• Decision Date: 29 August 2006
• Docket Number: No. 05-70.,05-70.
• Citation: 141 P.3d 673,2006 WY 107
• Parties: Suzanne W. BROWN, individually; Suzanne W. Brown, as Successor Trustee of the Marie Arp Schroeder Testamentary Trust; and Suzanne W. Brown, as Successor Trustee of the Catherine S. Holmes Trust, Appellants (Defendants), v. ARP AND HAMMOND HARDWARE COMPANY, Appellee (Plaintiff).
• Court: Wyoming Supreme Court

Page 673

141 P.3d 673

2006 WY 107

Suzanne W. BROWN, individually; Suzanne W. Brown, as Successor Trustee of the Marie Arp Schroeder Testamentary Trust; and Suzanne W. Brown, as Successor Trustee of the Catherine S. Holmes Trust, Appellants (Defendants), v. ARP AND HAMMOND HARDWARE COMPANY, Appellee (Plaintiff).

No. 05-70.

Supreme Court of Wyoming.

August 29, 2006.

COPYRIGHT MATERIAL OMITTED

Representing Appellants: Scott W. Meier, of Hickey & Evans, LLP, Cheyenne, Wyoming.

Representing Appellee: John B. "Jack" Speight & Robert T. McCue, of Speight, McCue & Associates, P.C., Cheyenne, Wyoming; Amanda Hunkins Newton, of Jones, Jones, Vines & Hunkins, Wheatland, Wyoming.

Before VOIGT, C.J., and GOLDEN, HILL^*, KITE, and BURKE, JJ.

BURKE, Justice.

[¶ 1] Suzanne Brown, in her individual capacity and as successor trustee of two trusts, (collectively "Appellants"), held a minority interest in Arp and Hammond Hardware Company. The corporation executed a reverse stock split, cashing out Appellants' resulting fractional shares. Appellants exercised their right to dissent. Unable to reach an agreement concerning the value of Appellants' shares, the corporation filed an appraisal proceeding in district court. On appeal, Appellants challenge the district court's appraisal of their minority shares. They assert it was error for the district court to apply a minority discount and a discount for trapped-in capital gains in determining the fair value of Appellants' shares. Appellants also claim assets were erroneously omitted from the valuation. We conclude that the district court erred by discounting for minority status and trapped-in capital gains. We also find error in the district court's failure to include all corporate assets in its valuation. We reverse and remand.

ISSUES

[¶ 2] Appellants present the following issues for review:

1) Whether the District Court erred when, under the Wyoming dissenters' rights statute, it applied a discount for hypothetical trapped-in capital gains in determining the fair value of Appellants' [i]nterest in Arp and Hammond Hardware Company.

2) Whether the District Court erred when, under Wyoming dissenters' rights statute, it applied a lack of control discount (also known as a minority interest discount) in determining the fair value of Appellants' interest in Arp and Hammond Hardware Company.

3) Whether the District Court committed clear error when, in its Findings of Fact, it failed to include the value of non-ranch assets in determining the fair value of Arp and Hammond Hardware Company as an entity, and thus undervalued the fair value of Appellants' interest in Arp and Hammond Hardware Company.

Appellee phrases the issues as follows:

1) Whether the Wyoming Business Corporation Act allows for the application of the lack of control/minority discount in a judicial appraisal proceeding pursuant to Wyo. Stat. § 17-16-1301, et seq.;

2) Whether this Court should defer to the finding of the District Court that appraisal proceedings are inherently fact-specific, and therefore the application of discounts should be left for the trier of fact in an appraisal proceeding 3) Whether the District Court was correct in applying an adjustment for the built-in capital gains tax liability based on the facts of this case; and

4) Whether this Court should take into account additional assets not considered by the District Court in its valuation of Arp and Hammond.

FACTS

[¶ 3] Arp and Hammond Hardware Company ("Arp and Hammond") is a closely-held corporation, formed in 1950 under Wyoming law. Over the years, ownership of Arp and Hammond passed to descendants of one of the company's founders. In recent history, the shares were held by four cousins. Three of the cousins, Frances Read, Doran Lummis, and Catharine Holmes each held approximately twenty percent, and the fourth cousin, Elizabeth Arp Stoddard, held approximately forty percent of the shares.

[¶ 4] The four shareholders contemplated a sale of the company's ranch to Lummis Livestock Company, LLC ("Lummis Livestock"). After discussions with counsel, the majority of the shareholders decided that a sale of stock would be preferable. On March 31, 2000, Lummis Livestock purchased the shares of Ms. Stoddard and Ms. Read for $930 per share, acquiring approximately sixty percent of the outstanding shares in Arp and Hammond. Although Ms. Holmes had previously agreed to sell the land, she did not want to sell her entire interest in the corporation. She declined to sell her shares. Subsequently, tension grew between the shareholders.

[¶ 5] Ms. Holmes eventually transferred her interest in Arp and Hammond to her daughter, Suzanne Brown, as the successor trustee of two trusts. Ms. Brown also held four shares in her individual capacity. Collectively, Appellants held 594 shares. On June 12, 2003, Doran Lummis sold his block of shares to Lummis Livestock, of which he was a member. Consequently, of the 2,717 shares of Arp and Hammond, Lummis Livestock held 2,123 shares, or approximately 80% of the outstanding shares.

[¶ 6] On June 13, 2003, Arp and Hammond gave notice of its intention to amend its Articles of Incorporation to cause a reverse stock split. The amendment proposed a reduction in the number of shares at a rate of 2,123 to 1, and required the corporation to acquire all fractional shares. Appellants voted against the reverse stock split, but it was approved by the majority shareholder on September 25, 2003. The amendment to the Articles of Incorporation was filed with the Secretary of State on September 26, 2003.¹ Appellants' 594 shares were thereby converted to a fractional share. The resolution enacting the amendment provided that following the stock split, Arp and Hammond would purchase the fractional shares.

[¶ 7] Appellants exercised their right to dissent from the reverse stock split pursuant to Wyo. Stat. Ann. § 17-16-1302(a)(iv)(E) (LexisNexis 2005).² They demanded payment for their shares and deposited them with the corporation. Arp and Hammond tendered payment to Appellants in the amount it considered to be fair value, $264,924, representing $446 per share.³ Appellants objected to the amount of the payment, and Arp and Hammond subsequently filed an action in district court, requesting an appraisal of Appellants' shares pursuant to Wyo. Stat. Ann. § 17-16-1330 (LexisNexis 2005).⁴

[¶ 8] A bench trial was held October 12-14, 2004. The parties stipulated that all of the procedural requirements and prerequisites of Wyo. Stat. Ann. § 17-16-1301, et seq. were met and carried out in a timely manner, allowing the district court to appraise the value of Appellants' shares. The parties also stipulated that as of the valuation date, corporate assets included ranch land in Laramie County, a building in Cheyenne, and cash on hand. Several other assets were identified and valued in expert appraisal reports admitted by joint stipulation.⁵ The primary focus at trial was valuation of the corporation's largest asset, the ranch property, with the parties contesting the value of particular parcels. The parties disagreed whether certain discounts should be applied in determining the fair value of Appellants' shares.

[¶ 9] The district court issued its Findings of Fact and Conclusions of Law on November 22, 2004. The district court determined the value of Arp and Hammond's ranch land to be $4,203,000.⁶ Appellants' shares represented 21.86% of the shares in the company. Applying that percentage to the $4,203,000, the district court found that the undiscounted value of Appellants' interest amounted to $918,776.

[¶ 10] The district court considered four discounts proposed by the corporation and rejected two of the discounts. The district court rejected a marketability discount because it would "provide a windfall to Arp and Hammond." It also concluded that a 10% "real estate discount," as a downward adjustment to the value of the ranch land, was not warranted.⁷ However, two discounts totaling 35% were applied. The district court found a minority discount of 30% appropriate because the majority and minority took "radically different positions concerning the future of Arp and Hammond" and the minority's desire to develop the ranch land was "subordinate to the will of the majority." Additionally, the district court applied a 5% discount for trapped-in capital gains in anticipation that Arp and Hammond would be forced to sell some of its assets to satisfy the judgment in Appellants' favor.⁸ Applying these discounts, the district court determined that the fair value of Appellants' shares was $597,204. Its fair value determination was based upon Arp and Hammond's ranch property and did not include any other corporate assets. After deducting the amount Arp and Hammond had previously paid to Appellants, and adding accrued interest at 6.5%, the district court entered judgment in the amount of $357,481.13 in favor of the minority shareholders.⁹ This appeal followed.

STANDARD OF REVIEW

[¶ 11] "When a matter has been the subject of a bench trial before the district court, we review its factual determinations under a clearly erroneous standard and the legal conclusions de novo." Union Pacific R.R. v. Trona Valley Fed. Credit Union, 2002 WY 165, ¶ 6, 57 P.3d 1203, 1205 (Wyo. 2002). We will not set aside a district court's findings of fact unless they are clearly erroneous or contrary to the great weight of the evidence. Kimball v. Turner, 993 P.2d 303, 305 (Wyo.1999). When reviewing questions of law, we afford no deference to the district court. Harber v. Jensen, 2004 WY 104, ¶ 8, 97 P.3d 57, 60 (Wyo.2004). Statutory interpretation is a question of law reviewed de novo. Union Pacific R.R., ¶ 7, 57 P.3d at 1205.

DISCUSSION

[¶ 12] As a matter of first impression, we consider the meaning of "fair value" in a dissenters' rights proceeding. Appellants take issue with three aspects of the district court's fair value determination: discounting for minority status,...