In re Marriage of Harvey

• Docket Number: F078166
• Decision Date: 16 December 2021
• Parties: In re the Marriage of MICHAEL S. and CYNTHIA M. HARVEY. v. CYNTHIA M. HARVEY, Appellant. MICHAEL S. HARVEY, Appellant,
• Court: California Court of Appeals Court of Appeals

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In re the Marriage of MICHAEL S. and CYNTHIA M. HARVEY.

MICHAEL S. HARVEY, Appellant,
v.
CYNTHIA M. HARVEY, Appellant.

F078166

California Court of Appeals, Fifth District

December 16, 2021

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Stanislaus County No. 457566, Loretta Murphy Begen, Judge.

Shore McKinley Conger & Jolley and John H. McKinley; Downey Brand, Jay-Allen Eisen, Bradley C. Carroll, and Joseph K. Little for Appellant Michael S. Harvey.

Arnold & Porter Kaye Scholer, Sean M. SeLegue and Sean A. McCormick; Goss & Goss, Michael A. Goss and Mark A. Goss for Appellant Cynthia M. Harvey.

OPINION

DETJEN, Acting P. J.

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INTRODUCTION

This is an appeal and cross-appeal from a July 23, 2018 judgment of the Stanislaus County Superior Court.

Appellant Michael S. Harvey and appellant Cynthia M. Harvey^[1] married in 1988. Three years later, Michael founded and incorporated Enviro Tech Chemical Services, Inc. (Enviro Tech), a chemical manufacturing company. By 2010, the Harveys jointly owned 825 shares in Enviro Tech, amounting to nearly 70 percent of the outstanding common stock. On March 14, 2011, they signed a "SHAREHOLDER BUY-SELL AGREEMENT" (Agreement), which included provisions relating to a "Sale on Marital Dissolution or Separation of Shareholder."

The Harveys separated on October 23, 2011. Thereafter, Michael purchased additional Enviro Tech shares from other stockholders. He also petitioned for dissolution of marriage. Pursuant to Family Code section 2337, the superior court bifurcated the issue of marital status. In May 2015, the Harveys' marriage was terminated.

In a "FINAL JUDGMENT ON RESERVED ISSUES" filed on July 23, 2018, the court concluded that the fair market value of Cynthia's one-half interest in the jointly owned Enviro Tech shares was $21, 332, 000 as of December 31, 2017; awarded Michael "all right, title, and interest in and to" these shares; and ordered Michael to pay Cynthia $21, 332, 000 as equalization, either as a one-time lump sum or in installments pursuant to the terms and conditions of a seven-year promissory note. The court also concluded that Cynthia "failed to establish any impairment of [her] undivided one-half interest in the

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community estate from any breach of fiduciary duty by [Michael]." (See Fam. Code, § 1101, subd. (a).)

On appeal, Michael contends that the court erred by disregarding Section 11 of the Agreement, "which sets out the terms on which the [Enviro Tech] shares are to be purchased from Cynthia," and imposing "significantly more burdensome" and "onerous terms and conditions on [his] acquisition of [Cynthia's] shares." We conclude that Section 11 did not apply.

On cross-appeal, Cynthia contends that the court "erred in applying two discounts to the valuation of [her] interest in the 825 community shares of [Enviro Tech]." (Boldface & capitalization omitted.) First, "the court erred in applying a discount for possible future taxes that were not immediate and specific." (Capitalization omitted.) Second, "the trial court improperly utilized a marketability discount in valuing [Enviro Tech]." (Capitalization omitted.) Cynthia further contends that the court "erred by denying relief to [her] regarding Michael's secret purchases of additional [Enviro Tech] shares." (Boldface & capitalization omitted.) We conclude: (1) the valuation erroneously accounted for a tax liability that was not immediate and specific, but substantial evidence supported a discount for lack of marketability; and (2) the court impliedly made the factual findings necessary to support its ruling regarding Cynthia's breach of fiduciary duty claim.

STATEMENT OF FACTS

I. The Agreement

The Agreement read, in part:

"This Shareholder Buy-Sell Agreement ('Agreement') is made and entered into . . . by, between and among MICHAEL S. HARVEY and CYNTHIA M. HARVEY, Trustees of the MICHAEL AND CYNTHIA HARVEY REVOCABLE TRUST dated December 20, 2010 ('Harvey

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Trust') and MICHAEL B. ARCHIBALD^[2] and DEBRA L. ARCHIBALD, Trustees of the ARCHIBALD 2010 REVOCABLE TRUST dated June 22, 2010 ('Archibald Trust') and ENVIRO TECH CHEMICAL SERVICES, INC., a California corporation (the 'Corporation'). The Harvey Trust and Archibald Trust are collectively but nonspecifically referred to herein in the singular as 'Shareholder' and in the plural as 'Shareholders.' The Corporation and Shareholders are collectively but nonspecifically referred to in this Agreement in the singular as 'Party' and in the plural as 'Parties.'

"Section 1. Recitals.

"A. The Shareholders are the owners of a portion of the outstanding common stock of the Corporation as follows:

“Shareholder	Number of Shares
“Harvey Trust	825 . . .
“Archibald Trust	275 . . .

"B. The remaining shares of the Corporation which are owned by persons or entities other than the Shareholders are owned as follows:

"Shareholder	Number of Shares
"Fernanda Cabral	5
"John Pray	60
"Jon Howarth, PhD -32

"The Shareholder's [sic] agree that such shares are not subject to the terms of this Agreement.

"C. This Agreement is entered into with respect to all shares of common stock of the Corporation, now or hereafter owned by the Shareholders, for the purpose of protecting the Corporation and the Shareholders, as well as providing continuity for the Corporation's business in the event of the occurrence of certain events discussed in this Agreement. [¶] . . . [¶]

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"NOW, THEREFORE, in consideration of the mutual agreements, conditions, covenants, promises, representations, undertakings, and warranties contained herein, the Corporation and Shareholders agree as follows:

"Section 2. Restriction On Transfer. The Parties hereby mutually agree to restrict their respective right and ability to freely transfer the shares owned by each Shareholder in accordance with the terms and conditions set forth in this Agreement. None of the shares presently owned or subsequently acquired by the Shareholders shall be sold, pledged, encumbered, transferred, or disposed of in any way, whether voluntarily, involuntarily, or by operation of law except under the terms of this Agreement. . . . [¶] . . . [¶]

"Section 4. Option to Purchase.

"A. No Conveyance. Except as specifically provided in this Agreement, no Shareholder shall sell, transfer, assign, pledge, encumber, hypothecate, or in any way dispose of any of his or her shares (all of which shall be deemed a 'transfer') or any right or interest in them. A Shareholder desiring to transfer his or her shares shall give written notice (for purposes of this Section 4.A., 'Offer Notice') to the Corporation and the other Shareholders, in accordance with Section 19 of this Agreement, of his or her intention to transfer his or her shares or an interest in them. The notice must include the name and address of the proposed transferee and specify the number of shares to be transferred, the interest to be transferred, the price per share, and the terms of payment. Promptly on receipt of the notice, the Secretary of the Corporation shall forward a copy of the notice to each member of the Corporation's board of directors.

"B. Corporation Option Period. Provided Section 7 below ('Drag-Along and Tag-Along Rights') is not applicable or if such Section is applicable, the option conferred thereunder has not been exercised, then for a period of the longer of: (i) one hundred eighty (180) days following the receipt of the Offer Notice by the Secretary of the Corporation, or (ii) ninety (90) days following the final determination of value under Section 10 of this Agreement ('Corporation Option Period'), the Corporation shall have the option to purchase all or any portion of the offered shares, at either the price and terms stated in the Offer Notice or at a price determined under Section 10 of this Agreement and the terms set forth in Section 11 of this Agreement as determined at the option of the Corporation. [¶] . . . [¶]

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"D. Shareholder's Option Period. Provided Section 7 below ('Drag-Along Rights') is not applicable or if such Section is applicable, the option conferred thereunder has not been exercised, then, if the Corporation fails to exercise its option as to all of the offered shares within the Corporation Option Period, then for ninety (90) days following the expiration of the Corporation Option Period, the other Shareholders shall have the option to purchase all or any portion of the offered shares not purchased by the Corporation ('Shareholder Option Period'), at the same price and terms as provided to the Corporation in subpart 4.B. above, as elected by the purchasing Shareholder(s). [¶] . . . [¶]

"Section 5. Other Events Giving Rise To Option To Purchase.

"A. Triggering Events. On the occurrence of the following events (each being a 'Triggering Event') the Corporation and the Shareholders shall have an option to purchase the shares of the Shareholder and his or her spouse (and the shares of any permissible transferee^[3] to whom such Shareholder has previously transferred shares of the Corporation), if any, who is the subject of the event giving rise to the option to purchase. [¶] . . . [¶]

"(1) Bankruptcy / Involuntary Dissolution. In the event any Shareholder is adjudicated as bankrupt under the Federal Bankruptcy Code (voluntarily or involuntarily), or makes an assignment for the benefit of creditor, or files a petition seeking to force the involuntary winding up and dissolution of the Corporation under California Corporations Code Section 1800 or a successor provision, or if substantially all property of the Shareholder is levied on and sold in a judicial proceeding, the Corporation first, and then the other Shareholders shall have the option to purchase all, or any part, of the shares owned by...