Middleburg Training Center, Inc. v. Firestone

• Decision Date: 06 March 2007
• Docket Number: No. 1:07cv37.,1:07cv37.
• Citation: 477 F.Supp.2d 719
• Parties: MIDDLEBURG TRAINING CENTER, INC., Plaintiff, v. Myrna FIRESTONE, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

477 F.Supp.2d 719

MIDDLEBURG TRAINING CENTER, INC., Plaintiff, v. Myrna FIRESTONE, Defendant.

No. 1:07cv37.

United States District Court, E.D. Virginia, Alexandria Division.

March 6, 2007.

John A.C. Keith, Blankingship & Keith PC, Fairfax, VA, for Plaintiff.

Kenneth J. Nunnenkamp, Patton Boggs LLP, McLean, VA, for Defendant.

MEMORANDUM OPINION

ELLIS, District Judge.

At issue in this removed shareholder appraisal action, brought pursuant to Va. Code § 13.1-729 et seq., is whether defendant, Myrna Firestone, agreed to litigate her appraisal rights action in a Virginia state court when she purchased shares in plaintiff, Middleburg Training Center, Inc. ("MTC"), a Virginia corporation. Fully briefed and argued, this issue is now ripe for disposition. For the reasons that follow, plaintiffs motion to remand to the Circuit Court of Loudon County, Virginia, must be granted. Because the Virginia Stock Corporation Act ("VSCA"), Va.Code § 13.1-601, et seq., is deemed a part of the contract between a corporation and its shareholders, it follows that when Fire-stone acquired her shares of MTC she agreed to a forum selection provision requiring her to litigate her appraisal rights in the Circuit Court of Loudon County, Virginia, in accordance with Va.Code § 13.1-740.

I.

The material facts are undisputed and may be succinctly stated. Plaintiff, MTC, is a Virginia corporation incorporated in 1975 for the purpose of operating a horse farm. Its principal assets were approximately 149.5 acres of land in Loudon County, Virginia, the MTC Training Center, which included horse farm-related improvements and farm-related personal property.

Defendant, Myrna Firestone, a citizen of Washington, D.C., purchased one share of MTC in May 1987 and served, at all times relevant here, as a member of MTC's Board of Directors.¹ Firestone was one of five shareholders and her share, at all times relevant here, represented a 20% interest in MTC.

Beginning at least as early as 2003, MTC's directors and shareholders considered selling either the MTC Training Center, or alternatively, their shares in MTC. In this' connection, MTC received several offers of purchase, none of which were judged adequate by MTC's Board of Directors and shareholders.² MTC next retained a local realtor to advise the Board of Directors on setting an appropriate sales price for the MTC Training Center. The realtor advised the Board of Directors that the MTC Training Center should be priced in the range between $4.3 and $4.5 million.

Thereafter, on July 18, 2006, MTC held a special shareholder's meeting to consider an offer by Randolph D. Rouse to purchase MTC's assets for $4 million. Firestone opposed the sale, arguing (i) that the price was too low and (ii) that, for tax purposes, a sale of stock was preferable to a sale of assets. Instead of accepting the Rouse offer, Firestone suggested that a realtor be engaged to sell MTC's stock for $6.7 million, an amount based on appraisals and realtor opinions Firestone had obtained. The Board did not accept Firestone's suggestion. Accordingly, on July 28, 2006, Firestone notified MTC of her intent to exercise her appraisal rights and to demand payment of the fair value of her share in the event the Rouse asset sale was approved by the Board of Directors.

On that same day, July 28, 2006, the Board of Director's held a meeting, with Firestone present, to consider Rouse's offer. During the meeting MTC's president, Lewis S. Wiley, presented a professional appraisal valuing MTC's real estate at $4.35 million. Additionally, Wiley noticed a special meeting of MTC's directors and shareholders for August 7, 2006 to act on Rouse's offer, stating:

Since consummation of the Purchase Contract would leave Middleburg Training Center, Inc. without a significant continuing business activity, you as a shareholder are entitled to vote' on the proposed Purchase Contract and also are entitled to appraisal rights pursuant to Article 15 of the Virginia Stock Corporation Act, § 13.1-729, et seq. of the Code of Virginia....

In response, Firestone again notified Wiley of her intent to exercise appraisal rights if the proposed sale was approved. At the August 7, 2006 meeting, the sale of MTC's assets to Rouse was approved with Firestone as the only dissenting director or shareholder. Two days later, Wiley informed the shareholders that the sale was complete. and that MTC would receive net proceeds of $3,760,942.00,³ minus any federal corporate income taxes.

On August 17, 2006, MTC mailed Firestone an appraisal notice, as required by Va.Code § 13.1-734.⁴ Because this appraisal notice omitted information required by the statute, MTC mailed Firestone an amended appraisal notice on October 6, 2006, resolving most, if not all, of the deficiencies of the earlier notice and stating that MTC had determined the estimated value of Firestone's share to be $563,477.00.⁵ The amended notice further stated that Firestone was required to complete and return the appraisal form by November 15, 2006,⁶ certifying that she owned a share in MTC and that she desired to seek appraisal rights. Firestone returned the appraisal form on October 17, 2006, providing the requested information and notifying MTC that she believed the estimated valuation of her share was inadequate. Notably, one day before returning the appraisal form, Firestone filed a civil action in the United States District Court for the Eastern District of Virginia alleging nine claims against MTC and its directors and shareholders. Firestone v. Wiley, Case No. 1:06cv1168 (E.D.Va. Oct. 16, 2006) (Complaint)⁷

On November 15, 2006, after receiving the information in Firestone's appraisal form, MTC, following the command of Va. Code § 13.1-737,⁸ paid Firestone $563,477.00, an amount equal to the company's estimate of the fair value of Firestone's share of MTC stock, plus $6,135.65, the amount of interest on this fair value estimate that accrued from August 8, 2006 through November 15, 2006. Additionally, MTC advised Firestone of her right to demand further payment, provided she made a written demand no later than December 18, 2006. On December 11, 2006, counsel for Firestone explained that Firestone's October 17, 2006 letter constituted her written demand, pursuant to Va.Code § 13.1-739.A.⁹ Accordingly, in accordance with Va.Code § 13.1-740,¹⁰ MTC filed a petition in the Circuit Court of Loudon County, Virginia on December 14, 2006, to adjudicate Firestone's demand for payment.

On January 10, 2007, Firestone removed this action to the United States District Court for the Eastern District of Virginia, based on diversity jurisdiction. See 28 U.S.C. § 1332. Two days later, Firestone moved to dismiss the removed petition arguing that the petition's claims should have been brought as compulsory counterclaims under Rule 13(a), Fed.R.Civ.P., in the federal civil action Filed by Firestone on October 16, 2006. In response, MTC moved to remand this matter to the Circuit Court for Loudon County, Virginia, alleging that removal was improper as Firestone agreed, by virtue of purchasing shares in a Virginia corporation, to a contractual forum selection provision requiring her to litigate her appraisal rights in the Circuit Court of Loudon County, Virginia.

II.

Because the appraisal rights procedure established by the VSCA, Va.Code § 13.1-601, et seq., is central to disposition of this matter, a brief summary of the principal aspects of this procedure is warranted. To begin with, the VSCA provides that where, as here, a' corporation disposes of its assets, any shareholder entitled to vote on such disposition is entitled to appraisal rights, meaning the shareholder may "obtain payment of the fair value of that shareholder's shares." Va.Code § 13.1-730. Thus, when a proposed corporate action, including a disposition of assets, is to be submitted to a vote of the shareholders, the meeting notice must state that the corporation has concluded that any dissenting shareholders will be entitled to assert their appraisal rights. Va.Code § 13.1-732. Then, when the proposed corporate action is submitted to a vote at a shareholder's meeting, a dissenting shareholder wishing to assert appraisal rights (i) must deliver to the corporation, before the vote is taken, written notice of their intent to demand payment if the proposed action is effectuated and (ii) must not vote any shares in favor of the proposed action. Va.Code § 13.1-733. If the proposed action is approved, the corporation has ten days within which to deliver to the shareholder a written appraisal notice and form, containing the information required by Va. Code § 13.1-733, and setting a date, between forty and sixty days from the date of the appraisal notice, by which time the shareholder must complete and return the appraisal form. Va.Code § 13.1-734.¹¹ Then, within thirty days after the appraisal form is due, the corporation must pay the dissenting shareholder the fair value of their shares, plus interest. Va.Code § 13.1-737. If the dissenting shareholder is dissatisfied with the amount paid, they must notify the corporation in writing, stating the estimated fair value of their shares and demanding payment of that estimate. Va.Code § 13.1-739. If the dissenting shareholder's demand for payment remains unsettled, the VSCA provides that "the corporation shall commence a proceeding ... to determine the fair value of the shares and accrued interest." Va.Code § 13.1-740. Importantly, the VSCA specifically provides that "[t]he corporation shall commence [this] proceeding in the circuit court of the city or county where the corporation's principle office" is located, and such court has "plenary and exclusive" jurisdiction over the proceeding. Id.

III.

The question presented by MTC's remand motion is whether Firestone, by virtue of purchasing stock in a Virginia corporation, is contractually bound by the forum selection provision in Va.Code 13.1-740, stating that the...