Sentinelc3, Inc. v. Hunt

• Decision Date: 31 July 2014
• Docket Number: No. 89317–9.,89317–9.
• Citation: 331 P.3d 40,181 Wash.2d 127
• Court: Washington Supreme Court
• Parties: SENTINELC3, INC., a Washington Corporation, Petitioner, v. Chris J. HUNT, an individual and the marital community, if any, comprised of Chris J. Hunt and Carmen Hunt; Michael Blood, an individual and the marital community, if any, comprised of Michael Blood and Janae Blood, Respondents.

181 Wash.2d 127

331 P.3d 40

SENTINELC3, INC., a Washington Corporation, Petitioner,

v.Chris J. HUNT, an individual and the marital community, if any, comprised of Chris J. Hunt and Carmen Hunt; Michael Blood, an individual and the marital community, if any, comprised of Michael Blood and Janae Blood, Respondents.

No. 89317–9.

Supreme Court of Washington, En Banc.

July 31, 2014.

Kjirstin June Graham, Attorney at Law, Spokane, WA, Thomas Timbridge Bassett, K & L Gates LLP, Spokane, WA, for Petitioner.

Vicki L. Mitchell, Paine Hamblen LLP, Spokane, WA, Christopher Stephen Crago, Paine Hamblen, Spokane, WA, Michael Blood, (Appearing Pro Se), Boise, ID, Janae Blood, (Appearing Pro Se), Boise, ID, for Respondent.

GORDON McCLOUD, J.

¶ 1 This case concerns a judicial proceeding to determine the fair value of shares in a closely held corporation. The primary question presented is whether the respondents, shareholders who disagreed with the corporation's estimate of that fair value, presented sufficient evidence to defeat the corporation's motion for summary judgment. We must also decide whether the trial court properly awarded attorney and expert fees to the corporation.

¶ 2 We hold that the respondents did not provide sufficient evidence to defeat the corporation's motion for summary judgment. We also hold that the respondents did not act in a manner that justified the trial court's award of fees to the corporation. We therefore reverse the Court of Appeals as to the summary judgment issue and affirm it as to the fees.

FACTS

¶ 3 Respondents Chris Hunt and Michael Blood (collectively Respondents) owned shares of Petitioner SentinelC3 Inc. (Sentinel), a closely held corporation. Hunt owned 1,000,000 shares (approximately a 22.2 percent interest), and Blood owned 250,000 shares. On April 19, 2010, Sentinel provided the Respondents with a valuation report prepared by a business valuation expert named James Kukull (Kukull Report). The Kukull Report valued the Respondents' interests at $0.1952 per share as of December 31, 2009.

¶ 4 On October 28, 2010, a majority of the Sentinel shareholders voted to approve a reverse stock split. The Respondents were the only dissenting shareholders.

¶ 5 As dissenting shareholders, the Respondents were entitled under Washington's dissenters' rights statute to payment for the “fair value” of their shares, plus interest, as of the date immediately preceding the reverse stock split. RCW 23B.13.010, .250. Sentinel estimated the fair value of the shares to be the same as that reflected in the Kukull Report: $0.1952 per share. It issued checks to both men consistent with that estimate.

¶ 6 The Respondents disagreed with the estimate in the Kukull Report. Per RCW 23B.13.280, both Respondents notified Sentinelthat they objected to the company's valuation and had retained their own valuation expert to evaluate the shares. Each claimed that the valuation expert placed the per share price at $0.4267, and each objected that Kukull's valuation was outdated at the time of the reverse stock split.

¶ 7 In other respects, however, the Respondents' fair value estimates differed from one another. Hunt asserted that the value of the shares would be 20 percent higher if a “negotiated transaction of the corporation to a strategic buyer is imminent” and stated that he believed that Sentinel was contemplating such a sale. Clerk's Papers (CP) at 62. Blood claimed that Sentinel's nondissenting shareholders had arranged some sort of “ ‘close’ agreement” whereby the number of total shares was artificially inflated—and his own interest thereby artificially diminished—just prior to the reverse stock split. CP at 328–29. He asserted that during discussions following the reverse split vote,

it became clear that Sentinel had already offered and The Managing Class of Shareholders ... accepted an agreement [that] allowed The Managing Class ... to exchange their shares of Sentinel for another Sentinel asset with separate benefits before their fractional shares were repurchased along with the Non Managing Class of Shareholders after the recapitalization of Sentinel.

CP at 327–28. According to Blood, the proper value of his shares was $0.6443 per share.

¶ 8 Pursuant to RCW 23B.13.300, Sentinel petitioned the superior court for a determination of the shares' fair value. RCW 23B.13.300 requires a corporation to commence such a proceeding within 60 days after receiving a dissenting shareholder's demand for payment, unless the corporation elects to meet the demand instead. That statute also provides that “[t]he dissenters are entitled to the same discovery rights as parties in other civil proceedings” and that “[t]he court may appoint one or more persons as appraisers to receive evidence and recommend decision on the question of fair value.” RCW 23B.13.300(5).

¶ 9 Blood and Hunt answered Sentinel's petition on March 10 and April 7, 2011, respectively. On May 6, 2011, the trial court entered a case schedule order with a discovery cutoff date of December 9, 2011.

¶ 10 In early April 2011, the Respondents answered Sentinel's first interrogatories and requests for production and identified the valuation experts they had retained as “Meg Carlson and Korri Hall, the C & H Group, LLC.” CP at 334, 348. The Respondents refused to produce any documents related to Carlson's and Hall's valuation, however, on the ground that they had “retained them as consulting experts only.” CP at 334, 349 (emphasis omitted). Hunt also asserted that his belief that Sentinel might be contemplating a sale to a strategic buyer was “based upon the actions of Sentinel C3.” CP at 350. Blood did not explain the basis for his allegation that Sentinel had artificially diminished his shares' value in a secret agreement.

¶ 11 In late June and early July 2011, Sentinel responded to the Respondents' first interrogatories. Sentinel objected to many of the Respondents' interrogatories and requests for production on the grounds that they were unduly burdensome, called for privileged information, or were unlikely to lead to the discovery of admissible evidence. Indeed, many of the Respondents' requests were quite broad. E.g., CP at 394 (“Please identify all corporate actions and/or corporate documents of Sentinel C3 ... which were created, started, discussed, partially carried out, completed or which any other activity was performed related to the action or document between January 1, 2008 and the present....”). Despite its objections, Sentinel produced many responsive documents. It also asked for a protective order preventing public dissemination of corporate documents containing trade secrets. On August 5, 2011, the Respondents stipulated to the entry of that protective order. The trial court entered it one month later. CP at 565.

¶ 12 Four days after the Respondents stipulated to the entry of the protective order, Sentinel moved for summary judgment on the ground that the dissenters had not offered any evidence to refute the company's valuation. Sentinel also requested attorney and expert fees under RCW 23B.13.310(2)(b). That statute allows the court to

assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable: ... if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by chapter 23B.13 RCW.

RCW 23B.13.310(2)(b). Along with this motion, Sentinel filed an affidavit by Kukull swearing to the truth of the January 17, 2011, letter in which he stated that “the value per share ... as shown in [his] appraisal report as of December 31, 2009 had [not] changed significantly as of October 31, 2010.” CP at 319–20.

¶ 13 Hunt filed a response on September 26, 2011. He argued that the discovery cutoff date was December 9, 2011 (still two and a half months off), that he had recently retained an (unnamed) expert who would testify as to the shares' value, and that this expert was still going through the financial records obtained in discovery. He also asserted that Kukull's letter and affidavit were contradicted by Sentinel's financial records. Specifically, he claimed that the Kukull Report “relied upon a statement that Sentinel C ³ expected minimal or no growth in 2010,” and that this statement was “no longer true as of October 28, 2010” when “financial records showed an increase in growth of approximately 9%.” CP at 562.

¶ 14 Blood also filed a response in opposition to summary judgment. Like Hunt's, Blood's response asserted that the Kukull Report was out of date and failed to reflect higher than expected revenues at the time payment was due. Unlike Hunt's, it did not mention any other expert's valuation. Instead, it reasserted Blood's theory that Sentinel's “Management Class” had “concocted a plan to force [the Respondents] out of the company” and reached a “secret agreement” to artificially diminish the value of the dissenters' shares. CP at 576. Blood provided no specific (nonconclusory) facts in support of these allegations.

¶ 15 In response, the parties stipulated to a short continuance for additional discovery related to the newly disclosed (unnamed) expert witness. The court set a new summary judgment hearing date for October 21, 2011.

¶ 16 On October 13, 2011, Hunt provided Sentinel with a copy of the expert testimony he planned to introduce at trial—a valuation report by a certified public accountant named Jerry Hecker (Hecker Report). Hunt did not file the report with an affidavit from Hecker swearing to the truth of its contents. Instead, on October 18, he filed it with the court with an affidavit from his attorney stating that it was “a true and accurate copy of Hunt's Fair Value Analysis of Sentinel C3, Inc.” CP at 597. At the summary judgment hearing, Hunt's attorney acknowledged that his affidavit was not sufficient to authenticate the Hecker Report. Verbatim Report of...