Opinion
No. 60923-8-I.
December 8, 2008.
Appeal from a judgment of the Superior Court for King County, No. 05-2-20201-7, Harry J. McCarthy, J., entered November 2, 2007.
Affirmed by unpublished opinion per Ellington, J., concurred in by Schindler, C.J., and Agid, J.
In this dissenter's rights suit, the limited liability company (LLC) initially paid the dissenting member less than the fair value of its share. But the trial court found that the LLC had substantially complied with the statute, and assessed fees and costs against the dissenting member for acting arbitrarily, vexatiously, or not in good faith. We affirm.
BACKGROUND
Humphrey Industries LLC, through its principal, George Humphrey (collectively, Humphrey), and business partners Joseph and Ann Lee Rogel, Scott Rogel, and ABO Investments created several limited liability companies. One of those was Clay Street Associates LLC, which was formed to hold a single real estate asset. Each investor held a one-quarter interest in Clay Street. In the fall of 2004, Clay Street had no significant cash assets, the real estate market was weak, and the property had a high vacancy rate.
The relationship between Humphrey and the other investors became acrimonious. Various issues arose with all the LLCs. As to Clay Street, the members could not agree as to how to go forward. There was no means of liquidating the LLC other than by sale of the property, to which Humphrey would not consent. On the advice of attorney George Cowan, the other three members of Clay Street agreed to merge Clay Street into a new LLC in order to facilitate sale of the property.
The merger was to be effective December 7, 2004. Humphrey dissented from the merger, and on October 1, 2004, demanded payment of the fair value of its interest.
In May 2005, after several months of marketing, Clay Street sold its real property and associated leaseholds to Favro Investments, LLC for $3.3 million. After the sale, using the income capitalization approach, Cowan calculated the value of Humphrey's share as of December 7, 2004 at $181,192, including interest, and sent that amount to Humphrey on May 27, 2005. Humphrey rejected Cowan's calculation and demanded an additional $424,607 based on its estimation of value at $4.109 million.
After receiving Humphrey's demand, Clay Street hired Ken Barnes, a professional appraiser. Barnes concluded the property's fair value as of December 7, 2004 was $3.15 million. In an effort to resolve the dispute, Clay Street offered in July 2005 to pay Humphrey an additional $150,764, a figure based on Barnes' appraisal but which made no deduction for transaction costs or existing liabilities other than the original loan.
Humphrey rejected the offer and filed this dissenter's rights lawsuit under the Washington Limited Liability Company Act, chapter 25.15 RCW (LLC Act). On July 29, 2005, Clay Street filed a petition seeking judicial determination of Clay Street's value. The court consolidated the two actions.
On October 27, 2006, Clay Street made Humphrey a CR 68 offer in the amount of $144,183, plus interest at 7.75 percent from December 7, 2004, inclusive of Humphrey's costs and attorney fees. Humphrey rejected the offer.
The trial court heard testimony about the marketing and sale of the property. Expert witnesses Ken Barnes and Darin Shedd, a court-appointed appraiser, testified as to the fair value of Humphrey's share. George Humphrey gave his lay opinion on the property's value. The court found the property was worth $3.15 million as of the merger date, December 7, 2004. After deducting Humphrey's portion of the transaction costs and Clay Street's outstanding liabilities, the court calculated Humphrey's share to be $231,947. The court then offset the $181,192 already paid, added interest, and ruled that Humphrey was due an additional payment of $60,588.
All parties sought fees and costs. The court found that Humphrey had acted arbitrarily, vexatiously, and not in good faith, and assessed attorney and expert fees against Humphrey under RCW 25.15.480 (2)(b). The court also awarded Clay Street its post-CR 68 offer costs pursuant to that rule. Finding that Clay Street substantially complied with the statute and did not behave arbitrarily, vexatiously, or in bad faith in connection with the litigation, the court denied Humphrey's fees request.
Humphrey contends the court erred in its assessment of the fair value of Humphrey's interest in Clay Street, in denying its request for attorney fees and costs, and in granting Clay Street's and the Rogels' requests for same.
ANALYSIS Preliminary Matters
An appellant must separately assign error to each challenged finding, and the opening brief must include the relevant argument with citations to legal authority and references to relevant parts of the record. Material portions of challenged findings should be quoted in the text or included in an appendix. Unchallenged findings are verities on appeal.
RAP 10.3(g).
RAP 10.3(a)(6).
RAP 10.4(c).
State v. Hill, 123 Wn.2d 641, 644, 870 P.2d 313 (1994).
In its opening brief, Humphrey assigned error to "Findings [of Fact] 2, 5, 6, 11, 13, 16-19, 21, 23-24, 26-28, and 35-44," and attached the findings as an appendix. But most of the relevant argument and references to the record appear not in the 50 page opening brief, but in a 30 page appendix, with the challenged portions of each finding italicized and followed by argument and related references to the record. This not only violated the requirement that the argument appear in the body of the brief, but also effectively violated the 50 page limit.
Revised Br. of Appellant at 2.
RAP 10.3(a), (g).
RAP 10.4(b).
When challenged on this approach by respondents, Humphrey requested permission to file an overlength brief. We deny this request, and limit our analysis to the issues raised and argued in the body of the opening brief.
The Fair Value of Humphrey's Interest
Humphrey attacks the trial court's determination of fair value on several grounds. First, Humphrey challenges the court's refusal to allow George Humphrey to offer expert testimony as to the fair value of the property.
In general, the qualifications of an expert are judged by the trial court, and its determination will not be overturned absent an abuse of discretion. Although Mr. Humphrey has experience with real estate, he is not an appraiser, and his certified public accountant license is inactive. The court allowed him to give his lay opinion of the value of the property. The court did not abuse its broad discretion by refusing to treat him as an expert.
Seybold v. Neu, 105 Wn. App. 666, 678, 19 P.3d 1068 (2001).
Second, Humphrey faults the court for failing to apply Financial Accounting Standards Board (FASB) methods for assessing fair value. In fact, the trial court made explicit, unchallenged findings that the definition of fair value offered by the two appraisers was consistent with FASB standards.
Next, Humphrey challenges the finding of fair value of the Clay Street property as of December 7, 2004 ($3.15 million). "[W]here the trial court has weighed the evidence, our review is limited to determining whether substantial evidence supports the findings." "`Substantial evidence' exists when there is a sufficient quantum of proof to support the trial court's findings of fact."
Ridgeview Properties v. Starbuck, 96 Wn.2d 716, 719, 638 P.2d 1231 (1982).
Org. to Preserve Agr. Lands v. Adams County, 128 Wn.2d 869, 882, 913 P.2d 793 (1996).
RCW 25.15.425(3) does not say how fair value is to be calculated. Humphrey does not challenge the court's conclusion that, in the context of a single-asset LLC owning a parcel of real estate, the fair value is essentially the price for which the property could be sold on the open market between a willing buyer and willing seller, other than in a forced or liquidation sale.
The record shows that in the fall of 2004, Clay Street member Ostroff listed the property at $3.35 million. The listing generated a $2.9 million offer in October and a $3.19 million offer in November. Clay Street countered at $3.3 million, which both buyers rejected. In December 2004, Favro offered $3.3 million subject to a rent guarantee, which Clay Street refused. After Clay Street filled its remaining vacancies, Favro agreed to purchase the property for $3.3 million without a rent guarantee. The sale closed in May 2005.
The court made an unchallenged finding that the transaction was an orderly, fair market sale. Therefore, appraisal standards required that the actual sales price be given substantial weight in determining the property's value. Appraiser Shedd did not consider the sale price, apparently because he was "aware that there were allegations of duress." Barnes, on the other hand, placed considerable weight on the sale price, concluded it represented the actual value of the property in May 2005, and that the value in December 2004 was $3.15 million. The court found Barnes' approach persuasive. The evidence supports the court's finding of fair value.
RP (June 11, 2007) at 79.
Finally, Humphrey contends the court improperly deducted transaction costs from its one-quarter share. We disagree.
In a different context involving division of marital assets upon dissolution of marriage, the courts have held that an asset's value should be reduced by sales costs if the party receiving it intends an imminent sale and there is evidence regarding the costs of sale. The rationale, that the party to whom the asset is awarded is realizing only its net value when the asset is to be sold immediately, applies even more so here. The sale of the property was not of the remaining members' choosing. Rather, it was the only means to resolve the impasse and satisfy Clay Street's obligations toward Humphrey. The valuation figure does not reflect the transaction costs incurred to unlock the value, so deduction of that amount is necessary to achieve a proportional split. The court did not err.
In re Berg, 47 Wn. App. 754, 759, 737 P.2d 680 (1987); In re Martin, 32 Wn. App. 92, 97, 645 P.2d 1148 (1982); In re Hay, 80 Wn App. 202, 206, 907 P.2d 334 (1995).
Attorney and Expert Fees Under RCW 25.15.480 (2)(a)
Humphrey asserts that Clay Street did not substantially comply with the provisions of the statute, and the court should have awarded fees in his favor pursuant to RCW 25.15.480, which provides:
(2) The court may . . . assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable:
(a) Against the limited liability company and in favor of any or all dissenters if the court finds the limited liability company did not substantially comply with the requirements of this article; or
(b) Against either the limited liability company or a dissenter, in favor of any other party, 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 this article.
The court did not err. First, the fees statute is permissive, not mandatory. The court may decline to award fees even where there is no substantial compliance with the statute. Humphrey's argument thus fails.
See Nat'l Elec. Contractors Ass'n v. Riveland, 138 Wn.2d 9, 28, 978 P.2d 481 (1999) (the term "may" in a statute has a permissive or discretionary meaning).
Second, the statute authorizes a substantial compliance inquiry. Washington courts have defined substantial compliance as "`actual compliance in respect to the substance essential to every reasonable objective of [a] statute.'" Under the substantial compliance doctrine, an appellate court will not reverse for "a merely technical error that does not result in prejudice." Whether a party substantially complied with a statute is a mixed question of law and fact. We review the findings for substantial evidence. The application of law to those facts is subject to de novo review.
City of Seattle v. Public Employment Relations Comm'n, 116 Wn.2d 923, 928, 809 P.2d 1377 (1991) (quoting In re Santore, 28 Wn. App. 319, 327, 623 P.2d 702 (1981)) (alteration in original).
See Black v. Dep't of Labor Indus., 131 Wn.2d 547, 552-53, 933 P.2d 1025 (1997).
Tapper v. State Employment Sec. Dep't., 122 Wn.2d 397, 403, 858 P.2d 494 (1993) ("a mixed question of law and fact . . . requires the application of legal precepts . . . to factual circumstances")
Ridgeview Properties, 96 Wn.2d at 719.
Tapper, 122 Wn.2d at 403.
Humphrey challenges the court's implicit finding that Clay Street's belated initial payment was its only violation of the LLC Act. Humphrey identifies three other violations, alleging that Clay Street did not provide it with complete financial statements, filed suit after the statutory deadline, and failed to make a credible fair value payment. Humphrey argues that these violations, either by themselves or taken together, defeat the court's conclusion that Clay Street substantially complied with the LLC Act.
Payment Deadline. Clay Street violated the LLC Act by paying its estimate of the fair value of Humphrey's share more than five months after the date of the merger, in violation of the 30 day limit imposed by RCW 25.15.460. The very close deadlines imposed in RCW 25.15.435 emphasize the legislature's concern with protecting the property rights of dissenters.
"This obligation to make immediate payment is based on the view that since the person's rights as a shareholder are terminated with the completion of the transaction, the shareholder should have immediate use of the money to which the corporation agrees it has no further claim. A difference of opinion over the total amount to be paid should not delay payment of the amount that is undisputed." 2 Senate Journal, 51st Leg., Reg. and Spec. Sess., at 3091 (Wash. 1989).
The deadlines are premised upon the assumption that the LLC has (or can acquire) funds to pay the dissenter. Where a corporation has only one illiquid asset, such that sale of that asset is the only source of payment, compliance with the deadlines may be objectively impossible. Under such circumstances, the reasons for the delay and the conduct of the parties are relevant to a substantial compliance determination.
Here, Clay Street acted swiftly to liquidate its only asset and paid Humphrey immediately upon realizing the proceeds of sale, including interest. Humphrey was thus not financially prejudiced. Nor was Humphrey prejudiced by inability to participate in the management of the LLC subsequent to its dissent. The only actions taken thereafter were intended to, and in fact did, enable the LLC to fulfill its statutory obligations toward Humphrey. Humphrey's rights were protected to the extent circumstances allowed. This is what the statute intends.
Also relevant are the genesis of the entire scenario in an irreparable rift among the parties, and the fact that the merger was made necessary by Humphrey's refusal to consent to liquidation.
The legislature's objective, to avoid oppression of the dissenting LLC member by the remaining members, was not compromised. Clay Street's belated payment did not preclude a finding of substantial compliance.
Financial Statements. Humphrey also argues that Clay Street violated the statute by providing only its income statement along with its payment, not the previous year's financial statements as mandated by RCW 25.15.460. Humphrey raises this argument for the first time on appeal. We thus do not address it.
See RAP 2.5(a)(3); State v. Scott, 110 Wn.2d 682, 686-87, 757 P.2d 492 (1988).
Timely Filing. Humphrey argues that Clay Street violated the LLC Act in a third way by failing to file its suit within 60 days after receiving Humphrey's October 2004 demand for payment. Humphrey relies on language in RCW 25.15.475(1): "If a demand for payment under RCW 25.15.450 remains unsettled, the limited liability company shall commence a proceeding within sixty days after receiving the payment demand and petition the court to determine the fair value of the dissenting member's interest in the limited liability company, and accrued interest."
But the statutes must be read together. RCW 25.15.460 requires the LLC to pay its estimate of fair value within 30 days of the dissenter's initial demand. If the dissenter is not content, RCW 25.15.470 provides a further 30 days in which to demand payment according to its own estimate of fair value. The LLC and the dissenter thus have a total of 60 days for this exchange of communications. Under Humphrey's reading of the 60 day deadline in RCW 25.15.475(1), if each party waited its entire 30 days to act, the LLC would be required to file a petition for judicial determination of value on the day the dissenter makes demand under RCW 25.15.470.
The language "remains unsettled" in RCW 25.15.475(1) suggests that the trigger for the deadline for the petition is the dissenter's demand of its own estimate of fair value. This is a more sensible reading of the statutes. Clay Street filed its suit within 60 days of Humphrey's demand for payment of its own estimate and did not violate the LLC Act in this respect.
Humphrey informed Clay Street of its own estimate of fair value on June 1, 2005. Clay Street filed its petition for a judicial determination of value on July 29, 2005.
Credible Fair Value Payment. Humphrey next contends Clay Street violated the LLC Act by failing to make a "credible fair value payment." We need not decide whether such failure could defeat a finding of substantial compliance, because Clay Street's payment was credible. Its initial payment ($181,192) is almost 75 percent of the fair value determined by the court ($231,947, a one-quarter interest in net value, plus $9,833 interest for 2.5 years). Humphrey's argument fails.
Revised Br. of Appellant at 21.
Compare Spinnaker Software Corp. v. Nicholson, 495 N.W.2d 441, 446 (Minn.App. 1993) (upholding determination that corporation failed to substantially comply with dissenter's rights provisions and award of fees to dissenter, where company paid $0.90 per share and court concluded minimum fair value would be approximately $1-5/8 per share).
The court's finding that Clay Street substantially complied with the dissenter's rights statute is supported by the record. Consequently, an award of costs and attorney fees was not available to Humphrey under RCW 25.15.480(2)(a).
In the alternative, Humphrey contends it should have awarded fees pursuant to RCW 25.15.480(2)(b) because Clay Street, not Humphrey, acted arbitrarily, vexatiously, or not in good faith.
Humphrey first argues that Clay Street's initial payment was vexatious because it was intended to start a negotiation process. Humphrey offers no evidence in support of this allegation.
Humphrey next argues the value used by Cowan to calculate the initial payment was arbitrary, pointing out that the $2.5 million base figure Cowan used matched the valuation for the Clay Street property used by Scott Rogel in his divorce. This observation does not support an argument that the payment amount was arbitrary. Humphrey also contends Cowan used a book value that ignored two rejected offers for $2.9 and $3.19 million. But Cowan used the income capitalization approach. This is a valid appraisal approach, and was considered by both trial experts. Further, Cowan's result was reasonably close to the court's final calculation of Humphrey's interest. Humphrey did not show that Clay Street acted arbitrarily in making its initial payment.
Lastly, Humphrey challenges the court's finding that Clay Street relied in good faith on the advice of its attorney. He argues the only evidence of advice of counsel was a July 14, 2004 memorandum from attorney Cowan to Ostroff regarding the proposed merger. Humphrey is mistaken. The court also considered Ostroff's testimony and the deposition of Cowan. Humphrey's argument that the advice of counsel defense is not available to a defendant who does not call its counsel as a witness at trial also fails; the case authority Humphrey relies upon does not support its contention, and we have found no case so holding.
See Bill Edwards Oldsmobile, Inc. v. Carey, 219 Va. 90, 244 S.E.2d 767, 772 (1978) (holding that the advice of counsel defense to a malicious prosecution action was not available under the facts of the case, where the advice of counsel was based upon incorrect and incomplete information.)
The finding that Clay Street did not act arbitrarily, vexatiously, or not in good faith is supported by substantial evidence. That finding precluded an award of attorney's fees and costs to Humphrey under RCW 25.15.480(2)(b). The court did not err in rejecting Humphrey's request for attorney fees.
Award of Fees to Clay Street and the Rogels Under RCW 45.15.480(2)(b)
Humphrey challenges the finding that it acted arbitrarily, vexatiously, or not in good faith, and contends the court abused its discretion in awarding fees to Clay Street and to Joseph and Ann Lee Rogel.
In its order regarding attorney fees and expenses, the court designated its finding that Humphrey acted "arbitrarily, vexatiously, or not in good faith" as a conclusion of law. See Clerk's Papers at 2328, 2331. This is a factual finding and we review it accordingly. Willener v. Sweeting, 107 Wn.2d 388, 394, 730 P.2d 45 (1986).
Humphrey does not challenge the court's award of $24,961 in costs to Clay Street pursuant to CR 68.
As a preliminary matter, Humphrey raises several evidentiary issues. Humphrey argues the court erred in considering the July 2005 settlement offer because it was "unfunded" and, in any case, inadmissible. Humphrey failed to object to this evidence, however, and cites no authority suggesting it was irrelevant to the question of vexatious behavior.
Humphrey attacks as irrelevant the evidence of several arbitration awards involving the other LLCs in which the members were involved. But the arbitration awards were relevant to understanding the litigation environment here. Those LLCs involved Humphrey and many of the same partners, and suffered a similar fate when relationships deteriorated.
Finally, Humphrey argues the court improperly considered evidence of Clay Street's CR 68 offer. Humphrey is correct that evidence of a CR 68 offer is not admissible except in a proceeding to determine costs, the award of which is mandatory when the final judgment obtained is less favorable than the offer. The court erroneously considered the CR 68 offer in determining whether Humphrey's behavior with respect to its dissenter's rights was vexatious.
We nevertheless uphold the finding that Humphrey acted vexatiously, because the rest of the evidence amply supports it. Humphrey has the right to pursue its interests under the statute, but must act reasonable in doing so.
The LLC was dysfunctional, but Humphrey objected to selling the property. Then Humphrey objected to Clay Street's initial payment and demanded an additional $424,607 based on an alleged value of over $4.1 million, a figure the court ultimately Page 19 rejected as unsupported by substantial or credible evidence. Then Humphrey rejected the offer of an additional $150,764, by which Humphrey would have received $65,426 more than the other members. The court eventually awarded $45,524 less than Humphrey had been offered.
Further, the evidence points to Humphrey as the source of the acrimony and resulting dysfunctional relationships. In prior arbitrations involving many of the same investors but different LLCs, arbitrators found Humphrey's conduct wanting. One arbitrator found that Humphrey breached its fiduciary duty and that its conduct left winding up "the only rational solution."
Clerk's Papers at 2323.
Finally, Humphrey's litigiousness was itself unreasonable. Humphrey engaged in multiple lawsuits against these and other partners. Each of these disputes involved similar circumstances and a similar trail of rejected offers. In each, Humphrey lost. This included actions against Joseph and Ann Lee Rogel, who were retired, passive investors in Clay Street and another LLC in Tacoma known as 615. As to 615, Humphrey's lawsuit against them was twice dismissed. Humphrey refused to dismiss them from this litigation, despite admitting it had no claim that they were involved in any misconduct.
The evidence amply supports the court's finding that Humphrey acted vexatiously in pursuing its dissenter's rights. The court had discretion to award attorney fees and expenses to Clay Street and the Rogels under RCW 25.15.480(2)(b).
We affirm the trial court in all respects, and award Clay Street and Joseph and Ann Lee Rogel their reasonable attorney fees on appeal under RAP 18.1 and RCW 25.15.480(2)(b).
Affirmed.
WE CONCUR: