Opinion
Civil Docket No.: CL17-4956
12-01-2017
Re: Midgett v. O'Brien
Douglas E. Kahle, Esquire
Wolcott Rivers Gates
200 Bendix Road, Suite 300
Virginia Beach, VA 23452 Gregory A. Giordano, Esquire
Wilcox & Savage, P.C.
222 Central Park Avenue, Suite 1500
Virginia Beach, VA 23462 Dear Counsel:
Today the Court rules on the Amended Complaint for Declaratory Judgment filed by Robert Preston Midgett, II ("Midgett"), as co-executor of the Last Will and Testament of Nancy M. Midgett (the "Will") and co-trustee of the family trust established by the Will (the "Family Trust"). The Will provides that the shares of stock in Jungle Golf of Virginia Beach, Inc. (the "Corporation") owned by Nancy Midgett ("Nancy"), which total 70 percent of the issued and outstanding stock, are to be divided equally among Midgett and Midgett's two sisters with Midgett having the option to purchase his sisters' shares at fair market value, taking into account appropriate discounts for lack of marketability and minority interest, if applicable. The two issues before the Court are (1) the fair market value of the shares of stock in the Corporation available for purchase by Midgett and (2) the appropriate date of valuation. The Court finds that the fair market value of the shares in the Corporation available for purchase by Midgett from his sisters is $1,538,000 and that the appropriate valuation date is July 27, 2017.
The Court therefore declares that the fair market value of the shares of the stock in the Corporation available for Midgett to purchase—a 46.66 percent ownership interest, discounted for lack of marketability and minority interest—is $1,538,000 as of July 27, 2017.
Background
Nancy executed the Will on or about March 22, 2002. The Will provides, in pertinent part, as follows:
The then Family Trust assets, if any, shall be divided, per stirpes, into equal shares, one share for each child of mine who survived me and one share for each child of mine who predeceased me with issue then living. In the event my son, Robert Preston Midgett, II ("Preston"), survives me, I hereby grant and give to my son the exclusive right and option to purchase, under the terms as hereinafter set forth, not less than all of the interests the Family Trust may own in Jungle Golf of Virginia Beach, Inc., or its successors (the "Corporation"), not otherwise allocated to him hereunder. In allocating shares in the Corporation to Preston, he may be allocated one-third (1/3) of the shares given to the Family Trust or may be allocated such shares as shall equal in value his one-third (1/3) share of the Family Trust, or any amount in between, in Preston's discretion. The purchase price shall be equal to the fair market value of such shares of stock to be purchased, which shall be based upon such assets' value as of the date of my death as finally determined for estate tax purposes, plus any appreciation or depreciation occurring thereafter, if any, and the refutable presumption shall be that there is no such change in value. If no estate tax return is required to be filed, fair market value shall be determined by the accounting firm then serving the Corporation and such value shall take into account appropriate discounts for the number of shares of stock owned by the Family Trust, including, but not limited to, discounts for lack of marketability and for minority interest, if applicable. The option shall be exercised by written notice delivered to the Trustee within sixty (60) days of receipt by my son of the "closing letter" from the Internal Revenue Service relating to the estate tax return of my estate or the accountant's valuation, a copy of which shall promptly be delivered to my son. If not exercised by such date, the option shall then terminate and expire.(Trial Exhibit ("Ex.") 3, at 4-5.) The parties stipulated that no estate tax return was required to be filed.
Nancy died on January 5, 2014, and she was survived by Midgett, Nancy O'Brien ("O'Brien"), and Kim Workman ("Workman"). Pursuant to the Will, Midgett and O'Brien were named as co-executors of the Will and co-trustees of the Family Trust. Midgett and O'Brien qualified as co-executors on or about January 16, 2014.
At the time of her death, Nancy Midgett owned 70 percent of the issued and outstanding stock of the Corporation, which operates a miniature golf course in the oceanfront tourist area of Virginia Beach, Virginia. Midgett owned the other 30 percent of stock in the Corporation, having been an employee of the Corporation since 1982 and in charge of the corporation's day-to-day business since 1994.
After Nancy's death, Midgett had a bank appraise the Corporation in conjunction with an application for a loan, ostensibly to purchase O'Brien's and Workman's shares. The appraisal did not take into consideration any discounts for lack of marketability and for minority interest, as anticipated by the Will. O'Brien did not agree that the appraisal met the requirements for determining the fair market value of the Corporation as envisioned by the Will.
On or about December 10, 2015, Midgett requested that O'Brien cooperate in authorizing the Corporation's accountant to value the Corporation. O'Brien did not believe that the Will required her to cooperate under the circumstances.
The Court found, in a related suit, that "the accounting firm then serving the Corporation" was not qualified to perform the necessary valuation. (Order 1-2, Midgett v. O'Brien, No. CL15-5388 (Norfolk Cir. Ct. Feb. 2, 2017).) On February 2, 2017, the Court entered an order directing the parties "to authorize a mutually agreed upon firm to conduct the valuation per the Will," i.e., to determine the fair market value of the shares of the corporate stock—applying discounts, if applicable—available for Midgett to purchase. (Id. at 2.) In light of the necessary delay to accommodate the valuation, the Court established a sixty-day deadline after issuance of the valuation report by which Midgett could exercise the option to purchase O'Brien's and Workman's shares in the Corporation. (Id.)
The parties retained Gary Baum, MBA, CPA/ABV, CVA, a recognized valuation expert with the firm of Wall, Einhorn & Chernitzer. Baum calculated the fair market value of the Corporation—as of December 10, 2015, and as of July 27, 2017—for the following ownership interests: a 70 percent ownership interest (representing the shares owned by Nancy at the time of her death); a 46.66 percent ownership interest (representing O'Brien's and Workman's collective shares, i.e., two-thirds of Nancy's ownership interest); and a 23.33 percent ownership interest (representing the shares of O'Brien and Workman, individually). Each of these calculations included discounts for lack of marketability and minority interest if appropriate.
Midgett filed a suit for declaratory judgment action pursuant to Section 8.01-184 et seq. of the Code of Virginia seeking direction from the Court regarding (1) how the shares in the Corporation should be valued for the purpose of Midgett purchasing O'Brien's and Workman's shares and (2) the appropriate valuation date.
The Court held a trial on November 20, 2017, after which the Court took the matter under advisement. The Court now issues its ruling.
Positions of the Parties
Midgett's Position
Midgett argues that in reading the provisions of the Will as a whole, the appropriate valuation of "such shares of stock to be purchased" by Midgett is the fair market value of a 46.66 percent ownership. (Pet'r's Mem. 6-7.) As such, he asserts that the fair market value of the ownership interest should be determined by applying appropriate discounts, as provided by the Will and calculated by Baum. (Id. at 7-12.)
Specifically, Midgett contends that lack of marketability and minority interest discounts must be applied because a 46.66 percent ownership interest in the a Corporation represents a non-controlling interest in a closely held entity, as opposed to a controlling interest in a public entity. (Id. at 7-8.) Midgett explains that, therefore, it is illogical to consider the discounts as if he were purchasing a 70 percent block of interest. (Id. at 8.) Midgett further argues that, considering the context of the Will, the valuation of the shares must be based on the number of shares owned by the Family Trust "not otherwise allocated to him hereunder" and that to interpret it otherwise is in direct conflict with the provision stating that "[t]he purchase price shall be equal to the fair market value of such shares of stock to be purchased." (Id. at 8-9; Ex. 3, at 4.) Additionally, Midgett notes that Nancy's intent in including discounts was to prevent Midgett from overpaying for the shares, not to make him pay more than another willing buyer. (Pet'r's Mem. 10-13.)
Midgett argues that the appropriate date of valuation is December 10, 2015. (Id. at 13-14.) He asserts that is the date he requested that "O'Brien, as co-trustee, cooperate in engaging [the Corporation's] accountants to perform the valuation required" under the option provision of the Will, which request was refused by O'Brien. (Id. at 14.) Midgett reasons that this is the appropriate valuation date because it was "the date the valuation would have been commissioned were it not for the Defendants' refusal to cooperate." (Id.) He therefore ascribes a valuation—as calculated by Baum—of $1,378,000. (Ex. 4, at 44-45.)
O'Brien's Position
O'Brien, on the other hand, argues that "the number of shares of stock owned by the Family Trust"—Nancy's entire 70 percent ownership interest—needs to be valued prior to calculating the 46.66 percent ownership interest available for purchase by Midgett. (Defs.' Mem. 1-3.) She contends that discounts for lack of marketability and minority interest therefore are not "appropriate" or "applicable" as contemplated by the Will. (Id. at 1-3.) To support her argument, O'Brien points out that the number of shares in the Corporation available for Midgett to purchase—based on Nancy owning a 70 percent ownership interest when she executed the Will—always would be a minority interest, making the "appropriate" and "if applicable" language in the Will "meaningless surplus." (Id. at 3-4.)
O'Brien argues that the proper valuation date is July 27, 2017, which accounts for the appreciation or depreciation of the shares as anticipated by the Will. (Id. at 6-7.) O'Brien points out that the Will "directs that the Valuation is to be effective as of Ms. Midgett's date of death plus appreciation or depreciation occurring thereafter." (Id. at 6.) Calculating the value of all of Nancy's shares—without discounts for lack of marketability and minority interest, as such discounts do not apply to the 70 percent ownership interest—and then calculating a price per share and equating that to the shares available for purchase by Midgett yields a fair market value of $2,330,334. (Ex. 5, at 46.)
Baum calculated the fair market value of the 70 percent ownership interest as $3,496,000, making the fair market value of a 46.66 percent ownership $2,330,334 ($3,496,000 / 70 x 46.66 = $2,330,334).
Analysis
The Court has considered the pleadings, evidence and oral argument presented at trial, and applicable authorities.
Wills are construed in a manner similar to the interpretation of contracts. "The paramount rule in will construction is that the testator's intention controls; the problem is to ascertain it." Westmoreland Cty. Volunteer Rescue Squad v. Melnick, 243 Va. 222, 224, 414 S.E.2d 817, 818 (1992) (quoting Gillespie v. Davis, 242 Va. 300, 303, 410 S.E.2d 613, 615 (1991)). "This intention must be ascertained, if possible, from the language of the document." Id.; see also Harbour v. SunTrust Bank, 278 Va. 514, 519-20, 685 S.E.2d 838, 841 (2009) (applying the same rules of construction to trusts).
Fair Market Value of the Shares Available for Purchase by Midgett
By the plain language of the Will, the Family Trust assets are to be divided, per stirpes, into equal shares for each surviving child. As there were three surviving children, Midgett is entitled to one-third of Nancy's 70 percent ownership interest, in addition to the 30 percent ownership interest he already possessed at the time of Nancy's death. The Will also provides that Midgett has the option to purchase the remaining two-thirds of Nancy's 70 percent ownership interest—a 46.66 percent ownership interest—that otherwise would go to O'Brien and Workman (the "Option Purchase").
The only Family Trust assets before the Court are the ownership interests in the Corporation. Although the Will provides that Midgett is entitled to receive one third of the shares of the Corporation owned by Nancy, he alternatively can elect to "be allocated such shares as shall equal in value his one-third (1/3) share of the Family Trust." If he elected this latter alternative and then decided to exercise the option to purchase his sisters' shares of the Corporation, he would be purchasing less than a 46.66 percent ownership interest, which still would be a minority interest. The Court therefore assumes for valuation purposes that Midgett will be purchasing a 46.66 percent ownership interest in the Corporation—to which discounts would apply—which is the maximum ownership interest available for him to purchase under the Will.
One question before the Court is how to value the Option Purchase. The applicable Will provision provides as follows:
In the event [Midgett] survives me, I hereby grant and give to [him] the exclusive right and option to purchase, under the terms as hereinafter set forth, not less than all of the interests the Family Trust may own in [the Corporation], not otherwise(Ex. 3, at 4-5 (emphasis added).) The intent, as evidenced by this provision, is to value the shares of stock available for purchase by Midgett, which are—according to the Will—the shares of stock "not otherwise allocated to [Midgett] hereunder" and also "such shares of stock to purchase."
allocated to him hereunder. In allocating shares in the Corporation to Preston, he may be allocated one-third (1/3) of the shares given to the Family Trust or may be allocated such shares as shall equal in value his one-third (1/3) share of the Family Trust, or any amount in between, in Preston's discretion. The purchase price shall be equal to the fair market value of such shares of stock to be purchased, which shall be based upon such assets' value as of the date of my death as finally determined for estate tax purposes, plus any appreciation or depreciation occurring thereafter, if any, and the refutable presumption shall be that there is no such change in value. If no estate tax return is required to be filed, fair market value shall be determined by the accounting firm then serving the Corporation and such value shall take into account appropriate discounts for the number of shares of stock owned by the Family Trust, including, but not limited to, discounts for lack of marketability and for minority interest, if applicable.
The Will provides that, in determining the fair market value of the Option Purchase—the 46.66 percent ownership interest—discounts are to be applied based on any lack of marketability and any minority interest that might exist. Specifically, the applicable Will provision provides that "such value shall take into account appropriate discounts for the number of shares of stock owned by the Family Trust, including, but not limited to, discounts for lack of marketability and for minority interest, if applicable" (the "Discount Provision"). (Id.)
The Court is not persuaded by O'Brien's argument that the terms "appropriate" and "if applicable" in the Discount Option would be mere surplusage unless Nancy's intent were to value all of the shares being conveyed by the Will, as the ownership interest available for purchase by Midgett always would be for a minority interest. O'Brien reasons that because Nancy owned a 70 percent ownership interest in the Corporation—and because the Will contemplated an automatic transfer of one third of that to Midgett—the amount available for purchase by Midgett would always be a 46.66% minority interest. This assumes that Nancy's ownership interest in the Corporation could not change between the time she executed the Will and the time of her death, however. There was nothing preventing Nancy from increasing her ownership interest prior to her death. For example, had she acquired an additional 5 percent ownership interest prior to her death—from Midgett, perhaps—the ownership interest available for purchase by Midgett upon Nancy's death would have been 53.33 percent (two-thirds of 80 percent), a majority ownership interest.
Viewed in isolation, the Discount Provision does not expressly state whether the reference in the Will to "shares of stock owned by the Family Trust" is intended to mean "shares owned by the Family Trust at the time of Nancy's death" or "shares owned by the Family Trust available for purchase by Midgett." The provision read as a whole provides the necessary context, however. The Discount Option must be read in conjunction with the prior references to the shares of stock of the Corporation being valued. All references in the Will provision regarding valuation are to the fair market value of the shares that otherwise would go to O'Brien and Workman, and thus are available to be purchased by Midgett. The use of the term "such value" in the Will refers back to "the fair market value of such shares of stock to be purchased" (emphasis added), which itself refers back to the shares "not otherwise allocated to [Midgett] hereunder." See West v. Hines, 245 Va. 379, 384, 429 S.E.2d 1, 3 (1993) ("Inconsistencies in testamentary documents 'are not looked upon with favor and the court should undertake, wherever it is possible, to reconcile conflicting provisions, keeping in mind always this elementary rule, the testatrix's intentions control.'" (quoting Whittle v. Roper, 156 Va. 407, 413, 157 S.E. 827, 829 (1931))).
The valuation of concern therefore is the fair market value of the shares of stock in the Corporation available to Midgett for purchase, which is a 46.66 percent ownership interest. Fair market value is "the price a property will bring when offered for sale by one who desires, but is under no obligation to sell it, and is bought by one who has no immediate necessity to purchase it." W. Ref. Yorktown, Inc. v. Cty. of York, 292 Va. 804, 820, 793 S.E.2d 777, 785 (2016); see also Value, Black's Law Dictionary (10th ed. 2014) (defining "fair market value" as "the price that a seller is willing to accept and a buyer is willing to pay on the open market and in an arm's-length transaction"). In other words, because Midgett is entitled to one third of the shares in the Corporation owned by Nancy as of right, the proper inquiry for the Court is what price a buyer who otherwise has no stake in the Corporation would pay for those shares on the open market. If, for analysis purposes, Midgett had elected to purchase none of the remaining shares, another buyer would have the ability to purchase only a 46.66 percent interest in the Corporation, not a 70 percent ownership interest. As explained by Baum in his expert report, the fair market value of a 46.66 percent ownership interest is subject to discounting—to account for both lack of marketability and lack of control—had these shares been offered on the open market to a willing buyer.
Contrary to O'Brien's assertion, the Court does not view the facts here as analogous to fragmenting or bifurcating an estate's controlling interest in a closely held corporation to improperly reduce estate tax liability. The specific task at hand is not to determine the fair market value of the Corporation as a whole, but rather to value a 46.66 ownership interest. The tax cases cited by O'Brien in her brief therefore are inapposite.
This interpretation of the Will provision is not only plain from the context of the surrounding language; it also is consistent with what the testator almost certainly intended. The reason Nancy would explicitly mandate the application of discounts is to preclude Midgett from having to pay more for the ownership interest than another willing buyer. Without the discounts, the valuation would not be an accurate reflection of fair market value. See Goldsborough v. Washington, 112 Va. 104, 111-15, 70 S.E. 525, 527-28 (1911) (holding that a court will not impute an absurd or improbable intent to the testator). The Court finds that Nancy's intent was not to require her son to pay more for the shares than a complete stranger would pay, especially given that her son is the only person apparently willing and able to carry on the family business.
Indeed, the structure of the Will enables Midgett to ultimately own all shares of stock in the Corporation.
Based on the above, the Court finds that the fair market value of the shares of stock in the Corporation available to be purchased by Midgett, as determined by Baum, is $1,538,000.
This is based on a valuation date of July 27, 2017, as discussed infra.
Date of Valuation of the Shares
Nancy clearly intended that the shares in the Corporation available to be purchased by Midgett be valued—and Midgett be given the opportunity to exercise the option to purchase those shares—shortly after her death. According to the Will, "The option shall be exercised by written notice delivered to the Trustee within sixty (60) days of receipt by my son of the 'closing letter' from the Internal Revenue Service relating to the estate tax return of my estate or the accountant's valuation, a copy of which shall promptly be delivered to my son."
Nancy also recognized, however, that the valuation and exercise of the option could be delayed. The Will also provides the following: "The purchase price shall be equal to the fair market value of such shares of stock to be purchased, which shall be based upon such assets' value as of the date of my death as finally determined for estate tax purposes, plus any appreciation or depreciation occurring thereafter, if any, and the refutable presumption shall be that there is no such change in value." (Emphasis added.)
The Court previously addressed the inability of the Corporation's accountant to conduct the valuation, which led to the eventual retention of Baum. The related litigation significantly delayed the valuation of the shares in the Corporation available to be purchased by Midgett, although the Court finds that this was through no fault of O'Brien. The Court also finds that it would not be appropriate to penalize O'Brien and Workman for this delay. The Court therefore finds that O'Brien and Workman are entitled to the appreciated value of the shares of stock in the Corporation that Midgett chooses to purchase from them. The Court notes that had Midgett exercised the Option Purchase as Nancy contemplated, O'Brien and Workman would have had the opportunity to benefit from the time-value of money since roughly the date of her death.
The appreciation of the 46.66 percent ownership interest of the shares of stock in the Corporation between when Midgett requested that O'Brien agree to have the Corporation's account calculate a valuation—December 10, 2015—and the date used by Baum to reflect the current fair market value—July 27, 2017—is $160,000. (Compare Ex. 4, at 44-45 with Ex. 5, at 45-46.) --------
The Court therefore finds that the proper valuation date of the shares in the Corporation available for Midgett to purchase is July 27, 2017.
Conclusion
Based on the foregoing, the Court declares that the fair market value of the shares of stock in the Corporation available to be purchased by Midgett is $1,538,000 as of July 27, 2017. This represents the fair market value of a 46.66 percent ownership interest in the Corporation, discounted for lack of marketability and minority interest.
The Court directs counsel for Preston Midgett to prepare and circulate a Final Order consistent with the ruling in this opinion and submit it to the Court for entry within fourteen days.
Sincerely,
/s/
David W. Lannetti
Circuit Court Judge
By Designation