Hugh Owen Winn et al. v. Winn Enterprises, Limited Partnership, et al.
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DIVISION I
CA06-1375
October 10, 2007
HUGH OWEN WINN, et al.
APPELLANTS
AN APPEAL FROM UNION COUNTY
CIRCUIT COURT
[No. CV 2004-510-4]
v.
WINN ENTERPRISES, LIMITED
PARTNERSHIP, et al.
APPELLEES
HONORABLE CAROL ANTHONY,
CIRCUIT JUDGE
REVERSED and REMANDED ON
DIRECT APPEAL; AFFIRMED ON
CROSS-APPEAL
This appeal involves a dispute over the valuation of a family limited partnership when
some of the members of the partnership withdrew. The circuit court determined the
partnership’s value and then applied discounts for lack of marketability and for being a
minority interest to the withdrawing partners’ proportionate interests to arrive at the amount
due the withdrawing partners. The partnership assets include 880 acres of timberland in
Union County, together with oil and gas royalty interests and cash on hand. The withdrawing
partners appeal, challenging the application of the discounts. The partnership and the
remaining partners cross-appeal, arguing that the circuit court should have adopted the lower
asset valuation suggested by one of the partnership’s expert witnesses. We reverse on direct
appeal and affirm on cross-appeal.
Appellants Hugh Winn, Nancy Winn, Bonnie Winn, Frank Winn, Jean Roland, and
the Joan W. Culver Revocable Trust and appellees Lawrence Lyle, James Winn, Debbie
Snyder, Mary Winn, Darrell Winn, Donald Winn, Deanne Prellwitz, and the Illa F. Winn
1999 Trust are the members of appellee Winn Enterprises Limited Partnership (the
partnership). Lyle serves as the general partner, and the rest are limited partners. Hugh Winn,
Nancy Winn, Bonnie Winn, and Frank Winn each have a 5.392857143% interest in the
partnership, while Roland and the Joan Culver Revocable Trust each have a 3.595238095%
interest. The partnership’s timberland was originally acquired by James Russell Winn in
1848 by a federal land grant. The partnership was formed in 1984 for the express purpose
of keeping the land in the Winn family. The original members of the partnership at the time
of its formation were the sole owners of the 880 acres.
The partnership agreement provides that a partner may withdraw upon six months’
notice to the partnership and the other partners. Upon withdrawal, the withdrawing partner
“shall be entitled” to receive the “fair value” of that partner’s interest in the partnership as
of the date of withdrawal. The partnership agreement was amended in October 2002 to
provide that the partnership shall have a “right of first refusal” if a partner desires to sell his
or her interest to someone outside the family.
On December 13, 2004, appellants filed their complaint seeking payment of the “fair
value” of their interests. In the alternative, appellants sought judicial liquidation of the
partnership. Appellees denied the material allegations of the complaint and noted that the
880 acres are ancestral land.
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The matter was tried to the bench in January 2006. Jeff Neill, a certified general realestate appraiser and a registered forester, testified for appellants and valued the timber at
$1,900,000. He said that he adjusted his appraisal to account for a timber sale that occurred
after he completed his fieldwork for the appraisal. He added on redirect that a discount was
not part of the scope of his work because he was determining the value of the entire tract.
Peter Emig, a certified appraiser, testified that the partnership’s royalty interest was worth
$29,000 as of May 3, 2004.1 He was not asked to apply a discount, nor did he think one was
appropriate.
Hugh Winn testified that the withdrawing partners disagreed with the management
of the partnership because they (the withdrawing members) wanted to convert the
partnership to a limited liability company. He valued his interest as being $105,644.95,
based on his proportionate interest of the values established by Neill and Emig. He said that
he valued the interests of the Culver Trust and Jean Roland at $70,430.56 each. On crossexamination, he said that a discount was not appropriate because he was not attempting to
sell his interest to a third party. He also observed that appellees’ interest will increase once
appellants withdraw.
Lawrence Lyle, the general partner of the limited partnership, had no objection to
Emig’s valuation of the royalty interest at $29,000. He gave an opinion that a discount was
customary and appropriate. On cross-examination, Lyle acknowledged that his interest in
1
He also proffered an updated report showing the value of the royalty interest to be
$59,000 as of the date of trial.
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the partnership would be enlarged with appellants’ withdrawal. The testimony of Donald
Robinson, another member of the partnership, was to the same effect.
Mike Nolan, a forester and a certified appraiser, testified on behalf of the partnership.
He valued the land and timber at $1,498,000, excluding the April 2004 timber sale. On
cross-examination, he admitted that he did not apply a discount to his valuation in the
present case because it was not part of his assignment. He also said that his appraisal did not
comply with state appraisal guidelines.
Appellees also presented the testimony of their valuation expert, Ted Duncan, a
certified public accountant. He said that he had reviewed the appraisals of Neill, Emig, and
Nolan, as well as other financial documents and records as part of his valuation process.
Duncan used Emig’s valuation of the royalty interest and Nolan’s appraisal of the timber
interest, together with cash on hand to arrive at a valuation of $1,633,859 for the
partnership’s assets. He said it was common for discounts to be applied in valuing a minority
interest in a limited partnership. Accordingly, Duncan applied a 30% discount for lack of
control and a 15% discount for lack of marketability. His ultimate “fair market valuation”
of the 5.392857143% interest was $52,231, while his fair market value of the
3.595238095% interest was $34,954. Although acknowledging that the partnership
agreement called for the withdrawing partners to receive the “fair value” for their interests,
it was Duncan’s opinion that it was the same as the “fair market value” in this case. He also
said that there could be circumstances where the term “fair value” could be interpreted
differently, and he gave as an example the case of a dissenting shareholder. On cross-
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examination, he said that, if “fair value” and “fair market value” were interpreted differently,
it would require different methods of valuation.
The circuit court issued a letter opinion in which it found Neill’s testimony to be more
credible and persuasive. The court adopted his valuation of the timber and land of
$1,900,000 as part of the court’s overall valuation of the partnership assets of $2,035,859.
The circuit court then noted that it was persuaded by the testimony of Ted Duncan that the
total should be discounted by 30% due to lack of control and by 15% for lack of
marketability. This resulted in Hugh Winn, Nancy Winn, Bonnie Winn, and Frank Winn
each having their interests valued at $60,445.44 while the interests of Jean Roland and the
Jean W. Culver Revocable Trust were each valued at $40,256.69. A written order
memorializing the court’s decision was entered on May 26, 2006. This appeal and crossappeal followed.
Appellants’ sole point on appeal is that the circuit court erred by applying discounts
for lack of control and for lack of marketability in determining the value of their interests
in the partnership. We hold that the circuit court erred in applying the discounts.
Appellants primarily rely on our supreme court’s decision in General Securities Corp.
v. Watson, 251 Ark. 1066, 477 S.W.2d 461 (1972), a case involving dissenting shareholders
objecting to a merger and seeking payment of the “fair value” for their shares under what
is now Ark. Code Ann. § 4-26-1007 (Repl. 2001). There, the court recognized that there is
no set standard or formula to determine the “fair value” of stock and cited with approval a
Maryland case holding that discounts were not appropriate in determining the “fair value”
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for a dissenting shareholder. Id. (citing American Gen. Corp. v. Camp, 171 Md. 629, 190
A. 225 (1937)).
Appellants also rely on the Eighth Circuit’s decision in Swope v. Siegel-Robert, Inc.,
243 F.3d 486 (8th Cir. 2001), another case involving dissenting corporate shareholders.
There, the court reviewed decisions from Missouri, New Jersey, Delaware, Maine, South
Dakota, Oregon, and Kansas wherein the courts rejected application of discounts. Based on
the reasoning of those courts, the Swope court concluded:
The marketability discount is incompatible with the purpose of the appraisal
right, which provides dissenting shareholders with a forum for recapturing their
complete investment in the corporation after they are unwillingly subjected to
substantial corporate changes beyond their control. . . .
....
We conclude that the market for minority stock in a dissenting shareholders’
appraisal proceeding, absent extraordinary circumstances, is not a relevant fact or
circumstance to consider when determining fair value.
Swope, 243 F.3d at 493-94.
Even though Watson and Swope both involved dissenting shareholders in
corporations, they are instructive here because, contrary to Ted Duncan’s testimony, a
withdrawing partner under Ark. Code Ann. § 4-43-604 is in a position analogous to a
corporation’s dissenting shareholders. Sections 4-26-1007 and 4-43-604 both use the term
“fair value” to describe what is to be paid to the dissenting shareholder or the withdrawing
partner for his or her interest. In both instances, the individual (whether a dissenting
shareholder or a withdrawing partner) is exercising a statutory right to withdraw from the
entity and the entity is absorbing that interest. If discounts are applied, the entity obtains the
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withdrawing shareholder or partner’s interest for less than that interest would be worth in
the hands of the withdrawing shareholder or partner. Further, because the two situations are
analogous and the General Assembly used the term “fair value” in both statutes to specify
the type of value the withdrawing partner or shareholder is to receive for his or her interest,
we hold that the “fair value” provided for in section 4-43-604 does not include discounts for
lack of control or lack of marketability. On similar facts, a Maryland court used the same
analysis to conclude that discounts were not applicable in the determination of “fair value”
under a statute identical to Ark. Code Ann. § 4-43-604. East Park Ltd. P’ship v. Larkin, 167
Md. App. 599, 893 A.2d 1219 (2006). The American Law Institute and various
commentators are also in agreement that discounts should not be applied in determining the
“fair value” of a dissenting shareholder’s or withdrawing partner’s interest.2
As noted above, Ark. Code Ann. §§ 4-26-1007 and 4-43-604 both provide for “fair
value” not “fair market value.” Neither statute defines the term “fair value.” Ted Duncan
testified that, in the circumstances of this case, they are the same. We disagree. Black’s Law
Dictionary, 1549 (7th ed. 1999) defines fair market value as “[t]he 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[.]” On the other hand, “fair value” is determined by ascertaining all assets and
2
See Am. Law Inst., Principles of Corporate Governance: Analysis and
Recommendations § 7.22(a) (Standards for Determining Fair Value) & cmt. e (1994); Harry
J. Haynsworth IV, Valuation of Business Interests, 33 Mercer L. Rev. 457, 459 (1982);
Joseph W. Anthony & Karlyn V. Boraas, Betrayed, Belittled . . . But Triumphant: Claims of
Shareholders in Closely Held Corporations, 22 Wm. Mitchell L. Rev. 1173, 1186 (1996);
and Barry M. Wertheimer, The Shareholders’ Appraisal Remedy and How Courts Determine
Fair Value, 47 Duke L.J. 613, 636-37 (1998).
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liabilities of the business and the intrinsic value of its stock rather than merely appraising its
market value. See American Gen. Corp., supra. In the case of dissenting shareholders or
withdrawing partners, there is no sale on the open market; their situation is more akin to a
forced sale. East Park, supra. The difference between “fair market value” and “fair value”
also serves to distinguish the present case from the line of cases that determine the value of
stock in a divorce because our divorce code, Ark. Code Ann. § 9-12-315, specifically
requires the use of “fair market value” in the valuation of stock in a divorce. See, e.g., Cole
v. Cole, 82 Ark. App. 47, 110 S.W.3d 310 (2003); Crismon v. Crismon, 72 Ark. App. 116,
34 S.W.3d 763 (2000).
Because the circuit court erred in applying the discounts, we reverse and remand with
directions that the circuit court determine the value of appellants’ interests without
application of discounts.
Appellees raise one point on cross-appeal and argue that the circuit court erred in
adopting the valuation fixed by appellants’ expert instead of the valuation suggested by their
own expert. The strength or lack of strength of the evidence on which an expert’s opinion
is based goes to the weight and credibility, rather than to the admissibility, of the opinion in
evidence. Killian v. Hill, 32 Ark. App. 25, 795 S.W.2d 369 (1990). Where the testimony
shows a questionable basis for the opinion of the expert, the issue becomes one of credibility
for the fact-finder, rather than a question of law. Id. Here, Nolan admitted that his appraisal
did not adhere to state standards for appraisals. The circuit court made a specific finding that
Neill’s appraisal was more credible, and we defer to that assessment.
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Reversed and remanded on direct appeal; affirmed on cross-appeal.
VAUGHT and HEFFLEY, JJ., agree.
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