Waller v. American International Distribution Corp.

Annotate this Case
Waller v. American International Distribution Corp.  (96-446); 
167 Vt. 388; 706 A.2d 460

[Opinion Filed 26-Nov-1997]

[Motion for Reargument Denied 20-Jan-1998]

  NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.

                            No. 96-446

Arnold D. Waller                             Supreme Court

                                             On Appeal from
    v.                                       Chittenden Superior Court

American International Distribution          March Term, 1997
Corporation, Paul Sprayregen, Peter A.
Miller, and Marilyn McConnell

       Alden T. Bryan, J.

       David W.M. Conard of Portnow, Little & Cicchetti, P.C., Burlington,
  for plaintiff-appellee

       Christina A. Jensen of Lisman & Lisman, P.C., Burlington, for

       PRESENT:  Amestoy, C.J., Dooley, Morse and Johnson, JJ., and Allen,
                 C.J. (Ret.), Specially Assigned

       AMESTOY, C.J.  Defendants appeal from an order of the Chittenden
  Superior Court directing them to purchase plaintiff's minority interest of
  shares in defendant corporation at the value set by the court.  Defendants
  argue that the court erred in its valuation of plaintiff's stock by (1)
  basing valuation on the corporation's 1982 financial performance, (2)
  failing to consider plaintiff's offer to sell his stock, (3) failing to
  consider his minority shareholder status, (4) using the "discounted future
  earnings" method of valuation, and (5) making "normalizing" corrections to
  the corporation's financial performance.   We affirm.

                                  I. Facts

       Plaintiff Arnold Waller founded defendant company American
  International Distribution Corporation (AIDC) in 1986.  Incorporated in
  Vermont, AIDC performs warehousing and order fulfillment for book
  publishers and direct mail services.  Defendant Peter Miller joined the
  company in 1987 as co-owner and chief executive officer.


       In July 1987, defendant Paul Sprayregen began providing AIDC with
  substantial funds to help offset company losses, in return for which Waller
  and Miller agreed that Sprayregen would receive a fifty-one percent
  interest in the company, Miller thirty percent, and Waller nineteen
  percent.  In 1988, Waller and Miller each conveyed a five percent interest
  to a new employee, Marilyn McConnell, leaving Miller with a twenty-five
  percent interest and Waller with fourteen percent.  Waller, Miller, and
  McConnell received salaries, while Sprayregen did not.

       In June 1990, Sprayregen negotiated and personally guaranteed a
  $500,000 bank loan for AIDC.  At about that time, Waller requested that
  AIDC assume liability on the renewal of an earlier $10,000 bank loan, which
  had been personally guaranteed by Waller and his wife.  Miller and
  Sprayregen were angered by the request because AIDC was paying interest and
  principal on Waller's note and Sprayregen himself was at risk for over
  $600,000.  Miller told Waller that AIDC would assume Waller's debt only if
  he gave up his stock in the company, an offer which Waller declined. 
  Thereafter, Miller threatened Waller with loss of his job, but retracted
  his threats, and Waller was not fired.

       On April 4, 1990, Waller delivered a letter to the company stating
  that he would sell his stock and resign his position only if $14,500 of
  loans he had taken on behalf of the company were repaid by the company and
  if he received a severance package.  The next day Waller attended a
  shareholders' meeting at which a majority of the shareholders voted to
  remove him as president and director of AIDC, but not to fire him as an
  employee.  Waller then quit his job, telling Miller that he did not want to
  stay where he was not wanted.  Defendants did not involve him in the
  affairs of the company thereafter.

       As of March 1990, Sprayregen had advanced AIDC a total of $618,490
  through promissory notes at ten percent interest.  Although business
  expanded rapidly between 1988 and 1991, AIDC made no payments of interest
  or principal on Sprayregen's advances until 1992, the first year in which
  the company showed a net profit, when it paid him $83,159 in interest.  In


  1992, AIDC also paid Sprayregen's wholly-owned company, Investors
  Corporation of Vermont (ICV), a $50,000 management fee, which the court
  found was based on AIDC's ability to pay, rather than on the services
  actually performed by ICV.

       In September 1991, Waller filed a complaint alleging that defendants
  acted to "squeeze out" Waller by withholding information about the affairs
  of the corporation and firing him. Waller claimed damages, however,
  relating only to frustration of his "reasonable expectations to receive a
  return from his investment and labor through the payment of salary and

       The court found that Waller's job loss at AIDC resulted from Waller's
  choice to leave and not from majority oppression.  The court did find,
  however, that the majority had oppressed Waller by depriving him of his
  rights and interests as a minority shareholder of AIDC, and concluded that
  he was entitled to a monetary remedy.

       The court considered several methods of valuing Waller's fourteen
  percent share in AIDC and, based on the testimony of Waller's expert,
  concluded that the "discounted earnings" method was appropriate, which on
  these facts was indistinguishable from the method commonly called the
  "income capitalization" approach.  See Beach Properties, Inc. v. Town of
  Ferrisburg, 161 Vt. 368, 372, 640 A.2d 50, 52 (1994) (explaining
  capitalization, or income approach to establishing fair market value of
  property).  Although the complaint had been filed in 1991, the court
  concluded, over defendants' objection,(FN1) that company profits from 1992
  provided an appropriate basis for calculating stock value under the income
  capitalization formula.  The court awarded Waller $92,500, and the present
  appeal followed.


                 II.  Waller's Claims of Oppressive Conduct

         A.  "Oppressive Conduct" Claim and Use of 1992 as Base Year

       Where a court finds that "the acts of the directors or those in
  control of the corporation are . . . oppressive," the court may liquidate
  the assets of the business.  11 V.S.A. § 2067.(FN2)   Defendants do not
  challenge the trial court's determination that their actions oppressed
  Waller. AIDC's issues on appeal focus on the remedy fashioned by the court.

       Remedies provided under 11 V.S.A. § 2067 do not specifically include a
  buyout of a minority shareholder who alleges oppressive conduct by the
  majority interest in a corporation. Some courts in other states, however,
  have construed similar statutes and found the buyout remedy appropriate
  where there has been oppressive conduct but dissolution is not necessary to
  provide the plaintiff with a suitable remedy, and dissolution would
  needlessly harm a functioning business.  See, e.g., Alaska Plastics, Inc.
  v. Coppock, 621 P.2d 270, 274-275 (Alaska 1980); Sauer v. Moffitt, 363 N.W.2d 269, 274-75 (Iowa Ct. App. 1984).  We need not reach this question
  because defendants here concede that the court did not err in mandating a
  buyout under 11 V.S.A. § 2067.  Defendants argue rather that it was error
  for the court to base its valuation on AIDC's 1992 financial performance
  because the prevailing law in other jurisdictions is that valuation should
  be determined as of the date the complaint is filed, in this case 1991.

       Because 11 V.S.A. § 2067 is silent regarding the proper date of
  valuation, the standard to be applied in weighing the validity of the
  court's order is whether it abused its discretion in exercising its general
  equitable powers.  See Kanaan v. Kanaan, 163 Vt. 402, 407, 659 A.2d 128,
  132 (1995) (valuation of closely held business within discretion of trial
  court); see also Hendley v. Lee, 676 F. Supp. 1317, 1327 (D.S.C. 1987)
  (proper date of valuation for forced buyout purposes was date of trial on
  merits); Taxy v. Worden, 536 N.E.2d 901, 904 (Ill. App.


  Ct. 1989) (fair value of dissenting shareholder's stock is determined for
  buyout purposes by court's judgment after consideration of relevant

       We do not agree that the court lacked the authority to consider 1992
  as the focal year for its analysis.  Defendant cites 11A V.S.A. § 20.15,
  which provides that "the court shall . . . determine the fair value of such
  shares as of the close of the business on the day on which the petition for
  dissolution was filed."  This section of the Vermont Business Corporation
  Act became effective on January 1, 1994, after the complaint was filed in
  the present action.

       Moreover, the purpose of § 20.15 makes its application inappropriate
  for the present case.  The purpose of § 20.15 is to allow shareholders of a
  close corporation who desire continuation of the business to purchase the
  shares of the petitioner for dissolution at "fair value."  11A V.S.A. §
  20.15(b).  The statute encourages electing shareholders to calculate
  whether it is in their interests to buy out the petitioner or risk entry of
  a dissolution order.  Once they make an election, several results ensue,
  each requiring a determinable focal date, including the posting of a bond,
  the commencement of interest payable to the minority on the value of the
  shares to be purchased, and the loss of the minority rights as
  shareholders.  Id.

       The trial court's decision to base share value on 1992 financial
  performance is reasonable under the circumstances and is supported by the
  record.  The trial court sought to value the shares as of the approximate
  date of trial and decision, rather than the date Waller filed his
  complaint.  Noting that complete financial data was not available for 1993
  or 1994, the trial court chose 1992 because it was the year closest in time
  to the trial for which reliable data on the company's economic performance
  was available.  The court's use of 1992 was thus not an abuse of

       Moreover, in its June 1, 1995 order, the trial court expressly invited
  the parties to submit motions under V.R.C.P. 59 to provide the court with
  additional evidence of the company's financial performance in preceding
  years.  That opportunity remained open for over a year until this Court's
  August 14, 1996 entry order.  Defendants' failure to file a timely Rule 59


  evidenced assent to the use of 1992 as the base year.  We will not disturb
  the trial court's resolution of this issue.

                B.  Waller's 1995 Offer as Basis of Valuation

       Defendants next argue that the court erred in its valuation of
  Waller's shares by failing to consider his 1995 offer to sell his stock for
  payment in full of the $14,500 loans he had taken on behalf of the
  corporation.  Defendants do not maintain that the 1995 offer was
  controlling as a matter of law.  Their argument is simply that the court
  ignored their evidence in favor of Waller's evidence.  It is well settled
  that the weight to be given to particular evidence is a matter within the
  sound discretion of the trial court.  In re Vermont National Bank, 157 Vt.
  306, 310, 597 A.2d 317, 319 (1991).

                  C.  Minority Status of Waller's Holdings

       Defendants also contend that the court erred in failing to recognize
  the minority status of Waller's holdings because "it is common knowledge
  that, as a practical matter, the stock acquired by one who purchases a 49%
  interest in a `close' family corporation . . . is worth considerably less
  than 49% of the book value of such stock."  Baker v. Commercial Body
  Builders, Inc., 507 P.2d 387, 398 (Or. 1973).  We find defendants' argument
  unpersuasive because the "minority discount" is inappropriate where the
  court has found oppression of the minority.  See Columbia Management Co. v.
  Wyss, 765 P.2d 207, 214 (Or. Ct. App. 1988).

            D.  Use of "Discounted Earnings" Method of Valuation

       Defendants also challenge the court's use of the "discounted future
  earnings" method in valuing Waller's shares.  Again, we disagree.  As
  explained by Waller's expert, this method of valuation is indistinguishable
  from determination of market value by the income capitalization method,
  which we have described as "probably the most accurate way to establish
  value, at least as to commercial properties, because it values property on
  the basis of what income it will yield to the purchaser -- and income is
  the very reason for the purchaser to acquire the property." Beach
  Properties, Inc., 161 Vt. at 372, 640 A.2d  at 52.  The weight to be given
  to a particular


  method of valuation of securities is within the sound discretion of the
  court.  Independence Tube Corp. v. Levine, 535 N.E.2d. 927, 930 (Ill. App.
  Ct. 1989); In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997,
  1001 (Me. 1989); see also Goodrich v. Goodrich, 158 Vt. 587, 590, 613 A.2d 203, 205 (1992) (in valuation of business for divorce purposes, no single
  methodology is mandated, and so long as valuation is supported by credible
  evidence, it will suffice).  The income capitalization approach may be used
  to value a minority interest in an action such as the one at bar.  See In
  re Seagroatt Floral Co., Inc., 583 N.E.2d 287, 290-291 (N.Y. 1991)
  (approving use of "capitalization of earnings" valuation method for company

                  E.  "Normalization" of 1992 AIDC Figures

       Defendants argue that even if the court's choice of valuation method
  was proper in theory, and the base year of 1992 was appropriate, it
  nevertheless erred in making two "normalizing" corrections to the company's
  putative income for 1992.  In the first such correction, the court added
  back to the company's 1992 income statement a $50,000 fee paid to ICV,
  Sprayregen's wholly-owned company.  In the second correction, the court
  added back to stated income the $83,159 interest payment on Sprayregen's
  aggregate financial contributions to the company through the end of 1992.

       "Normalization" of an income statement is often a necessary step in
  the income capitalization process.  By adding to the income statement
  certain financial transactions not initially reported therein, a more
  accurate profit picture results, which in turn yields a more appropriate
  multiplicand for the income-capitalization formula.  See Hendley v. Lee,
  676 F. Supp.  at 1327 (adding salary of $93,813 to statement of corporate
  profits, thereby raising calculated value of company).

       The trial court concluded that the fee paid to ICV should be
  re-characterized as a return on Sprayregen's investment in the company --
  and thus considered company income -- rather than an expense for services
  rendered.  Sprayregen was not employed by AIDC.   Though he was an active
  shareholder with the most to lose if AIDC failed, that very factor strongly


  that the time he spent on AIDC corporate affairs was motivated by his
  personal investment goals and those of ICV.  The trial court was in the
  best position to determine whether the fee was a legitimate business
  expense for time Sprayregen spent on AIDC affairs or, rather, was more
  properly characterized as a disbursement of profit to the company's largest
  shareholder.  We find no abuse of discretion in the trial court's
  conclusion that payment of the fee arose from Sprayregen's dominant
  position in the corporation and that the 1992 financial reports should be
  adjusted to reflect that amount as income.

       The trial court similarly re-characterized the $83,159 payment to
  Sprayregen as a return on equity, rather than an interest payment on
  Sprayregen's loans.  Observing that commercial lenders would not have lent
  money to AIDC, the court described Sprayregen's infusions of capital as
  bearing "the hallmark of equity, that is, capital put at risk, rather than
  debt."  The trial court noted that payment to Sprayregen was entirely
  within the control of the majority interest and could be manipulated to
  show inaccurately low income for the corporation.  Re-characterization of
  the payment to Sprayregen is supported by the record below, and the court's
  decision to "normalize" AIDC's 1992 earnings by including an $83,159
  payment to Sprayregen was well within its discretion.


                              FOR THE COURT:

                              Chief Justice


FN1. Plaintiff's argument that defendants did not preserve this
  argument is without merit because defendants' counsel stated during the
  testimony of plaintiff's valuation expert that his objection to the use of
  1992 was not waived, and the court noted a continuing objection.

FN2.  At the time of trial, the provisions of 11 V.S.A. § 2067 were in
  effect.  That section was repealed as of January 1, 1994, when the Vermont
  Business Corporation Act (VBCA) went into effect.  See 1993, No. 85, §§ 2,
  3(a), eff. Jan. 1, 1994.  The VBCA is codified at 11A V.S.A. §§ 1.01 -