Opinion
C075929
02-24-2017
JOHN PERRY et al., Plaintiffs and Respondents, v. SCOTT SACKETT, as Receiver, etc., Defendant; MARC BATTAGLIA, Appellant.
NOT TO BE PUBLISHED California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. CVPT122043)
John Perry, Gary Bunch, and Rick Johnston (petitioners), the majority shareholders of Perry, Bunch, Battaglia & Johnston, Inc., Certified Public Accountants (corporation), elected to voluntarily dissolve the corporation. The trial court granted petitioners' request for judicial supervision of the dissolution and appointed a receiver to wind up and dissolve the corporation. The receiver sold the assets of the corporation at an auction sale to a new corporation organized by petitioners, Perry, Bunch & Johnston, Inc., over the objection of a fourth shareholder, Marc Battaglia. The trial court subsequently approved and confirmed the sale and dissolved the corporation.
Battaglia now contends (1) the trial court erred in approving and confirming the sale without approval of 90 percent of the corporation's shareholders, (2) the sale price fails to take into account most of the corporation's goodwill, (3) although the corporation was sold as a going concern, the sale price reflected its piecemeal value, and (4) petitioners had the ability to manipulate the sales price because they controlled the accounts receivable and work in process.
Finding no merit in Battaglia's contentions, we will affirm the judgment. We will not address petitioners' assertion of mootness because we previously rejected an identical argument when we denied their motion to dismiss the appeal.
BACKGROUND
The corporation is an accounting firm in Yolo County. The shareholders of the corporation are petitioners and Marc Battaglia. Each shareholder owned 25 percent of the shares of the corporation.
Differences arose between petitioners and Battaglia that, in the view of petitioners, made it impossible to manage the corporation. Consequently, petitioners and Battaglia engaged in negotiations in 2012 for petitioners to buy out Battaglia's interest in the corporation. They retained certified public accountant Theodore Mitchel to determine the fair market value of the corporation. Mitchel opined that the fair market value of the corporation, as a going concern, as of August 2012 was $1,921,000. Mitchel further opined that the corporation's goodwill was worth $981,000.
The parties did not reach agreement on a buyout price. Thus, petitioners elected to voluntarily wind up and dissolve the corporation on October 1, 2012. Perry (as president) and Johnston (as secretary) issued a notice to shareholders of the commencement of proceedings to wind up and dissolve the corporation. Battaglia left the corporation and obtained employment with one of the corporation's clients.
Petitioners filed a verified petition for judicial supervision of the winding up and dissolution of the corporation and for appointment of a receiver. They asked the trial court to assume jurisdiction of the winding up under Corporations Code section 1904, alleging that court supervision and appointment of a receiver would ensure the matter proceeded fairly and without delay. Petitioners proposed Scott Sackett as a receiver. Battaglia agreed judicial supervision and appointment of a receiver were necessary because petitioners were trying to freeze Battaglia out of the corporation, drive down the value of his interest, and form a new corporation to serve the corporation's clients and exploit the corporation's goodwill.
Further undesignated statutory references are to the Corporations Code. --------
The trial court assumed jurisdiction of the winding up of the corporation under section 1904 and appointed Sackett as receiver pursuant to section 1803.
The receiver filed an initial inventory report and also filed a motion seeking the trial court's approval of proposed bidding procedures for the sale of the corporation's assets. He proposed selling the assets at auction on February 7, 2013, in order to maximize the value by selling them before the end of the tax season. The receiver proposed a minimum bid price of $450,000, which he later raised to $505,000.
Battaglia complained that the minimum bid price was less than 25 percent of Mitchel's fair market value determination and the proposed sale procedures devalued Battaglia's interest and were inconsistent in that they purported to sell the corporation's client list but did not allow bidders to see the list prior to bidding. Battaglia also complained that there was no evidence the receiver made any collection efforts, which Battaglia said reduced the value of his interest. Battaglia further argued that, to the extent the proposed sale procedures permitted the receiver to sell the corporation's assets to petitioners for cash without Battaglia's consent, the proposed sale procedures violated section 1001, subdivision (d) (section 1001(d)) and section 2001, subdivision (g) (section 2001(g)). He argued the proposed sale procedures were a charade designed to ensure that petitioners would buy the assets of the corporation.
The receiver filed a response, asserting that section 2001(g) did not apply because the trial court appointed him under sections 1803, 1904 and Code of Civil Procedure section 565, not section 1805. In addition, according to the receiver, the phrase "other persons appointed by the court pursuant to Section 1805" in section 2001(g) did not refer to a receiver. The receiver also argued it was inappropriate to use the Mitchel appraisal to determine the minimum bid price at auction because Mitchel opined on the fair market value rather than the liquidation value of the corporation. And Mitchel's appraisal assumed a non-compete agreement would be executed to preserve the goodwill of the corporation, but no such agreement was executed for the auction sale. The receiver submitted a declaration explaining how he calculated the minimum bid price of $505,000.
Following a hearing, the trial court found that the receiver had conducted a reasoned and diligent analysis to determine the minimum bid price. The trial court concluded the receiver was not an "other person" appointed under section 1805, subdivision (b) and no approval of at least 90 percent of the voting power of the corporation was required for a sale to petitioners. The trial court authorized the receiver to conduct an auction of the corporation's assets and approved the procedure for the auction sale.
Petitioners' new corporation was the sole and successful bidder at the receiver's auction with a bid of $505,010. Battaglia requested a hearing for the trial court to determine whether the proposed sale was equitable to all shareholders. He argued the sale price should be based on "fair value" rather than piecemeal sale value, the receiver erred in valuing goodwill and work in progress, and he argued the receiver should have collected and not sold the accounts receivable. Battaglia also maintained the sale violated sections 1001(d) and 2001(g) because he did not approve the sale.
Following hearings, the trial court entered an order confirming the sale to petitioners' new corporation.
The receiver filed the following: his final account and report; a motion to settle and approve the same, for discharge, distribution of the corporation's assets, and a declaration that the corporation was wound up and dissolved; and a supplement to his final account and report. Battaglia objected to the receiver's final account and report, repeating some of the arguments he made earlier, including his complaint that the receiver sold the corporation's assets to petitioners' new corporation without Battaglia's consent.
The trial court granted the receiver's motion after conducting two hearings. It found that the receiver acted in good faith and in the best interest of the receivership estate and interested parties, and he properly exercised his duty to maximize the value of the assets of the receivership estate to allow the highest recovery for all shareholders. The trial court approved the receiver's final account and report, discharged the receiver, exonerated the receiver's bond, awarded compensation to the receiver and his attorney, ratified and approved the receiver's actions, authorized distribution of the corporation's assets to the shareholders, and declared that the corporation was duly wound up and dissolved.
Battaglia appeals from the orders (1) approving the petition for court supervision and appointment of a receiver; (2) granting the receiver's motion to establish bidding procedures for the sale of the corporation's assets; (3) confirming the sale of the corporations assets; (4) granting the receiver's motion for instructions regarding petitioners' request for increased compensation; and (5) granting the receiver's motion for approval of the final account and report, discharge, exoneration of surety, distribution of assets, and declaration of winding up and dissolution.
DISCUSSION
I
Battaglia contends the trial court erred in approving and confirming the sale without approval of 90 percent of the corporation's shareholders. He argues sections 1001(d) and 2001(g) prohibit the receiver from selling the corporation's assets for cash without his minority shareholder approval.
Section 1001, subdivision (a) provides that a corporation may sell or dispose of its assets when the principal terms are approved by the board; the sale must also be approved by the outstanding shares if the transaction is not conducted in the regular course of business. Moreover, except in circumstances inapplicable here, if the buyer in a transaction pursuant to section 1001, subdivision (a) is in control of the selling corporation or has common control of the corporation with the seller, the principal terms of the sale must be approved by at least 90 percent of the voting power of the selling corporation. (§ 1001, subds. (d), (e).) "Control" means "the ownership directly or indirectly of shares or equity securities possessing more than 50 percent of the voting power of a domestic corporation, a foreign corporation, or an other business entity." (§ 160, subd. (b).) In addition, section 2001 provides that directors (or other persons appointed by the court pursuant to section 1805) and officers are authorized after the commencement of a dissolution proceeding to sell or dispose of corporate assets in an amount deemed reasonable by the board without complying with section 1001, except for section 1001 , subdivision (d). (§ 2001(g).)
But section 1001(d) and section 2001(g) do not purport to limit the power of a trial court supervising the winding up and dissolution of a corporation. Sections 1804 and 1904 do not state that a trial court's power to make orders as justice and equity require is subject to compliance with the shareholder approval requirement in section 1001(d). A court would not be able to determine "the rights of shareholders and of all classes of shareholders in and to the assets of the corporation" (§ 1806, subd. (c)) and wind up and dissolve a corporation (§§ 1804, 1806, subd. (k), 1808, 1904) if it could not resolve the claim of a minority shareholder that he is being treated unfairly or provide for adequate value for his or her interest in the dissolving corporation. (See In re Trinity Tractor Co. (1970) 3 Cal.App.3d 428, 434-435, 441 [in a court supervised voluntary dissolution proceeding, the trial court's authority to " 'make orders and adjudge as to any and all matters concerning the winding up of the affairs of the corporation' " permits the court to determine the validity and priority of creditors' claims and to the extent that former section 4607 (which is now section 1904) and former section 4801 (which is now section 2001) conflict, former section 4607 must prevail and directors must exercise their powers subject to the trial court's orders as to matters concerning the winding up]; In re San Joaquin Light & Power Corp. (1942) 52 Cal.App.2d 814, 825 [the purpose of a court supervised voluntary winding up and dissolution proceeding is "to settle disputes, correct errors and obtain such orders as may be necessary to carry out and accomplish the end in view"]; 2 O'Neal & Thompson, Oppression of Minority Shareholders and LLC Members (2016 Supp.) § 7:26, p. 77, fns. omitted ["Most recent judicial decisions addressing the issue have held that courts have inherent equity powers to dissolve a corporation or provide alternative remedies, and that statutory dissolution remedies do not deprive the court of equitable authority."].) Construing the applicable language of the General Corporation Law, we conclude the trial court had the authority to approve and confirm the sale of the corporation's assets to petitioners' new corporation even if Battaglia withheld his approval of the sale.
While it is true that majority shareholders have no right to dissolve a corporation in an effort to "freeze out" minority shareholders (In re Security Finance Co. (1957) 49 Cal.2d 370, 376-377) and that protection of minority shareholders is an objective of court supervised dissolution proceedings (2 Ballantine & Sterling, Cal. Corporation Laws (4th ed. 2016) § 315.02[2], p. 15-23), our interpretation of the statutes is consistent with the goal of protecting minority shareholder interests. Battaglia had an opportunity to litigate his claims in the trial court. After conducting hearings and considering Battaglia's claims, the trial court approved the sale but ordered the receiver to pay Battaglia additional sums. The trial court considered Battaglia's arguments again when he objected to the receiver's final account and report. After hearings, the trial court rejected those claims, finding that the receiver properly exercised his duty to maximize the value of the assets of the receivership estate to allow the highest recovery for all shareholders and acted in good faith and in the best interest of the receivership estate and interested parties.
The trial court did not err in concluding that sections 1001(d) and 2001(g) did not preclude judicial approval and confirmation of the sale of the corporation's assets in this case.
II
Battaglia next contends the sale price fails to take into account most of the corporation's goodwill.
"Although the definition of goodwill has taken different forms over the years, the shorthand description of goodwill as 'the expectancy of continued patronage,' [citation] provides a useful label with which to identify the total of all the imponderable qualities that attract customers to the business." (Newark Morning Ledger Co. v. United States (1993) 507 U.S. 546, 555-556 [123 L.Ed.2d 288, 299-300]; see Bus. & Prof. Code, § 14100 [the goodwill of a business is the expectation of continued public patronage]; Code Civ. Proc., § 1263.510, subd. (b) [in the context of eminent domain law, goodwill "consists of the benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in probable retention of old or acquisition of new patronage"].) The value of goodwill is a question of fact to be determined based on the facts and circumstances of each case. (Pacific Coast Medical Enterprises v. Department of Benefit Payments (1983) 140 Cal.App.3d 197, 212.)
The factual aspects of a court's determination of a corporation's value are reviewed under the substantial evidence standard. (Mart v. Severson (2002) 95 Cal.App.4th 521, 530.) Under that standard, our inquiry begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted, to support the trial court's finding. (Cahill v. San Diego Gas & Electric Co. (2011) 194 Cal.App.4th 939, 957.) Substantial evidence is evidence that is "reasonable, credible, and of solid value." (Id. at p. 958.) We view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor. (Id. at pp. 957-958.) We do not reweigh the evidence or evaluate the credibility of witnesses. (Id. at p. 958.) We must uphold the trial court's finding if there is substantial evidence to support it. (Ibid.)
The receiver estimated the corporation's "going concern/goodwill" -- which he defined as consisting of (1) "established public relations/phone number/website/name recognition;" (2) "client list lead generation potential (.5% of 2012 revenue);" and (3) "saved startup costs/IP, in place systems and business processes/library" at $18,000. He submitted a declaration explaining the basis for his estimate. In addition, the receiver estimated the value of the corporation's "client list" at $97,790. The receiver explained he arrived at that amount by applying a 50 percent retention rate to the revenue generated in 2012 from "Battaglia's clients," based on the assumptions that petitioners would form a new corporation, petitioners' clients would take their business to the new corporation, and only half of Battaglia's clients would remain with the corporation.
The shareholders of the corporation did not sign non-compete agreements. "Bogle clients, including Bogle Trust clients" left the corporation after Battaglia's departure. Two other clients took their business elsewhere when Battaglia left the corporation. The receiver averred that petitioners' clients would also stop using the corporation and would use petitioners' new corporation instead. There was no "expectancy of continued patronage" by clients who elected not to remain with the corporation. Under these circumstances, we cannot conclude that the receiver's estimate of the value, in a liquidation sale, of the goodwill of the corporation is erroneous or that the trial court's approval of the receiver's estimate is without substantial support.
Citing Mart v. Severson, supra, 95 Cal.App.4th 521, Battaglia argues the lack of non-compete agreements by the shareholders should not affect goodwill valuation. Mart v. Severson is inapposite because it involved the determination of the "fair value" of shares under section 2000, a statute not applicable in this case. (Id. at pp. 523-524.) Section 2000 defines fair value as " 'the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation.' " (Id. at p. 524, fn. omitted.) Section 2000 requires that the going concern value of the corporation be reflected in the fair value price. (Ibid.) Accordingly, when making a section 2000 fair value determination, appraisers must assume a hypothetical seller will execute a covenant not to compete. (Id. at p. 534.) This case does not involve a buyout or appraisal of "fair value" under section 2000.
Battaglia complains that the receiver's goodwill valuation ($115,790) is significantly less than the goodwill valuation by Mitchel ($981,000). But Mitchel explained that his appraisal is of the fair market value of the corporation, which is not appropriate for use in a case involving an auction sale. Mitchel defined fair market value as "the price expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts." Mitchel opined that liquidation value, and not fair market value, is the appropriate measure of value for an auction sale, and liquidation value typically may be lower than fair market value. Further, Mitchel said his appraisal was based on the assumption that the shareholders would sign non-compete covenants. And no such agreements were executed in this case. The Mitchel appraisal is not a basis for reversing the trial court's ruling.
III
Battaglia also claims that although the corporation was sold as a going concern, the sale price reflected its piecemeal value.
"Going concern" is "[a]n enterprise which is being carried on as a whole, and with some particular object in view. The term refers to an existing solvent business, which is being conducted in the usual and ordinary way for which it was organized. When applied to a corporation, it means that it continues to transact its ordinary business." (Black's Law Dict. (6th ed. 1990) p. 691, col. 1.) The receiver's minimum bid estimate includes value estimates for a going concern, i.e., equipment, furniture, software, "going concern/goodwill," remaining clients, accounts receivable, and work in progress. Battaglia's contention fails because he does not say what element of a going concern the sale price does not take into account.
IV
Battaglia further claims petitioners had the ability to manipulate the sales price because they controlled the accounts receivable and work in process, which were key factors in determining the sales price. Battaglia points to paragraph 9 of his declaration in opposition to the receiver's motion to establish bidding procedures in support of his factual assertion. He stated in that declaration that petitioners were "[t]he only party who could reasonably estimate the component value of the receivables at any time."
Substantial evidence supports the trial court's implied rejection of Battaglia's assertion that petitioners manipulated the accounts receivable. The receiver was authorized to manage the affairs of the corporation during the receivership. He had possession of, access to and control over the corporation's assets, including its files, work in progress, and receivables. The receiver evaluated the corporation's accounts receivables and work in progress as part of his minimum bid estimate. These facts belie Battaglia's assertion that petitioners were the only persons who could estimate the value of the corporation's account receivables.
DISPOSITION
The judgment is affirmed.
/S/_________
MAURO, J. We concur: /S/_________
ROBIE, Acting P. J. /S/_________
HOCH, J.