In re Discontinuance & Disposition of P.K. Smith Motors, Inc.
Docket: No. 50,357-CA
Court: Louisiana Court of Appeal; March 8, 2016; Louisiana; State Appellate Court
A family dispute has arisen between Bradley Kyle Smith, the executor of his late father’s estate, and his uncle regarding the family-owned corporation, P.K. Smith Motors, Inc. Smith is appealing a ruling that denied his request to discontinue and sell the corporation and mandated adherence to a 1984 shareholder agreement requiring the estate to sell its shares back to the corporation. The trial court valued the corporation at $1,000,000, determining the estate's 50 percent share to be worth $500,000. However, the court also found that the decedent owed the corporation $168,469.65, which was deducted from the share value, resulting in a buyout amount of $386,580.85 for the estate. The court’s judgment was affirmed.
The corporation was established in 1974 by P.K. Smith and his family, later renamed in 1989. A special meeting held in 1983 granted authority to Mike Smith for conducting corporate business. In 1984, a shareholder agreement was signed, which restricted share transactions during a shareholder's life and upon their death, requiring the corporation to buy shares from deceased shareholders at their death. Payment for these shares was stipulated to occur within 60 days after the succession representative was qualified. If the corporation could not purchase all shares, remaining shareholders would have the option to acquire them. The agreement also stipulated that the share price could only be changed by a 75% vote of the total voting power at the annual meeting.
After Marjorie's death in 1997, Mike and Perry became equal shareholders of the corporation, operating harmoniously until Perry's death in 2009. On January 16, 2013, the estate initiated a lawsuit against Mike and P.K. Smith to dissolve the corporation under former La. R.S. 12:143(C), which allows either of two equal shareholders to petition for dissolution and asset distribution unless prohibited by the articles of incorporation. The estate's petition included a plan for a third party to appraise the business for sale, with subsequent steps for agreement or broker engagement if no sale occurred within set timeframes. The defendants opposed this plan, filing reconventional demands seeking specific performance of a 1984 shareholders' agreement that they claimed mandated the sale of the estate's shares. They also asserted a claim for $161,735.04 owed to P.K. Smith by Perry and accused Bradley, the executor, of acting in bad faith and breaching fiduciary duties by failing to renew financial documents. In reaction, the estate raised various exceptions, including a declinatory exception of lis pendens regarding the claim for money owed, citing that it was already part of another pending case. The trial court denied this exception, and the court declined supervisory review. On December 10, 2013, the defendants proposed their own plan under La. R.S. 12:143(C), arguing against liquidation due to negative impacts on employees and the local economy while offering to purchase the estate's shares.
In the absence of a purchase price agreement, the involved parties requested the court to hold a hearing to establish a fair value, with the option to pay that price or agree to liquidation, after which a liquidator would be appointed. The trial court approved this plan and scheduled a trial for February 2014. The estate opposed this plan, filing motions for summary judgment to proceed with dissolution and for partial summary judgment on a specific performance claim related to a 1984 shareholders’ agreement, arguing the absence of a price rendered the buy/sell agreement unenforceable. The trial court denied both motions before the trial began.
During the trial, Bradley, the son of the deceased director Perry, testified about his father’s role in P.K. Smith and his attempts to become involved in its management after Perry's death. He claimed that Mike, who had taken control of the company, resisted his involvement and failed to hold a shareholders’ meeting to fill Perry’s vacant director position, creating a deadlock. Bradley expressed concerns over the estate receiving no profits or dividends while being expected to guarantee P.K. Smith's debts, which his father had previously guaranteed. He refused to obligate the estate on these debts, suspecting mismanagement by Mike, who he alleged acted unilaterally and withheld financial information from the estate.
On cross-examination, Bradley acknowledged that he and his mother had benefitted from a life insurance policy funded by the corporation, receiving substantial amounts. He could not clarify whether his father owed money to P.K. Smith and admitted to not hiring an accountant to review corporate records since the lawsuit began. He described Perry’s workspace as informal, using a table in the coffee room, and noted that Mike had honored an agreement with Perry to partition their rental properties. Ultimately, Bradley expressed that he did not intend to shut down P.K. Smith and was open to a fair valuation to allow the business to continue.
Mike testified about the ownership structure of P.K. Smith, originally shared among him, his parents, and Perry, each holding 25 percent, which shifted to Mike and Perry as 50 percent owners after their mother’s death in 1997. Following this, Mike and Perry served as the only directors, with Mike as president and dealer-operator since their father's death in 1983. He acknowledged Perry's formal titles as vice-president and successor dealer but claimed Perry played no significant role in the company.
Mike indicated that their father intended for him to manage the dealership and for Perry to oversee the oil and gas business, which they operated until its sale in 2005. At the time of Perry's death, P.K. Smith compensated Perry with a monthly salary of $3,300 and covered his life and health insurance, along with gas expenses. Mike noted that Perry had begun borrowing from P.K. Smith for personal expenses, including a new home and credit card debts, while admitting to similar borrowing practices himself, having repaid over $40,000.
After a complaint to GM regarding his issues, Mike withdrew over $160,000 from P.K. Smith but later returned it to avoid undercapitalization. He received a salary that increased from $36,000 to $60,000 post-Perry’s death due to increased responsibilities. When asked about profits not reaching the estate since Perry's death, Mike explained that P.K. Smith was burdened with over $400,000 in debts, which the estate benefited from.
Mike claimed authority to manage P.K. Smith based on a 1983 resolution from shareholders and referenced a 1984 shareholder agreement designed to govern share sales within the family. He clarified that the purchase price section was left blank due to market volatility at that time, intending for fair market value to be determined later. Following Perry’s death, Mike made a verbal offer to purchase the estate’s shares per the agreement, though he did not specify a price.
Mike claimed he fulfilled his agreement with Perry regarding the division of their rental property but asserted that Bradley failed to comply with the shareholder agreement. He expressed willingness to pay a fair value for the estate's shares per the agreement but acknowledged that he did not pursue the purchase after being notified of Bradley's appointment as executor. Bradley countered that he had not received any purchase offer from Mike and only discussed the rental property division, with no mention of P.K. Smith.
Diane Smith, Perry's widow, testified that Perry received a salary and benefits from P.K. Smith, which continued for several months after his death. She noted that Perry managed P.K. Smith while Mike engaged in politics but also worked half his time on their farm. Diane indicated that Perry occasionally withdrew additional funds from P.K. Smith beyond his salary, with Perry suggesting that Mike would take equal amounts to balance their finances. She denied seeing any documents indicating Perry owed debt for these withdrawals and could not recall signing the shareholder agreement or discussing share pricing.
O’Neal, P.K. Smith's long-time office manager, detailed the financial management practices, including a daily petty cash allowance and the categorization of credit card charges as either business or personal. She explained that personal expenses were to be reimbursed, and Perry’s account included personal credit card expenses and salary advances. At Perry's death, his account balance stood at $161,735.04, increased to $163,469.65 with posthumous credit card charges. O’Neal confirmed the accuracy of Perry's balance but acknowledged the lack of complete documentation for all charges. Mike had an open account as well, which he paid off periodically.
Michael Graham, an expert in real estate appraisal, testified about the appraisal he conducted for P.K. Smith in 2011, with his report introduced into evidence.
Graham appraised the dealership at $800,000, the adjacent excess land at $170,000, and an additional 1.41 acres across the street at $168,905. He based these valuations on the property's highest and best use, a cost approach considering the expense of constructing a similar facility, and comparisons with other dealerships. Graham also factored in a 75 percent total depreciation based on market evaluations of comparable sales. His valuations for November 27, 2009, were slightly lower, with the dealership at $760,000 but maintaining the same values for the excess land and the 1.4-acre tract, indicating no significant market change between 2009 and the trial.
Larry Sikes, a C.P.A. and expert in business valuation, used Graham’s appraisals along with financial statements and corporate records to determine a fair market value for P.K. Smith Motors as of January 16, 2013. Sikes utilized the net asset approach, estimating the corporation's value at $1,370,553 and $1,397,397 based on Graham's appraisals, applying discounts for lack of marketability and control, ultimately valuing the business around one million dollars. Sikes acknowledged that his valuations were not based on audited financials but were supported by GM-required financial statements.
David Brewer, the estate's commercial real estate appraisal expert, valued the dealership at approximately $2 million as of November 27, 2009. However, his assessment was criticized for inaccuracies, including inappropriate comparisons with dissimilar businesses and a failure to use reliable comparable data due to the scarcity of automotive service buildings. Brewer acknowledged errors in his report, such as inflated effective age and depreciation rates compared to Graham's methodology, which would have aligned his valuation more closely with Graham's had he applied similar depreciation factors.
Ronald Gagnet served as the court-appointed expert C.P.A. and certified evaluation analyst, conducting a business evaluation of P.K. Smith as of November 27, 2009, following Perry’s death. His valuation, based on Brewer’s appraisal, utilized the net adjusted asset value method, as he deemed the income and market approaches inapplicable due to insufficient income and instability in the automotive industry. Gagnet clarified the distinction between "fair value" and "fair market value," noting that the former excludes discounts for lack of control and marketability. He reviewed financial statements and tax returns from 2005 to 2009, concluding an adjusted entity value of $2,740,243, from which he deducted a 15 percent discount for lack of marketability, valuing a 50 percent interest at $1,123,500. However, using Graham’s appraisals, he recalculated this interest at $673,320, aligning more closely with Sikes’ valuation.
The trial court, after four days of testimony, determined that the estate failed to meet its burden under La. R.S. 12:143(C) to dispose of corporate assets. It found a mutual understanding in the shareholder agreement for maintaining shares within the family post-death, requiring a "reasonable price" for shares despite no explicit price being stated. The court deemed Brewer’s testimony unreliable due to methodological flaws and accepted Graham’s appraisals, establishing the corporation's "fair value" at $1 million, thus setting the estate's 50 percent share price at $500,000. Additionally, the court found the estate owed the corporation $163,469.65, which could be deducted from the share purchase price, leading to a net payment of $336,530.35 to the estate, ordered to be paid within 30 days of the final judgment signed on February 10, 2015.
The estate presents ten assignments of error regarding the trial court's findings. It contends the court incorrectly determined the estate did not meet the burden of proof under La. R.S. 12:143(C), improperly enforced the 1984 shareholder agreement, allowed expert testimony, made flawed credibility assessments, and miscalculated the share price. Regarding the "open account" claim, the estate argues the court erred by rejecting the exceptions of prescription and lis pendens, ruling that defendants met their burden of proof, and awarding more than the claimed amount. The estate also criticizes the court for not considering evidence of Mike's self-dealing and mismanagement.
The case involved extensive testimony and numerous exhibits, with the trial court’s factual findings subject to review only if they are clearly wrong or manifestly erroneous. The standard of review emphasizes deference to factual determinations based on witness credibility, including expert testimony. The estate asserts the shareholder agreement is unenforceable due to lack of price specification, while P.K. Smith argues the trial court appropriately exercised discretion in enforcing the agreement and establishing a "reasonable price" based on expert testimony. The 1984 agreement includes provisions for share sales during a shareholder's lifetime, upon their death, and upon termination of a community property regime, stipulating that shares must carry a legend indicating restrictions on transfer as per the agreement.
Parties to the agreement imposed restrictions on share transfers both during their lifetime and upon death. The estate's claim that the agreement is an unenforceable "contract to sell" due to lack of price is rejected; the agreement is seen as a valid transfer restriction, particularly for mortis causa sales of stock. Transfer restrictions are subject to strict construction since they influence commerce and property transferability. Courts will enforce clear, unambiguous transfer agreements executed by capable parties, adhering to the parties' intent as discerned from the contract's language.
The review indicates the shareholder agreement mandates the sale of a deceased shareholder's shares to the corporation; if the corporation cannot purchase all shares, the remaining shares must be offered to other shareholders. Shares not acquired by either the corporation or other shareholders become unrestricted. The agreement aims to prevent deadlock by ensuring the deceased shareholder’s shares are sold to either the corporation or the remaining shareholder, preserving ownership within the closely held corporation.
The trial court favored enforcing the shareholder agreement over dissolution under La. R.S. 12:143(C), which allows but does not require involuntary dissolution. Testimony indicated a preference to keep the dealership operational, supporting the court's decision to deny dissolution relief and enforce the agreement.
The trial court favored enforcing the shareholder agreement instead of dissolving P.K. Smith, recognizing this as the best resolution for the dispute, which aligns with the agreement's intent and supports the local economy by maintaining the business as a viable entity. The court's denial of the estate's request for relief under La. R.S. 12:143(C) was deemed free of manifest error. Testimonies from Bradley and Mike indicated a mutual agreement on a fair price, with historical context explaining the absence of a predetermined price in the 1984 shareholder agreement due to market volatility. Diane's lack of recollection regarding the agreement's details further weakened the estate's position.
The trial court's order for a trial date was linked to a plan from P.K. Smith and Mike, which involved determining P.K. Smith's fair value before either buying the estate's shares or opting for liquidation. Similar provisions were suggested in Bradley's petition. Both plans emphasized the necessity of a valuation, with both parties having ample opportunity to present expert testimony during the trial.
The recently enacted Business Corporation Act allows shareholders to elect to buy a petitioning shareholder's shares at fair value during dissolution proceedings. Although this case was filed under previous statutes, nothing precluded the court from allowing a share purchase instead of ordering dissolution. The trial court's decision to permit expert valuation testimony was upheld, with its valuation findings deemed credible, particularly those from Graham and Sikes, who valued P.K. Smith at $1,000,000. In contrast, Brewer's valuation was found unreliable, leading to a significant disparity in estimated values, with Gagnet's recalculation aligning more closely with the credible appraisal.
The trial court's assessment of expert testimony is given considerable deference and is reviewed under the manifest error standard. Upon review, there is no manifest error in valuing P.K. Smith at $1,000,000, with the estate's 50% ownership valued at $500,000. The estate contends that the trial court incorrectly ruled that Perry's debt of $161,735.04 was not prescribed. This claim is categorized as either an "open account" or a claim for money lent, both subject to a three-year liberative prescription under Louisiana Civil Code Article 3494, which starts when payment is exigible.
The court clarifies that merely having a debt does not constitute an open account unless it involves goods or services rendered. Since P.K. Smith did not provide any goods or services to Perry, the unpaid balance is better classified as a simple loan. Without a specific maturity date, each loan prescribes three years from the date of advancement. Louisiana Code of Civil Procedure Article 424 allows a prescribed claim to be used as a defense if it relates to the obligation sought to be enforced, enabling the estate to offset the prescribed claims against the main demand.
The trial court found that the claim for money lent by a corporation to a shareholder connects to a shareholder's claim regarding the corporation's dissolution. Although the trial court ruled to enforce transfer restrictions in the shareholder agreement rather than dissolve P.K. Smith, it appropriately offset the prescribed claims against the estate's shares' purchase price. Therefore, the court found no error in denying the estate's exception of prescription.
Additionally, the estate argues against the trial court's denial of its exception of lis pendens, which claimed that the money lent was part of an earlier derivative action. If the trial court's ruling on lis pendens stems from an incorrect application of the law, it is not entitled to deference on appeal.
When multiple lawsuits arise from the same transaction involving the same parties, a defendant can file an exception of lis pendens to dismiss all but the first suit. The critical factor is whether a judgment in the first suit would have res judicata effect on the second. In this case, the court determined that this condition was not satisfied, as the second suit was actively litigated before the first. Consequently, the trial court's denial of the exception of lis pendens was upheld, emphasizing judicial economy.
On the substantive issues, the estate contended that the trial court incorrectly found that P.K. Smith proved the claim for money lent and awarded more than requested. The trial court deemed the testimony of O’Neal credible, affirming that Perry had taken various advances and used business funds for personal expenses, leading to a total owed of $163,469.65 upon his death. This amount could be offset against a $500,000 purchase price for the estate's shares.
Bradley challenged the trial court's handling of evidence regarding alleged self-dealing and mismanagement by Mike, asserting that relevant expenses were not adequately considered. However, the trial court found these claims less relevant to the current proceedings and noted the absence of expert analysis from the estate on the expenses in question.
The court affirmed the trial court's ruling, with costs assigned to Bradley Kyle Smith, the Independent Executor for the Succession of Perry Joe Smith. A rehearing application was denied, and the matter had been heard over several months in 2014, although certain evidence, like certificates, was not introduced. Neither party claimed ignorance of a 1984 shareholder agreement.
