Before Judges Wallace, Jr., Cuff and
The opinion of the court was delivered by: Wallace, Jr., J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
On appeal from the Superior Court of New Jersey, Chancery Division, Burlington County.
This appeal is the sequel to Musto v. Vidas, 281 N.J. Super. 548 (App. Div. 1995), certif. denied, 143 N.J. 328 (1996) (Musto I), wherein we held that plaintiff William Musto was an oppressed shareholder of Semcor, Inc., and that the remedy was a court- ordered buy-out of his shares pursuant to N.J.S.A. 14A:12-7(8) by the other one-third shareholders of Semcor, Inc., Vincent Vidas and John Degnan (defendants).
We remanded for the trial judge to determine the fair value of plaintiff's one-third interest. Following lengthy valuation proceedings, the trial judge valued Semcor, Inc. (Semcor) at $6,240,000 as of December 31, 1990, and plaintiff's share at $2,080,000. On December 26, 1996, the trial judge entered judgment requiring plaintiff to sell his shares in Semcor to defendants in return for $3,052,946. This amount included interest of $128,472 from January 1, 1991 through December 31, 1996, and a $155,526 credit to defendants for payments made to plaintiff pursuant to a prior order. Subsequently, on June 18, 1997, plaintiff was awarded litigation fees and expenses in the amount of $482,088.03. Plaintiff appeals and defendants cross-appeal.
While the appeal was pending, we remanded the matter to the trial judge to consider plaintiff's motion to supplement the record regarding the sale of Semcor in June of 1998 to Advanced Communication Systems, Inc. (ACS) for approximately $40 million dollars. Following a hearing, the trial judge denied this motion. Plaintiff then filed a new notice of appeal and defendants again filed a cross-appeal.
On appeal, plaintiff contends the trial judge erred in: (1) establishing December 31, 1990 as the valuation date; (2) failing to give plaintiff an equitable adjustment for post-valuation date profits; (3) failing to apply the equitable interest rate advanced by plaintiff's expert; (4) determining he could not alter the valuation date from December 31, 1990; and (5) denying plaintiff's motion to supplement the record. In addition, plaintiff contends we should award him $96,025 for attorney's fees incurred in the appellate courts.
In the cross-appeal, defendants contend the judge erred in: (1) awarding plaintiff litigation expenses; (2) awarding prejudgment interest; (3) failing to grant two equitable adjustments to the fair value claimed by defendants; and (4) holding that the insurance provision in the shareholders' agreement survived the termination of plaintiff's shareholder status.
We reject plaintiff's and defendants' various challenges and affirm.
Plaintiff's primary arguments concern the selection of December 31, 1990 as the valuation date for determining fair value. Plaintiff suggests that December 31, 1996 would be a more appropriate and equitable valuation date because that date would take into account defendants' failure to distribute Semcor's profits to all the shareholders between 1991 and 1996, as well as Semcor's growth during these years. Alternatively, plaintiff urges that if December 31, 1990 remains the valuation date, then he is entitled to equitable adjustments to account for these factors.
Defendants maintain the trial judge was correct in not deviating from the presumptive valuation date set forth in the statute (the date of the filing of the complaint) because an award of post-1990 profits under any rationale would constitute an illegal double recovery since the determination of fair value is actually based upon a company's future income stream. Defendants further assert that plaintiff would not have sought a post-1990 valuation date if Semcor's value had decreased after 1990. Defendants also claim that plaintiff is judicially estopped from contending otherwise because he had asserted as late as 1994 that December 31, 1990 was the proper valuation date.
As an initial matter, we reject defendants' judicial estoppel claim. Generally, the doctrine of judicial estoppel bars a party to a legal proceeding from arguing a position inconsistent with one previously asserted. Bell Atlantic Network Servs., Inc. v. P.M. Video Corp., 322 N.J. Super. 74, 94 (App. Div.), certif. denied, 162 N.J. 130 (1999)(citation omitted). However, the doctrine is only applicable when the party against whom it is to be applied successfully asserted the inconsistent position in the prior proceeding. Id. at 95. Here, plaintiff advanced December 31, 1990 as the valuation date when he was to be the purchaser of the shares, a position which we reversed in Musto I. Since plaintiff was not successful in his argument, and the circumstances have now changed, we find no reason to apply the doctrine of judicial estoppel.
We turn now to plaintiff's arguments addressed to the valuation date. Pursuant to N.J.S.A. 14A:12-7(8)(a), in a court-ordered buy-out:
The purchase price of any shares so sold shall be their fair value as of the date of the commencement of the action or such earlier or later date deemed equitable by the court, plus or minus any adjustments deemed equitable by the court if the action was brought in whole or in part under paragraph 14A:12-7(1)(c).
The "date of the commencement of the action" is considered the presumptive valuation date. See Stuart L. Pachman, Title 14A- Corporations, Comment to 14A:12 (1998-99)(noting that the date of the commencement of the action is the presumptive date for determining the fair value of shares which are bought out).
In Musto I, we instructed the trial judge with respect to the determination of the valuation date as follows:
On remand, the trial court must again determine the valuation date . . . . The trial court found no equitable reason to deviate from [N.J.S.A. 14A:12- 7(8)(a)'s] provision that the commencement date of the action be the "presumptive date" for valuation purposes and determined that December 31, 1990 was the valuation date. However, in light of our conclusion that plaintiff should not be re-employed by the corporation, the court ordered payment of salary to plaintiff, the passage of time since the filing of the complaint, and other factors the trial court may deem relevant, we do not foreclose the trial court from considering whether a different valuation date would be "deemed equitable." [Musto I, supra, 281 N.J. Super. at 561.]
In determining to maintain December 31, 1990 as the valuation date, Judge Gottlieb stated:
There's an assumption . . . that we're going to use December 31,  here. Equitable reasons means to me that there's going to be some unfairness brought about by using December 31,  that can't otherwise be addressed. [A]lthough you've given me a menu of reasons why I should deviate from December 31,  and bring it closer to today, the only one that really has any intellectual appeal to me is [an equitable adjustment for post-1990 undistributed profits]. And, in that regard I find that equitably it's not sufficient to overcome the assumption that we're going to go with the filing date, because it can be addressed by another course, and that is just a matter of calculation of the adjustment for the undistributed profit plus interest.
However, Judge Gottlieb subsequently decided against an equitable adjustment for post-1990 corporate profits, stating:
I determine that post-1990 . . . corporate profits are irrelevant for purposes of an equitable adjustment . . . .
I say that because, one, another provision of the statute, which is subsection 8D says, "Interest may be allowed at the rate and from the date determined by the Court to be equitable . . . ." That's the remedy for the post-valuation date use of the money.
However, the interest rate is to be set by me in the exercise of my reasoned judgment or discretion in an equitable fashion obviously, and in order to do that post-1990 financial circumstances . . . of the corporation are meaningful . . . .
If, in fact, I were to allow an equitable adjustment as being participation in the post- valuation date . . . profits of the entity, then intellectually it raises an inconsistency, [because] the valuation as of December 31, 1990 not only factors in what is the present value of this and that . . . but also what is . . . the likely future course of the corporation. As long as that is factored in obtaining a value for purposes of valuation, then you can't have it duplicated by saying not only are we giving you something . . . which is based on, in part, the likely future course of the corporation, future earnings . . . we're also going to give you those future earnings. That can't occur. By the declaration in the statute, the provision of which I quoted for interest, that is the remedy that is to be provided.
Plaintiff claims that the trial judge erred by deviating from his original inclination to permit the equitable adjustments which should have been the law of the case.
The "law of the case" doctrine may be applied to the question of whether or not a decision made by a trial judge during one stage of the litigation is binding throughout the course of the action. State v. Hale, 127 N.J. Super. 407, 410-11 (App. Div. 1974). The rule is "based upon the sound policy that when an issue is once litigated and decided during the course of a particular case, that decision should be the end of the matter." Id. at 410 (citation omitted). As applied to rules or orders of an interlocutory nature, such as a ruling by a trial judge during one stage of the action, application of the doctrine is discretionary. State v. Reldan, 100 N.J. 187, 205 (1985).
Here, the trial judge's initial comments concerning equitable adjustments were not included as part of the corresponding April 19, 1996 order. In addition, the issue of post-valuation date profits had neither been briefed nor argued when the trial judge made his comments. Essentially, the trial judge made a tentative observation which he later changed. Under these circumstances, we find no reason to apply the law of the case doctrine.
In arguing that the trial judge abused his discretion by not taking the equities of the case into consideration in setting the valuation date, plaintiff relies on two recent New Jersey Supreme Court decisions, Balsamides v. Protameen Chems., Inc., 160 N.J. 352 (1999) and Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383 (1999).
Balsamides involved the question of whether a judicially ordered buy-out pursuant to N.J.S.A. 14A:12-7(8) should include a marketability discount in determining the fair value of the purchaser's shares. Balsamides, supra, 160 N.J. at 354. The Court explained that a marketability discount accounts for a lack of liquidity in the shareholder's interest in a close corporation because there is no readily available market for the shares. Id. at 373. The Court held that a marketability discount should be applied in light of the equities of the case; specifically, the Court cited the fact that the seller was the oppressor and that the purchaser should not bear the brunt of the company's illiquidity merely because he or she is the designated buyer. Id. at 377-79. In Lawson Mardon Wheaton, the issue was whether a marketability discount should be applied in determining fair value in a statutory appraisal action pursuant to N.J.S.A. 14A:11-1 to -11. The Court held that absent the presence of "extraordinary circumstances," such as where the dissenting shareholder has held out in order to exploit the transaction giving rise to the appraisal, the marketability discount should not be applied because to do so would enrich the majority shareholders and penalize the minority shareholders for taking advantage of the protection afforded by the appraisal statute and would inevitably encourage corporate "squeeze-outs." Lawson Mardon Wheaton, supra, 160 N.J. at 402-04.
Thus, the Lawson Mardon Wheaton and Balsamides cases demonstrate that the "equities of the case" must be considered when ascertaining fair value in oppressed shareholder actions. Specifically, the Court stated in Balsamides:
In cases where the oppressing shareholder instigates the problems, as in this case, fairness dictates that the oppressing shareholder should not benefit at the expense of the oppressed . . . . The statute does not allow the oppressor to harm his partner and the company and be rewarded with the right to buy out that partner at a discount. We do not want to afford a shareholder any incentive to oppress other shareholders. What to do when it is the oppressing shareholder who is given the buy-out option is a harder question that we need not decide. The guiding principle we apply in this case and in Lawson Mardon Wheaton is that a marketability discount cannot be used unfairly by the controlling or oppressing shareholders to benefit themselves to the detriment of the minority or oppressed shareholders. [Balsamides, supra, 160 N.J. at 382-83 (emphasis added).]
Unlike in Balsamides and Lawson Mardon Wheaton, the issue of a marketability discount, or any other discount, does not arise in this case; nor was the valuation date an issue in either of the Supreme Court cases. Beyond that, plaintiff's reliance on these cases is weakened by the fact that the "equities of the case" are taken into consideration when setting the valuation date under N.J.S.A. 14A:12-7(8)(a). This section requires that the valuation date be the date of the commencement of the action or such earlier or later date "deemed equitable" by the court, plus or minus any adjustments the court "deem[s] equitable." N.J.S.A. 14A:12-7(8)(a). We are satisfied that Judge Gottlieb considered the "equities of the case" in reaching his ultimate determination to maintain the presumptive valuation date of December 31, 1990.
Plaintiff also argues that if December 31, 1990 is found to be the appropriate valuation date, then the trial judge erred in failing to make equitable adjustments to fair value to reflect Semcor's growth in the years following the valuation date. In this context, plaintiff does not dispute the trial judge's determination of fair value or its utilization of the income capitalization method of valuation.
There are various factors which are considered fundamental in valuing a close corporation, including: (1) the nature of the business; (2) its history; (3) the economic outlook in general; and (4) the condition and outlook of the specific industry in particular. Lavene v. Lavene, 162 N.J. Super. 187, 193-94 (Ch. Div. 1978) (quoting Rev. Rul. 59-60, 1959-1 C.B. 237). Generally, in valuation proceedings the corporation must be valued as a going concern, which necessitates not only examination of the corporation's historical earnings, but also consideration of the corporation's future prospects. Universal City Studios, Inc. v. Francis I. duPont & Co., 334 A.2d 216, 218 (Del. 1975).
In utilizing the income capitalization method of valuation, the company's prospective income growth must be considered. See Lavene, supra, 162 N.J. Super. at 195 (noting that "potential future income is a major factor in valuing stocks of closely held corporations"). See also Olson v. Olson, 585 N.E.2d 1082, 1089 (Ill. App.)(holding that both the future economic outlook and the capitalization of future earnings are important tools for valuing a close corporation), appeal denied, 596 N.E.2d 630 (Ill. 1992); Waller v. American Int'l Distribution Corp., 706 A.2d 460, 463 (Vt. 1997)(stating that the income capitalization method is identical to the discounted future earnings method of valuation). Thus, if the judge had allowed an equitable adjustment to account for a company's actual growth in the years following the ...