On appeal from the Superior Court of New Jersey, Law Division, Hudson County, L-375-98.
Before Judges Wallace, Jr., Lintner and Parrillo.
The opinion of the court was delivered by: Wallace, Jr., J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Defendants, Schripps, Inc. and Dan Marcus, appeal from a judgment of the Law Division determining the value and date of valuation of the shares of stock of Schripps, a closely held corporation. On appeal, defendants contend (1) in several arguments that the trial judge erred in rejecting his expert witness's opinion on the value of the corporation; and (2) the valuation date should be September 29, 1997 rather than February 28, 1997. In his cross appeal, plaintiff Danilo Torres contends it was error not to award him attorneys fees and prejudgment interest. We reverse the determination of the value of the corporation and, in all other respects, we affirm.
Schripps was incorporated in March 1985. The corporation was formed for the purpose of operating a wholesale gourmet bakery business to sell bread, rolls, and specialty bakery items to restaurants. Defendant*fn1 supplied the initial capital to operate the business. He was in Germany while plaintiff handled the day- to-day operations of the business in New Jersey. Defendant initially owned all of the shares of stock issued by Schripps. Plaintiff subsequently acquired a twenty-five percent interest in the corporation through corporate stock sales and the issuing of stock by Schripps. Defendant eventually moved to the United States and thereafter dealt with the bookkeeping and management of the company, while plaintiff continued to operate the business.
In October 1994, plaintiff and defendant entered into a Cross Purchase Agreement (Agreement). The Agreement related to the disposition of each of the parties' interest in the stock whether disposed of during life or upon either parties' death. The Agreement permitted plaintiff to purchase one share of stock per year for the price of $10,000.00 per share. However, the stock was valued in the agreement at $12,000 per share or a total value of $1,200,000. This value was later increased to $15,000 per share or a total value of $1,500,000. The Agreement provided that upon the death of either party, the living party shall purchase the decedent's stock for the value in the Certificate of Value partially using the proceeds from life insurance held by the partners. In addition, the Agreement provided:
In the event Torres desires to cease to be employed by the Corporation or in the event he shall cease being employed by the Corporation for any reason other than his death or disability, Marcus shall have a first option to purchase Torres' interest in the Corporation at a price mutually agreed upon. If Marcus refuses Torres' offer to sell his Stock, then Torres shall be free to sell his Stock to a third party.
From the time of its inception, Schripps had grown and had become marginally profitable by 1996. Plaintiff believed he was entitled to more money from the corporation. In January 1997, he wrote to defendant requesting that Schripps be restructured. Plaintiff set forth the following options to accomplish his desire for a greater share of the corporation: (1) an increase in his salary to at least $10,000 monthly and a decrease in defendant's salary, but with defendant taking profits as a shareholder; (2) continuing the current salary structure of $4500 monthly to each partner, with a 50-50 split of the profits, but also with the ownership interests remaining the same for the purposes of sale or death of one of the parties; (3) an increase in his stock by 15%, giving him a 40% interest in the company in recognition of his past service to the company; (4) sell Schripps and dissolve the partnership; or (5) defendant could buy him out but retain plaintiff as General Manager and pay him in accord with the benefits and salary of a person in that position.
Defendant was upset by plaintiff's letter. He felt plaintiff was attempting to steal his business. After speaking with plaintiff on the phone and at Schripps the next day, defendant approached plaintiff about leaving the business. Both parties agreed that it would be best for defendant to buy plaintiff's interest and for plaintiff to leave as an employee of the corporation.
From February 4, 1997 until February 28, 1997, plaintiff and defendant attempted to reach an agreement regarding the buyout. They each hired counsel. Defendant wanted plaintiff to temporarily remain employed in a consulting role, teaching defendant how to operate the business. Defendant also wanted plaintiff to sign a non compete agreement. After considering the proposal, plaintiff informed defendant he was uncomfortable signing the non compete, and eventually refused to sign the agreement. The parties made offers and counter-offers to purchase each others' shares but without success.
On February 28, 1997, after the negotiations broke down, defendant wrote plaintiff a letter terminating his employment with Schripps effective April 15, 1997. Defendant suggested an independent appraisal of the corporation to determine the price he would pay for plaintiff's shares.
Defendant then obtained an appraisal, which listed the net equity of the corporation at $98,764, with liabilities totaling $364,756 and assets totaling $463,520.00. Plaintiff believed the appraisal undervalued the assets of the corporation and wholly excluded other assets. Defendant then offered to buy plaintiff's 25% interest in the company in accord with the $98,764.00 appraised value. Plaintiff stated that if the corporation was only worth $98,000 then he would buy defendant's interest and thus own the company outright. Plaintiff then offered to purchase the corporation for $200,000. Defendant in turn matched this offer and plaintiff counter-offered at $300,000. The parties still could not reach an agreement.
In April 1997, plaintiff formed Alpine Bakery, Inc., a wholesale specialty bakery business. The master baker for Schripps, Gerard Von Gerichten, left Schripps and started working for Alpine Bakery in July 1997. Defendant claimed the loss of Von Gerichten was crippling to the corporation.
Following plaintiff's departure, Schripps began to lose money. Defendant asserted that Schripps' gross sales decreased by $748,000 for the first nine months of 1997, and the corporation lost $125,215 for that period.
Plaintiff testified that Alpine Bakery began to actively solicit customers in August 1997, and its first sale was September 5, 1997. Plaintiff admitted that several other Schripps' employees, apart from the master baker, came to work for him in August and September 1997 and by October he was serving two of Schripps' former customers.
In August 1997, the Board of Directors of Schripps adopted a resolution to dissolve the corporation. On September 8, 1997, a Special Meeting of the shareholders was held. As majority shareholder, defendant voted to dissolve the corporation and distribute the assets of the corporation in accordance with a Plan for Liquidation. Plaintiff objected to the dissolution. On September 12, 1997, plaintiff offered to purchase Schripps for $200,000 and assume payments of Schripps' liabilities, subject to conditions.
On September 29, 1997, European Bread, Inc., a corporation solely owned by defendant, purchased the assets of Schripps for $200,000 and assumed liabilities of approximately $364,756. Defendant thereafter claimed that plaintiff was owed $50,000 for his 25% ownership share of Schripps stocks. Schripps no longer operated any business after September 29, 1997, but European Bread registered the trade name of Schripps and operated the business. On November 18, 1997, European Bread, trading as Schripps, submitted a loan application to Summit Bank. Defendant's financial statement was attached to the application and listed Schripps as an asset valued at $850,000. The financial statement was dated September 18, 1997, eleven days prior to the sale of Schripps.
On December 4, 1997, plaintiff filed a complaint against defendant and Schripps. Plaintiff alleged defendant improperly depleted the profits and cash reserves of Schripps, and claimed defendant's acts constituted fraud, illegality, mismanagement, and acts of oppression. Plaintiff sought to have (1) a receiver appointed to manage Schripps until a fair reasonable valuation could be obtained; (2) an inspection of the financial records of Schripps and European Bread; (3) an independent valuation of Schripps; (4) a reversal of the transfer of Schripps assets to European Bread; and (5) the opportunity to purchase Schripps after the market value was obtained. Defendant and Schripps filed an answer denying the allegations.
Prior to the start of trial, defendant sought to exclude testimony of all settlement offers between the parties. He conceded plaintiff was entitled to be paid the value of his minority interest, but the only issue was the value of corporation. Plaintiff sought to admit the settlement offers for the limited purpose to show defendant's bad faith and on the issue of credibility. The judge expressed doubt as to the materiality of the settlement discussions, but deferred ruling on the motion until trial. At trial, the judge ruled that the settlement discussions would not be considered for purposes of valuation of the corporation.
Plaintiff testified to his version of what transpired, but failed to present expert testimony as to the valuation of Schripps. Defendant called Stephen C. Chait, C.P.A., as his expert on the value of Schripps. Chait stated the company was profitable as of December 31, 1996, but from January 1997 to August 31 of 1997, there had been a significant change as Schripps had lost money, which impaired its capital, its retained earnings and the overall health of the company. Chait found that for the year 1997 Schripps lost $114,000 as of September 1997. Chait opined that the company's outlook was questionable at that time.
Chait testified he used the capitalization of net income method in determining the value of the corporation as of February 1997. He explained that this method involved examination of the income stream of the company to determine the appropriate capitalization factor, which in turn translated into value. Chait stated that the formula he used was to "take the net income,  add to it the expected long-term growth, and  divide that by [the] required rate of return, minus long-term growth." After applying that methodology, Chait valued Schripps at $222,400 as of February 28, 1997.
Chait testified he could not use the capitalization method for the September 29, 1997, valuation date because the company was in much worse financial condition at that time, since it had a loss of $114,000 for the first eight months. He opined the only way to value Schripps would be the cost approach.
Chait admitted on cross-examination that he was unable to use a market approach in valuing Schripps because he could not find comparable sales of similar corporations within the industry. Chait also admitted that if defendant and his wife were taking exorbitantly high salaries for minimal work, the valuation could potentially double. Moreover, Chait stated he did not do an independent evaluation of the company's assets or account receivables, as these numbers were supplied to him by defendant. Chait was also questioned about whether he valued the goodwill of the company. He replied he did not compute a separate figure for goodwill, but that goodwill was "contained in the income ...