July 10, 2008
HOLIDAY MEDICAL CENTER, INC., PLAINTIFF-RESPONDENT, AND ARLENE MARKIND, PLAINTIFF-APPELLANT,
BARTON D. WEISMAN, ANDREW S. WEISMAN, HOWARD L. LIPSCHUTZ, ARTHUR KROSNICK, BARRY KANTROWITZ, MILLENNIUM HEALTH SYSTEMS, LLC, HBA HEALTH SYSTEMS, LLC, HBA THERAPY SERVICES, INC., AND THREE B FINANCIAL SERVICES, INC., DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Chancery Division, General Equity Part, Ocean County, Docket No. C-195-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted May 27, 2008
Before Judges Parrillo, Gilroy and Baxter.
Plaintiff Arlene Markind, a minority shareholder in Holiday Medical Center, Inc. (HMC), a New Jersey for-profit corporation, which until March 2005, owned and operated a nursing home facility*fn1 in Lakewood, dissented from the sale of the nursing home to a third-party private, non-private, religious school for girls. Because HMC did not respond affirmatively to Markind's demand that it commence an action to determine the fair value of her shares pursuant to N.J.S.A. 14A:11-7(1), Markind filed an action in the Chancery Division on August 4, 2005, seeking, among other matters: an accounting to determine the fair value of her shares in HMC; and, an order compelling HMC to pay her the fair value as determined by the court.*fn2
Markind appeals from the July 16, 2007 order, which, among other matters, granted HMC's motion for summary judgment in part, determining that Markind was not entitled to any additional payment aside from the $80,000 she had previously received for her shares in HMC. Markind also appeals from the August 29, 2007 order, denying her motion for reconsideration. We reverse; and remand the matter to the trial court for further proceedings consistent with this opinion.
Markind was a 5% shareholder in HMC, and individual defendants, Barton Weisman; his son, Andrew S. Weisman; Howard L. Lipschutz; and Arthur Krosnick served as HMC's Board of Directors and Officers. Together the four individual defendants and their immediate family members owned 75% of the outstanding stock of HMC. On November 30, 2004, the Directors notified Markind that because of Medicenter's operational losses as a nursing home, HMC had entered into a tentative contract to sell Medicenter to a non-profit school, with the sale expected to yield approximately $2,000,000 in cash to HMC.
On January 7, 2005, HMC's Directors issued a notice to the shareholders, advising that there would be a shareholders' meeting on January 31, 2005, to vote on the approval of the asset sale to the private school for the gross sale price of $8,000,000.*fn3 The notice described the sale as including "all of the Corporation's right, title, and interest in the Holiday Medical Center Nursing Home facility, including the land, the building and contents of the building (collectively, the 'Facility'). The Sale does not include the Corporation's computers, software, or Facility's policies and procedures." Moreover, the notice indicated that HMC would donate approximately $3,000,000 of the sale proceeds to the buyer as a charitable contribution.*fn4
On March 1, 2005, HMC sold Medicenter to the private school for $8,000,000. In accordance with the terms of the contract, $3,275,464.87 was deducted from the purchase price to pay off an existing mortgage lien, and $2,895,060.45 was donated back to the private school as a seller's concession. After payment of other miscellaneous closing fees, HMC received $2,000,000 from the sale. Barring any dispute, Markind, as a 5% shareholder of HMC, was entitled to receive $100,000 from the sale proceeds, or $1,727 per share.
On March 23, 2005, Markind sent a notice of her dissent to the asset sale, and demanded payment of the fair value of her shares in HMC, pursuant to N.J.S.A. 14A:11-2(3). Failing to receive an offer from HMC to purchase her shares, Markind made a demand on the corporation to commence an action to determine the fair value of her shares, pursuant to N.J.S.A. 14A:11-7(1). On HMC's failure to file the action, Markind filed her complaint in the Chancery Division on August 4, 2005, naming the individual defendants and the various corporations in which Markind alleged the named individual defendants had financial interests. In addition to her demand for an accounting and for payment of the fair value of her shares, Markind also alleged fraud against all defendants, demanding exemplary damages.
On November 18, 2005, the trial judge granted defendants' motion, dismissing Markind's claims against the individual defendants for any damages caused by their actions or omissions as Directors of HMC, determining that as a dissenting shareholder, Markind no longer possessed the right to assert such claims; however, the judge denied defendants' motion "to the extent it [sought] to insulate the individual Directors from a cause of action on behalf of [HMC] . . ., determining that "any recovery for the Directors' wrongdoing is the property of the corporation, and the case should move forward in that regard."*fn5 Markind does not challenge these determinations.
On January 6, 2006, the trial judge heard argument on Markind's motion to enjoin distribution of the sale proceeds. HMC acknowledged that it not only had distributed 80% of the sale proceeds to all shareholders except Markind, but also had kept $550,000 in an escrow fund to cover cost of litigation, ongoing corporate operating expenses, and Markind's share of the sale proceeds. Although the judge denied Markind's motion, determining that she had not satisfied the four-prong standard of Crowe v. De Gioia, 90 N.J. 126, 132-35 (1982), he suggested that HMC distribute $80,000 to Markind, the equivalent of 80% of the $100,000 she would have received had she not dissented from the sale transaction. On January 13, 2006, HMC complied with the judge's suggestion and made the $80,000 distribution to Markind.
On October 6, 2006, the parties appeared before the court on Markind's motion for partial summary judgment, seeking an order determining that the $8,000,000 sale price represented the value of HMC, on which the fair value of her shares in the corporation should have been determined. Rather than deciding the motion, the judge exercised his discretion, stating that it would be appropriate from the cost effectiveness of the litigation to appoint an independent appraiser, pursuant to N.J.S.A. 14A:11-8(c) "to receive evidence and report to the [c]court on the question of fair value" of the corporation.
On October 16, 2006, an order was entered appointing CBIZ Valuation Group, LLC (CBIZ) as the independent appraiser. On March 14, 2007, CBIZ issued its report, determining that operating Medicenter "was marginally financially feasible." CBIZ appraised HMC in the alternative as: 1) a going concern, that is, determined its value as a nursing home facility; and 2) a liquidation value, that is, determined the sale value of the facility to a third party to use as a school. CBIZ determined that the going concern value as of January 30, 2005, was $5,540,000, and that the liquidation value as of the same date was $7,000,000. Neither Markind nor HMC disputed CBIZ's alternate valuations or the methodologies it had used in determining those valuations.
Accordingly, the parties filed cross-motions for summary judgment based on the valuations contained in CBIZ's report. Markind moved for partial summary judgment, requesting that the court accept CBIZ's valuation of the real estate of $7,000,000 as the fair value of the real estate and appoint CBIZ, or another qualified appraiser, to appraise the value of the nursing home license held by the corporation. Markind asserted that by setting the value of the corporation at $7,000,000, she was due an additional payment of $116,226.76 from HMC, exclusive of her share of the value of the nursing home license or any other assets held by the corporation. ($7,000,000 - the mortgage loan balance of $3,075,464.87 = $3,924,535.13 x 5% = $196,226.76 - $80,000 previously received = $116,226.76).
HMC filed a cross-motion for summary judgment seeking to:
1) establish that the going concern value of $5,540,000 represented the value of the corporation; 2) determine that Markind was not entitled to any additional payments from the corporation as fair value for her shares of stock; 3) enjoin Markind's actions and to set them aside; and 4) assess Markind for its costs and expenses in defending the action. While the cross-motions were pending, Markind filed a second motion for counsel fees and costs, asserting that she was required to have filed the complaint and prosecute the action, because of HMC's failure to identify the fair value of the corporation or offer her payment for her shares of stock.
On June 22, 2007, the trial judge rendered his decision, granting HMC's motion in part, determining that Markind was not entitled to any additional payments from HMC for the fair value of her interest in the corporation, having previously received a fair value for her shares of stock when she received the $80,000 from HMC in January 2006; and denying HMC's motion for attorney's fees and costs in defending the action. The judge also denied Markind's motions. In rendering his decision, the judge stated:
In the instant case since neither party has argued that the other's preferred valuation method is generally not acceptable to the financial community, the [c]court has the discretion to pick either one or even substitute a different method entirely. The Delaware cases cited, the [c]court notes are not directly on point because they deal with dissents to mergers, not the dissent of the sale of substantially all the corporate assets. However, in the absence of any cases on point in New Jersey, the Delaware Court's reasoning regarding the purpose and intent of the fair value remedy is persuasive.
When the vote was taken regarding the sale of the assets, plaintiff's choice was between approving the sale to the buyer or continuing the ongoing operations of [Medicenter]. Thus, what the majority shareholders stripped plaintiff of was her ongoing interest in Medicenter, and it is the fair value of that interest that the Statute entitles her to. But the [c]court['s] finding is that the plaintiff's motion for Summary Judgment based on highest and best use analysis must be denied. The facts remain unchallenged. However, since the plaintiff is not entitled to a highest and best use evaluation, the plaintiff is not entitled to [a] valuation of the licenses independent of the going concern valuation. The value of the licenses is already incorporated in the going concern valuation. And the [c]court would note that . . . the value of the license was addressed by . . . CBIZ.
The [c]court also notes in terms of establishing fair value that the defendant undertook to go through a series of different analyses as to the return or fair share of the plaintiff.
The best case scenario, as cited by the defendant, is that if the highest best use were utilized on a $7 million cash deal [it would] result in . . . $93,192 versus an actual sale donation or difference of about $13,977.
The going concern analysis would establish the [Medicenter] at 5,540,000 and again the highest and best use would be at seven million. The [c]court notes here that there was a sale of eight million, albeit with a charitable donation. But the arithmetic as set forth in the defendant's moving papers is persuasive that running the various analyses runs a range or return for the shareholder of anywhere from [$40,000] to $80,000.
Both parties have moved for costs and expenses in the within litigation. The costs and expenses of bringing an action to assess fair value of a dissenting shareholder's share shall be determined by the [c]court and a portion then assessed as the [c]court finds equitable upon the parties. When an offer of payment to a dissenting shareholder is not made in good faith or when no offer is made at all, the dissenting shareholder must bring an action to receive the fair value of the shares. The [c]court may in its discretion award reasonable counsel fees and expenses.
Now, in this instance the [c]court does not find the record supports the view that there was any bad faith on the part of defendant nor the view that there was any self[-]dealing or anything other than an arms[-]length transaction. It may well be, according to the plaintiff's position, that due diligence was lacking with respect to the marketing of the property, but the ultimate sale at eight million bears out the finding that the ultimate business decision or business judgment of the [c]orporation was one that was reasonable and consistent with good business practices here.
The defendant argues that plaintiff should bear the costs because the litigation was costly and the defendant made payment to the plaintiff in good faith. However, the defendant only made payment at the invitation of the [c]court. And the defendant makes no argument that the plaintiff conducted the litigation in such a way as to make it equitable for the plaintiff to bear all costs.
Similarly, the plaintiff's motion for costs and expenses are denied, as the [c]court will deny those of the defendant. It appears that [Medicenter] has already given Markind more than she is legally entitled to, although the [c]court is not inclined to alter that. It seems that the plaintiff's motion for fees and expenses should be denied.
In summary, based upon the information before the [c]court, the [c]court is satisfied and finds that the corporation Holiday Medical Center trading as [Medicenter] sold its business as a going concern for $8 million and its terms and conditions including the charitable deduction, taking into account the nursing license, assets, was one which can be viewed as an arms[-] length transaction and established fair value for the constituent shareholders, whether that shareholder be a five percent shareholder or otherwise. [(emphasis added).]
A confirming order was entered on July 16, 2007.*fn6
On July 31, 2007, Markind moved for reconsideration of the July 17, 2007 order, contending that the trial judge erred by not determining the value of HMC at $8,000,000, the sale price reported by HMC in its tax filings; or, in the alternative, at $7,000,000, the liquidation value determined by CBIZ. Markind asserted that under either scenario, the judge should not have reduced the gross value of the assets by deducting the charitable contribution of $2,895,060.45 made to the school, because she did not receive any benefit from the deduction. Lastly, Markind argued that if the judge disagreed with her first two arguments, then he should have determined the value of the corporation by accepting CBIZ's going concern value of $5,540,000; and, if he had, after deducting the total of the mortgage lien plus the monies Markind had previously received from the corporation, then he should have concluded that she was owed an additional $33,226.76 from HMC as fair value of her shares.
On August 17, 2007, the judge denied Markind's motion for reconsideration. However, after ascertaining that the escrow account established by HMC on closing of title may have contained un-disbursed funds, the judge directed HMC to provide the court and Markind with an accounting, stating the amount of monies presently in the account, together with an explanation of all funds expended from that account, no later than August 31, 2007.*fn7 A confirming order was entered on August 29, 2007.
On appeal, Markind argues:
THE COURT SHOULD HOLD THAT AS A MATTER OF LAW UNDER THE NEW JERSEY FAIR VALUE STATUTE, FAIR VALUE IS THE HIGHEST AND BEST VALUE FOR THE ASSETS AT ISSUE.
A. IN ORDER TO GIVE EFFECT TO THE NEW JERSEY STATUTE, WHICH PROVIDES AN APPRAISAL REMEDY IN THE CASE OF A CORPORATE LIQUIDATION, FAIR VALUE MUST AS A BASELINE BEGIN WITH THE HIGHEST AND BEST VALUE AVAILABLE.
B. THIS COURT SHOULD ENDORSE THE USE OF ORDINARY APPRAISAL STANDARDS, WHICH REQUIRE AN APPRAISER TO APPLY WHICHEVER STANDARD YIELDS THE HIGHEST VALUE, TO FAIR VALUE ACTIONS.
C. DELAWARE LAW SHOULD IN ANY CASE NOT BE APPLIED PIECEMEAL; IT REQUIRES CORPORATE DIRECTORS TO OBTAIN THE HIGHEST AND BEST PRICE IN SELLING A COMPANY, WHICH WAS NOT DONE HERE.
D. IN SETTING FAIR VALUE, THE COURT SHOULD CONSIDER THE PURPOSE OF THE APPRAISAL REMEDY.
E. IN ADDITION TO REVERSING THE LOWER COURT'S RULING THAT FAIR VALUE SHOULD BE BASED ON GOING-CONCERN RATHER THAN BEST VALUE, THE COURT SHOULD REMAND FOR VALUATION OF OTHER ASSETS AND REVERSE THE DENIAL OF APPELLANT'S REQUEST TO APPOINT AN APPRAISER TO VALUE THE CORPORATION'S NURSING HOME LICENSE.
THE LOWER COURT NEVER RULED ON APPELLANT'S ESTOPPEL ARGUMENT.
EVEN IF THE COURT DID NOT ERR IN SETTING FAIR VALUE BASED ON THE MUCH LOWER GOING-CONCERN VALUE, RATHER THAN LIQUIDATION VALUE, ITS INITIAL MATHEMATICAL CALCULATIONS WERE SIMPLY WRONG AND ITS SUBSEQUENT REFUSAL TO RECTIFY THE PROBLEM IS LEGALLY INSUPPORTABLE.
A. AT THE AUGUST 17 HEARING, THE LOWER COURT ACCEPTED THE ACCURACY OF APPELLANT'S CALCULATION, BUT REFUSED TO SET VALUE AT THAT AMOUNT.
B. THE COURT'S ORIGINAL CONCLUSION AND RULING CONCERNING FAIR VALUE AT THE JUNE 22 HEARINGS WAS INSUPPORTABLE IN EITHER LAW OR FACT.
1. THE LOWER COURT WAS OBLIGATED TO PERFORM A FAIR VALUE CALCULATION, AND DID NOT DO SO.
2. THE LOWER COURT'S INITIAL DETERMINATION IMPROPERLY RELIED ON AFTER-TAX CALCULATIONS SUBMITTED BY RESPONDENT-CORPORATION.
a. AS A PRELIMINARY MATTER, THE RESPONDENT'S SUBMISSIONS DO NOT CONTAIN A CALCULATION OF FAIR VALUE, AND IMPROPERLY INCLUDE DEDUCTIONS FOR PURPORTED TAX LIABILITY.
b. THE RESPONDENT'S SUBMISSIONS DO NOT SATISFY BASIC EVIDENTIARY STANDARDS EITHER FOR EXPERT EVIDENCE OR NON-EXPERT EVIDENCE, AND THE LOWER COURT THEREFORE SHOULD NOT HAVE RELIED ON THEM.
THE LOWER COURT ABUSED ITS DISCRETION IN FAILING TO AWARD COSTS AND FEES, INCLUDING COUNSEL FEES, AGAINST THE RESPONDENTS, GIVEN RESPONDENTS' COMPLETE FAILURE TO FOLLOW THE REQUIREMENTS OF THE STATUTE AND ATTEMPT, INSTEAD, TO SPEND OR DISTRIBUTE CORPORATE ASSETS LEAVING NOTHING FOR THE APPELLANT, AND THE COURT'S OWN MISUNDERSTANDING OF APPLICABLE LAW.
A trial court will grant summary judgment to the moving party "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c); see also Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 523 (1995). "An issue of fact is genuine only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact." R. 4:46-2(c).
On appeal, "the propriety of the trial court's order is a legal, not a factual, question." Pressler, Current N.J. Court Rules, comment 3.2.1 on R. 2:10-2 (2008). "We employ the same standard that governs trial courts in reviewing summary judgment orders." Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). On review of motions for reconsideration, we will reverse only on a finding of abuse of discretion. See Cummings v. Bahr, 295 N.J. Super. 374, 389 (App. Div. 1996).
In Point I, Markind argues that the trial judge erred in determining that she had received fair value for her 5% interest in HMC, when she received the one-time distribution of $80,000 from the corporation in January 2006. Markind contends that the judge erred in basing his decision on "the lower going-concern value ($540,000 from the CBIZ appraisal, rather than the much higher liquidation value $7,000,000 for the real estate alone, plus other assets)." Markind asserts that the judge erred in determining "that a dissenting shareholder is entitled to no more than the going-concern value of its shares, even where substantially all the assets are sold in a liquidation sale, and are worth substantially more in liquidation . . . ." Markind urges this court to hold as a matter of law that the phrase "fair value" as contained in N.J.S.A. 14A:11-3(2) should be interpreted to mean "the highest and best value" available. We disagree.
Corporations in New Jersey are governed by the New Jersey Business Corporations Act (BCA), N.J.S.A. 14A:1-1 to 14A:17-18. In analyzing corporate issues, however, the courts also find Delaware law instructive. Balsamides v. Protameen Chems., Inc., 160 N.J. 352, 372 (1999).
When the nature of a corporation undergoes a substantial change, such as a merger, dissolution, or a sale of all or substantially all of the corporation's assets, a shareholder who disagrees with the change may disassociate himself or herself from the corporation and recover the fair value of his or her investment in the corporation. N.J.S.A. 14A:11-1; N.J.S.A. 14A:11-3(2). A shareholder who disagrees with the substantial change of the corporation and demands payment for his or her shares is "referred to as a 'dissenting shareholder.'" N.J.S.A. 14A:11-3(1). A dissenting shareholder's rights are limited. When a dissenting shareholder exercises his or her right to dissent, the shareholder ceases to possess the rights of a shareholder and is left only with those rights afforded under the BCA, including the right to be paid fair value for his or her shares. N.J.S.A. 14A:11-3(2). A dissenting shareholder's rights replace the "veto power" held at common law. As described by the Court:
Historically, corporations could act only with the unanimous consent of all shareholders. That rule protected minority stockholders by giving them an effective veto power over the will of the majority. However, it frequently led to deadlock and corporate paralysis. To promote the flexibility needed by modern corporations, an alternative was adopted. Unanimity was traded for "majority rule" and veto power exchanged for appraisal rights. Minority owners could no longer stop their company from pursuing a course with which they disagreed. But they did not have to go along. They had the right to demand to be bought out by the company at "fair value." [Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383, 396 (1999).]
The fair value of a dissenter's shares may be determined via agreement or litigation. After the prescribed statutory period of time has expired, see N.J.S.A. 14A:11-6(2), and the parties have still failed to agree on a fair value for the dissenting shareholder's interest in the corporation, the dissenting shareholder may demand that the corporation commence a court action "for the determination of the fair value of [his or her] shares." N.J.S.A. 14A:11-7(1).*fn8 If the corporation fails to commence the action, the dissenting shareholder may commence such action in the name of the corporation. N.J.S.A. 14A:11-7(2).
The phrase "fair value"*fn9 as used in the Appraisal Statute*fn10 is not defined. Lawson, supra, 160 N.J. at 396. Although "'fair value' is not synonymous with 'fair market value,' consideration of market price still can be a 'valuable corroborative tool.'" Id. at 397 (quoting Dermody v. Sticco, 191 N.J. Super. 192, 199 (Ch. Div. 1983)) (fn. omitted). "There is no inflexible test for determining fair value." Ibid. As recently stated by the Court:
Although it would be helpful to pronounce a consistent rule regarding the determination of "fair value" and the applicability of discounts under various circumstances, we cannot do so. Each decision depends not only on the specific facts of the case, but also "should reflect the purpose served by the law in that context."
[Balsamides, supra, 160 N.J. at 381 (citation omitted).]
"[T]he statute should be liberally construed in favor of the dissenting shareholders." Lawson, supra, 160 N.J. at 400.
Moreover, the "equities of the case" must be considered when ascertaining fair value. Id. at 407.
"Fair value" shall be determined "[a]s of the day prior to the day of the meeting of shareholders at which the proposed action was approved." N.J.S.A. 14A:11-3(3)(a). "In all cases, the 'fair value' shall exclude any appreciation or depreciation resulting from the proposed action." N.J.S.A. 14A:11-3.
In assessing the fair value of a dissenting shareholder's interest in a corporation, a court may consider appraisal methodologies that are generally acceptable to the financial community. Lawson, supra, 160 N.J. at 397. "The valuation is fact sensitive and 'depends upon the experience of the appraiser and the completeness of the information upon which his conclusions are based.'" Torres v. Schripps, Inc., 342 N.J. Super. 419, 435 (App. Div. 2001) (quoting Bowen v. Bowen, 96 N.J. 36, 44 (1984)).
The determination of fair value is within the discretion of the trial judge and should only be disturbed on a showing that "'it is clearly erroneous or shows an abuse of discretion.'" Balsamides, supra, 160 N.J. 352, 367-68 (1999) (quoting Madeline Marzano-Lesnevich & Francine Del Vescovo, the Minority Discount, 18 N.J. Fam. Law 338, 339 (1998)). The question, however, "of what standards of value are permissible to consider is one of law and is, thus, subject to de novo review." Casey v. Brennan, 344 N.J. Super. 83, 113 (App. Div. 2001), aff'd. o.b., 173 N.J. 177 (2002). "The judge may use any acceptable method to calculate the value, but he must determine that the chosen method yields the fair value of the shares." Torres, supra, 342 N.J. Super. at 434. "As long as it is established that the technique relied upon is generally acceptable in the financial communities, and otherwise admissible in court, it should not be excluded automatically." Casey, supra, 344 N.J. Super. at 114.
"To adjudicate fairness . . . a court must first consider separately the alternate methods of valuation proposed and then assign to each the evidentiary weight it deserves in the context in which it is being offered." Dermody, supra, 191 N.J. Super. at 197. A trial judge's discretion is not limited to a choice among the methods advanced by the parties' experts or an expert appointed by the court. Torres, supra, 342 N.J. Super. at 430-32. As the factfinder, the trial judge is free to disregard the methods advanced by the various experts. Ibid.
"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." Musto v. Vidas, 333 N.J. Super. 52, 63 (App. Div.), certif. denied, 165 N.J. 607 (2000). "[T]he underlying assumption in a dissenter's rights appraisal case is that the dissenter would be willing to continue the investment had the merger or other corporate action giving rise to dissenter's rights not occurred." Stuart L. Pachman, Title 14A - Corporations, commentary to 14A:11-11 at 508 (2008). "Consequently, the corporation must be valued as an operating entity, and the dissenting shareholder's shares valued as what is being taken from the shareholder, that is, the shareholder's proportionate share in the corporation as a going concern." Ibid. See also Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 298 (Del. 1996), where the Delaware Supreme Court held:
[T]he dissenter in an appraisal action is entitled to receive a proportionate share of fair value in the going concern on the date of the merger, rather than value that is determined on a liquidated basis. Thus, the company must first be valued as an operating entity. In that regard, one of the most important factors to consider is the "nature of the enterprise" that is the subject of the appraisal proceeding.*fn11
[(internal citations omitted).]
Markind argues that the trial judge abused his discretion in determining the overall gross value of HMC as of January 30, 2005. Markind contends that the judge incorrectly accepted CBIZ's going concern value of $5,540,000 as the value of the corporation. We reject these contentions for several reasons.
First, based on the above stated principles, we conclude that accepting the going concern value of a corporation to determine the fair share value of a dissenting shareholder's interest in the entity is a proper method of appraisal acceptable in the business community. Musto, supra, 333 N.J. Super. at 63. Secondly, the trial judge's decision did not accept CBIZ's going concern valuation as the value of HMC; but rather used CBIZ's valuation to corroborate the arms-length sale price, which, after deductions, including the charitable contribution to the school, resulted in a valuation of the corporation at $2,000,000. On ruling on the cross-motions for summary judgment, the judge stated:
In summary, based upon the information before the [c]court, the [c]court is satisfied and finds that the corporation Holiday Medical Center trading as [Medicenter] sold its business as a going concern for $8 million and its terms and conditions including the charitable deduction, taking into account the nursing [home] license, assets, was one which can be viewed as an arms length transaction and established fair value for the constituent shareholders, whether that shareholder be a five percent shareholder or otherwise.
In ruling on Markind's motion for reconsideration, the judge further stated:
You would agree then that fair value as set forth in this Statute is not a science or mathematical formula; it's what would be deemed to be fair under the circumstances of a particular business entity. And in this instance, the Directors and the powers to be structured an $8 million sale, albeit with a charitable deduction of some $2 million plus . . . .
A [c]court could hold them responsible if, for example, CBIZ in their valuation of this business was at variance with the ultimate sale at eight million at this point. But isn't the CBIZ valuation in terms of selling this as a going concern, doesn't that support . . . the viability of this transaction?
In this case the [c]court established a fair value of [Markind's] share based on the going concern value of the [c]orporation identified by the [c]court appointed appraiser, CBIZ, . . . who was appointed pursuant to Title 14A:11-8c. According to this report, the value of the [c]orporation was $5,540,000.
. . . The [c]court's approach here, in essence, is no different than [Markind's] arithmetic set forth in her motion for reconsideration which submits that under the CBIZ going concern [value] [Markind] is owed $33,226.76. The determinative figures here are as follows:
[Medicenter] sold its assts for $8,000,000 -- or business.
Second, $3,275,464.84 was used to satisfy the outstanding mortgage. Following a charitable deduction of $2,896,060.45, [Medicenter] received $2 million in cash proceeds.
The [c]court also determined that the sale by [Medicenter] for 8 [million] dollars . . . factoring in the mortgage payoff, charitable deduction, did result in fair value being realized by [Markind]. The [court] is urged to exercise its equitable powers and believes it has considered all the circumstances attendant to the sale and notions of fairness and practicality dictate that after two years of litigation, in the [c]court's view and further considering the CBIZ valuation, the [c]court does not find otherwise. In other words, the [c]court does not find that the plaintiff Markind was denied fair value, and the motion for reconsideration will be denied . . . .
Simply stated, the trial judge determined that the sale transaction to the private school was an arms-length transaction negotiated by the Directors in good faith, resulting in a value of HMC of $5,104,939.55, after the charitable deduction allowance. The court reasoned that after allowing for the payoff of the existing mortgage lien and other closing expenses, the net corporate value was $2,000,000, and that Markind's 5% interest of that figure represented her fair value share.
Because the judge was not obligated to accept either appraisal valuation determined by CBIZ, we discern no abuse in the judge's acceptance of an arms-length sale transaction of the corporate assets as a means of determining the value of the corporation.
Markind's prime dispute with the judge using the sale value in determining the value of HMC is with his decision allowing the charitable contribution to the school. Markind asserts that shareholders with other sources of income, not her, received the benefit from that deduction; and as such, she should have received a higher value for her shares of stock. This issue and other issues that follow were not fully addressed by the trial judge, and accordingly, we are constrained to reverse the summary judgment order of July 17, 2006, as well as the order denying the motion for reconsideration; and remand this matter to the trial court to reconsider the issue of fair value of Markind's 5% interest in HMC. We direct on remand that the trial court address the following issues.
First. Although we conclude that the judge may accept the arms-length sale transaction of Medicenter in determining the value of HMC, the judge did not explain why he accepted the sale transaction price in determining the corporation value, rather than CBIZ's going concern valuation of $5,540,000, which would have increased the value of the corporation by $435,060.45 ($5,540,000 - ($8,000,000 sales price - $2,895,060.45 charitable deduction) = $435,060.45). We remand to the trial court for the judge to explain, pursuant to Rule 1:7-4, why he used the sale transaction price rather than CBIZ's going concern valuation in determining the value of the corporation, when the difference in the amounts appeared more than de minimis.
Second. The judge did not address Markind's challenge to HMC taking the charitable deduction before determining the fair share value of the corporation. Markind contended that she did not receive any benefits from the charitable deduction as did the majority shareholders; and therefore, she was entitled to a greater value for her shares. HMC counters that the tax benefit was there for Markind to use, and whether she took advantage of the tax credit or not was a choice that she made. Because this issue was neither fully explored in the trial court nor addressed by the judge in his decision, we cannot discern whether allowing the charitable deduction resulted in a depressed value of Markind's shares as compared to the majority shareholders. Accordingly, we remand this issue to the trial court to address the appropriateness of allowing the deduction before determining the value of the corporation against which value Markind's shares are then assessed.
Third. Markind contends that if the trial court had accepted CBIZ's going concern value as the value of HMC, she would have been entitled to an additional payment of $33,226.76. ($5,540,000 sale price - $3,275,464.87 mortgage lien = $2,264,535.13 X .05 = $113,226.76 - $80,000 previously paid = $33,226.76). If the judge amends his decision and adopts CBIZ's going concern valuation as the value of the corporation, then this issue must also be addressed on remand.
We assume the argument is also applicable to the judge's use of the sale transaction price of $8,000,000 less the amount paid to satisfy the existing mortgage, the charitable deduction, and other closing expenses, which resulted in a net value of $2,000,000. Against this valuation, Markind's 5% interest would have equated to $100,000. Although HMC retained $550,000 in escrow to cover any additional monies due Markind, and ongoing corporate expenses and litigation costs, the record does not disclose whether Markind received her pro rata share value for each share of stock as compared to the other shareholders.*fn12 In other words, did all shareholders only receive 80% of fair value?
The ongoing corporate expenses and litigation costs should be born equally by all shareholders, and Markind should receive the same percentage amount that all other shareholders received. Although the trial judge requested an accounting of the escrow account, the record does not disclose any determination by the judge concerning whether Markind was due any additional payment from the escrow fund or from HMC, with HMC charging back the other shareholders for any additional monies due Markind.
Fourth. We also remand the issue pertaining to Markind's request for counsel fees and expenses to the trial court for reconsideration. Generally, in the absence of a statute or court rule authorizing the shifting of the obligation to pay, each party to a legal proceeding bears his or her own counsel fees. This principle is generally referred to as the "American Rule." See N. Bergen Rex Trans. v. Trailer Leasing Co., 158 N.J. 561, 569 (1999). Contrary to the American Rule, the Appraisal Statute grants discretion to the trial court to award "any dissenting shareholder who is a party to the action reasonable fees and expenses of his [or her] counsel and of any experts employed by the dissenting shareholder," where the trial court determines that the corporation did not make an offer of payment as required by N.J.S.A. 14A:11-6. N.J.S.A. 14A:11-10.
Here, the judge determined that neither party had acted in bad faith in prosecuting or defending the action. However, the judge also found that HMC did not tender any payment to Markind after receipt of her notice of dissent and demand for payment on March 23, 2005; and only tendered the $80,000 payment to her in January 2006, after Markind had instituted suit at the suggestion of the court. Although we recognize that the award of attorney fees and expenses is discretionary under the statute, we are not able to discern the weight which the trial judge gave to the fact that Markind was forced to file a complaint for an appraisal of the fair value of her stock to protect her interest in accordance with the Appraisal Statute, N.J.S.A. 14A:11-7(2). The mere absence of bad faith is not determinative of the award of counsel fees and costs. Other factors are relevant under the statute. Accordingly, on remand, we direct the trial judge to reconsider Markind's application against HMC for payment of reasonable attorney fees and costs.
Reversed; and remanded to the trial court for further proceedings consistent with this opinion. We do not retain jurisdiction.