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Tutunikov v. Markov

Superior Court of New Jersey, Appellate Division

August 1, 2013

ROMAN TUTUNIKOV and VIKTOR ZURAKHINSKY, individually and as Shareholders of MARKOV PROCESSES, INC., and MIKSOFT, INC., and as Members of MARKOV PROCESSES INTERNATIONAL, L.L.C., Plaintiffs-Respondents/ Cross-Appellants,
v.
MICHAEL MARKOV, MIKHAIL KVITCHKO, MARKOV PROCESSES, INC., MIKSOFT, INC., MARKOV PROCESSES INTERNATIONAL, L.L.C., a New Jersey Limited Liability Company, MARKOV PROCESSES INTERNATIONAL, L.L.C., a Delaware Limited Liability Company, and MPI JAPAN, INC., Defendants-Appellants/ Cross-Respondents.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued October 23, 2012

On appeal from the Superior Court of New Jersey, Chancery Division, Union County, Docket No. C-0116-05.

Lawrence S. Lustberg argued the cause for appellants/cross-respondents (Gibbons, P.C. and Samuel Goldman & Associates, attorneys; Mara E. Zazzali-Hogan and Jonathan S. Liss, on the brief).

David G. White and Adam B. Schwartz argued the cause for respondents/cross-appellants (Pashman Stein, attorneys; Mr. White, Mr. Schwartz and Janie Byalik, on the brief).

Before Judges Messano, Ostrer and Kennedy.

PER CURIAM

Following a bench trial, judgment was entered against Michael Markov; Mikhail Kvitchko; Markov Processes, Inc. (Processes); Miksoft, Inc. (Miksoft); Markov Processes International, L.L.C. (MPI), a New Jersey limited liability company; Markov Processes International, L.L.C. (MPI-Delaware), a Delaware limited liability company; and MPI, Japan, Inc. (MPI-Japan) (collectively defendants), in favor of plaintiffs Roman Tutunikov and Viktor Zurakhinsky, in the amounts of $891, 979 and $668, 985, respectively, including pre-judgment interest. The judge also awarded attorney fees and costs of $1, 685, 374.

Defendants appeal, arguing that the judge erred: 1) by finding plaintiffs were oppressed shareholders under the Business Corporation Act, N.J.S.A. 14A:1-1 to 16-4 (the BCA); and 2) by extending remedies available in the BCA to plaintiffs' claims under the Limited Liability Company Act, N.J.S.A. 42:2B-1 to -70 (the LLCA), because the BCA does not apply to limited liability companies (LLCs).[1] Defendants also argue that the judge erred in determining the "fair value" of plaintiffs' interests in the defendant business entities, and, therefore, his award was too high. Lastly, defendants raise arguments about the scope of the judgment and denial of their application for a payment plan.

Plaintiffs cross-appeal. They contend the judge erred by undervaluing their interests, and, therefore, his award was too low.

We have considered the arguments raised in light of the record and applicable legal standards. We affirm in part, reverse in part and remand for entry of judgment consistent with this opinion.

I.

On August 2, 2005, plaintiffs filed their complaint naming Markov, Kvitchko, Processes, Miksoft and MPI as defendants. Plaintiffs specifically brought the action "as oppressed shareholders" under the BCA and LLCA, and alleged in three counts that: 1) defendants had violated N.J.S.A. 14A:12-7; 2) breached fiduciary and contractual obligations to plaintiffs "as managing members [of MPI] and acted unfairly and oppressively"; and 3) otherwise misappropriated their intellectual property. Before defendants answered, plaintiffs moved to enjoin an anticipated transaction between MPI and Sage Capital Growth, Inc. (Sage), that would have infused capital through MPI's merger with MPI-Delaware, a Delaware limited liability company in which Sage would have an equity interest (the Sage transaction).

On November 23, 2005, the parties entered into a consent order whereby MPI agreed temporarily to refrain from completing its merger with MPI-Delaware.[2] On February 2, 2006, the court declined to enjoin further the Sage Transaction and ordered mediation, which proved unsuccessful.

Plaintiffs subsequently amended their complaint to include MPI-Delaware and MPI-Japan, alleged to be a "wholly[-]owned subsidiary of [MPI], " as defendants. The amended complaint added two counts that sought to set aside the Sage transaction and requested an accounting of MPI-Japan's assets.

Defendants subsequently moved for summary judgment. On June 11, 2008, the judge entered an order denying the motion as to the first two counts of the amended complaint, i.e., claims brought under the BCA and LLCA. He granted the balance of defendants' motion, dismissing plaintiffs' claim for misappropriation of intellectual property, their demand to set aside the Sage transaction, and any claim against MPI-Japan, noting, as to the last, there was "no factual support." The case proceeded to trial.

II.

A.

Markov was a mathematician who came to the United States from the former Soviet Union in May 1989. In 1990, he formed a consulting firm, Processes, and began designing financial software for Balch, Hardy, Scheinman & Winston (Balch Hardy), a financial trading firm. In 1991, Markov hired Kvitchko, a Soviet computer scientist. In 1994, Kvitchko formed Miksoft to develop some of his own products, and he and Markov became equal partners in Miksoft and Processes ("the Corporations"). When Balch Hardy filed for bankruptcy in 1994, Steven Hardy, one of its principals, formed a new company and purchased the rights to Style Advisor, software Markov and Kvitchko designed. Kvitchko and Markov continued to provide consulting services through Processes.

In 1995, Tutunikov, who was working for Dow Jones as a full-time consultant, approached Markov and formed a business relationship whereby Processes would bill Dow Jones for Tutunikov's services, and payments would pass through Processes to Tutunikov. That same year, Hardy terminated the consulting arrangement with Markov and Kvitchko, leading them to initiate development of a new and improved product, Stylus. In May 1996, both plaintiffs began to work with Markov and Kvitchko on Stylus. The parties disputed the exact nature and significance of plaintiffs' contribution to the program.

In December 1996, plaintiffs, Markov and Kvitchko decided to formalize their business relationships, circulating numerous drafts of proposed operating agreements. On December 8, 1996, a draft agreement was presented at a meeting attended by the four men. It was, however, never executed.

This "Final Draft" anticipated the formation of a "prospective new company, " described the anticipated distribution of "equity shares" in that company and set salaries for the four men. Under the Final Draft, Markov's and

Kvitchko's combined equity share was 76%, and they were to be full-time employees compensated at $100, 000 per year; Tutunikov was to receive a 15% equity share and also be a full-time employee with the same yearly compensation; Zurakhinsky was to receive a 9% equity share, be a part-time employee and receive $50, 000 per year in compensation. The agreement also included a vesting schedule whereby each person's "shares" would vest over a period of three years: 66% on January 1, 1997; 85% by January 1, 1998; and 100% by January 1, 1999.

On February 8, 1997, the four men executed two resolutions, one for processes and one for Miksoft, reflecting the result of meetings held in January 1997. The resolutions provided the "stock ownership" in each corporation was: Markov -- 37%; Kvitchko -- 37%; Tutunikov -- 15%; and Zurakhinsky -- 9%. The remaining 2% of the shares were not addressed in the resolutions.

At trial, there was conflicting testimony regarding the difference in share allocation between the Final Draft and the resolutions. Markov believed the resolutions contained a typographical error and should have stated that he and Kvitchko each owned 38% of the shares. Plaintiffs both testified that the allocation in the Final Draft was in error, and the resolutions correctly stated the individual defendants' equity interests.

The vesting schedule was meant to encourage the four men to remain with the Corporations for at least two years after the resolutions were signed. Nevertheless, Tutunikov found another position and left the Corporations in March 1997. Tutunikov acknowledged that all of his fifteen shares had not yet vested when he left, and he wrote Markov indicating he was returning five shares.

Zurakhinsky left the Corporations in December 1997, when only 7.5% of his shares had vested. He began to work as a consultant for another company, Commercial Risk, a client of the Corporations. Markov and Kvitchko agreed to permit him to bill for his consulting services through the Corporations.

Although a limitation on salaries was discussed among the four, they never signed an agreement to that effect. At trial, plaintiffs contended there was a $100, 000 salary cap; Markov acknowledged that partner salaries were capped at $100, 000, but there was never a limitation on bonuses or total compensation. Plaintiffs produced John F. Doyle, initially a commissioned salesperson for Processes, as a witness. Doyle testified that he was told executive salaries were capped at $100, 000.

On December 21, 2000, defendants filed a certificate of formation for MPI. In testimony, plaintiffs denied any knowledge of the filing. On January 1, 2001, Doyle became a shareholder in Processes.

A series of e-mails in evidence reflected the parties' understanding regarding share distribution. In an e-mail dated October 18, 2001, to Steven Foreht, an attorney who filed MPI's certificate of formation, Markov acknowledged that he and Kvitchko each had 37% of the shares, Tutunikov had 10% and Zurakhinsky had 7%. He noted that left 7% of the shares "unvested, " and he understood these "[went] back to the company." Markov further explained that since Doyle now had 2%, "the unvested pool is 5%."[3]

On October 31, 2001, Markov informed Kvitchko, Tutunikov and Zurakhinsky by e-mail that, after Doyle had been given a 2% equity stake in MPI, there remained 4.5% "in the company treasury." Markov wrote, "This portion of unvested shares . . . stays with the company, i.e., belongs to all shareholders proportiona[te]ly."

However, Miksoft's 1998, 1999, 2000 and 2001 corporate tax returns showed that Markov and Kvitchko each had 41.25% of the shares.[4] On November 15, 2001, the four men unanimously executed corporate resolutions merging Processes with Miksoft in anticipation of forming a "single corporation" in New Jersey. On December 31, 2002, Miksoft filed a certificate of dissolution executed by plaintiffs and the individual defendants.[5]

Meanwhile, a proposed operating argument for MPI dated January 1, 2002, named the four men and Doyle as members.[6] The agreement set forth the relative member contributions in dollar amounts, with Markov and Kvitchko each contributing $24, 140.32, Tutunikov contributing $6150.40, Zurakhinsky contributing $4612.80, and Doyle contributing $2460.16.[7] The Agreement expressly replaced all prior agreements; provided that most matters would be decided by a majority of voting shares, except for the addition of new members or dissolution of the LLC, which required a two-thirds majority; provided that all losses and profits would be allocated to members in accordance with their shares; named Markov and Kvitchko as managers; and required the managers to inform the other members of the internal affairs of the LLC.

Plaintiffs did not sign the Agreement. Zurakhinsky was concerned that the agreement created "two classes of shares, so that [the individual defendants] would have . . . more rights tha[n] [he and Tutunikov] would have." He also testified that he did not sign the operating agreement because it would supersede all prior agreements. Tutunikov, dissatisfied with the creation of "two class[es] of shares" and the lack of control over management compensation, also never signed the Agreement.

Markov conceded in testimony that the 4.5 treasury shares that had been unallocated in the Corporations eventually were divided between himself and Kvitchko. MPI's tax return for 2002 listed Kvitchko and Markov as each owning 39.25% of MPI, Tutunikov owning 10%, Zurakhinsky owning 7.5% and Doyle owning 4%.

On December 19, 2003, Markov sent an e-mail to Doyle, Tutunikov, Zurakhinsky, and Kvitchko stating that MPI revenues for the year were $2.2 million, including an $80, 000 profit, and salaries for Markov and Kvitchko would be raised to "market value" of $200, 000 each. The same e-mail noted that Doyle was receiving $136, 000 in "trailing commissions" even though he had already left the company, and that Zurakhinsky was receiving $135, 000 for consulting services to Commercial Risk.

Doyle acknowledged the email during cross-examination, and stated that he believed Markov and Kvitchko had the authority to raise their compensation because they owned nearly 80% of the company. When Zurakhinsky received Markov's email, he responded by first indicating, "Congratulations with a good year!" He then wrote: "I think that 100% increase of management compensation, however justifiable, should be at least discussed among partners prior to decision."

In a May 2004 conference call, plaintiffs expressed concern with the salary increases for Markov and Kvitchko since they (plaintiffs) were not receiving distributions; they requested a buyout of their interests. In June, Markov offered to buy out plaintiffs' interests for $10, 000 per share, but plaintiffs refused. Markov conceded that the amount he offered was not related to the value of the company, which he believed to be $1 million, but rather to what Markov believed the company could pay. Plaintiffs believed the company was worth $10 million, and wanted $1.8 million for their shares.

On November 3, 2004, Sage tendered a preliminary written "Outline for . . . Proposed Investment in MPI." Markov did not inform Tutunikov and Zurakhinsky about the Sage transaction negotiations at the time.

However, in December 2004, MPI's attorney advised plaintiffs' attorney of "preliminary discussions with a party that ha[d] indicated a willingness to provide financing to [MPI] at a valuation that would indicate . . . an offer to buy out [plaintiffs'] interests for $500, 000 would be extre[]mely reasonable." MPI's counsel wrote:

You informed me that your clients wanted strongly to be bought out, and I indicated MPI's willingness to discuss such a buyout at a reasonable price, but not at anything approaching the $1.8 million which you stated that your clients were asking. I also informed you that MPI had no objection to your clients remaining as members and that if your clients believed so strongly in the value of the company maybe they should stay.

Apparently, to the extent any negotiations continued, they did not bear fruit because, in August 2005, plaintiffs' counsel served MPI's counsel with a copy of the complaint.

The Sage proposal valued MPI at $5 million. Sage would make a $500, 000 cash infusion and obtain a 9.09% equity interest in a newly-formed LLC. Sage would retain an option to make further cash investments and obtain a greater equity interest.

On October 14, 2005, MPI issued a proposed agreement reflecting its merger with MPI-Delaware. All members who did not consent to the merger were to be bought out in amounts set forth in the agreement. Tutunikov was to receive $350, 000; Zurahkinsky, $262, 500. The total amount of all members' interests equaled $3.5 million.

On February 23, 2007, MPI merged with MPI-Delaware. On the same day, Sage made its initial $500, 000 investment, but it ultimately never exercised its option to invest further. MPI-Delaware assumed all the rights and responsibilities of MPI.

B.

In his written decision following trial, the judge first recounted much of the testimony we recite above. He then noted:

Plaintiffs contend that as oppressed members of an LLC, they are entitled to relief under the LLC[A] . . . and by analogy to statutes related to oppressed shareholders in closely held corporations. It is their contention that any buy-out of plaintiffs' shares would be net of discounts as withdrawing members under the LLC[A] . . . and that the court should look to the [BCA] for guidance in valuing their interest at fair value. . . .

Noting defendants' contention that the BCA did not apply because Miksoft and Processes were dissolved in 2003, and an oppressed shareholder action was not cognizable under the LLCA, the judge concluded:

Under the[] circumstances, . . . plaintiffs, as minority shareholders of the dissolved compan[ies], are entitled to have their claims of oppression for actions taken against them in the old company decided under the [BCA]. Since MPI[] is the successor entity[, ] a buy-out of their interest in the LLC under the [BCA] for claims arising prior to the dissolution of the old companies is an appropriate remedy . . . .
. . . [B]ecause MPI is an LLC, the court concludes that it is appropriate in the absence of situations not covered by the LLCA to look to the [BCA] for guidance. Because the LLCA is silent regarding relief for claims of oppression, the court may logically look to the [BCA] for appropriate remedies. . . .

The judge then addressed plaintiffs' specific claims of oppression, which he set forth earlier as: "[b]reach of 1996 agreement, particularly the salary cap"; "[b]uy-out offer of June 4, 2004"; "payment of bonuses"; the "Sage transaction"; "[c]reation of MPI . . ."; and "[r]eallocation of treasury shares."

He found that the 1996 Final Draft was not an agreement, but rather "one of a series of outlines respecting the negotiations." Based upon the subsequent conduct of the parties, the judge concluded "there was an agreement only as to share allocation and vesting . . . ." He rejected plaintiffs' claim that there was any agreement regarding salary caps, and, in this regard, he found that Doyle's testimony did "not support the contention."

The judge then recounted the conflicting evidence regarding share allocations in the Corporations. He found defendants' explanation and their contention that there were no "treasury shares" "simply not credible." The judge further found that, "upon forming the LLC, the 4.5 shares were not preserved in treasury, but allocated to defendants." The judge concluded this "constitute[d] an act of oppression and a breach of [defendants'] fiduciary duty." He determined that "Tutunikov ha[d] 10.45 shares (10 shares plus 10% of treasury) and Zurakhinsky ha[d] 7.8375 shares (7.5 shares plus 7.5% of treasury)."

The judge then determined that defendants "paid bonuses to company employees and raised salaries (including their own) without notice to the plaintiffs[, ]" "engaged in negotiations with a potential investor . . . without informing . . . plaintiffs, " and "controlled the business checkbook and the flow of information in such a manner to eliminate the minority shareholders['] claims on earnings and deprive them of participation in the affairs of the company."

Having "found that . . . defendants engaged in oppressive conduct toward the minority shareholders, " the judge determined "plaintiffs [were] entitled to relief under the [BCA]." He concluded that "a buy-out [of plaintiffs' interests] would fairly compensate the plaintiffs and [was] a practical alternative to dissolution of the LLC."

The judge then considered valuation of plaintiffs' interests, an issue we discuss more fully below.

III.

At this point, we address defendants' arguments that the judge erred by applying the oppressed shareholder provisions of the BCA to MPI, an LLC, and erred in finding they engaged in any oppressive conduct toward plaintiffs. Defendants further argue that because they did not engage in oppressive conduct, and because the LLCA has no fee-shifting provision, the judge erred in awarding counsel fees to plaintiffs.

A.

We first recognize some basic principles that inform our review.

Final determinations made by the trial court sitting in a non-jury case are subject to a limited and well-established scope of review: 'we do not disturb the factual findings and legal conclusions of the trial judge unless we are convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice[.]
[Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169 (2011) (quoting In re Trust Created By Agreement Dated December 20, 1961, ex. rel. Johnson, 194 N.J. 276, 284 (2008) (internal quotation marks omitted)).]

"[T]he scope of appellate review is expanded when the alleged error on appeal focuses on the trial judge's evaluations of fact, rather than his or her findings of credibility." Walid v. Yolanda for Irene Couture, Inc., 425 N.J.Super. 171, 179 (App. Div. 2012) (citation omitted).

The judge's "interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995). As a result, we review the judge's legal conclusions de novo. Little v. KIA Motors America, Inc., 425 N.J.Super. 82, 90 (App. Div. 2012) (citing Manalapan Realty, supra, 140 N.J. at 378).

B.

In 1973, the Legislature for the first time provided oppressed minority shareholders in closely-held corporations a statutory cause of action under the BCA. Brenner v. Berkowitz, 134 N.J. 488, 503 (1993).

The Superior Court, in an action brought under this section, may appoint a custodian, appoint a provisional director, order a sale of the corporation's stock . . ., or enter a judgment dissolving the corporation, upon proof that
(c) In the case of a corporation having 25 or less shareholders, the directors or those in control . . . have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.
[N.J.S.A. 14A:12-7(1)(c).]

"If the court finds that the action was maintainable under [N.J.S.A.]14A:12-7(1)(c), the court in its discretion may award to the selling . . . shareholders reasonable fees and expenses of counsel and of any experts, including accountants, employed by them." N.J.S.A. 14A:12-7(8)(d). Additionally, "[i]f the court determines that any party to an action brought under this section has acted arbitrarily, vexatiously, or otherwise not in good faith, it may in its discretion award reasonable expenses, including counsel fees incurred in connection with the action, to the injured party or parties." N.J.S.A. 14A:2-7(10).

These provisions of the BCA recognize the uniquely disadvantageous position a minority shareholder occupies in a close corporation. As the Court explained:

That special vulnerability exists for three reasons.
First, because the majority has the controlling interest, it has the power to dictate to the minority the manner in which the corporation is run. Second, shareholders in close corporations frequently consist of family members or friends and once the personal relationship is destroyed, the company deteriorates. Third, unlike shareholders in larger corporations, minority shareholders in a close corporation cannot readily sell their shares when they become dissatisfied with the management of the corporation. Indeed, the discord in the corporation makes the minority stock even more difficult to sell.
[Brenner, supra, 134 N.J. at 505 (internal citations and quotation marks omitted).]

Oppression "has been defined as frustrating a shareholder's reasonable expectations" and "is usually directed at a minority shareholder personally . . . ." Id. at 506. However, the "minority shareholders' expectations must . . . be balanced against the corporation's ability to exercise its business judgment and run its business efficiently." Muellenberg v. Bikon Corp., 143 N.J. 168, 179 (1996) (citation omitted).

The purpose of the LLCA, first enacted in 1994, "was to enable members and managers of LLCs 'to take advantage of both the limited liability afforded to shareholders and directors of corporations and the pass-through tax advantages available to partnerships.'" Kuhn v. Tumminelli, 366 N.J.Super. 431, 439 (App. Div.) (quoting Senate Commerce Comm. Statement, S. Doc. No. 890, at 1 (June 14, 1993), certif. denied, 180 N.J. 354 (2004). The LLCA permits a dissatisfied minority member to simply resign. N.J.S.A. 42:2B-38. The LLCA compels the LLC to remit to a resigning member his distribution in accordance with the terms of the operating agreement, and, "if not otherwise provided or permitted in an operating agreement, he is entitled to receive, within a reasonable time after resignation, the fair value of his limited liability company interest as of the date of resignation, less all applicable valuation discounts . . . ." N.J.S.A. 42:2B-39.

Unlike the BCA, the LLCA has no equivalent oppressed shareholder provision. In Denike v. Cupo, 394 N.J.Super. 357, 378 (App. Div. 2007), rev'd on other grounds, 196 N.J. 502 (2008), we expressly rejected a claim that N.J.S.A. 14A:12-7(8)(a), the BCA's provision permitting the court to choose an evaluation date "deemed equitable by the court, " applied to an LLC.

The recently-adopted RLLCA no longer permits a member to resign and be paid his fair value; instead, a member may withdraw, but his status thereafter is as a "disassociated member." See N.J.S.A. 42:2C-45. The Legislature, however, chose to include an oppressed member provision in the RLLCA. N.J.S.A. 42:2C-48a(5)(b). That section permits a member to apply to the Superior Court for "an order dissolving the company on the grounds that the managers or those members in control of the company . . . have acted . . . in a manner that is oppressive and was, is, or will be directly harmful to the applicant."

Given the lack of an oppressed member provision in the LLCA, our holding in Denike and the Legislature's recent actions, we think it clear that the BCA's oppressed shareholder provisions have no application to an LLC.

As a result, plaintiffs presented no cognizable claim regarding much of the conduct that the trial judge concluded evidenced minority shareholder oppression, because it occurred after MPI was formed. It is without question that when MPI's proposed operating agreement was circulated in 2002, plaintiffs had voluntarily removed themselves from the daily operation of the business for nearly five years.[8] Markov executed the operating agreement as MPI's manager, and, pursuant to its terms, had, with certain exceptions, "the exclusive right to bind the LLC in dealings with third parties, " as well as, subject to express terms of the operating agreement to the contrary, "the exclusive right to decide all LLC matters relating to the business of the LLC." Thus, it was legal error for the judge to conclude that defendants' decisions to pay bonuses without notice to plaintiffs, engage in negotiations with investors and control the "business checkbook" amounted to a cognizable claim of oppression.

C.

That brings us to the reallocation of treasury shares, the only other factual determination made by the trial judge in support of his legal conclusion that the individual defendants had acted oppressively toward plaintiffs as minority shareholders.

Initially, we reject defendants' argument that there was insufficient evidence that the parties intended to create and retain treasury shares. In his opinion, the judge found that the Final Draft was not a binding agreement and rejected, for example, plaintiffs' claims regarding salary caps based upon the document. However, the judge also found that the parties reached an agreement on share allocation, including the reservation of treasury shares. Contrary to defendants' argument, he based this finding not on the Final Draft, which indicated a share aggregate totaling 100%, but on the parties conduct, the corporate resolutions that followed and Markov's emails setting forth the allocation and noting that the remaining shares went back to the "company treasury." In short, the judge's finding was supported by adequate credible evidence in the record, and we will not disturb it.

The critical issue, in our minds, is whether defendants' allocation of ownership interests in MPI to include their ownership of the 4.5% interest represented by the treasury shares amounted to oppression under N.J.S.A. 14A:12-7. If it did, then we must consider whether that cognizable claim of oppression under the BCA carried forward into the formation of the MPI, and whether the judge fashioned an appropriate equitable remedy as a result.

In considering whether conduct is oppressive under the BCA, "[t]he court has discretion to determine which factors are pertinent to its evaluation of the quality and nature of the misconduct, but certain factors apply in most cases." Brenner, supra, 134 N.J. at 508. These include the "seriousness of the violation, " "whether the misconduct places the minority shareholder's investment at risk" and "whether the misconduct thwarts the minority shareholder's reasonable expectations of his or her role in the corporation." Id. at 508-09. In this latter regard, "[t]he special nature of the close corporation requires that the court go beyond considering merely monetary harm." Id. at 509. Oppression might result, for example, by "termination of the employment of the [minority] shareholder's children . . . ." Ibid.

"Ordinarily, oppression by shareholders is clearly shown when they have awarded themselves excessive compensation, furnished inadequate dividends, or misapplied and wasted corporate funds." Muellenberg, supra, 143 N.J. at 180 (citation omitted). The Court has recognized other "additional factors, " including "whether the minority shareholder was aware of the misconduct prior to filing suit but failed to act, and whether the minority shareholder participated in the misconduct." Brenner, supra, 134 N.J. at 509-10.

In this case, the judge determined that the individual defendants misappropriated treasury shares "upon forming the LLC." He further stated "[t]he [individual] defendants['] attempt to allocate 39.25 shares to themselves is a breach of their agreement with the plaintiffs and constitutes an act of oppression." Thereafter, the judge wrote:

The plaintiffs have demonstrated that the defendants engaged in a course of conduct . . . designed to freeze them out of the company's activities. The action of [the individual] defendants, as outlined below, demonstrates their intent to exclude plaintiffs from the corporate income or advantages which they reasonably expected and to which they were entitled. Such effort to freeze out minority shareholders is an abuse of corporate power.

The "action[s]" "outlined below" in the judge's opinion make it clear that he viewed the share misappropriation, whenever it precisely occurred, within the context of a much broader pattern of misconduct, all of which occurred: 1) after plaintiffs left the day-to-day operations of the Corporations; and 2) after MPI was formed as an LLC.

Based upon our reasoning, the actions of the individual defendants relied upon by the judge to place the misappropriation of treasury shares in the context of an "abuse of corporate power" were not cognizable claims of oppression, since MPI was formed on January 1, 2002. Only afterwards did plaintiffs lodge their complaints regarding the individual defendants' actions outlined by the judge. None of those complaints had anything to do with the allocation of shares or equity in MPI. Indeed, misappropriation of ownership interests by the individual defendants was never among the various reasons plaintiffs gave regarding their refusal to execute MPI's operating agreement.

The judge bridged the legal gap between any misappropriation of treasury shares in the Corporations and conduct that followed the formation of the LLC by relying upon our decision in Grato v. Grato, 272 N.J.Super. 140 (App. Div.), certif. denied, 138 N.J. 264 (1994). Grato specifically dealt with the dissolution of a closely-held family corporation by the majority shareholders and continuation of the same business under a different corporate name without participation of the former minority shareholders. Id. at 147-48. We noted:

[W]hile the law allows a majority interest to effect a liquidation of a corporation, the power to cause such extraordinary corporate action may not be exercised without scrupulous loyalty to the interest of minority shareholders. Majority stockholders cannot, under color of a plan of dissolution, appropriate the business of the corporation to the detriment of minority stockholders. As a consequence, majority stockholders cannot vote to discontinue the business of the corporation for the purpose of turning it over to another corporation and excluding minority stockholders from participating therein.
[Id. at 153-54 (quoting 19 Am.Jur.2d, Corporations, § 2752 (1986)).]

We concluded "[t]he dissolution . . . by [the] defendants was a transfer of the old business to the new corporation to the exclusion of [the] plaintiffs." Id. at 159.

Notably, while we affirmed the trial judge's findings that the plaintiffs were oppressed shareholders because of the defendants' breach of their fiduciary duties, we disagreed with the remedy imposed by the judge. Id. at 160. Specifically, we rejected the conclusion that the plaintiffs' damages should be measured by the value of the successor-corporation, since they had "no legal right to participate in that corporation and . . . they never participated in its capitalization . . . ." Id. at 160-61 (emphasis added).

We think Grato has no particular application to the facts of this case. Grato dealt with the dissolution of a corporation and the subsequent transfer of its assets to a new corporation in which the plaintiffs-oppressed shareholders of the former corporation had no interest. We do not believe that Grato supports the proposition that in this case, the alleged act of majority shareholder oppression -- the misappropriation of treasury shares -- translates into a continuing cause of action after a new entity, not subject to the BCA, was formed. To be sure, plaintiffs were entitled to a determination of their respective interests in MPI that included their interests in the reserved treasury shares of the predecessor corporations. In our opinion, they were entitled to nothing more.

The judge's focus on conduct that occurred after the formation of MPI skewed his consideration of the facts supporting any cognizable claim of oppression under the BCA. Whether majority shareholder misconduct is oppressive under the BCA turns on whether the misconduct thwarted the minority shareholders' reasonable expectations. Brenner, supra, 134 N.J. at 506; see also Bonavita v. Corbo, 300 N.J.Super. 179, 194 (Ch. Div. 1996) (noting "[t]he focus [is] on 'reasonable expectations' rather than a search for 'wrongful' conduct") (citation omitted).

Assessment of plaintiffs' reasonable expectations was essential to determining whether the individual defendants' conduct was oppressive.

"The special circumstances, arrangements and personal relationships that frequently underl[ie] the formation of close corporations generate certain expectations among the shareholders concerning their respective roles in corporate affairs, including management and earnings. These expectations preclude the drawing of any conclusions about the impact of a particular course of corporate conduct on a shareholder without taking into consideration the role that he is expected to play. Accordingly a court must determine initially the understanding of the parties in this regard. Armed with this information, the court can then decide whether the controlling shareholders have acted in a fashion that is contrary to this understanding . . . ."
[Brenner, supra, 134 N.J. at 509 (quoting Exadaktilos v. Cinnaminson Realty Co., 167 N.J.Super. 141, 154-55 (Law Div. 1979), aff'd o.b., 173 N.J.Super. 559 (App. Div.), certif. denied, 85 N.J. 112 (1980)) (emphasis added).]

The judge did not make specific findings as to plaintiffs' "reasonable expectations" beyond what was implicit, i.e., they assumed the treasury shares -- reflecting 4.5% of the equity in the Corporations -- would be retained by the Corporations and not be split by Markov and Kvitchko when MPI was formed.

Otherwise, the judge expressed plaintiffs' reasonable expectations only in general terms, i.e., the "corporate income or advantages [to] which . . . they were entitled." For the reasons discussed above regarding the general structure of an LLC and the preeminent role of the managing member, that general statement had no application to MPI once it was formed.

After they left in 1997, plaintiffs never anticipated having any role in the day-to-day operations of the Corporations or in MPI. They had no reasonable expectation that their particular individual ownerships interests were greater than 10%, for Tutunikov, and 7.5%, for Zurakhinsky. Nor did they reasonably expect that the treasury pool would result in any additional distributions to them; in their brief, plaintiffs conceded "[t]he distributions associated with 4.5% treasury shares stay with the company."

Additionally, we note that every tax return in the record, dating back to Miksoft's 1998 corporate return, showed the individual defendants each claimed more than a 37% interest in the Corporations. Plaintiffs denied knowledge of the returns, and the judge made no specific findings.

The proposed operating agreement contained capitalizations reflecting equity percentages of 39.25% for each individual defendant. As of January 1, 2002, when the operating agreement was circulated and plaintiffs refused to sign, they should have been aware that 4.5% of equity in the company had been distributed to the individual defendants without any pro rata distribution to them. Yet, plaintiffs' complaints did not surface until Markov's end-of-year report in 2003, when questions regarding his and Kvitchko's compensation arose. Importantly, no specific claim of share or equity interest misappropriation was raised.

Under all these circumstances, we conclude that whether the misappropriation of treasury shares occurred before the formation of MPI, or as the judge found "upon forming the LLC, " standing alone, and in light of all the other evidence in the case, it cannot serve as the basis for a finding of shareholder oppression under the BCA. Instead, the appropriate relief was to determine plaintiffs' ownership interests in MPI. And, in this regard, we find no basis to disturb the judge's conclusion setting those interests at 10.45% for Tutunikov and 7.8375% for Zurakhinsky.

D.

The judge found "plaintiffs were [the] prevailing parties in connection with their claim of oppression" under the BCA. He further reasoned:

The conduct of the other party is not relevant to the consideration of the fee application under N.J.S.A. 14A:12-7(8)(d) upon a showing of oppression. While the court did not conclude that all allegations of oppression had been proven by the plaintiffs and dismissed those claims[, ] other oppression claims were proven and thus counsel fees are appropriate even in the absence of bad faith by the defendants.

The judge awarded $1, 685, 374 in attorney fees and costs, including: $100, 000 for plaintiffs' expert; $19, 745 for the mediator/discovery master; and most of the remainder to plaintiffs' three law firms.

The judge also reasoned that plaintiffs were entitled to pre-judgment interest pursuant to N.J.S.A. 14A:12-7(8)(d). He concluded plaintiffs' rejection of an offer to buy out their interests in MPI was not conduct evidencing "bad faith, " and interest should be awarded to "fairly compensate . . . plaintiffs where . . . defendants had the use of the plaintiffs' money . . . ."[9]

We agree with defendants that no attorney fees can be awarded pursuant to the LLCA. And, having concluded that any misappropriation of treasury shares under the particular circumstances of this case was not shareholder oppression, there was no basis to award counsel fees and costs to plaintiffs. We vacate that portion of the judgment in its entirety.[10]

IV.

We address the competing claims regarding the judge's determination of the "fair value" of plaintiffs' interests in MPI. Plaintiffs' expert opined MPI's value was $35.5 million; defendants' expert valued the company at $3.5 million. The judge rejected both opinions.

Instead, reviewing the terms of the Sage transaction, the judge found it "present[ed] valuation data which is less subject to the prejudices of the party experts and thus, presents information from which a more realistic value of the company may be determined." The judge continued: "Sage acquired 9.09% of MPI for $500, 000 on October 31, 2005[, ] which is the valuation date in this matter. The $500, 000 investment indicates that the value of MPI prior to the investment was $5 million . . . ." The judge concluded that "the value of MPI and thus, the plaintiffs' interest in the company may fairly be determined by the Sage transaction."

Citing Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383 (1999), the judge recognized that "discounts generally should not be applied in determining the fair value of dissenters' shares in an oppressed shareholder action absent unusual or extraordinary circumstances." However, the judge also concluded:

[T]he price paid by Sage was a non-marketable interest since MPI is a non-publicly traded company. A marketability discount adjusting for the lack of liquidity in Sage's interest . . . is embedded in the price. Accordingly, the $5 million value derived from the Sage transaction which contains a marketability discount must be removed to reconstitute the fair value of the shares.

As a result, the judge valued MPI at $6.75 million, which he calculated utilizing the Sage transaction's evaluation -- $5 million -- and adding 35%. The judge, however, rejected plaintiffs' request that he apply a "minority discount, " finding "[t]o do so would . . . pay them for rights in the company they do not enjoy."

Defendants argue that Sage received other benefits, such as a seat on the board of directors and a liquidation preference, which evidenced Sage's willingness to pay more than it otherwise would have paid for an equity interest in MPI. They contend the actual value of MPI was $3.5 million, as testified to by their expert.

Defendants also argue that even if $5 million dollars was the market value of MPI, the judge should have applied the marketability discount and arrived at a value of $3.25 million.

Plaintiffs do not challenge the judge's use of a 35% marketability discount. In their cross-appeal, they argue that the judge erred because he failed to apply a minority discount to adjust for plaintiffs' lack of control over the LLC. Plaintiffs also contend that the judge made a simple mathematical error in applying the marketability discount to the value of MPI. They assert that the correct calculation would have considered Sage's offer to represent only 65% of the total value of MPI. To arrive at the proper value, the judge should have divided $5 million by .65, arriving at $7, 692, 307 as the proper value of MPI. Indeed, $5 million is 65% of $7, 692, 307.

The deferential standard of review that applies to factual findings by the judge in a non-jury trial "is particularly significant in valuation disputes, which frequently become battles between experts." Balsamides v. Protameen Chems., 160 N.J. 352, 368 (1999). However, "we need not give deference to the trial judge's determinations of what discounts or premiums the determination of fair value may include, or must exclude, since they are questions of law." Casey v. Brennan, 344 N.J.Super. 83, 110 (App. Div. 2001), aff'd, 173 N.J. 177 (2002); see also Denike, supra, 394 N.J.Super. at 382 (citing Casey, supra, 344 N.J.Super. at 113) (recognizing the de novo standard of review regarding "what standards of value are permissible to consider" in valuing an LLC).

"A minority discount adjusts for lack of control over the business entity, while a marketability discount adjusts for a lack of liquidity in one's interest in an entity." Balsamides, supra, 160 N.J. at 373. In Balsamides, id. at 376, the Court held that "marketability discounts generally should not be applied in determining the 'fair value' of a dissenting shareholder's stock in an appraisal action." However, citing to the oppressed shareholder provisions of the BCA, the Court also said, "[I]n deciding whether to apply a marketability discount to determine the 'fair value' of shares of a shareholder forced to sell his stock in a judicially ordered buy-out[, ] [courts] must take into account what is fair and equitable." Id. at 377.

Initially, we reject plaintiffs' claim that the judge should have found that Sage's offering price contained an embedded minority discount. Sage obtained benefits -- a seat on the board of directors; a liquidation preference; a right to invest additional funds at a preferred rate; and an opportunity to negotiate the terms of a new operating agreement for MPI-Delaware – beyond an equity interest in MPI. There was no error in denying plaintiffs' request in this regard. Similarly, we also reject defendants' claim that the Sage offer actually included a premium for preferred membership in the LLC.

The judge determined there was a marketability discount "embedded . . . in the Sage price[]" because "MPI [was] a non-publicly traded company." In Balsamides, supra, 160 N.J. at 381, and Lawson Mardon Wheaton, supra, 160 N.J. at 407, the Court "held that the 'equities of the case[s]' must be considered when ascertaining 'fair value' in appraisal and oppressed shareholder actions." Usually, application of marketability discounts should not be applied in calculating fair value absent "extraordinary circumstances." Id. at 402 (citation omitted). "Such circumstances require more than the absence of a trading market in the shares . . . ." Id. at 403 (quoting 2 ALI, Principles of Corporate Governance: Analysis and Recommendations § 7.22(a) cmt. e at 312 (1994)).

In this case, however, the judge utilized a marketability discount in valuing MPI, not in valuing plaintiffs' particular interests. This distinction is important.

To understand at what level the discounts are to be applied also may be significant:
"It is important to note the distinction between applying a discount at the corporate level to one or more of the values initially determined in valuing the entire corporation, as opposed to applying a discount at the shareholder level after the corporation has been valued. Discounting at the corporate level may be entirely appropriate if it is generally accepted in the financial community in valuing businesses."
[Balsamides, supra, 160 N.J. at 373-74 (quoting 1 John MacKay II, New Jersey Business Corporations, § 9-10(c)(2), n.426 (citations omitted)).]

Here, although the judge rejected the experts' valuation of MPI, both experts applied a marketability discount of 35% in assessing Sage's offer. As a result, we find no basis to disturb the judge's determination as to the fair value of MPI.

However, we agree with plaintiffs that the judge committed a mathematical error in applying the discount factor to the value of MPI. Based upon the judge's findings, the fair value of MPI was $7, 692, 307. Thus, the fair value of Tutunikov's interest was 10.45% of that value, or $803, 846; Zurakhinsky's interest was 7.8375% of that value, or $602, 885.

V.

Lastly, we consider defendants' arguments regarding the scope of the judgment. They contend that entry of judgment against both the individual defendants and the business entities was inequitable and contrary to statute; there can be no judgment against MPI-Delaware and MPI-Japan because they were granted summary judgment; the judge erred in transforming his "equitable buyout order" into a "money judgment"; and the judge erred in denying their post-judgment motion for payment terms and in permitting a post-judgment levy upon the assets of MPI-Delaware.

Plaintiffs having asserted no argument in their brief to the contrary, we agree that there can be no judgment against MPI-Japan, which was dismissed from the litigation on summary judgment, the judge having found there was no factual basis for any claim against it. However, we reject the balance of defendants' arguments.

Defendants' notice of appeal lists the October 28, 2010, order as the only one for which they seek review. That order resulted from plaintiffs' request for final judgment and sought the addition of pre-judgment interest, counsel fees and expenses to the amounts already determined to be the value of plaintiffs' interests in MPI, which were contained in the earlier June 24, 2010, order.

Defendants opposed the motion, challenging the amount of fees and costs contained in plaintiffs' counsel's certification and requesting the judge to permit payment terms. The judge, in an oral opinion placed on the record on October 15, 2010, concluded that all the requested counsel fees and litigation costs were reasonable. He also refused to enter any payment terms because defendant had not cross-moved for the relief, and he lacked "adequate information . . . to conclude that . . . the financial circumstances of the defendant corporation are such that payment cannot be made." The order makes no mention of payment terms.

Defendants did not move for payment terms until months later and after the appeal was filed. On May 11, 2011, the judge entered an order denying the request to enter payment terms and granting plaintiffs' turnover motion. Defendants never amended their notice of appeal. We refuse to consider the issue of whether the judge erred in denying payment terms or in entering the turnover order. See 1266 Apartment Corp. v. New Horizon Deli, Inc., 368 N.J.Super. 456, 459 (App. Div. 2004) ("only the judgment or orders designated in the notice of appeal . . . are subject to the appeal process and review").

Defendants never opposed plaintiffs' request to enter judgment against both the individual defendants and the business entities, and against MPI-Delaware. They were fully on notice since the proposed order accompanied plaintiffs' motion. Having never raised the issue before the trial judge, we refuse to consider it for the first time on appeal. See Nieder v. Royal Indemn. Ins. Co., 62 N.J. 229, 234 (1973) ("It is a well-settled principle that our appellate courts will decline to consider questions or issues not properly presented to the trial court when an opportunity for such presentation is available . . . .").

VI.

In sum, we reverse the judgment under review, and remand the matter to the trial court for entry of judgment in plaintiffs' favor in the amounts set forth in Section V above, plus an award of pre-judgment interest based upon the newly-calculated judgment amounts. The judgment shall not include MPI-Japan. We vacate the award of counsel fees and costs entirely. We do not retain jurisdiction.


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