Judge Jon R. Takasugi, Case Number: 22STCP04406, Date: 2023-12-05 Tentative Ruling

The Court confirms the fair value of $5,0330,000 for the 35% PCH interest as of 12/1/9/2022.

On 12/19/2022, Terry Krekorian, as an individual and as a Trustee of the Mr. Shmoobus Family Trust dated 1/25/2018 (Plaintiff) filed suit against PCH Treatment, Inc., and Jeffrey D. Ball as an individual and as a Trustee of the S&J Ball Family Trust dated 8/1/2014, alleging: (1) judicial dissolution; (2) accounting; and (3) breach of fiduciary duty.

Now, Jeffrey Ball (Defendant) moves to confirm an award of the Court-appointed Appraisers’ valuation and issue a buyout decree. Concurrently, Terry Krekorian (Plaintiff) moves to confirm an award.

The Court ordered appraisals of the Residential LLCs as of February 27, 2023 pursuant to Corporations Code §17707.03 in its June 20, 2023 Order.

The appraisers then met and conferred, and a consensus by a majority of the appraisers of $5,033,000 was obtained (Vickery Decl., ¶¶ 9, 10). Johnstone agreed to increase his value up to $3,900,000 if there could be a unanimous determination, but such an effort was unsuccessful. (Ibid ¶ 8).

Defendant argues that the valuation of Mr. Johnstone should be accepted because it reflects the true value of the assets, and the valuations generated by Mr. Ashbrook and Mr. Vickery contain procedural and substantive improprieties and deficiencies.

1) In contrast to Mr. Johnstone who has been a Certified Public Accountant for nearly 30 years and an interim Chief Financial Officer twice, neither Mr. Ashbrook nor Mr. Vickery are CPAs or have ever been CFOs.

2) Mr. Ashbrook and Mr. Vickery both assigned and added value to PCH going forward for purported derivative claims brought by Mr. Krekorian on behalf of PCH in this action that were never filed and do not exist. In addition, they added back “Derivative Action” expenses totaling $395,000 to historical earnings, meaning that these expenses were added back twice.

3) Mr. Ashbrook and Mr. Vickery improperly added $1,104,000 to the value of PCH for “receivable” accounts that are uncollectible, cannot be used to generate a tax write-off, have no terms, and accrue no interest. No buyer of PCH would assign any value to these accounts.

4) Mr. Ashbrook and Mr. Vickery improperly added back to PCH’s historical earnings hundreds of thousands of dollars in salaries actually paid to PCH employees in order to inflate profit projections going forward.

5) Krekorian inserted himself into the appraisal process despite the Court’s order that he refrain from doing so.

6) Mr. Ashbrook and His Associate, Christian Kostal, had improper private meetings with Mr. Vickery without Mr. Johnstone present.

In opposition, Plaintiff argues that Mr. Johnstone’s valuation is biased and unreliable, and Plaintiff responded to each of the alleged improprieties or deficiencies identified by Defendant.

As for Mr. Johnstone’s valuation, Plaintiff argues that the report is unreliable because: (1) he only considered the COVID years (2020-2022) and did not include a historical analysis of his valuation, as would an independent buyer of the going concern; (2) He took inconsistent positions as to the "due to due from" and refused to consider it as a receivable for PCH in an effort to reduce the value both for PCH and for the Residential LLCs, by $1.2-1.3 million (Vickery Decl, ¶¶ 20-21); (3) he discounted the value of Krekorian's 35% interest for lack of marketability, when a going concern analysis under Corporations Code §2000 does not allow for such reduction; (4) he relied upon fair market value LLC cases under Corporations Code §17707.03, rather than fair value cases regarding corporations under Corporations Code §2000; (5) He used an unsupportable 3.51-4.34 times EBITDA multiple when investment bankers deemed the value should be 7 times to 10 times EBITDA, and that PCH would warrant a 6 multiple, and misstates that Ashbrook's investment banking group supports a 4x multiple (Id. at ¶ 18); (6) he relied solely on RMA as an industry source for his working capital assumptions, when RMA include "Substance Abuse Facilities," which is not reflective of PCH operations. Johnstone failed to consider other industry data sources; (7) he failed to consider the considerable multi-million dollar cash distributions to the shareholders, historically, and the profit margins garnered by PCH over the years. (Id. at ¶ 23c); and (8) he failed to make adjustments for non-recurring expenses and income.

Plaintiff also argues that Mr. Johnstons’ report lacks a narrative report offering detailed explanations, reasoning, and analyses pertinent to how he reached his opinion, does not include industry or economic analysis detailing relevant market data, and contains no financial analysis indicating an independent assessment of the reliability of the data prior to 2020.

As for the concerns raised by Defendant, Plaintiff provided the following rebuttals:

- You need not be a certified public accountant or chief financial officer to determine business valuation. Both Ashbrook and Vickery have more than a quarter century worth of experience in business valuations. Moreover, Johnstone did not conduct any CPA or order an audit of PCH financial statements.

- Ashbrook and Vickery were required to consider derivative claims in their valuations. The derivative claims asserted by Krekorian are to have Ball return to the corporation funds that he wrongfully took therefrom. These would have been added to the assets of the corporation and must be considered. Cotton v. Expo Power Systems, Inc. (2009) 170 Cal. App. 4th 1371 states that a determination of fair value under Corporations Code §2000 includes an assessment of the value, if any, of pending derivative actions and their effect on the fair value of the shares.

- The due to PCH receivable from the Residential LLCs is an asset of the company as is shown in their income tax returns and financial statements. So too, it is a liability for the Residential LLCs as shown in their financial statements and income tax returns. A buyer of the going concern may well not be the buyer of the Residential LLCs, and would clearly pursue his action for the loans shown on all the financial statements. Johnstone's inconsistent consideration of the "due to due from" in the Residential LLCs' valuation and the PCH valuation is revealing.

- Ashbrook and Vickery properly considered excessive salaries to Ball and Krekorian as compared to industry standards, and the "salary" paid to Ball's wife who performed no duties for PCH, and the excessive salary to Ball's friend, Santamaria. These expenses would be removed by any perspective buyer of the going concern, as it would pay its principals industry salaries, not profit participations shown as salary or bonus for the sub-chapter S corporation. Further, a buyer would normalize expenses to industry norms, as the buyer would place appropriate safeguards to avoid excessive personal expenses taken by Ball and equalized to Krekorian in the past.

- The panel sought information and opinion from both Ball and Krekorian to assist them in their understanding of the business and the valuation of the company's going forward. It was PCH and Brian Conners, aided by panel internal information from Johnstone, who tried to insert himself into the appraisal process. Conners' September 27, 2023 email (Exh. 3) clearly shows he had advanced knowledge of inside panel discussions, and Johnstone admitted direct communications and disclosures with PCH (Vickery Decl., ¶ 12)

After review, the Court confirms the fair value of $5,0330,000 for the 35% PCH interest as of 12/1/9/2022, the majority consensus of the panel.[1] This is based on a number of considerations. First, the Court is persuaded by Plaintiff’s explanations to show that the reports of Mr. Ashbrook and Mr. Vickery were not based on any improprieties or facially defective methods. Second, Mr. Ashbrook’s and Mr. Vickery’s report were supported by thorough and detailed analysis which included narrative reports which provided explanations, reasoning, and analyses pertinent to the assumptions that were made in developing the opinions.

Based on the foregoing, the Court confirms the fair value of $5,0330,000 for the 35% PCH interest as of 12/1/9/2022.

Parties who intend to submit on this tentative must send an email to the court at smcdept17@lacourt.org by 4 p.m. the day prior as directed by the instructions provided on the court website at www.lacourt.org. If a party submits on the tentative, the party’s email must include the case number and must identify the party submitting on the tentative. If all parties to a motion submit, the court will adopt this tentative as the final order. If the department does not receive an email indicating the parties are submitting on the tentative and there are no appearances at the hearing, the motion may be placed off calendar. For more information, please contact the court clerk at (213) 633-0517.

[1] As part of an effort to reach a unanimous consensus, Mr. Vickery agreed to reduce his valuation to $5,0330,000, the valuation reached by Mr. Ashbrook.