Judge Michael J. Strickroth, Case 2020-01176326 2023-08-07 Tentative Ruling

Judge: Michael J. Strickroth, Case: 2020-01176326, Date: 2023-08-07 Tentative Ruling

Motion to Appoint Appraiser and Stay Actions.

Defendants William Schlabach, Rebecca Virtue, Charles Pinkow, Frederick Fucci, Ralph Pierce, Adeline Bernardo, and Kathy Silver’s motion to Stay Dissolution of the Lunada Bay Corporation (“LBC”) and to Appoint Appraisers to Fix Value of Plaintiff Mercantile Capital Holdings, LLC’s Stock Pursuant to Corporations Code Section 2000 is GRANTED in part and CONTINUED in part.

New evidence submitted with Reply:

“The general rule of motion practice, which applies here, is that new evidence is not permitted with reply papers.” Jay v. Mahaffey (2013) 218 Cal. App. 4th 1522, 1537. However, where the evidence is to fill in gaps raised by the opposition or goes to the admissibility of evidence submitted in opposition to the motion, the evidence may be properly considered. (Id. at 1538 [“[t]o the extent defendants argue they had the right to file any reply declarations at all, they are not wrong. Such declarations, however, should not have addressed the substantive issues in the first instance, but only filled gaps in the evidence created by the limited partners’ opposition.”]

Here, Defendants have submitted with their Reply a
Supplemental Declaration of William Schlabach and a Second Supplemental Declaration of Damien Capozzola, which attaches new evidence. The evidence submitted with the Reply responds to contentions raised by Plaintiff in the opposition. Therefore, the Court will consider this evidence in ruling on the Motion.

Merits:

To avoid dissolution of LBC, Defendants seek to purchase Plaintiff’s shares pursuant to Corporations Code section 2000.

“In response to a corporate shareholder filing for involuntary dissolution, section 2000 prescribes the procedure for a shareholder defendant, or the corporation, to avoid dissolution by purchasing the shares of the party who initiated dissolution.” Crane v. R. R. Crane Inv. Corp. (2022) 82 Cal.App.5th 748, 756. “The objective of section 2000 is to provide an alternative to dissolution through a buy-out by the holders of 50 percent or more of the shares of the corporation.” Trahan v. Trahan (2002) 99 Cal.App.4th 62, 75.

Corporations Code section 2000, subdivision (a) provides: “Subject to any contrary provision in the articles, which may include a reference to a separate written agreement between two or more shareholders pertaining to the purchase of shares: [¶] In any suit for involuntary dissolution, or in any proceeding for voluntary dissolution initiated by the vote of shareholders representing only 50 percent of the voting power, the corporation or, if it does not elect to purchase, the holders of 50 percent or more of the voting power of the corporation (the “purchasing parties”) may avoid the dissolution of the corporation and the appointment of any receiver by purchasing for cash the shares owned by the plaintiffs or by the shareholders so initiating the proceeding (the “moving parties”) at their fair value. [¶] The fair value shall be determined on the basis of the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation. In fixing the value, the amount of any damages resulting if the initiation of the dissolution is a breach by any moving party or parties of an agreement with the purchasing party or parties may be deducted from the amount payable to the moving party or parties, unless the ground for dissolution is that specified in paragraph (4) of subdivision (b) of Section 1800. The election of the corporation to purchase may be made by the approval of the outstanding shares (Section 152) excluding shares held by the moving parties.”

Section 2000, subdivision (b) provides: “If the purchasing parties (1) elect to purchase the shares owned by the moving parties, and (2) are unable to agree with the moving parties upon the fair value of those shares, and (3) give bond with sufficient security to pay the estimated reasonable expenses (including attorneys’ fees) of the moving parties if those expenses are recoverable under subdivision (c), the court upon application of the purchasing parties, either in the pending action or in a proceeding initiated in the superior court of the proper county by the purchasing parties in the case of a voluntary election to wind up and dissolve, shall stay the winding up and dissolution proceeding and shall proceed to ascertain and fix the fair value of the shares owned by the moving parties.”

Stay of Proceedings:

Plaintiff filed this action seeking involuntary dissolution of LBC. (Complaint, ¶¶ 76-83.) It is undisputed Plaintiff is a minority shareholder of LBC, owning 36.2% of the shares in LBC. Collectively, Defendants William Schlabach, Rebecca Virtue, Charles Pinkow, Frederick Fucci, Ralph Pierce, Kathy Silver, and Julius Bernardo (heir to the late Adeline Bernardo) hold the remaining 63.8% of the total shares of LBC. (Schlabach Decl., ¶ 3; Fucci, Pierce, Pinkow, Silver, Virtue, Bernardo Decls., ¶ 2; Capozzola Decl., ¶ 4.) Defendants oppose dissolution of LBC and have elected to invoke their rights under section 2000 and purchase the shares of Plaintiff. (Id.) LBC has not brought any motion under section 2000 to elect to purchase the shares. Defendants have also shown that LBC’s Articles of Incorporation and the Shareholders’ Agreement do not contain any “contrary provisions” to section 2000. (Supp. Schlabach Decl., at ¶¶ 2-3, Exs. 1-2.)

Further, Defendants have shown they are unable to agree with the moving parties upon the fair value of those shares. Specifically, Defendants’ have submitted evidence to show that their counsel asked Plaintiff’s counsel “to provide for our consideration a price at which MCH is willing to be bought out,” to which Plaintiff never responded. (Supp. Capozzola Decl., at ¶ 2, Ex. B; Second Supp. Capozzola Decl., at ¶ 4.)

As for the bond requirement, Defendants are prepared to deposit a bond to pay the estimated reasonable expenses, including attorneys’ fees of Plaintiff, if Defendants fail to make payment for Plaintiff’s shares within a time specified by court order. (Schlabach Decl., ¶ 4; Capozzola Decl., ¶ 5.)

Plaintiff contends Defendants cannot proceed by virtue of election to purchase the shares under the circumstances because to determine how much Plaintiff should be paid pursuant to any proceeding under section 2000, the parties will have to litigate the merits of the underlying claims brought by Plaintiff. This contention lacks merit because “a determination of the fair value of the shares of a corporation under section 2000 includes an assessment of the value, if any, of pending derivative actions and their effect on the fair value of the shares.” Cotton v. Expo Power Systems, Inc. (2009) 170 Cal.App.4th 1371, 1374.

Based on the foregoing, Defendants have satisfied the statutory criteria for pursuing the buyout process under section 2000. Accordingly, Defendants’ request to stay the dissolution is GRANTED.

Defendants also ask that in addition to ordering the stay of the dissolution process, the Court stay the instant litigation in its entirety as well as the related matter of Schlabach v. Colvin et al (OCSC Case No. 30-2022- 01294984-CU-BT-CJC) (“Related Action”). Staying the remainder of this action would promote the efficient use of judicial and party resources, as the remainder of the proceedings may be resolved as a result of the buyout process. Further, Plaintiff does not object to the Court staying the entire litigation in this action and in the Related Action if the Court grants the stay of dissolution in this action.

Accordingly, the Court exercises its discretion and inherent power to control the disposition of the cases on its docket and stays the entirety of this action and the Related Action.

Bond requirement:

Pursuant to section 2000(b), the purchasing parties must post a bond to cover the estimated reasonable expenses, including attorney fees, incurred by the shareholder whose shares are being purchased if the purchasing parties fail to pay the price determined by the court. Corp. Code §2000(b).

Neither party has addressed the amount of bond that would be sufficient to pay Plaintiff’s reasonable expenses.

Therefore, the Court requires the parties come prepared to the hearing to address the amount of bond which would be sufficient to cover the estimated reasonable expenses, including attorney fees, incurred by Plaintiff if Defendants’ fail to pay the price determined by the Court.

Appointment of Appraisers:

Corporations Code section 2000, subdivision (c) instructs that: “The court shall appoint three disinterested appraisers to appraise the fair value of the shares owned by the moving parties, and shall make an order referring the matter to the appraisers so appointed for the purpose of ascertaining the value. The order shall prescribe the time and manner of producing evidence, if evidence is required.”

The parties disagree on how the appraisers should be appointed by the Court.

Plaintiff asks the Court to set a deadline for the parties to submit to the Court three qualified appraisers per side, with the qualifications of said appraiser, and that the Court appoint the three appraisers following review of the submissions by the parties, if the parties are unable to agree to the same three appraisers.

Defendants ask the court to use the approach utilized in Crane v. R.R. Crane Investment Corp. (2022) 82 Cal.App.5th 748 (Crane) whereby each side selects an appraiser and then those two appraisers select a third appraiser to collectively determine the fair value of Plaintiff’s shares. (Id. at p. 754.) In the event, the two appraisers cannot agree on the third appraiser, then those two appraisers may make a recommendation to the Court and the Court can break the impasse by selecting the third appraiser and appointing all three appraisers.

The approach used in Crane is equitable, as such, the Court will use this approach.

Valuation Date:

Corporations Code section 2000, subdivision (f) states: “the valuation date shall be (1) in the case of a suit for involuntary dissolution under Section 1800, the date upon which that action was commenced, or (2) in the case of a proceeding for voluntary dissolution initiated by the vote of shareholders representing only 50 percent of the voting power, the date upon which that proceeding was initiated. However, in either case the court may, upon the hearing of a motion by any party, and for good cause shown, designate some other date as the valuation date.

Defendants ask the Court to set the date of valuation of the shares owned by Plaintiff as December 28, 2020, the date the Complaint was filed. Plaintiff objects to a valuation date of December 28, 2020, the date the Complaint was filed.

Since the parties disagree as to the date of valuation, Plaintiff may file a Motion to Determine the Valuation Date as provided below.

Based on the foregoing, the Court Orders as follows:

--The winding up and dissolution proceeding shall be STAYED pending the Court ascertaining and fixing the fair value of Plaintiff’s shares of LBC. The Court further exercises its discretion and inherent power to control the disposition of the cases on its docket and stays the entirety of this action and the related matter of Schlabach v. Colvin et al (OCSC Case No. 30-2022- 01294984-CU-BT-CJC).

--Defendants shall post a bond in the amount of $______ [to be determined at the hearing] to pay the estimated reasonable expenses (including attorneys’ fees) of Plaintiff if those expenses are recoverable under section 2000(c). The bond shall be posted within 15-days of the August 7, 2023, hearing on this Motion.

--Plaintiff may file a Motion to Determine the Valuation Date to be heard on September 29, 2023 at 9:00 AM in C15. Briefing on the motion will be as per Code.

--The Court CONTINUES the hearing on the instant Motion to September 29, 2023, at 9:00 AM on the issues discussed below. The parties are to meet and confer as to the issues below and at least 5 court days prior to the next hearing, the parties shall jointly file a declaration stating whether the parties were able to agree upon the following issues and if they were not able to agree, each party’s position as to each issue:

1. The identity of three disinterested appraisers using the approach utilized in Crane v. R.R. Crane Investment Corp. (2022) 82 Cal.App.5th 748 (Crane);

2. The time and manner of producing evidence to the appraisers, if evidence is required, pursuant to Corporations Code section 2000(c);

3. The deadline for the appraiser to submit their award to the Court for confirmation;

4. Procedure for objecting to any portion of any of the appraisers’ valuation opinion; and

5. The deadline after confirmation of the award for Defendants to make payment.

Moving Defendants to give notice.

Motion for Continuance of Trial

Defendants William Schlabach, Rebecca Virtue, Charles Pinkow, Frederick Fucci, Ralph Pierce, Adeline Bernardo, and Kathy Silver’s motion to stay all proceedings and continue the trial date for at least nine (9) months is MOOT.

Based on the Court’s ruling in Motion No. 1 staying all proceedings in this Action, the request for stay is MOOT.

Trial date set for 10/2/2023 is vacated.

Moving Defendants to give notice.

Case Management Conference

The Case Management Conference is continued on the court’s own motion to September 29, 2023, at 9:00 AM in C15.

Defendants to give notice.