Litigation & Disputes Bulletin: Q2 2022
Hundreds of cases are settled by our courts every day and it can be hard to keep up with the latest rulings. In this quarter’s newsletter, KSM’s Litigation & Disputes team has pulled together some interesting case summaries that obtained a meaningful result in the context of economic damages. Read on to see what’s happened recently.
If you require the perspective of an expert in commercial damages, we’d love to discuss how KSM can help. Please contact a member of our team or complete this form.
In This Issue:
- A Louisiana Appeals Court Decides That the Trial Court Abused Its Discretion in Choosing the Method of Determining Damages
- Minnesota Appellate Court Upholds Prejudicial Conduct to Oppressed Shareholder and Affirms Disallowance of Marketability Discount
- Court Reverses Its Order to Strike Expert Testimony That Utilized the Discounted Cash Flow Method in Valuing a Business
A Louisiana Appeals Court Decides That the Trial Court Abused Its Discretion in Choosing the Method of Determining Damages
Dettenhaim Farms, Inc. v. Greenpoint Ag, LLC, 2021 La. App. LEXIS 1729; 54,162 (La.App. 2 Cir.); 2021 WL 5349451 (Nov. 17, 2021)
This decision of the appeal court of Louisiana took up the alleged damages of soybean crop and the trial court’s decisions on the matter. The appeal court found that the trial court abused its discretion when it chose an expert’s methodology for determining damages, “as another methodology was supported by the record and was not overly speculative.” As a result, a reduced damage award was appropriate.
The appeal court affirmed two other decisions of the trial court, that the damage to the soybean crop was caused “by an LLC” and that a son and a corporation lacked a real and actual interest in the unharvested soybeans. While these two decisions are rationale, found in the opinion, are of interest, and can be found in the case, we digest here the issue of the amount damages.
Background. Bobby and his son, Jason, farmed 800 acres in East and West Carroll Parishes. Jason’s parents owned the land. Dettenhaim Farms Inc. (DFI) never farmed crops before 2018, and it owned no cropland. Wesley Sanchez, a friend of the Dettehaims, worked as an outside salesman for farm chemicals. Greenpoint Ag LLC (LLC) became Sanchez’s employer around 2011. Sanchez would check the fields before and after the annual burndown to see what weeds needed to be destroyed. The Dettenhaims “completely relied on Sanchez to check their crops and make recommendations about what and when to spray.”
The 2016 growing season. Going into the 2016 season, the Dettenhaims had a carryover balance with LLC of around $45,000. On March 14, they paid an outstanding balance of $134,000 to John Deere Financial (JDF). Bobby and Jason applied for credit from JDF. The Dettenhaims ran into cash and credit problems with LLC soon thereafter regarding purchases of chemicals. On April 7, Jason told LLC’s credit manager that he planned to sell several houses and some of his cattle. Jason was told the account would go to collection if not paid by June 15.
Between May 8 and May 12, Bobby and Jason planted their soybean crops. LLC’s location manager claimed that, during a June 9 call with Bobby, their past due account had caused a lot of anxiety and he thought it best they find a new supplier. Later that month, the manager told Sanchez he might not need to go back to the Dettenhaims’ fields and could spend his time more wisely. He did not let the Dettenhaims know of this. No one from LLC passed this along to Dettenhaims. “Sanchez knew that the Dettenhaims did not have a crop consultant. However, he thought what Benny had told them was sufficient.”
On June 29, Jason said he could pay only $5,000 at that time, to which the credit manager told him that was “perfect.” “A cash account was opened for Bobby and Jason at Greenpoint in June. This allowed them to buy products from Greenpoint by either producing a check or paying at the time the product was picked up or delivered.” The crops, remaining generally unchecked, had infestations of stinkbugs. Ultimately, the Dettenhaims were able to harvest some of their crop and sell the beans. “On March 1, 2017, Bobby, in his individual capacity, and Jason, individually and as president of DFI, executed a promissory note for over $57,000 in favor of Greenpoint. No payments were ever made on this note.”
Lawsuit. On Dec. 14, 2016, DFI filed suit against LLC, its insurer, and Sanchez. DFI asserted that, for 20 years, it had relied on Sanchez to check for insects and weeds and recommend treatment. DFI also asserted that, due to this reliance, major damage was incurred to its 2016 crop thus reducing the yield. DFI could have hired a new consultant had it been notified that Sanchez was stopping consulting. In August 2017, DFI amended its petition to add Bobby and Jason as individuals and as owner and manager of DFI. DFI alleged it suffered damages to its crop yield and had to prematurely sell its cattle to compensate for the crop loss. DFI also alleged it suffered mental anguish as a result of the defendants’ actions.
In April 2018, LLC filed a reconventional demand that DFI, Jason, and Bobby owed payment in full on the $57,000 note, that it was due and payable in full. The plaintiffs answered that any amount owed to LLC was the result of its own negligence and they should be estopped from seeking payment.
Trial. A bench trial was held in July 2019, with numerous documents and witnesses. Reynold Minsky testified as an Ag expert. He estimated that the first field had a 10%-to-20% stinkbug and worm infestation, but the other two fields had severe damage. He determined his damages by counting the good pods and bad pods on a plant and then looking at the bad pods. The third field had the worst damage, but he did not provide an estimate because he did not take counts in that field. Minsky did not perform a commercial count or net sweep but stood by his calculations. He also asked about soybean yields from a couple of surrounding farms. “Based upon that information as well as his own observations and 66 years of experience, he estimated that Bobby’s and Jason’s yield would have been 65-70 bushels per acre in one field, and 75-80 bushels per acre in the second field.” He did not go out into the fields to make a count, but he thought he provided an educated guess of what he saw.
Dave Elliott, a neighbor, drew a map of where his fields lie adjacent or across the road from Dettenhaims’ fields. Carlton Clark, CPA, specializes in economic damages, lost profits, and business valuation. He offered three alternative methods to determine the damages: (1) average yields from 2011 to 2015 to determine the yield percentages ($91,795); (2) highest yielding year (2014) to determine the yield ($148,946); and (3) 2016 yield of the Elliott farm ($246,334).
“Edward Peters is an independent crop consultant who testified on behalf of defendants as an expert in crop consulting, entomology, weed science, and plant pathology.” Peters was retained by the defendants in 2018 and never visited the Dettenhaim fields. He felt it important to visit each field since they can vary materially. Peters agreed the stinkbugs were very bad in 2016. He thought the range damages Minsky determined were large. He thought Minsky did not conduct a lot of sample collecting, analysis, and counts. He opined one cannot look at a few stalks in one or two fields and apply that to 800 acres.
Reasons for judgement. The trial court concluded that the plaintiffs relied on LLC and Sanchez to advise them, and this reliance led to a change in their position to their detriment. “The trial court did not agree with Greenpoint’s argument that detrimental reliance was not applicable because the Dettenhaims were in debt for more than $50,000 to Greenpoint going into the 2016 crop year.” Among other things, the TC noted that, during the alleged June 9 phone call, LLC never said that Sanchez would no longer be allowed to scout their properties or sell products to them. Further, LLC sold products to them at later dates. The trial court found that the defendants owed a duty to inspect and spray. Thus, the preponderance of the evidence proved causation.
The trial court accepted Clark’s third method of damages, noting that their yields would be comparable to the Elliott yields. The trial court rejected the argument that the plaintiffs had to sell cattle to pay down debt as a result of the crop damage. The trial court also rejected any damages for mental anguish. The trial court also found in favor of LLC on the matter of reconventional demand of the promissory note.
Damages. LLC argued that the method of damages the trial court chose, relying on yields from the Elliott farms, was not the proper legal standard for calculating damages. Per the Aultman case (citation omitted), “Generally, the amount of damages which should be awarded for the loss of a growing crop is the average yield and market value of crops of the same kind, planted and cared for in the same manner and in the same area, less the cost of cultivating, harvesting, and marketing the crop.”
The plaintiffs countered that Clark was the only accounting expert to testify at trial. They noted that Minsky testified that expected yields could be expected as for other fields in the area. The appeal court pointed out that, while there were similarities in the plaintiffs’ fields and those of Elliott, there were also significant differences. “Clark relied on the methodology presented in a publication by Robert L. Dunn titled Recovery of Damages for Lost Profits. He testified that he used Elliott’s yields because he thought it was a relevant comparable. However, that comparable is not consistent with the standard used in Aultman.” The appeal court concluded that the trial court abused its discretion when it chose Clark’s third alternative. The appeal court further noted that use of the alternative two was supported by the record and was not overly speculative. The appeal court reduced the damages to $148,946.
Mitigation. The appeal court noted that an injured party has an obligation to reasonably mitigate its damages. LLC maintained the trial court committed manifest error in not finding that the plaintiffs failed to mitigate their damages. LLC stated several reasons to support this contention.
The plaintiffs countered that they did contact multiple crop consultants as to what to do, made a pesticide application when told to do so, and harvested the crop. The plaintiffs also explained the timing and issues that they incurred in trying to mitigate the damages.
Reviewing the record, the appeal court concluded that Bobby and Jason failed to mitigate the damages and reduced the damages by 10%, to $134,051.
Minnesota Appellate Court Upholds Prejudicial Conduct to Oppressed Shareholder and Affirms Disallowance of Marketability Discount
Gerring Props. v. Gerring, 2020 Minn. App. Unpub. LEXIS 964; 2020 WL 7490729 (Dec. 21, 2020)
The appellate court of Minnesota considered appeals and cross-appeals in a series of shareholders’ disputes. The appellants are Gerring Properties Inc. (GP) and Quality Car Wash Operations Ltd. (QCW). QCW operated a family-owned car-wash facility in Minnesota, leasing the land and equipment from GP. The Gerring brothers and some of their children now “accuse each other of various improprieties spanning decades.” Respondents included one of the brothers, Martin Gerring, and his wife, Lori-Ann Gerring. The three Gerring brothers comprised the board of directors. The ownership shares in GP were currently divided equally between two shareholder factions.
There was a history of lack of compliance with corporate requirements and recordkeeping, which created tension between the family factions. Tensions rose as a result of a transfer of 10 shares from Virginia Gerring, the matriarch, to Lori-Ann. This resulted in the two-family factions owning equal shares of GP. The family factions also disagreed on how to manage and finance the companies.
In September 2016, Martin and Lori-Ann were terminated as employees of QCW. The appellants asserted that Martin engaged in misconduct by failing to comply with orders from the board of directors. The district court found that Martin had a reasonable expectation of continued employment, income, and access to financial records. The district court found that Martin did engage in conduct in violation of board directives. However, the district court also found that the primary reason for his termination was to force Lori-Ann to transfer ownership of her shares back to Virginia.
The district court also determined a buyout to be the most appropriate remedy for the respondents to receive value for their ownership interests. The district court appointed a special master to provide valuations of the companies and assist in the buyout process. The independent appraiser determined “that the fair-market values as of August 22, 2016 (the valuation date set by the court) were $1,150,000 for QCW and $1,696,899 for GP.” The special master recommended that the appellants pay the respondents the full value of their ownership interests in cash, no later than 60 days after the entry of the district court’s order. The special master disagreed with the appellants’ contention that a DLOM should be applied to the buyout price, citing the Follett case, which required extraordinary circumstances in applying a DLOM. The appellants argued that the independent appraiser had “double counted” the value of QCW. The district court adopted the special master’s recommendations including concluding that QCW had not been double counted. The district court also adopted the special master’s opinion that 60 days was reasonable time for the appellants to pay the respondents in cash. If the appellants failed to make the stated payment, the district court ordered that the companies would be dissolved and the assets would be sold at the highest value.
The district court did not abuse its discretion in finding unfairly prejudicial conduct warranting equitable relief under Minn. Stat. § 302A.751. Unfavorably prejudicial conduct included conduct that frustrated reasonable expectations of the shareholder. The reasonable expectations of closely held corporation shareholders included “a job, salary, a significant place in management, and economic security for [the shareholder’s] family” (Pedro v Pedro). The district court found the reasonable expectation of continued employment from the fact that Martin was a long-term employee since before its incorporation and the shareholders have historically received distributions of profits. Martin had received no monetary benefit from his ownership since his termination. The district court did not abuse its discretion in finding unfairly prejudicial conduct. “Martin was not required to plead wrongful termination in order to bring a claim for equitable relief for wrongful termination.”
The district court did not abuse its discretion by ordering a buyout of the respondents’ shares. A court-ordered buyout is an equitable remedy. District courts have broad powers in fashioning an equitable buyout. Absent an agreement among the parties, the district court can set payment terms in determining the equitable remedy. The appellants argued that the district court inappropriately applied the holdings of Follett by requiring the buyout to occur within 60 days, which they claim was objectionably impossible, and by not applying a marketability discount to the purchase price. Factors to be considered in determining whether extraordinary circumstances exist included whether the buyer or seller have acted in an unfairly oppressive way to the other or have reduced the value of the corporation; whether the oppressed shareholder has other remedies; or whether any condition of the buyout including price would be unfair to the remaining shareholders because it would be unduly burdensome on the corporation. Here, neither the record nor the district court’s contention supported the existence of extraordinary circumstances. The special master said that he believed that 60 days was reasonable to pay the respondents and that any payment in “incremental fashion” would place the respondents at risk of not achieving full value for their shares. It was reasonable for the district court to accept the special master’s recommendations. The district court did not abuse its discretion in not applying a DLOM to the purchase price nor in requiring the buyout to be completed in 60 days.
The district court did not abuse its discretion in ordering dissolution of the companies. The appellants argued that the district court abused its discretion in ordering the dissolution of the companies in the absence of sufficient findings. Since the district court found that the appellants failed to exercise the option to purchase within the parameters the district court ordered and that additional time would not likely achieve the buyout, dissolution was the only reasonable way for the respondents to obtain value for their ownership interests. The district court also found other options to be unfeasible. “Although some of the shareholders continued to receive benefit through their employment at the Companies, the court found that this benefit did not outweigh the impact of the shareholder deadlock and prejudicial conduct towards respondents.” The district court here made specific findings of irreconcilable shareholder deadlock and concluded that dissolution was the only reasonable option. The district court did not abuse its discretion.
The district court did not abuse its discretion in its valuation of the respondents’ shares. Here, the issue was valuation of the shares of a closely held corporation in a buyout. If the parties are unable to agree on a value, the court shall determine the value of the shares. “The court shall determine … the fair value of the shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by the corporation or by a dissenter.” “[T]he district court has broad discretion and authority to determine the fair value of the shares in whatever way it deems appropriate.” The appellants argued that the independent appraiser “double counted” the going-concern valuation of QCW. The appraiser testified that he did not double count QCW’s value and explained why. The district court did not abuse its discretion in adopting the valuation of the companies from the special master’s report.
Court Reverses Its Order to Strike Expert Testimony That Utilized the Discounted Cash Flow Method in Valuing a Business
V5 Techs., LLC v. Switch, Ltd., 2021 U.S. Dist. LEXIS 216426; 2021 WL 5237228 (Nov. 8, 2021)
This case dealt with a motion to reconsider an order granting the defendant’s, Switch’s, motion to strike the expert testimony of J Douglas Zona (Zona). Zona submitted his calculation of Cobalt’s (i.e., V5 Tech’s) going-concern value as of 2015 when it went out of business using the discounted cash flow (DCF) method. Cobalt argued that the court erred in finding the DCF to be too speculative and asked the court to vacate its previous order. A motion for reconsideration is an “extraordinary remedy to be used sparingly.”
First, the court agreed with Cobalt that utilizing future lost profits was not improper. Notably, however, “[r]elying on future lost profits does not eliminate the rule that a party may not recover both future lost profits and going-concern value.” The DCF, in this case, required Zona to calculate future profits to a point in time and then discount them back to a present value. Zona believed that Cobalt would have received the necessary investments ($50 million) over a period of time. “This makes Zona’s reliance on the investment slightly less speculative and worthy of jury presentation.” The court decided presentation to a jury was the best procedure to follow and noted that Switch can make the same arguments to the jury that it made in its arguments in its motion to strike.
The plaintiff’s motion to reconsider was granted.
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