Wetmore v. MacDonald, Page ( 2007 )


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  •              United States Court of Appeals
    For the First Circuit
    No. 06-2103
    FRANK U. WETMORE,
    Plaintiff-Appellant,
    v.
    MACDONALD, PAGE, SCHATZ, FLETCHER & COMPANY, LLC,
    Defendant-Appellee.
    APPEAL FROM THE UNITED STATES DISTRICT COURT
    FOR THE DISTRICT OF MAINE
    [Hon. George Z. Singal, United States District Judge]
    Before
    Howard, Circuit Judge,
    Selya, Senior Circuit Judge,
    and Shadur,* Senior District Judge.
    James T. Kilbreth, with whom Peter S. Black and Verrill Dana,
    LLP were on brief, for appellant.
    Bruce W. Hepler, with whom Laurence H. Leavitt and Friedman,
    Gaythwaite, Wolf & Leavitt were on brief, for appellee.
    February 12, 2007
    __________
    *Of the Northern District of Illinois, sitting by designation.
    SHADUR, Senior District Judge. This diversity action was
    brought in the United States District Court for the District of
    Maine   in   February   2006     by   Frank   Wetmore    (“Wetmore”)    against
    Macdonald, Page, Schatz, Fletcher & Co., LLC (“Macdonald Page”), a
    Maine limited liability company none of whose members shares
    Wetmore’s Massachusetts citizenship.           Wetmore’s complaint alleges
    that Macdonald Page committed professional negligence, breach of
    contract     and   negligent    misrepresentation       when   it   appraised   a
    business in which Wetmore was a shareholder for less than half its
    actual value.
    When Macdonald Page moved to dismiss the action under
    Fed. R. Civ. P. (“Rule”) 12(b)(6), a magistrate judge recommended
    granting its motion, and the district court then upheld that
    recommendation.      Wetmore has filed a timely appeal challenging the
    dismissal.
    STANDARD OF REVIEW
    As taught in such cases as Epstein v. C.R. Bard, Inc.,
    
    460 F.3d 183
    , 187 (1st Cir. 2006):
    We review a Rule 12(b)(6) dismissal de novo,
    considering all well-pleaded facts in the
    complaint to be true.
    That familiar principle adheres to the seminal teaching of Conley
    v. Gibson, 
    355 U.S. 41
    , 45-56 (1957) that “a complaint should not
    be dismissed for failure to state a claim unless it appears beyond
    doubt that the plaintiff can prove no set of facts in support of
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    his claim which would entitle him to relief.”                 To that end, in
    addition to the acceptance of all well-pleaded allegations and all
    reasonable inferences from those allegations as well, Nisselson v.
    Lernout, 
    469 F.3d 143
    , 150 (1st Cir. 2006) explains:
    Facts distilled in that fashion may be
    augmented by reference to (i) documents
    annexed to it [the complaint] or fairly
    incorporated into it, and (ii) matters
    susceptible to judicial notice.
    BACKGROUND
    Wetmore’s complaint concerns the sale of his stock in
    Portland Shellfish Company, Inc. (“Company”), a Maine-based close
    corporation whose chief business is processing live shellfish.                  As
    one of the two owners, Wetmore held 300 voting and 150 non-voting
    shares of Company stock, while the remaining 300 voting shares were
    held by Donna Holden.     Ms. Holden’s husband Jeff (hereafter simply
    “Holden”) served as President of the Company and managed its daily
    operations, including production, procurement and sales.
    Under the Company’s Shareholders’ and Officers’ Agreement
    (“Agreement,”   attached       to   the    complaint   as    an    exhibit),   the
    Company’s   board   of   directors        was   restricted    to    two   members:
    Wetmore and Holden.       By late 2001 number of disagreements had
    arisen between Wetmore and the Holdens over the management and
    direction of the Company.           After unsuccessful efforts to resolve
    those   differences,     the   Holdens       invoked   the   deadlock-breaking
    provision of Agreement §11.5.5:
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    In the event the operations of the Company are impaired
    because of deadlock on the board of directors, the
    shareholders agree that they shall each have the right to
    acquire the other shareholder’s stock, as follows. In
    the event of a deadlock, the directors shall hire an
    accountant at MacDonald Page & Co., South Portland,
    Maine, to determine the value of the outstanding shares.
    Once the value is reported to the directors by the
    accountant, the directors shall call a meeting, each
    shareholder shall have the right to buy out the other
    shareholder(s)’ interest, at a price equal to or greater
    than the price determined by the accountant. The highest
    offer made by any shareholder at the meeting shall be
    binding upon the other shareholder(s). The shareholder
    who is acquiring the stock shall be required to close on
    the acquisition within 90 days of the meeting of the
    shareholders.
    In   accordance    with   that   provision,   Wetmore      and   the
    Holdens retained Macdonald Page to evaluate the Company’s shares by
    identifying the fair market value of a 100% common equity interest.
    In its engagement letter Macdonald Page defined “fair market
    value”:
    The price at which the property would change hands
    between a willing buyer and a willing seller, neither
    being under a compulsion to buy or sell and both having
    reasonable knowledge of relevant facts.
    As called for by the Agreement and Macdonald Page’s
    engagement   letter,   it   delivered     its   valuation   report   to    the
    Company, estimating “the fair market value of the common stock of
    [the Company] at June 30, 2002, to be approximately $1,090,000.”
    Ms. Holden then offered to purchase Wetmore’s shares at a price
    equal to 60% (Wetmore’s proportionate share) of Macdonald Page’s
    valuation.   Wetmore, however, resisted that offer and countered by
    offering $1.25 million for Ms. Holden’s shares if Holden would sign
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    a non-compete agreement.         Alternatively Wetmore offered to join in
    selling the Company to a third party.
    In   response   the    Holdens    rejected     both   of     Wetmore’s
    offers. Ms. Holden insisted that Wetmore was obligated to sell his
    shares pursuant to Agreement §11.5.5, stating that she would sue if
    he refused.      Facing the threat of litigation, Wetmore sold his
    shares to Ms. Holden for $750,705, a price that represented 60% of
    the Macdonald Page evaluation after adjustment to eliminate a 7%
    “marketability discount” included in Macdonald Page’s report.
    As stated at the outset, Wetmore’s Complaint asserts that
    Macdonald Page’s valuation “was well less than half the actual
    value” of the Company’s total stock, which Wetmore attributes to
    factors including Macdonald Page’s disregard for “commonly accepted
    and   reliable    methods   of    valuation   in   favor    of    less   reliable
    methods.”        More   specifically,    Count     I   charges     professional
    negligence, Count II charges breach of contract and Count III
    charges negligent misrepresentation.
    REQUIRED ELEMENTS OF PROOF
    All three of Wetmore’s claims stem from the common
    law--two sound in tort, one in contract.           And all three were found
    wanting by the district court based on its determination that
    Wetmore would be unable to prove causation, a critical element in
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    each.1
    Thus Graves v. S.E. Downey Land Surveyor, P.A., 
    885 A.2d 779
    , 782 (Me. 2005)(emphasis added) instructs that “[t]he plaintiff
    in a professional negligence action must establish the appropriate
    standard of care, demonstrate that the defendant deviated from that
    standard, and prove that the deviation caused the plaintiff’s
    damages.”    Similarly, Maine Energy Recovery Co. v. United Steel
    Structures, Inc., 
    724 A.2d 1248
    , 1250 (Me. 1999)(emphasis added)
    identifies the required elements of proof in a breach of contract
    action as comprising “(1) breach of a material contract term;
    (2) causation; and (3) damages.”   Finally, Chapman v. Rideout, 
    568 A.2d 829
    , 830 (Me. 1990) holds that Maine recognizes the tort of
    negligent misrepresentation as defined in Restatement (Second) of
    Torts, §552(1) (1977)(emphasis added)):
    One who, in the course of his business, profession or
    employment, or in any other transaction in which he has
    a pecuniary interest, supplies false information for the
    guidance of others in their business transactions, is
    subject to liability for pecuniary loss caused to them by
    their justifiable reliance upon the information, if he
    fails to exercise reasonable care or competence in
    obtaining or communicating the information.
    With all other components of each of Wetmore’s theories
    of recovery plainly being met by his complaint’s allegations, the
    central issue on this appeal is whether Wetmore’s well-pleaded
    1
    Throughout this opinion we look to the substantive law of
    Maine, which Agreement §15 designates as providing the rules of
    decision.
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    facts support a claim that Macdonald Page’s negligent valuation
    caused him to receive less than fair market value for his shares.
    We turn to that question.
    CAUSATION ELEMENT
    As we have said in Napier v. F/V Deesie, Inc., 
    454 F.3d 61
    , 68 (1st Cir. 2006), “[i]n order for the negligent act to
    constitute         proximate   cause,   the   act    or   omission   must   be    a
    substantial factor in bringing about the harm and the injury
    incurred must have been a reasonably foreseeable consequence.”2
    Merriam v. Wanger, 
    757 A.2d 778
    , 780-81 (Me. 2000) has put the same
    concept in these terms:
    Evidence is sufficient to support a finding of proximate
    cause if the evidence and inferences that may reasonably
    be drawn from the evidence indicate that the negligence
    played a substantial part in bringing about or actually
    causing the injury or damage and that the injury or
    damage was either a direct result or a reasonably
    foreseeable consequence of the negligence.      The mere
    possibility of such causation is not enough, and when the
    matter remains one of pure speculation or conjecture, or
    even if the probabilities are evenly balanced, a
    defendant is entitled to judgment.
    Notably, Merriam does not insist that a defendant’s
    conduct must be the only cause of the harm--instead it must have
    contributed substantially to the harm suffered.               We therefore look
    to the question whether under the facts as pleaded a reasonable
    jury       could   conclude    that   Macdonald     Page’s   negligence     was   a
    2
    Although Napier was a case sounding in admiralty, its
    stated principles of proximate causation are universally applied.
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    substantial factor in Wetmore’s recieving less than the full market
    value of his shares.
    According to the district court, Wetmore cannot establish
    causation because “[n]othing in the Agreement or in the other
    factual allegations of the complaint required the plaintiff to
    accept Donna Holden’s offer.”         Instead “[a]ll he had to do was
    offer her the same amount or more per share for her shares than she
    had offered him for his.”         It was the district court’s view that
    the deadlock provision required Wetmore to accept Ms. Holden’s
    offer only if and when he determined that he was unwilling to offer
    more money per share to purchase her stock.          Through the district
    court’s lens Wetmore “had many options, ranging from challenging
    the appraisal in any of a number of ways to offering Donna Holden
    the same amount per share to offering her more per share.”
    In that light the district court ultimately held that
    Macdonald Page’s valuation was not and could not have been a cause,
    substantial or otherwise, of Wetmore’s loss.          We disagree.
    Under the Agreement the parties, in the event of a
    deadlock, were required to hire Macdonald Page in what would be the
    first   step   in   potentially    resolving   the   stalemate.      It   was
    Macdonald Page’s role to provide a valuation that the parties would
    use to begin a bidding process.            As the plain language of the
    Agreement put it, the purpose of the Macdonald Page valuation was
    “to determine the value of the outstanding shares” so that at the
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    ensuing shareholders’ meeting “each shareholder shall have the
    right to buy out the other shareholder(s)’ interest, at a price
    equal to or greater than the price determined by the accountant”
    (emphasis added).     In brief, Macdonald Page’s figure was to serve
    as a floor--the lowest possible bid.           To say that a negligently-
    arrived-at valuation that set an artificially low floor would not
    have a substantial effect on a shareholder in Wetmore’s position
    ignores the logic of cause and effect.
    Importantly, Wetmore was under no compulsion to enter the
    active bidding process.       If for any reason he felt himself unable
    to compete on a level playing field after acquiring total ownership
    of the Company (it will be remembered that the Holdens would be
    free to engage in the same business post-sale, with Holden having
    the operating experience that Wetmore lacks), he had the absolute
    right to accept Ms. Holden’s offer so long as it equaled or
    exceeded Macdonald Page’s valuation figure.            And that meant he had
    the right to rely on Macdonald Page to generate a valuation that
    set a fair price for the shares.
    Instead, under the allegations of the complaint that must
    be   accepted   as   gospel   for   present    purposes,    Macdonald     Page
    improperly promulgated a figure that was less than half the true
    value   of   Wetmore’s   shares.     To   be   sure,    Wetmore   could   have
    responded by offering Ms. Holden more for her shares, but being
    limited to that route deprived him of the full benefit of his
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    bargain by foreclosing his opportunity to sell at a fair price.
    Once Macdonald Page rendered its negligent undervaluation of the
    Company, it was too late--indeed, impossible--for Wetmore to choose
    to exercise that equally absolute right.           Wetmore’s allegations
    thus offer far more than “pure speculation or conjecture” (Merriam,
    
    757 A.2d at 781
    ) as to Macdonald Page’s improper valuation being a
    substantial factor in Wetmore’s asserted loss.
    It should be added that Wetmore’s injury was entirely
    foreseeable.    What Macdonald Page’s alleged misfeasance imposed on
    Wetmore was precisely the type of bind that shareholders in a close
    corporation seek to avoid when they include buy-sell provisions in
    their agreements. Protections afforded by buy-sell provisions that
    set a bidding floor are fully meaningful only if the initial
    valuation of the company is performed accurately.          Otherwise, as
    here, the distortion of that base valuation skews the entire
    process.
    In   this   instance   the    parties   selected   a   buy-sell
    provision that would have been evenhanded if the valuation had been
    properly arrived at.    By contrast, it is entirely foreseeable that
    a shareholder who receives an improperly low bid based on a
    negligently-reached valuation will suffer a loss based on the
    undervaluation of his or her shares.         And here Macdonald Page’s
    engagement letter expressly confirmed its own understanding that
    its valuation would play a key role in the bidding process:
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    We understand that our valuation conclusion will be used
    in conjunction with the Company’s “Shareholder’s and
    Officer’s Agreement” dated February 1, 1994, paragraph
    11.5.5....
    To   argue   that     Wetmore’s     loss   was     not    foreseeable     would    be
    disingenuous, given that plain language confirming Macdonald Page’s
    duty to the Company’s shareholders.
    In its decision the district court also reasoned that if
    Macdonald Page’s valuation had been higher, there is no guaranty
    that Ms. Holden would have made an offer.                We too lack an unclouded
    crystal   ball   to    tell    us   what   would    have     transpired    had    the
    valuation been performed without negligence.                  There are multiple
    possibilities, including the prospect that an unsuccessful bidding
    process might for example have led the parties to resolve their
    differences, breaking their deadlock, or might instead have led to
    the invocation of Maine’s statutory provision for the resolution of
    corporate deadlocks.          But such speculation plays no part in the
    determination at the pleading stage whether Wetmore has stated a
    cognizable claim--he clearly has. We emphasize that there are many
    factual questions and matters of proof that remain unresolved, but
    those will require a more developed record--they simply are not
    before us at the Rule 12(b)(6) stage.
    CONCLUSION
    For the reasons that have been stated here we REVERSE the
    district court’s dismissal of Wetmore’s complaint and REMAND for
    further proceedings consistent with this opinion.
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