Hornberger, D. v. Dave Gutelius Excavating, Inc. , 176 A.3d 939 ( 2017 )

J-A15004-17
2017 PA Super 395D. ALLEN HORNBERGER IN THE SUPERIOR COURT
OF
PENNSYLVANIA
Appellant
v.
DAVE GUTELIUS EXCAVATING, INC.
Appellee No. 103 MDA 2017
Appeal from the Judgment Entered December 19, 2016
In the Court of Common Pleas of Union County
Civil Division at No(s): 15-085
BEFORE: MOULTON, J., SOLANO, J., and MUSMANNO, J.
OPINION BY MOULTON, J.: FILED DECEMBER 15, 2017
D. Allen Hornberger appeals from the December 19, 2016 judgment
entered in the Court of Common Pleas of the 17th Judicial District (Union
County Branch) in favor of Dave Gutelius Excavating, Inc. (“DGE”) following a
non-jury trial. We affirm.
DGE is a closely held Pennsylvania corporation that operates an
excavation construction business. Hornberger worked as a land surveyor for
DGE from March 1999 until November 2011. In February 2006, Hornberger
bought 10 shares of common capital stock in DGE pursuant to a stock
purchase agreement. On February 16, 2006, Hornberger also entered into a
shareholders’ agreement (“Agreement”) with DGE and other shareholders.
Under paragraph 3 of the Agreement, DGE retained the right to redeem
Hornberger’s 10 shares if he ceased being an employee:
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In the event that Hurst, Gramly, Beaver, Shaffer, or
Hornberger resign[s], retires, or otherwise voluntarily or
involuntarily terminates his employment with [DGE], [DGE]
shall have the right to redeem all or part of the shares of
stock of [DGE] owned by such Stockholder within thirty
(30) days of the Stockholder’s termination as to whether
it desires to redeem all or part of the stock of [DGE] owned
by the Stockholder and, if so, the number of shares which
it desires to purchase at a price to be determined and paid
in accordance with the provisions of Paragraph 5 hereof.
...
Agmt. ¶ 3 (emphases in original). Paragraph 5 of the Agreement further
provides:
With respect to the purchase price for any shares in
[DGE] of Hurst, Gramly, Beaver, Shaffer, or
Hornberger purchased pursuant to Paragraphs 2, 3 and 13
hereof relating to the voluntary or involuntary
relinquishment of a Stockholder’s shares in [DGE] shall be
calculated by reference to the “Adjusted Net Book
Value.” The term “Adjusted Net Book Value” shall mean
the value of [DGE’s] shares as of the end of the month
immediately preceding the sale or transfer, as determined
by [DGE’s] independent certified public accountants, subject
to the following provisions:
(i) No allowance shall be made for the goodwill or
trade name of [DGE].
(ii) Accounts payable shall be taken at face
amounts less discounts deductible therefrom,
and accounts receivable shall be taken at face
amount less discounts less a reasonable
reserve for bad debts.
(iii) All real property . . . and all tangible personal
property . . . shall be taken into account at
their fair market value as of the date of the
proposed sale or transfer. . . .
Id. ¶ 5 (emphases in original).
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Hornberger voluntarily quit his employment with DGE on November 30,
2011. After obtaining a valuation from Bradley D. Kellett, an independent
certified public accountant (“CPA”), DGE sought to redeem Hornberger’s 10
shares of stock for the purchase price of $42,800. Kellett’s valuation letter
stated:
I have calculated the adjusted net book value of [DGE]
as of August 31, 2013 for use in determining the value to
be paid to Allen Hornberger who currently owns 10 shares
of common stock of the corporation. . . .
The net book value as of August 31, 2013 is calculated
as $6,436 per share before discounts for a minority interest
and lack of marketability. These types of discounts are
widely used in valuation methodologies . . . .
. . . I used a conservative minority discount of 30% and
a conservative lack of marketability discount of 5%, as
appropriate. As a result, the minority interest discount is
$1,931 per share and the lack of marketability discount is
$225 per share.
The adjusted net book value per share of the
corporation’s stock after discounts is $4,280. Using this per
share adjusted net book value, the adjusted net book value
of [Hornberger’s] 10 shares would be $42,800.
Kellett Ltr. to DGE, 5/1/14, at 1.
On September 9, 2014, DGE filed an action in equity for specific
performance under the Agreement. On April 11, 2014, the trial court issued
a preliminary injunction, ordering Hornberger to surrender his shares within
seven days and ordering DGE to pay Hornberger $42,800. Both parties
complied, and the trial court dissolved the preliminary injunction.
On February 12, 2015, Hornberger filed suit against DGE, alleging that
DGE improperly discounted the value of Hornberger’s shares in violation of
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the Agreement. Hornberger asserted that his 10 shares should have been
valued at $64,360, rather than $42,800, and sought judgment in the amount
of $21,560, the difference between the two figures.
In his expert report, Kellett explained the rationale for his valuation of
Hornberger’s shares as follows:
The calculated adjusted net book value of [DGE] as of
August 31, 2013 was $6,371,402 or $6,436 per share based
on 990 shares outstanding. The amount was calculated by
taking the net book value . . . and reducing it by equipment
at depreciated cost of $2,795,889 and increasing it by
equipment at fair value of $3,905,795 (per appraisal). The
result was $6,421,402[,] which was further reduced by bad
debts of $50,000 (for accounts receivable greater than 200
days old).
As the Agreement provides, our CPA firm did take the above
provisions into account, but that did not limit any other
adjustments which our firm determined were applicable to
the shares being valued. Given that Mr. Hornberger only
owned approximately one percent (1%) of the outstanding
issued shares, it is our professional opinion, and in
accordance with current valuation methodologies, that a
minority discount and lack of marketability discounts are
appropriate. The Agreement did not limit our professional
discretion as it related to adjusting the net book value of
[DGE]. In our view, Paragraph 5 of the Agreement was
intended to keep the value of each share much lower so as
not to reward any shareholder/employee who decides to
voluntarily leave [DGE]. Thus, the per share value was
reduced by a minority discount of 30% and lack of
[marketability] discount of 5%. Thus, the adjusted net book
value per share of [DGE’s] stock after the discounts is
$4,280.
Kellett Rpt., 11/7/16, at 1-2.
The trial court held a non-jury trial on November 22, 2016. At trial,
Hornberger presented the testimony of CPA Brian Elsasser. Elsasser disagreed
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with Kellett’s valuation only insofar as Kellett applied discounts for minority
ownership and lack of marketability. Elsasser concluded that the contract
language – specifically the listing of three mandated adjustments in
subparagraphs (i) through (iii) – was exclusive and did not permit further
adjustments for lack of marketability or minority interest. N.T., 11/22/16, at
35-36. Using his understanding of the method of calculation outlined in
paragraph 5 of the Agreement, Elsasser opined that the adjusted net book
value of Hornberger’s shares was $64,360 and, thus, DGE owed Hornberger
$21,560. Id. at 36-37. In response to questions from the trial court, Elsasser
conceded that had the Agreement not included a list of particular adjustments,
then he would have had to consider applying discounts for minority ownership
and lack of marketability to arrive at the adjusted net book value. Id. at 46-
47.1
In addition to offering Kellett’s expert report into evidence, DGE
presented the testimony of CPA Eric Blocher. Blocher testified that the method
for determining adjusted net book value in the Agreement is a fair-market-
value-based calculation. Id. at 60-61; see id. at 80 (“[Paragraph 5] does say
the adjusted net book value which is a fair market value method.”). Blocher
further testified that when determining adjusted net book value in a closely
held corporation, it is customary in the accounting industry to apply discounts
____________________________________________
Hornberger also testified on his own behalf. Although he did not offer
1
testimony as to the parties’ intent, Hornberger noted that paragraph 5 of the
Agreement does not list minority interest and lack of marketability discounts
as adjustments that must be made to the book value. N.T., 11/22/16, at 10.
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for lack of marketability and minority interest. Id. at 61, 64-65. Blocher
opined that Kellett’s application of those discounts, and the valuation of
Hornberger’s shares at $42,800, were proper under the Agreement. Id. at
67-68.
At the conclusion of trial, the trial court entered a verdict in DGE’s favor,
concluding:
[T]he adjustments are proper and consistent with the
language in the [Agreement].[2] The Court does not find the
contract to be vague or ambiguous. It seems clear and
unequivocal. It’s the adjusted net book value. That is
determined by the standard practices in the industry. . . .
The Court finds that the adjustments should have been
made; and that based on the adjustments, the value of
[Hornberger’s] shares [is] $42,800.
Id. at 104.
Hornberger filed a timely post-trial motion, which the trial court denied
on December 13, 2016. After the entry of judgment on December 19, 2016,
Hornberger timely appealed to this Court. On January 20, 2017, Hornberger
filed a Pennsylvania Rule of Appellate Procedure 1925(b) statement of errors
complained of on appeal. The trial court did not file a Rule 1925(a) opinion,
relying instead on its oral decision rendered at the conclusion of the November
22, 2016 trial.
On appeal, Hornberger raises the following issue: “Did paragraph 5 of
the [Agreement] permit [DGE’s] CPA to apply discounts for minority interest
____________________________________________
According to the transcript, the trial court said “statute.” Given the
2
context, however, the court plainly meant “Agreement.”
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and lack of marketability in order to reduce the value of [Hornberger’s] ten
(10) shares of stock?” Hornberger’s Br. at 4 (full capitalization omitted).
Our standard of review of a non-jury verdict is limited to determining
“whether the findings of the trial court are supported by competent evidence
and whether the trial court committed an error in any application of the law.”
Stephan v. Waldron Elec. Heating & Cooling LLC, 100 A.3d 660, 664
(Pa.Super. 2014) (quoting Wyatt Inc. v. Citizens Bank of Pa., 976 A.2d
557, 564 (Pa.Super. 2009)). “We consider the evidence in a light most
favorable to the verdict winner” and will reverse only if the trial court’s
“findings of fact are not supported by competent evidence in the record or if
its findings are premised on an error of law.” Id. at 664-65. Further, “[t]he
interpretation of any contract is a question of law[,] and this Court’s scope of
review is plenary.” Id. at 665 (quoting Humberston v. Chevron U.S.A.,
Inc., 75 A.3d 504, 509 (Pa.Super. 2013).
Hornberger asserts that the trial court erred in concluding that the
Agreement permitted discounts for minority interest and lack of marketability
when such discounts were not expressly included in the Agreement. In
response, DGE contends that although the Agreement identifies certain
adjustments that must be made, it does not prohibit additional adjustments
that are determined by the CPA to be customary in the accounting industry.
It is well settled that “[t]he fundamental rule in contract interpretation
is to ascertain the intent of the contracting parties.” Ins. Adjustment
Bureau, Inc. v. Allstate Ins. Co., 905 A.2d 462, 468 (Pa. 2006). “When
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the words of a contract are clear and unambiguous, the intent of the parties
is to be discovered from the express language of the agreement.” Raiken v.
Mellon, 582 A.2d 11, 13 (Pa.Super. 1990). Moreover, “[i]n interpreting the
value of shares pursuant to a stock redemption agreement, our only useful
authority is the language of the agreement itself.” Osborne v. Carmichaels
Mining Mach. Repair, Inc., 628 A.2d 874, 877 (Pa.Super. 1993).
Here, the Agreement provides that the purchase price of Hornberger’s
shares “shall be calculated by reference to the ‘Adjusted Net Book Value.’”
Agmt. ¶ 5 (emphasis in original). Paragraph 5 then states:
The term “Adjusted Net Book Value” shall mean the
value of [DGE’s] shares as of the end of the month
immediately preceding the sale or transfer, as determined
by [DGE’s] independent certified public accountants, subject
to the following provisions:
(i) No allowance shall be made for the goodwill or
trade name of [DGE].
(ii) Accounts payable shall be taken at face amounts
less discounts deductible therefrom, and accounts
receivable shall be taken at face amount less
discounts less a reasonable reserve for bad debts.
(iii) All real property . . . and all tangible personal
property . . . shall be taken into account at their
fair market value as of the date of the proposed
sale or transfer. . . .
Agmt. ¶ 5 (emphasis in original).
In construing this language, the trial court observed that the Agreement
does not define the phrase “adjusted net book value,” stating, “[Paragraph 5]
doesn’t say, This is the definition of adjusted net book value. It says it’s the
adjusted net book value with the three qualifications.” N.T., 11/22/16, at
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103; see also id. (“[A]djusted net book value is not defined. It is qualified.”).
Based on its conclusion that “adjusted net book value” is undefined, the trial
court stated, “When [a contract term] is not defined, we have to look to the
standard, the normal and accepted practices within the industry.” Id. Relying
on Kellett’s expert report and the testimony of both CPAs, the trial court
concluded that the adjustments for lack of marketability and minority interest
were proper and, thus, “the value of [Hornberger’s] shares [is] . . . $42,800.”
Id. at 104. After reviewing the language of the Agreement and the trial
testimony, we agree.
The parties do not dispute the meaning of “book value.”3 Rather, the
central interpretive dispute involves the meaning of “adjusted.” Hornberger
contends that “adjusted” is defined, and thus limited, by reference to the three
adjustments listed in paragraph 5. In other words, Hornberger argues that
the only permissible adjustments to book value are those expressly listed in
the Agreement – relating to good will, discounts to accounts payable and
accounts receivable, and the appraisal of real and tangible personal property.
DGE, in contrast, argues that the specific adjustments listed in the Agreement
are non-exclusive and that its CPA appropriately made additional adjustments
consistent with business valuation standards. We agree with DGE.
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Our Court has explained that “‘[b]ook value’ has a standard meaning
3
under general accounting principles; that is, standard ‘book value’ refers to
the assets of a company over its liabilities.” Osborne, 628 A.2d at 878; see
also N.T., 11/22/16, at 27 (according to Elsasser, “what book value basically
means are the assets on the balance sheet minus the liabilities”).
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Expert testimony from both sides supported the general proposition that
adjustments based on minority interest and lack of marketability are standard
industry practice when valuing shares in closely held corporations. See, e.g.,
N.T., 11/22/16, at 46-47 (testimony of Brian Elsasser); id. at 56-62
(testimony of Eric Blocher). The ultimate conclusion of Hornberger’s expert –
that such adjustments were not appropriate in this case – was based not on
his accounting or valuation expertise but instead on his interpretation of other
language in the Agreement. Specifically, he testified, and Hornberger argues
to this Court, that the listing of three specific adjustments in the Agreement
precluded the use of other, ordinarily appropriate adjustments. See id. N.T.
at 35-36; Hornberger’s Br. at 12-14. We disagree. Not only does the
Agreement contain no such limiting language, but its terms contemplate
adjustments to book value beyond those listed in subparagraphs (i) through
(iii).
The Agreement expressly provides that, in the case of a departing
shareholder, “the value of [DGE’s] shares” shall be “determined by [DGE’s]
independent certified public accountants.” Agmt. ¶ 5. That valuation, by its
terms, is an adjustment to book value based on the expertise of DGE’s CPAs.
No one disputes that adjustments for minority interest and lack of
marketability are consistent, as a general matter, with expert valuation
methodologies. The Agreement then provides that the application of that
expertise is “subject to the following provisions,” which address good will,
accounts payable and receivable, and the valuation of real and personal
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property. See id. The listing of three types of adjustments that DGE’s
accountants must make cannot reasonably be understood to preclude the
application of any other adjustments that valuation experts would ordinarily
make. Indeed, the structure of the relevant provision calls on DGE’s CPAs to
determine the value of the shares, which presumptively calls for the exercise
of their professional judgment, and only then mandates the application of
particular adjustments. While the parties could have contracted to exclude
other adjustments, they did not do so here.4
Accordingly, we conclude that the trial court properly applied the law
and its findings are supported by competent evidence.
Judgment affirmed.
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4As Hornberger points out, paragraph 5 of the Agreement provides two
different valuation methods – one for determining the value of shares
following a stockholder’s death, and another for determining the value of
shares when a stockholder voluntarily or involuntarily terminates his
employment. Paragraph 5 states that the value of a deceased stockholder’s
shares is “equal to the fair market value of the . . . stock” as determined by
DGE’s CPA, whereas the value of a terminated stockholder’s shares is equal
to the “adjusted net book value” as determined by the CPA. Agmt. ¶ 5.
Hornberger asserts that the absence of the phrase “fair market value” from
the latter portion of paragraph 5 precludes the use of fair-market-value-based
discounts. Hornberger’s Br. at 17-18. We disagree.
As discussed above, Blocher explained that an adjusted-net-book-value
calculation, by definition, is an asset-based approach “whereby all assets and
liabilities, including off-balance sheet, intangible, and contingent items are
adjusted to their fair market value.” N.T., 11/22/16, at 59; see id. at 60-61,
80. Moreover, all three experts appeared to agree that minority interest and
lack of marketability discounts are customarily applied when valuing shares in
closely held corporations, no matter which valuation method is used. In any
event, contrary to Hornberger’s contention, nothing in the language of the
Agreement precludes the use of fair-market-value-based adjustments to the
book-value calculation.
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Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 12/15/2017
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