FILED May 05 2020, 9:26 am
CLERK Indiana Supreme Court Court of Appeals and Tax Court
ATTORNEY FOR APPELLANT ATTORNEYS FOR APPELLEE Mark J. Crandley Louis F. Britton Barnes & Thornburg, LLP Scott Craig Indianapolis, Indiana Cox Zwerner Gambill & Sullivan Terre Haute, Indiana
IN THE COURT OF APPEALS OF INDIANA
Blake B. Hartman, May 5, 2020 Appellant-Plaintiff, Court of Appeals Case No. 19A- PL-2263 v. Appeal from the Parke Circuit Court BigInch Fabricators & The Honorable Hunter J. Reece, Construction Holding Company, Special Judge Inc., Trial Court Cause No. Appellee-Defendant. 61C01-1809-PL-394
Riley, Judge.
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 1 of 17 STATEMENT OF THE CASE [1] Appellant-Plaintiff, Blake B. Hartman (Hartman), appeals the trial court’s
summary judgment in favor of Appellee-Defendant, BigInch Fabricators &
Construction Holding Company (Company), concluding that, pursuant to the
Shareholder Agreement, the value of the shares held by a minority shareholder
can be discounted by lack of control and lack of marketability.
[2] We reverse.
ISSUE [3] Hartman presents one issue on appeal, which we restate as: Whether, as a
matter of law, the value of shares under a buyback provision in a Shareholder
Agreement can be discounted for lack of marketability and control when the
Company is required to purchase the shares.
FACTS AND PROCEDURAL HISTORY [4] The Company is a closely-held Indiana corporation, located in Montezuma,
Indiana, and is in the business of fabricating and installing natural gas and
pipeline compressor/pumping stations and related apparatus. Hartman was
one of the founders and former president of the Company, serving as president
from 1998 to 2014. At all times relevant to these proceedings, there were ten
shareholders in the corporation, with no single shareholder holding a majority
position.
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 2 of 17 [5] On March 1, 2006, the shareholders of the corporate predecessor to the
Company entered into a Shareholder Agreement that included the obligations
of the shareholders to each other and to the Company. The Company’s
shareholders and directors executed a Consent to Corporate Action that bound
the Company to the terms of the Shareholder Agreement. The Shareholder
Agreement required the Company to purchase the shares of any shareholder
who is involuntarily terminated as an officer or director of the Company.
Pursuant to the provisions of the Shareholder Agreement, this purchase must be
made at “appraised market value on the last day of the year preceding the
valuation, determined in accordance with generally accepted accounting
principles by a third-party valuation company.” (Appellant’s App. Vol. II, pp.
57-58).
[6] In March 2018, Hartman was involuntarily terminated from his position as a
director and officer at the Company, triggering the required purchase provisions
in the Shareholder Agreement. To comply with the terms of the Shareholder
Agreement, the Company retained Wonch Valuation Advisors (Wonch) to
appraise the value of Hartman’s shares. Wonch’s report valued Hartman’s
8,884—or 17.77%--shares at $3,526,060. The report discounted this amount
due to Hartman’s lack of controlling interest in the Company and lack of
marketability as he did not have a market in which to sell his shares. As such,
the report determined the fair market value of the shares to be $2,398,000. The
Shareholder Agreement afforded Hartman the right to dispute Wonch’s
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 3 of 17 valuation by obtaining a second professional appraisal. Hartman declined to
avail himself of that option.
[7] On September 10, 2018, Hartman filed a petition for declaratory judgment,
seeking a declaration as to the value of the shares and alleging that the
Company improperly applied discounts for lack of control and marketability to
the mandatory sale of the shares. On December 26, 2018, the Company filed
an Answer and Counterclaim for declaratory judgment. On March 12, 2019,
Hartman moved for summary judgment, and on May 13, 2019, the Company
filed a cross-motion for summary judgment. On August 22, 2019, the trial
court conducted argument on the parties’ respective motion for summary
judgment. One month later, on September 19, 2019, the trial court issued
summary judgment, concluding that the Company could discount the value of
the shares for lack of control and marketability.
[8] Hartman now appeals. Additional facts will be provided as necessary.
DISCUSSION AND DECISION I. Standard of Review
[9] In reviewing a trial court’s ruling on summary judgment, this court stands in the
shoes of the trial court, applying the same standards in deciding whether to
affirm or reverse summary judgment. First Farmers Bank & Trust Co. v. Whorley,
891 N.E.2d 604, 607 (Ind. Ct. App. 2008), trans. denied. Thus, on appeal, we
must determine whether there is a genuine issue of material fact and whether
the trial court has correctly applied the law. Id. at 607-08. In doing so, we Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 4 of 17 consider all of the designated evidence in the light most favorable to the non-
moving party. Id. at 608. A fact is ‘material’ for summary judgment purposes if
it helps to prove or disprove an essential element of the plaintiff’s cause of
action; a factual issue is ‘genuine’ if the trier of fact is required to resolve an
opposing party’s different version of the underlying facts. Ind. Farmers Mut. Ins.
Group v. Blaskie, 727 N.E.2d 13, 15 (Ind. 2000). The party appealing the grant
of summary judgment has the burden of persuading this court that the trial
court’s ruling was improper. First Farmers Bank & Trust Co., 891 N.E.2d at 607.
[10] We observe that, in the present case, the trial court entered findings of fact and
conclusions of law thereon in support of its judgment. Generally, special
findings are not required in summary judgment proceedings and are not binding
on appeal. AutoXchange.com. Inc. v. Dreyer and Reinbold, Inc., 816 N.E.2d 40, 48
(Ind. Ct. App. 2004). However, such findings offer a court valuable insight into
the trial court’s rationale and facilitate appellate review. Id.
II. Buyback Provision
[11] Hartman contends that the trial court inappropriately allowed the Company to
reduce the value of his shares with a lack of marketability and control discount
even though these discounts are not applicable to a compulsory sale. He
maintains that the language of the Shareholder Agreement, determining the
valuation method of the Company’s shares, should not be equated with fair
market value as the sale of the shares cannot be completed in the open market
place and the purchaser already controls the Company.
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 5 of 17 [12] Construction of the terms of a written contract is a pure question of law for the
court, and we conduct a de novo review of the trial court’s conclusions in that
regard. Grandview Lot Owners Ass’n, Inc. v. Harmon, 754 N.E.2d 554, 557 (Ind.
Ct. App. 2001). If a contract is ambiguous because of the language used in the
contract, rather than because of extrinsic facts, its construction is a pure
question of law to be determined by the court. Id. A contract is not ambiguous
merely because a controversy exists where each party favors a different
interpretation; rather, a contract is ambiguous where it is susceptible to more
than one interpretation and reasonably intelligent persons would honestly differ
as to its meaning. Ind. Dep’t of Transp. v. Shelly & Sands, Inc., 756 N.E.2d 1063,
1069-70 (Ind. Ct. App. 2001), trans. denied. Absent ambiguity, this court will
give the terms of a contract their plain and ordinary meaning. Id. at 1070.
[13] Indiana courts have long recognized that shareholders in closely-held
corporations may enter into agreements to buy or sell shares which include a
valuation method to determine the value of those shares. See Shriner v. Sheehan,
773 N.E.2d 833, 843 (Ind. Ct. App. 2002) (“It is for the parties, not the court, to
stipulate a valuation method in a purchase agreement, and we will not rewrite
an explicit agreement even if that method does not produce a price for the
shares of stock that reflects a business’s true value.”). Close corporations
generally find no market for their shares and the only people interested in the
business are the “incorporated partners” who are intimately involved with the
entity. Krukemeier v. Krukemeier Mach. & Tool Co., 551 N.E.2d 885, 890 (Ind. Ct.
App. 1990). Because there is often no market, it is difficult and speculative to
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 6 of 17 value a close corporation’s shares; therefore, repurchase agreements frequently
include specific valuation methods. See Shriner, 773 N.E.2d at 842.
[14] Article V of the Shareholder Agreement provides for the “Valuation and
Payment for the Shares” in Section 5.1 as follows:
The price per Share for the Shares of the Corporation to be sold pursuant to Article III or Article IV of this Agreement shall be the appraised market value on the last day of the year preceding the valuation, determined in accordance with generally accepted accounting principles by a third party valuation company within the twenty-four months preceding the transfer of shares, with adjustments for changes in the number of outstanding Shares since such year end, and in the case of sales under Article IV, if the value is less than the price paid to acquire the Shares paid by the Involuntary Transferee.
(Appellant’s App. Vol. II, pp. 57-58) (emphasis added). In determining the
appraised value of Hartman’s shares, the Wonch report applied the fair market
value, which included a discount for the marketability of the stocks and the lack
of control represented by Hartman’s minority interest.
[15] In support of his argument that the Wonch report applied an incorrect valuation
method as appraised market value cannot be equated to fair market value,
Hartman relies on Wenzel v. Hopper & Galliher, P.C., 779 N.E.2d 30 (Ind. Ct.
App. 2002). In Wenzel, this court rejected marketability and control discounts
in a dispute about the value of a departing partner’s interest in a law firm. Id. at
37. The firm brought an action to value the partner’s interest under the Indiana
Professional Corporations Act and asserted that the valuation must consider
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 7 of 17 both marketability and control. Id. We rejected the argument and adopted the
general proposition that ‘fair value’ is not the same as ‘fair market value.’ Id.
We found that ‘fair value’ carried with it the statutory purpose that shareholders
be fairly compensated, which may or may not equate with the market’s
judgment about the stock’s value. Id. ‘Fair market value,’ on the other hand,
represented “the amount for which property will sell upon negotiations in the
open market between an owner willing to sell and a buyer willing but not
obligated to buy.” Id. The Wenzel court explained that
Minority and marketability discounts are open market concepts. A minority discount allows an appraiser to adjust for lack of control over the corporation on the theory that minority shares of stock are not worth the same amount to a third party as the majority holdings due to lack of voting power. A marketability discount allows an appraiser to adjust for a lack of liquidity in the stock itself on the theory that there is a limited supply of purchasers of the stock.
Id. at 37 (citations omitted). Wenzel recognized that a “substantial majority” of
courts in other jurisdictions had reached the same result and “rejected the
application of minority and marketability discounts when determining the fair
value of stock in cases where a majority shareholder or corporation purchases
the stock.” Id. at 38. Acknowledging that the discounts would create a
“windfall” if applied to a sale outside the open market, the Wenzel court
clarified that a sale of the minority shareholders’ shares to majority
shareholders consolidates or increases the power of those already in control, so
applying a minority discount to such a case would result in a windfall to the
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 8 of 17 purchasing majority shareholder, particularly because the shares would have
the same value in the minority shareholder’s hands as in the majority
shareholders. Id. at 39.
[16] Cases applying Indiana law since Wenzel have affirmed that minority and
control discounts have no application in compelled transactions to a controlling
party. In Stone v. Peoples Tr. & Sav. Bank, 363 F. Supp. 2d 1036, 1039 (S.D. Ind.
2005), the Southern District of Indiana rejected a marketability discount where
there is “a ready-made market.” Relying on Wentzel, the court concluded that
“[i]t would be incongruous to discount the shares of the minority shareholder
for lack of liquidity when valuation is being done in connection with a
proceeding that creates liquidity.” Id. (quoting Wenzel, 779 N.E.2d at
40)(quoting Charles W. Murdock, The Evolution of Effective Remedies For and
Valuation of Minority Shareholders and Its Impact Upon Valuation of Minority Shares,
65 NOTRE DAME L. REV. 425, 486 (1990)). When there is a “ready-made
market” for shares through a mandatory purchase agreement, “[a]llowing a
minority or non-marketability discount to be deducted from their value would
indeed amount to a windfall to the [buyer] and its majority shareholders, which
is precisely what the Wenzel court sought to avoid.” Stone, 363 F. Supp. 2d at
1039.
[17] In the years since Wenzel was decided, a wide majority of courts in sister states
have regularly rejected the application of control and marketability discounts to
situations where a shareholder is compelled to sell to the majority. See, e.g., In
re Stebnitz, 586 B.R. 289 (E.D. Wisc. 2018) (finding no need for a lack of control
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 9 of 17 discount when the controlling interests bought the stock and holding that a
“discount for lack of marketability is likewise inappropriate when the
agreement obligates the remaining membership groups to purchase the existing
member’s interest.”); Shawnee Telecom Resources, Inc. v. Brown, 354 S.W.3d 542,
555 (Ky. 2011); HMO-W Inc. v. SSM Health Care Sys., 611 N.W.2d 250, 257
(Wis. 2000) (marketability and control discounts “inflict a double penalty upon
the minority shareholder [because] the shareholder not only lacks control over
corporate decision making, but also upon the application of a minority discount
receives less than proportional value for loss of that control.”).
[18] In response, the Company distinguishes Wenzel and its progeny on the ground
that the dispute in Wenzel revolved around the determination of fair value of
minority shareholder’s interest, as required by statutory language, and not the
shares’ market value, as included in the Shareholder Agreement. 1 Instead, the
Company relies on the Wonch report and contends that the fair market value
standard used in the report is consistent with the Shareholder Agreement’s
1 In a footnote, the Company directs us to Alexander v. Alexander, 927 N.E.2d 926, 938 (Ind. Ct. App. 2010) in support of its argument that “Indiana courts have approved the application of marketability and control discounts for valuations of shares in closely-held corporations when they were not bound by a statutory requirement of ‘fair value.’” Appellee’s Br. p. 12 n.1. However, we distinguished Alexander from Wenzel based on two considerations, none of which are present here. First, we noted the trial court’s broad discretion when determining the value of property in dissolution proceedings which differentiated the circumstances in Alexander from those in Wenzel. “This broad discretion leads to a more direct and simple valuation of how the trial court has valued property than was presented in Wenzel.” Id. Furthermore, unlike the facts in Wenzel, the party in Alexander was not selling her interest in the property—rather the trial court was attempting to valuate the property in light of the divorce proceedings. Id. at 939. Therefore, the trial court was not acting to prevent a windfall to the majority, but rather was trying to place a value on the interest. Id.
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 10 of 17 requirement to use appraised market value. Reiterating the trial court’s
conclusion, the Company focuses on dictionary definitions which indicate that
market value and fair market value are remarkably similar. Black’s Law
Dictionary defines ‘fair market value’ as “[t]he amount at which property
would change hands between a willing buyer and a willing seller, neither being
under a compulsion to sell and both having reasonable knowledge of the
relevant facts.” BLACK’S LAW DICTIONARY, (6th Edition). ‘Market value’ is
defined as “[t]he price property would command in the open market. The
highest price a willing buyer would pay and a willing seller accept, both being
fully informed, and the property being exposed for a reasonable period of time.”
BLACK’S LAW DICTIONARY, (6th Edition). Likewise, Indiana Code section 23-
1-43-11 of the Indiana Business Corporation Act, defined the term market value
as meaning fair market value. While this statute deals with the open-market
concepts of share valuations in the context of mergers and other business
combinations, the Company relies on it for its instructive value in this context.
As such, the Company contends that Wonch properly applied a fair market
value in performing his appraisal and the application of the discounts should
stand.
[19] We find Wenzel to be persuasive to the situation at hand where a Shareholder
Agreement includes the valuation method of the members’ shares. Unlike
Hartman’s argument, we cannot conclude that Wenzel is limited to cases arising
under the statutory application of the fair value standard; Wenzel and its
progeny rejected the application of open-market discounts to any sale occurring
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 11 of 17 in a closed market, regardless of the used valuation standard. The Shareholder
Agreement itself recognizes that the mandated buyback of shares to the
Company differs from a sale to a third party on the open market and thus,
different interests must be recognized by implementing an appraised market
value rather than the open-market valuation method of fair value or fair market
value. Indiana law does not allow parties “to read into the contract terms to
which the parties did not agree.” Zawistoski v. Gene B. Glick Co., 727 N.E.2d
790, 794 (Ind. Ct. App. 2000). Courts therefore will not add provisions not
agreed upon by the parties. Kaghann’s Korner, Inc. v. Brown & Sons Fuel Co., Inc.,
706 N.E.2d 556, 565 (Ind. Ct. App. 1999).
[20] Wonch’s appraisal report narrated that “[Wonch] ha[d] been engaged by the
Company to estimate the fair market value of the property described herein as
of December 31, 2017. This valuation was performed solely to assist with a
valuation requirement in a shareholder agreement due to a triggering event
involving [Hartman].” (Appellant’s App. Vol. II, p. 72). After determining the
market value of the shares, the report then applied the open market concepts of
minority and marketability discounts, as required by the concept of fair market
value. See Wenzel, 779 N.E.2d at 39. Thus, instead of using the “appraised
market value” of the Shareholder Agreement, the Wonch report applied the
open-market valuation method of fair market value, without acknowledging
that there is a built-in market or that Hartman’s shares must be sold to those
already controlling the Company. As such, the Wonch report’s application of
the valuation method would allow the Company to purchase Hartman’s shares
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 12 of 17 at a discount and then immediately retain control over the Company and resell
the shares without the discount, thereby allowing the Company to reap a
windfall.
[21] The Shareholder Agreement ensured a market for the shares of departing
shareholders by compelling the Company to buy the shares at appraised market
value. The Wonch report appraised the market value of the Company and
calculated the per share value of this total market value figure by dividing the
Company’s value by the number of shares, resulting in a per share price of
$396.90. Based on the 8,884 shares owned by Hartman, his share of the
appraised market value of the Company amounted to $3,526,060. This reflects
the appraised value of the shares based on the market value of the Company
and corresponds with the requirement of the Shareholder Agreement to utilize
the appraised market value. As there is no sale of the shares in the open
market, the discounts for lack of control and marketability cannot be taken into
account in the calculation of the shares’ value in this compelled transaction.
Consequently, as the trial court erred, as a matter of law, by applying these
discounts, we reverse the trial court’s summary judgment.
CONCLUSION [22] Based on the foregoing, we hold that, as a matter of law, the value of shares
under the buyback provision in the Shareholder Agreement, which required to
apply the appraised market valuation, cannot be discounted for lack of
marketability and control when the Company is required to purchase the
shares. Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 13 of 17 [23] Reversed.
Mathias, J. concurs
Tavitas, J. concurs in part and dissents in part with separate opinion
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 14 of 17 IN THE COURT OF APPEALS OF INDIANA
Blake B. Hartman, Court of Appeals Case No. 19A-PL-2263 Appellant-Plaintiff,
v.
BigInch Fabrication & Construction Holding Company, Inc., Appellee-Defendant.
Tavitas, Judge concurring in part and dissenting in part
[24] I respectfully concur in part and dissent in part.
[25] I fully concur that the trial court erred by granting the Company’s motion for
summary judgment. I write separately to also emphasize and note that, in
calculating the “fair market value,” the Wonch report relied upon an Internal
Revenue Service (“IRS”) Revenue Ruling, which defines “fair market value” as
“the price at which the property would change hands between a willing buyer
and a willing seller when the former is not under any compulsion to buy and
the latter is not under any compulsion to sell, both parties having reasonable
knowledge of relevant facts.” Appellant’s App. Vol. II p. 69. Hartman,
however, was involuntarily removed from his position, and the Company is
required to purchase Hartman’s shares at the “appraised market value.” Under
Court of Appeals of Indiana | Opinion 19A-PL-2263 | May 5, 2020 Page 15 of 17 these circumstances, the Company was under a compulsion to buy, and
Hartman was under a compulsion to sell. Accordingly, the IRS definition of
fair market value is not applicable here.
[26] I dissent only to the extent that the majority opinion fails to address Hartman’s
motion for summary judgment in its conclusion. See Appellant’s Br. p. 23
(“Mr. Hartman respectfully requests that the Court reverse the summary
judgment in favor of the Company and enter summary judgment in his favor
declaring that he is entitled to the $3,526,000 his shares are worth without the
inapplicable discounts.”). I would reverse both the trial court’s grant of the
Company’s motion for summary judgment and the trial court’s implied denial
of Hartman’s motion for summary judgment.
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