Bohac v. Benes Serv. Co.

In this case, the Supreme Court of Nebraska affirmed, vacated in part, and reversed and remanded with directions. The holdings of the Supreme Court included: (1) The district court erred in its determination of fair value (FV) in allowing discounts; and (2) the disallowance of attorney’s fees was affirmed.

After Marlene’s (the decedent) death, her ownership interest in Benes Service Co. (BSC) passed to her daughters through her estate. Four of Marlene’s sons were actively managing BSC at her death. Over concerns about BSC’s corporate practices, the estate filed a petition for dissolution through its representative, Karen Bohac. BSC responded with an election to purchase in lieu of dissolution.

A trial was held to determine the estate’s 14.84% interest in BSC. The judgment provided for payment in annual installments. Bohac appealed, and BSC cross-appeal. We affirm in part, vacate, and remand with directions to the district court to recalculate this opinion and set new payment terms.

Background.

BSC is a family-owned C-corporation consisting of a farm implement division and a farming operation. Each of the four sons owned 21% to 22% of BSC at Marlene’s death. BSC employed one of the six daughters (beneficiaries) for many years. She and her husband held a 0.61% interest in BSC. The parties could not agree on the fair value, so the trial court was given that task. Bohac appealed, and BSC cross-appealed.

Assignments of error.

Bohac assigned that the trial court erred in: (1) failing to apply the definition of fair value under the Nebraska statute; (2) applying DLOC and DLOM discounts to an asset approach as a going concern; (3) failing to find an award for expenses; (4) failing to award expenses; and (5) granting BSC five years of interest-free payments to satisfy the award. On cross-appeal, BSC assigned that the trial court erred in applying the asset-based approach instead of the income approach in determining FV.

What is the fair value of the estate’s 14.84% interest in BSC? The court must first determine the definition of “fair value” under the statute. Then, a determination must be made as to whether “this definition of fair value includes, excludes, or has no effect on the applicability of discounts for lack of marketability and control.” Third, determining the premise of value, i.e., going concerned or liquidation, must be made. Fourth, does the principle of highest and best use mandate the use of a specific methodology?

Fair value determination.

The Supreme Court discussed the valuation issues related to the Nebraska Model Business Corporation Act, concluding then that “fair value shall be determined using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring an appraisal.” Fair value was defined within the Nebraska statutes as the value of the corporation’s shares determined immediately before the effectuation of the corporate action to which the plaintiffs object, using current valuation concepts and techniques, without discounting for marketability or minority status. Bohac urged that a definition excluding discounts be adopted, while BSC argued for an exception.

Discounts for lack of marketability and control.

Bohac argued that the trial court erred in applying the above discounts. She argued that the definition of fair value applied in this case should be the definition from the statute that prohibited the application of these discounts. The exception in the statute for the exclusion is related to exceptions that do not apply in this case. The Supreme Court agreed with Bohac and determined that fair value in this matter excluded the application of a DLOM and a DLOC. The Supreme Court decided that the legislature has not made any amendments that would change their conclusion and “allow the majority to take advantage of minority shareholders who have been forced against their will to accept the appraisal triggering transaction.” Here, BSC forced Bohac and other minority shareholders to accept the transaction and thus held an advantage over them. Further, the Nebraska Model Business Corporation Act exception allowing a discount would apply only to a minority interest (DLOC) discount, but there was no mention of allowance of a DLOM.

Oppression need not be proved to justify the exclusion of discounts.

Bohac alleges wrongful and oppressive conduct by majority shareholders in filing the petition for dissolution. BSC, the alleged oppressor, elected to purchase the estate. Discounts were protected from DLOMs and DLOCs. Oppression was not tried.

The premise of value.

There was a discussion of the premise of value during the discussion of methodology. The premise was going concerned and liquidation.

Valuation methodology.

The Supreme Court discussed the three approaches to value and what each means. The Supreme Court must select the methodology before a fair value can be determined. Bohac argued that the highest and best use principle required applying the asset-based approach because that method resulted in a higher value from each expert. “BSCargues that this understanding of the principle of the highest and best use is misplaced and artificially inflates the value of BSC.” BSC’s expert, Labenz, chose the higher of her two asset-based values for her opinion of FV. It was unclear where her lower value came from and under what premise. It appeared she used a liquidation premise for her selected value.

Bohac’s expert, Stadler, valued the estate’s interest on an asset approach going concern basis. Stadler referred to a not-named “well-known valuation expert” who states that the asset-based approach can be used with the going-concern premise of value. The Supreme Court determined that the correct methodology for BSC is an asset approach.

Value determinations.

At trial, the parties presented multiple witnesses to testify about the assets BSC held and rebate income on chemical sales and tax liabilities. “Because the trial court presided over this matter and observed witness and expert testimony, the trial court is best situated to determine the credibility of valuations provided.” We will not summarize the various asset valuations, but they can be found in the opinion of BVLaw.

Tax liabilities.

Both experts accounted for tax liabilities related to potential future sales of assets. Labenz assumed that the sales would be as of the valuation date, while Stadlerassumed the sales would be in the future, perhaps more than ten years. The Supreme Court sided with the trial court in adopting the deferred tax liability determined, presumably on a PV basis, by Stadler.

Reimbursement of expenses.

The Supreme Court sided with the trial court in disallowing any reimbursement of expenses. The court-ordered payment of judgment and question of interest. Nebraska law allowed payment of interest and installment payments, but neither was required. TheSupreme Court found no abuse of discretion in the trial court’s setting of payment terms. However, “because we have instructed the court to recalculate the fair value of BSC in accordance with this opinion, these payment terms may need to change based on the needs and abilities of both parties.” The trial court may set the payment terms with or without interest on remand.

The Supreme Court vacated in part and affirmed in part. It remanded for a rehearing on fair value.