Herremans v. Fedo (In re Herremans), 2023

This case in Bankruptcy Court involved a court determination of the fair value of a 50% interest in a Ponderosa restaurant in Michigan. The two 50% owners who founded the restaurant 27 years ago had a falling out and set about using litigation to wrest control of the restaurant from each other. Eventually, they ended up turning to the court to determine what happens next to the Ponderosa restaurant. After a trial, the court ruled that Randy Fedo “willfully oppressed the rights of Craig Herremans (herein “Herremans,” the “Plaintiff,” or the “Debtor”) as a shareholder in Ran-Starr, Inc. when he used corporate funds to pay personal attorney’s fees incurred in state court litigation against Herremans. For his part, the court found that Herremans also willfully oppressed Fedo’s rights as a shareholder in Ran-Starr, Inc. when he unilaterally withdrew $15,000 from a Ran-Starr bank account.”

The parties were unable to settle, so the court issued its opinion and findings. The court issued a prior opinion as to the liability issues, summarized as follows.

Summary of liabilities findings of fact. 

Two events significantly cooled the relationship of the parties. The second of these events occurred when the Herremans filed for Chapter 12 bankruptcy. “Neither Ran-Starr nor Fedo was listed on the bankruptcy schedules or given notice of the bankruptcy case, notwithstanding the fact that Fedo was a creditor as a result of a loan to Craig Herremans.” The loan was secured by Herremans’ interest in Ran-Star. Fedo learned that Herremans had also pledged that interest to Chemical Bank. Fedo’s claim was finally allowed as fully secured in the amount of $185,000. The court settlement also gave a 60% interest in the proceeds of the sale of the stock to Fedo and 40% to Chemical Bank. The court affirmed the Herremans’ Chapter 12 plan in February 2016 and incorporated the above settlement.

Both parties committed a series of bad acts subsequent to the Chapter 12 affirmation. The Herremans ultimately defaulted on their obligations to Fedo under the Chapter 12 plan. “Fedo then filed a lawsuit in the Oceana County Circuit Court to liquidate Herremans’ interest in the Ran-Starr stock.” The parties generally agreed that the state court judgment of $184,920.41 would be stayed until this court entered its judgment.

Summary of liability conclusions of law. 

Editor’s note: Please refer to the opinion as to this section, which does not directly relate to the valuation issues we are most interested in. 

Findings of fact and conclusions of law regarding damages and remedies. 

Remedy for shareholder oppression. Generally, the court under Michigan law could call for dissolution and sale of the assets or purchase of the shares of one shareholder by the other shareholder. The court here believed the appropriate remedy for Fedo’s oppressive conduct was to order Fedo to purchase Herremans’ Ran-Starr shares at “fair value.” Though both parties have committed oppressive conduct, Fedo was in control of the restaurant and was operating it. Further, Herremans was currently a Chapter 12 debtor and did not have the financial ability to operate the restaurant.

Legal standard for determining ‘fair value.’ In Michigan, fair market value is not synonymous with fair value. “[A]pplication of discounts in the valuation analysis is neither precluded nor required. Instead, the court is charged with fashioning an ‘appropriate’ remedy for the oppression that occurred, ‘which may include an order to purchase shares at “fair value” or at any other value that the court concludes is appropriate under the totality of the circumstances.’”

At least one prior Michigan opinion had implicitly endorsed valuing the oppressed party’s interest as of the date just before the oppressive conduct began. (Moore v. Carney) 

Summary of trial evidence pertaining to valuation.

The evidence at trial as to the value of Ran-Star was limited. Both parties testified as to their general beliefs as to the value of Ran Star. Their assessments were mostly polar opposites. Herremans believed that Ponderosa was a “dying breed” and, thus, the bulk of the value is in the real estate. This view was bolstered by financial statements of Ran-Star showing positive but not significant income in recent years.

The parties also commissioned a valuation by Paul A. Wassink, CPA, of The CPA Group PC. It was a proposed exhibit by both parties and used by both to question witnesses, but Wassink was not called to testify and his report was not entered into evidence. The other evidence was mostly related to the value of assets of the company, primarily the testimony of Stacey L. Broersma, who appraised the real estate Ran-Star held. Her opinion was that the real estate had a value of $665,000 as of Feb. 22, 2018. Her value excluded any furniture, fixtures, and equipment (FFE) and did not include any going-concern value for the business. No competing or contravening evidence to her appraisal was offered. The other evidence of asset value admitted was limited to select Ran-Star balance sheets and a sampling of monthly bank account statements.

The positions of the parties.

The parties’ concept of fair value was vastly different. Herremans focused on the value of the real estate. He argued for the adoption of the real estate value (with estimated value adjustment of 5% per year) plus additional value for other assets such as FFE and cash, which was inflated at the suggested valuation date by the receipt of PPP funds in that month. All of this resulted in a value of $1.4 million, or $700,000, for Herremans’ interest.

Fedo believed the value of Herremans’ interest should be the “fair market value” established at the state court foreclosure sale in December 2022 in the amount of $150,000, which was the winning bid Fedo made.

The court determined that neither side’s assessment of fair value was adequate. “[T]he most credible evidence before the court regarding the value of Ran-Starr’s real estate is the Broersma appraisal, which is dated February 22, 2018. Under the circumstances, the court believes that is an appropriate date on which to value the real estate.” Non-real estate assets will be valued using the corporate balance sheet as of Dec. 31, 2017. The court rejected the valuation attempts of both parties as not being representative of the fair value.

The court’s calculation of fair value.

The evidence pointed to a restaurant with fading popularity that had not paid dividends since 2015. Thus, the court believed an asset approach was the most appropriate method for valuing the Ran-Star stock. The court started with the Dec. 31, 2017, balance sheet. The various entries will be adjusted based on evidence to represent fair value more accurately.

Assets. 

Real estate. The Broersma appraisal value of $665,000 was used.

Cash. The balance sheet amount of $34,094 was used.

Accounts receivable. Valued at zero.

Inventory. The balance sheet amount for inventory at the 2017 date was $4,803 and the same for the 2016 and 2015 balance sheets. Obviously, that cannot be right, the court noted, but, having no other evidence, it adopted that amount.

FFE. The Wassink valuation, though not admitted, was used at trial as noted above. It estimated the value of the FFE at 28% of the book value. Given the evidence available, that amount of $28,000 most closely represented the economic value of the FFE.

Vehicles. “There is … no evidence from which the court could determine their fair value. Accordingly, the court has valued the category of ‘Vehicles’ at zero.”

Additional adjustments for the parties’ oppressive conduct. 

As noted in the opinion, both parties committed oppressive conduct. “[B]ut for the oppressive actions of both Fedo using $14,658 for personal legal fees and Herremans withdrawing $15,000 in cash for his personal benefit, Ran-Starr’s assets would have included an additional $29,658 as of December 31, 2017. The court will add this amount into its valuation.”

Liabilities. The court discussed some smaller liabilities, not amounting to any significant amount.

Notes payable to Fedo. The court noted that the book value of these notes was $77,246 and had been that amount since 2006. That was the correct amount, since interest only had been paid on those notes.

Conclusion. 

The court found the fair value of Ran-Star to be $662,948, with Herremans’ 50% valued at $331,474. The sale will be consummated on Aug. 31, 2023.

Editor’s note: This case demonstrated the need for clear and sufficient evidence. The parties did not look forward to the probability that the court would determine the fair value, and, as such, they presented primarily advocacy evidence that did not aid the court in determining the fair value. While a valuation was performed, it was not entered into evidence, further impeding the court in its effort to determine the fair value of the business.