Larry R. BLASINGAME, Plaintiff-Appellee, v. AMERICAN MATERIALS, INC., Defendant-Appellant.
Supreme Court of Tennessee, at Jackson.
April 18, 1983.
Opinion on Petition to Rehear July 18, 1983.
649 S.W.2d 659
Edwin C. Townsend, Robert N. Townsend and Edwin Townsend, Jr., Townsend & Townsend, Parsons, for plaintiff-appellee.
OPINION
FONES, Chief Justice.
We granted defendant corporation‘s Rule 11 application to review a judgment awarding plaintiff $429,000 for fraudulent breach of an oral employment contract, affirmed by the Court of Appeals. Briefly, the issues in this Court are the application of the general Statute of Frauds, the authority of the president and dominant person in the corporation to bind the corporation to an employment contract agreeing to sell a key employee a one-quarter stock interest in the corporation, the application оf the Statute of Frauds of the investment securities chapter of the UCC, and the measure of damages for fraudulent breach of an employment contract that requires valuation of a minority stock interest in a closely held corporation.
I.
Robert S. Doggett and Melvin Cornwell organized defendant corporation for the purpose of producing emulsified asphalt and concrete for sale. The charter was issued on June 17, 1967. Doggett and Cornwell and their wives were the incorporators and the original stockholders. Both Cornwell and plaintiff had worked for other corporations that had been dominated by Doggett. Plaintiff had learned how to manufacture emulsified asphalt while wоrking for several of those corporations and testified that only fifteen or twenty persons in Tennessee knew how to make emulsified asphalt.
In its early days, defendant corporation purchased asphalt from other sources before it acquired its own manufacturing facilities. In anticipation of producing its own asphalt, Doggett and Cornwell decided to seek out plaintiff to be in charge of that operation, and Cornwell made the first contact with plaintiff offering that employment. Doggett died before this suit was brought so that the only direct testimony about the oral employment contract came from Cornwell and Blasingame.
In July 1969, when defendant corporation made its offer tо plaintiff, he was working as a truck driver in Tupelo, Mississippi, earning, according to plaintiff, $275 to $325 per week. His response to the initial contract was that he would require stock in the corporation to leave Mississippi and move to Decatur County, Tennessee. Cornwell told him that he would have to take that up with Doggett. A meeting was arranged at Doggett‘s home in Franklin, Tennessee, and the contract of employment was consummated on that occasion. Plaintiff‘s version was that he was to receive a salary, an annual bonus of five percent of gross profit or seven or eight percent of net profit, whichever was greater, and that he would be allowed to purchase 300 shares of stock in the corporation for $25,000 which could be paid for out of the annual bonuses he would receive. The 300 shares would constitute one-fourth of the stock of the corporation. The other stockholders would be Doggett, Cornwell, and Jere Fly, each owning 300 shares with their respective spouses, or a one-quarter interest in each family block of stock. Plaintiff was asked to accept a beginning salary of $150 per week. Plaintiff accepted the offer, moved his family to Parsons, Tennessee, and worked for defendant corporation until October 13, 1975.
Robert S. Doggett
River Circle Farm, Sneed Road
Franklin, Tennessee 37064
May 2, 1973
Dear Larry:
Re: Your Receiving Stock in American Materials, Inc.
My ideas about this have not changed and I would welcome you as a stockholder. Of course, stock secured could not exceed 300 shares (which is the amount of blocks of stock owned by present stockholders). I would only agree that your stock would be non-voting stock (non-voting until at such time as the corporation is out of debt to the point to which it is not necessary for any of the stockholders to personally endorsе for the corporation to secure operating capital). Such stock secured on a book value basis and as above stated not to exceed 300 shares.
I am in hopes that American Materials, Inc. will prosper as it should and all concerned can realize a nice profit and income from it. There being no reason it should not if all involved do their part.
Personal regards,
/s/Robert S. Doggett
RSD:rl
Cornwell testified that Doggett told him that the letter he wrote plaintiff was not worth the paper it was written on and that he wrote it to pacify plaintiff.
In May 1974, Doggett brought Doyle Vaughn into the corporation as General Manager and Vaughn acquired 300 shares of stock for $25,000. Plaintiff again became concerned about his stock and his position in the corporation, as Vaughn was superior to him in the day-to-day operation of the corporation.
On October 13, 1975, plaintiff went to Doggett‘s home in Franklin, Tennessee, asked about his stock, and Doggett responded that he was sorry, but that “things had not worked out between us.” Plaintiff gave notice that he would resign in thirty days, but later that same day upon his return to Parsons he learned that Doggett had fired him.
Plaintiff returned to Mississippi and started his own asphalt business. He acknowledged at trial that he had been making preparation to go into business for himself for several months before the October 1975 confrontation with Doggett. Doggett died September 1, 1976. Plaintiff filed this suit on January 21, 1977, and the case wаs tried on June 15 and 16, 1978.
The learned chancellor rendered written findings, dated November 10, 1978, as follows:
- (1) That plaintiff carried the burden of proof, “as to the offer extended to him prior to his acceptance of his involvement with defendant corporation“;
- (2) That Doggett ruled the corporation with an iron hand and “they perpetrated a fraud on plaintiff, specifically mention-
(3) Denied plaintiff‘s claim for a bonus based upon a percentage of earnings but held that plaintiff was entitled to the same bonuses that other stockholders had received, “and this will continue to this date“;
(4) That plaintiff was entitled tо the actual value of 300 shares of defendant‘s stock, less a set-off of $25,000, the purchase price of the stock, none of which had ever been paid by plaintiff; and
(5) Expressly denied the remedy of specific performance prayed for in plaintiff‘s complaint.
In response to requests for clarification of the findings dated November 10, 1978, the chancellor ruled (1) instead of the actual value of 300 shares, plaintiff was entitled to the actual value of twenty-five percent of American Materials, Incorporated, as of November 10, 1978,1 and (2) plaintiff was entitled to the same bonuses that other stockholders were paid, only through calendar year 1975, the year plaintiff was terminated. A reference to the clerk and master was ordered to determine the value of twenty-five percent of the corporation as of November 10, 1978, and the amount of bonus due plaintiff through calendar year 1975.
The master found that the value of twenty-five percent of defendant corporation as of November 10, 1978, was $324,988 less the $25,000 purchase price; and that stockholders had received a total of $22,000 through calendar year 1975 while plaintiff had received only $18,000. Three CPA‘s testified for plaintiff that the value of twenty-five percent of defendant corporation was $672,500, $657,572, and $660,419.68, respectively. The CPA called by defendant calculated the value of twenty-five percent of defendant corporation by three different methods resulting in sums of $115,350, $127,033, and $165,670. The master‘s finding was arrived at by averaging the highest opinion value of $672,500 and the lowest of $115,350, to which was applied a 17.5% discount because of the limited marketability of a minority interest in a closely held corporation. The master reported plaintiff entitled to a judgment in the sum of $303,938.
Both parties filed exceptions to the master‘s report. The chancellor held that it was improper to arrive at the actual value of the stock of defendant corporation by averaging the expert testimony. He held that the “preponderance of the evidence rule applied,” and found the actual value of “300 shаres of stock to be $600,000 as of November 10, 1978.” The chancellor applied a 25% minority interest discount, deducted the purchase price, added the $4,000 bonus due, and rendered judgment for plaintiff in the sum of $429,000.
A majority of the Court of Appeals affirmed.
II.
The threshold issue in this Court is whether enforcement of the alleged oral employment contract, which clearly was not to be performed in one year, was barred by the Statute of Frauds,
The chancery court and the Court of Appeals have concurred in factual findings, both implicitly and explicitly, that throughout the relevant time period, July 1969 to October 1975, plaintiff was led to believe that the oral employment contract he made with defendant corporation would be honored; that in reliance thereon, plaintiff proceeded tо perform his part of the bargain; and that in doing so, he so altered his position as to suffer an unconscionable loss if the corporation was allowed to rely upon the Statute of Frauds. There is material evidence in this record to support those concurrent factual findings and they are binding in this Court.
Justice Burnett, writing for the Court, articulated the controlling principle as follows:
“This doctrine of partial performance to take the verbal contract out of the operation of the Statute of Frauds is рurely an equitable doctrine and is a judicial interpretation of the acts of the parties to prevent frauds. The acts of the appellant relied on as partial performance had been done by him in pursuance to the averred contract and agreement and are clearly referable thereto. ‘The plaintiff must be able to show such acts and conduct of the defendant as the court would hold to amount to a representation that he proposed to stand by his agreement and not avail himself of the statute to escape its performance; and also that the plaintiff, in reliance on this representation, has proceeded, either in рerformance or pursuance of his contract, so far to alter his position as to incur an unjust and unconscious injury and loss, in case the defendant is permitted after all to rely upon the statutory defense.’ 49 Am. Jur., Sec. 427, page 733. We think this quotation fairly sums up the obligation of the complainant in the instant case and that by the averments of the bill the complainant has met these obligations.” 194 Tenn. at 137, 250 S.W.2d at 48.
We hold that doctrine applicable to this case and that defendant will not be heard to invoke the Statute of Frauds to prevent enforcement of the oral employment contract which the lower courts have concurrently found that plaintiff has established by the proof.
III.
Next, defendant insists that thе Statute of Frauds, set out in
In Kenney v. Porter, 557 S.W.2d 589 (Tex.Civ.App.1977), the defendant sought to rely upon the Statute of Frauds in Article 8, U.C.C., in resisting an oral contract to sell stock in a closely held corporation. The Texas Court said that it was a question оf fact whether the stock of a corporation was dealt in upon securities exchanges or commonly recognized as a medium for investment, or otherwise came within the definition of a security; that it was incumbent upon the party relying upon Article 8 of the U.C.C. to produce evidence sufficient to satisfy the definitional requirement of section 8-102 as a prerequisite to its application. See also Zamore v. Whitten, 395 A.2d 435 (Me.1978) and Rhode Island Hospital v. Collins, 117 R.I. 535, 368 A.2d 1225 (1977) where stock in closely held corporations was denied classification as a “security” because it was not dealt in by securities exchanges or commonly recognized as a medium for investment.
As heretofore indicated, the history of defendant corporation‘s stock and the restriction upon its sale in the by-laws revealed in this record upon other issues clearly rendered it impossible for defendant to show that its stock was dealt in by securities exchanges or was commonly recognized as a medium for investment.
IV.
Defendant contends that Doggett, as president, could not bind the corporation to a contract to issue stock to a third party without the approval of the Board of Directors and that such approval was not given.
In July 1969, when Doggett and plaintiff negotiated the oral employment contract between plaintiff and the corporation, the corporation had issued only 600 shares of its stock, 300 to Doggett and his wife and 300 to Cornwell and his wifе. The minute book of the corporation contains minutes of an organizational meeting held on June 21, 1969, reflecting those four individuals as subscribers to its stock. The next minutes record a meeting of stockholders in October 1970. No directors were elected at either of those meetings. Cornwell testified that the four stockholders were directors, but he did not testify as to when they were elected. It is clear that in July 1969, Doggett and Cornwell were conducting all of the business of the corporation either with their wives’ knowledge or their acquiescence. Further, the record supports and the lower courts have concurred in a finding that Doggett, not only in July 1969, but throughout his lifetime, exercised absolute authority over the affairs of defendant corporation and his actions and decisions were never questioned, altered, or rejected by its Board of Directors. The contention that Doggett did not have the requisite actual or apparent authority to bind this corporation at all
V.
Defendant has raised a number of issues with respect to the damages awarded for the value of plaintiff‘s stock interest.
Defendant asserts that it was error to award plaintiff a twenty-five percent stock interest, that if he was entitled to any award the evidence supported only an award of 300 shares. Further, defendant points out that in October 1975, when plaintiff was terminated, the corporation had issued an outstanding 1,500 shares of stock, and therefore plaintiff‘s 300 shares would represent 16.6% of the corporate stock. The short answer to this contention is that while the preponderance of the evidence only supports an award of 300 shares, there is a concurrent factual finding that plaintiff was promised and is entitled to a twenty-five percent interest in the corporation, and that this Court cannot disturb that finding.
Defendant insists that the method of valuation used by plaintiff‘s expert witnesses was erroneous and resulted in an excessive valuation of plaintiff‘s stock interest. Defendant points to the fact that all three of plaintiff‘s experts used only one method of valuation, called either the Earnings Value Method or Capitalization of Earnings Method, and that only the earnings for 1978, the corporation‘s best earnings year, were considered. By that method and the use of the corporation‘s best year, each of plaintiff‘s experts valued plaintiff‘s stock interest as being within the narrow range from $657,572 to $672,500. Our research convinces us that the majority of jurisdictions require at least the use of three years as an appropriate minimum period to validate the Earnings Value Method; the traditionаl period is five years, yet for some corporations the appropriate period might even be as many as ten years. See, e.g., Piemonte v. New Boston Garden Corp., 377 Mass. 719, 387 N.E.2d 1145 (1979); Universal City Studios, Inc. v. Francis I. duPont & Co., 334 A.2d 216 (Del.1975); Application of Delaware Racing Association, 42 Del.Ch. 406, 213 A.2d 203 (Del.1965); Sporborg v. City Specialty Stores, 35 Del.Ch. 560, 123 A.2d 121 (1956). We hold that any valuation of earnings that does not take into consideration a minimum of three years corporate earnings experience should be rejected, unless the expert opinion clearly and convincingly establishes the validity of a lesser period.
The basic rule prescribing the measure of damages for fraud is that the injured party should be compensated for the actual injuries sustained by placing him or her in the same position that he or she would have occupied had the wrongdoer performed and the fraud not оccurred. See, e.g., Conover v. Baker, 134 Vt. 466, 365 A.2d 264 (1976); Daniels v. Coleman, 253 S.C. 218, 169 S.E.2d 593 (1969); Harsche v. Czyz, 157 Neb. 699, 61 N.W.2d 265 (1953). Applying that rule to this case, it is our opinion that plaintiff stood in the same position on October 13, 1975, as any minority stockholder entitled to dissent and to receive the fair value of his or her shares under the circumstances set forth in
“It appears, as a matter of general law, that there are three primary methods used by courts in determining the fair value of shares of dissenting stockholders. These three methods are the market value method, the asset value method, and the investment or earnings value method. The market value method establishes the value of the share on the basis of the price for which a share is selling or could be sold to a willing buyer. This method is most reliable where there is an established market for the stock. The asset value method looks to the net assets of the corporation valued as a ‘going concern‘, each share having a pro rata value of the net assets. The net assets value depends on the real worth of the assets as determined by physical appraisals, accurate inventories, and realistic allowances for depreciation and obsolescence. The investment value method relates to the earning capacity of the corporation and involves an attempt to predict its future income based primarily on its previous earnings record. Dividends paid by the corporation are cоnsidered in its investment value. Generally, all the elements involved in these methods are considered in determining the value of the dissenter‘s stock. 19 Am.Jur.2d Corporations, Sec. 518, Anno., 38 A.L.R.2d 442; N., Valuation of Dissenter‘s Stock, 79 Harv.L.Rev. 1453 (1966); N., Elements in Valuation of Corporate Stock, 55 Mich.L.Rev. 689 (1957).”
Id. at 254.
In Brown, North Dakota adopted the Delaware rule requiring that all three methods be used in determining the fair value of a dissenter‘s shares, assigning such weight to each method as may be appropriate considering the type of business, the objectives of the corporation, and other relevant factors.
In Brown, the Supreme Court of North Dakota, in assigning the percentage of weight to be given each of the three valuation methods discussed guidelines to be considered as follows:
“Normally, where there is an established market for the stock of a corporation the market price is given great weight. In other cases where there is no reliable market and none can be reconstructed, market price is not considered at all. However, as to the QB & R stock, there has been a limited market such that we can properly reconstruct a realistic market price for a share of QB & R stock. Application of Delaware Racing Association, [42 Del.Ch. 406, 213 A.2d 203 (Del. 1965)]; Vought v. Republic-Franklin Insurance Co., [117 Ohio App. 389, 192 N.E.2d 332 (1962)]. We have assigned a weight of 50% to the asset value of Q B & R. Normally, a higher value is assigned only in cases where the primary purpose of the corporation is to hold assets, such as real estate, for the purpоse of allowing them to appreciate in value. Swanton v. State Guaranty Corporation, 42 Del.Ch. 477, 215 A.2d 242 (Ch.1965); In re General Realty & Utilities Corporation, 29 Del.Ch. 480, 52 A.2d 6 (Ch.1947). In other words, assets are weighed more heavily when they are held for appreciation purposes rather than for commercial retail or wholesale purposes designed to generate earnings. Here the assets of Q B & R primarily consisted of inventories for sale and the necessary buildings and equipment to carry out this business purpose. The inventories held by Q B & R would depreciate in value rather than appreciate but the value of the lots and building is substantial in relation to the inventories and will likely appreciate in value. We have assigned a weight of 25% to the investment or earnings value of Q B & R. Normally, in a commercial business, earnings are given great weight as the primary purpose of the business is to generate earnings and not to hold assets that will appreciate in value. Sporborg v. City Specialty Stores, [35 Del.Chan. 560, 123 A.2d 121 (1956)]; Felder v. Anderson, Clayton & Co., 39 Del.Ch. 76, 159 A.2d 278 (Ch.1960). QB & R was such a business, whose primary purpose was to generate
earnings for its shareholders. The fact that Q B & R has failed in the past several years to generate such earnings does not mean that earnings are not an important part of the value of Q B & R stock. In re Olivetti Underwood Corp., 246 A.2d 800 (Del.Supr.1968); Application of Delaware Racing Association, supra. However, after Hedahl‘s had purchased control, a new board of directors was elected in December 1967. This resulted in new, and, we believe, improved management of Q B & R. Although earnings should ordinarily weigh heavily in determining the true value of the stock in a commercial corporation, we believe, under the circumstances, it is proper to give less weight in this case. Accordingly, we have determined that the ‘fair value’ of a share of Q B & R stock as of March 8, 1968, is $138.65 per share.
| Value | x | Weight | = | Result |
|---|---|---|---|---|
| Asset $242.81 | x | 50% | = | $121.40 |
| Market 69.00 | x | 25% | = | 17.25 |
| Earnings 0.00 | x | 25% | = | 0.00 |
| Total Value Per Share | $138.65” | |||
Id. at 259.
There are numerous other factors that expert witnesses may deem relevant on the question of the weight to be given each of the three methods, but the courts must make the final determination of the appropriate weight to be given each method as well as the ultimate value of the stock interest.
We adopt the Delaware rule requiring the use of all three methods in determining the fair value of a dissenting minority stockholder‘s shares.
The chancellor and the Court of Appeals have erred as a matter of law in their determination that plaintiff was entitled to have his stock interest valued as of November 10, 1978. While defendants have only obliquely raised this issue, it is an error of law of the character that we must address pursuant to T.R.A.P. 13(b).
Defendant corporation terminated plaintiff‘s employment on October 13, 1975. That same day, plaintiff learned that his oral employment contract had been breached, and on that same day, his cause of action for fraud accrued. Reason, logic, and the general principles of the law of damages dictate that the property that is the subject of the fraud must be valued as of the date the fraudulent representations were made or the date of the discovery of the fraud and accrual of thе cause of action. See 37 Am.Jur.2d Fraud and Deceit § 365, “Time as of which damages and property value determined” (1968). Obviously, it would be inappropriate and would render plaintiff‘s suit worthless if we applied the date the fraudulent representations were made. It is just as obvious that the date of November 10, 1978, has no efficacy whatsoever as the appropriate time to value the stock in defendant corporation which has been denied plaintiff. The effect of the chancellor‘s ruling was to give plaintiff specific performance as of October 13, 1975, and to assume that plaintiff would have held that minority stock interest until the court rendered its findings. Plaintiff did not tender the purchase price of the stock on October 13, 1975, or at any other time, and there exists no valid theory upon which he can sustain November 10, 1978, as the appropriate date for valuing his stock interest. In addition, as we have indicated, on the day plaintiff‘s services were terminated by the corporation, his interests and those of the majority stockholders of the corporation became adverse and antagonistic, and his position parallelled that of a minority stockholder entitled to the benefits of
“(5) The fair value of shares shall be determined as of the day prior to the date on which the vote was taken approving the proposed corporate action, excluding any аppreciation or depreciation of shares in anticipation of such corporate action.”
The date the defendant corporation took the action that gave rise to plaintiff‘s right to receive the fair value of his minority stock interest was October 13, 1975. There is no reason to use the day prior because the action of the corporation adverse to plain-
We affirm the judgment of the Court of Appeals holding defendant corporation liable to plaintiff for a stock interest equivalent to one-fourth of the corporation‘s value and affirm the award of $4,000 as the correct sum due plaintiff for unpaid bonuses. The award of $425,000 is set aside and this cause is remanded to the trial court for appropriate proceedings to determine the value of a stock interest equal to one-fourth of the value of the corporation as of October 13, 1975, consistent with the principles announced herein. Upon determination of the value of the stock interest awarded plaintiff, judgment shall be entered for that sum, less $25,000, plus $4,000, and the net award to plaintiff shall bear interest from the date of the filing of the complaint, at the statutory rates that prevailed, from time-to-time, for computing interest оn judgments.
Costs in this Court are adjudged against plaintiff.
COOPER, BROCK, HARBISON and DROWOTA, JJ., concur.
OPINION ON PETITION TO REHEAR
FONES, Chief Justice.
Plaintiff has filed a petition to rehear to which we find it appropriate to respond.
First, plaintiff says we have rejected the use of any period less than three years in determining the earnings value to be assigned in arriving at the value of plaintiff‘s stock interest in defendant, American Materials. We have made no judgment whatever with respect to the merit or lack of merit of any of the expert testimony presented at the trial of this case. If the expert testimony had been such as to satisfy the requirements of the weighted average method1, as plaintiff seems to suggest, it was unacceptable because the valuation date used was November 10, 1978, and the stock should have been valued as of October 13, 1975. We have simply enunciated a guideline that says that the use of less than a three year corporate earnings experience is suspect, and should be rejected unless the expert opinion clearly and convincingly establishes the validity of a lesser period. That discretion remains open to the trial judge in this case.
Second, plaintiff questions whether the Court has directed the trial court to use the formula on page nineteen of the opinion, in assessing the weight to be given to the three values in the weighted average method. The answer is no. The percentages assigned there were the results reached by the Brown court, after weighing the expert testimony and the factors discussed in the quotation that precedes the mathematical computation. The Brown case merely provided an example of the use of the formula. There is no rigidity to the weighted average method in the proportion to be assigned the three value factors, and, of course, they may vary widely from one corporation to another.
Obviously, there are very significant differences between the Q B & R stock in Brown and the stock of American Materials. It appears from the expert testimony heretofore adduced that earnings are more significant in the instant case than in Brown and assets are less significant. The experts testifying in this case have all recognizеd that American Materials stock should be discounted for lack of marketability of a minority interest. The master applied a seventeen and one-half percent discount and the chancellor a twenty-five percent discount. Under the weighted average
Finally, plaintiff says we should not have adjudged all of the costs against plaintiff. We agree that that was a mistake. The costs incurred in the Supreme Court only, are adjudged seventy-five percent against defendant and twenty-five percent against plaintiff, the costs in the other courts to remain as adjudged, and costs on remand to be adjudged by the trial court.
Otherwise, the petition to rehear is denied.
COOPER, BROCK, HARBISON and DROWOTA, JJ., concur.