Shaffer, K. v. Visaggio's, Inc.

J-A12039-15

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37

KEITH A. SHAFFER, IN THE SUPERIOR COURT OF

PENNSYLVANIA

Appellee

v.

VISAGGIO’S, INC.,

Appellant No. 1959 MDA 2014

Appeal from the Order entered October 20, 2014,

in the Court of Common Pleas of Cumberland County,

Civil Division, at No(s): 2009-02122

BEFORE: BOWES, DONOHUE, and ALLEN, JJ.

MEMORANDUM BY ALLEN, J.: FILED JULY 29, 2015

Visaggio’s, Inc., (“Appellant”), appeals from the trial court’s order

adopting the appraiser’s report and recommendations regarding the value of

Appellant’s business and of the 25% share of stock belonging to dissenting

stockholder, Keith Shaffer, (“Shaffer”). We affirm.

In its order adopting the report and recommendations from Appraiser

William A. Duncan, (“Appraiser Duncan”), the trial court set forth the

following background relative to this action:

[Appellant] was a corporation incorporated under the laws

of Pennsylvania in 1980. At formation, [Appellant] had three

shareholders: Rosemary Lumadue who held 25% of

[Appellant’s] shares, William Lumadue who held 25% of

[Appellant’s] shares, [hereinafter “the Lumadues,”] and

[Shaffer], who held 50% of [Appellant’s] shares. In 1981,

[Shaffer] sold half of his interest in [Appellant] to the Lumadues,

thereby resulting in [the Lumadues] holding 37.5% each and

[Shaffer] holding 25% of [Appellant]. In 1981, due to

disagreements between the Lumadues and [Shaffer], [Shaffer]

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ended participation in the business, but retained his 25%

ownership interest. The situation remained as it was until 2008,

when [Shaffer] was notified of an impending shareholder's

meeting to consider a merger of [Appellant] with and into

Visaggio's Acquisition, Inc. (Acquisition) [hereinafter collectively

“Appellant”]. [Shaffer] received a proxy statement, which he

returned indicating that he would be voting against the merger.

A meeting was held in 2008 and the merger was approved.

Pursuant to 15 Pa.C.S.A. § 1575, a notice was mailed to

[Shaffer] informing him that as a dissenting shareholder he is

entitled to demand payment for the fair value of his stock.

[Shaffer] made such a demand, to which [Appellant] estimated

[Shaffer’s] ownership interest to have a fair value of $35,000.

[Shaffer] refused the offer, believing his shares to be worth

$500,000, which was subsequently refused by [Appellant].

[Shaffer] then filed the instant action under 15 Pa.C.S.A. § 1579

on April 17, 2009.

At the time of merger, [Appellant’s] real property consisted

of 5 acres of land and other improvements such as the

restaurant, hotel, garage, and banquet facilities. The hotel was

not franchised and lacked various amenities as well as

connection to water and sewer services. The restaurant had

various pieces of equipment related to the business. An action

having been filed under 15 Pa.C.S.A. § 1579, this court

appointed the services of a statutorily-permitted appraiser[,

Appraiser Duncan,] to conduct the valuation of [Appellant].

Following the filing of cross pre-hearing memoranda, hearings

before [Appraiser Duncan], and consideration of post-hearing

memoranda, [Appraiser Duncan] filed his report on November 1,

2010. [Shaffer] then filed an appeal from the report of the

appraiser, citing both factual and legal errors. [Thereafter,

Appellant] filed their exceptions to the report of [Appraiser

Duncan], also alleging both factual and legal errors.

Subsequently, it was determined that a preliminary objection in

the form of insufficient service remained outstanding, raising the

question of whether the Court had jurisdiction over the matter.

We sustained the preliminary objection.

Following proper service, the parties stipulated that the

actions of the Court until that point, assigning an appraiser who

held hearings and filed a report, would stand as the record

rather than repeat the process which would only further delay

the matter and increase costs. In summation, [Appraiser

Duncan] has heard the evidence and filed his report and both

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parties have filed their exceptions and/or appeal arguing against

the adoption of the report. The Court must now determine

whether the report should be adopted or, in the alternative,

whether it should adopt one of the parties’ valuation or its own

valuation.

[] [Appraiser Duncan’s] findings are exceptionally simple

to declare. [Appraiser Duncan] found that [Appellant’s] real

estate valuation totaled $1,800,000, less a debt of $1,600,000,

while the business equipment totaled $325,000. This

determination included the following for the real estate

valuation, "[t]he hotel rooms and liquor license should be

considered but not to the extent promoted by [Shaffer’s]

appraiser for the reasons presented by the Lumadues [sic] [who

highlighted that the comparable sales used by Shaffer’s

appraiser involved franchised hotels with upgraded amenities

and accommodations]." [Appraiser Duncan’s Report at 3].

Further, the Appraiser indicated that for the equipment value,

"insurance coverages were considered together with the

Appraiser’s view of the premises. The equipment is used, readily

available, not unique and in some cases, very dated." Id. The

total valuation of [Appellant] at the time of merger was therefore

$525,000, making [Shaffer’s] 25% share worth $131,250.

[] Neither party … wishes the Court to adopt [Appraiser

Duncan’s] Report as it was presented. To that end, [Appellant]

continues to maintain that the value of the corporation based on

the going concern as of the date of merger was $0 due to the

value of the property, standing debt, back pay [of $1,300,000]

owed to [the Lumadues] upon demand, and unpaid pension fund

for non-shareholder management employees, [John Lumadue

and William Lumadue, Jr., hereinafter “the Lumadue children,”]

which have not been claimed in approximately three decades].

This would indicate that [Shaffer’s] 25% share would also be $0.

[Shaffer], meanwhile, argues that the value of the

corporation should either be $799,461 or "between $3,000,000

and $5,000,000" based on admissions by a representative of

[Appellant]. ([Shaffer’s Exceptions] at 2). This would provide

[Shaffer’s] 25% share as either $199,865 or $750,000 to

$1,250,000, respectively.

[] [Appellant] additionally claims that [Appraiser Duncan]

failed to consider both the pension fund and back pay. However,

[Appraiser Duncan] noted that the back pay did not appear

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under [Appellant’s] reports until 2007, only one year prior to the

merger proposal. Obviously the Appraiser considered this

evidence; however it is equally clear that he did not believe it to

be substantial enough to integrate into his calculations.

[Appraiser Duncan] stated he used the insurance values as

the basis and then his own observations that the equipment was

"used, readily available, not unique and in some cases, very

dated," to reduce the value appropriately. We are satisfied that

the value of the restaurant equipment is based on competent

evidence.

In the alternative, [Shaffer] is asserting that the Appraiser

failed to properly accept [Appellant’s] admission that the

business is worth between $3,000,000 and $5,000,000.

[Shaffer] would have us determine the value of a company

based on the wishful thinking of the president of the corporation

to the exclusion of all of the testimony provided by both parties’

expert witnesses and [Appraiser Duncan’s] conclusion. We will

not do so. Instead, we note that the conclusions of [Appraiser

Duncan] bear a reasonable relationship to the values established

by the parties’ experts and is clearly supported by substantial

evidence.

For the foregoing reasons, [Appraiser Duncan’s] Report is

adopted. The value of [Appellant] at the time of merger is

deemed to be $525,000, with [Shaffer’s] 25% interest having a

value of $131,250.

Trial Court Opinion, 10/20/14, at 1-7 (some citations to the record omitted).

Appellant timely appealed from the trial court’s order adopting

Appraiser Duncan’s report and recommendations. The trial court did not

direct compliance with Pa.R.A.P. 1925.

Appellant presents two issues for our review:

A. Did the trial court err by adopting [Appraiser Duncan’s]

Report without substantial evidence, where [Appraiser Duncan’s]

conclusion that [Appellant’s] business equipment had a value of

$325,000 was unsupported by the record?

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B. Did the trial court err by adopting [Appraiser Duncan’s]

Report without substantial evidence, where [Appraiser Duncan’s]

failure to consider the authorized but unpaid wages to [the

Lumadues] and the unfunded pension obligation to [the

Lumadue children] was unsupported by the record?

Appellant’s Brief at 2. Appellant’s issues concern the trial court’s adoption of

Appraiser Duncan’s report and recommendations. We will address them

together.

In Pennsylvania, under 15 Pa.C.S.A. § 1579, a stockholder dissenting

to a merger may demand a valuation of the fair value of his share of stocks

at the time of the merger as follows:

§ 1579. Valuation proceedings generally

(a) General rule.--Within 60 days after the latest of:

(1) effectuation of the proposed corporate action;

(2) timely receipt of any demands for payment under section

1575 (relating to notice to demand payment); or

(3) timely receipt of any estimates pursuant to section 1578

(relating to estimate by dissenter of fair value of shares); if any

demands for payment remain unsettled, the business

corporation may file in court an application for relief requesting

that the fair value of the shares be determined by the court.

(b) Mandatory joinder of dissenters.--All dissenters,

wherever residing, whose demands have not been settled shall

be made parties to the proceeding as in an action against their

shares. A copy of the application shall be served on each such

dissenter. If a dissenter is a nonresident, the copy may be

served on him in the manner provided or prescribed by or

pursuant to 42 Pa.C.S. Ch. 53 (relating to bases of jurisdiction

and interstate and international procedure).

(c) Jurisdiction of the court.--The jurisdiction of the court

shall be plenary and exclusive. The court may appoint an

appraiser to receive evidence and recommend a decision

on the issue of fair value. The appraiser shall have such

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power and authority as may be specified in the order of

appointment or in any amendment thereof.

(d) Measure of recovery.--Each dissenter who is made a

party shall be entitled to recover the amount by which the

fair value of his shares is found to exceed the amount, if

any, previously remitted, plus interest.

(e) Effect of corporation’s failure to file application.--If the

corporation fails to file an application as provided in subsection

(a), any dissenter who made a demand and who has not already

settled his claim against the corporation may do so in the name

of the corporation at any time within 30 days after the expiration

of the 60-day period. If a dissenter does not file an application

within the 30-day period, each dissenter entitled to file an

application shall be paid the corporation’s estimate of the fair

value of the shares and no more, and may bring an action to

recover any amount not previously remitted.

15 Pa.C.S.A. § 1579 (a) – (e) (emphasis supplied).

In deciding whether to accept an appraiser’s report and

recommendations regarding the value of a dissenting stockholder’s stocks

pursuant to 15 Pa.C.S.A. § 1579, a trial court must preliminarily find that

the appraiser’s report and recommendations are supported by competent

and substantial evidence, and having found that it is, a trial court’s adoption

of an appraiser’s report and recommendations will not be disturbed absent

an abuse of discretion. In re Watt & Shand, 304 A.2d 694, 697 (Pa.

1973).

We have observed that “substantial evidence is more than a scintilla.

It means such relevant evidence as a reasonable mind might accept as

adequate to support a conclusion.” In re Glosser Bros., Inc., 555 A.2d

129, 132 (Pa. Super. 1989) (internal citation omitted). In “reject[ing] [an]

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appellant's request that we make an independent determination as to the

fair value of her shares,” we have reiterated that “‘[t]his [C]ourt does not sit

as a trier of issues of fact expecting to be persuaded that one or the other

side is more credible. That is only a task for the trial court and we would

never invade that area of the judicial process.’” Id. citing Appeal of

Connor, 283 A.2d 279, 280 (Pa. 1971).

Instantly, Appellant maintains that the trial court erred in adopting

Appraiser Duncan’s recommendation that Appellant’s business equipment

had a value of $325,000 dollars rather than the zero value which Appellant

had ascribed to the business equipment. Appellant posits that “[Appraiser]

Duncan’s view of the Property (like the information on insurance coverage)

was not and could not be a part of the record in this matter, as it occurred

almost two months after the record closed and was not a basis to value that

equipment.” Appellant’s Brief at 17 (emphasis in original omitted). We

disagree.

Initially, we find that Appellant waived this claim of error by failing to

object, at the earliest opportunity, to Appraiser Duncan’s request for a site

visit and for Appellant’s insurance policies. We have explained:

Our Supreme Court has frequently stressed the necessity

of raising claims at the earliest opportunity, i.e., during

the trial or hearing, so that alleged errors can be corrected

promptly, thus eliminating the possibility that an appellate

court will be required to expend time and energy reviewing

claims on which no trial ruling has been made.

Mazlo v. Kaufman, 93 A.2d 968, 969 (Pa. Super. 2002). Thus,

as a general rule, assuming there is an opportunity to do so,

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claims that have not been raised during trial may not be raised

for the first time on appeal. Id. See also Jahanshahi v. Centura

Development Co., Inc., 816 A.2d 1179, 1189 (Pa. Super. 2003)

(stating same).

Wilson v. Transport Corporation, 889 A.2d at 568, 573 (Pa. Super. 2005)

(emphasis in original).

On June 1, 2009, the trial court ordered the appointment of Appraiser

Duncan to hear Shaffer’s petition, an appointment which received no

objection from either party. See Order, 6/1/09, at 1. The lack of objection

was not surprising, given Appraiser Duncan’s noted familiarity with various

expert witnesses in the case, such that he indicated that “qualifying certain

witnesses in detail will not be necessary.” N.T., 1/13/10, at 5 and 56; N.T.,

6/4/10, at 305. Appraiser Duncan expressed that he had “been involved

with various businesses,” was the “chair of the [B]oard of [R]eview for

[Cumberland] [C]ounty,” and “usually … serves as an auditor.” N.T.,

1/13/10, at 22 and 56; N.T., 6/4/10, at 305. Appraiser Duncan observed

that “most auditors in Cumberland County kind of follow my format” in

preparing reports. N.T., 6/4/10, at 305.

Appraiser Duncan heard testimony on January 13-14, 2010, and on

June 4, 2010. On July 7, 2010, Appraiser Duncan scheduled an inspection of

Appellant’s business. On July 27, 2010, Appraiser Duncan viewed

Appellant’s business in the presence of all counsel. The record is wholly

devoid of any evidence that Appellant’s counsel ever objected to Appraiser

Duncan’s request for a site visit or for Appellant’s insurance policies

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contemporaneously with these events. Likewise, at the time of the

foregoing requests and events, Appellant’s counsel failed to assert that

Appraiser Duncan’s requests were impermissibly dehors a closed record.

Indeed, Appellant does not cite to any document setting forth such a timely

objection seeking to thwart Appraiser Duncan’s visit or his receipt of the

insurance policies. While Appellant asserts that he “raised and preserved

the issue” of Appraiser Duncan’s “incorrect valuation of [Appellant’s]

equipment” in its November 30, 2010 Exceptions to the Report of Appraiser,

(Appellant’s Brief at 10), Appellant disregards that this challenge was raised

four months following the foregoing requests, which was not Appellant’s

earliest opportunity to object. Appellant’s failure to object at the earliest

opportunity effects waiver of this claim of error.

Even absent waiver, we reject Appellant’s contention that the record

was closed when Appraiser Duncan visited Appellant, or when he requested

and reviewed Appellant’s insurance coverage. Appraiser Duncan specifically

advised the parties at the beginning of the multi-day proceedings, that he

would continue to review the materials regarding the action following the

conclusion of oral testimony. N.T., 1/13/10, at 9 (“I was appointed in June

[2009] and because of lengthy discovery I haven’t finished my job yet, but

I’d like to conclude it as quickly as possible.”). After testimony concluded on

June 4, 2010, Appraiser Duncan reiterated the active status of the action

following the hearing. Specifically, he advised the parties, “I can tell you

from listening to the testimony that each side is well lawyered but that the

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conclusion will not be what you are seeking and the conclusion will not be

what you’re offering, but beyond that I will continue to review these

statements and financials.” N.T., 6/4/14, at 398. Consonant with Appraiser

Duncan’s ongoing review, within weeks of the June 4, 2010 proceedings,

Appraiser Duncan requested, and without objection conducted, a visit to

Appellant in the presence of all counsel, following which he requested, and

likewise received without protestation, Appellant’s insurance policies. In

fact, Appraiser Duncan observed that the “value provided to the casualty

insurer of … $642,000 for [Appellant’s] business personal property,” was

within “the insurance documents submitted post-hearing,” rather than

dehors the record. Appraiser Duncan’s Report, 11/1/10, at 13 (emphasis

supplied). Accordingly, we reject Appellant’s contention that the evidentiary

record was closed, such that Appraiser Duncan’s visit to Appellant, and his

request, receipt, and review of Appellant’s insurance policies was dehors the

record.

Additionally, we are mindful that the trial court’s adoption of Appraiser

Duncan’s report and recommendations arising from the foregoing evidence

falls within the trial court’s sound discretion as the ultimate arbiter of the

admissibility of evidence. We have expressed:

When we review a trial court’s ruling on admission of

evidence, we must acknowledge that decisions on admissibility

are within the sound discretion of the trial court and will not be

overturned absent an abuse of discretion or misapplication of

law. Spino, supra at 734 (citing Rogers v. Johnson & Johnson

Products, Inc., 401 Pa.Super. 430, 585 A.2d 1004, 1007

(1990)). In addition, for a ruling on evidence to constitute

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reversible error, it must have been harmful or prejudicial to the

complaining party. Aldridge v. Edmunds, 561 Pa. 323, 333, 750

A.2d 292, 298 (2000); Pittsburgh Construction Co. v. Griffith,

834 A.2d 572, 585 (Pa. Super. 2003), appeal denied, 578 Pa.

701, 852 A.2d 313 (2004); Spino, supra at 735.

Hutchinson v. Penske Truck Leasing Co., 876 A.2d 978, 984 (Pa. Super.

2005). We have explained:

Judicial discretion requires action in conformity with law on

facts and circumstances before the trial court after hearing

and consideration. Consequently, the court abuses its

discretion if, in resolving the issue for decision, it

misapplies the law or exercises its discretion in a manner

lacking reason. Similarly, the trial court abuses its

discretion if it does not follow legal procedure.

Miller v. Sacred Heart Hosp., 753 A.2d 829, 832 (Pa. Super.

2000) (internal citations omitted).

“Where the discretion exercised by the trial court is

challenged on appeal, the party bringing the challenge

bears a heavy burden.” Paden v. Baker Concrete Constr.,

Inc., 540 Pa. 409, [412,] 658 A.2d 341, 343 (1995)

(citation omitted).

[I]t is not sufficient to persuade the appellate court that it

might have reached a different conclusion if ... charged

with the duty imposed on the court below; it is necessary

to go further and show an abuse of the discretionary

power. An abuse of discretion is not merely an error of

judgment, but if in reaching a conclusion the law is

overridden or misapplied, or the judgment exercised is

manifestly unreasonable, or the result of partiality,

prejudice, bias or ill-will, as shown by the evidence or the

record, discretion is abused.

Id. (internal quotations and citations omitted).

Bartlett v. Bradford Publishing, Inc., 885 A.2d 562, 566 (Pa.

Super. 2005).

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Lineberger v. Wyeth, 894 A.2d 141, 146 9Pa. Super. 2006) (internal

citations omitted).

Moreover, within the context of business valuations, we have

observed:

[Our] Supreme Court instructed that fair value is to be construed

as going concern value, as contrasted with liquidation value.

The court noted that there is a potentially endless list of factors

that are considered relevant to this value. The “going concern”

concept of fair value in a dissenting shareholders’ appraisal

proceeding and the many individual factors comprising it were

aptly described by the Delaware Supreme Court in Tri–

Continental Corp. v. Battye, Del., 74 A.2d 71, 76 (1950):

The basic concept of value under the appraisal is that the

stockholder is entitled to be paid for that which has been

taken from him, viz., his proportionate interest in a going

concern. By value of the stockholder’s proportionate

interest in the corporate enterprise is meant the true or

intrinsic value of his stock which has been taken by the

merger. In determining what figure represents this true or

intrinsic value, the appraiser and the courts must take into

consideration all factors and elements which might

reasonably enter into the fixing of value. Thus, market

value, asset value, dividends, earning prospects, the

nature of the enterprise and any other facts which were

known or which could be ascertained as of the date of the

merger and which throw any light on future prospects of

the merged corporation are not only pertinent to any

inquiry as to the value of the dissenting stockholders’

interest, but must be considered by the agency fixing the

value.

Id. at 72.

[Our Supreme Court] court noted that courts had properly

distilled all of these factors into three principal valuation

methods, i.e. (1) net asset value; (2) actual market value; and

(3) investment value. The court defined these valuation

methods as follows:

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Net Asset Value is the share which the stock represents in

the value of the net assets of the corporation. Such assets

include every kind of property and value, whether realty or

personalty, tangible and intangible, including good will and

the corporation’s value as a going concern.

Investment Value is an estimate of present worth in light

of past, present and prospective financial records of the

company and is obtained by capitalizing earnings. There

are two basic steps in the capitalization process:

calculation of a representative annual earnings figure, and

choice of a capitalization ratio which reflects the stability

and predictability of earnings of the particular corporation.

Market Value refers to the price at which the stock was

selling on the market prior to the action which is objected

to, disregarding any change in price due to the action.

O'Connor, 452 Pa. at 292–93 n. 7, 304 A.2d at 698 n. 7.

However, we do not read the O'Connor opinion as limiting

a trial court to a consideration of only these three valuation

methods. Id. at 291–92, 304 A.2d at 697–98. Financial analysis

has become increasingly complex with the passage of time. New

methods of valuing investments have been developed and are

generally accepted in the financial community as being reliable.

In recognition of this fact, other jurisdictions that previously

restricted a trial court to the foregoing three valuation methods

have now expanded the types of valuation information that may

be considered in a stock valuation proceeding. For example, in

Weinberger v. UOP, Inc., 457 A.2d 701 (Del.1983), the Supreme

Court of Delaware, known for its expertise in these matters,

directed that Delaware courts would no longer be bound to use

only the traditional “Delaware block” or weighted average

approach to valuation. [] The Weinberger court found this

approach too restrictive and directed that courts henceforth use

a “more liberal approach [which] must include proof of value by

any techniques or methods which are generally considered

acceptable in the financial community and otherwise admissible

in court....” Id. at 712–13.

In re Glosser Bros., 555 A.2d at 133-134.

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Here, the trial court did not err in determining that the evidence on

which Appraiser Duncan relied in valuing Appellant’s business equipment

was competent and substantial. The parties’ real estate experts visited

Appellant. N.T., 1/13/10, at 62; N.T., 6/4/10, at 346. The condition of the

property, including its business equipment, was raised during the

proceedings. Significantly, Appellant’s own counsel emphasized during his

opening statement to Appraiser Duncan that the site’s condition was one of

“the significant points that I think you’re going to hear in the dispute about

value.” N.T., 1/13/10, at 17. Specifically, Appellant’s counsel stated that

Appraiser Duncan would “hear a lot about the overall condition of the

property. The property is substantially old.” Id. at 18.

Appraiser Duncan directly questioned Shaffer’s real estate valuation

expert, Mr. William Rothman, following Mr. Rothman’s direct and cross-

examination by the parties. Id. at 89. Appraiser Duncan confirmed that, in

opining that Appellant’s real estate had a value of $1,900,000.00, Mr.

Rothman had “assigned no value to furniture and fixtures throughout the

structures[.]” Id. Appraiser Duncan specifically queried, “[s]o if I were to

come into these structures, everything vacant, it would be 1.9 [million

dollars], no tables, no chairs, no kitchen equipment?” Id. Mr. Rothman

agreed, and stated, “[r]eal estate only, yes, just the four walls.” Id. On re-

direct examination, Mr. Rothman confirmed that he had not assigned a value

to Appellant’s “liquor license … furniture, fixtures and equipment” in order

“to stay within the same constraints as in a prior appraisal done by

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[Appellant’s] appraiser.” Id. at 90-91. While the parties confined their real

estate appraisal reports to non-fixtures and non-equipment items, it does

not follow based on the jurisprudence above, that Appraiser Duncan, who

was tasked to “make a recommendation to the [trial] court as to the value of

[Shaffer’s] stock,” was confined accordingly in evaluating Appellant’s

business.

Moreover, Appellant’s business equipment was an asset listed on

Appellant’s balance sheets, and was discussed by the parties’ accounting

experts. Appellant’s accountants, Greenwalt & Company, prepared the

financial statements which were relied on by Appellant’s accounting expert,

Mr. William Boles. Greenwalt & Company’s Accountant’s Report indicated

that they had “compiled the accompanying balance sheets of [Appellant] as

of December 31, 2008 and 2007.” Accountant’s Report, 5/19/09, at 1. The

enclosed balance sheets for “December 31, 2008 and 2007” listed

Appellant’s “Assets,” and included $505,537 for “Equipment” for 2008 and

for 2007, respectively. Id. at 2. In the “Summary of Significant Accounting

Policies,” the Accountant’s Report explained that “[p]roperty and equipment

are presented at cost, and depreciated on the straight-line method based on

the following estimated useful lives … Equipment … 10 to 15 years. Items

sold or retired are removed from cost and accumulated depreciation and any

resulting gains or losses are recognized in current operations.” Id. at 8. A

March 6, 2008 Accountant’s Report enclosed balance sheets for “December

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31, 2007 and 2006,” and listed Equipment at $505,537 and at $503,913,

respectively, for 2007 and 2006. Accountant’s Report, 3/6/08, at 2.

Additionally, in his opening statement, Appellant’s counsel remarked

that Appraiser Duncan would “hear that in – at the end of 2007 there were

some marketable securities held by the company, $111,[747] of marketable

securities. You will also hear that by the date of the merger those

securities had been liquidated and had been rolled into the

operations of the company either for equipment or to continue

operations during the economic downturn that was taking place in 2008 of

which we are all painfully aware.” Id. at 19 (emphasis supplied).

Appellant’s treatment of the marketable securities was raised by Mr.

William Boles, Appellant’s accounting expert, in his report, (“Boles’ report”).

The Boles’ report’s treatment of the marketable securities was challenged by

Shaffer’s accounting expert, Mr. James Smeltzer. Id. at 100. Mr. Smeltzer

observed that the Boles’ report did not include the $111,747 marketable

securities in valuing Appellant. Mr. Smeltzer testified that “[i]f you look at

[Appellant’s] December [20]07 financial statements, they indicate that there

were investments in the corporation of $111,747. My conclusion was,

looking at the financial statements, that the asset should be added as a

nonoperating asset,” to Appellant’s value. Id. Mr. Smeltzer explained that

“[o]ne of the components in valuation, which is also included in the Boles’

report, is that nonoperating assets of a business need to be evaluated if it is

not contributing to the profitability of the company.” Mr. Smeltzer testified

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that “quite frankly, I think that asset of [$]111,747 at December 31st, 2007

needs to be added to the value of the company to determine not only the

operating value of the company but assets that are not involved with the

operation, which in my opinion this—investments and securities was that

kind of asset.” Id. at 101.

Mr. Smeltzer further testified that “the [$111,747] was borrowed

money. So we know the debt is reflective in the balance sheet. In other

words, everybody is taking the debt number out, but if we ignore that asset

that’s sitting on the books at that particular point in time from a value

standpoint, it was assets held for investments, which is what it says on the

statement. It clearly should be added – reducing – I look at it as a reduction

of the debt outstanding at that time.” N.T., 6/4/10, at 393.

Mr. Boles rebutted Mr. Smeltzer’s position and testified as follows:

Well, in my original report, you know, we did consider

those numbers[.] And at the time of interview with the

Lumadues, we asked a question about those investments and

they told us that those funds were there until they could get

their renovations and new equipment in place and that they

were going to be expended. So I knew that that was really not

excess accumulated earnings or any excess asset of any sort.

In our normal business valuations when we have

excess earnings, we carve them out just as Mr. Smeltzer

did, and tack them onto the total value, but in this case

since we knew that the amounts were required, and from

our tour of the property I saw that they were required,

you know, in all respects of the business, that I excluded

those numbers and that’s why I believe Mr. Smeltzer’s

adjustment [of adding the $111,747 to Appellant’s value]

is incorrect.

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And as – and subsequently I found out that, by looking at

the December 31st, 2008 financial statements, those assets – or

the cash and investments were already gone and spent on

improvements so that they were no longer in existence at the

date of the merger.

Id. at 366-367 (emphasis added). As recognized by the trial court,

following Appraiser Duncan’s visit to Appellant, Appraiser Duncan found that

the equipment was “used, readily available, not unique and in some cases,

very dated.” Trial Court Opinion, 10/20/14, at 6-7. The trial court observed

that Appraiser Duncan did not include the $111,747 in Appellant’s value, (id.

at 5), which is consonant with Appellant’s treatment of the marketable

securities.

Appellant’s equipment was further referenced by Mr. Boles in two of

the three approaches he used to value Appellant. Mr. Boles’ “valuation

efforts” included “the income approach and the market approach,” as well as

“asset approach.” Id. at 352. In describing the asset approach, Mr. Boles

testified:

Mr. Boles: What we did there was we said, okay, I’m going to –

in a company like this let’s take the value of the assets in the

business or in the corporation and we said, okay, what are the

assets. It’s the tangible assets. The most important tangible

assets is [sic] the real estate and we have a real estate appraisal

for that.

We also have the value of the furniture, fixtures, and

equipment and inventory and we have that number from

the financial statements of the business. And on top of that

we said what are the other assets of the business and we said,

well, there is – you know, this is an ongoing concern. There

should be some goodwill involved there, some entity or

organization goodwill.

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And we did a calculation of that and added those factors

up and came up to a value before all the other – the deferred

compensation [of the Lumadue children] and before the

authorized but unpaid compensation [of the Lumadues,] of

191,555, but after application of [the deferred compensation and

authorized and unpaid compensation] — the net value was zero.

Id. at 353 (emphasis added).

As recognized by Mr. Smeltzer, the Boles’ report referenced Appellant’s

business equipment in the market approach valuation method, prior to

applying the unpaid wage claims to ultimately reduce Appellant’s value to

zero. Mr. Smoltzer explained that in using the market approach valuation

method, Mr. Boles “t[ook] the weighted average of revenue, sales[.]” N.T.,

1/13/10, at 105. Mr. Boles “refer[red] to Pratt’s stats[,] which is an analysis

of sales transactions[,] and conclude[d] that … 34 percent of gross sales is

an indicator of what a restaurant operation’s value would be, which would

include the operating assets, which is property—which is equipment plus

any goodwill and conclude[d] the value was $487,714 [dollars].” Id. at

106 (emphasis supplied). Mr. Smeltzer testified that, as to goodwill, Mr.

Boles “came down with a value of about $6,586 for the intangible goodwill in

this business.” Id. at 107.

Appraiser Duncan had a valid and reasonable basis to examine the

issue of Appellant’s equipment, and substantial and competent record

evidence from which to derive the equipment’s value. Appellant listed the

equipment on its balance sheets. Appellant’s counsel in his opening

statement, and via Mr. Boles’ report and opinion, argued that $111,747 of

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marketable securities had been liquidated at least in part for “equipment”

and should be omitted from Appellant’s value. Appellant’s equipment was

referenced in some of the methods used to value Appellant. Moreover,

Appellant’s equipment was listed within Appellant’s insurance policies, which

we do not find were impermissibly secured from dehors a closed record,

especially since Appellant failed to object in a timely manner.

We reject Appellant’s argument that Appraiser Duncan’s impressions

from the site visit or from his review of the insurance policies were

inadmissible evidence considered in his valuation of Shaffer’s stock, and that

his consideration of Appellant’s insurance policies was “not proper.”

Appellant’s Brief at 16. Appellant’s pinpoint citations challenging Appraiser

Duncan’s consideration of Appellant’s insurance policies are contextually

inapposite to this scenario concerning the valuation of a dissenting

shareholder’s stock pursuant to 15 Pa.C.S.A. § 1579. See Appellant’s Brief

at 16-17, citing Estate of Franklin v. Commissioner of Internal

Revenue, 64 T.C. 752, 768 (U.S. Tax Ct. 1975) and Kane v. State Farm

Fire Ins. & Cas. Co., 841 A.2d 1038, 1045 (Pa. Super. 2003). Moreover, a

plain reading of the cited portions of the foregoing authorities reflects that

they do not stand for Appellant’s proposition that it was legally improper for

Appraiser Duncan to consider Appellant’s insurance policies. Id.

By contrast, our Supreme Court has expressed:

[I]t should be observed that while the term ‘fair value’ is

hardly self-executing in its clarity, the object of an appraisal

proceeding is to determine the value of the dissenter’s shares on

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a going concern basis. In determining what figure

represents this true or intrinsic value, consideration must

be given to all factors and elements which reasonably

might enter into the fixing of value.

In re Watt, 304 A.2d at 697-698 (internal citations and footnote omitted)

(emphasis supplied); see also In re Glosser Bros., 555 A.2d at 139

(affirming the trial court’s admission of challenged expert testimony, and

recognizing that “particularly … in the context of a valuation proceeding[,]

the [trial] court needs a broad variety of information relating to the true

value of the stock at issue”). Likewise, we have determined:

“For evidence to be admissible, it must be competent and

relevant. Evidence is competent if it is material to the issue to

be determined at trial. Evidence is relevant if it tends to prove

or disprove a material fact.” American Future Systems, Inc. v.

BBB, 872 A.2d 1202, 1212 (Pa. Super. 2005). See Pa.R.E., Rule

401 (“Relevant evidence” means evidence having any tendency

to make the existence of any fact that is of consequence to the

determination of the action more probable or less probable than

it would be without the evidence.”) “Relevant evidence is

admissible if its probative value outweighs its prejudicial impact.

The trial court's rulings regarding the relevancy of evidence will

not be overturned absent an abuse of discretion.” American

Future Systems, Inc., 872 A.2d at 1212. “A party suffers

prejudice when the trial court's error could have affected the

verdict.” Gaudio v. Ford Motor Co., 976 A.2d 524, 535 (Pa.

Super. 2009).

***

We reiterate that a trial court has broad discretion with

regard to the admissibility of evidence, and is not required to

exclude all evidence that may be detrimental to a party’s case.

See Pittsburgh Const. Co. v. Griffith, 834 A.2d 572, 585 (Pa.

Super. 2003). Such rulings on the admission of evidence will not

be overturned by this Court absent a conclusion that the law has

been overridden or misapplied, or the judgment exercised is

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manifestly unreasonable, or the result of partiality, prejudice,

bias or ill-will, as shown by the evidence or the record. Stumpf

[v. Nye, 950 A.2d 1032-1035-1036 (Pa. Super. 2008)].

Schuenemann v. Dreemz, LLC, 34 A.3d 94, 101 (Pa. Super. 2011).

Here, based on our review of the record, we find that the evidence

adduced by Appraiser Duncan was relevant, admissible, competent and

substantial. We therefore agree with the trial court’s determination that “the

conclusions of [Appraiser Duncan] bear a reasonable relationship to the

value established by the parties’ experts and is clearly supported by

substantial evidence.” Trial Court Opinion, 10/20/14, at 7. We further

concur with the trial court’s observation that “we need not conclude that

[Appraiser Duncan] was correct to a mathematical certainty. Instead, the

only determination that needs to be made is whether [Appraiser Duncan’s]

Report is supported by substantial and competent evidence[.]” Id. at 5.

Finding that it is, we affirm the trial court’s order adopting Appraiser

Duncan’s report and recommendations valuing Appellant’s business

equipment at $325,000.

Appellant further argues:

In determining [Appellant’s] share value, [Appraiser]

Duncan refused to consider the unpaid wages due and owing to

[the Lumadues]. [Appellant’s] financial statements specifically

state that the corporation owes the Lumadues approximately

$1,300,000 in [accrued but] unpaid wages. [Shaffer] bore the

burden of proving the salaries were unreasonable, but he offered

no evidence or reason why the salaries were unreasonable.

Therefore, [Shaffer] failed as a matter of law to carry his burden

of proof, and [Appraiser] Duncan’s failure to include the

authorized but unpaid wages in his determination of the value of

[Shaffer’s] shares was not supported by competent and

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substantial evidence. The trial court erred in adopting

[Appraiser Duncan’s] report in this respect.

[Appraiser] Duncan also refused to consider [Appellant’s]

unfunded pension obligation in his determination of [Appellant’s]

share value. The evidence established that as of the November

5, 2008 merger date, [Appellant] had a $560,000 unfunded

pension obligation to its non-shareholder management

employees, John Lumadue and William Lumadue, Jr., [the

Lumadue children]. The unfunded pension obligation is a legal

obligation of [Appellant] and it must be included in the valuation.

[Shaffer’s] business valuation expert did not disagree that this

obligation has to be considered in valuing the stock. [Appraiser]

Duncan’s refusal to consider the pension obligation was contrary

to law and the uncontradicted evidence. The trial court should

not have adopted [Appraiser Duncan’s] report in this respect.

Appellant’s Brief at 12-13. Based on our review of the record, we disagree.

Appraiser Duncan directly examined Mr. Boles as follows:

Appraiser Duncan: Now you’ve talked about this accrued liability

of salaries [for the Lumadues] and the unfunded and unqualified

benefit to [the Lumadue children] which totals close to $1.8

million, is that correct?

Mr. Boles: That’s right.

Appraiser Duncan: Now, if you were advising either the owners

or the employees as to the probability that they would get this

money with the current operating condition of the company,

what would you advise them?

Mr. Boles: Well, in my experience I’ve found that we don’t know

what real estate values are going to go. We don’t know, you

know, what is going to happen with the business. And based

upon that, I would say that for their own personal planning I

would discount those numbers substantially.

Appraiser Duncan: You wouldn’t count on them, would you?

Mr. Boles: No, I would not.

N.T., 6/4/10, at 367-368.

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Mr. Boles acknowledged on cross-examination that the financial

statements that he relied upon in valuing Appellant’s business “were not”

audited financial statements. Id. at 369. Mr. Boles confirmed that “in the

doing the financial statements, the accountant [who prepared the financial

statements] compiled information that was from the representation of

management[.]” Id. at 370. Mr. Boles further confirmed that “in [his]

valuation process [he] did not turn back the clock and do any audited

financial statements[,]” and that “for a large part of [his] appraisal and

valuation process [he] has relied on the statement of management[.]” Id.

Mr. Boles acknowledged that he did not “include [his conclusion of the

unfunded, nonqualified deferred compensation claim of the Lumadue

children] in the schedules” of his original report. Id. at 373. He conceded

that either “in 2007 or 2006 … somewhere in the more recent years”, was

“the first time that the authorized but unpaid salaries [for the Lumadues]

were quantified” in Appellant’s financial statements. Id. at 374. Mr. Boles

did not recall “ever seeing the unfunded deferred compensation [for the

Lumadue children] quantified in any financial statement.” Id. Mr. Boles

denied that there “exist[ed] money [at the time of the merger] to pay the

accrued but unpaid salaries [of the Lumadues.]” Id. at 375. He “doubt[ed]”

that “[t]he corporation could have borrowed money” to pay the Lumadues “if

the Lumadues would have demanded the corporation pay” the accrued but

unpaid salaries. Id. at 375-376. Mr. Boles further denied that at the time

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of the merger “the corporation [was] in a financial position to pay the …

deferred compensation” of the Lumadue children. Id. at 376.

Mr. Smeltzer opined that the foregoing wage liabilities “are

approximately 147 percent higher on the accrued wage schedule than what

is reasonable for an operating business of this nature.” N.T., 1/13/10, at

119. Mr. Smeltzer concluded that “the salary authorization was higher than

market when it was established and quite frankly I think based on the data

that I would have done, which is similar to what [Mr.] Boles for reasonable

comp[ensation] is, the comp[ensation] that’s being accrued currently is well

beyond reasonable comp[ensation] levels.” Id. at 120. Mr. Smeltzer

testified that “the fact that we are dealing with an extended period of time

here, from 1981 to 2010, a considerable period of time, I think 28, 29 years,

I think that overstatement of compensation to a great degree led to that

accrual.” Id. at 121. Mr. Smeltzer further testified that “based on the facts

of the [Boles’ report] I reviewed, the valuation valuating the reasonable

comp[ensation], the accrual of compensation … it appears to me that the

accrual is quite frankly excess compensation and not reasonable to be paid

by a corporation of this size.” Id. at 122. Mr. Smeltzer stated that if

Appellant “would have been paying that comp[ensation] since 1981, the

corporation would have been close to two million dollars in deficit. So those

salaries were never – in my opinion there was no expectation of them being

paid based on the numbers I’ve seen.” Id. Mr. Smeltzer confirmed that he

“excluded [the wage claims] from [his] computation” of Appellant’s value

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“because there was no expectation or there should be no expectation” of the

wage claims being paid “because they are excessive[.]” Id. at 122-123.

Mr. Smeltzer further testified that “the fact that they were excessive based

on the analysis [of] the industry led me to the conclusion that the liability

was … almost like a freeze out of a minority shareholder, we’re going to

create a liability that’s going to accumulate to a certain number that makes

the minority shareholder’s value worthless.” Id. at 123. Mr. Smeltzer

opined, “there’s no rational reason that the corporation would have entered

into that kind of [wage] agreement based on the trend of earnings the

company experienced.” Id.

Accordingly, despite Appellant’s contentions to the contrary, there

was substantial and competent evidence of record to support Appraiser

Duncan’s exclusion of the unpaid wage claims for the Lumadues and their

children, such that we discern no trial court error in adopting Appraiser

Duncan’s report and recommendations, which excluded the unpaid wage

claims. See In re Spang Industries, Inc., 535 A.2d 86, 90-91 (Pa. Super.

1987) (although remanding for an adjustment to the trial court’s

computations, the trial court’s order was affirmed “in all respects,” including

where “the [trial] court, within its discretion, drew proper conclusions based

on the evidence presented [that] [t]here was more than sufficient evidence

to sustain the trial court's conclusion that this was a “squeeze out merger”

and that [appellant] was a dynamic going concern which understated its

assets and overstated its liabilities in preparation for the merger). We are

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mindful that Appellant’s argument would require us to impermissibly reweigh

the evidence adduced in this action, and to reassess from a cold record the

credibility of the witnesses who testified before Appraiser Duncan in favor of,

and against, the inclusion of these wage claims in valuing Shaffer’s stock.

Appellant’s argument would have us ignore Appraiser Duncan’s conclusion,

following the examination of the witnesses and presentation of evidence,

that the wage claim was “an obvious attempt to deprive Shaffer as to the

value of his Twenty-Five Percent (25%) interest.” Appraiser Duncan’s

Report, 11/1/10, at 15. We cannot do so. Brown v. Progressive

Insurance Co., 860 A.2d 493, 497 (Pa. Super. 2004) (internal citation

omitted) (“Concerning questions of credibility and weight accorded evidence

at trial, we will not substitute our judgment for that of the finder of fact.”).

Discerning no error or abuse of discretion by the trial court, we affirm

the trial court’s order adopting Appraiser Duncan’s report and

recommendations.

Order affirmed.

Judge Bowes concurs in the result and Judge Donohue files a

Dissenting Memorandum.

Judgment Entered.

Joseph D. Seletyn, Esq.

Prothonotary

Date: 7/29/2015

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