Froelich v. Senior Campus Living LLC

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIAN P. FROELICH, 

Plaintiff-Appellee,

v.

SENIOR CAMPUS LIVING LLC,

Defendant-Appellant,

and  No. 02-2305

JOHN C. ERICKSON; NANCY ERICKSON;

SCL, INC.; ERICKSON RESOURCE

TRUST; SCL CONSTRUCTION, INC.;

SUBCO, INC.; SENIOR CAMPUS LIVING

HOLDINGS LLC,

Defendants.



Appeal from the United States District Court

for the District of Maryland, at Baltimore.

Paul W. Grimm, Magistrate Judge.

(CA-98-694-L)

Argued: October 31, 2003

Decided: January 22, 2004

Before MICHAEL, MOTZ, and TRAXLER, Circuit Judges.

Affirmed by published opinion. Judge Motz wrote the opinion, in

which Judge Michael and Judge Traxler joined.

COUNSEL

ARGUED: James David Mathias, PIPER RUDNICK, L.L.P., Balti-

more, Maryland, for Appellant. Michael John Collins, THOMAS &

2 FROELICH v. SENIOR CAMPUS LIVING

LIBOWITZ, P.A., Baltimore, Maryland, for Appellee. ON BRIEF:

John R. Wellschlager, PIPER RUDNICK, L.L.P., Baltimore, Mary-

land, for Appellant.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

This diversity case involves a challenge to the valuation of a lim-

ited liability company as determined by the statutory appraisal proce-

dure provided under Maryland law. A member of the company, who

objected to a reclassification of membership interests and squeeze-out

merger that eliminated his interest in the company, exercised his right

to have a statutory appraisal resolve the fair value of that interest

immediately prior to the reclassification. The district court accord-

ingly appointed a panel of three appraisers, who determined the value

of the interest as of the day the company’s members voted to approve

the reclassification. The company contends a court must adjust the

valuation of that appraisal panel “downward” or order a new appraisal

because (1) the objecting interest holder assertedly presented to the

appraisers evidence and arguments that conflicted with earlier rulings

of the district court and (2) the appraisers improperly included in their

valuation appreciation resulting from the contested reclassification.

The magistrate judge, who presided over the appraisal proceedings

with the agreement of the parties, rejected these arguments and

entered judgment for the member on the basis of the court-appointed

appraisers’ valuation of the company. For the reasons that follow, we

affirm.

I.

This appeal grows out of a dispute between Senior Campus Living,

LLC (“SCL”), a developer of large, campus-style retirement commu-

nities, and one of its former employees and interest holders Brian

Froelich. SCL owns a number of operating retirement communities

and several future projects in various stages of development.

One future project regarded as critical by SCL in the fall of 1997

was Greenspring Village in Springfield, Virginia. Equitable Real

FROELICH v. SENIOR CAMPUS LIVING 3

Estate Investment Management, Inc. (“Equitable”) had agreed to pro-

vide $26 million in mezzanine financing for Greenspring if SCL first

obtained $55 million in construction financing. By September 1997,

SCL had obtained a $55 million construction loan from Mercantile-

Safe Deposit & Trust Company, but only on the condition that SCL

founder John Erickson — who still had substantial financial interests

in SCL despite selling the firm to Froelich and others in a leveraged

buy-out in 1996 — personally guarantee the loan. Erickson agreed to

provide the guarantee, and Equitable then scheduled the closing for

the Greenspring financing for October 3, 1997.

On October 1, 1997, however, the SCL Board voted to remove

Froelich from his position as Chief Executive Officer of the company

and replace him with Erickson. As a result, Equitable decided to post-

pone the Greenspring closing. Equitable subsequently notified SCL

that it would require an additional $35 million in personal guarantees

from Erickson to assuage its concerns about SCL’s financial condi-

tion.

Erickson told the SCL Board that he would provide personal guar-

antees for the additional $35 million if the Board reclassified its mem-

bership interests (both preferred and common) into a single class of

common interests, with the reclassification to be based upon the fair

market value of the company determined by an independent appraisal.

Under the previous classification of membership interests (resulting

from the 1996 leveraged buy-out), Erickson had preferred interests in

the company worth about $160 million (including accrued and unpaid

interest). In addition, Froelich and Erickson’s brother, Michael Erick-

son, had subordinate preferred interests with assigned values of $8

million and $4 million, respectively. The common interests in the

company were allotted among John Erickson (30%), Michael Erick-

son (26%), Froelich (26%), and thirteen other SCL employees (34%).

These subordinate preferred and common interests only had value

to the extent the company was worth more than the value of Erick-

son’s senior preferred interests, i.e., $160 million. Thus, if the Board

acted on Erickson’s proposal to reclassify the company’s preferred

and common interests into a single class of common interests based

on the company’s fair market value, Erickson would end up with vir-

4 FROELICH v. SENIOR CAMPUS LIVING

tually all of the common stock of SCL if the appraisal valued the

company at less than $160 million.

After forming independent committees to negotiate with Erickson

regarding his proposal, explore available alternatives to Erickson’s

offer, and confer with Equitable regarding the Greenspring closing,

the SCL Board unanimously voted to recommend to the members that

they accept Erickson’s reclassification proposal. By November 5,

1997, fifteen of sixteen members had approved the proposal, with

only Froelich dissenting. On November 6, 1997, after Erickson sup-

plied the additional $35 million in guarantees, SCL, in Erickson’s

words, “completed the signing and execution of all documents with

Mercantile and Equitable for the $80 million project financing for

[the] Greenspring [project].”

In December 1997, SCL retained Coopers & Lybrand, LLP

(“Coopers”) to perform an independent appraisal valuing the com-

pany as of the November 5, 1997 reclassification. Coopers valued

SCL at $155 million. This valuation included an appraisal of $6.325

million for the Greenspring project. The SCL Board accepted Coo-

pers’ valuation in January 1998. Because Coopers appraised the com-

pany at less than the value of Erickson’s preferred interests (i.e., $160

million), the reclassification resulted in Erickson holding 99.9% of

the new common interests and left Froelich with $1.50 after a

squeeze-out merger in February 1998 eliminated his remaining inter-

est.

Shortly after the squeeze-out merger, Froelich filed a fourteen

count complaint against SCL, Erickson, and others in federal court.

Froelich alleged, inter alia, breach of fiduciary duty, asserting that

Erickson had disparaged SCL to potential investors (thereby thwart-

ing SCL’s ability to obtain capital) in order to regain control over

SCL and had devalued and engaged in self-dealing with respect to

Froelich’s preferred and common interests. Froelich also alleged

fraud, claiming that Erickson and the SCL Board had agreed, at the

time of the 1996 leveraged buy-out of SCL, that Erickson would

relinquish authority to run SCL and not disparage SCL, when in fact

they knew that Erickson would not honor this agreement. In addition,

Froelich asserted rights to severance pay and to a statutory appraisal

FROELICH v. SENIOR CAMPUS LIVING 5

(the latter of which had allegedly been triggered by the November 5,

1997 reclassification and subsequent squeeze-out merger).

Judge Benson Legg granted summary judgment to SCL on all alle-

gations of fraud and breach of fiduciary duty. See Froelich v. Erick-

son, 96 F. Supp. 2d 507, 511 (D. Md. 2000). However, Judge Legg

granted summary judgment to Froelich with respect to his claim for

severance pay and his demand for a statutory appraisal. Id. at 511. As

to the latter, the judge concluded that “Froelich is entitled to appraisal

rights” and that appraisers would be appointed to value Froelich’s

interest in SCL “as of November 5, 1997, which is just prior to the

reclassification.” Id. at 511, 528. In an unpublished opinion, we

affirmed in all respects the judgment entered by Judge Legg. Froelich

v. Senior Campus Living, LLC, No. L-98-694, 2001 WL 256080 (4th

Cir. Mar. 15, 2001).

Judge Legg then followed the procedures set forth in Md. Code

Ann., Corps. & Ass’ns § 3-210(a) (1999) and appointed three disin-

terested appraisers, whom SCL and Froelich had recommended, to

value SCL as of November 5, 1997. The appraisers appointed to per-

form the valuation were Patrick O. Ring, Joseph T. Gardemal, and

Robert A. Frank. Patrick O. Ring, the panel chairman, received an

MBA in financing from Wharton, worked as a bank officer for almost

twenty years, wrote over thirty articles on business valuation and

other financial subjects, and since 1992 had worked with the Baker-

Meekins Company, Inc., a business valuation company. Joseph T.

Gardemal, another panel member, was certified as a public accoun-

tant, fraud examiner, valuation panelist, and government financial

manager, and had worked in a number of accounting firms on busi-

ness valuation and related financial matters and was currently work-

ing with Capital Analysis Group, a financial consulting firm, in which

he was responsible for business valuation and litigation support.

Finally, Robert A. Frank was a chartered financial analyst, who had

worked as a managing director of a real estate securities research

group and was currently serving as the managing director of InCap

Group, Inc.

The parties agreed that Magistrate Judge Paul W. Grimm would

preside over the appraisal proceedings. The parties submitted two

bound volumes of exhibits and deposition excerpts to the three

6 FROELICH v. SENIOR CAMPUS LIVING

appraisers, who heard testimony from witnesses for three days in

March 2002. The appraisers considered evidence that included a letter

dated December 22, 1997, from an SCL Board Member to Coopers

stating that SCL “has been unable to secure financing to further

develop the ‘Future Projects’ [including Greenspring],” despite the

fact that as of the November 5, 1997 valuation date, arrangements for

financing the Greenspring project were in place (except for provision

of $35 million in personal guarantees from Erickson) and that SCL

actually closed on the Greenspring project on November 6, 1997. The

appraisers also heard testimony from Coopers officials indicating that

Coopers had relied on these representations in its appraisal. Addition-

ally, an Equitable official testified that Equitable might have been

willing to close on the Greenspring deal without Erickson’s $35 mil-

lion guarantee as long as the full $55 million in construction financing

was in place. Froelich also presented the appraisers with evidence

regarding the willingness of other financial institutions to invest in

SCL.

After considering this and other evidence, the appraisers heard

closing arguments and received lengthy memoranda from the parties.

On June 17, 2002, the panel issued majority and minority reports; all

three appraisers determined that the value of SCL as of November 5,

1997, was $176 million, which was $21 million higher than Coopers’

$155 million valuation.

Two members of the panel, Ring and Gardemal, issued a thirty-

four page majority report, which used two separate valuation methods

to value SCL at $176 million. Ring and Gardemal’s first method ana-

lyzed the approaches used in the three appraisal reports submitted to

the panel (the Coopers report, as well as two additional reports — one

commissioned by each of the parties), and then determined which

approach arrived at the most reasonable conclusion as to the fair value

of each SCL property. In this lead analysis, Ring and Gardemal

adopted the $34 million valuation of the Greenspring project calcu-

lated by Froelich’s appraiser, Thomas Nagle of Valuation Counselors,

rather than Coopers’ $6.325 million valuation of Greenspring or the

$20.94 million valuation advanced by the expert commissioned by

SCL. Ring and Gardemal also adopted Nagle’s valuations for all of

SCL’s current projects (which were generally lower that those offered

by Coopers), and adopted estimates significantly lower than Nagle’s

FROELICH v. SENIOR CAMPUS LIVING 7

for SCL’s other future projects. Thus, the majority panelists’ higher

appraisal for Greenspring largely explains why their $176 million

total valuation of SCL significantly exceeded Coopers’ $155 million

total valuation.1

To “test the validity” of the $176 million total valuation based on

their lead analysis, Ring and Gardemal conducted an alternative inde-

pendent valuation analysis, which used cash flow projections pro-

vided by SCL management. This alternative valuation confirmed the

$176 million value they had reached in the lead analysis. Further, the

third member of the panel, Robert Frank, filed an eighteen-page sepa-

rate report, in which he employed still a different valuation method

to arrive at an identical total value for SCL of $176 million as of

November 5, 1997.

Both SCL and Froelich filed objections seeking modification of the

appraisal assessment. Judge Grimm heard extensive oral argument,

and then, in a thorough and persuasive oral opinion, denied the objec-

tions and adopted the appraisal panel’s unanimous conclusion that the

value of SCL as of November 5, 1997, was $176 million. Judge

Grimm concluded that SCL had not shown that any part of the Green-

spring valuation conflicted with “Judge Legg’s ruling that the deci-

sion of the board of directors fell within the protection of the business

judgment rule,” nor had it presented evidence sufficient to convince

him that the panel had erroneously included value created by the

reclassification by failing to adjust for Erickson’s $35 million in per-

sonal guarantees. Further, Judge Grimm held that even if he had

found the majority’s lead analysis to be defective, he would have sim-

ply adopted the majority’s alternative analysis or Frank’s minority

report as his own valuation, and that this would have “correct[ed] the

error.” Judge Grimm entered final judgment in favor of Froelich in

the amount of about $11.2 million, representing the value of his inter-

est in SCL on November 5, 1997, and pre-judgment interest.

SCL noted a timely appeal; Froelich does not cross appeal.

1

The majority panelists’ lower appraisal for most of SCL’s other future

projects meant that their estimate for the total value of SCL was $72 mil-

lion lower than Nagle’s $248 million assessment.

8 FROELICH v. SENIOR CAMPUS LIVING

II.

The Maryland General Assembly first authorized corporate consol-

idations and mergers in 1868. See Roselle Park Trust Co. v. Ward

Baking Corp., 9 A.2d 228, 231 (Md. 1939). Four decades later, in

1908, the General Assembly enacted legislation providing a stock-

holder objecting to a consolidation, merger, or sale of all corporate

assets the right to demand fair value for his interests, as determined

by a statutory appraisal. See Warren v. Baltimore Transit Co., 154

A.2d 796, 798 (Md. 1959); Am. Gen. Corp. v. Camp, 190 A. 225, 227

(Md. 1937). This legislation was intended to overcome the problem,

which had “proved in the past a disadvantage to the other stockhold-

ers,” of objecting stockholders blocking mergers or consolidations

arguably beneficial to the corporation, “and, at the same time, to pro-

tect” fully the property rights of the objecting stockholder. Am. Gen.

Corp., 190 A. at 227.

Thus for almost a century, Maryland has provided by statute that:

(1) “by compliance with prescribed conditions and procedure” one

Maryland corporation can be consolidated with, or merged into,

another, or sell substantially all of its assets, with the approval of less

than all of the stockholders, id., but (2) stockholders objecting to the

consolidation, merger, or sale of substantially all corporate assets,

upon satisfaction of certain conditions, have the absolute statutory

“right to demand and receive payment of the fair value of the stock-

holder’s stock from the successor,” Md. Code Ann., Corps. & Assn’s

§ 3-202(a) (1999).2 See Md. Code Ann., Corps. & Assn’s §§ 3-101 et

seq. (1999). See generally, J.J. Hanks, Jr., Maryland Corporation Law

§ 10.1-10-8 at 329-43 (1990 and 2002 supp.) (hereinafter “Hanks”);

B. Manning, The Stockholders Appraisal Remedy: An Essay for

Frank Coker, 72 Yale L.J. 223 (1962).

2

Md. Code Ann., Corps. & Assn’s § 4A-705 (1999) confers on “[a]

member of a limited liability company objecting to a merger of the lim-

ited liability company” the “same rights with respect to the member’s

interest in the limited liability company as a stockholder of a Maryland

corporation who objects has with respect to the stockholder’s stock

under” Md. Code Ann., Corps. & Assn’s §§ 3-202 et seq. (1999).

FROELICH v. SENIOR CAMPUS LIVING 9

The Maryland General Corporation Law directs that this “fair

value” is to be determined by an appraisal performed by three court-

appointed “disinterested appraisers.” Md. Code Ann. Corps. & Assn’s

§ 3-210(a) (1999). The statute sets forth the valuation date, providing

that, with exceptions inapplicable here, “fair value is determined as

of the close of business . . . on the day the stockholders voted on the

transaction objected to” (which the parties agree is November 5, 1997

in this case). § 3-202(b)(1)(ii). The statute further provides that, again

with inapplicable exceptions, “fair value may not include any appreci-

ation or depreciation which directly or indirectly results from the

transaction objected to or from its proposal.” § 3-202(b)(2). It also

sets forth in some detail the procedure to be followed in obtaining a

statutory determination of "fair value," including the time in which an

objecting stockholder can exercise his appraisal right, the required

notices, and the content of the petition for appraisal. See §§ 3-203 to

3-208. Finally, the statute provides that the court shall, after consider-

ation of the appraisers’ report and on motion of any party, “enter an

order which . . . [c]onfirms, modifies, or rejects it.” § 3-211(a)(1).

The Maryland General Corporation Law does not, however, further

define or describe “fair value.”3 Nor does it set forth the standard a

court should employ in reviewing the appraisers’ determination of

“fair value.” Moreover, notwithstanding the venerable history of the

Maryland statutory appraisal right, few cases have discussed the

meaning of “fair value” or the role of courts in reviewing the statutory

appraisers’ resolution of that question. In those few cases, however,

Maryland’s high court has provided some helpful guidance.

The court has recognized that each corporation poses a “particular”

valuation problem and noted “the manifold possibilities and difficul-

ties of the problem, and the impracticability of the statement of any

rule of uniform application as to the factors of fair value.” Am. Gen.

Corp., 190 A. at 229. The court has also pointed out that “[t]he real

objective is to ascertain the actual worth of that which the dissenter

3

State appraisal statutes “variously” provide a dissenting stockholder

is entitled to “market value,” “fair value,” “value” or “fair cash value.”

H.G. Henn, Law of Corporations § 349 at 1002 (3d ed. 1983). Mary-

land’s high court has noted that these “terms are considered synony-

mous.” Warren, 154 A.2d at 799.

10 FROELICH v. SENIOR CAMPUS LIVING

loses because of his unwillingness to go along with the controlling

stockholders, that is, to indemnify him.” Warren, 154 A.2d at 799.

Thus, although the value of the dissenting stockholder’s stock “should

not be affected by a corporate change in which he refused to partici-

pate,” Am. Gen. Corp., 190 A. at 228, the corporation should, unless

in liquidation, be valued “by assuming that [it] will continue as a

going concern” and “by appraising all material factors and elements

that affect value. . . .” Warren, 154 A.2d at 799; see Hanks, § 10.6

at 340. Accordingly, “that the corporation may not offer [stockhold-

ers] more than the market value does not mean that the appraisers are

so limited.” Burke v. Fid. Trust Co., 96 A.2d 254, 259 (Md. 1953).

Given the complexity and idiosyncracies of the valuation of a dis-

senting stockholder’s interest, it is hardly surprising that the Maryland

courts have concluded that the role of the judiciary in an appraisal

proceeding is “limited.” Warren, 154 A.2d at 800. In recognition that

“[t]he questions involved are rather economic than legal in character,”

courts are to “give great weight to the findings of the appraisers.” Id.

(internal quotation marks omitted). Thus, the standard for judicial

review of an appraisal panel’s determination of fair value is extremely

deferential:

The presumption is that their award is correct, and effect

will be given to their determination unless it appear by clear

and satisfactory evidence that the award was, by reason of

some material and prejudicial error of law, in conduct or of

fact, not the fair value of the stock, without regard to any

depreciation or appreciation thereof in consequence of the

merger or consolidation.

Am. Gen. Corp., 190 A. at 230; accord Warren, 154 A.2d at 800; see

also Burke, 96 A.2d at 259.

With these principles in mind, we turn to SCL’s two challenges

regarding the statutory appraisal in this case.

III.

SCL initially contends that Judge Grimm erred in permitting

Froelich to present certain evidence and arguments to the appraisal

FROELICH v. SENIOR CAMPUS LIVING 11

panel that “directly contradict[ ] the prior, binding judicial rulings of

Judge Legg and this Court.” Brief of Appellant at 4. Specifically, SCL

complains that Judge Grimm ignored Judge Legg’s prior rulings in

permitting Froelich to offer evidence and argument that Coopers’

November 5, 1997 appraisal was flawed because Coopers did not

receive accurate and complete information from Erickson and SCL

officials on which to base its appraisal. Id. at 23. The company asserts

that Froelich’s submissions regarding the Cooper appraisal directly

conflict with Judge Legg’s rejection of Froelich’s fraud and breach of

fiduciary duty claims against SCL and Erickson and Judge Legg’s

finding that “the decisions of the [SCL] Board are protected by the

business judgment rule.” Froelich, 96 F. Supp. 2d at 527.

SCL’s argument rests on a misunderstanding of Judge Legg’s ini-

tial findings, the statutory appraisal process, and the deference

accorded a trial court’s rulings as to the propriety of legal argument

and the admissibility of evidence.

First, Judge Legg never addressed most of the grounds on which

SCL objects to Froelich’s evidence and argument. For example, in

granting summary judgment to Erickson and SCL on Froelich’s fraud

counts, Judge Legg understandably addressed only Froelich’s relevant

allegations, i.e., that Erickson and the SCL Board had fraudulently

represented to Froelich in the 1996 leveraged buy-out of SCL that

Erickson would relinquish authority to run SCL and not make dispar-

aging remarks about the company when they knew he had no inten-

tion of honoring this agreement. Froelich, 96 F. Supp. 2d. at 522-23.

Similarly, in granting Erickson summary judgment on Froelich’s

breach of fiduciary duty claim, Judge Legg only rejected Froelich’s

contention that “Erickson usurped a corporate opportunity by retaking

control of the company and its profitability,” finding “no credible evi-

dence that Erickson created [a financial] crisis” or that the SCL Board

did not actually view Erickson’s proposal as the best alternative for

the company. Id. at 526-27. Nowhere in these rulings, or his rulings

on Froelich’s other counts, did Judge Legg even discuss SCL’s provi-

sion of information to Coopers.

Certainly, Judge Legg never determined the factual accuracy of the

financing information SCL submitted to Coopers. Contrary to SCL’s

suggestions, Judge Legg’s ruling that the business judgment rule pro-

12 FROELICH v. SENIOR CAMPUS LIVING

tected the SCL Board does not equate to a finding that the Board’s

decisions were correct. The business judgment rule simply requires

courts to defer to the decisions of corporate boards unless a challenger

produces evidence establishing that the directors acted fraudulently or

in bad faith, NAACP v. Golding, 679 A.2d 554, 559 (Md. 1996), or

with gross or culpable negligence, Parish v. Maryland & Virginia

Milk Producers Ass’n, 242 A.2d 512, 540 (Md. 1968); see Md. Code

Ann., Corps. & Assn’s § 2-405.1 (1999) (codifying standard of care

required of corporate directors); see also Hanks, § 6.8 at 179-83

(2000 supp.). Under the business judgment rule, “[a]ll that is

required” of directors is that they “act reasonably and in good faith

in carrying out their duties”; they “are not expected to be incapable

of error.” NAACP, 679 A.2d at 559 (emphasis added) (internal quota-

tion marks and citation omitted).4

We recognize that Froelich’s arguments that Erickson or other SCL

officials withheld relevant information from Coopers resulting in fatal

flaws in Coopers’ valuation may be in some tension with Judge

Legg’s rejection of Froelich’s fraud and breach of fiduciary duty

claims. But that tension does not constitute an irreconcilable conflict.

Judge Legg found Froelich entitled to a statutory appraisal at the very

same time he rejected Froelich’s fraud and fiduciary duty claims.

Moreover, Judge Legg explicitly recognized that Froelich’s likelihood

of success before the appraisers depended upon his ability to prove to

them “that the Coopers and Lybrand appraisal was flawed.” Froelich,

96 F. Supp. 2d at 528 n.25. This entirely accords with the long-

established view of the Maryland Court of Appeals that, without any

proof of fraud, majority and minority stockholders may hold a “wide

variance in opinion” as to the value of a corporation, necessitating a

statutory appraisal. See Homer v. Crown Cork & Seal Co., 141 A.

425, 432 (Md. 1928); accord Lerner v. Lerner, 511 A.2d 501, 506

(Md. 1986); see also Walk v. Baltimore & Ohio R.R., 847 F.2d 1100,

1107 (4th Cir. 1988) (noting, in the course of applying Maryland law,

that “allegations of ‘fraud’ are often nothing more than disagreements

about methods of valuation, which are more appropriately resolved in

4

SCL points to no authority suggesting that the business judgment rule

applies to statutory appraisals, such that appraisers must similarly defer

to a board’s conclusions. Such a requirement would, of course, undercut

the very purpose of having an independent statutory appraisal.

FROELICH v. SENIOR CAMPUS LIVING 13

the statutory appraisal proceeding”), vacated on other grounds by 492

U.S. 914 (1989).

Indeed, the very purpose of the statutory appraisal in this case —

to value the company to determine the fair value of Froelich’s interest

as of November 5, 1997 — virtually required the appraisers to con-

sider all evidence as to any shortcomings in the Coopers appraisal.

Section 3-202(a) directs statutory appraisers to determine the “fair

value” of a stockholder’s interest in the corporation; in doing so, the

appraisers must consider “all material factors and elements that affect

value.” Warren, 154 A.2d at 799 (emphasis added). Because Coopers

valued SCL at less than $160 million as of November 5, the reclassifi-

cation of the company approved on that date resulted in a total elimi-

nation of Froelich’s interest. The validity of the Coopers appraisal,

therefore, certainly constituted a “material factor[ ] affect[ing] [the]

value” of Froelich’s interest, which, under Warren, the statutory

appraisers were required to consider.

Finally, SCL’s argument completely ignores the operative standard

of review when examining rulings challenging legal arguments as

improper or evidence as inadmissible, under which we will vacate a

judgment only if the trial court abused its discretion. See Rowland v.

Am. Gen. Fin., Inc., 340 F.3d 187, 194 (4th Cir. 2003); Arnold v. E.

Air Lines, Inc., 681 F.2d 186, 194-95 (4th Cir. 1982). Because of a

trial judge’s “superior vantage point” we defer to him or her in such

matters even in jury trials, see, e.g., Arnold, 681 F.2d at 197, when

any improper argument or inadmissible evidence could mislead lay

people. This deference seems all the more appropriate in statutory

appraisal proceedings in which three sophisticated business people

determine the primarily economic question of corporate value. See

Warren, 154 A.2d at 800-01.

Our close review of the record here reveals no abuse of discretion.

Rather, Froelich presented the appraisers with a very substantial

amount of appropriate evidence and argument supporting his conten-

tion that the Coopers appraisal lacked validity. Accordingly, contrary

to SCL’s contentions, it was well within the district court’s discretion

to find that any fragments of improper argument or inadmissible evi-

dence did not “unfairly prejudic[e]” the company. Brief of Appellant

at 16. Indeed, we note that Judge Grimm’s patient superintending of

14 FROELICH v. SENIOR CAMPUS LIVING

numerous documents and complicated testimony and his scrupulous

consideration of the parties’ legal contentions before, during, and

after the appraisal hearings evidence the utmost care, rather than any

abuse of discretion.

IV.

SCL also contends that we must reject the statutory appraisal

because it includes appreciation in value resulting from the very

reclassification of SCL stock to which Froelich objected. As noted

above, the Maryland General Corporation Law expressly prohibits

appraisers from including in their “fair value” determination “any

appreciation . . . which directly or indirectly results from the transac-

tion objected to or from its proposal.” § 3-202(b)(2) (emphasis

added).

According to SCL, the November 5 reclassification was needed to

obtain Erickson’s agreement to pledge guarantees of $35 million,

which in turn were needed to secure the $80 million in financing com-

mitments for the November 6 closing on the Greenspring project.

Therefore, in the company’s view, any value evidenced by the $80

million closing necessarily derived from the $35 million in guarantees

that “result[ed] from” the reclassification and so should not have been

considered by the appraisers in determining SCL’s fair value as of

November 5.

Unquestionably, Ring and Gardemal did consider the $80 million,

November 6 financing of Greenspring in their lead analysis; they

explained that they viewed “SCL’s November 6, 1997, closing on the

Springfield financing” as “a subsequent event that provides evidence

of value that existed as of the [November 5] valuation date.” How-

ever, SCL has not presented “clear and satisfactory evidence” that, in

so considering the November 6 closing, the appraisers necessarily

incorporated value resulting from the reclassification in violation of

§ 3-202(b)(2). Warren, 154 A.2d at 800 (quoting Am. Gen. Corp., 190

A. at 230).

To start, the mere fact that the appraisers took into account an

event that occurred subsequent to the November 5 valuation date and

the reclassification does not, in and of itself, violate § 3-202(b)(2).

FROELICH v. SENIOR CAMPUS LIVING 15

Indeed, SCL itself acknowledges that “an event occurring subsequent

to the valuation date may be considered in hindsight as evidence of

value that likewise existed as of the valuation date, even if the subse-

quent event was not foreseeable on the valuation date.” Brief of

Appellant at 32.

Moreover, the evidence in the record does not compel the conclu-

sion that approving the reclassification in exchange for Erickson’s

$35 million in guarantees was in fact the only way to close on the

financing for Greenspring, as opposed to one option among several

that might fall within the discretion of the SCL Board under the busi-

ness judgment rule. That is, the evidence does not show that declining

to approve the reclassification would have precluded SCL from mov-

ing forward on the Greenspring project. The record shows that most

of the financing for Greenspring was in place well before the reclassi-

fication was even proposed. Further, Froelich presented evidence that

numerous investors were willing to invest in SCL; he also presented

the testimony of an Equitable official who suggested that Equitable

might have been willing to close on the Greenspring deal without the

guarantees. Indeed, even SCL’s own expert opined that SCL “could

have obtained the financing for one Future Project absent John Erick-

son’s financial support.” In light of this evidence, the appraisers were

justified in their conclusion that “[w]ith $134.4 million in equity

value [for current SCL projects] at the valuation date, the assumption

that $80 million in financing commitments would be available for at

least one new project in 1998 is entirely reasonable.”5

Operating under this legitimate assumption, the appraisers were

certainly free to conclude that approving the reclassification in

exchange for the $35 million in guarantees was, at most, merely one

5

SCL argues that if the $134 million in equity were suddenly encum-

bered with the liability of the $80 million in financing for Greenspring

without the guarantees, its value would have to be adjusted downward

(making it impossible to escape the need to make an adjustment down-

ward for the guarantees). But Froelich notes that a hypothetical outside

buyer — whose perspective the panel must adopt in its valuation —

would not necessarily have to immediately siphon off $65 million in

equity, as Erickson planned to do, upon the sale of one of SCL’s projects,

and that this would make up for any extra encumbrance on the equity.

16 FROELICH v. SENIOR CAMPUS LIVING

option among several for providing the final bit of financing needed

to close on the Greenspring deal, and not an indispensable step, the

absence of which would have prevented any closing from occurring.

Thus, the appraisers could reasonably look to the November 6 closing

for evidence of the Greenspring project’s financeability (and hence

value) on November 5, as long as they subtracted whatever they

assessed the value or cost of that final bit of financing (in this case,

the value of the $35 million guarantees) to be, from the perspective

of a hypothetical outside investor. The fact that Gardemal and Ring

state that they took the November 6 closing only as evidence that SCL

had “substantially all of the required financing in place,” (emphasis

added) — not all of the financing in place — suggests that the

appraisers did, indeed, subtract those elements of the financing

(namely the $35 million in personal guarantees) that actually resulted

from the reclassification.

True, Ring and Gardemal never explained in their lead analysis

exactly how they accounted for the additional value of the $35 million

in guarantees in their valuation. However, given the “presumption

. . . that [the appraisers’] award is correct,” we cannot take the mere

absence of an explicit explanation as “clear and satisfactory evidence”

that the majority panelists failed to consider (and properly discount

any value added by) the guarantees. Warren, 154 A.2d at 800 (quot-

ing Am. Gen. Corp., 190 A. at 230). This is particularly so given that

the record not only reveals the appraisal panel’s awareness and con-

cern about the guarantees (both in their review of the facts involving

these guarantees in their report, and in the questions they posed about

the guarantees during the appraisal hearing), but also suggests a num-

ber of ways in which they could have engaged in the analysis and

reached the result that they did, yet still afforded proper treatment to

the guarantees.

For one, if, as just suggested, Ring and Gardemal concluded that

SCL’s equity sufficed to finance Greenspring and that the $35 million

in guarantees were therefore not actually necessary, they may well

have determined that the guarantees did not significantly affect the

value of SCL as of the November 5 valuation date, from the perspec-

tive of a hypothetical outside investor.

Alternatively, Ring and Gardemal could have reasoned that they

did make a significant downward adjustment in value to take into

FROELICH v. SENIOR CAMPUS LIVING 17

account the guarantees by adopting Nagle’s valuation for Greenspring

and for all of SCL’s current projects. Nagle testified that he accounted

for the value of the guarantees in his total estimate of SCL’s value by,

as SCL itself recognizes, “adding one percentage point to his discount

rates on all SCL assets, across the board.” Nagle estimated this

increase in the discount rate had a total impact of a $17 million down-

ward adjustment, which he testified would “more than offset the pro-

vision of a guarantee.” By adopting Nagle’s valuation of Greenspring

and all current projects, then, Ring and Gardemal subsumed a large

proportion of Nagle’s $17 million downward adjustment in their $176

million appraisal. While they did not adopt all of Nagle’s valuations

(they adopted valuations for the remaining projects that totaled $56

million less than Nagle’s), the appraisers certainly did not have to

incorporate the entirety of Nagle’s estimate of the value of the guar-

antees, which Nagle himself suggested was generous.

Finally, even if we were to conclude that the statutory appraisers

erroneously failed to consider the $35 million in additional guarantees

in their lead analysis, which we do not, we could simply adopt, as our

own valuation, the majority report’s alternative analysis or the minor-

ity report’s analysis, both of which came to an identical valuation of

$176 million. SCL has advanced no substantive challenge to the

approaches used in either the alternative or minority analysis.6 We

note that Frank’s report, in particular, specifically states that he

accounted for SCL’s need for “outside financing in the form of a $35

million guarantee,” by “heavily discount[ing] the Greenspring proj-

ect” and adopting a discount rate of 33.1%, nearly as large as that

used by Coopers.

6

SCL simply argues that we cannot adopt Ring and Gardemal’s alter-

native analysis because they intended it to be only a “test,” and that we

cannot adopt Frank’s minority report because Md. Code Ann., Corps. &

Assn’s § 3-210(b) states that the “conclusion of the majority as to the fair

value of the stock” shall be filed with the court. See Reply Brief of

Appellant at 22-24. Those arguments are totally unpersuasive. Section 3-

211(b)(2)(ii) empowers a court reviewing the appraisers’ fair value

assessment to substitute its own valuation in place of the appraisers’ if

it rejects the appraisers’ award. Therefore, nothing would prevent us

from adopting, as our own, the alternative valuation or Frank’s valuation.

18 FROELICH v. SENIOR CAMPUS LIVING

Thus, SCL’s second challenge to the statutory appraisal fares no

better than its first.

V.

For all of these reasons, the judgment of the magistrate judge is

AFFIRMED.