The opinion
Filed 9/1/21; Certified for Publication 9/22/21 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
BERNICE CHENG, B303519
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC680509)
v.
COASTAL L.B. ASSOCIATES,
LLC, et al.,
Defendants and
Respondents.
APPEAL from an order of the Superior Court of Los
Angeles County, Dennis Landin, Judge. Affirmed.
Robert D. Feighner for Plaintiff and Appellant.
Einwechter & Hyatt and John P. Einwechter for
Defendants and Respondents.
******
This action concerns the purchase of minority interests in a
California limited liability company pursuant to Corporations
Code section 17707.03, subdivision (c).1 The subject limited
liability company, Clary Associates, LLC (the LLC), is owned
equally by siblings Bernice Cheng (appellant), Arlene Cheng
(Arlene), Caroline Cheng Jones (Caroline), and Diana Cheng
(Diana).2 Appellant challenges the trial court’s order confirming
a majority appraisers’ award valuing the parties’ respective 25
percent interests in the LLC at a discounted fair market value of
$623,979 and setting a final buyout price of $621,954.
We affirm the trial court’s order.
BACKGROUND
Involuntary dissolution action and election pursuant to
section 17707.03
Appellant filed an action for involuntary dissolution of the
LLC in October 2017. Respondents moved for an order staying
the dissolution action and electing to purchase appellant’s and
Arlene’s interests in the LLC pursuant to section 17707.03. The
parties thereafter stipulated to an order staying the dissolution
action and appointing three appraisers to determine the fair
market value of their respective 25 percent interests in the LLC
“using generally accepted appraisal and reporting methods and
standards” under section 17707.03. The parties stipulated that
“[t]he term ‘fair market value’ shall be defined as commonly
1 All further statutory references are to the Corporations
Code.
2 Because the parties share the same surname, we refer to
them by their first names to avoid confusion. Caroline and Diana
are referred to collectively as respondents.
2
understood in the appraisal industry, California statutes, and
precedents which have applied Corp. Code 17707.03.” The
parties further stipulated that “[t]he award of the appraisers, or a
majority of them when confirmed by the court, shall be final and
conclusive upon all parties, pursuant to § 17707.03(c)(3).” The
parties’ stipulation also stated: “Arlene and Bernice have not
alleged any direct or derivative claims for damages against any
defendant in this case.[3] Arlene and Bernice reserve the right to
assert such claims in the future if any evidence supporting such
allegations comes to light, to the extent permitted by existing
law, and to seek a lifting of the stay to the extent permitted by
existing law. Caroline and Diana reserve the right to oppose any
such requests.”
Pursuant to the parties’ stipulation, the trial court
appointed John Thomson, Gazelle Wichner, and Laurence
Sommer as appraisers. At the time of the appraisal, the LLC’s
sole asset was a single-story industrial warehouse located in San
Gabriel, California. The building, which was appraised at $3
million in March 2018, was occupied by a single tenant whose
five-year lease term was set to expire sometime in 2021. The
three appraisers worked separately on their initial individual
valuation reports, and each reached a different valuation.4
3 Appellant’s first amended complaint (FAC), the operative
pleading at the time the parties entered into the stipulation,
asserted causes of action for dissolution and partition only. As
the basis for dissolution, the FAC alleged, among other grounds,
mismanagement of the property owned by the LLC and
respondents’ “persistent and pervasive fraud, mismanagement
and/or abuse of authority.”
4 Thomson calculated a value of $3,252,791 and applied a 31
percent discount, for a fair market value of $561,000. Wichner
3
Respondents filed a motion asking the trial court to
instruct the appraisers to determine whether they could agree on
a consensus valuation. Appellant opposed the motion. The trial
court granted respondents’ motion and instructed the appraisers
to review their respective reports, confer with each other, and
submit their joint conclusions as to the fair market value of the
LLC interests.
The appraisers submitted a joint final report on August 20,
2019. In their joint report, the appraisers unanimously agreed on
a net asset value of $831,973 for a 25 percent interest in the LLC
as of October 20, 2017. The report stated that a majority of the
appraisers agreed that the fair market value standard required
consideration of discounts and “the value should be $623,979
after the application of a 27% discount applicable to a minority
interest in the Clary Associates, LLC.”
Respondents moved to confirm the appraisers’ valuation on
September 4, 2019. Appellant opposed the motion.
The parties then stipulated to an order allowing appellant
to file a third amended complaint (TAC) in the stayed dissolution
action.5 The TAC, filed on October 15, 2019, and the operative
calculated a value of $3,040,000 and applied a 23 percent
discount, for a fair market value of $610,000. Sommer calculated
a value of $906,973 and concluded no discount was warranted.
5 Appellant filed a second amended complaint on July 17,
2019, asserting new derivative causes of action for
mismanagement and breach of fiduciary duty. Respondents
notified appellant of their intent to demur on the grounds that
the new derivative causes of action failed to allege statutory
prerequisites for derivative actions and failed to allege sufficient
facts to constitute any claims for mismanagement or breach of
fiduciary duty. Appellant agreed to withdraw the derivative
4
pleading at the time of the LLC buyout, asserts causes of action
for dissolution of the LLC, partition, and an accounting. As
grounds for dissolution, the TAC alleges, among other grounds,
mismanagement and conflicts of interest by respondents.
On November 12, 2019, the trial court confirmed the
appraisers’ discounted fair market valuation of a 25 percent
interest in the LLC at $623,979. Pursuant to an agreement by
the parties, the trial court ordered an additional deduction of
$2,025 for reimbursement of appraisal fees and set a final buyout
price of $621,954 for a 25 percent interest in the LLC. The trial
court ordered respondents to prepare the necessary documents
and to tender payment to complete the purchase of appellant’s
and Arlene’s respective LLC interests by January 31, 2020.
Appellant filed this appeal on January 8, 2020.
CONTENTIONS ON APPEAL
Appellant raises the following contentions on appeal:
I. The trial court’s order instructing the appraisers to
review each other’s reports, confer with one another, and reach a
consensus on the fair market valuation did not comply with the
statutory procedures set forth in section 17707.03. That statute,
appellant maintains, required the trial court either to confirm
one of the three valuations initially submitted by the appraisers
or to make a de novo determination of the fair market value of
the LLC interests.
II. The consensus valuation confirmed by the trial court
improperly discounted the fair market value of the LLC interests.
claims, and respondents stipulated to allow the filing of the TAC
without any direct or derivative claims of mismanagement or
breach of fiduciary duty.
5
Such discounts are disallowed under section 2000, which governs
the buyout of shareholder interests in closely held corporations,
and appellant argues that discounts should similarly be
disallowed under section 17707.03.
III. The valuation confirmed by the trial court improperly
failed to account for appellant’s mismanagement allegations.
DISCUSSION
I. Applicable law and standard of review
Section 17707.03, subdivision (a), authorizes any member
of a limited liability company to file an action to dissolve the
limited liability company in certain specified circumstances. The
statutory grounds for dissolution include “[t]he management of
the limited liability company is deadlocked or subject to internal
dissension” (§ 17707.03, subd. (b)(4)), and “[t]hose in control of
the limited liability company have been guilty of, or have
knowingly countenanced, persistent and pervasive fraud,
mismanagement, or abuse of authority” (§ 17707.03, subd. (b)(5)).
In any action for judicial dissolution, the other members of
the limited liability company may avoid the dissolution by
purchasing for cash the fair market value of the interests owned
by the members initiating the dissolution proceeding.
(§ 17707.03, subd. (c)(1).) If the parties are unable to agree on a
value, then “[t]he court shall appoint three disinterested
appraisers to appraise the fair market value of the membership
interests owned by the moving parties, and shall make an order
referring the matter to the appraisers so appointed for the
purpose of ascertaining that value. . . . The award of the
appraisers or a majority of them, when confirmed by the court,
6
shall be final and conclusive upon all parties.” (§ 17707.03, subd.
(c)(3).)
The appraisers’ award does not bind the trial court. The
court may select among conflicting appraiser opinions or decide
the matter de novo. (Dickson v. Rehmke (2008) 164 Cal.App.4th
469, 475 (Dickson).) The trial court’s valuation order is
appealable. (§ 17707.03, subd. (c)(3); Dickson, at p. 476.) We
review the trial court’s valuation order under the substantial
evidence standard. (Dickson, at p. 477.) We review de novo
appellant’s challenge to the trial court’s statutory authority to
order the appraisers to meet and confer and attempt to reach a
consensus valuation. (See Mart v. Severson (2002) 95
Cal.App.4th 521, 530 [trial court’s interpretation of statutory
standard for valuation subject to de novo review]; City of Desert
Hot Springs v. Valenti (2019) 43 Cal.App.5th 788, 793
[determination of proper scope of trial court’s authority under
statute is a matter of statutory construction subject to de novo
review].)
II. Alleged failure to follow statutory procedures
A. Section 17707.03 does not prohibit the trial
court from ordering the appraisers to meet and
confer and does not require the trial court to
make a de novo determination of value
The trial court’s order instructing the appraisers to review
each other’s reports, confer with one another, and attempt to
reach a consensus valuation did not contravene the statutory
procedures set forth in section 17707.03. The statute provides in
pertinent part:
“The court shall appoint three disinterested
appraisers to appraise the fair market value of the
membership interests owned by the moving parties,
7
and shall make an order referring the matter to the
appraisers so appointed for the purpose of
ascertaining that value. The order shall prescribe
the time and manner of producing evidence, if
evidence is required. The award of the appraisers or
a majority of them, when confirmed by the court,
shall be final and conclusive upon all parties.”
(§ 17707.03, subd. (c)(3).)
Nothing in the statutory language prohibits or restricts the trial
court’s authority to order the appraisers, if unable initially to
reach a majority consensus on valuation, to confer further with
each other to determine whether such a consensus can be
achieved. Similarly, nothing in the statutory language requires
the trial court to make a de novo determination of value in the
absence of a consensus valuation determined by a majority of the
appraisers.
B. Case authority does not require the trial court
to make a de novo determination of value
Case authority interpreting and applying the buyout
procedures of section 17707.03 is sparse. Absent such authority,
courts have looked to cases applying section 2000, which
prescribes similar buyout procedures to avoid dissolution of a
closely held corporation.6 (Dickson, supra, 164 Cal.App.4th at
6 Section 2000 provides that shareholders representing 50
percent or more of the voting power of a closely held corporation
may avoid the dissolution of the corporation by purchasing at fair
value the shares owned by those initiating the dissolution
proceeding. (§ 2000, subd. (a).) The statute sets forth a
procedure similar to that in section 17707.03 for the court to
appoint three disinterested appraisers to ascertain fair value.
Section 2000 similarly provides that “[t]he award of the
8
pp. 474-475.) Cases decided under section 2000 do not support
appellant’s argument that the trial court was required to make a
de novo determination of value.
The court in Brown v. Allied Corrugated Box Co. (1979) 91
Cal.App.3d 477 (Brown) expressly rejected appellant’s position in
the context of a shareholder buyout under section 2000: “We find
absolutely no merit in plaintiffs’ contention that a trial court
faced with highly conflicting appraisal reports is obligated to
make a de novo determination of value. Plaintiffs’ authority for
this proposition, Venables v. Credential Ins. Agency, Inc. [(1956)]
140 Cal.App.2d 724, says no such thing. Rather, the court in that
case merely held that if the trial court becomes convinced that an
appraisal award is erroneous, then it becomes the duty of the
court to examine the matter de novo.” (Brown, at p. 491.)
In accord with Brown, the section 2000 cases appellant
cites conclude that a de novo determination of value is required
only when the trial court finds the appraisers’ award to be
erroneous or incorrect. (Cotton v. Expo Power Systems, Inc.
(2009) 170 Cal.App.4th 1371, 1376 (Cotton) [“[I]f the court
concludes that the appraisers’ award is incorrect, rather than
confirm the award, the court must examine the matter de novo
and fix the correct value.”]; Brown, supra, 91 Cal.App.3d at
p. 489; Venables v. Credential Ins. Agency, Inc., supra, 140
Cal.App.2d at p. 727 (Venables).)7 The trial court in this case did
appraisers or of a majority of them, when confirmed by the court,
shall be final and conclusive upon all parties.” (§ 2000, subd. (c).)
7 Brown and Venables involved shareholder buyouts under
former sections 4658 and 4659, predecessor statutes to section
2000. (See Legis. Com. com., Deering’s Ann. Code Corp. Code,
§ 2000 (2009) pp. 432-433.)
9
not find any of the three appraisal valuations to be erroneous. A
de novo determination of value accordingly was not required.
Brown, supra, 91 Cal.App.3d 477 also contradicts
appellant’s claim that the trial court lacked authority to order the
appraisers, after submitting their initial reports, to meet and
confer and attempt to reach a consensus valuation. In Brown,
the trial court’s order appointing the appraisers expressly stated
that if the appraisers were unable to agree, “‘they shall petition
the court for instruction.’” (Id. at p. 491.)
III. Allegedly erroneous determination of fair market
value
A. Minority interest discount
1. The valuation discount was not improper
The appraisal award did not improperly discount the fair
market value of the LLC interests. The stipulated order
appellant entered into defines fair market value as that term is
“commonly understood in the appraisal industry, California
statutes, and precedents which have applied Corp. Code
§ 17707.03.” A majority of the appraisers agreed that the fair
market value standard requires consideration of discounts and
that a 27 percent discount should be applied to the 25 percent
LLC interests. Wichner and Thomson explained in their
individual reports that a commonly accepted definition of fair
market value is set forth in IRS Revenue Ruling 59-60 as “the
price at which the property would change hands between a
willing buyer and a willing seller when the former is not under
any compulsion to buy and the latter is not under any compulsion
to sell, both parties having reasonable knowledge of the relevant
facts.” (Rev. Rul. 59-60, 1959-1 C.B. 237.) That same definition
has been applied by courts in California. (See, e.g., Rappaport v.
10
Gelfand (2011) 197 Cal.App.4th 1213, 1228 [buyout of limited
partnership interest]; see also Metropolitan Water Dist. of So.
California v. Campus Crusade for Christ, Inc. (2007) 41 Cal.4th
954, 965 [eminent domain]; In re Marriage of Hewitson (1983)
142 Cal.App.3d 874, 882, fn. 7 [stock valuation in marriage
dissolution]; People v. Romanowski (2017) 2 Cal.5th 903, 914-915
[value of property in theft offenses]; Mola Development Corp. v.
Orange County Assessment Appeals Bd. (2000) 80 Cal.App.4th
309, 321-322 [valuation for real property tax assessment
purposes].)
Wichner stated in her report that Revenue Ruling 59-60
requires discounts to be considered when valuing fractional
interests. She explained that a lack of control discount “is
applicable for minority interests, which are interests of less than
50% in a given asset or entity” and that “[m]inority, non-
controlling interests in real estate holding companies have
historically sold at a discount in comparison to their prorata
share due primarily to lack of control and lack of marketability.”
Wichner further explained that another reason for discounting
the minority LLC interests was the general unavailability of
conventional financing for partial real estate interests.
Wichner based her discount analysis on sales of real estate
limited partnership interests in the secondary market. Thomson
based his discount analysis on valuation principles applied to
specialized closed end funds holding real estate assets and
valuation studies involving restricted stock transactions.
The 27 percent discount applied by a majority of the
appraisers and confirmed by the trial court is consistent with
commonly understood fair market valuation principles stipulated
11
to by the parties. It is also supported by substantial evidence,
consisting of Wichner’s and Thomson’s reports and analyses.8
We disregard appellant’s argument that a ruling in a prior,
wholly separate trust dispute between the parties has any
relevance to the valuation analysis and the discount applied in
this case. The prior case did not concern the buyout of LLC
membership interests under section 17707.03 or the valuation of
those interests. It accordingly has no relevance to the issues
presented here.
2. The valuation standard prescribed under
section 2000 does not apply
Appellant contends the valuation standards prescribed for
shareholder buyouts under section 2000 should apply to LLC
membership purchases under section 17707.03. Section 2000,
which governs shareholder purchases initiated to avoid
dissolution of a closely held corporation, “does not permit a lack
of control discount when determining the fair value of a minority
shareholder interest.” (Goles v. Sawhney (2016) 5 Cal.App.5th
1014, 1019; see Ronald v. 4-C’s Electronic Packaging, Inc. (1985)
168 Cal.App.3d 290, 298-299; Brown, supra, 91 Cal.App.3d at
p. 486.) Appellant claims such discounts should similarly be
disallowed here.
Appellant’s position contravenes ordinary principles of
statutory construction. When construing a statute, a court need
only consider other statutes or case law applying other statutes if
8 One appellate court has suggested that a trial court’s
decision to apply a minority discount is within the scope of its
discretionary authority. (Maughan v. Correia (2012) 210
Cal.App.4th 507, 523 [“the court’s choice to apply a minority
discount at all may involve an exercise of its discretion”].)
12
the plain language of the statute at issue is unclear. (Hoechst
Celanese Corp. v. Franchise Tax Bd. (2001) 25 Cal.4th 508, 519.)
That is not the case here. Section 17707.03 plainly states that
members may avoid dissolution of a limited liability company by
purchasing at “fair market value” the membership interests of
those seeking dissolution. The commonly accepted definition of
“fair market value” under California law is the price at which the
property would change hands between a willing buyer and a
willing seller when the former is not under any compulsion to buy
and the latter is not under any compulsion to sell, and both
parties have reasonable knowledge of the relevant facts.
(Rappaport v. Gelfand, supra, 197 Cal.App.4th at p. 1228; see
Metropolitan Water Dist. of So. California v. Campus Crusade for
Christ, Inc., supra, 41 Cal.4th at p. 965; In re Marriage of
Hewitson, supra, 142 Cal.App.3d at p. 882, fn. 7; People v.
Romanowski, supra, 2 Cal.5th at pp. 914-915; Mola Development
Corp. v. Orange Assessment Appeals Bd., supra, 80 Cal.App.4th
at pp. 321-322.) Fair market value includes discounts reflected in
the market. (See Miller, Discounts and Buyouts in Minority
Investor LLC Valuation Disputes Involving Oppression or Divorce
(2011) 13 U.Pa. J. Bus. L. 607, 611 (hereafter Miller) [“‘fair
market value’ would be the owner’s proportionate interest in the
corporation multiplied by the value of the corporation, plus or
minus any premiums or discounts that would be reflected in the
market”]; see also Moll, Shareholder Oppression and “Fair
Value”: of Discounts, Dates, and Dastardly Deeds in the Close
Corporation (2004) 54 Duke L.J. 293 [discussing difference
between “fair value” and “fair market value” in close corporation
dissolutions].)
13
Section 2000, in contrast, specifies that shareholders
seeking to avoid dissolution of closely held corporation must
purchase at “fair value” the shares of those seeking dissolution.”
“Fair value” is defined in section 2000 as “the liquidation value as
of the valuation date but taking into account the possibility, if
any, of sale of the entire busines as a going concern in a
liquidation.” (§ 2000, subd. (a); accord, Mart v. Severson, supra,
95 Cal.App.4th at p. 526.) Fair value “does not consider market-
related factors that could affect value in the particular hands of a
specific owner. Instead, ‘fair value’ considers only ‘the
proportionate interest in a going concern.’” (Miller, supra, 13
U.Pa. J. Bus. L. at p. 611; see Brown, supra, 91 Cal.App.3d at
p. 486; Estate of Rowell (1955) 132 Cal.App.2d 421, 429.)
The difference in the statutory language evidences a
difference in legislative intent. “‘“When the Legislature uses
materially different language in statutory provisions addressing
the same subject or related subjects, the normal inference is that
the Legislature intended a difference in meaning.”’” (American
Coatings Assn. v. South Coast Air Quality Management Dist.
(2012) 54 Cal.4th 446, 463, quoting People ex rel. Lockyer v. R.J.
Reynolds Tobacco Co. (2005) 37 Cal.4th 707, 717.) Had the
Legislature intended to apply a “fair value” standard to
purchases of membership interests under section 17707.03, it
would have done so expressly in the statutory language.
“Fair value,” as defined in section 2000, does not apply to
purchases of limited liability membership interests under section
17707.03.
B. Mismanagement allegations
Appellant’s operative TAC asserts no direct or derivative
claims of mismanagement. Appellant confirmed in the parties’
14
joint stipulation and order that she has “not alleged any direct or
derivative claims for damages against any defendant in this case”
and that “there are no grounds for any direct or derivative claims
for damages asserted against any defendant in this matter.”
The TAC alleges mismanagement and conflicts of interest
solely as grounds for dissolution of the LLC. The dissolution
action was stayed pursuant to section 17707.03 and the parties’
stipulated order. (§ 17707.03, subd. (c).) There were accordingly
no claims of mismanagement to be accounted for in the buyout
valuation.
Appellant’s counsel claimed during oral argument that
appellant asserted mismanagement claims independent of the
dissolution proceeding, in her cause of action in the TAC for
failure to produce LLC records, and these claims should have
been valued in the appraisal award. To the extent those claims
were not stayed pursuant to section 17707.03, they were excluded
from the appraisers’ valuation by the parties’ joint stipulation
that no direct or derivative claims for damages were being
asserted against respondents.
Cotton, supra, 170 Cal.App.4th 1371 and Brown, supra, 91
Cal.App.3d 477, on which appellant relies, are distinguishable.
Cotton involved reversal of a valuation order under section 2000
because the valuation failed to consider a pending derivative
action for breach of fiduciary duty. (Cotton, at p. 1380.) Brown
similarly involved a valuation that failed to consider the impact
of a pending wrongful death action against the corporation.
(Brown, at pp. 482, 490-491.) Here, there were no pending
actions for the appraisers or the trial court to consider.
Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238,
which appellant also cites, is inapposite. The court in that case
15
simply held that an individual shareholder has standing to assert
a direct cause of action for breach of fiduciary duty against the
majority shareholders and is not limited to a derivative action.
(Id. at pp. 1257-1260.) Appellant here has asserted no direct or
derivative claims of mismanagement.
DISPOSITION
The order confirming the majority appraisal award and
setting a final buyout price of $621,954 for each 25 percent
interest in the LLC is affirmed. Respondents are awarded their
costs on appeal.
___________________________
CHAVEZ, J.
We concur:
_______________________________
ASHMANN-GERST, Acting P. J.
_______________________________
HOFFSTADT, J.
16
Filed 9/22/21
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
BERNICE CHENG, B303519
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC680509)
v.
COASTAL L.B. ASSOCIATES, ORDER CERTIFYING
LLC, et al., OPINION FOR
PUBLICATION
Defendants and
Respondents. NO CHANGE IN
JUDGMENT
THE COURT:*
The opinion in the above-entitled matter filed on
September 1, 2021, was not certified for publication in the
Official Reports. For good cause, it now appears that the opinion
should be published in the Official Reports, and it is so ordered.
*ASHMANN-GERST, Acting P. J. CHAVEZ, J. HOFFSTADT, J.