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National Parks Resort Lodge Corp. v. Perfetto

Court of Appeals of Tennessee, Knoxville

May 29, 2018


          Session April 18, 2018

          Appeal from the Chancery Court for Sevier County No. 03-3-138 Robert E. Lee Davies, Senior Judge

         This appeal arises from a judicial determination of the fair value of dissenters' shares in a corporation. In 2002, King Solomon's Palace, Inc., ("KSP") a corporation created in 1986 for the purpose of establishing a hotel in Pigeon Forge, announced its pending merger into another company, National Parks Resort Lodge Corporation ("Plaintiff"). Johnny Jess Davis ("Davis") was the majority shareholder of KSP. Dissenters Antonio Perfetto and David L. Donohue ("Defendants") each held 50 shares of KSP common stock. Plaintiff filed a complaint in the Chancery Court for Sevier County ("the Trial Court") seeking a judicial determination of the fair value of Defendants' shares. After a trial, the Trial Court awarded Defendants $186, 913 for their shares and $122, 876 in attorney's fees and costs. The Trial Court found, in part, that Davis had manipulated and withheld financial information to Defendants' detriment. Plaintiff appeals to this Court, arguing, among other things, that the evidence preponderates against the Trial Court's findings regarding Davis's conduct. Defendants raise an additional issue arguing that the Trial Court set the value of their shares lower than it should have under the evidence. We affirm the judgment of the Trial Court.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed; Case Remanded

          Lewis S. Howard, Jr. and Erin J. Wallen, Knoxville, Tennessee, for the appellant, National Parks Resort Lodge Corporation.

          D. Scott Hurley and Ryan N. Shamblin, Knoxville, Tennessee, for the appellees, Antonio Perfetto and David L. Donohue.

          D. Michael Swiney, C.J., delivered the opinion of the court, in which Charles D. Susano, Jr. and John W. McClarty, JJ., joined.




         In 1986, Davis and Ed Neely formed KSP for the purpose of developing a hotel in Pigeon Forge, Tennessee. Davis later acquired Neely's stock interest in KSP. Davis contracted with Rouse Construction Company to build the hotel. Defendants were owners and officers of Rouse Construction. KSP could not afford the nearly 5 million dollar price for building the hotel. Instead, in exchange for their foregoing the final $350, 000 on construction costs, Defendants each accepted 50 shares of KSP common stock. There were 2, 000 outstanding shares overall. Davis owned 90% of the shares, Defendants owned 5% together, and the partnership of Snowden and Wallace owned another 5%.

         From 1987 through the merger that precipitated this lawsuit in 2003, Defendants were shareholders in KSP. Defendants never received any income from their KSP stock. Snowden and Wallace's shares later were bought and converted to treasury stock, the result being Defendants then held 5.26% of KSP's outstanding shares. From the year 1993 through 2002, KSP's annual sales ranged from a low of $2, 422, 008 in 1997 to a high of $2, 715, 493 in 2002. In November 1996, Davis signed a Personal Financial Statement representing KSP was worth $11, 600, 000.

         In the '90s, Davis undertook various transactions that became a point of controversy in this case. Perhaps the most contentious is that of Davis's unpaid salary, or management fee, and his level of transparency in the amount he claimed he was owed. Davis wrote off more than 2 million dollars in KSP assets. Davis engaged in transactions with other entities he owned or held controlling interest to effectuate large write-offs of receivables. Meanwhile, a 1997 Woodford and Associates appraisal of the hotel reflected its worth as $11, 500, 000. In 2002, despite no obvious intervening factors other than the passage of several years, an appraisal by Woodford and Associates reflected the lesser value of $7, 250, 000.

         In November 2002, KSP gave notice that it would vote upon a merger with Plaintiff. At a December 2002 shareholder meeting, Defendants voted against the merger. Defendants did not, however, provide written notice of dissent as required by Tenn. Code Ann. § 48-23-202. In January 2003, Plaintiff sent Defendants a check for $11, 600 for their KSP shares. Defendants objected to this amount. In March 2003, Plaintiff filed suit against Defendants in the Trial Court seeking a judicial determination of the value of their shares. The case subsequently plodded on for over a decade before finally being tried without a jury on November 29, 30, and December 1, 2016.

         In March 2017, the Trial Court entered its detailed amended memorandum and order wherein it placed a value on Defendants' shares, stating as follows in pertinent part:

In 1997, Davis implemented a series of financial transactions between KSP and these other entities in which he owned a complete or controlling interest. The overall impact of the related party transactions resulted in large write-offs of value or new liabilities for KSP. In addition to the unpaid salary claim, Davis caused KSP to loan sums to his other entities which he later wrote off as expenses or caused KSP to become indebted to pay for expenses incurred by these entities which he owned, totaling approximately $2.5 million dollars. Neither the unpaid salary claim nor the related party transactions were recorded as having been approved by KSP in any minutes of any board of directors meeting. The bylaws of KSP provide that no loans will be contracted on behalf of the corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. While the bylaws allow the board of directors to meet without having a formal meeting, they still require written consent and provide that these resolutions must be included in the minutes.
In the fall of 1997, Perfetto and Donohue asked Davis if he objected to the transfer of their stock to Rouse Construction. Davis agreed, but when Mr. Ingram [Davis's CPA] was informed, he told Davis this would cause KSP tax issues. In September 1997 Perfetto and Donohue transferred their fifty shares of KSP to Rouse Construction. On February 25, 1998, KSP filed suit in Knox County Chancery Court and obtained an injunction setting aside the Defendants' transfer of their KSP stock to Rouse. As part of the injunction lawsuit, Defendants requested additional financial records of KSP, and KSP provided Defendants with the 1996 financial statement; however, KSP did not provide the 1997 year-end financial statement within a year, Defendants requested to have their shares of KSP purchased for $600, 000. As a result, in 2001, Davis decided to eliminate the Defendants by use of a merger. He spoke to his CPA who advised Davis that he would need a business appraisal and a real estate appraisal. Davis then contacted Woodford and Associates to perform the real estate appraisal for the express purpose of negotiating the buyout of the minority shareholders' interest. Woodford's appraisal was completed August 12, 2002. In that appraisal, Woodford valued the land at $3, 350, 000, the improvements at $3, 650, 000, and furnishings, fixtures and equipment at $250, 000 for a total of $7, 250, 000. Five years earlier, Woodford had appraised the same property for Davis when Davis was in the process of obtaining a loan from the bank. The 1997 Woodford appraisal valued the land at $3, 250, 000, the improvements at $7, 500, 000 and the furnishings, fixtures and equipment at $750, 000 for a total of $11, 500, 000. Davis' own financial statement of November 10, 1996 (Exhibit 48), indicates the total value of KSP stock (including the hotel and 3.5 acres) to be $11, 600, 000.
On October 17, 2002, KSP advised Defendants by letter that it anticipated a merger of KSP into another company (National Parks Resort Lodge, Corp.). Since May 2002, Defendants (through their attorney) had made multiple requests for access to financial statements of KSP (specifically the 1997 financial statement); however, this financial information was not produced. During the same time, KSP had received a business evaluation prepared by Renee Harwell of Coulter and Justus, P.C. Harwell had evaluated one hundred shares of KSP stock as of August 31, 2002 with an appraisal dated October 7, 2002. By letter dated November 25, 2002, KSP provided Defendants with written notice of a special meeting of the shareholders of KSP to be held on December 12, 2002 for the purpose of considering and voting upon the merger of KSP into National Parks Resort. Although the Defendants did not provide written notice to KSP of any intent to demand payment for their shares if the proposed merger went through, Davi[s] knew that both Defendants had repeatedly demanded that their shares be purchased.
Renee Harwell testified on behalf of the Plaintiff. Harwell worked for Coulter and Justus from 1999 to 2014. She has been a certified public accountant since 1989. Davis provided Harwell with the information which she requested. Harwell used the Delaware Block method for her business appraisal of KSP. Under that method the appraiser includes the asset approach, the income approach, and the market approach. Although the Delaware Block Method recommends the use of five years of financial statements, Harwell, in her preliminary appraisal used four years and seven months. As a result, she did not use and was not provided the 1997 year-end financial statement. However, she agreed the appraiser should attempt to identify any extraordinary, non-reoccurring transactions that have nothing to do with the business and then exclude those transactions from the appraisal. Since she was not provided the 1997 financial statement, she did not consider the $750, 000 of cancellation of debt from Davis to KSP. She also did not consider the $1, 028, 856 of charge offs of accounts receivables. Although she was provided with the 1997 Woodford appraisal of $11, 500, 000, she elected not to consider it; nor did she consider the sale of the Snowden and Wallace stock with an agreed value of $250, 000.
Harwell's final appraisal was completed in March 2007. Due to the issue of the unpaid salary or management fees, Harwell came up with three scenarios. In the first scenario there is no cash flow. Under scenario two, the management fee is reduced to the industry average of three percent (3%) plus an additional two percent (2%) for owner compensation. The final scenario three is the average of scenario one and two. Harwell assigned a twenty-five percent (25%) weight to the asset approach, twenty-five percent (25%) weight to the market approach, and fifty percent (50%) weight to the income approach. Her indicated fair value of the equity of one hundred shares (representing a 5.26% interest) ranged from $31, 800 (Scenario one) to $62, 900 (Scenario two).
Both Defendants testified. Donohue basically went along with and relied upon Perfetto. Neither Perfetto nor Donohue realized that Davis was planning to cancel the debt owed by his related companies to KSP or to reach back and recover over a million dollars with prior period adjustments for his unpaid salary. Although both Defendants testified they were told by both Davis and his attorney that there was nothing in the original shareholders' agreement (between Davis and Neely) that concerned them, those representations are of no avail. Likewise, in 1992, Davis asked Perfetto to guarantee additional debt with First National Bank. As an inducement, Davis represented he would limit his management fee to no more than $85, 000 a year. Although a draft document was prepared to this effect, it was never signed; however, Perfetto did guarantee the debt. The Court finds the testimony of Perfetto and Donohue, although limited, to be credible.
Defendants hired Leroy Bible as their expert. Bible is a certified public accountant and a certified fraud examiner. He has testified many times for plaintiffs and defendants and as a court appointed expert. The items considered by Bible are set forth in Exhibit 58. Bible prepared a detailed critique of the Coulter and Justus business appraisal. The purpose of Bible's report was to determine if the Coulter and Justus report was in fact a fair offer to the Defendants. Bible agreed with the Delaware Block Method used by Coulter and Justus; however, he had four issues with the report:
1. He was concerned with the adjustment made to retained earnings which was greater than forty percent (40%) of the total revenue;
2. The failure to consider the addition of the right-of-way;
3. Hiding the 1997 financial statement from Coulter and ...

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