Filed 1/13/20 Sparber v. Annen CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

RICHARD E. SPARBER,

Plaintiff and Appellant,

v.

RICHARD J. ANNEN,

Defendant and Respondent.

D073855, D074327

(Super. Ct. Nos. 37-2015-00011623-

CU-PT CTL, 37-2015-00016445-CU-

BT-CTL)

APPEAL from an order of the Superior Court of San Diego County, Lisa Schall, Judge; APPEAL from a judgment of the Superior Court of San Diego County, Eddie C. Sturgeon. Order and judgment affirmed.

Gordon & Rees, William M. Rathbone and Timothy K. Branson for Plaintiff and Appellant.

Keehn Law Group and L. Scott Keehn for Defendant and Respondent.

I.

INTRODUCTION

Plaintiff Richard E. Sparber appeals from an order entered in case No. 37-2015-00011623-CU-PT-CTL (case No. 11623) and a judgment entered in case No. 37-2015-00016445-CU-BT-CTL (case No. 16445). Sparber filed both actions.

In the first action, case No. 11623, Sparber filed a “Petition for Court Supervision of Voluntary Winding Up” (some capitalization omitted), seeking the court’s assistance in the winding up and dissolution of Sparber Annen Morris & Gabriel, a Professional Law Corporation (SAMG) after Sparber and his partner, defendant Richard J. Annen, could not agree on a number of matters related to SAMG. After Sparber moved for dissolution of SAMG, Annen responded by filing a document titled “Notice of Election and Election to Purchase Petitioner’s Shares in Sparber Annen Morris & Gabriel, APLC Pursuant to California Corporations Code[ ] § 2000,” thereby indicating his intention to purchase Sparber’s shares in order to avoid dissolution of SAMG.

While the dissolution matter was pending, Sparber filed another action, asserting shareholder derivative claims on behalf of SAMG against Annen in case No. 16445.

In the dissolution matter, the trial court appointed three appraisers who were to provide an appraisal report setting forth the value of the outstanding shares of stock in SAMG. The appraisers’ report would permit the court to set an appropriate valuation for Sparber’s shares, which Annen would then purchase, pursuant to section 2000. As part of the appraisal process, the appraisers were permitted to place a value on Sparber’s shareholder derivative action and include the value of that asset in determining the overall value of SAMG.

Approximately 21 months after being appointed, the appraisers provided a final appraisal report to the court overseeing the dissolution action. In this report, the appraisers stated that they had considered all of the documents that Sparber and Annen had provided them, including documents related to the derivative claims filed by Sparber. Two of the appraisers agreed that the total value of SAMG on the relevant date set by the court was $238,000, while one appraiser placed SAMG’s value on that date at $103,000. All three appraisers agreed that the value to be assigned to Sparber’s shareholder derivative action was zero.

The court overseeing the dissolution action confirmed the conclusions of the majority of the appraisers, setting the fair value of the common stock of SAMG at $238,000 on the relevant date; the value of Sparber’s ownership of 50 percent of the common stock of SAMG as of that date was thus $119,000. The court decreed that as an alternative to the winding up and dissolution of the business of SAMG, defendant Richard J. Annen was to pay Sparber $119,000 within 10 days of the entry of the decree. Annen paid Sparber that sum within the time limits set forth in the alternative decree, and Sparber transferred his stock in SAMG to Annen.

While the appraisal process was ongoing, the court that was overseeing the shareholder derivative action repeatedly continued various hearing dates and eventually issued a stay of the action. After the court in the dissolution action entered the alternative decree pursuant to section 2000, and after the sale of Sparber’s shares to Annen was completed, the court overseeing the shareholder derivative action granted Annen’s motion to dismiss the shareholder derivative action, finding that Sparber no longer had any interest in SAMG and therefore lacked standing to pursue the derivative claims. That court subsequently entered a judgment of dismissal.

Sparber appeals from both the order entering an alternative decree in the special proceeding held pursuant to section 2000, as well as from the judgment of dismissal in the shareholder derivative matter. Sparber contends that the court in the dissolution action erred in accepting the appraisers’ valuation of SAMG because, he maintains, the record suggests that the appraisers did not actually consider or value the derivative claims and, instead, avoided making any determination of the value of those claims. Sparber asserts that the court should have either returned the matter to the appraisers for consideration of the shareholder derivative action, or held a proceeding on its own to determine the value of that asset.

Sparber further asserts that the court in the shareholder derivative action erred in dismissing that action based on Sparber’s lack of standing because, he argues, he continues to have an interest in SAMG as a result of his appeal from the court’s alternative decree in the special proceeding.

We affirm both the order entering the alternative decree in case No. 11623 and the judgment of dismissal entered in case No. 16445.

II.

FACTUAL AND PROCEDURAL BACKGROUND

A. Sparber petitions to wind up the business of SAMG and Annen moves to purchase Sparber’s shares rather than dissolve SAMG

In or around 2012, disputes arose between Sparber and Annen related to their law firm. Sparber and Annen each owned 50 percent of the issued and outstanding common shares in SAMG. Sparber and Annen attempted to reconfigure the firm, but ultimately were unable to reach agreement on a number of issues. Sparber advised Annen that dissolution of the firm was the only viable option, but the two could not reach agreement on a dissolution plan.

In April 2015, Sparber filed a “Petition for Court Supervision of Voluntary Winding Up” (some capitalization omitted) pursuant to Corporations Code section 1904 (the Dissolution Action). In response to Sparber’s filing, Annen filed a “Notice of Election and Election to Purchase Petitioner’s Shares in Sparber Annen Morris & Gabriel, APLC Pursuant to California Corporations Code § 2000” (Election to Purchase Shares). In this notice, Annen stated that he “elects to avoid dissolution of the Corporation and any Court supervision of its affairs by purchasing the 50% of the voting shares of the Corporation currently standing in the name of Mr. Sparber for one cash payment in the total amount of $25,000.000 . . . .”

By way of a minute order issued May 12, 2015, the court in the Dissolution Action “converted” the “hearing on [Sparber’s] Petition for Court Supervision of Voluntary Windup” into a hearing on “[Annen’s] Motion for Election to Purchase Petitioner’s Shares and Appointment of 3 Appraisers pursuant [to] section 2000 of the California Corporations Code.”

B. Sparber files a separate shareholder derivative action against Annen

On May 15, 2015, Sparber filed a shareholder derivative action against Annen entitled Richard E. Sparber, derivatively on behalf of Sparber Annen Morris & Gabriel, APLC v. Richard J. Annen, case No. 16445 (the Derivative Action). In the complaint filed in the Derivative Action, Sparber asserted causes of action for breach of fiduciary duty, gross mismanagement, corporate waste and unjust enrichment, and sought an accounting. Among other allegations, Sparber alleged that Annen had made unauthorized bonus distributions to himself and to other SAMG employees, improperly directed revenues belonging to SAMG to Annen’s personal sub-account instead of directing those revenues to the SAMG general account, concealed SAMG revenues from Sparber by altering the accounting system and refusing to hire a bookkeeper, unilaterally made decisions about SAMG’s finances and management, thereby causing financial losses to SAMG, and engaged in conduct that resulted in the filing of three lawsuits against SAMG.

C. The granting of Annen’s petition to stay dissolution and for the appointment of appraisers pursuant to section 2000

A week after filing the Derivative Action against Annen, Sparber offered to sell his shares to Annen for $150,000 in response to Annen’s Election to Purchase Shares in the Dissolution Action. Annen rejected the offer. On June 17, 2015, Annen filed a petition to stay the dissolution proceedings and to have the court appoint appraisers to determine the fair value of the SAMG shares. In his papers, Annen asserted that the operative valuation date for determining the value of the shares was March 17, 2015, the date on which Sparber had “executed a ‘Written Consent of Shareholders to Voluntarily Wind Up and Dissolve’ ” SAMG. Because Sparber’s Derivative Action was not filed until May 15, 2015, a March 17, 2015 valuation date would have excluded consideration of the claims in the derivative action for purposes of valuing SAMG.

In response, Sparber contended that the claims in the derivative action should be considered in the appraisal even though the derivative action was filed after March 17, 2015, pursuant to the authority of Cotton v. Expo Power Systems, Inc. (2009) 170 Cal.App.4th 1371 (Cotton), or, in the alternative, that good cause existed for the trial court to change the valuation date to account for the Derivative Action.

The court in the Dissolution Action held a hearing on July 10, 2015 regarding Annen’s petition to stay the dissolution of SAMG and instead appoint appraisers. At that time, Annen proposed that the court change the valuation date to May 15, 2015 and agreed that the appraisers should be allowed to consider any litigation pending as of that date, as well as any misconduct alleged to have been engaged in by either party prior to the May 15, 2015 valuation date. Annen’s attorney argued that “both sides can talk to the appraisers and pitch their case without going into full-blown litigation-type discovery.” He further argued that “the appraisers, at least the one[s] I’m familiar with, are sophisticated enough to say we can make some assessment as to a range of potential impact.” The court agreed with the parties and indicated its intention to modify the tentative order to change the valuation date to May 15, 2015.

The court in the Dissolution Action thereafter entered an order granting Annen’s petition to stay dissolution proceedings in favor of appointing appraisers and setting a hearing to determine the fair market value of SAMG. On August 3, 2015, the court entered an order setting forth a number of details regarding the appointment of the appraisers. Among other things, the court ordered (1) that each party was to select an appraiser, and the court would order these two appraisers to nominate a third appraiser; (2) that May 15, 2015 would be the valuation date for the purposes of establishing the value of Sparber’s shares in SAMG; and (3) that the court would instruct the appraisers that “in appraising the value of SAMG’s shares, [the appraisers] are allowed to consider any lawsuits that were pending on the Valuation Date, as well as any alleged misconduct by any of the parties in this special proceeding that is alleged to have occurred on or before the Valuation Date insofar as it would affect value.”

D. The selection and appointment of three appraisers

In August 2015, the parties each nominated an appraiser to perform the valuation. Annen nominated Brian Brinig, JD, CPA, and ASA, of Brinig & Company. Sparber nominated Steve Schenk, ASA, CIRA, MBA of Vantage Point Appraisers.

In late September 2015, the court in the Dissolution Action entered a ” ‘First Appointment Order’ Pursuant to Court’s August 3, 2015 Order on Verified Petition to Stay Dissolution Petition and Appoint Appraisers, Etc.” (some capitalization omitted), in which the court formally appointed Brinig and Schenk as appraisers in the matter and ordered them to select a third “disinterested” appraiser. The court’s order set the ” ‘Valuation Date’ ” for purposes of appraising the value of SAMG’s shares as May 15, 2015, and stated: “In appraising the value of the Corporation’s shares, the appraisers are allowed to consider any lawsuits that were pending on the Valuation Date, as well as any alleged misconduct by any of the parties in this special proceeding that is alleged to have occurred on or before the Valuation Date insofar as it would affect value.”

The two appraisers appointed by the court nominated Kim W. Ufford, CPA, CFF, ABV, ASA of LevitZacks to serve as the third appraiser in the matter.

In mid-December 2015, the court in the Dissolution Action entered a document titled ” ‘Final Appointment Order’ Pursuant to Court’s August 3, 2015 Order on Verified Petition to Stay Dissolution Petition and Appoint Appraisers, Etc.” (some capitalization omitted). In this order, the court formally appointed Ufford as the third appraiser, and reiterated the language of the prior appointment order regarding the appraisers’ consideration of any pending lawsuits and any alleged misconduct of the parties in arriving at their valuation of SAMG.

The court in the Dissolution Action ordered that the appraisers submit one or more written reports setting forth their opinion or opinions (depending on whether they all agreed on a figure) as to the fair value of SAMG.

E. Proceedings in the Derivative Action are delayed

Beginning in October 2015, proceedings in the Derivative Action were delayed. Annen moved to require Sparber to furnish a $50,000 bond under Corporations Code section 800, and the hearing on this motion was continued from October 2015 to March 2016. Later, in a December 2015 Case Management Statement filed jointly by the parties, the parties advised the court of the pending “Petition for Court Supervision of Voluntary Dissolution” of SAMG pursuant to Corporations Code section 1904, as well as Annen’s filing of a “Notice of Election to Purchase Shares pursuant to Section 2000.” The parties further stated that they “believe that this derivative action should be stayed to allow the appraisal process to be completed because only after the appraisal process is completed will the parties know if this action will be viable.”

The court in the Derivative Action continued the “Civil Case Management Conference” from December 2015 to April 2016, and also moved the hearing for the pending motion to post a bond to the same April 2016 date.

The parties stipulated to multiple continuances of hearing dates in the Derivative Action over a period of approximately two years while the appraisal process continued in the Dissolution Action.

E. The appraisal process in the Dissolution Action

In January 2016, the appraisers, through Ufford, e-mailed the attorneys for the parties with an “initial information request.” The information request included a request for: “16. Information about any alleged misconduct of any party to this proceeding that occurred before May 15, 2015 that is alleged to have an effect on the fair value of the corporation at May 15, 2015.”

The parties submitted multiple memoranda, letters, and evidentiary exhibits in response to the appraisers’ request number 16 between mid-February and late March 2016.

F. The appraisers meet with the parties and their attorneys

In late May 2016, the appraisers met with Annen and Sparber, and their respective attorneys, for a full day. At this meeting, the appraisers posed questions to the parties about SAMG and sought information relevant to the appraisal.

During this meeting, at least one appraiser indicated some concerns about how the appraisers were to go about attempting to place a monetary value on Sparber’s shareholder derivative claims, while acknowledging that such a valuation was required. Specifically, Brinig stated:

“And I guess I primarily have to ask the parties, but I guess what I, as an appraiser, seek from you folks is we have to consider and quantify these pieces of litigation.

“Now, we’re all big boys here, and the court reporter is a big girl. How on the face of the earth can three accountants do that and come up with – – we can consider it, and lawyers get to argue about what people didn’t do very well – – and some days I’m jealous of you guys’ position. They didn’t do this. They didn’t consider that. That’s ridiculous.

“We’ve got to say something affirmative. How can three accountants determine the value of a lawsuit by a corporation against somebody? And I was thinking to myself as I was driving in, if anybody can figure out the value of litigation, we wouldn’t have any litigation because if I could tell you at the beginning of a case this case is worth $600,000, why do we need lawyers?

“So it becomes a circular kind of question in my mind – – and I’m not sure these guys agree with me, but I’m just hitting you guys over the head as much as I can – – give us some quantification of how we do it.”

The record does not disclose how or even whether the appraisers or the parties further addressed the concern that appraiser Brinig articulated.

After the May 2016 meeting, Sparber provided additional information, as requested by the appraisers at the May meeting, including financial information that he believed supported his derivative claims.

G. Additional proceedings in the Dissolution Action after the May 2016 meeting

In late December 2016, the court in the Dissolution Action sent a letter to the appraisers requesting that they update the court on the status of the appraisal by January 17, 2017. On January 9, 2017, the appraisers sent a letter to the court advising the court that they were requesting additional information from the parties regarding a number of matters, none of which related to the shareholder derivative claims.

H. The appraisers’ draft appraisal report

On May 8, 2017, the appraisers provided the parties with a “draft appraisal report.” The appraisers stated the following with respect to their reasoning for submitting a draft report:

“The Appraisal Panel is issuing this draft appraisal report in an effort to quantify a reconciled valuation conclusion for the parties’ benefit in moving this protracted litigation forward. During the course of the investigation, the individual members of the Appraisal Panel came to the conclusion that some of the valuation issues are not able to be precisely quantified and that it would be in the interest of the parties to present the Panel members’ joint thinking on these issues with a summary valuation conclusion. As will be discussed, the Panel members will present three alternatives for dealing with the asset, ‘Due from Hillsborough.’ ”

The draft report did not specifically address the shareholder derivative claims. The appraisers did state the following, however, which appears to be an oblique reference to Sparber’s allegations regarding Annen’s conduct as alleged in the derivative action:

“Discussion of Other Financial Issues. The members of the Appraisal Panel do not believe that the Panel is capable of ‘recasting’ the activities of the professional corporation for several years prior to the date of valuation. We have heard suggestions or arguments that one member may have been overcompensated or another may have been undercompensated, but the Panel is not aware of a basis by which it could (or would) change the historical financial operations of SAMG.”

The major point of dissention among the appraisers was how to value the asset referred to as ” ‘Due from Hillsborough,’ ” a reference to “SAMG’s advances to the related real estate entity, Hillsborough Development Company, LLC.” The appraisers disagreed “on the proper approach to determining the value of the ‘Due from Hillsborough’ asset as a component of the fair value of SAMG.” However, the appraisers otherwise indicated full agreement that the fair value of SAMG as of May 15, 2015, exclusive of the ” ‘Due from Hillsborough’ ” asset, was $92,838.

In response to the draft appraisal report, Sparber provided the appraisers with additional argument and evidence in support of his derivative claims, and indicated his belief that the claims were worth, at a minimum, $780,428, and possibly an additional $446,525. Sparber also again urged the appraisers to provide a specific value for the derivative claims, and advised them that the failure to value the derivative claims was “erroneous” under the authority of Cotton, supra, 170 Cal.App.4th at pages 1380–1383 and Goles v. Sawhney (2016) 5 Cal.App.5th 1014, 1019.

On August 10, 2017, the court in the Dissolution Action held an ex parte hearing at which the court and the parties discussed the delays in the appraisal process. After the hearing, the court sent a letter to the appraisers requesting that they complete their appraisal report by September 8, 2017.

I. The Final Appraisal Report

The appraisers submitted a “Final Appraisal Report” to the parties on September 8, 2017. Sparber filed the document with the court in the Dissolution Action the following month. In their report, the appraisers indicated that they unanimously agreed on the value of SAMG as of May 15, 2015, with the exception of one asset—the “Due from Hillsborough” asset, and stated the following in this regard:

“In pursuit of the appraisal objective, the Appraisal Panel has been provided with thousands of pages of documents from the parties and we have interviewed the parties about the background and history of the law practice. The members of the Appraisal Panel have reviewed the documents provided, the Panel has met and conferred, performed valuation analysis, considered the nature and history of the law practice, considered other factors required under the statute and relevant case law, and determined the opinions of fair value set forth in this report. The members of the Appraisal Panel are unanimous in their opinions of fair value of SAMG with the exception of the members’ opinions of the fair value of the non-operating asset, Due from Hillsborough. Consequently, this report opines unanimously on the fair value of 100% of the equity interest in SAMG, excluding the non-operating asset, Due from Hillsborough.” (Fn. omitted.)

Elsewhere, the appraisers stated the following with respect to the Derivative Action and Sparber’s allegations regarding Annen’s conduct, specifically:

“Discussion of the Derivative Lawsuit, Richard E. Sparber derivatively on behalf of Sparber Annen Morris & Gabriel, APLC vs. Richard J. Annen, case No. 37-2015-00016445-CU-BT-CTL. The Appraisal Panel has considered the value of the pending derivative lawsuit as a component of the fair value of SAMG as of May 15, 2015. The lawsuit alleges, inter alia, breach of fiduciary duty, gross mismanagement, corporate waste, unjust enrichment and accounting seeking damages in an amount to be proven at trial. The Panel recognizes that the lawsuit may have merit and could possibly result in a judgment against the derivative defendant in favor of the law corporation. The Appraisal Panel is advised that both the facts and liability alleged in the lawsuit are vigorously disputed by the ultimate defendant. The Panel anticipates that the defense of the lawsuit will be costly to the corporation and that an ultimate judgment in favor of SAMG in both the fact of judgment and the amount of the judgment is not determinable at May 15, 2015. As a result of the uncertainty of recovery and the cost of defending the lawsuit, the Appraisal Panel concludes that the fair value of the derivative action is zero as of the date of valuation.” (Third italics added.)

In the “Adjusted Balance Sheet” (some capitalization omitted) in which the appraisers input their valuation numbers for various assets and liabilities of SAMG, the appraisers entered a “-” to represent a valuation of zero for the asset “Derivative Action.”

The appraisers ultimately unanimously concluded that “the fair value of 100% of the common stock in [SAMG] is approximately $103,000 at May 15, 2015 exclusive of the non-operating asset, ‘Due from Hillsborough.’ ” With respect to the asset ” ‘Due from Hillsborough,’ ” two of the appraisers concluded that it should be valued at $135,000, while the third appraiser concluded that the asset should not be included in the valuation of SAMG, but instead, that any proceeds ultimately obtained on the note from this asset should be “Divide[d] in Kind” between Annen and Sparber. Thus, two of the appraisers placed SAMG’s value as of May 15, 2015 at $238,000, while one appraiser placed SAMG’s value as of May 15, 2015 at $103,000.

J. The parties inform the court in the Derivative Action of the completion of the appraisal report in the Dissolution Action

On October 4, 2017, the parties advised the court in the Derivative Action that the appraisal in the Dissolution Action had been completed, and that the parties were working to schedule briefing and a hearing with respect to the appraisal report in that action. At that time, the court in the Derivative Action ordered a stay in that case until December 15, 2017.

K. Briefing and arguments in the Dissolution Action with respect to the final appraisal report

On November 8, 2017, Sparber filed a document titled “Petitioner Richard E. Sparber’s Opening Brief Re: Final Section 2000 Appraisal Report” (some capitalization omitted). Sparber also lodged with the court in the Dissolution Action the brief and evidentiary submissions that he had provided to the appraisers with respect to his shareholder derivative claims. Sparber argued to the court that the appraisers had failed to value his derivative claims and that the appraisers’ failure to do so was erroneous as a matter of law. Sparber urged the court to conduct a hearing to take additional evidence with respect to the shareholder derivative claims and to make a de novo determination of the value of those claims, in order to comply with Corporations Code section 2000.

Annen filed a brief regarding the final appraisal report on November 8, 2017, as well. Annen raised other issues regarding the final appraisal report, but did not challenge the appraisers’ determination with respect to Sparber’s shareholder derivative claims.

The court in the Dissolution Action held a hearing to discuss the final appraisal report on November 20, 2017. The parties presented arguments as to whether, and to what extent, the appraisers had met their obligation to determine the fair value of SAMG, including arriving at a fair valuation of Spaber’s shareholder derivative claims. An attorney for Sparber argued:

“It is clear what happened here. If you look at the final report in isolation, maybe it looks like they looked at it and just came to a zero valuation. But if you look at the entire course of the appraisal hearing, that is not what happened. They clearly punted.

“I was in the May 25th meeting with the appraisers, and we talked for six of the seven hours about fundamental accounting issues. At the seventh hour one of the appraisers said, all right, elephant in the room, the derivative claims, we don’t know, we don’t know what to do, and we don’t know how to value these things. And that is kind of how it was left. It was just out there. And the draft report kind of indicates that they just didn’t want to touch that. And the final report I think is just a – put a zero on it and be done with it and wipe their hands.

“But as a practical matter, it makes no sense because the way they valued SAMG contradicts their position on the derivative claims. If they say that the valuation of SAMG at May 2015 was the combined value of these subaccounts, Mr. Annen’s subaccount and Mr. Sparber’s subaccount, and then divide that by two, that means that they are accepting the derivative claims as they are, just not valuing them. . . .

“Now to the argument that of course they are not going to value derivative claims because their case was new, it hadn’t progressed, there weren’t depositions or discovery, that is always the case with an . . . — a voluntary dissolution. These cases are frequently brought with derivative claims attached, and then a section 2000 appraisal process is initiated. Derivative claims in those situations are always at their infancy. So the idea that they couldn’t value it because it was a new claim that hadn’t progressed is essentially wrong, and if that were the case, appraisers in section 2000 appraisal processes would never value derivative claims. They would just essentially always punt on them because these claims are new, there is no significant discovery, we don’t know what to do. So I think that sets a bad precedent. And if that were to be the position that a court of appeal took, it would essentially [write] out Cotton and Goles and the purpose of section 2000 out of the statute books.”

Sparber’s attorney proposed that the trial court issue an order requiring the appraisers to “take another look at the derivative claims” and report back within 60 days. Annen’s attorney opposed the entry of such an order, arguing that the history of delays with the appraisers would likely further extend an already lengthy proceeding beyond the 60 days. Annen’s attorney requested that the court review all of the documents and make a “judgment call today or tomorrow.”

L. The court’s final order and entry of the alternative decree in the Dissolution Action

On November 21, 2017, the day after the final hearing, the court in the Dissolution Action issued a minute order in which it approved the valuation of SAMG as provided by two of the three appraisers. The court stated that it had “fully considered the arguments of all parties, both written and oral, as well as the evidence presented.” The court further stated that it “sees no errors by the majority of the appraisers in reaching their calculations and conclusions,” and that the court “is not convinced that the appraisers’ award is incorrect.” The court declined to review any of the matters de novo.

On November 29, 2017, the court in the Dissolution Action entered its alternative decree. In the decree, the court ordered the voluntary winding up and dissolution of SAMG unless Annen paid Sparber $119,000 within 10 days of the entry of the decree. If Annen paid Sparber as set forth in the decree, then Sparber’s petition for court supervised dissolution of SAMG pursuant to Corporation Code section 1904 would be immediately dismissed with prejudice. In addition, the court ordered that, upon the tender of a cashier’s check from Annen to Sparber for $119,000, Sparber was to transfer his shares in SAMG to Annen within three business days.

The record does not reflect that Sparber sought a stay of the court’s alternative decree or its incorporated orders.

M. Annen requests a continuance of the December status conference in the Derivative Action

Annen filed a status report in the Derivative Action in anticipation of the mid-December 2017 status conference that the court had set. In his status report, Annen informed the court that the court in the Dissolution Action had made a ruling regarding the Corporations Code section 2000 petition and that he was in the process of purchasing Sparber’s shares. Annen suggested to the court in the Derivative Action that Sparber was “on the cusp of losing his standing to prosecute [the Derivative] [A]ction,” and requested that the court therefore further “continu[e] the pending matters for at least 60 days to allow that process to play out.”

It appears from the record that the court in the Derivative Action did not grant the requested continuance of the mid-December 2017 status conference.

N. Annen purchases Sparber’s shares in SAMG

On December 7, 2017, Annen delivered a check in the amount of $119,000 to Sparber. Sparber immediately transferred his shares in SAMG to Annen.

O. The court in the Derivative Action holds a status conference and declares that the case will be dismissed

At the conclusion of the previously-scheduled December 2017 status conference in the Derivative Action, the court issued a minute order in which it stated, “Issues have been resolved,” and ordered that the parties file a dismissal “within 45 days.”

P. Sparber appeals from the court’s judgment in the Dissolution Action

Sparber filed a timely notice of appeal from the alternative decree entered in the Dissolution Action, case No. 11623, on February 9, 2018.

Q. Dismissal of the Derivative Action

On February 16, 2018, the court in the Derivative Action issued a final “Notice of Dismissal” in the Derivative Action. In the Notice of Dismissal, the court informed the parties that the court would enter a dismissal with prejudice if the parties failed to file either a judgment or a dismissal with the court by March 13, 2018, or appear ex parte by that date to demonstrate good cause why a dismissal should not be entered. Sparber scheduled an ex parte hearing to take place on March 13, 2018.

Approximately five days prior to the date of the ex parte hearing, Sparber filed a noticed motion seeking to reinstate the prior stay in the Derivative Action pending the resolution of the appeal in the Dissolution Action. The day before the scheduled ex parte hearing, Sparber filed an ex parte application to reinstate the stay, or, in the alternative, to shorten time to hear the noticed motion that was scheduled for June 29. Sparber indicated in these papers that he had filed an appeal in the Dissolution Action challenging the court’s acceptance of the appraisers’ valuation of SAMG, contending that the court had erred in not considering de novo the value of SAMG. Sparber argued that during the pendency of his appeal in the Dissolution Action, that proceeding was not final and, thus, a stay of the Derivative Action should be reinstated until the Dissolution Action was final. According to Sparber, if the appellate court were to reverse the trial court’s alternative decree in the Dissolution Action, the value of SAMG might increase and if that were to occur, Annen might decide not to purchase Sparber’s shares at the new valuation. In that event, the Derivative Action would have to proceed.

In the meantime, Annen filed an ex parte application seeking dismissal of the Derivative Action. Annen argued that Sparber had lost standing to prosecute the action upon Annen’s purchase of Sparber’s shares in SAMG.

On March 16, 2018, the trial court dismissed the Derivative Action, without prejudice, on the ground that Sparber was no longer a shareholder in SAMG and thus did not have standing to pursue a derivative action on its behalf. Annen filed a notice of entry of judgment three days later.

R. Sparber appeals from the court’s judgment in the Derivative Action

Sparber filed a timely notice of appeal from the trial court’s judgment entered in the Derivative Action, case No. 16445 on May 14, 2018.

S. This court consolidates the Derivative Action and Dissolution Action appeals

On our own motion on August 9, 2019, this court consolidated the appeals from the Derivative Action and the Dissolution action for purposes of oral argument and decision.

III.

DISCUSSION

A. Sparber’s appeal from the alternative decree in the Dissolution Action

1. Background regarding a section 2000 special proceeding

Sparber’s appeal in the Dissolution Action is from a special proceeding conducted pursuant to section 2000 of the Corporations Code and is expressly authorized under that statute. (§ 2000, subd. (c).)

The Dissolution Action originally began as a voluntary dissolution proceeding. Shareholders of a corporation who represent 50 percent or more of the voting power may elect to wind up and dissolve that corporation by initiating a voluntary dissolution proceeding. (§§ 1900–1903.) However, Annen subsequently filed a notice under section 2000 that he was electing to purchase Sparber’s shares in order to avoid dissolution of SAMG. Section 2000 establishes a special proceeding whereby “a 50 percent shareholder [may] avoid dissolution of the corporation by purchasing the stock of the shareholder(s) seeking to dissolve the corporation.” (Abrams v. Abrams–Rubaloff & Associates, Inc. (1980) 114 Cal.App.3d 240, 247.) “This procedure, which also applies in involuntary proceedings, reflects the Legislature’s ‘interest [in] preserving the corporate enterprise as a going concern if desired by the majority or by the other 50[%] owners’ and is intended to be a ‘meaningful alternative to termination of the enterprise.’ ” (Mart v. Severson (2002) 95 Cal.App.4th 521, 524 (Mart), quoting Legis. Com. com., 23E West’s Ann. Corp. Code, § 2000 (1990 ed.) pp. 514, 516–517.)

Under section 2000, the holder of 50 percent of the voting power who wishes to avoid dissolution can avoid that consequence “by purchasing for cash the shares owned by the [moving parties] at their fair value.” (§ 2000, subd. (a), italics added.) Section 2000 defines “fair value” as “the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation.” (Id., subd. (a).)

The Legislature foresaw that opposing parties in a dissolution proceeding may not agree as to the “fair value” of the shares of the corporation and therefore established a procedure for determining the fair value. If parties cannot agree on the fair value of the shares, the party seeking to purchase the other party’s shares may apply to the superior court to stay the dissolution proceeding and for the court to “ascertain and fix the fair value of the shares owned by the moving parties.” (§ 2000, subd. (b).) In the event that such a request is made, the court “shall appoint three disinterested appraisers to appraise the fair value of the shares owned by the moving parties, and shall make an order referring the matter to the appraisers so appointed for the purpose of ascertaining the value. . . . The award of the appraisers or of a majority of them, when confirmed by the court, shall be final and conclusive upon all parties.” (Id., subd. (c).)

Upon confirmation of the award of the appraisers regarding the fair value of the shares, the court is to “enter a decree, which shall provide in the alternative for winding up and dissolution of the corporation unless payment is made for the shares within the time specified by the decree.” (§ 2000, subd. (c).) Either party “may appeal the court’s decision” if aggrieved by it. (Ibid.)

“If the purchasing parties desire to prevent the winding up and dissolution, they shall pay to the moving parties the value of their shares ascertained and decreed” within the time specified in the decree or, if on appeal, within the time fixed on appeal. Upon receiving such payment, “the moving parties shall transfer their shares to the purchasing parties.” (§ 2000, subd. (d).) Thus, once the fair value is set by the court pursuant to section 2000, the purchasing party or parties have the right, but not an obligation, to purchase the moving party’s shares at that fair value price. (Id., subd. (d).)

2. Consideration of pending litigation, including derivative claims, for purposes of determining fair value under section 2000

“A derivative claim is a property right that belongs to the corporation. [Citations.] It is properly viewed as an ‘asset’ of the corporation. [Citation.] ‘Because a corporation exists as a separate legal entity, the shareholders have no direct cause of action or right of recovery against those who have harmed it. The shareholders may, however, bring a derivative suit to enforce the corporation’s rights and redress its injuries when the board of directors fails or refuses to do so.’ [Citation.]” (Cotton, supra, 170 Cal.App.4th at p. 1380.) ” ‘If successful, a derivative claim will accrue to the direct benefit of the corporation and not to the stockholder who litigated it. [Citations.]’ [Citation.]” (Ibid.)

The fair value determination for shares of a corporation “must reflect ‘the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation.’ [Citations.]” (Cotton, supra, 170 Cal.App.4th at p. 1381.) Therefore, in assessing the fair value of the shares of a corporation, appraisers must “take [any] derivative claims into account in determining the fair value of [a shareholder’s] shares.” (Ibid.)

Pursuant to the process for valuing a corporation for purposes of a buyout of shares under section 2000, a court must “either obtain a complete appraisal of the fair value of [the shares of the corporation] from the appraisers [including an assessment of pending derivative claims], or conduct a hearing to resolve the matter” of the fair value of those shares if the appraisers that the court appointed to provide a report fail to consider the value of such pending claims. (Cotton, supra, 170 Cal.App.4th at pp. 1381–1382.)

3. Analysis of Sparber’s contentions

Sparber contends that the court’s alternative decree entered in the Dissolution Action, in which the court set forth the value of SAMG as of March 15, 2015 and ordered Annen to purchase Sparber’s 50 percent share of SAMG for half of that value to avoid dissolution of the corporation, must be reversed because the court erred in accepting the appraisers’ determination of the fair value of Sparber’s shareholder interest. Specifically, Sparber contends that the appraisers failed to actually consider and value the claims asserted in the Derivative Action in placing a value on SAMG.

In considering Sparber’s contention on appeal, to the extent that we are reviewing factual aspects of the trial court’s fair value determination, we review those matters for substantial evidence. (Mart, supra, 95 Cal.App.4th at p. 530.) “However, the superior court’s interpretation of the statutory standard set forth in section 2000 is subject to de novo review on appeal. [Citations.]” (Ibid.; Cotton, supra, 170 Cal.App.4th at p. 1380.)

Sparber contends that “despite [the] enormous expenditure of time and expense from appointment to final appraisal, and despite the clear orders of the trial court and the [appraisal] Panel’s own recognition of their duty to value the derivative claims as part of their appraisal of SAMG, the Panel never attempted to put a value on the derivative claims.” Sparber concedes, however, that the appraisers “included a perfunctory statement in their Final Appraisal Report that they had ‘considered the value of the pending derivative lawsuit as a component of fair value of SAMG,’ ” but he nevertheless asserts that “a fair reading of the record of the appraisal proceedings and the Panel’s explanation of its ‘zero value’ determination reflects that the Panel did not attempt to value these claims at all.” Sparber equates what the appraisers did in this case with what occurred in Cotton, supra, 170 Cal.App.4th 1371.

In Cotton, the appellate court reversed the trial court’s alternative decree on the ground that the court had neither obtained “a complete appraisal of the fair value of [the shares of the corporation] from the appraisers” that included their valuation of a pending derivative action, nor conducted its own de novo hearing to determine the fair value of the shares of the corporation that included an assessment of the value of the derivative action. (Cotton, supra, 170 Cal.App.4th at pp. 1381–1382.) Indeed, in Cotton, the appraisers whom the court had appointed to provide a report assessing the fair value of the petitioner’s shares “clearly stated in their report and responses to interrogatories that they did not attempt to value Cotton’s derivative claims, nor did they take the derivative claims into account in determining the fair value of Cotton’s shares.” (Id. at p. 1381, italics added.) The report generated by the appraisers, therefore, “failed to appraise the value of a potential asset of the corporation.” (Ibid.)

The Cotton court noted that the trial court had “recognized that the appraisal was incomplete as to the issue of pending claims in litigation,” but in response to the incomplete appraisal, the trial court had failed to “either obtain a complete appraisal of the fair value of Expo from the appraisers, or conduct a hearing to resolve the matter.” (Cotton, supra, 170 Cal.App.4th at pp. 1381–1382.) In disposing of the case, the appellate court reversed the trial court’s order and remanded with directions that the court either “obtain an appraisal taking into account the effect of the pending litigation on the fair value of Expo as of November 2003, or in the alternative, . . . allow the parties to litigate that issue before the court.” (Id. at p. 1383.)

The basis for the holding in Cotton was the complete failure of the appraisers to consider and place a value on the value of pending derivative litigation, and the trial court’s acceptance of the incomplete appraisal report. The record in this case demonstrates that what occurred in Cotton did not occur here. Rather, the appraisers in this case specifically and expressly discussed and addressed the derivative action, titling a paragraph in the report “Discussion of the Derivative Lawsuit, Richard E. Sparber derivatively on behalf of Sparber Annen Morris & Gabriel, APLC vs. Richard J. Annen, case No. 37-2015-00016445-CU-BT-CTL.” Not only did the appraisers expressly state that they “ha[d] considered the value” of the Derivative Action “as a component of the fair value of SAMG as of May 15, 2015,” but they specifically placed a value on the action—albeit, a value of zero. The appraisers were not required to assign a positive value to the Derivative Action. Although Sparber believes that the value of the Derivative Action is greater than zero, the appraisers were entitled to review all of the relevant documents (as they stated they did) and reach a conclusion different from Sparber’s. Indeed, the appraisers cited their weighing of the “uncertainty of recovery” and the potential costs of litigating as components of their determination that the Derivative Action should be assigned a value of zero.

Unlike in Cotton, where the court accepted a report from the appointed appraisers that wholly failed to consider the value of a pending derivative lawsuit, the appraisers in this case did consider the Derivative Action and placed a value of zero on that asset. The appraisal report was not incomplete since it did assign a value to the Derivative Action; the trial court could thus properly rely on the report. Given that the trial court had before it a complete appraisal report, we see no error in the trial court’s determination that there were “no errors by the majority of the appraisers in reaching their calculations and conclusions,” and that the appraisers’ conclusion as to the value of SAMG’s shares should be given effect. On this record, the court was not required to allow the parties to litigate the issue of the value of the Derivative Action before the court.

Sparber attempts to undermine the statements and conclusions of the appraisers in the jointly submitted Final Appraisal Report. For example, Sparber relies heavily on a portion of the transcript from the May 2016 meeting of the parties, their attorneys and the appraisers, during which one of the appraisers indicated that he thought that it would be difficult for the appraisers to value the derivative claims. Sparber notes, for example, that the appraiser asked, “How on the face of the earth can three accountants . . . determine the value of a lawsuit by a corporation against somebody?” Elsewhere, Sparber contends that the statements made by the appraisers in the final appraisal report suggest that the appraisers were indicating that “they were incapable of valuing the claims.” Sparber argues that the appraisers simply “vaguely mentioned the potential costs and uncertainties of litigation and put a zero value on the claims.”

 

According to Sparber, the “only difference between [this case and Cotton] is that the appraisers in Cotton expressly admitted in their report that they did not attempt to value the derivative claims.” Sparber argues that the appraisers in this case were similarly express in their draft report about their failure to value the Derivative Action, but that after they were “admonished” by Sparber, the appraisers “attempted to disguise their non-action by adding the conclusory statements that ‘The Appraisal Panel has considered the value of the pending derivative lawsuit as a component of the fair value of SAMG’ and ‘the Appraisal Panel concludes that the fair value of the derivative action is zero.’ ” Sparber contends that “the Panel did not change their position or otherwise attempt to appraise the value of the derivative claims as an asset of the corporation in its final report, thereby rendering the appraisal incomplete.”

We disagree with Sparber’s assertions, and specifically, with his suggestion that we should look beyond the express statements of the appraisers in the Final Appraisal Report and assume instead that the appraisers did something other than what they stated they did—which was to consider the value of the pending litigation and place a value of zero on that asset. The appraisers stated that they had “considered the value of the pending derivative lawsuit as a component of the fair value of SAMG.” By making this statement, and signing their names to the Final Appraisal Report, the appraisers verified that this statement is accurate. There is simply no basis for rejecting the appraisers’ statement that they considered the value of the pending derivative claims, as Sparber would have us do. Further, contrary to Sparber’s assertions about what occurred, there is nothing in the final appraisal report that suggests that the appraisers concluded that they were “incapable” of valuing the claims. Rather, the appraisers appear to have weighed all of the relevant factors and concluded that any possible recovery in the Derivative Action was so speculative that it did not outweigh the costs of litigating the action.

The record in this case is materially different from the record in Cotton. Here, the trial court had a complete Final Appraisal Report that included a valuation of the pending Derivative Action as an asset of SAMG. Sparber’s speculation regarding the actions of the appraisers provides no basis for rejecting the trial court’s ruling as to the valuation of SAMG. We therefore affirm the trial court’s alternative decree.

B. Sparber’s appeal from entry of judgment after dismissal of the Derivative Action

Sparber contends that the trial court erred in dismissing the Derivative Action based on its determination that Sparber lacked standing to further prosecute the case because he had sold his shares in SAMG to Annen pursuant to the alternative decree issued in the Dissolution Action. According to Sparber, the court’s dismissal of the Derivative Action was erroneous for any of three possible reasons. First, he argues, because he has appealed from the trial court’s alternative decree in the Dissolution Action, “neither the SAMG appraisal nor Annen’s subsequent purchase of Sparber’s shares are final.” Second, Sparber contends that “notwithstanding Annen’s purchase of the shares in compliance with the Alternative Decree, Sparber has maintained a beneficial interest in the shares of SAMG by virtue of his appeal, which satisfies the shareholder derivative standing requirements of Corporations Code section 800.” Finally, Sparber argues that “even if [he] has technically lost his shareholder status pending the appeal, equitable considerations require the application of an exception to the continuous stock ownership requirement.”

We need not delve into the intricacies of Sparber’s arguments because it is clear that our affirmance of the court’s alternative decree in the Dissolution Action effectively renders moot Sparber’s appeal in the Derivative Action. Our affirmance confirms the court’s decree; pursuant to that decree, Sparber sold his shares in SAMG to Annen. Sparber thus no longer possesses any interest in SAMG. Sparber cannot be considered to retain any interest in SAMG, beneficial or otherwise, and therefore, clearly lacks standing to pursue the Derivative Action. That action must now be dismissed.

 

However, to the extent that one could argue that Sparber’s appeal in the Derivative Action has not been rendered moot by our affirmance of the alternative decree in the Dissolution Action because our affirmance is not yet final at the time this opinion is filed and Sparber still retains the option of seeking review in the Supreme Court, we nevertheless would reject his contentions on their merits.

First, the fact that Sparber appealed from the trial court’s alternative decree does not negate the fact that he actually sold his shares to Annen and thus no longer possesses any interest in SAMG. It is clear that an alternative decree is not automatically stayed upon the perfecting of an appeal. (See Veyna v. Orange County Nursery, Inc. (2009) 170 Cal.App.4th 146, 150 (Veyna).) The parties were therefore required to act pursuant to the terms of the decree by the time of the deadlines set forth in the decree in order to avoid automatic dissolution of SAMG, and they did so. Annen tendered $119,000 to Sparber and Sparber sold his shares in SAMG to Annen; Annen now possesses 100 percent of the shares.

If Sparber had wanted to put that transaction on hold before the sale occurred, he could have requested a stay of the decree in the trial court, or could he have asked this court to exercise its discretion to issue a writ of supersedeas to stay the underlying action. (See Veyna, supra, 170 Cal.App.4th at pp.156–157 [appellate court acknowledged its ability to issue writ of supersedeas but declined to exercise discretion to issue requested relief because party seeking writ “could have at any time applied to the trial court for

 

relief” in the form of a stay of execution of the alternative decree]; see also People ex rel. San Francisco Bay Conservation & Development Com. v. Emeryville (1968) 69 Cal.2d 533, 537 [” ‘[I]n aid of their appellate jurisdiction the courts will grant supersedeas in appeals where to deny a stay would deprive the appellant of the benefit of a reversal of the judgment against him, provided, of course, that a proper showing is made’ “].) Sparber made no effort to seek a stay of the execution of the alternative decree. Because his appeal from the alternative decree did not trigger an automatic stay, and because he sold his shares to Annen pursuant to the terms of the decree, Sparber is simply incorrect that he retains some interest in SAMG as a result of his appeal from the alternative decree. Sparber’s failure to obtain a stay, and his subsequent sale of his shares to Annen pursuant to the decree, also entirely undermine Sparber’s second contention that he somehow holds a “beneficial interest” in the SAMG shares by virtue of his appeal from the alternative decree. Again, Sparber had available to him at least two methods by which he could have sought to prevent having to sell his shares to Annen while he pursued this appeal (request a stay in the trial court or ask the appellate court to exercise discretion to issue a writ of supersedeas), but he did not attempt to utilize either process. Given this, we also conclude that the equities do not weigh in favor of permitting Sparber to continue to pursue the Derivative Action pending the outcome of the appeal in the Dissolution Action. We therefore reject Sparber’s contentions that the trial court erred in dismissing the Derivative Action.

IV.

DISPOSITION

The order of the trial court in case No. 11623 is affirmed. The judgment of dismissal in case No. 16445 is affirmed. Annen is entitled to costs on appeal.

AARON, J.

WE CONCUR:

HUFFMAN, Acting P. J.

GUERRERO, J.