Filed 6/25/20 McNaughton v. Newport Harbor Offices & Marina, LLC CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

KENT A. MCNAUGHTON,

Plaintiff and Appellant,

v.

NEWPORT HARBOR OFFICES & MARINA, LLC,

Defendant and Respondent;

PAUL D. COPENBARGER,

Intervener and Appellant.

G056743

(Super. Ct. No. 30-2016-00872226)

O P I N I O N

Appeal from an order of the Superior Court of Orange County, Martha K. Gooding, Judge. Affirmed.

MLG, Jonathan A. Michaels, Daniel Uribe, and John M. Whelan for Plaintiff and Appellant.

Copenbarger & Associates and Elaine B. Alston, for Intervener and Appellant.

No appearance for Defendant and Respondent.

* * *

This appeal addresses alleged errors in the appraisal and buyout process for the litigation incubator known as Newport Harbor Offices & Marina, LLC (NHOM). After years of litigating against each other (and others) over the operation of NHOM, the entity’s two equal partners, Kenneth McNaughton and Paul Copenbarger, decided to go their separate ways and to litigate about that as well.

In August 2016, McNaughton filed a complaint seeking involuntary dissolution of NHOM, and Copenbarger countered with a motion to purchase McNaughton’s interest. As required by statute, the court appointed a panel of three appraisers to put a value on NHOM for purposes of the buyout. The appraisers unanimously concluded NHOM had only a nominal value as of August 30, 2016, the designated valuation date. The court entered an order valuing McNaughton’s interest in NHOM in accordance with the appraisers’ unanimous report, and ordered the parties to split the expense of the report, with McNaughton responsible for paying $44,025 of the $64,025 total, and Copenbarger responsible for paying $20,000.

McNaughton appeals, arguing here, as he did in the trial court, that the appraisers’ report was fundamentally flawed because (1) it assigned no value to the improvements existing on the property leased by NHOM; (2) it erroneously projected NHOM’s expenses; (3) it relied on flawed accounting data; (4) it failed to count NHOM’s cash on hand; (5) it failed to properly assess NHOM’s debt; and (6) it failed to assign value to the liability release provision in NHOM’s operating agreement.

None of those arguments is persuasive. McNaughton has made no showing that the existing building on the leased property has continuing value to NHOM, or that NHOM has the right to either remove or sell it. His attacks on the financial data are misleading, fail the substantial evidence test, and are unsupported by any showing that correction of the alleged flaws would affect NHOM’s valuation. Moreover, McNaughton’s assertion that the appraisers failed to determine the amount of NHOM’s debt ignores the fact the appraisers concluded the amount of debt was irrelevant in assessing NHOM’s market value.

McNaughton also contends the court erred by refusing to require Copenbarger to pay the amounts secured by McNaughton’s guarantees of NHOM’s obligations as a condition of the buyout. In making that assertion, McNaughton addresses the merits of the issue, while ignoring the fact the trial court denied his request on procedural grounds. He has consequently waived any claim that the court erred by doing so.

Finally, both McNaughton and Copenbarger, by way of cross-appeal, contend the court erred by ordering them to share the cost of the appraisal, with each party suggesting that cost should be imposed solely on his opponent. McNaughton claims that because the statutory scheme requires that the party seeking the buyout post a bond to cover the expense of the appraisal, it is that party (in this case Copenbarger) who is required to bear it. We disagree. The statute McNaughton references requires such a payment only when the putative purchaser ultimately declines to purchase the appraised interest. That did not happen here.

Copenbarger’s contention is that McNaughton’s failure to negotiate in good faith is the sole reason the appraisal was required, and consequently he should bear its entire cost. We reject that assertion as well. This is not a marital dissolution, in which the parties are statutorily required to cooperate. There is no analogous statute related to a business dissolution. There is thus no basis to effectively sanction a party for his insufficient willingness to cooperate.

FACTS

McNaughton filed his complaint in August 2016, requesting an involuntary dissolution of NHOM, alleging various acts of misconduct by Copenbarger. In response, Copenbarger invoked his right to buyout McNaughton’s interest in NHOM, pursuant to Corporations Code section 17707.03.

As required by section 17707.03, the court appointed a panel of appraisers to determine the “fair market value” of McNaughton’s interest in NHOM, as of the date he filed his complaint for dissolution, for purposes of the proposed buyout.

The appraisers submitted their report to the court in March 2018. The report identifies NHOM as an entity founded in 2003 for the purpose of acquiring a sublease for a commercial property located on Pacific Coast Highway in Newport Beach. According to the report, NHOM financed the purchase of the sublease through two notes secured by deeds of trust—one for $3 million from the Hazel I Maag Trust (Maag Trust) and the other for $1.2 million from the Plaza del Sol Real Estate Trust (Plaza del Sol). The report states that upon expiration of the sublease on November 30, 2018, NHOM would have “no continuing rights in connection with” the property.

The report explains the appraisers determined NHOM’s value based on a “Discounted Cash Flow Method (DCFM),” which estimates the present value of the entity’s future cash flow; the appraisers did not employ an “Asset Approach,” which tallies up the market value of the company’s assets and liabilities. They decided on the DCFM approach because NHOM “does not operate as an asset holding company. Instead, from the Valuation Date [August 2016] through expiration of the [sublease], NHOM is expected to oversee management of the [Newport Beach] property. At expiration of the [sublease], the Property will be ultimately surrendered to the Lessor. NHOM does not have any contractual options to review the [sublease] at the expiration date in November of 2018. Thus its only material asset is a right to cash flows from the [Newport Beach] Property through termination of the [sublease].” Although McNaughton’s interest is NHOM is not controlling, that did not factor into the appraisers’ opinion of its value.

In formulating their opinion regarding the value of McNaughton’s interest, the appraisers reviewed NHOM’s operating agreement, its sublease for the Newport Beach property and related documents, its operating statements and bank statements for the period from August 2015 through August 2016, its tax returns for 2015 and 2016, and the notes and deeds of trust securing NHOM’s indebtedness to the Magg Trust and Plaza del Sol. The appraisers also considered correspondence from various entities, as well as declarations submitted by both McNaughton and Copenbarger.

The appraisers assessed the value of McNaughton’s interest in NHOM by first determining that NHOM’s projected cash flow generated an “Enterprise Value” of $1.3 million. They then subtracted NHOM’s interest bearing debt (specifically the notes to the Maag Trust and Plaza del Sol) from that Enterprise Value. The appraisers acknowledged there was some dispute (and thus some uncertainty) about the true scope of NHOM’s debt, but explained that the debt exceeded NHOM’s Enterprise Value without regard to whether the debt was valued in accordance with the “interest bearing debt accounts” (i.e., at $3.9 million) or in accordance with NHOM’s 2016 tax return (i.e., at $2 million). Consequently, the appraisers concluded that McNaughton’s interest in NHOM had only a nominal fair market value.

McNaughton filed objections to the appraisers’ report, while Copenbarger filed a motion for an order to allocate the entire appraisal cost of $64,025 to McNaughton. McNaughton countered Copenbarger’s request by arguing that the cost of the appraisal should be borne by the party that initiated the appraisal process. McNaughton additionally asserted in a supplemental brief that the court should order Copenbarger to release him from liability for the personal guarantees he signed in favor of NHOM, as a condition of the buyout.

The court overruled McNaughton’s objections to the appraisers’ report, and adopted their valuation of McNaughton’s interest in NHOM. The court stated that “if Copenbarger elects to purchase McNaugton’s interest in NHOM,” he was required to pay the nominal price of $1.

The court concluded it had discretion to apportion the cost of the appraisal, and allocated $44,025 of the cost to McNaughton, and $20,000 of the cost to Copenbarger.

Finally, the court rejected McNaughton’s request for an order requiring that he be released from liability for personal guarantees as part of the buyout. The court stated it was denying the request “on procedural grounds” because it was first raised in an “opposition brief to a motion to set the valuation of NHOM” and was consequently “not properly before the court.”

DISCUSSION

1. Governing Law

Section 17707.03, subdivision (a), authorizes any member of a limited liability company to file an action in court to “decree the dissolution of a limited liability company” in specified circumstances. Among the circumstances justifying an action for dissolution are when “[t]he management of the limited liability company is deadlocked or subject to internal dissension” (§ 17707.03, subd. (b)(4)), or when “[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)).

However, “[i]n any suit for judicial dissolution, the other members may avoid the dissolution of the limited liability company by purchasing for cash the membership interests owned by the members so initiating the proceeding, the ‘moving parties,’ at their fair market value. In fixing the value, the amount of any damages resulting if the initiation of the dissolution is a breach by any moving party or parties of an agreement with the purchasing party or parties, including, without limitation, the operating agreement, may be deducted from the amount payable to the moving party or parties; provided, that no member who sues for dissolution on the grounds set forth in paragraph (3), (4), or (5) of subdivision (b) shall be liable for damages for breach of contract in bringing that action.” (§ 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, shall be final and conclusive upon all parties.” (§ 17707.03, subd. (c)(3).) The court’s valuation order is appealable. (Ibid.)

The consensus in cases interpreting section 2000, a parallel provision of the Corporations Code applicable to corporations, is that “[t]he factual aspects of the court’s fair value determination are reviewed under the substantial evidence standard.” (See Mart v. Severson (2002) 95 Cal.App.4th 521, 530.) However, as pointed out in Dickson v. Rehmke (2008) 164 Cal.App.4th 469, 477 (Dickson), this substantial evidence review appears to be inconsistent with the statutory language indicating it is the appraisers’ award, rather than the court’s own determination of value, which is “final and binding,” and that the court’s role is simply to confirm or reject that award—much like a binding arbitration award. “It is troublesome that this authority simply fails to consider the express statutory designation of the confirmed award as final and binding.” (Ibid.) We agree, especially because if it is the court’s own assessment of value, rather than that of the expert appraisers, which is subject to review on appeal, the appraisers’ opinion would itself qualify as substantial evidence upholding the court’s judgment. However, we acknowledge that the appraisal process pursuant to section 2000 has been consistently interpreted this way—including in Dickson—and both parties here agree it is the applicable standard. We consequently apply it.

2. Value of Improvements and Erroneous Projection of NHOM’s Expenses

McNaughton contends the trial court erred because the valuation of NHOM fails to assign any value to the 40,234 square foot building that is located on the land that NHOM leased. According to McNaughton, the original ground lease, executed in 1963, gave NHOM the right to remove that building when the lease expired in November of 2018. He suggests that right “has value” to NHOM because it could have negotiated a price for leaving the valuable building in place.

However, in making that assertion, McNaughton ignores the requirements of the substantial evidence test. “Where the appellant challenges the sufficiency of the evidence, the reviewing court starts with the presumption that the record contains evidence sufficient to support the judgment; it is the appellant’s affirmative burden to demonstrate otherwise. [Citations.] The appellant’s brief must set forth all of the material evidence bearing on the issue, not merely the evidence favorable to the appellant, and must show how the evidence does not sustain the challenged finding. [Citations.] If the appellant fails to set forth all of the material evidence, its claim of insufficiency of the evidence is forfeited.” (Garlock Sealing Technologies, LLC v. NAK Sealing Technologies Corp. (2007) 148 Cal.App.4th 937, 951.)

Rather than summarizing the complete record pertaining to NHOM’s purported right to remove the entire building—which would presumably include not only the original 1963 ground lease, but also every amendment to and assignment of that lease executed during its 55 year term—McNaughton points to only an excerpt of the original lease, consisting of its first and final pages. But NHOM, which was founded in 2003, was not a party to the original lease, and thus has no rights under it. Consequently, McNaughton has failed to demonstrate that NHOM had a right to remove the existing building from the leased property, let alone show that none of the other evidence pertaining to the issue would have been sufficient to support the trial court’s implied conclusion to the contrary. Thus, the contention is forfeited.

In any event, if we were inclined to accept McNaughton’s invitation to focus solely on paragraph 25 of the 1963 ground lease, his claim would fail. Paragraph 25, which is the final substantive paragraph of the original lease, is titled “Removal of Existing Improvements.” The provision states that the lessee has the right to remove “any existing improvements.” It does not include any language to suggest the phrase “existing improvements” is intended to refer to whatever improvements might exist at the end of the lease term, 55 years hence.

We believe the phrase “existing improvements” refers to whatever improvements existed on the leased property at the time the lease was entered into—i.e., improvements owned by the lessor, that might otherwise impede the lessee’s ability to redevelop the property during the 55 year lease. McNaughton fails to explain why the provision might be reasonably construed to give the lessee an option to “remove” whatever improvements exist on the property at the end of the lengthy lease term, and we can think of none. Just as it makes sense to give the lessee the option to retain existing improvements on the property (or not) during the 55 year lease term, it makes sense to allow the lessor to decide whether to retain any existing improvements (or not) when it retakes the property at the end of the lease term.

We consequently reject McNaughton’s assertion that the trial court erred by failing to assign value to NHOM’s purported right to demolish the building at the end of the 55 year lease term. And because we find no merit in McNaughton’s claim that the building would presumptively “no longer be standing” after the lease expired, we also reject his assertion that the property manager, Pacific West, would no longer be earning leasing commissions near the end of that term. According to McNaughton, it is “absurd” to conclude that Pacific West might still be leasing space in a building that will soon be demolished. Because the premise is flawed, the purported absurdity disappears.

3. Flawed Accounting Data and Failure to Count NHOM’s Cash

McNaughton next asserts that none of the accounting data supplied by Pacific West should have been relied on in assessing the value of his interest in NHOM. According to McNaughton, this data cannot be relied upon because the chief financial officer (CFO) of Pacific West acknowledged that “none of [the] data is reliable.” Not so.

What the CFO actually said is that Pacific West had not verified the accuracy or completeness of the information it provided, and that Pacific West “does not prepare a complete balance sheet for NHOM.” Those disclosures do not suggest that Pacific West’s information is inherently unreliable, only that it has not been audited, and that it addresses only a part of NHOM’s overall financial picture. We presume the appraisers, and thus the court, gave proper weight to those issues.

McNaughton also complains that Pacific West’s financial data was compromised because Copenbarger “refused to provide financial data to Pacific West since April 2017.” (Original italics.) The cited reference does not support the charge. It says only that April 2017 “was the last month” Pacific West “received any journal entries from [Copenbarger’s] office.” There is no explanation as to what the “journal entries” are, or how they might be crucial to Pacific West’s reporting of financial data. In short, McNaughton has made no effort to demonstrate how this purported lapse might have affected the valuation of his interest in NHOM. In the absence of such a showing, it provides no basis for reversal.

Finally, McNaughton contends the court’s valuation fails to account for a NHOM account, purportedly controlled entirely by Copenbarger, which “received deposits totaling . . . $5,856.713.13.” The only “evidence” McNaughton cites in support of this claim is an exhibit attached to his post-appraisal objections, which appears to be a self-created grid listing “Deposit[s],” by date, to an unidentified bank account. There are no authenticated bank records documenting these alleged deposits into any identifiable account, let alone any demonstration that the unknown account did not also have corresponding withdrawals, or any showing what its balance might be. In the absence of competent evidence to prove even the existence of this bank account, we reject the contention.

4. Failure to Assess NHOM’s Debt or Assign Value to the Liability Release Provision in NHOM’s Operating Agreement

McNaughton further complains the appraisers’ failure to determine the amount of NHOM’s debt, prohibited them—and thus the court—from accurately valuing his interest in the company. However, this assertion ignores the fact the appraisers were tasked with assessing the “fair market value” of McNaughton’s interest, which they concluded was essentially zero without regard to which of the two proposed debt figures was accurate. Having failed to acknowledge what the appraisers said about the debt discrepancy, McNaughton has made no effort to explain why their analysis might be incorrect. He has consequently waived any such contention.

McNaughton suggests that the appraisers erred by failing to assign “value” to the liability release provision in NHOM’s operating agreement. McNaughton does not explain why that provision is an asset of NHOM, or how it might operate to increase the “fair market value” of McNaughton’s interest in NHOM. Because the assessment of NHOM’s “fair market value” was the only issue presented to the appraisers, McNaughton has made no showing that they erred by failing to account for the liability release provision. So again, the contention is waived.

5. The Trial Court’s Failure to Require Copenbarger to Pay Amounts Secured by McNaughton’s Guarantee

McNaughton contends the court erred by refusing to require Copenbarger to pay the amounts secured by McNaughton’s guarantees of NHOM’s obligations, as a condition of the buyout. In making that assertion, McNaughton addresses the merits of the issue, while ignoring the fact the trial court explicitly denied his request “on procedural grounds.”

Specifically, the court noted in its order that McNaughton first raised the issue in his supplemental opposition brief, after he had already filed his objections to the appraisers’ report. It is in that document that McNaughton “asks that this Court enforce a section of [NHOM’s] Operating Agreement that applies to [him]. The section releases a member being bought out by the LLC from personal liabilities and guarantees.”

In refusing to address the issue on the merits, the court stated, “McNaughton cannot properly seek a ruling from the Court on a disputed issue of contract interpretation . . . in an opposition brief to a motion to set the valuation of NHOM pursuant to the Corporations Code. That issue is not properly before the Court on Copenbarger’s Application/Motion. Indeed, it is not clear to the Court that this issue is even the subject of the Complaint in this Action.” Because McNaughton ignores the court’s actual ruling in his appellate brief, he has waived any claim that the court erred in making its ruling.

6. Apportionment of Appraisal Cost

McNaughton’s final contention is that the court erred by ordering him to pay the majority of the $64,025 cost of the appraisers’ report. Copenbarger, by way of cross-appeal, agrees the court erred in its apportionment of costs, but Copenbarger contends the court’s error was its failure to require McNaughton to pay the entire cost of the appraisal. We reject both contentions.

McNaughton’s argument is that because section 17707.03, subdivision (c)(2), requires that the party seeking the buyout post a bond to cover the expense of the appraisal, it is that party (in this case Copenbarger) who must bear it. We disagree. The statute requires such a payment only when the putative purchaser ultimately declines to purchase the appraised interest. That did not happen here.

Section 17707.03 says nothing about the allocation of an appraisal expense in a case in which the party seeking the buyout goes through with the purchase at the appraised price. We believe the issue is governed by Code of Civil Procedure section 1032, subdivision (a)(4), which provides courts with the discretion to award costs to the “prevailing party” in an action, and to apportion costs in cases in which “any party recovers other than monetary relief . . . .” McNaughton makes no assertion that the court’s apportionment of the appraisal costs in this case constituted an abuse of its discretion.

For his part, Copenbarger argues it was an abuse of the court’s discretion to order him to share in the appraisal cost, suggesting McNaughton’s failure to negotiate in good faith requires that McNaughton be assessed with the entire cost. We cannot agree. This is not a marital dissolution, in which the parties are required by statute to cooperate and may be sanctioned for failure to do so (see, Family Code section 271, authorizing an award of attorney’s fees or costs when a party’s conduct “frustrates the policy of the law to promote settlement of litigation” and “to reduce the cost of litigation by encouraging cooperation between the parties and attorneys.”)

Moreover, while McNaughton’s belief that his share in NHOM had a significant market value was proved incorrect, Copenbarger has not demonstrated that McNaughton maintained that belief in bad faith, or that it was wholly frivolous. Instead, Copenbarger simply repeats on appeal the same arguments he made to the trial court on this issue, as though this appeal allows for a de novo review.

Because the trial court was given discretion to apportion the costs, we would disturb its ruling only if Copenbarger demonstrated that the court’s ruling was “so irrational or arbitrary that no reasonable person could agree with it.” (Olive v. General Nutrition Centers, Inc. (2018) 30 Cal.App.5th 804, 827.) He has made no such showing.

Copenbarger instead relies on subdivision (c)(1) of section 17707.03 to support the proposition that the court had “inherent authority” to determine that “although [Copenbarger] owed only a dollar to [McNaughton for] purchase of his interest in NHOM, [he] is entitled to a set off of the full amount paid to the appraisers.” Copenbarger’s argument is misplaced for two reasons.

First, it implies that the trial court failed to apportion the entire appraisal cost to McNaughton because it believed it lacked authority to do so. That is not the case. And second, the statute Copenbarger relies upon does not support his position.

Subdivision (c)(1) of section 17707.03 authorizes a deduction of damages from “the amount payable” for McNaugton’s share of NHOM. Since that amount is $1, the most that could be deducted is $1; i.e., $44,024 less than the share of costs the court already ordered McNaughton to pay. Even if we believed the trial court had some obligation to order such a deduction (and we do not), there would be no basis to conclude Copenbarger was harmed by that error.

We find no error in the court’s apportionment of the appraisal costs.

DISPOSITION

The order is affirmed. The parties shall bear their own costs on appeal.

GOETHALS, J.

WE CONCUR:

O’LEARY, P. J.

MOORE, J.