Keith Perron v. Mountain Laurel Enterprises, Inc. (2011)

MEMORANDUM OF DECISION

The sole issue in this consolidated action is the fair value of plaintiff, Keith Perron's fifty percent interest in Mountain Laurel Enterprises, Inc. (“MLE”).

MLE is engaged in the business of restoring damaged property.   It derives its customers from referrals by insurance companies.   It is a franchisee of Paul Davis Restoration, Inc. Agata Trojanowski and Keith Perron each currently own a fifty percent interest in MLE. Trojanowski acquired her interest in 2007.   Perron acquired his interest in July 2008.

In calendar 2009, the first full year of joint ownership and operation of MLE by Trojanowski and Perron, the company experienced a dramatic increase in revenue from some $380,000.00 in 2008 to over $900,000.00 in 2009.   This revenue increase continued through 2010, when reported revenue through November 30, 2010 exceeded $1,080,000.00.

Notwithstanding this improved financial performance, significant friction and disagreements arose between the principals in the day-to operation and management of the corporation.   This led Perron to file an action entitled Perron v. Mountain Laurel Enterprises, Inc., CV 10 6010675–S, claiming breach of fiduciary obligation by Trojanowski.   This initial complaint was superceded by an amended complaint, filed on June 7, 2010, seeking a judicial dissolution of the corporation pursuant to Section 33–896.   Trojanowski filed a cause of action entitled Trojanowski v. Perron, CV 10–6011332–S, in which she claimed improper conduct by Perron.   The two actions were consolidated pursuant to a stipulation and order of this court on July 28, 2010.

Prior to the entry of the stipulation order, Trojanowski elected under the provisions of Conn. Gen.Stat. § 33–900(b) to purchase all the shares of MLE. The stipulation stated that all outstanding claims made by Trojanowski and Perron against each other would be considered resolved and the only claim for relief would be a valuation of the company.   Pursuant to stipulation, each party submitted names of proposed appraisers to the court.   After a hearing, the court designated Edward Pratesi of Brentmore Valuation Advisors, LLC as the court appointed appraiser.   The parties reserved the right to propose either a reduction or enhancement of the valuation of Pratesi's appraisal.   At a hearing on the valuation of MLE and the interest of Perron, Pratesi submitted his appraisal report dated February 10, 2011.   The parties agreed that the fair value of Perron's shares would be 50% of the value of MLE.

In undertaking his task, Pratesi was provided by Trojanowski with profit and loss statement of the company for the calendar year 2009, internally prepared financial statements for the years ending December 31, 2007–2009, and internally prepared financial statements for the six months period ending on June 30, 2010 and the eleven months period ending November 30, 2010.   From this material Pratesi noted that revenue of the company increased from a low for the year 2007 of $103,342.00 to a little over $900.00 for the year ending December 31, 2009.   For the six months ending June 30, 2010, revenue totaled $738,438.00 and is estimated by management to total approximately 1.1 million dollars with net income expected to approximate $87,000.00 for 2010.   At the end of November 2010, actual revenue totaled $1.085 million and net income before taxes was $188,827.00.

For the purpose of determining the value of MLE as of the valuation dated of June 30, 2010, the report notes:

It is our opinion, based on a review of the actual operating results from year end 2007 through year end 2009, and giving consideration to the operating results recorded through June 20, 2010 and November 30, 2010, that the weighting of current results (year end 2009), normalize for certain adjudgments, will be the most important indication of earnings that are sustainable in the determination of the value of MLE as of June 30, 2010.   While normally we would consider more heavily the operating result from previous years, in our opinion using prior periods is not indicative of current operations and considered other owners.

Pratesi used the income and market approach in developing an estimate of value of MLE. He used primarily the 2009 and 2010 revenues.   He applied a capitalization rate of eighteen percent and concluded the value of the equity in MLE as of June 30, 2010 is $255,000.00 and Mr. Perrone's fifty percent interest is $127,500.00.

At the trial, Mr. Pratesi was confronted with a discrepancy between the income of MLE for 2009 as shown in the company's quick books ($175,703.00) and the tax return ($133,163.00).   Mr. Pratesi then recalculated the value of MLE based upon the tax return of 2009.   He determined the value in MLE to be, as rounded, $171,500.00 and the value of Perrone's fifty percent interest to be $85,750.00.

Perrone accepts the final value of Pratesi and urges this court to value the company and Perrone's interests accordingly.   Trojanowski attacks the appraisal on three grounds.   First is that the 2010 financial data is not reliable and should not be used in valuing MLE. Perrone contends the 2010 figures are unadjusted and therefore not reliable.   She points to the discrepancy between the company's profit and loss statement for 2009 and its income tax return to show that reliance on the profit and loss statement is unreliable.   Trojanowski does not, however, show in what particular way the 2010 numbers, which she herself provided to Pratesi are, inaccurate.   The profit and loss statement which Trojanowski provided to Pratesi are the only figures for 2010 that he had, and he had a right to consider them in reaching his valuation.

Trojanowski's second assertion is that the capitalization rate used in the appraisal is too low.   She suggests a cap rate of twenty-two percent.   Pratesi based the eighteen percent cap rate on a six percent specific company risk premium.   Trojanowski claimed that that risk premium should be ten percent which would increase the overall capitalization rate to twenty-two percent.   However, she has no authority for that.   The court believes that Pratesi, with his extensive experience, more accurately states that specific company risk premium and therefore concludes that the eighteen percent cap rate is justifiable in this case.

Trojanowski's third criticism of Pratesi's appraiser is that the years 2007 and 2008 should have been taken into account in valuing MLE. Pratesi had two reasons for basing his appraisal on 2009 and 2010 revenues.   The first is that those years represented a sustainable upward trend for MLE. Thus, 2007 and 2008 were not representative of the business going forward.   This court concludes that such a justification is warranted in this case.   Pratesi's second reason for limiting his valuation to data of 2009 and 2010 is that this was the time period in which both parties were shareholders and participating in the operation of MLE. Again, that is an appropriate justification for Pratesi's method of valuation and their joint efforts reflect the future earnings of the company.

Finally, Trojanowski claims that the franchise transfer fee of $17,000 should be taken into account in the valuation of the company.   However, the evidence at trial was that the franchiser, Paul Davis Restoration would very likely waive the fee if the transfer was simply between stockholders of MLE.

The court concludes that the appraisal of Pratesi is accurate and that the value of MLE is $171,500.00 and the value of Perrone's fifty percent interest is $85,750.00.

Section 33–900(e) provides:  “The court shall enter an order directing the purchase upon such terms and conditions as the court deems appropriate, which may include payment of the purchase price in installments, where necessary in the interest of equity.”   The court will allow the parties to attempt to reach an agreement on how Perrone is to be paid his interest of $85,750.00.   If they cannot reach an agreement, the court will hear the parties on the method of payment.

Robert Satter, JTR

Satter, Robert, J.T.R.