Hardiman v. Woodlands Store, Inc., 2024
This appeal to the California Court of Appeal dealt with an appraisal of the plaintiffs’, Roy and Janet Hardiman’s, 15% interest in a grocery business the defendant, Woodlands Store Inc., owned and operated. The plaintiffs challenged the superior court’s decision to deny their petition to vacate its appraisal-arbitration award affirming in favor of the defendant. They reason was the award was “procured by fraud and the arbitrator/appraiser prejudiced their rights by her misconduct.”
The appellate court found no basis for a reversal and affirmed the superior court.
Factual and procedural background.
Woodland owned three grocery stores in Northern California, including San Francisco. Roy and Janet Hardiman own collectively 15% of the defendant’s outstanding stock.
Amended and restated shareholders’ agreement.
The operative shareholders’ agreement, signed in 2012, gave the plaintiffs a contractual right to have the defendant purchase their shares at a price determined “by an appraiser of recognized standing” jointly selected by the parties.
In 2020 and 2021, the plaintiffs disagreed with several business decisions that the defendant made, including a decision to purchase five condominiums in San Francisco. The plaintiffs did not learn of the purchases until they had already been made, in violation of the defendant’s own rules. The five condominiums were those in which the defendant operated the San Francisco store and were purchased at a discounted price of $5,475,000. The units had been “recently appraised for approximately $1.5 million more than the discounted price that [Woodlands] paid.”
In July 2021, the plaintiffs exercised their “exit rights.” The parties chose Serena Morones, CPA, ASA, ABV, CFE, as the arbitrator/appraiser.
Appraisal process.
The engagement with the appraiser included the following rules: (1) an initial document request with the possibility of additional requests; (2) after obtaining “sufficient information within an adequate timeframe necessary to reach an independent conclusion,” Morones met with each party; and (3) each party submitted a written memorandum including all issues and documents they wish the appraiser to consider.
Neither side disclosed the letter relating to the purchase of the San Francisco condominiums.
The appraiser’s draft report.
The appraiser issued a draft report. The parties were allowed to comment but not on valuation methodologies. The plaintiffs’ “letter noted that the draft report concluded the recently purchased San Francisco condominium units were ‘non- operating’ valued at $5,425,000.” They took issue with the value and noted that no appraisal was given, but the purchase price was assumed to be the market value, noting that the defendant claimed that the condominiums were purchased at a discount of $1.5 million. “[T]he appraiser asked Woodlands, in light of the new information contained in the Hardimans’ letter, to provide any additional documents in its possession that ‘may indicate fair market value of the SF real estate.’”
The defendant would not provide additional information, saying doing so violated the engagement and that the plaintiffs had violated the engagement agreement by challenging the draft in ways the engagement agreement did not permit. The defendant argued that the condominiums were not nonoperating assets but rather operating assets. “As an operating asset, the value of the condominiums would be captured in the overall enterprise valuation of the Company.” Morones insisted that it was reasonable for real estate appraisal information to be provided, warning that, if the defendant did not provide the appraisal, “I will issue a final report, disclaiming the value of the real estate component, describing the basis for my conclusion as the acquisition cost, but noting that an appraisal exists and was not provided.”
The appraiser’s final report.
Morones delivered the final report valuing the 15% interest at $3,366,000. The report included the threatened disclaimer regarding appraisal of the real estate. The estimated market value of the San Francisco condominiums thus remained an “extraordinary assumption” in the final report analysis with an indication that the final report could be different if additional information were given as to the fair market value of the condominiums.
Discussion.
The plaintiffs contended the superior court erred by denying their petition to vacate the appraisal-arbitration award because it was procured by fraud and their rights were prejudiced by misconduct of the appraiser-arbitrator.
No fraud, corruption, or other undue means.
Fraud means “extrinsic fraud which denies a party a fair hearing.” (Comerica Bank v. Howsam). The standard for vacating an arbitration was not met here. The record here reflected that the plaintiffs had full opportunity to address the value of the condominiums during the hearing. The plaintiffs had notice of the purchase almost immediately after it occurred. The plaintiffs failed to produce this information, including the “discount” at which the properties were purchased. The plaintiffs “were obligated to provide the arbitrator ‘all documents and data that you wish for us to consider’ before preparation of the draft report. As such, they cannot complain about the arbitrator’s failure to have this information when they could have given, but did not give, it to her in a timely manner.”
Further, there was evidence that the defendant did not make fraudulent statements to the arbitrator about the value of the condominiums. The defendant did not submit any information on the value of the condominiums because the arbitrator asked only for information on “non-operating assets” and the defendant considered the condominiums to be operating assets since they were used exclusively in the operations of the San Francisco store. Only after the defendant’s meeting with the arbitrator, at which appraisals were not discussed nor asked for, when the draft report was received, did the defendant find out that the arbitrator was treating the buildings as nonoperating assets. It was not the role of the appellate court to weigh evidence in conducting its limited review of an arbitration award for fraud or undue means.
The defendant also correctly noted that it did not provide value and appraisal information on the condominiums to the arbitrator after the issuance of the draft report because, under the engagement, the time for documents and discovery had passed. Further, the defendant’s decision not to provide this information “was based on its view that the arbitrator incorrectly labeled the condominiums as ‘non-operating assets’—an analytical finding not subject to challenge at that point in the arbitration process.”
The plaintiffs have not proved that the defendant’s refusal to produce the real estate appraisals deprived them of a fair and impartial hearing to substantial prejudice. The appellate court noted that “[p]arties who stipulate in an agreement that controversies that may arise out of it shall be settled by arbitration, may expect not only to reap the advantages that flow from the use of that nontechnical, summary procedure, but also to find themselves bound by an award reached by paths neither marked nor traceable and not subject to judicial review.” (Moncharsh). Applying that principle, the appellate court declined to disturb the award here.
No refusal by arbitrator to postpone the hearing or to hear material evidence.
The appellate court found that the process here, even if not perfect, was completed and there was no reason to disturb it.
No arbitrator misconduct.
The appraiser felt that she had adequate information to support her conclusions and opinions. and, had she not, she would have violated her professional standards. The appellate court declined to override the arbitrator’s judgment. Whether her conclusions were right or wrong, “the parties have contracted that such a decision should be conclusive.” (Griffith Co. v. San Diego College)
The arbitration-appraisal award stood.