Filed: Feb. 12, 2007
Latest Update: Feb. 22, 2020
Summary: -3-, In the event the operations of the Company are impaired, because of deadlock on the board of directors, the, shareholders agree that they shall each have the right to, acquire the other shareholders stock, as follows.exceeded Macdonald Pages valuation figure.value of Wetmores shares.
United States Court of Appeals
For the First Circuit
No. 06-2103
FRANK U. WETMORE,
Plaintiff-Appellant,
v.
MACDONALD, PAGE, SCHATZ, FLETCHER & COMPANY, LLC,
Defendant-Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. George Z. Singal, United States District Judge]
Before
Howard, Circuit Judge,
Selya, Senior Circuit Judge,
and Shadur,* Senior District Judge.
James T. Kilbreth, with whom Peter S. Black and Verrill Dana,
LLP were on brief, for appellant.
Bruce W. Hepler, with whom Laurence H. Leavitt and Friedman,
Gaythwaite, Wolf & Leavitt were on brief, for appellee.
February 12, 2007
__________
*Of the Northern District of Illinois, sitting by designation.
SHADUR, Senior District Judge. This diversity action was
brought in the United States District Court for the District of
Maine in February 2006 by Frank Wetmore (“Wetmore”) against
Macdonald, Page, Schatz, Fletcher & Co., LLC (“Macdonald Page”), a
Maine limited liability company none of whose members shares
Wetmore’s Massachusetts citizenship. Wetmore’s complaint alleges
that Macdonald Page committed professional negligence, breach of
contract and negligent misrepresentation when it appraised a
business in which Wetmore was a shareholder for less than half its
actual value.
When Macdonald Page moved to dismiss the action under
Fed. R. Civ. P. (“Rule”) 12(b)(6), a magistrate judge recommended
granting its motion, and the district court then upheld that
recommendation. Wetmore has filed a timely appeal challenging the
dismissal.
STANDARD OF REVIEW
As taught in such cases as Epstein v. C.R. Bard, Inc.,
460 F.3d 183, 187 (1st Cir. 2006):
We review a Rule 12(b)(6) dismissal de novo,
considering all well-pleaded facts in the
complaint to be true.
That familiar principle adheres to the seminal teaching of Conley
v. Gibson, 355 U.S. 41, 45-56 (1957) that “a complaint should not
be dismissed for failure to state a claim unless it appears beyond
doubt that the plaintiff can prove no set of facts in support of
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his claim which would entitle him to relief.” To that end, in
addition to the acceptance of all well-pleaded allegations and all
reasonable inferences from those allegations as well, Nisselson v.
Lernout, 469 F.3d 143, 150 (1st Cir. 2006) explains:
Facts distilled in that fashion may be
augmented by reference to (i) documents
annexed to it [the complaint] or fairly
incorporated into it, and (ii) matters
susceptible to judicial notice.
BACKGROUND
Wetmore’s complaint concerns the sale of his stock in
Portland Shellfish Company, Inc. (“Company”), a Maine-based close
corporation whose chief business is processing live shellfish. As
one of the two owners, Wetmore held 300 voting and 150 non-voting
shares of Company stock, while the remaining 300 voting shares were
held by Donna Holden. Ms. Holden’s husband Jeff (hereafter simply
“Holden”) served as President of the Company and managed its daily
operations, including production, procurement and sales.
Under the Company’s Shareholders’ and Officers’ Agreement
(“Agreement,” attached to the complaint as an exhibit), the
Company’s board of directors was restricted to two members:
Wetmore and Holden. By late 2001 number of disagreements had
arisen between Wetmore and the Holdens over the management and
direction of the Company. After unsuccessful efforts to resolve
those differences, the Holdens invoked the deadlock-breaking
provision of Agreement §11.5.5:
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In the event the operations of the Company are impaired
because of deadlock on the board of directors, the
shareholders agree that they shall each have the right to
acquire the other shareholder’s stock, as follows. In
the event of a deadlock, the directors shall hire an
accountant at MacDonald Page & Co., South Portland,
Maine, to determine the value of the outstanding shares.
Once the value is reported to the directors by the
accountant, the directors shall call a meeting, each
shareholder shall have the right to buy out the other
shareholder(s)’ interest, at a price equal to or greater
than the price determined by the accountant. The highest
offer made by any shareholder at the meeting shall be
binding upon the other shareholder(s). The shareholder
who is acquiring the stock shall be required to close on
the acquisition within 90 days of the meeting of the
shareholders.
In accordance with that provision, Wetmore and the
Holdens retained Macdonald Page to evaluate the Company’s shares by
identifying the fair market value of a 100% common equity interest.
In its engagement letter Macdonald Page defined “fair market
value”:
The price at which the property would change hands
between a willing buyer and a willing seller, neither
being under a compulsion to buy or sell and both having
reasonable knowledge of relevant facts.
As called for by the Agreement and Macdonald Page’s
engagement letter, it delivered its valuation report to the
Company, estimating “the fair market value of the common stock of
[the Company] at June 30, 2002, to be approximately $1,090,000.”
Ms. Holden then offered to purchase Wetmore’s shares at a price
equal to 60% (Wetmore’s proportionate share) of Macdonald Page’s
valuation. Wetmore, however, resisted that offer and countered by
offering $1.25 million for Ms. Holden’s shares if Holden would sign
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a non-compete agreement. Alternatively Wetmore offered to join in
selling the Company to a third party.
In response the Holdens rejected both of Wetmore’s
offers. Ms. Holden insisted that Wetmore was obligated to sell his
shares pursuant to Agreement §11.5.5, stating that she would sue if
he refused. Facing the threat of litigation, Wetmore sold his
shares to Ms. Holden for $750,705, a price that represented 60% of
the Macdonald Page evaluation after adjustment to eliminate a 7%
“marketability discount” included in Macdonald Page’s report.
As stated at the outset, Wetmore’s Complaint asserts that
Macdonald Page’s valuation “was well less than half the actual
value” of the Company’s total stock, which Wetmore attributes to
factors including Macdonald Page’s disregard for “commonly accepted
and reliable methods of valuation in favor of less reliable
methods.” More specifically, Count I charges professional
negligence, Count II charges breach of contract and Count III
charges negligent misrepresentation.
REQUIRED ELEMENTS OF PROOF
All three of Wetmore’s claims stem from the common
law--two sound in tort, one in contract. And all three were found
wanting by the district court based on its determination that
Wetmore would be unable to prove causation, a critical element in
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each.1
Thus Graves v. S.E. Downey Land Surveyor, P.A., 885 A.2d
779, 782 (Me. 2005)(emphasis added) instructs that “[t]he plaintiff
in a professional negligence action must establish the appropriate
standard of care, demonstrate that the defendant deviated from that
standard, and prove that the deviation caused the plaintiff’s
damages.” Similarly, Maine Energy Recovery Co. v. United Steel
Structures, Inc.,
724 A.2d 1248, 1250 (Me. 1999)(emphasis added)
identifies the required elements of proof in a breach of contract
action as comprising “(1) breach of a material contract term;
(2) causation; and (3) damages.” Finally, Chapman v. Rideout,
568
A.2d 829, 830 (Me. 1990) holds that Maine recognizes the tort of
negligent misrepresentation as defined in Restatement (Second) of
Torts, §552(1) (1977)(emphasis added)):
One who, in the course of his business, profession or
employment, or in any other transaction in which he has
a pecuniary interest, supplies false information for the
guidance of others in their business transactions, is
subject to liability for pecuniary loss caused to them by
their justifiable reliance upon the information, if he
fails to exercise reasonable care or competence in
obtaining or communicating the information.
With all other components of each of Wetmore’s theories
of recovery plainly being met by his complaint’s allegations, the
central issue on this appeal is whether Wetmore’s well-pleaded
1
Throughout this opinion we look to the substantive law of
Maine, which Agreement §15 designates as providing the rules of
decision.
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facts support a claim that Macdonald Page’s negligent valuation
caused him to receive less than fair market value for his shares.
We turn to that question.
CAUSATION ELEMENT
As we have said in Napier v. F/V Deesie, Inc., 454 F.3d
61, 68 (1st Cir. 2006), “[i]n order for the negligent act to
constitute proximate cause, the act or omission must be a
substantial factor in bringing about the harm and the injury
incurred must have been a reasonably foreseeable consequence.”2
Merriam v. Wanger,
757 A.2d 778, 780-81 (Me. 2000) has put the same
concept in these terms:
Evidence is sufficient to support a finding of proximate
cause if the evidence and inferences that may reasonably
be drawn from the evidence indicate that the negligence
played a substantial part in bringing about or actually
causing the injury or damage and that the injury or
damage was either a direct result or a reasonably
foreseeable consequence of the negligence. The mere
possibility of such causation is not enough, and when the
matter remains one of pure speculation or conjecture, or
even if the probabilities are evenly balanced, a
defendant is entitled to judgment.
Notably, Merriam does not insist that a defendant’s
conduct must be the only cause of the harm--instead it must have
contributed substantially to the harm suffered. We therefore look
to the question whether under the facts as pleaded a reasonable
jury could conclude that Macdonald Page’s negligence was a
2
Although Napier was a case sounding in admiralty, its
stated principles of proximate causation are universally applied.
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substantial factor in Wetmore’s recieving less than the full market
value of his shares.
According to the district court, Wetmore cannot establish
causation because “[n]othing in the Agreement or in the other
factual allegations of the complaint required the plaintiff to
accept Donna Holden’s offer.” Instead “[a]ll he had to do was
offer her the same amount or more per share for her shares than she
had offered him for his.” It was the district court’s view that
the deadlock provision required Wetmore to accept Ms. Holden’s
offer only if and when he determined that he was unwilling to offer
more money per share to purchase her stock. Through the district
court’s lens Wetmore “had many options, ranging from challenging
the appraisal in any of a number of ways to offering Donna Holden
the same amount per share to offering her more per share.”
In that light the district court ultimately held that
Macdonald Page’s valuation was not and could not have been a cause,
substantial or otherwise, of Wetmore’s loss. We disagree.
Under the Agreement the parties, in the event of a
deadlock, were required to hire Macdonald Page in what would be the
first step in potentially resolving the stalemate. It was
Macdonald Page’s role to provide a valuation that the parties would
use to begin a bidding process. As the plain language of the
Agreement put it, the purpose of the Macdonald Page valuation was
“to determine the value of the outstanding shares” so that at the
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ensuing shareholders’ meeting “each shareholder shall have the
right to buy out the other shareholder(s)’ interest, at a price
equal to or greater than the price determined by the accountant”
(emphasis added). In brief, Macdonald Page’s figure was to serve
as a floor--the lowest possible bid. To say that a negligently-
arrived-at valuation that set an artificially low floor would not
have a substantial effect on a shareholder in Wetmore’s position
ignores the logic of cause and effect.
Importantly, Wetmore was under no compulsion to enter the
active bidding process. If for any reason he felt himself unable
to compete on a level playing field after acquiring total ownership
of the Company (it will be remembered that the Holdens would be
free to engage in the same business post-sale, with Holden having
the operating experience that Wetmore lacks), he had the absolute
right to accept Ms. Holden’s offer so long as it equaled or
exceeded Macdonald Page’s valuation figure. And that meant he had
the right to rely on Macdonald Page to generate a valuation that
set a fair price for the shares.
Instead, under the allegations of the complaint that must
be accepted as gospel for present purposes, Macdonald Page
improperly promulgated a figure that was less than half the true
value of Wetmore’s shares. To be sure, Wetmore could have
responded by offering Ms. Holden more for her shares, but being
limited to that route deprived him of the full benefit of his
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bargain by foreclosing his opportunity to sell at a fair price.
Once Macdonald Page rendered its negligent undervaluation of the
Company, it was too late--indeed, impossible--for Wetmore to choose
to exercise that equally absolute right. Wetmore’s allegations
thus offer far more than “pure speculation or conjecture” (Merriam,
757 A.2d at 781) as to Macdonald Page’s improper valuation being a
substantial factor in Wetmore’s asserted loss.
It should be added that Wetmore’s injury was entirely
foreseeable. What Macdonald Page’s alleged misfeasance imposed on
Wetmore was precisely the type of bind that shareholders in a close
corporation seek to avoid when they include buy-sell provisions in
their agreements. Protections afforded by buy-sell provisions that
set a bidding floor are fully meaningful only if the initial
valuation of the company is performed accurately. Otherwise, as
here, the distortion of that base valuation skews the entire
process.
In this instance the parties selected a buy-sell
provision that would have been evenhanded if the valuation had been
properly arrived at. By contrast, it is entirely foreseeable that
a shareholder who receives an improperly low bid based on a
negligently-reached valuation will suffer a loss based on the
undervaluation of his or her shares. And here Macdonald Page’s
engagement letter expressly confirmed its own understanding that
its valuation would play a key role in the bidding process:
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We understand that our valuation conclusion will be used
in conjunction with the Company’s “Shareholder’s and
Officer’s Agreement” dated February 1, 1994, paragraph
11.5.5....
To argue that Wetmore’s loss was not foreseeable would be
disingenuous, given that plain language confirming Macdonald Page’s
duty to the Company’s shareholders.
In its decision the district court also reasoned that if
Macdonald Page’s valuation had been higher, there is no guaranty
that Ms. Holden would have made an offer. We too lack an unclouded
crystal ball to tell us what would have transpired had the
valuation been performed without negligence. There are multiple
possibilities, including the prospect that an unsuccessful bidding
process might for example have led the parties to resolve their
differences, breaking their deadlock, or might instead have led to
the invocation of Maine’s statutory provision for the resolution of
corporate deadlocks. But such speculation plays no part in the
determination at the pleading stage whether Wetmore has stated a
cognizable claim--he clearly has. We emphasize that there are many
factual questions and matters of proof that remain unresolved, but
those will require a more developed record--they simply are not
before us at the Rule 12(b)(6) stage.
CONCLUSION
For the reasons that have been stated here we REVERSE the
district court’s dismissal of Wetmore’s complaint and REMAND for
further proceedings consistent with this opinion.
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