Most forms of California business entities have statutory buyout procedures allowing the company or its owners to avoid claims by a disgruntled owner for judicial dissolution by purchasing the disgruntled owner’s interest.
For example, see:
- Corporations Code section 17707.03 — LLC statutory buyouts
- Corporations Code section 15908.02 — limited partnership statutory buyouts
- Corporations Code section 2000 — corporation statutory buyouts
In a case recently published by California’s Second District Court of Appeal — Crane v. R. R. Crane Investment Corp., Inc. — the court addressed, and shot down, a creative argument from a corporate dissolution plaintiff that he was entitled to prejudgment interest on his buyout price.
Facts: statutory buyout triggered; plaintiff claims entitlement to prejudgment interest
Plaintiff Brian Crane filed a lawsuit for judicial dissolution of R. R. Crane Investment Corporation, Inc., a family-owned investment corporation in which he owned 50% of the shares along with his brother Kevin who owned the other 50%. The claim for dissolution was based on typical allegations of mismanagement and abuse of control.
To avoid dissolution, Kevin and R. R. Crane invoked the statutory appraisal and buyout procedure set forth in Corporations Code section 2000.
After a “prolonged appraisal process,” in December 2020 the trial court confirmed the fair value of Brian’s shares at over $6.1 million, valued as of the date Brian sued for dissolution as set forth in section 2000 — which was more than three years earlier in November 2017. Brian argued in the trial court that prejudgment interest under Civil Code section 3287(a) or section 3288 should be added to the appraised buyout value based on the delay and the “time value of the money” owed to him as of November 2017.
The trial court rejected Brian’s argument, and Brian appealed.
Court of Appeal: no prejudgment interest on statutory buyout
The Court of Appeal affirmed the trial court’s decision.
Evaluating Brian’s argument under Civil Code section 3287(a), the court observed that this statute, by its express terms, prescribes interest only for those who are entitled to recover “damages.” Damages, in turn, are defined by section 3281 as monetary compensation for one who suffers detriment from the unlawful act or omission of another. To be entitled to interest under section 3287(a), a plaintiff must normally show: (1) an underlying monetary obligation; (2) damages which are certain or capable of being made certain by calculation; and (3) a right to recovery that vests on a particular day.
The statutory buyout award, the court held, did not constitute “damages” under section 3287(a). As stated by the court: “The party seeking the dissolution does not have a right or an entitlement to a buyout. Instead, once the complainant seeks the dissolution, the shareholder defendant (or the corporation) may elect to purchase the shares after the trial court confirms the valuation. Corporations Code section 2000 provides for an optional business exchange within the prerogative of the buyer….”
Turning to Brian’s argument under Civil Code section 3288, the court noted that this statute only applies to “an action for breach of an obligation not arising from contract,” such as claims for fraud. The court held that the statutory buyout valuation award was not such a claim.
Last, addressing Brian’s arguments based on fairness and equity, the court noted that until the actual purchase of the shares, the owner continues to enjoy the benefits of the shares, including the receipt of any dividends. Further, under the statutory framework the trial court has discretion to modify the date of valuation (which, by default, is the date the dissolution claim is filed). Brian filed a motion requesting that relief in the trial court, but did not appeal the trial court’s denial of his motion.
Under the holding of the Crane opinion, a corporate dissolution plaintiff is not entitled to prejudgment interest on the value of his shares pursuant to a statutory buyout under Corporations Code section 2000.