Preview
FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018
NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
______________________________________________
In the Matter of the Application of: : Index No.: 154466/2018
:
GURNEY’S INN RESORT & SPA, LTD., a New York : (Hon. Barry R. Ostrager)
corporation, :
:
Petitioner, :
:
and :
:
NANCY ARZANIPOUR, PAUL ARZANIPOUR,
:
ANTHONY CARBONE, NEIL CARBONE, KEVIN
:
COTTER, DOLLY WANDER IRREVOCABLE
:
TRUST, LORRAINE FERRETTI, PATRICIA
:
FRANK-JANEWICZ, GEORGE ROSENFELD INC.,
:
MICHAEL GIORDANO, JANICE KATZ, CHRISTINE
:
LAURIA, NEIL CARBONE REVOCABLE TRUST,
:
MARCIA RUSKIN, JAY SCANSAROLI, JANICE
:
SCANSAROLI, JOSEPH SCOGNAMIGLIO, ALAN
:
SPARKS, SYSTEMATIC CONTROL CORP. and
:
VITO VITRANO
:
Respondents, :
:
To Determine the Fair Value of the Common Shares of :
Gurney’s Inn Resort & Spa, Ltd. Held by Respondents :
Pursuant to Section 623 of the New York Business :
Corporation Law. :
:
:
PETITIONER’S MEMORANDUM OF LAW IN OPPOSITION TO
RESPONDENTS’ MOTION FOR LEAVE TO REARGUE AND IN
SUPPORT OF PETITIONER’S CROSS-MOTION FOR LEAVE TO REARGUE
GREENBERG TRAURIG, LLP
200 Park Avenue
The Metlife Building, 39th floor
New York, New York 10166
(212) 801-9200
Attorneys for Petitioner
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TABLE OF CONTENTS
PRELIMINARY STATEMENT .................................................................................................... 1
ARGUMENT .................................................................................................................................. 5
POINT I RESPONDENTS’ MOTION SHOULD BE DENIED BECAUSE THE
COURT DID NOT OVERLOOK ANY FACTS OR APPLICABLE LAW IN
DETERMINING HOW TO CALCULATE THE FAIR VALUE OF
GURNEY’S CLASS A SHARES ................................................................................. 5
A. The Court Properly Declined To Allocate Value To Respondents’ Shares
Pursuant to the MOU Formula................................................................................ 6
B. The Court Appropriately Deducted Gurney’s Mortgage Debt From The
Unencumbered Value Of Its Assets Before Calculating The Value Of
Respondents’ Shares ............................................................................................... 9
POINT II THE COURT OVERLOOKED UNREBUTTED RECORD EVIDENCE IN
CONCLUDING THAT HVS WAS MORE REALISTIC THAN CBRE IN
PREDICTING HOW TERMINATING TIMESHARE OWNERSHIP
WOULD AFFECT ECONOMIC PERFORMANCE IN 2018 ................................... 12
A. CBRE Appropriately and Accurately Estimated the Increase in Net
Income That Would Result from Terminating Timeshare Ownership in
2018....................................................................................................................... 13
B. HVS Made Factual, Conceptual and Mathematical Errors in Predicting
that Going from 87% Free Market Rental to 100% Free Market Rental
Would Triple Net Income ..................................................................................... 15
CONCLUSION ............................................................................................................................. 19
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TABLE OF AUTHORITIES
Cases
Matter of Cawley,
72 N.Y.2d 465 (1988) ................................................................................................................8
Cisco v. Lavine,
72 Misc. 2d 1087 (Sup. Ct. Nassau Cnty. 1973)........................................................................5
Dan River, Inc. v. Icahn,
701 F.2d 278 (4th Cir. 1983) ...................................................................................................10
Finkelstein v. Harwood,
28 A.D.3d 336 (1st Dep’t 2006) ................................................................................................6
Fosdick v. Hempstead,
126 N.Y. 651 (1891) ..................................................................................................................5
Hallmark v. Cohen & Slamowitz, LLP,
No. 11-CV-842W(F), 2016 U.S. Dist. LEXIS 37952 (W.D.N.Y. Mar. 23,
2016) ........................................................................................................................................10
Mazzei v. Licciardi,
47 A.D.3d 774 (2d Dep’t 2008) .................................................................................................5
New York Cent. Mut. Ins. Co. v. Davalos,
39 A.D.3d 654 (2d Dep’t 2007) .................................................................................................5
Matter of Pace Photographers, Ltd.,
71 N.Y.2d 737 (1988) ................................................................................................................7
Matter of Penapent Corp.,
96 N.Y.2d 186 (2001) ................................................................................................................7
Ricketts v. Cuffe Auto Sales, Inc.,
106 A.D.3d 635 (1st Dep’t 2013) ..............................................................................................6
Sachar v. Columbia Pictures Industries, Inc.,
129 A.D.3d 420 (1st Dep’t 2015) ..............................................................................................6
Matter of Sands Point Land Co. v. Rossmoore,
43 Misc.2d 368 (Sup. Ct. Nassau Cnty. 1964)...........................................................................7
Matter of Selma K. Friedman v. Beway Realty Corp.,
87 N.Y.2d 161 (1995) ................................................................................................7, 8, 10, 11
Sieger v. Sieger,
No. 6975/1998, 2005 NY Slip Op 51348(U) (Sup. Ct. Kings Cnty. June 29,
2005) ........................................................................................................................................10
State v. Robert V.,
33 Misc. 3d 1208(A), 2011 WL 4904400 (Sup. Ct. Bronx Cnty. Sept. 29,
2011) ..........................................................................................................................................5
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Matter of the Dissolution of Seagroatt Floral Company, Inc.,
78 N.Y.2d 439 (1991) ................................................................................................................8
Weitzenberg v. Nassau Cnty. Dep’t of Recreation and Parks,
24 Misc. 3d 1204(A), 2004 WL 5719796 (Sup. Ct. Nassau Cnty. Jan. 26,
2004) ..........................................................................................................................................5
William P. Pahl Equip. Corp. v. Kassis,
182 A.D.2d 22 (1st Dep’t 1992) ................................................................................................5
Wright v. Phillips,
Civil Action No. 11536-VCG, 2017 Del. Ch. LEXIS 857 (Ch. Dec. 21, 2017) .....................10
Other Authorities
CPLR 2221(d) ..................................................................................................................................5
Financial Accounting Standards Board, Statement of Financial Accounting
Concepts No. 6 (2008) ............................................................................................................10
Ronald S. Longhofer, Business Valuation § 8.01 ..........................................................................10
USPAP, Advisory Opinion No. 34 ................................................................................................18
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Petitioner Gurney’s Inn Resort & Spa, Ltd. (“Gurney’s”), by its undersigned counsel,
submits this memorandum of law (a) in opposition to the motion by respondents for leave to
reargue the Court’s Decision and Order filed December 21, 2018 (the “Decision”) and (b) in
support of Gurney’s cross-motion for leave to reargue the Decision.
PRELIMINARY STATEMENT
In 2013, to stave off yet another (and most likely fatal) bankruptcy, Gurney’s timeshare
owners (who then held approximately 203,500 of Gurney’s 657,900 authorized Class A shares)
voted by an overwhelming majority (85%) to have Gurney’s enter into a memorandum of
understanding (the “MOU”1) with 290 Old Montauk Associates (“290 OMA”). Such shareholder
approval was one of the preconditions to 290 OMA’s agreement to buy the sponsor’s majority
ownership interest and take over financial and management responsibility for the resort. Among
the financial inducements offered to the timeshare owners under the MOU (in addition to allowing
them to either sell their shares to 290 OMA immediately or relinquish them in exchange for five
years of use free of charge) was a reduction in maintenance for five years and a guaranteed buy-
out at the end of the five-year period. Whether a third party or 290 OMA bought Gurney’s, to the
extent that the price exceeded $50 million, the MOU allocated a greater proportion to the minority-
owned Class A shares than to the majority-owned Class A shares purchased from the prior sponsor.
See MOU § 5(k).
In March 2018, when 290 OMA fulfilled its obligation under the MOU to purchase
timeshare owners’ shares, even though the $84 million CBRE appraisal (the “MOU Appraisal” 2)
corresponded to a value of less than $95 per share3, pursuant to the MOU, 290 OMA offered to
pay the timeshare owners $118.81 per share (the “Tender Price”). The respondents in this
1
A copy of the MOU is annexed to the accompanying Affirmation of Daniel R. Milstein, dated February 15, 2019
(the “Milstein Aff.”) as Exhibit A.
2
A copy of the MOU Appraisal is annexed to the Milstein Aff. as Exhibit B.
3
($84,000,000 unencumbered value - $21,543,861 mortgage) ÷ 657,900 shares = $94.93.
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proceeding are a handful of former timeshare owners – representing only 4,650 Class A shares –
who, dissatisfied with the contractual compensation to which they had agreed, invoked appraisal
rights under BCL 623.4 After a trial, post-trial briefing and supplemental letter briefs requested
by the Court, the Court determined that Gurney’s had a value of $115 million and that this total
value corresponded to a per-share fair value of $142.05 for each of Gurney’s 657,900 Class A
shares. While Gurney’s respectfully submits that the Court erred in adopting the HVS appraisal,
it correctly calculated “fair value” under BCL 623 by allocating the net value of Gurney’s after
satisfaction of its mortgage debt among all Class A shares on a simple pro-rata basis. The Court
properly refused to credit respondents’ argument that they could simultaneously reject the MOU
Appraisal and the Tender Price resulting therefrom, but retain the MOU’s unequal allocation
formula because, in a BCL 623 proceeding, the law mandates that all shares of the same class be
valued equally
By this motion, respondents again ask the Court to adopt the unequal MOU allocation
formula and to increase their recovery to $191.13 per share. As an alternative, respondents ask
the Court to allocate value without first deducting Gurney’s mortgage debt. Both requests are
meritless. If the MOU formula for valuing the 203,550 minority-owned shares is adopted, and
they are each allocated $191.13, as respondents demand, then the other 454,450 Class A shares,
by mathematical certainty, can have a value of only $120.89.5 Insofar as respondents concede
(and the Court of Appeals mandates) that the BCL “require[s] equal treatment of all shares of the
same class of stock” (Mov. Mem. at 5), an allocation that values respondents’ Class A shares 58%
higher than majority-owned Class A shares6 is unlawful. Further, respondents’ contention that
4
The only reason that the timeshare owners had such statutory rights in the first instance is because 290 OMA
elected to complete the contractually mandated buy-out by way of a merger. Gurney’s could have simply cancelled
the remaining timeshare owners’ shares on its books and mailed them payment in full for their shares.
5
Total value net of $21,543,000 mortgage is $93,456,139. If 203,550 minority-owned shares are worth $191.13
each, then only $54,939,115 of the $93,456,139 is available for allocation to the remaining 454,450 shares.
$54,939,115 ÷ 454,450 = $120.89.
6
$191.13 - $120.89 ÷ $120.89 = 58.1%.
2
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there is no record evidence supporting deduction of the mortgage balance before allocating value
among the Class A shares is absurd. Both CBRE and HVS testified that they valued Gurney’s as
if it were unencumbered, ignoring the mortgage debt. But it is undisputed that there is a mortgage
encumbering Gurney’s property. It is equally undisputed that in order to sell property for its
unencumbered fair market value, you must deliver it to the buyer free of encumbrances. To do so
requires satisfaction of a $21.5 million mortgage. By valuing their own shares as if they were free
of such encumbrance, respondents would place the entire burden of the mortgage on the other
Class A shareholders. The law requiring equal treatment of all shares precludes such a result.
Finally, as set forth below, while the Court adopted the correct value allocation method, it
did not adopt the correct total value. In adopting HVS’s $115 million estimate as Gurney’s value,
the Court misconstrued and/or overlooked unrebutted record evidence. Contrary to the Court’s
conclusion that CBRE “did not appropriately value the potential average daily room rate for units
that were subject to time shares in 2017” (Decision at 2), the evidence discloses not only that
CBRE expressly considered the increased revenues Gurney’s would experience from removal of
timeshare ownership, but that its prediction of the increased ADR that such rooms would earn and
the ADR that the entire resort would experience in 2018 was far more reasonable, and ultimately
far more accurate, than HVS’s predictions, even though, unlike HVS, CBRE did not have actual
2018 performance data when it completed its appraisal. It is HVS’s appraisal that did not
realistically, logically or accurately account for the effects of removing timeshare ownership in
2018.7
While timeshare owner occupancy accounted for only 13% of Gurney’s total room nights
in 2017 (with 87% of the room nights being rented at market rates), in estimating the impact of
adding this 13% to the market rental pool in 2018, HVS predicted that: (a) these rooms would rent
7
A copy of the HVS appraisal is annexed to the Milstein Aff. as Exhibit C.
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for a price that was significantly (36%) higher than timeshare-owned rooms already in the rental
pool, even though HVS conceded that the rooms were economically indistinguishable; (b) adding
these rooms to the rental inventory in 2018 would somehow lead to a 21% increase in the rental
price of all resort rooms, even though HVS conceded that this prediction ran counter to basic
economic principles of supply and demand; and (c) room rental revenue would increase by 49%
and Gurney’s net income would almost triple in 2018.
HVS’s predictions of how growing the rental pool by 13% would affect Gurney’s bottom
line were so illogical that the Court should have had serious doubts about the reliability of HVS’s
valuation. Those doubts should have been confirmed when the Court learned that, ignoring
USPAP advisory opinions, HVS declined to reconsider its methods or conclusions even after it
had received actual performance data for 2018, when the resort was entirely free of timeshare
ownership and was 100% market-based, and learned that its predictions were significantly off base.
HVS justified its decision by explaining that “if I was a buyer as of that date [March 20, 2018], I
wouldn’t have had this information.” Transcript at 223.8 Thus, the Court’s conclusion that HVS’s
valuation was “more realistic” than CBRE’s (Decision at 2) finds no support in the record. Indeed,
the unrebutted record evidence shows that CBRE’s prediction for the ADR increase in 2018 was
only 2% short of actual performance, and its prediction of net income in 2018 had an error factor
of only 3.6%. The conceptual, factual and mathematical errors that infected HVS’s analysis and
led to its absurdly inflated – and inaccurate – performance predictions are discussed in further
detail below.
8
A copy of the excepts from the trial transcript cited herein is annexed to the Milstein Aff. as Exhibit D.
4
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ARGUMENT
POINT I
RESPONDENTS’ MOTION SHOULD BE DENIED BECAUSE THE COURT
DID NOT OVERLOOK ANY FACTS OR APPLICABLE LAW IN DETERMINING
HOW TO CALCULATE THE FAIR VALUE OF GURNEY’S CLASS A SHARES
Pursuant to CPLR 2221(d), a motion for leave to reargue “shall be based upon matters of
fact or law allegedly overlooked by the court in determining the prior motion, but shall not include
any matters of fact not offered on the prior motion . . . .” Such motions “are addressed to the sound
discretion of the court which decided the prior motion and may be granted upon a showing that
the court overlooked or misapprehended the facts or law or for some [other] reason mistakenly
arrived at its earlier decision.” Mazzei v. Licciardi, 47 A.D.3d 774 (2d Dep’t 2008) (internal
quotation marks and citations omitted). “Reargument is not designed to afford the unsuccessful
party successive opportunities to reargue issues previously decided or to present arguments
different from those originally asserted.” William P. Pahl Equip. Corp. v. Kassis, 182 A.D.2d 22,
27 (1st Dep’t 1992); Fosdick v. Hempstead, 126 N.Y. 651, 653 (1891).
Where the court has misconstrued case law that is relevant to the issues argued on the
motion, grounds for reargument exist. See New York Cent. Mut. Ins. Co. v. Davalos, 39 A.D.3d
654, 655 (2d Dep’t 2007) (reargument appropriate “in light of a recent Court of Appeals decision
that had been overlooked.”); State v. Robert V., 33 Misc. 3d 1208(A), 2011 WL 4904400 (Sup. Ct.
Bronx Cnty. Sept. 29, 2011); Weitzenberg v. Nassau Cnty. Dep’t of Recreation and Parks, 24
Misc. 3d 1204(A), 2004 WL 5719796 (Sup. Ct. Nassau Cnty. Jan. 26, 2004); Cisco v. Lavine, 72
Misc. 2d 1087, 1088 (Sup. Ct. Nassau Cnty. 1973).
Alternatively, where the court has overlooked pertinent facts or record evidence, leave to
reargue is also properly granted. See Sachar v. Columbia Pictures Industries, Inc., 129 A.D.3d
420 (1st Dep’t 2015) (“motion court providently exercised its discretion in granting plaintiff’s
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motion for reargument on the basis that it had ‘overlooked or misapprehended the facts or the law
. . .’”);Ricketts v. Cuffe Auto Sales, Inc., 106 A.D.3d 635 (1st Dep’t 2013) (“court providently
exercised its discretion in granting reargument, since the court, in its prior order, appeared to have
overlooked most of plaintiffs’ evidence”); Finkelstein v. Harwood, 28 A.D.3d 336 (1st Dep’t 2006)
(“The court, however, properly recognized on reargument that it had overlooked evidence . . . .”)
Here, the Court overlooked neither law nor facts in determining how to allocate value
among the Class A shares of Gurney’s. However, as discussed below, Gurney’s respectfully
contends that the Court did overlook unrebutted record evidence in deciding to adopt the HVS
appraisal of $115 million as the value to be allocated.
A. The Court Properly Declined To Allocate Value To Respondents’
Shares Pursuant to the MOU Formula
In support of their motion to reargue, respondents primarily rehash their assertion that the
MOU’s unequal allocation formula should be used to determine how much of Gurney’s
unencumbered value should be allocated to their shares. The Court was appropriately unpersuaded
by this argument the first time it was briefed. In dissenting from the merger, respondents
disavowed the MOU and elected instead to pursue their statutory rights under the BCL. In this
resulting appraisal proceeding, they are entitled only to a determination of the fair value of their
shares — not the value that theoretically may have been allocated to those shares under a
contractual agreement they otherwise seek to avoid through this proceeding.9
As explained in Gurney’s prior briefing, the MOU is a contractual obligation that has no
application in this statutory valuation proceeding. See Gurney’s Pre-Hearing Memo. at 11-12;
Gurney’s Post-Hearing Memo. at 2-3. Indeed, the Court of Appeals has held that valuation
methodologies set forth in a shareholder agreement are inapplicable in statutory valuation
9
The MOU specifically gave the director representing the minority Class A shareholders veto rights over the
appraiser chosen to value Gurney’s for purposes of the minority buy-out. It did not give the minority shareholders
the right to reject the resulting appraisal as they did by commencing this proceeding.
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proceedings unless the agreement expressly provides that it is to apply. Matter of Pace
Photographers, Ltd., 71 N.Y.2d 737, 748 (1988);10 see also Matter of Penapent Corp., 96 N.Y.2d
186 (2001) (rejecting argument that contractual valuation terms applied in a BCL 1118 valuation
proceeding); Matter of Sands Point Land Co. v. Rossmoore, 43 Misc.2d 368, 371 (Sup. Ct. Nassau
Cnty. 1964) (rejecting shareholder agreement to sell shares back to corporation at par value; where
shareholder has right to valuation under BCL 623, fair value rather than contract value is the
benchmark; to hold otherwise “would nullify the provisions of section 623”). Here, the MOU
neither expressly nor impliedly indicates that its value allocation formula applies if shareholders
reject the MOU in favor of seeking a judicial fair value determination under BCL 623.
Rather than apply the MOU’s unequal allocation formula to determine the fair value of
respondents’ shares, the Court appropriately applied the pro-rata allocation methodology
mandated in BCL 623 proceedings. Under that methodology, the fair value of minority shares is
simply the minority shareholder’s “proportionate interest” in the shareholder equity value of the
entire company. The Court correctly applied this pro-rata methodology by (a) determining the
value of Gurney’s as a going concern, (b) deducting Gurney’s mortgage debt to arrive at the
company’s net or equity value (see infra at 9-12), and then (c) dividing that net or equity value
equally among the 657,900 Class A shares outstanding as of the date of the merger. See Matter of
Selma K. Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 168-69 (1995) (“fair value [is]
calculated on the basis of petitioners’ proportionate share of all outstanding corporate stock”);
Matter of the Dissolution of Seagroatt Floral Company, Inc., 78 N.Y.2d 439, 443 (1991) (fair
10
In Pace Photographers, there was a shareholder agreement that ascribed a set value to the respective majority and
minority interests and provided that such value would apply to a voluntary sale between shareholders. Id. at 741. In
the context of a valuation proceeding pursuant to BCL 1118 (in which a majority owner elects to buy out the
minority owners rather than dissolve the company), the majority shareholder argued that the value established by the
shareholder agreement must be the fair value of the minority interests.The Court of Appeals held that unless the
shareholder agreement expressly stated that the agreed value would apply in a judicial fair value proceeding or that a
sale pursuant to the BCL would be deemed voluntary, it would be error to adopt the shareholder agreement’s value
rather than conduct an independent investigation into the company’s fair value. Id. at 748.
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value process ascribed value to company and then divided by “the total number of common shares
. . . to obtain a per-share value”).
The Court should not be fooled by respondents’ attempt to portray this standard pro-rata
formula as somehow resulting in the unequal treatment of Class A shares. It is in fact respondents’
position that would result in unequal treatment of shares of the same class of stock, and in an
allocation not reflective of the fair value of their shares.
Respondents concede that “[d]eterminations of the fair value of a dissenter’s shares . ..
require equal treatment of all shares of the same class of stock.” Friedman v. Beway Realty Corp.,
87 N.Y.2d 161, 168 (1995) (citing Matter of Cawley, 72 N.Y.2d 465, 473 (1988)). Respondents,
however, misapprehend the law in arguing that because the Tender Price accepted by non-
dissenting minority shareholders was based on the MOU allocation formula (which gave minority-
owned shares a greater proportion of the appraised value than the majority-owned shares), the
same formula must be applied in the BCL 623 proceeding in order to treat dissenting and non-
dissenting shareholders equally. But this is an absurd argument. BCL 623 does not require equal
treatment of dissenting and non-dissenting shareholders. Indeed, the sole purpose of such a
proceeding is to obtain additional compensation for the dissenting shareholders, but not the
shareholders who have not dissented. The law does not require equal treatment of dissenters and
non-dissenters. Rather, the law, as described in Friedman, requires that, in determining whether
the dissenters are in fact entitled to any additional recovery, the Court must allocate total company
value equally among all shares within the same class, regardless of whether they are owned by
dissenting minority shareholders, non-dissenting minority shareholders or the majority
shareholders. See 87 N.Y.2d at 169-70 (refusing to discount share value based on the minority
status of respondents or special contractual restrictions on transfer). Gurney’s majority and
minority Class A shareholders are afforded equal treatment in this proceeding when the net or
equity value of Gurney’s is divided equally among all 657,900 Class A shares.
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The MOU allocation formula, in contrast, would allocate a disproportionately large share
of Gurney’s value in excess of $50 million to the minority-owned shares. As explained above
(supra at 2), in order for respondents’ shares to have a value of $191.13 per share, as they urge on
this motion, as a matter of simple mathematics, the 454,450 Class A majority-owned shares can
have a value of only $120.89 per share. Thus, far from treating all Class A shares equally in this
proceeding, application of the MOU unequal allocation formula would give respondents a
windfall, violating the very principle of equality they purport to invoke in this motion.
The goal of this statutory proceeding is to determine the objective fair value of respondents’
shares. It is not to reform the MOU by allowing them to reject those provisions they dislike (i.e.,
those requiring them to accept the value of the appraiser their board representative approved) while
retaining those they like (i.e., a disproportionate allocation of total value). For all of the above
reasons, the Court did not err in refusing to give respondents an undeserved windfall.
B. The Court Appropriately Deducted Gurney’s Mortgage Debt From The Unencumbered
Value Of Its Assets Before Calculating The Value Of Respondents’ Shares
Respondents’ second ground for reargument is that the Court overlooked facts and the law
when it deducted Gurney’s mortgage debt from the unencumbered value of the company’s assets
before allocating value to respondents’ shares. This argument is also unavailing. As an initial
matter, respondents point to no evidence or case law in support of their argument, much less facts
or law the Court overlooked. They in fact cite no authority whatsoever (other than their own say
so) in support of their position that the Court should have pretended that Gurney’s did not have a
$21.5 million mortgage when it allocated the unencumbered value of Gurney’s among its Class A
shareholders. Their failure to do so is unsurprising, as the Court’s decision to deduct Gurney’s
mortgage debt before allocating value to respondents’ shares was fully in line with logic, general
accounting principles and BCL 623 precedent.
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It is a basic principle of finance that shareholder equity is the difference between a
corporation’s assets and its liabilities. See, e.g. Ronald S. Longhofer, Business Valuation § 8.01
(“Subtracting the fair market value of all liabilities from the fair market value of assets yields the
fair market value of equity.”); Financial Accounting Standards Board, Statement of Financial
Accounting Concepts No. 6, ¶¶ 49-50 (2008) (“Equity or net assets is the residual interest in the
assets of an entity that remains after deducting its liabilities. . . . The equity or net assets of both
a business enterprise and a not-for-profit organization is the difference between the entity’s assets
and its liabilities.”), available at https://www.fasb.org/pdf/aop_CON6.pdf; accord Hallmark v.
Cohen & Slamowitz, LLP, No. 11-CV-842W(F), 2016 U.S. Dist. LEXIS 37952, at *23-24
(W.D.N.Y. Mar. 23, 2016); Dan River, Inc. v. Icahn, 701 F.2d 278, 286 (4th Cir. 1983). In truth,
this principle is really just an application of common sense: A calculation of shareholder equity
which ignores debt on the corporation’s primary asset would plainly result in an overstated and
inaccurate valuation of that equity.
Consequently, Courts routinely determine shareholder equity with reference to the “net” or
equity value of the corporation. See, e.g. Friedman, 87 N.Y.2d at 164 (in BCL 623 proceeding,
calculating the fair value of dissenters’ shares from the “net value” of corporations’ real estate
interests); Wright v. Phillips, Civil Action No. 11536-VCG, 2017 Del. Ch. LEXIS 857, at *2, 10,
13 (Ch. Dec. 21, 2017) (determining fair value of parties’ interests in real estate holding company
by (a) “[s]ubtracting the mortgage amount” from the judicially-accepted appraisal of the
company’s property, and (b) dividing the resulting “net” value, after certain adjustments, pro rata);
Sieger v. Sieger, No. 6975/1998, 2005 NY Slip Op 51348(U), ¶¶ 40-41 (Sup. Ct. Kings Cnty. June
29, 2005) (accepting appraiser’s report that had been updated to “take the mortgage into account,
so that the mortgage would have to be subtracted from her valuations to obtain the equity”).
Deduction of Gurney’s mortgage is also consistent with the Court of Appeals
characterization of the procedure for determining the value of the company to be allocated under
10
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BCL 623. According to the Court, the first step in this process is to calculate what “a willing
purchaser, in an arm’s length transaction, would offer for the corporation as an operating business.”
Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 168 (1995) (internal quotation marks and citation
omitted). No purchaser of a resort property would pay unencumbered value for an asset in fact
encumbered by over $21.5 million in mortgage debt. Either the purchase price would be reduced
to induce the buyer to assume the debt, or the mortgage would be repaid from the sale proceeds at
the titleclosing, reducing the funds available for the shareholders. See Gurney’s Post-Hearing
Memo. at 3 n.6.
Respondents’ argument that the Court should not have applied logic, basic accounting
principles, or the precedent cited above because the two appraisers did not address whether a
mortgage deduction was appropriate in a BCL 623 proceeding is nonsensical. See Mov. Mem. at
3. The appraisers were
Preview
FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ______________________________________________ In the Matter of the Application of: : Index No.: 154466/2018 : GURNEY’S INN RESORT & SPA, LTD., a New York : (Hon. Barry R. Ostrager) corporation, : : Petitioner, : : and : : NANCY ARZANIPOUR, PAUL ARZANIPOUR, : ANTHONY CARBONE, NEIL CARBONE, KEVIN : COTTER, DOLLY WANDER IRREVOCABLE : TRUST, LORRAINE FERRETTI, PATRICIA : FRANK-JANEWICZ, GEORGE ROSENFELD INC., : MICHAEL GIORDANO, JANICE KATZ, CHRISTINE : LAURIA, NEIL CARBONE REVOCABLE TRUST, : MARCIA RUSKIN, JAY SCANSAROLI, JANICE : SCANSAROLI, JOSEPH SCOGNAMIGLIO, ALAN : SPARKS, SYSTEMATIC CONTROL CORP. and : VITO VITRANO : Respondents, : : To Determine the Fair Value of the Common Shares of : Gurney’s Inn Resort & Spa, Ltd. Held by Respondents : Pursuant to Section 623 of the New York Business : Corporation Law. : : : PETITIONER’S MEMORANDUM OF LAW IN OPPOSITION TO RESPONDENTS’ MOTION FOR LEAVE TO REARGUE AND IN SUPPORT OF PETITIONER’S CROSS-MOTION FOR LEAVE TO REARGUE GREENBERG TRAURIG, LLP 200 Park Avenue The Metlife Building, 39th floor New York, New York 10166 (212) 801-9200 Attorneys for Petitioner 1 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 TABLE OF CONTENTS PRELIMINARY STATEMENT .................................................................................................... 1 ARGUMENT .................................................................................................................................. 5 POINT I RESPONDENTS’ MOTION SHOULD BE DENIED BECAUSE THE COURT DID NOT OVERLOOK ANY FACTS OR APPLICABLE LAW IN DETERMINING HOW TO CALCULATE THE FAIR VALUE OF GURNEY’S CLASS A SHARES ................................................................................. 5 A. The Court Properly Declined To Allocate Value To Respondents’ Shares Pursuant to the MOU Formula................................................................................ 6 B. The Court Appropriately Deducted Gurney’s Mortgage Debt From The Unencumbered Value Of Its Assets Before Calculating The Value Of Respondents’ Shares ............................................................................................... 9 POINT II THE COURT OVERLOOKED UNREBUTTED RECORD EVIDENCE IN CONCLUDING THAT HVS WAS MORE REALISTIC THAN CBRE IN PREDICTING HOW TERMINATING TIMESHARE OWNERSHIP WOULD AFFECT ECONOMIC PERFORMANCE IN 2018 ................................... 12 A. CBRE Appropriately and Accurately Estimated the Increase in Net Income That Would Result from Terminating Timeshare Ownership in 2018....................................................................................................................... 13 B. HVS Made Factual, Conceptual and Mathematical Errors in Predicting that Going from 87% Free Market Rental to 100% Free Market Rental Would Triple Net Income ..................................................................................... 15 CONCLUSION ............................................................................................................................. 19 NY 247892591v1 2 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 TABLE OF AUTHORITIES Cases Matter of Cawley, 72 N.Y.2d 465 (1988) ................................................................................................................8 Cisco v. Lavine, 72 Misc. 2d 1087 (Sup. Ct. Nassau Cnty. 1973)........................................................................5 Dan River, Inc. v. Icahn, 701 F.2d 278 (4th Cir. 1983) ...................................................................................................10 Finkelstein v. Harwood, 28 A.D.3d 336 (1st Dep’t 2006) ................................................................................................6 Fosdick v. Hempstead, 126 N.Y. 651 (1891) ..................................................................................................................5 Hallmark v. Cohen & Slamowitz, LLP, No. 11-CV-842W(F), 2016 U.S. Dist. LEXIS 37952 (W.D.N.Y. Mar. 23, 2016) ........................................................................................................................................10 Mazzei v. Licciardi, 47 A.D.3d 774 (2d Dep’t 2008) .................................................................................................5 New York Cent. Mut. Ins. Co. v. Davalos, 39 A.D.3d 654 (2d Dep’t 2007) .................................................................................................5 Matter of Pace Photographers, Ltd., 71 N.Y.2d 737 (1988) ................................................................................................................7 Matter of Penapent Corp., 96 N.Y.2d 186 (2001) ................................................................................................................7 Ricketts v. Cuffe Auto Sales, Inc., 106 A.D.3d 635 (1st Dep’t 2013) ..............................................................................................6 Sachar v. Columbia Pictures Industries, Inc., 129 A.D.3d 420 (1st Dep’t 2015) ..............................................................................................6 Matter of Sands Point Land Co. v. Rossmoore, 43 Misc.2d 368 (Sup. Ct. Nassau Cnty. 1964)...........................................................................7 Matter of Selma K. Friedman v. Beway Realty Corp., 87 N.Y.2d 161 (1995) ................................................................................................7, 8, 10, 11 Sieger v. Sieger, No. 6975/1998, 2005 NY Slip Op 51348(U) (Sup. Ct. Kings Cnty. June 29, 2005) ........................................................................................................................................10 State v. Robert V., 33 Misc. 3d 1208(A), 2011 WL 4904400 (Sup. Ct. Bronx Cnty. Sept. 29, 2011) ..........................................................................................................................................5 NY 247892591v1 3 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 Matter of the Dissolution of Seagroatt Floral Company, Inc., 78 N.Y.2d 439 (1991) ................................................................................................................8 Weitzenberg v. Nassau Cnty. Dep’t of Recreation and Parks, 24 Misc. 3d 1204(A), 2004 WL 5719796 (Sup. Ct. Nassau Cnty. Jan. 26, 2004) ..........................................................................................................................................5 William P. Pahl Equip. Corp. v. Kassis, 182 A.D.2d 22 (1st Dep’t 1992) ................................................................................................5 Wright v. Phillips, Civil Action No. 11536-VCG, 2017 Del. Ch. LEXIS 857 (Ch. Dec. 21, 2017) .....................10 Other Authorities CPLR 2221(d) ..................................................................................................................................5 Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 6 (2008) ............................................................................................................10 Ronald S. Longhofer, Business Valuation § 8.01 ..........................................................................10 USPAP, Advisory Opinion No. 34 ................................................................................................18 NY 247892591v1 4 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 Petitioner Gurney’s Inn Resort & Spa, Ltd. (“Gurney’s”), by its undersigned counsel, submits this memorandum of law (a) in opposition to the motion by respondents for leave to reargue the Court’s Decision and Order filed December 21, 2018 (the “Decision”) and (b) in support of Gurney’s cross-motion for leave to reargue the Decision. PRELIMINARY STATEMENT In 2013, to stave off yet another (and most likely fatal) bankruptcy, Gurney’s timeshare owners (who then held approximately 203,500 of Gurney’s 657,900 authorized Class A shares) voted by an overwhelming majority (85%) to have Gurney’s enter into a memorandum of understanding (the “MOU”1) with 290 Old Montauk Associates (“290 OMA”). Such shareholder approval was one of the preconditions to 290 OMA’s agreement to buy the sponsor’s majority ownership interest and take over financial and management responsibility for the resort. Among the financial inducements offered to the timeshare owners under the MOU (in addition to allowing them to either sell their shares to 290 OMA immediately or relinquish them in exchange for five years of use free of charge) was a reduction in maintenance for five years and a guaranteed buy- out at the end of the five-year period. Whether a third party or 290 OMA bought Gurney’s, to the extent that the price exceeded $50 million, the MOU allocated a greater proportion to the minority- owned Class A shares than to the majority-owned Class A shares purchased from the prior sponsor. See MOU § 5(k). In March 2018, when 290 OMA fulfilled its obligation under the MOU to purchase timeshare owners’ shares, even though the $84 million CBRE appraisal (the “MOU Appraisal” 2) corresponded to a value of less than $95 per share3, pursuant to the MOU, 290 OMA offered to pay the timeshare owners $118.81 per share (the “Tender Price”). The respondents in this 1 A copy of the MOU is annexed to the accompanying Affirmation of Daniel R. Milstein, dated February 15, 2019 (the “Milstein Aff.”) as Exhibit A. 2 A copy of the MOU Appraisal is annexed to the Milstein Aff. as Exhibit B. 3 ($84,000,000 unencumbered value - $21,543,861 mortgage) ÷ 657,900 shares = $94.93. 1 5 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 proceeding are a handful of former timeshare owners – representing only 4,650 Class A shares – who, dissatisfied with the contractual compensation to which they had agreed, invoked appraisal rights under BCL 623.4 After a trial, post-trial briefing and supplemental letter briefs requested by the Court, the Court determined that Gurney’s had a value of $115 million and that this total value corresponded to a per-share fair value of $142.05 for each of Gurney’s 657,900 Class A shares. While Gurney’s respectfully submits that the Court erred in adopting the HVS appraisal, it correctly calculated “fair value” under BCL 623 by allocating the net value of Gurney’s after satisfaction of its mortgage debt among all Class A shares on a simple pro-rata basis. The Court properly refused to credit respondents’ argument that they could simultaneously reject the MOU Appraisal and the Tender Price resulting therefrom, but retain the MOU’s unequal allocation formula because, in a BCL 623 proceeding, the law mandates that all shares of the same class be valued equally By this motion, respondents again ask the Court to adopt the unequal MOU allocation formula and to increase their recovery to $191.13 per share. As an alternative, respondents ask the Court to allocate value without first deducting Gurney’s mortgage debt. Both requests are meritless. If the MOU formula for valuing the 203,550 minority-owned shares is adopted, and they are each allocated $191.13, as respondents demand, then the other 454,450 Class A shares, by mathematical certainty, can have a value of only $120.89.5 Insofar as respondents concede (and the Court of Appeals mandates) that the BCL “require[s] equal treatment of all shares of the same class of stock” (Mov. Mem. at 5), an allocation that values respondents’ Class A shares 58% higher than majority-owned Class A shares6 is unlawful. Further, respondents’ contention that 4 The only reason that the timeshare owners had such statutory rights in the first instance is because 290 OMA elected to complete the contractually mandated buy-out by way of a merger. Gurney’s could have simply cancelled the remaining timeshare owners’ shares on its books and mailed them payment in full for their shares. 5 Total value net of $21,543,000 mortgage is $93,456,139. If 203,550 minority-owned shares are worth $191.13 each, then only $54,939,115 of the $93,456,139 is available for allocation to the remaining 454,450 shares. $54,939,115 ÷ 454,450 = $120.89. 6 $191.13 - $120.89 ÷ $120.89 = 58.1%. 2 6 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 there is no record evidence supporting deduction of the mortgage balance before allocating value among the Class A shares is absurd. Both CBRE and HVS testified that they valued Gurney’s as if it were unencumbered, ignoring the mortgage debt. But it is undisputed that there is a mortgage encumbering Gurney’s property. It is equally undisputed that in order to sell property for its unencumbered fair market value, you must deliver it to the buyer free of encumbrances. To do so requires satisfaction of a $21.5 million mortgage. By valuing their own shares as if they were free of such encumbrance, respondents would place the entire burden of the mortgage on the other Class A shareholders. The law requiring equal treatment of all shares precludes such a result. Finally, as set forth below, while the Court adopted the correct value allocation method, it did not adopt the correct total value. In adopting HVS’s $115 million estimate as Gurney’s value, the Court misconstrued and/or overlooked unrebutted record evidence. Contrary to the Court’s conclusion that CBRE “did not appropriately value the potential average daily room rate for units that were subject to time shares in 2017” (Decision at 2), the evidence discloses not only that CBRE expressly considered the increased revenues Gurney’s would experience from removal of timeshare ownership, but that its prediction of the increased ADR that such rooms would earn and the ADR that the entire resort would experience in 2018 was far more reasonable, and ultimately far more accurate, than HVS’s predictions, even though, unlike HVS, CBRE did not have actual 2018 performance data when it completed its appraisal. It is HVS’s appraisal that did not realistically, logically or accurately account for the effects of removing timeshare ownership in 2018.7 While timeshare owner occupancy accounted for only 13% of Gurney’s total room nights in 2017 (with 87% of the room nights being rented at market rates), in estimating the impact of adding this 13% to the market rental pool in 2018, HVS predicted that: (a) these rooms would rent 7 A copy of the HVS appraisal is annexed to the Milstein Aff. as Exhibit C. 3 7 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 for a price that was significantly (36%) higher than timeshare-owned rooms already in the rental pool, even though HVS conceded that the rooms were economically indistinguishable; (b) adding these rooms to the rental inventory in 2018 would somehow lead to a 21% increase in the rental price of all resort rooms, even though HVS conceded that this prediction ran counter to basic economic principles of supply and demand; and (c) room rental revenue would increase by 49% and Gurney’s net income would almost triple in 2018. HVS’s predictions of how growing the rental pool by 13% would affect Gurney’s bottom line were so illogical that the Court should have had serious doubts about the reliability of HVS’s valuation. Those doubts should have been confirmed when the Court learned that, ignoring USPAP advisory opinions, HVS declined to reconsider its methods or conclusions even after it had received actual performance data for 2018, when the resort was entirely free of timeshare ownership and was 100% market-based, and learned that its predictions were significantly off base. HVS justified its decision by explaining that “if I was a buyer as of that date [March 20, 2018], I wouldn’t have had this information.” Transcript at 223.8 Thus, the Court’s conclusion that HVS’s valuation was “more realistic” than CBRE’s (Decision at 2) finds no support in the record. Indeed, the unrebutted record evidence shows that CBRE’s prediction for the ADR increase in 2018 was only 2% short of actual performance, and its prediction of net income in 2018 had an error factor of only 3.6%. The conceptual, factual and mathematical errors that infected HVS’s analysis and led to its absurdly inflated – and inaccurate – performance predictions are discussed in further detail below. 8 A copy of the excepts from the trial transcript cited herein is annexed to the Milstein Aff. as Exhibit D. 4 8 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 ARGUMENT POINT I RESPONDENTS’ MOTION SHOULD BE DENIED BECAUSE THE COURT DID NOT OVERLOOK ANY FACTS OR APPLICABLE LAW IN DETERMINING HOW TO CALCULATE THE FAIR VALUE OF GURNEY’S CLASS A SHARES Pursuant to CPLR 2221(d), a motion for leave to reargue “shall be based upon matters of fact or law allegedly overlooked by the court in determining the prior motion, but shall not include any matters of fact not offered on the prior motion . . . .” Such motions “are addressed to the sound discretion of the court which decided the prior motion and may be granted upon a showing that the court overlooked or misapprehended the facts or law or for some [other] reason mistakenly arrived at its earlier decision.” Mazzei v. Licciardi, 47 A.D.3d 774 (2d Dep’t 2008) (internal quotation marks and citations omitted). “Reargument is not designed to afford the unsuccessful party successive opportunities to reargue issues previously decided or to present arguments different from those originally asserted.” William P. Pahl Equip. Corp. v. Kassis, 182 A.D.2d 22, 27 (1st Dep’t 1992); Fosdick v. Hempstead, 126 N.Y. 651, 653 (1891). Where the court has misconstrued case law that is relevant to the issues argued on the motion, grounds for reargument exist. See New York Cent. Mut. Ins. Co. v. Davalos, 39 A.D.3d 654, 655 (2d Dep’t 2007) (reargument appropriate “in light of a recent Court of Appeals decision that had been overlooked.”); State v. Robert V., 33 Misc. 3d 1208(A), 2011 WL 4904400 (Sup. Ct. Bronx Cnty. Sept. 29, 2011); Weitzenberg v. Nassau Cnty. Dep’t of Recreation and Parks, 24 Misc. 3d 1204(A), 2004 WL 5719796 (Sup. Ct. Nassau Cnty. Jan. 26, 2004); Cisco v. Lavine, 72 Misc. 2d 1087, 1088 (Sup. Ct. Nassau Cnty. 1973). Alternatively, where the court has overlooked pertinent facts or record evidence, leave to reargue is also properly granted. See Sachar v. Columbia Pictures Industries, Inc., 129 A.D.3d 420 (1st Dep’t 2015) (“motion court providently exercised its discretion in granting plaintiff’s 5 9 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 motion for reargument on the basis that it had ‘overlooked or misapprehended the facts or the law . . .’”);Ricketts v. Cuffe Auto Sales, Inc., 106 A.D.3d 635 (1st Dep’t 2013) (“court providently exercised its discretion in granting reargument, since the court, in its prior order, appeared to have overlooked most of plaintiffs’ evidence”); Finkelstein v. Harwood, 28 A.D.3d 336 (1st Dep’t 2006) (“The court, however, properly recognized on reargument that it had overlooked evidence . . . .”) Here, the Court overlooked neither law nor facts in determining how to allocate value among the Class A shares of Gurney’s. However, as discussed below, Gurney’s respectfully contends that the Court did overlook unrebutted record evidence in deciding to adopt the HVS appraisal of $115 million as the value to be allocated. A. The Court Properly Declined To Allocate Value To Respondents’ Shares Pursuant to the MOU Formula In support of their motion to reargue, respondents primarily rehash their assertion that the MOU’s unequal allocation formula should be used to determine how much of Gurney’s unencumbered value should be allocated to their shares. The Court was appropriately unpersuaded by this argument the first time it was briefed. In dissenting from the merger, respondents disavowed the MOU and elected instead to pursue their statutory rights under the BCL. In this resulting appraisal proceeding, they are entitled only to a determination of the fair value of their shares — not the value that theoretically may have been allocated to those shares under a contractual agreement they otherwise seek to avoid through this proceeding.9 As explained in Gurney’s prior briefing, the MOU is a contractual obligation that has no application in this statutory valuation proceeding. See Gurney’s Pre-Hearing Memo. at 11-12; Gurney’s Post-Hearing Memo. at 2-3. Indeed, the Court of Appeals has held that valuation methodologies set forth in a shareholder agreement are inapplicable in statutory valuation 9 The MOU specifically gave the director representing the minority Class A shareholders veto rights over the appraiser chosen to value Gurney’s for purposes of the minority buy-out. It did not give the minority shareholders the right to reject the resulting appraisal as they did by commencing this proceeding. 6 10 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 proceedings unless the agreement expressly provides that it is to apply. Matter of Pace Photographers, Ltd., 71 N.Y.2d 737, 748 (1988);10 see also Matter of Penapent Corp., 96 N.Y.2d 186 (2001) (rejecting argument that contractual valuation terms applied in a BCL 1118 valuation proceeding); Matter of Sands Point Land Co. v. Rossmoore, 43 Misc.2d 368, 371 (Sup. Ct. Nassau Cnty. 1964) (rejecting shareholder agreement to sell shares back to corporation at par value; where shareholder has right to valuation under BCL 623, fair value rather than contract value is the benchmark; to hold otherwise “would nullify the provisions of section 623”). Here, the MOU neither expressly nor impliedly indicates that its value allocation formula applies if shareholders reject the MOU in favor of seeking a judicial fair value determination under BCL 623. Rather than apply the MOU’s unequal allocation formula to determine the fair value of respondents’ shares, the Court appropriately applied the pro-rata allocation methodology mandated in BCL 623 proceedings. Under that methodology, the fair value of minority shares is simply the minority shareholder’s “proportionate interest” in the shareholder equity value of the entire company. The Court correctly applied this pro-rata methodology by (a) determining the value of Gurney’s as a going concern, (b) deducting Gurney’s mortgage debt to arrive at the company’s net or equity value (see infra at 9-12), and then (c) dividing that net or equity value equally among the 657,900 Class A shares outstanding as of the date of the merger. See Matter of Selma K. Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 168-69 (1995) (“fair value [is] calculated on the basis of petitioners’ proportionate share of all outstanding corporate stock”); Matter of the Dissolution of Seagroatt Floral Company, Inc., 78 N.Y.2d 439, 443 (1991) (fair 10 In Pace Photographers, there was a shareholder agreement that ascribed a set value to the respective majority and minority interests and provided that such value would apply to a voluntary sale between shareholders. Id. at 741. In the context of a valuation proceeding pursuant to BCL 1118 (in which a majority owner elects to buy out the minority owners rather than dissolve the company), the majority shareholder argued that the value established by the shareholder agreement must be the fair value of the minority interests.The Court of Appeals held that unless the shareholder agreement expressly stated that the agreed value would apply in a judicial fair value proceeding or that a sale pursuant to the BCL would be deemed voluntary, it would be error to adopt the shareholder agreement’s value rather than conduct an independent investigation into the company’s fair value. Id. at 748. 7 11 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 value process ascribed value to company and then divided by “the total number of common shares . . . to obtain a per-share value”). The Court should not be fooled by respondents’ attempt to portray this standard pro-rata formula as somehow resulting in the unequal treatment of Class A shares. It is in fact respondents’ position that would result in unequal treatment of shares of the same class of stock, and in an allocation not reflective of the fair value of their shares. Respondents concede that “[d]eterminations of the fair value of a dissenter’s shares . .. require equal treatment of all shares of the same class of stock.” Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 168 (1995) (citing Matter of Cawley, 72 N.Y.2d 465, 473 (1988)). Respondents, however, misapprehend the law in arguing that because the Tender Price accepted by non- dissenting minority shareholders was based on the MOU allocation formula (which gave minority- owned shares a greater proportion of the appraised value than the majority-owned shares), the same formula must be applied in the BCL 623 proceeding in order to treat dissenting and non- dissenting shareholders equally. But this is an absurd argument. BCL 623 does not require equal treatment of dissenting and non-dissenting shareholders. Indeed, the sole purpose of such a proceeding is to obtain additional compensation for the dissenting shareholders, but not the shareholders who have not dissented. The law does not require equal treatment of dissenters and non-dissenters. Rather, the law, as described in Friedman, requires that, in determining whether the dissenters are in fact entitled to any additional recovery, the Court must allocate total company value equally among all shares within the same class, regardless of whether they are owned by dissenting minority shareholders, non-dissenting minority shareholders or the majority shareholders. See 87 N.Y.2d at 169-70 (refusing to discount share value based on the minority status of respondents or special contractual restrictions on transfer). Gurney’s majority and minority Class A shareholders are afforded equal treatment in this proceeding when the net or equity value of Gurney’s is divided equally among all 657,900 Class A shares. 8 12 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 The MOU allocation formula, in contrast, would allocate a disproportionately large share of Gurney’s value in excess of $50 million to the minority-owned shares. As explained above (supra at 2), in order for respondents’ shares to have a value of $191.13 per share, as they urge on this motion, as a matter of simple mathematics, the 454,450 Class A majority-owned shares can have a value of only $120.89 per share. Thus, far from treating all Class A shares equally in this proceeding, application of the MOU unequal allocation formula would give respondents a windfall, violating the very principle of equality they purport to invoke in this motion. The goal of this statutory proceeding is to determine the objective fair value of respondents’ shares. It is not to reform the MOU by allowing them to reject those provisions they dislike (i.e., those requiring them to accept the value of the appraiser their board representative approved) while retaining those they like (i.e., a disproportionate allocation of total value). For all of the above reasons, the Court did not err in refusing to give respondents an undeserved windfall. B. The Court Appropriately Deducted Gurney’s Mortgage Debt From The Unencumbered Value Of Its Assets Before Calculating The Value Of Respondents’ Shares Respondents’ second ground for reargument is that the Court overlooked facts and the law when it deducted Gurney’s mortgage debt from the unencumbered value of the company’s assets before allocating value to respondents’ shares. This argument is also unavailing. As an initial matter, respondents point to no evidence or case law in support of their argument, much less facts or law the Court overlooked. They in fact cite no authority whatsoever (other than their own say so) in support of their position that the Court should have pretended that Gurney’s did not have a $21.5 million mortgage when it allocated the unencumbered value of Gurney’s among its Class A shareholders. Their failure to do so is unsurprising, as the Court’s decision to deduct Gurney’s mortgage debt before allocating value to respondents’ shares was fully in line with logic, general accounting principles and BCL 623 precedent. 9 13 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 It is a basic principle of finance that shareholder equity is the difference between a corporation’s assets and its liabilities. See, e.g. Ronald S. Longhofer, Business Valuation § 8.01 (“Subtracting the fair market value of all liabilities from the fair market value of assets yields the fair market value of equity.”); Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 6, ¶¶ 49-50 (2008) (“Equity or net assets is the residual interest in the assets of an entity that remains after deducting its liabilities. . . . The equity or net assets of both a business enterprise and a not-for-profit organization is the difference between the entity’s assets and its liabilities.”), available at https://www.fasb.org/pdf/aop_CON6.pdf; accord Hallmark v. Cohen & Slamowitz, LLP, No. 11-CV-842W(F), 2016 U.S. Dist. LEXIS 37952, at *23-24 (W.D.N.Y. Mar. 23, 2016); Dan River, Inc. v. Icahn, 701 F.2d 278, 286 (4th Cir. 1983). In truth, this principle is really just an application of common sense: A calculation of shareholder equity which ignores debt on the corporation’s primary asset would plainly result in an overstated and inaccurate valuation of that equity. Consequently, Courts routinely determine shareholder equity with reference to the “net” or equity value of the corporation. See, e.g. Friedman, 87 N.Y.2d at 164 (in BCL 623 proceeding, calculating the fair value of dissenters’ shares from the “net value” of corporations’ real estate interests); Wright v. Phillips, Civil Action No. 11536-VCG, 2017 Del. Ch. LEXIS 857, at *2, 10, 13 (Ch. Dec. 21, 2017) (determining fair value of parties’ interests in real estate holding company by (a) “[s]ubtracting the mortgage amount” from the judicially-accepted appraisal of the company’s property, and (b) dividing the resulting “net” value, after certain adjustments, pro rata); Sieger v. Sieger, No. 6975/1998, 2005 NY Slip Op 51348(U), ¶¶ 40-41 (Sup. Ct. Kings Cnty. June 29, 2005) (accepting appraiser’s report that had been updated to “take the mortgage into account, so that the mortgage would have to be subtracted from her valuations to obtain the equity”). Deduction of Gurney’s mortgage is also consistent with the Court of Appeals characterization of the procedure for determining the value of the company to be allocated under 10 14 of 23 FILED: NEW YORK COUNTY CLERK 02/15/2019 05:43 PM INDEX NO. 154466/2018 NYSCEF DOC. NO. 162 RECEIVED NYSCEF: 02/15/2019 BCL 623. According to the Court, the first step in this process is to calculate what “a willing purchaser, in an arm’s length transaction, would offer for the corporation as an operating business.” Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 168 (1995) (internal quotation marks and citation omitted). No purchaser of a resort property would pay unencumbered value for an asset in fact encumbered by over $21.5 million in mortgage debt. Either the purchase price would be reduced to induce the buyer to assume the debt, or the mortgage would be repaid from the sale proceeds at the titleclosing, reducing the funds available for the shareholders. See Gurney’s Post-Hearing Memo. at 3 n.6. Respondents’ argument that the Court should not have applied logic, basic accounting principles, or the precedent cited above because the two appraisers did not address whether a mortgage deduction was appropriate in a BCL 623 proceeding is nonsensical. See Mov. Mem. at 3. The appraisers were