Kenneth John Cannon, Jr. v. Lenard Bertrand

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

CA 07-1278

KENNETH JOHN CANNON, JR.

VERSUS

LENARD BERTRAND, ET AL.

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APPEAL FROM THE
TWENTY-SEVENTH JUDICIAL DISTRICT COURT
PARISH OF ST. LANDRY, NO. 06-C-5663-A
HONORABLE JAMES PAUL DOHERTY, JR., DISTRICT JUDGE

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JOHN D. SAUNDERS
JUDGE

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Court composed of Ulysses Gene Thibodeaux, Chief Judge, John D. Saunders, and
Glenn B. Gremillion, Judges.

AFFIRMED.

Steven Gerald Durio
Durio, McGoffin, Stagg & Ackermann
P. O. Box 51308
Lafayette, LA 70505-1305
(337) 233-0300
Counsel for Plaintiff/Appellant:
Kenneth John Cannon, Jr.

James Clarence Lopez
Guglielmo, Lopez, Tuttle, Hunter & Jarrell
P. O. Drawer 1329
Opelousas, LA 70571
(337) 948-8201
Counsel for Defendant/Appellee:
LBC, LLP

SAUNDERS, Judge.

This is a case wherein a withdrawing partner disputes the value assigned to his

share of the partnership by the court below. The partnership, when faced with the

withdrawal, chose to continue the partnership and, therefore, had to pay the

withdrawing partner for the value of his share. After the parties could not agree to that

value, the withdrawing partner sought a judicial determination of the value of his

share in the partnership.

The trial court totaled the assets of the partnership, $1,054,368, with one-third

of that total being $351,456. Next, the trial court determined that the $351,456 should

be discounted by applying a minority discount of 35%. The trial court found the

result, $228,447, to be the true market value of the withdrawing partner’s share. The

withdrawing partner has appealed. We affirm.

FACTS AND PROCEDURAL HISTORY:

LBC, L.L.P. (LBC) was a partnership formed by three persons, Kenneth John

Cannon, Jr. (Cannon), Lenard Bertrand (Bertrand), and Wade William Leger (Leger),

by a written agreement on March 25, 1997. LBC’s stated purpose was to engage in

agricultural pursuits including the sale and harvest of timber. This matter arises out

of Cannon’s withdrawal and subsequent demand for the payment of the value of his

one-third share in LBC.

According to the partnership agreement, profits and losses are shared at 33a

for each partner, with no partner receiving any compensation, salary, or drawing

account from the partnership. The partnership agreement further provides that the

partners have an equal voice in management.

On April 11, 1997, LBC purchased approximately 562 acres of land located in

Jefferson County, Mississippi for $450,000. The property was purchased for the

occasional sale of timber and for the partners to hunt.

At some time in the first half of 2006, Cannon notified Bertrand and Leger of

his intention to withdraw from LBC. After some apparent discussion and failure to

reach an agreement of the value of his one-third interest, Cannon filed a petition for

determination and payment of withdrawing partner’s interest on November 2, 2006.

Cannon sought a judicial determination of the value that his partnership share had at

the time that his membership ceased in accordance with La.Civ.Code arts. 2823,

et.seq. A trial was held on June 14, 2007.

The trial consisted mainly of an extensive discussion of the various expert’s

respective valuations of the underlying assets of the partnership and the value of

Cannon’s share. Each party presented a certified appraiser, whose valuation included

a timber appraisal by a professional forester, to compute the value of the underlying

assets of the partnership, and a Certified Public Accountant (CPA)/valuation expert

to extrapolate from the value of the assets, a valuation for the total partnership, and

ultimately, Cannon’s share.

On July 17, 2007, the trial court found that the total value of the partnership

was $1,054,368, with one-third of that value being $351,456. The trial court then

applied a minority discount of 35% to reach a determination that the true market

value of Cannon’s share was $228,447. Cannon appealed, citing four assignments of

error.

ASSIGNMENTS OF ERROR:

1. The trial court erred in its legal conclusion that a “discount of some amount,”
from the “value” otherwise due under Articles 2823-24, was warranted because
a withdrawing partner would otherwise receive an amount “equivalent to
liquidation without the cost of a liquidation.”

2. The trial court erred in its legal conclusion that a “discount of some amount,”

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from the “value” otherwise due under Articles 2823-24, was warranted because
the law does not allow the withdrawing partner “a right to demand liquidation”
and “there should be some trade off between allowing a partner to withdraw
without consent. . . and requiring the partnership to pay, in money, the value
to the withdrawing partner.”

3. The trial court erred in interpreting and applying Shopf v. Marina del Ray
Partnership, 549 So.2d 833 (La.1989) to authorize or require the sua sponte
imposition and judicial determination of “a discount of some amount” which
resulted in the deduction of $123,009 from the “value” otherwise due under
Articles 2823-24.

4. The trial court erred in its legal conclusion that a “discount of some amount,”
from the “value” otherwise due under Articles 2823-24, was not contrary to
Louisiana law.

ASSIGNMENTS OF ERROR #1, #2, #3, and #4:

Although Cannon lists four assignments of error, the crux of each assignment

is that the trial court should not have used a minority discount in determining the

value of his partnership share. As such, we will address the appropriateness of the

trial court’s application of a minority discount to this case under one heading.

STANDARD OF REVIEW:

Cannon’s assignments of error are termed as issues of law. Consequently, he

contends that the de novo standard of review is applicable to the case before us. We

do not agree.

Under Shopf v. Marina Del Ray Partnership, 549 So.2d 833 (La.1989), a court

is given the option to apply a minority discount when attempting to determine the

value of a minority share in a closely held business. The choice to apply a minority

discount is at the discretion of the court. Therefore, we will look to the record and

determine whether the trial court abused that discretion.

THE TRIAL COURT’S USE OF A MINORITY DISCOUNT:

“The former partner, his successors, or the seizing creditor is entitled to an

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amount equal to the value that the share of the former partner had at the time

membership ceased.” La.Civ.Code art. 2823. “If a partnership continues to exist after

the membership of a partner ceases, unless otherwise agreed, the partnership must pay

in money the amount referred to in Article 2823 as soon as that amount is determined

together with interest at the legal rate from the time membership ceases.”

La.Civ.Code art. 2824.

In Shopf, our Supreme Court established the basis for determining the value a

withdrawing partner’s share to be that of “fair market value.” The Shopf court defined

“fair market value” by stating:

Fair market value is defined generally as the price that a willing
buyer would pay to a willing seller for a certain piece of property in an
arm’s length transaction, neither being under any compulsion to buy or
sell and both having reasonable knowledge of the relevant facts. See
Black’s Law Dictionary 537 (rev.5th ed 1979).

Id. at 839.

Next, the Shopf court took an offer by one of the continuing partners, made just

prior to the withdrawing partner expressing his intent to withdraw, and adjusted that

amount for “other considerations.” Id. at 840. When discussing the “other

considerations,” the court stated:

The most significant adjustment must be made in recognition of
the fact that plaintiff’s share is a minority interest in a closely held
business. The determination of the value of a fractional share in a
business entity involves more than fixing the value of the business and
multiplying by the fraction being evaluated, especially when the share
is a minority interest. A minority interest may be uniquely valuable to
the owner, but may have considerably less value to an independent third
party, because the interest is relatively illiquid and difficult to market.
G. Desmond & R. Kelley, Business Valuation Handbook, ¶ 11.01, 11.07
(1977).

Id.

We find that there is no evidence that the trial court abused its discretion in

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choosing to discount Cannon’s share in the partnership by 35% based upon it being

a minority interest. There is evidence in the record that the value of owning an

undivided one-third interest differs between the two remaining partners and an

outside investor. This premise is evidenced by the following testimony of one of the

remaining partners, Mr. Wade Leger:

Q. Did you all discuss liquidating the property at the time that Mr.
Cannon told you he was withdrawing?

A. No, sir.

Q. Did you realize that you had that option under the partnership
law?

A. Yes, sir, but we put in so much work we want to keep it if we can.

Cannon’s arguments alleging that the trial court ruling was in error consist of

various forms of proclaiming that minority discounts are contrary to Louisiana law.

These arguments have no merit. Cannon first argues that the trial court erroneously

relied upon the notion that if no minority discount was given, he would otherwise

receive an amount “equivalent to liquidation without the cost of a liquidation.”

Cannon contends that La.Civ.Code arts. 2823 and 2824 call for the liquidation value

to be used when assessing the value of a withdrawing partner’s share. We do not

agree.

The value to be given to a withdrawing partner’s share under La.Civ.Code arts.

2823 and 2824 is that of “fair market value . . . in a true arms length transaction.”

Shopf, at 840. While there are times that the fair market value will equal the

liquidation value of a withdrawing partner’s share, it depends on the circumstances

of each case as to whether this will be true.

Next, Cannon contends that the use of minority discounts is not mandated

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under Louisiana law. To illustrate, Cannon cites the case of Smith v. James, Hardy

& Smith, 31,812 (La.App. 2 Cir. 5/19/99), 736 So.2d 996, writ denied, 99-1775 (La.

10/1/99), 748 So.2d 448. Cannon alleges that under Smith, minority discounts are not

required by our Supreme Court in Shopf. We agree with Cannon’s position. Under

Shopf, our Supreme Court has given courts the flexibility to use, at their discretion,

a tool in the form of a minority discount to make a judicial determination of the value

of a withdrawing partner’s share. Whether it is appropriate to use a minority discount

is dependant upon the circumstances of each case.

Further, the circumstances in the Smith case are very different than the case at

bar. In Smith the withdrawing partner was a CPA that was withdrawing from a CPA

firm. The value of his partnership share consisted of the accounts receivable and

income that he was able to generate through his skill and personality. These are both

tied to the withdrawing partner’s identity and separable from the assets brought to the

firm by the continuing partners.

Here, like in Shopf, the partnership’s main asset is land. It is not unreasonable

for the trial court to have found that a minority interest in that land is worth less than

a simple mathematical one-third of the total value of that land. It is certainly feasible

that an outside investor, in a fair, arms length deal, would not be willing to pay a full

one-third of the value of the total asset. Interestingly, this is evidenced by the

testimony of Anderson Hartiens, the CPA retained by Cannon as an expert. Hartiens

testified to the following:

Q. - - Well, that’s what this is about but it’s also about valuing the
share of the partner. In valuing the share of a partner, if you
would assume facts that I have given you in that the partner wants
to sell his [one-third] interest to a third party. Take withdrawal
out of my hypothetical question. Would you recommend that your
client who comes to consult with you about buying that interest

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would pay a full one-third for it?

A. No, sir.

Cannon also argues that minority discounts are contrary to Louisiana law by

pointing out that courts specifically reject the use of minority discounts in other areas

of law. To demonstrate this point, Cannon cites Head v. Head, 30,585 (La.App. 2 Cir.

5/22/98),714 So.2d 231, a family law case. While other areas of Louisiana law may

not use minority discounts, our Supreme Court has specifically interpreted

La.Civ.Code arts. 2823-2824 to allow the use of minority discounts in cases such as

the one before us. Further, as LBC points out in brief, minority discounts are used in

other areas of law. See Moore v. CIR, 62 T.C.M. (CCH) 1128 (1991) and Adams v.

U.S., 218 F.3d 383 (5th Cir. 2000). As such, we find no abuse of discretion in the trial

court’s decision to use a minority discount.

THE TRIAL COURT’S PERCENTAGE OF THE MINORITY DISCOUNT:

We also find that the trial court did not abuse its discretion in choosing to

discount the value of Cannon’s share by 35%. There is evidence in the record that the

trial court considered many factors when determining what percentage to discount

Cannon’s share. First, the trial court considered the discount in the Shopf case of one-

third. Second, it considered the discount cited in a magazine article used in the expert

report of Talbott Robertson, LBC’s expert CPA. The article cited stated that the data

collected resulted in an average discount of 38% from the net asset value of the

partnership that was given to a random outside investor purchasing a share in a

random limited partnership on the secondary market. Steven Kam, Hans Schroeder,

and Curt Smith, Pricing Non-Publicly Traded Limited Partnerships, HOULIHAN

VALUATION ADVISORS VALUATION REPORT, Spring 1994, at 5.

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Finally, the trial court looked to the suggested discounts from two expert

reports. Cannon’s expert, Hartiens opined that a minority discount was not warranted

because: (1) the partnership agreement of LBC did not address the issue related to

any payment to a withdrawing partner; (2) Louisiana Civil Code Article 2823

concerning the rights of a partner after withdrawal, shows that the former partner is

entitled to an amount equal to the value that the share of the former partner had at the

time the membership ceased; and (3) unless the partnership assets are liquidated and

then distributed to each partner, an automatic market exists, as the remaining partners

must purchase the withdrawing partner’s share equal to fair market value.

LBC’s expert, Robertson, opined that discounts were necessary for (1) a lack

of control over the property as a minority owner and (2) the lack of marketability of

the property. In Robertson’s opinion the value of Cannon’s share should be

discounted by approximately 80% to $73,000.

While the trial court did not choose the discount suggested by either expert, its

choice to discount Cannon’s share by 35% is clearly supported by the record. Further,

the three reasons cited by Cannon’s expert for not using a minority discount are

tenuous. First, had the partnership agreement addressed the issue of payment to a

withdrawing partner, there would likely be no need for judicial determination of the

value of Cannon’s share. Second, the value addressed in Article 2823 consists of the

true market value of that share. See Shopf. Finally, the fact that an automatic market

exists is irrelevant to the case at bar. If it was, we would not need “to determine the

fair market value of plaintiff’s share in a true arms length transaction.” Shopf, 549

So.2d at 840 (emphasis added).

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CONCLUSION:

Accordingly, we find that the trial court did not abuse its discretion in choosing

to use a minority discount, nor do we find that the trial court abused its discretion in

setting that discount at 35%. As such, we affirm the trial court’s judgment. All costs

associated with this appeal are to be paid by Cannon.

AFFIRMED.

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