Burdette v. Auburn-Opelika Invs., LLC

343 So.3d 9

Martin BURDETTE

v.AUBURN-OPELIKA INVESTMENTS, LLC

Auburn-Opelika Investments, LLC

v.Martin Burdette

1190767

1190801

Supreme Court of Alabama.

June 18, 2021

Russell C. Balch and Zeb H. Vaughn of Akridge & Balch, P.C., Auburn, for appellant/cross-appellee Martin Burdette.

Roger W. Pierce of Haygood, Cleveland, Pierce, Thompson & Short, LLP, Auburn, for appellee/cross-appellant Auburn-Opelika Investments, LLC.

STEWART, Justice.

Martin Burdette appeals from a judgment entered by the Lee Circuit Court ("the trial court") in favor of Auburn-Opelika Investments, LLC ("AOI"), regarding a dispute involving a promissory note entered into by the parties. AOI cross-appeals from the trial court's judgment denying its request for relief under the Alabama Litigation Accountability Act ("the ALAA"), § 12-19-270 et seq., Ala. Code 1975. We affirm the judgment.

Facts and Procedural History

In 2004, Martin Burdette and Susan Burdette, a married couple, formed AOI, with each owning 50% of the company. After its formation, AOI obtained a bank loan to purchase certain commercial property. In 2012, Martin and Susan sold property that they owned in Florida for $432,855. Martin and Susan agreed to use the proceeds from that sale, along with other funds, to make a loan to AOI so that it could pay off the bank loan. In May 2012, AOI executed a promissory note in which it agreed to pay Martin and Susan the principal sum of $489,000, with an interest rate of 5.75% ("the 2012 note").

In 2014, Martin and Susan divorced. Neither the 2012 note nor ownership of AOI was addressed in the divorce proceedings. In 2016, Martin and Susan had a disagreement regarding the management and operation of AOI, and Martin sued Susan. In June 2017, as part of those proceedings, Martin and Susan entered into a mediated settlement agreement wherein Susan agreed to pay Martin $560,000 in exchange for sole ownership of AOI ("the 2017 agreement"). The 2017 agreement provided, among other things, that the agreement was "intended to resolve all presently pending issues between Martin Burdette and Susan Burdette and is entered into in full and complete settlement of the above captioned lawsuit" and that the "agreement supersedes any prior understandings or agreements between the parties, whether or not the matters are covered in this agreement, except for the 2014 mediated settlement agreement" in the divorce proceedings. Susan paid Martin $50,000 in cash, and she executed a promissory note in favor of Martin in the amount of $510,000. That note was secured by a mortgage on the property owned by AOI. Susan later sold the property, and she paid the balance due on the note to Martin in full.

In August 2019, Martin sued AOI, asserting claims of breach of contract and unjust enrichment. Martin alleged that AOI had failed to pay Martin the amount owed under the 2012 note, which he asserted was $244,500. Martin sought $259,500.72, which included accrued interest, plus court costs, attorney fees, and additional interest. AOI filed an answer and asserted various affirmative defenses and filed a counterclaim seeking damages because, it asserted, Martin had commenced the action without substantial justification.

A trial was held on March 12, 2020. Martin testified that the 2017 agreement does not mention the 2012 note and that AOI was not a party to that agreement. Martin testified that he had been paid on his share of the interest on the 2012 note up until the 2017 agreement was entered into but that he had not received any payments since. Martin testified that he never agreed that the interest or principal payments to him on the 2012 note would stop after he and Susan entered into the 2017 agreement. Martin testified that he was still owed $244,500, which, he contented, amounted to his half of the debt owed by AOI on the 2012 note. Martin testified that he was never contacted by AOI or Susan regarding capitalizing the loan he and Susan had made to AOI. Martin acknowledged that he had accepted $560,000 as his value of half of AOI from Susan in 2017.

Robert Hudson, a certified public accountant, testified as an expert witness on behalf of Martin. Hudson testified that he had reviewed the 2012 note and the 2016 and 2017 federal tax returns of AOI, the 2017 agreement, and the 2017 promissory note from Susan to Martin. Hudson testified that the 2016 tax return showed an "outstanding loan to partners" of $489,000. Hudson further testified that nothing in the 2017 agreement would indicate that the 2012 note had been canceled or forgiven. Hudson testified that, in preparing the 2017 AOI tax return, he would have shown the 2012 note as a continuing loan from partners, unless he had been given further instructions. Hudson testified that the 2017 tax return showed that the 2012 note had been reclassified as equity or capital. Hudson explained that, typically, debt is repaid with interest payments while capital or equity does not necessarily have a promise of being repaid.

Hudson testified that, when Martin sold his 50% interest in AOI, the capitalization of the $244,500 debt owed to Martin increased Martin's basis by the amount of the reclassification and that, as a result, Martin paid fewer taxes. According to Hudson, if AOI had repaid the 2012 note, the amount paid to Martin would have been a tax-free return to Martin of the original principal amount but that, instead, the conversion of that debt to capital had saved Martin only $61,125 -- the maximum amount of federal taxes Martin would have had to pay. Hudson opined that the actual tax amount saved by Martin would have been less because the calculation of Martin's tax obligation would have also been based on other capital gains and losses. According to Hudson, a creditor's authorization is normally needed in order to convert a bona fide loan obligation into capital, but he also acknowledged that transferring what was a debt to Martin's capital account for the 2017 tax return was an acceptable general accounting practice.

Susan testified that, when she had agreed to pay to Martin $560,000 for his interest in AOI, that included all assets and liabilities of AOI, which included the debt owed under the 2012 note. Susan testified that, during the mediation, they had agreed that the value of AOI was around $1 million and that Martin had proposed that Susan pay $560,000 to acquire his half of AOI. Susan believed that, when they mediated the case, the payment to Martin of $560,000 included the $244,500 that he was owed, plus his equity in AOI. Susan acknowledged that Martin never approved converting the $244,500 to a capital account.

Jeff Hilyer, an attorney and certified public accountant, testified as Susan's expert witness. Hilyer testified that he had prepared AOI's tax returns and that Susan had represented to him that the 2017 agreement settled Martin's claims, that the amount of the 2012 note was no longer an obligation of AOI, and that, therefore, it was transferred from the category of "loans to the company" to the category of "capital contributed to the company." As a result, he said, Martin then had a capital increase equivalent to half the principal amount of the 2012 note.

Hilyer testified that it is reasonable to assume that an entity is worth the value of its underlying asset and that, in this case, AOI was worth the value of the real property that it owned. On direct examination by Susan's attorney, Hilyer testified to various calculations that he had done in determining whether Martin had received half the value of AOI and whether that included his half of the 2012 note:

"[Hilyer:] [Martin] was given $560,000 in the settlement agreement. And I say on here, payment to note zero, so net to Martin would have been [$]560,000. Martin had a 50[%] interest in the entity. So we divide what Martin got by [.5] to get assumed net sale proceeds [$1,120,000]. The actual transaction in December of 2019 had a 6[%] sales commission. So if we apply the 6[%] sales commission, you divide by [.94], you get an adjusted sales price of $1,191,500, and that's rounded to the nearest hundred dollars.

"....

"[Hilyer:] When you compare that to the price two and a half years later, and I would argue that if I took that two and half years later price and backed it up two and a half years it would be less. I'm just, for the sake of arguments here, using that price.

"....

"Martin got [88.6%] of the value comparing apples to apples.

"Q. Of the value of his one half interest?

"[Hilyer:] Yes. Based on the subsequent sale two and a half years later.

"....

"[Hilyer:] All right. You go back and do the transaction assuming [Martin] prevails on his claim here that he is due a payment of $244,900.¹ I'm looking in column three on the sheet right here [Exhibit 12]. That means he would have gotten [$560,000] plus [$]244,900 for a total of [$]804,9[00] for his half. Converting that to the whole, would mean that the value of the building, net proceeds from the sale would be [$]1,609,800 and would gross it up with the 6[%] commission, means that the building, for that transaction to fly and both of them get 50/50 and get equal, it would have to sell for $1,712,600, once again rounded to the nearest hundred dollars. In other words, it would have to sale for 127[%] of its actual value for that to happen. And coming to my conclusion that [Martin] was treated fairly, at [88.6%], you have to consider the time value, you've got two and a half years involved, the property could have appreciated in two and a half years. But in the valuing a fractional interest of an entity, you apply -- a fraction is not worth -- when you take an entity and fractionalize the ownership, the sum of the fraction, the pieces, is less than the value of the whole for two reasons: One, you're dealing with a lack of marketability. When people buy something, they want to buy the whole. They don't want to buy a fractional interest. So to sell a fractional interest in entities you have to discount them. What we

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