Hardiman v. The Woodlands Store, Inc.

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ROY HARDIMAN et al., Plaintiffs and Appellants, v. THE WOODLANDS STORE, INC., Defendant and Respondent.

A166704

California Court of Appeals, First District, Fifth Division

February 28, 2024

NOT TO BE PUBLISHED

(Marin County Super. Ct. No. CIV220179)

JACKSON, P. J.

This appeal involves a dispute over an appraisal of plaintiffs Roy and Janet Hardiman's (Hardimans) 15-percent ownership interest in a grocery business owned and operated by defendant The Woodlands Store, Inc. (Woodlands).

The Hardimans challenge the superior court's decision to deny their petition to vacate the appraisal-arbitration award and to confirm the award in favor of Woodlands. (Code Civ. Proc §§ 1286.2, 1285.)^[1] They reason that the award was procured by fraud and that the arbitrator (in this case, the appraiser) substantially prejudiced their rights by committing misconduct and by refusing to postpone the arbitration hearing or hear material evidence. Accordingly the Hardimans seek reversal of the judgment and a remand of this matter to the superior court with instructions to vacate the award. We find no basis for disturbing the appraisal-arbitration award and therefore affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Woodlands is a closely held corporation operating three grocery stores one in San Francisco^[2] and two in Marin County. From 2010 to 2021, Roy Hardiman was a member of Woodlands's board of directors. He and his wife, Janet Hardiman, also collectively owned a 15-percent share of Woodlands's outstanding stock.

I. Amended and Restated Shareholders Agreement.

In 2012, the Hardimans signed the operative amended and restated shareholders agreement with Woodlands, which gave them a contractual right to have Woodlands repurchase their shares at a price to be determined "by an appraiser of recognized standing" jointly selected by the parties.

In late 2020 and early 2021, Woodlands made several business decisions with which the Hardimans disagreed. One such disagreement, set out in a letter the Hardimans sent to Woodlands's counsel on May 10, 2021, related to the recent decision by the company to purchase five condominium units in San Francisco. According to this letter, Hardiman did not learn of the purchase until after it occurred because the company, in violation of its own rules, scheduled a special board of directors meeting to review and approve the purchase with just one business day's notice.

On May 20, 2021, Woodlands's counsel responded to the Hardimans' letter. Counsel explained that Woodlands purchased the five condominium units in which the company operated its San Francisco store, which the company previously rented, for "the discounted price of $5,475,000 ...." Counsel also advised the Hardimans that the five condominium units "were recently appraised for approximately $1.5 million more than the discounted price that [Woodlands] paid."

A few months later, on July 27, 2021, the Hardimans exercised their so-called "Exit Right" under the amended and restated shareholders agreement to compel Woodlands to repurchase their 15-percent ownership interest. The parties thus began the process of jointly selecting an arbitrator to determine the stock's fair market value, ultimately choosing Serena Morones of Morones Analytics (appraiser).

II. Appraisal Process.

On November 16, 2021, the parties signed an engagement letter with the appraiser that laid out the ground rules for the appraisal process. In adherence with these rules, the following measures were taken: (1) the appraiser issued an initial list of document requests to the parties covering 23 categories of information, leaving open the possibility of additional requests; (2) after the appraiser obtained "sufficient information within an adequate timeframe necessary to reach an independent conclusion," she met ex parte with each side and their counsel to discuss the company and its valuation; and (3) each side then submitted a written memorandum "summariz[ing] the nature of the company and any unique valuation issues that you want us to consider" that was accompanied by "all documents and data that you wish for us to consider as part of the appraisal." During this process, neither side disclosed to the appraiser the existence of the May 20, 2021 letter from Woodlands's counsel to the Hardimans relating to Woodlands's purchase of the five San Francisco condominium units in which the San Francisco store was operated.

A. The Appraiser's Draft Report.

On February 10, 2022, after the appraisal process was complete, the appraiser issued a draft report. Pursuant to the terms of the engagement letter, the parties were permitted to comment on the draft report, but only for the purpose of addressing typographical or factual errors and not "any issues of valuation methodology ...."

On February 22, 2022, the Hardimans submitted a nine-page letter identifying several concerns they had regarding the draft report. Relevant here, their letter noted that the draft report concluded the recently purchased San Francisco condominium units were "a 'non-operating'" valued at $5,425,000. Taking issue with this value, the letter continued: "The [draft report] recognizes that the condominiums ought to be appraised according to their 'market value.' [Citation.] But, the [draft report] states: 'We are not real estate appraisers.' [Citation.] Rather than obtain an appraisal for the value of these condominiums, the [draft report] instead 'assumes the option purchase price as a reasonable indication of market value based on management's representation. [Citation.] The Draft Report acknowledges that this assumption is 'extraordinary.' [Citation.] [¶] Management's 'representation' about the value of these condominiums is surprising given that as recently as May 2021 Woodlands claimed (though its lawyer, Frank Cialone) that the condominiums were purchased at a 'discounted price of $5,475,000.' Exhibit 1 at 1.^[3] Woodlands also claimed that these condominiums had been 'recently appraised for approximately $1.5 million more than the discounted purchase price than [sic] the Company paid.' Id. at 1."

The Hardimans' February 22, 2022 letter to the appraiser then concluded: "It is disappointing that Woodlands did not furnish you with the appraisal referenced in its lawyer's prior letter. In any event, it is clearly erroneous-and it would be tantamount to the knowing acceptance of a misrepresentation-to ignore the true and available facts regarding any recent relevant appraisal(s) of the condominiums."

Later the same day, Woodlands's counsel advised the appraiser that the company would not be responding to the Hardimans' critiques of her methodologies and conclusions "as that is outside the scope of this post-draft process." Nonetheless, the appraiser asked Woodlands, in light of the new information contained in the Hardimans' letter, to provide any additional documents in its possession that "may indicate fair market value of the SF real estate ...."

On February 28, 2022, Woodlands's counsel wrote to the appraiser to advise her that Woodlands would not provide any additional documents since, under the terms of the engagement letter, the time for the parties' document exchange had passed. Woodlands's counsel posited that the Hardimans were violating the parties' agreed-upon rules by challenging the draft report on matters that related not to perceived factual errors but to perceived errors in the appraiser's analysis, "including your valuation of specific assets, the comparable data and multiples that you selected, and much more." Woodlands, in turn, was complying with the agreed-upon rules by refraining from challenging what it perceived as the appraiser's analytic errors, including her conclusion that the five recently purchased San Francisco condominium units were "non-operating" assets.

In particular, Woodlands's counsel explained that Woodlands's failure to provide the appraiser information regarding the value of these condominium units was based on its view that the units were operating assets: "Your information request, dated November 18, 2021, calls for 'Information regarding any non-operating assets held by the company, such as real estate, surplus working capital, airplanes, boats. Income and expense information related to non-operating assets.' The condominium units are operating assets. They are where the Company's San Francisco store is located and operated. Prior to buying those units the Company leased them, and the Company purchased them by exercising an option that was included in that lease. The condominium units cannot be sold without closing the San Francisco store or renting the units from the buyer, likely at significantly higher cost. They are part of the ongoing infrastructure of the Company. As an operating asset, the value of the condominiums would be captured in the overall enterprise valuation of the Company. A separate valuation would not be warranted, you did not request appraisals or valuation information regarding operating assets, and the Company did not provide it."

Woodlands's counsel also reminded the arbitrator that the Hardimans had full knowledge during the appraisal process of the documents and information Woodlands did and did not provide-including its omission of any real estate appraisal. The Hardimans, counsel noted, were also in possession of his May 20, 2021 letter that referenced the appraisal of the condominium units and could have provided-but did not provide-it. At this point, however, the company's position was that it was too late for the appraiser or the Hardimans to insist on further disclosures since the final report was now due.

On February 28, 2022, the appraiser responded to Woodlands's counsel's letter, insisting it was ...