Opinion
No. 2010-CV-166
07-13-2012
Jeremiah Eames, et al. v. Joel Bedor, et al.
ORDER
This equitable action is brought by several limited partners of the former Mount Washington Hotel Limited Partnership ("MWHLP" or "the Partnership"). The Petitioners claim that the Respondents, Joel J. Bedor, Wayne W. Presby, Mountain Properties Preservation Corporation ("MPPC"), and The Mount Washington Railway Company ("the Cog"), breached their fiduciary duties as partners by self-dealing; converting and diverting partnership assets; and otherwise mismanaging and wasting partnership funds. Additionally, the individual Respondents, Mr. Bedor and Mr. Presby, have counterclaimed, asserting defamation against Petitioners, Jeremiah and Jack Eames. For the reasons stated in this Order, the Court finds for the Respondents on the Petitioners' equitable claims and finds for the Petitioners on the Respondents' counterclaim.
I
The partnership that forms the basis of this lawsuit was formed in 1991 when the Mount Washington Hotel was acquired after an FDIC auction. Prior to the auction date, Jeremiah Eames and his brother, John, agreed to purchase ten limited partnership shares and were awarded 20 percent of the stock in the corporate general partner MPPC. Jeremiah Eames was a sophisticated businessman who had worked for Merrill Lynch for four years and had been involved in numerous businesses. His brother John was a practicing attorney who had been the Grafton County Attorney for many years. The offering memorandum disclosed conflicts of interest, noting:
The partnership is subject to various conflicts of interest arising out of its relationships with the General Partner and its affiliates. Because the Partnership was organized by and will be operated by the General Partner, these conflicts will not be resolved through arm's length negotiations but through the exercise of the General Partner's judgment consistent with its fiduciary responsibility to the Limited Partners. . . . The General Partner, the principals of the General Partner, and other entities within which the principals of the general partner are active, are engaged in certain activities which may be deemed to be in competition with the partnership, including the operation of other tourist attractions and hotel/motel lodging establishments. In addition the General Partner and its affiliates expect to form and to manage other entities which may be involved in similar activities.Def.'s Ex. B at 9. This memorandum provided that the principals, Mr. Bedor and Mr. Presby, held ownership interests in both the Cog and the Bretton Woods Ski Area. It further stated, "[c]ross marketing approaches between the entities will be explored and enhanced. In addition, extensive packaging and other joint promotional activities will be conducted to aid the sale of rooms in the facilities as well as to enhance ticket sales at the attractions associated with the complex." Id. at 23.
In the early years of operation, the Cog provided substantial benefits to the Mt. Washington Hotel ("the Resort"). Over the years, the Partnership grew, acquiring the Bretton Woods Ski Area, its adjacent golf course, and other assets. Theses assets were collectively referred to by the parties as "the Resort," during the trial. The Cog distributed brochures for the Resort and enabled it to become a member of White Mountain Attractions. Members of this organization may place brochures in State rest stops. Hotels are generally prohibited from placing such brochures, but because the Cog was a member, and the Resort's promotional materials were included on the Cog brochures, its advertisement appeared in this area. Moreover, the Cog actually paid the salaries of certain Resort employees in the early years of operation.
In 2007, the Petitioners brought an action in the Grafton County Superior Court, alleging damages as a result of the Respondents diverting MWHLP assets to the Cog. The Court granted judgment on the pleadings in favor of the Respondents. See Eames v. Bedor, Grafton Cnty. Super. Ct., No. 07-E-299 (Nov. 5, 2008) (Order, Mohl, J.) ("Nov. 2008 Mohl Order").
In the prior pleadings, the Respondents set forth three grounds for dismissal. The Court only addressed the Respondents' argument that the Petitioners' claims were derivative and must fail because they did not comply with the statutory requirements. In doing so, the Court recognized that derivative actions are not the only form of relief available in cases involving limited partnerships and the Court "has the flexibility in this case to allow the petitioners to pursue their claims directly, and not as a derivative action, but only if doing so will not undermine the policy reasons for requiring derivative proceedings." Nov. 2008 Mohl Order, at 8 (discussing Kessler v. Gleich, 156 N.H. 488 (2007)). Applying Durham v. Durham, 151 N.H. 757, 760-61 (2005), the Court declined to exercise its discretion to permit the claims to proceed as direct actions.
Subsequently, the Petitioners filed a Motion to Reconsider, which the Court granted "only insofar as it requests the opportunity to file a motion to amend and an amended writ prior to final judgment." Eames v. Bedor, Grafton Cnty Super. Ct., No. 07-E-299, at 2 (Mar. 5, 2009) (Order, Mohl, J.). A new Petition and a Motion to Amend was filed on April 6, 2009, and granted over objection on June 22, 2009 (Mohl, J.). The Court directed the Clerk to schedule a structuring conference, thereby finding that the amended pleadings addressed the Court's prior concerns. See Eames v. Bedor, Grafton Cnty Super. Ct., No. 07-E-299, at 2 (June 22, 2009) (Order, Mohl, J.). On August 31, 2009, the Respondents filed a Motion to Bring Forward Motion for Judgment on the Pleadings. The Respondents asserted that the Court did not address their remaining arguments as to why the action should be dismissed: "(i) Partners cannot sue other partners until and unless there has been an accounting; and (ii) There is no basis to support Petitioners [sic] claim for attorneys' fees . . . ." Mot. to Bring Forward ¶ 10. Before the Motion was decided, this case was transferred to the Business and Commercial Dispute Docket and the Court held oral argument on the Respondents' Motion. The Court then ruled that an accounting was not required before the Petitioners could bring this suit and allowed the Petitioners to maintain fiduciary claims alongside their accounting claims. Eames v. Bedor, Merrimack Cnty. Super. Ct., No. 10-CV-166, at 3-8 (July 19, 2010) (Order, McNamara, J.). The case was then docketed for trial.
A
Prior to trial, the parties brought a number of motions in limine and Respondents requested a jury trial. The Court denied the Respondents' request for a jury trial because the gravamen of this case involves the equitable claims between the parties. Eames v. Bedor, Merrimack Cnty. Super. Ct., No. 10-CV-166, at 3 (Mar. 28, 2012) (Order, McNamara, J.).
Two of the motions in limine petitioned the Court to appoint a commissioner to take videotaped trial depositions. The Court granted these motions. The remainder of the Respondents' motions sought to exclude evidence from trial. The Petitioners objected to all of the Respondents' motions. The Court excluded expert opinion testimony from Attorney Richard Uchida. The Court denied the Respondents' request to exclude any mention of a bonus paid to Presby or a partnership interest awarded to Charles Kenison, and it denied the Petitioners' request to exclude documents held at the OMNI Hotel and the Petitioners' request to exclude expert testimony from Frank Zito. The Respondents also renewed their prior motion, asserting that an accounting must be held before any actions could be maintained between the parties. The Court rejected this argument as well.
The Court also deferred ruling on some of the motions involving expert testimony, as the judge need not serve as gatekeeper for himself. Traxys N. Am., LLC v. Concept Mining, Inc., 808 F. Supp. 2d 851, 853 (W.D. Va. 2011). Specifically, the Court deferred ruling on whether to exclude testimony from: Dr. Thomas Barocci; Drew Landry; Frank Zito, regarding salaries; and former MWHLP employees, regarding the amount of time they spent working for the Cog and the Resort. See Eames v. Bedor, Merrimack Cnty. Super. Ct., No. 10-CV-166 (Mar. 28, 2012) (Order, McNamara, J.). These motions in limine are now granted, denied, or moot, consistent with this narrative Order.
The Petitioners also moved to exclude certain testimony by Frank Zito following trial, including exhibit GGGGGG. Pet'rs' Post-Trial Mot. to Exclude Portion of Test. of Frank Zito 1-3. This motion asserts that Mr. Zito testified that, in addition to the expert testimony offered, he was also asked to calculate the Earnings Before Interest Taxation Depreciation and Amortization ("EBITDA") of assets not purchased by CNL. The Petitioners claim this testimony was not disclosed as part of the scope of Mr. Zito's testimony prior to trial, and ask that the Court strike this testimony. Mr. Zito's expert report states that he was retained by the Respondents "in order to present rebuttal to Plaintiffs' Expert Report and analysis concerning the treatment of past business practices and the resulting amount of benefits conferred to the Plaintiffs from the Defendants." Defs.' Ex. QQQQQQ, at 1. The report further states, "I also understand that I may be asked to testify regarding my opinions and matters that arise in trial by examination of witnesses concerning the damages or matters set forth in this report. I expect to expand upon the concepts expressed in this report . . . ." Id. at 2. Part of Mr. Zito's report considers that the Petitioners' expert, Drew Landry, applied incorrect accounting and auditing standards. As part of Mr. Zito's testimony, based on this expert conclusion, it would be reasonable to expect that Mr. Zito would perform the correct accounting tests or calculations. Although Mr. Zito's report does not refer to any EBITDA calculations, it contemplates that he may be asked to perform various additional calculations if necessary to rebut the Petitioners' evidence.
Respondents have not shown how they are prejudiced by the admission of this testimony. Petitioners' Motion in limine to exclude and their Post-Trial Motion to Strike are both DENIED for these and the reasons detailed below. The Court notes that Mr. Zito's testimony regarding his calculation of EBITDA is not necessary to its decision.
B
The Respondents asserted that the statute of limitations barred some of the Petitioners' claims because the alleged self-dealing and inappropriate partnership transfers occurred outside the three-year limitations period. The Petitioners argued that the statute of limitations, even if applicable was tolled by the discovery rule, RSA 508:4, I. The Court deferred its ruling until after trial.
Under the discovery rule, once the Respondents establish that a claim is outside the three (3) year statute of limitations, the burden shifts to the petitioner to establish that the statute was tolled. Beane v. Dana S. Beane & Co., 160 N.H. 708, 713 (2010). The Respondents contend that they have sustained the initial burden of proving that claims based upon conduct occurring before October 24, 2004 fall outside the three-year limitations period. Moreover, the Respondents argue that that the Petitioners are not entitled to equitable tolling. Finally, the Respondents maintain that the Petitioners waived any objections to the Respondents' allegedly-improper conduct.
The Petitioners object. They argue that claims based upon conduct occurring before October 24, 2004 are not barred by the three-year statute of limitations because the Petitioners could not have brought their legal and equitable claims until there had been an action for accounting. The Petitioners contend that an accounting claim does not accrue until dissolution, which the Court determined occurred only ten months before the Petitioners filed suit. After reviewing the parties' memoranda and the applicable law, the Court agrees with the Petitioners.
The Court's prior Orders guide its statute of limitations analysis in this case. The Court held that the Petitioners could not have maintained any causes of action against the Respondents in the absence of dissolution and an accounting. Eames v. Bedor, Merrimack Cnty. Super. Ct., 10-CV-166, at 2 (Mar. 28, 2012) (Order, McNamara, J.). In so holding, the Court followed the general rule that "an accounting [is] the exclusive remedy between partners." Id.; see also Smith v. Manchester Mgmt. Corp., 117 N.H. 361, 363 (1977). Additionally, the Court determined that the partnership dissolved on December 31, 2006. See Eames v. Bedor, Merrimack Cnty. Super. Ct., 10-CV-166, at 1-2 (July 19, 2010). Because the Petitioners could not have maintained their legal claims without simultaneously bringing an accounting action, the question before the Court is whether the Petitioners' accounting action is timely.
"[A] cause of action for a partnership accounting will not usually accrue prior to the dissolution of the partnership." Russell G. Donaldson, Annotation, When Statute of Limitations Commences To Run on Right of Partnership Accounting, 44 A.L.R. 4th 685 (1986). "This rule stems from the position that partners, as between themselves, are trustees, so that only a renunciation or other termination of the trust will give rise to a right of accounting." Id.
Petitioners brought their accounting action within the three-year limitations period under RSA 508:4. The parties agree that the applicable statute of limitations is three years. See RSA 508:4. The Partnership dissolved on December 31, 2006. To be timely, the Petitioners would have had to file their suit on or before December 31, 2009. The Petitioners filed suit on October 25, 2007. As a result, the Petitioners' claims are timely.
The Court rejects the Respondents' contention that the Petitioners were required to bring their action at the moment their legal claims arose. New Hampshire still follows the rigid common law rule preventing partners from bringing actions against one another in the absence of dissolution. This State has failed to adopt portions of the Revised Uniform Partnership Act specifically authorizing the assertion of legal claims prior to dissolution and accounting. See Revised Uniform Partnership Act, § 405(c) (1996). Thus, where a legal claim arises between partners in New Hampshire, the harmed partner is still "in the predicament of either causing a dissolution to resolve disputes or continuing the partnership despite a cloud of conflict and uncertainty hanging over it . . . ." Fike v. Ruger, 754 A.2d 254, 263 (Del. Ch. 1999). Under these circumstances, the partners had no immediate duty to dissolve the partnership when the legal claims arose.
Nor is the Court persuaded that Bayer v. Bayer, 123 N.H. 780, 786 (1983), is controlling. In Bayer, the Court held that a partner's actions for wrongful exclusion and accounting were time-barred. Id. at 785. The Court determined that the statute of limitations began to accrue on the Petitioners' exclusion and accounting claims on "the last date upon which the [partner] received notice of his [fellow partners'] actions." Id. A close reading of Bayer reveals that the wrongful exclusion caused the immediate dissolution of the partnership. See id. at 786 (rejecting the argument that the partner's prior withdrawal "did not constitute a dissolution of the partnership under the partnership agreement."). Because the partnership dis- solved at the time the legal harm occurred, the statute of limitations on both the legal claim and the accounting began to run at the same time. Id.
Here, dissolution did not occur at the moment the Petitioners' legal claims arose. The Court has already determined that dissolution occurred on December 31, 2006. See Eames, 10-CV-166, at 1-2 (July 19, 2010). Because the Petitioners could not bring their legal claims until they petitioned for an accounting, and because they could not petition for accounting until the partnership dissolved, the statute of limitations did not begin to run until December 2006.
Because the Petitioners' accounting claim is timely under RSA 508:4, the Court does not need to consider whether the Petitioners are entitled to equitable tolling. Furthermore, because the Petitioners' decision to wait to bring their suit in lieu of dissolution was lawful and reasonable, the Respondents' "waiver" argument fails as a matter of law.
The Court now considers the merits.
II
In attempting to prove their claims, the Petitioners make five arguments. First, they argue that Mr. Bedor and Mr. Presby engaged in self-dealing and utilized assets that belonged to the Resort to benefit the Cog, which they owned. The Petitioners maintain that the MWHLP provided the Cog with more than $400,000 in labor that the Respondents never recorded, reimbursed, or accounted for. Conversely, the Respondents, through Frank Zito, assert that from 1991 through 2006, the Resort received $520,660 worth of benefits from its association with the Cog.
Second, the Petitioners argue that Mr. Bedor and Mr. Presby improperly caused the partnership to pay the Cog's general manager $200,000 under an agreement that the Respondents never presented to the MWHLP Board and had expired prior to the payment.
Third, the Petitioners argue that an option agreement awarded to Charles Kenison, the general manager of the Cog, was blatant self-dealing. Fourth, the Petitioners object to a $300,000 bonus paid to Mr. Presby for his role in brokering the sale of the Resort to CNL/Celebration.
Fifth, and perhaps most significantly, the Petitioners claim that the commingling of assets between the Cog and the Resort caused MWHLP assets to sell for less than they would otherwise warrant. The Petitioners argue that the Respondents' actions commingling assets between the Cog and the Resort caused the buyer to lower its offering price by between $3.18 million and $4.88 million due to uncertainty regarding the relationship between the Cog and the Resort. Respondents brought one counterclaim for defamation based on Petitioners' disseminating a letter, which accused Mr. Presby and Mr. Bedor of engaging in self dealing and breaching their fiduciary duties to the other partners.
None of the parties' claims succeed.
A
The evidence does not show that the Cog benefitted from assets belonging to the Resort; rather, much of the evidence demonstrates that use of Cog assets benefitted the Resort. And in any event, the benefits flowing between the two entities over the years, amount to de minimus accounting events.
The Petitioners argue that work done for the Cog by Resort marketing employees amounted to a significant diversion of assets. To support their claim, the Petitioners submitted the expert testimony of Drew Landry. Mr. Landry is an accountant with more than 20 years of experience. The Petitioners hired Mr. Landry to determine whether the Cog received any benefits from the Resort that did not result in the Cog reimbursing the Resort for those benefits. The Petitioners also requested that Mr. Landry quantify the amount of any benefits the Cog received. Mr. Landry considered mostly Resort documents; Mr. Landry's review of Cog documents was minimal.
Significantly, Mr. Landry's opinions changed substantially over the course of litigation. Originally, Mr. Landry opined that the value of marketing received by the Cog for which it did not reimburse the Resort amounted to $417,610. Following his receipt of additional evidence and two subsequent revisions to his report, Mr. Landry settled on $356,271. During cross-examination, Respondents' counsel noted two significant flaws in Mr. Landry's report. First, the Respondents pointed out that Mr. Landry improperly included the salary of part-time Resort employees in calculating benefits to the Cog. The part-time Resort employees worked only during ski season, when the Cog was not operating. Thus, the employees could not have performed the allegedly improper marketing work. Second, Mr. Landry admitted he did not review any Cog documents before he authored his first report. In fact, Mr. Landry testified that even after his first report, his review of Cog documents was minimal. The Respondents submitted exhibit KKKKKK, which revealed that the Cog actually paid several Resort employees directly, thereby conferring a benefit on the Resort. Mr. Landry testified that this evidence would reduce the overall amount of the Cog's benefit, and thus his overall conclusion, by as much as 25 percent.
In addition to several Resort documents, Mr. Landry also based his opinion on statements of former employees who the Petitioners asked to "estimate" the amount of time they spent working on marketing for the Cog while also working for the Resort. Prior to trial, the Respondents sought to exclude the former MWHLP employees' testimony regarding the amount of time they spent working for the Cog. They argued that the employees' estimates were inadmissible because they were speculative and moved to strike Mr. Landry's testimony because he relied on the employees' estimates. The Court deferred ruling on the motion until it heard the evidence. Having heard the evidence, the Court finds that the evidence is admissible because there is a rational basis for the testimony and it is relevant. However, the Court does not give the employees' testimony great weight because their testimony was in some cases contradictory and often vague—which is understandable given that it related to work done as long as ten years ago.
The Court finds Mr. Landry's testimony is admissible. To say that Mr. Landry's report is admissible, however, is not to say that it is persuasive. As noted above, Mr. Landry's multiple reports contained several inaccurate assumptions. Even if this Court credited Mr. Landry's third report, the amount of allegedly diverted funds is relatively insignificant in two respects. First, the diverted funds are insignificant when juxtaposed against the total amount of the Resort's revenue. Mr. Landry opines that the amount of the diverted funds is $356,271. The Respondents argue credibly that when the ski-marketing payroll is removed from the calculation, Mr. Landry's testimony is at most that the Cog received $206,919 in benefits from Resort resources. See Defs.' Ex. DDDDDDDD. Even assuming the higher number is correct, the diverted resources totaled $356,000 over seven years; the average amount of resources diverted per year in question would total about $50,000. See Resp'ts' Ex. VVVVVVV. This sum is insignificant from an accounting standard in light of the Resort's revenues of $32 million in 2000 and $37 million in 2002. See id. Second, and far more importantly, the sum is insignificant when the Court considers the benefits the Cog provided to the Resort.
B
In order to show the benefits the Cog provided to the Resort, the Respondents submitted the expert testimony of Frank Zito. The Petitioners moved in limine to exclude aspects of Mr. Zito's testimony. The Court deferred ruling on the Petitioners' motion to exclude certain testimony from Mr. Zito based on the following considerations:
[M]uch of the information relied on by Zito is salary information. Depending on the outcome of the statute of limitations hearing, much of this information may become irrelevant. . . .See Eames v. Bedor, Merrimack Cnty. Super. Ct., No. 10-CV-166, at 19 (Mar. 28, 2012) (Order, McNamara, J.). Mr. Zito's testimony did not touch on any of the matters that concerned the Court with respect to the Petitioners' motions in limine, and the Court has already denied Respondents' motion to limit evidence based on the statute of limitations. Therefore, the Petitioners' motion to exclude is denied, and Mr. Zito's testimony is admitted in its entirety.
As part of their second motion in limine, Petitioners seek to exclude any reference by Zito regarding the credibility of witnesses. To the extent Zito discusses what formed the basis for his opinion—for example, that Zito did not rely on witnesses because he thought their memories were unreliable—this testimony is admissible because it is not credibility evidence.
1
Mr. Zito is a Managing Director at CBIZ Tofias. He is a Certified Public Accountant and is licensed to practice law in Massachusetts. He specializes in evaluating damages from lost profits, business valuation, and the misappropriation and secreting of income and assets. Mr. Zito reviewed the Resort's general ledgers, departmental reports, tax returns, vendor invoices, payroll records, and personnel files. Id. Mr. Zito reviewed MWHLP tax returns, visited the Cog and reviewed general registers, payroll registers, vendor invoices, and transactional documents. Id. Mr. Zito also reviewed depositions. Id. Mr. Zito testified credibly that the benefits provided by the Cog to the Resort amounted to $520,660 over the time of the partnership's existence. These benefits included: the Cog financially supporting the Resort in its early years; the Cog supplementing salaries for Resort employees; the Cog lending manpower and machinery to the Resort at no cost; and shared advertising efforts.
No party attempted to quantify the time value of money; i.e. whether contributions to the Resort made by the Cog in earlier years of the venture should be weighted.
When the parties purchased the Resort in 1991, it was thinly capitalized. For example, the FDIC required a $200,000 deposit be purchased shortly after the Mount Washington Hotel transfer. The Cog paid for the transfer. Defs.' Joint Trial Brief 4. Cog employees also worked at the Resort. The Cog paid them directly. Id.; see also Defs.' Ex. QQQQQQ (detailing the benefit conferred on the Resort by the Cog labor subsidy). Over the years, the Resort benefitted from the Cog's labor subsidy in the amount of $82,475. Between 1991 and 1997, the Cog paid Robert Clement, formerly General Manager of the Cog before transitioning to the Resort, approximately $157,800 while working for the Resort. In addition, the Cog provided Mr. Clement's health insurance from 1991 to 2004, at a value of $203,000. Mr. Bedor chose not to receive compensation from 2002 through 2006 for his position at the Resort. This amounted to $225,000 in benefits conferred on the Resort. Cog personnel also undertook construction and engineering projects at the Resort at no cost to the Resort. Defs.' Joint Trial Brief 5. The Cog lent manpower, machines, and plowing vehicles to the Resort at no cost. Id.
The Petitioners' primary complaint regarding commingling of assets is that the Resort used its marketing budget to benefit the Cog. The evidence established that "joint buys" of advertising offered the Resort the opportunity to buy more for less and actually benefitted both entities. The Cog and the Resort shared marketing costs by jointly advertising. Defs.' Joint Trial Brief 4. This not only saved both entities money, but also it allowed the Resort to advertise in places it would not otherwise be permitted. Id.
2
The Petitioners also make much of the decision in 2004 to run a "Cog ski train"—operated by the Cog railway, which had always been a summer attraction—in the winter. The Cog ski train allowed skiers to travel part way up Mt. Washington on the Cog railway and ski down part of Mt. Washington. The testimony established that the novelty of the ski train provided the Resort marketing department with a reason to persuade reporters to come to the hotel to write stories about the Resort. The Respondents produced a lengthy article that appeared in the Washington Post, and that other newspapers carried, which discussed both the Cog and the Resort in some detail. Ex. NNN. The value of an article written about a service or tourist location is termed "white space" and can be measured simply by comparing the price of column inch ad space to the column inch space filled by the story. The Washington Post article would have been worth approximately $34,000 in advertising to the Resort and the Cog. But the substantial benefit of such articles is that they are written by an independent author, and are not advertising material, and are therefore more persuasive to readers. The undisputed testimony established that in 2004, when the Ski Train was established, it generated a "buzz" about the Resort and the Cog in the tourism industry. Advertising by the Cog ski train significantly benefitted the Resort's marketing operations.
Thus, the Resort, and not the Cog, was the primary beneficiary of the Cog ski train. Indeed, the ski train did not continue to run after the single season it was established; its value was as a novelty. This skiing experience was not particularly desirable because the ski runs were short and the ski train was much slower than a modern lift, meaning that a skier could get fewer runs in each day. While the Resort and the Cog sold "joint tickets," the Resort did not reduce the price of its own Bretton Woods ticket in the joint ticket.
C
Nonetheless, the Petitioners argue that the Respondents purposely established a system whereby they would not keep track of the time spent by Resort employees working for the Cog. The Petitioners argue that as fiduciaries, partners have a duty to keep accurate records to prove that they properly dispose of partnership assets. Samia v. Central Oil Co., 158 N.E.2d 469, 484-85 (Mass. 1959). When partners fail to keep sufficient records, "every presumption will be made against the fiduciaries." Technicorp Int'l II v. Johnston, No. Civ.A 15084, 2000 WL 713750 at *2 (Del. Ch. May 13, 2000). In their post-hearing memorandum, the Petitioners argue that the Respondents failed to record the time that sales and marketing employees spent working for the Cog because they decided that this unreimbursed work would offset unrecorded benefits the Cog had provided to the Partnership in early and later years. Pet'rs' Post-Hearing Mem. 6. The Respondents, on the other hand, claim that it would not have been possible to track sales and marketing time.
The Court does not accept the Respondents' argument that it would not have been possible to track sales and marketing time. However, in the context of this case, the Court cannot find that the failure to keep such records constituted a breach of a fiduciary duty. RSA 304-B:5 governs limited partnership record-keeping and provides, in pertinent part:
I. Each limited partnership shall keep at the office referred to in RSA 304-B:4, I the following:
(c) Copies of the limited partnership's federal, state and local income tax returns and reports, if any, for the 3 most recent years; [and]
(d) Copies of any then effective written partnership agreements and of any financial statements of the limited partnership for the 3 most recent years;
II. Records kept under this section are subject to inspection and copying at the reasonable request and at the expense of any partner during ordinary business hours.
The Respondents promptly responded to the Eames' requests for documents related to Cog transactions. In October 2005, Joel Bedor told Jeremiah Eames that he was "prepared to commit whatever time is necessary to review any transactions between the two companies. . . ." Resp'ts' Ex. SSSS. The Respondents also provided document access to Jack Eames, Cathy Towle, and David Driscoll, a certified public accountant who served as the audit partner for the MWHLP from 1992 to 2006. The Resort's financials, from 2000 through the Partnership's dissolution, disclosed related party transactions, including those related to the Cog. From 2002 on, the Respondents accounted for the specific amount of direct expenses reimbursed by the Resort and the Cog to each other. The Respondents typically provided detailed monthly financial statements to all of the direct partners.
Moreover, even assuming the Cog's benefits did not offset the diverted funds from the Resort, the benefits provided to the Cog were immaterial. Mr. Driscoll is a certified public accountant with over 35 years of experience, and he identified roughly $160,898 in "tolerable misstatements." Mr. Driscoll also testified that when auditing the MWHLP's financial statements, he never noted any "material transactions" contributable to previously undetermined relationships, such as the Cog. He never notified Mr. Bedor or any of the other partners of any material transactions involving undocumented entities. Mr. Driscoll noted that any partner, general or limited, was free to review his audits at any time; the information was not simply for Mr. Bedor's review. The only logical conclusion from this testimony is that even if any sums had been diverted, the amount would have been "immaterial" in an accounting sense.
III
The Petitioners' second, third, and fourth arguments contest specific transactions by the Respondents and allege these transactions demonstrate that the Respondents engaged in self-dealing and improperly utilized Partnership assets. None of these claims succeed.
A
First, the Petitioners allege Charles Kenison, the Cog's General Manager, received an option to purchase a limited partnership share for $150,000. Pet'rs' Post-Trial Brief 13-14. The Petitioners contend that the Respondents improperly granted this option. Mr. Kenison's option would have allowed him to obtain a share of the Resort, but the Petitioners claim this option terminated in 2005 because of Jeremiah Eames's desire to "separate the two entities." Nonetheless, the Petitioners claim that the Respondents paid Mr. Kenison $200,000 upon sale of the Resort, as though he were a limited partner despite never purchasing any shares because his option expired. The Petitioners note that no board vote ever authorized the option.
However, Christopher Ellms, the manager of Bretton Woods ski area, owned by the Resort, also received an option to purchase limited partnership shares under similar circumstances. Both Mr. Kenison and Mr. Ellms attended MWHLP meetings and social events after being offered their interests. In fact, Mr. Kenison testified that shortly after he received his option, Jeremiah Eames congratulated him on joining the Partnership. While there was no formal board vote on Mr. Kenison's option, there was no formal board vote on Mr. Ellms's option either. Petitioners do not dispute that the MWHLP properly granted Mr. Ellms's option. In fact, Respondents admit that both Mr. Ellms and Mr. Kenison received an interest in the Partnership, but neither ever paid for their shares. Rather, each "received the net proceeds after the sale of the Resort following the purchase price." Defs.' Joint Trial Brief 15-16. Accordingly, Mr. Kenison's option was proper.
B
Petitioners argue that a $300,000 bonus MPPC awarded to Wayne Presby constituted self-dealing. Mr. Presby received the bonus at a September 2006 meeting because he negotiated the sale of MWHLP assets to CNL/Celebration, which resulted in a purchase price of $86,500,000. The Petitioners point out that the Eames' unrefuted testimony was that the vote purporting to authorize the $300,000 bonus passed. However, the Petitioners claim the vote is invalid because many of the members had a "conflict of interest" in the transaction.
A conflict transaction is one in which "the corporation . . . [or] a director of the corporation has a direct or indirect interest." RSA 293-A:8.31(a). The Petitioners point out that without full disclosure of the conflicts of interest and approval by a majority of "disinterested directors," the Respondents bear the burden of proving that the bonus was otherwise fair. Under RSA 293-A:8.30, while discharging his duties, a director must act: (1) in good faith; (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner he reasonably believes to be in the corporation's best interest. In accordance with RSA 293-A:8.30, a director may not engage in self-dealing. That is, he must avoid transactions in which he has an interest that may be adverse to the corporation or its interests. See RSA 293-A8.31. Although technically a director may violate RSA 293-A8.30 by engaging in such a transaction, these transactions are:
[N]ot voidable by the corporation solely because of the director's interest in the transaction if any one of the following is true: (1) the material facts of the transaction and the director's interest [were] disclosed or known to the board of directors or a committee of the board of directors or a committee of the board of directors and the board of directors or committee authorized, approved, or ratified the transaction; (2) the material facts of the transaction and the director's interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction; or (3) the transaction was fair to the corporation.
Id.
Before the MPPC Board voted to approve Mr. Presby's bonus, their attorney, David Fries, instructed them on RSA 293-A8.30-31. He informed them that as long as the transaction was fair, it would not be voidable. See Resp'ts' Ex. GG. Bill Presby, Lynn Presby, Joel Bedor, and Bill Bedor voted in favor of the bonus, and Jeremiah and Jack Eames voted against the bonus. The Petitioners assert that three of the individuals who voted in favor of the bonus constituted "interested parties" in the transaction because of their connection to Wayne Presby: Bill Presby is Wayne Presby's father; Lynn Presby is Wayne Presby's uncle and business partner; and Bill Bedor, according to Wayne Presby's testimony, was discussing with Wayne Presby the possibility that Joel Bedor would take over as the Cog's Chief Financial Officer.
The Respondents argue that the transaction was fair, and the Court agrees. Mr. Presby negotiated the purchase and sale of the MWHLP assets for approximately $86.5 million. One of the buyers' representatives, Charles Adams, described Mr. Presby as an "adept negotiator." He further stated that Mr. Presby is never one to "leave a nickel on the table." Mr. Adams testified that Mr. Presby secured an extremely fair price for the MWHLP. Moreover, the Petitioners do not seriously contest that Mr. Presby did an excellent job negotiating the transaction. In fact, the Petitioners voted to approve the negotiated purchase and sale with little hesitation. Mr. Presby testified that commissioning an independent broker for such work would have cost the partnership roughly $3.46 million. Further, if a broker produced a ready, willing and able buyer at a minimum price the partnership had agreed to, the partnership would have been required to accept the minimum price or to pay the broker's commission. In this light, Mr. Presby's bonus was fair to both MPPC and the MWHLP. Thus, the transaction is not voidable.
C
Finally, the Petitioners claim that the Respondents' alleged "commingling of assets" caused the buyers to lower their offering price by $3.18 to $4.88 million due to the buyers' uncertainty in MWHLP's financials. The Petitioners rely almost completely on the testimony of Thomas Barocci, Ph.D. to prove this allegation. The Respondents originally moved to exclude Dr. Barocci's testimony before trial; however, the Court deferred its ruling until after it heard the testimony. Eames v. Bedor, Merrimack Cnty. Super. Ct., No. 10-CV-166, at 13 (Mar. 28, 2012) (Order, McNamara, J.). The Court provided, "[t]he gatekeeping function . . . is relaxed where a bench trial is to be conducted . . . because the court is better equipped than a jury to weigh the probative value of expert evidence." Id. (quoting Traxys N. Am., LLC, 808 F. Supp. 2d at 853). After hearing Dr. Barocci's testimony, the Court is now in a position to rule on the Respondents' Motion.
Rule of Evidence 702 and RSA 516:29-a govern the reliability of expert testimony. Under Rule 702, "[i]f scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise." RSA 516:29-a, I provides, "[a] witness may not offer expert testimony unless the court finds: (a) [s]uch testimony is based upon sufficient facts or data; (b) [s]uch testimony is the product of reliable principles and methods; and (c) [t]he witness has applied the principles and methods reliably to the facts of the case."
The inquiry envisioned by the rules governing admissibility of expert testimony is a flexible one. Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 594 (1993). "The focus . . . must be solely on principles and methodology, not on the conclusions that they generate." Id. at 595. In determining reliability, the court looks to the four "Daubert factors": "(1) whether a theory or technique can be (and has been) tested; (2) whether the theory or technique has been subjected to peer review; (3) the known or potential rate of error of a particular technique; and (4) the Frye general acceptance test." Baker Valley Lumber, Inc. v. Ingersoll-Rand Co., 148 N.H. 609, 614 (2002) (quotations and ellipsis omitted); see also RSA 516:29-a, II. The party offering the expert testimony bears the burden of proving its relevance and reliability. State v. Newman, 148 N.H. 287, 291 (2002).
Dr. Barocci concluded that the price the MWHLP received when it sold the MWH was lower than it should have been because: (i) the Respondents diverted assets for the Cog's benefit; (ii) the Respondents failed to fully and clearly document and account for transactions between the Resort and the Cog; and (iii) the Respondents' actions created an uncertainty surrounding the appropriateness of operational and accounting practices. Dr. Barocci attempted to quantify these factors by: (1) calculating the amounts of shareholder resources that were diverted from the Resort to the Cog; (2) calculating the effect of the diverted resources on the EBITDA; (3) evaluating the impact the uncertainty had on the offering price; and (4) adjusting factors 1, 2, and 3 for the purchasing power of the losses to the date the Petitioners filed their claims.
Dr. Barocci did not calculate the value of "diverted resources" on his own; rather, he relies on Mr. Landry's report, see supra. Relying on Mr. Landry's estimates, Dr. Barocci concluded that between 2000 and 2006, the Resort's annual EBITDA revenues were lower due to diverted resources (e.g. lower by $96,661 in 2005). He assumed that the Cog was required to reimburse the Resort for all of these amounts. Dr. Barocci then used the consumer price index to arrive at a total value of the increased future EBITDA of $556,311.
Dr. Barocci used CNL's underwriting model—the "Dynamite Model"—to calculate the negative impact on the EBITDA. He concluded that the Buyers developed their offer based on a discounted cash flow model and that they offered to purchase the future EBITDA revenues. The future EBITDA revenues, he concluded, amounted to $45 million, which is equivalent to the Buyers' initial offering price. After calculating this amount, Dr. Barocci determined that the Buyers used a 15 percent discount rate when they submitted their offer. He also maintained that if the Cog had reimbursed the Resort, the result would have been to lower the operating expenses, thereby increasing the EBITDA. The increased EBITDA would have led to a higher initial offering price.
Finally, Dr. Barocci measured the actual "impacts" of the lower future EBITDA on the offering price. To do so, he relied on the Buyers' statements that they realized there was a close relationship between the Resort's assets and the Cog's assets. He submits that the Resort failed to provide documents to ease the Buyers' concerns. Dr. Barocci concluded that the Buyers were concerned about the joint marketing and sales efforts and, thus, factored uncertainty into their offer by using a "discount rate." He opines that, more likely than not, the Buyers increased their discount rate between two and three percent, which would have yielded between a $3.18 and $4.88 million higher offering price. He concedes, "[o]ffering an opinion on the exact amount would require knowing what was in the Buyers' minds and models regarding the level of risk."
The Respondents argue that the Court must exclude Dr. Barocci's opinion for several reasons. First, the Respondents maintain that the opinion is too speculative. They assert that attempting to determine the proper discount rate is exclusively within the Buyers' knowledge, and Dr. Barocci's attempt to calculate that number is improper. Second, the Respondents argue that Dr. Barocci misinterprets the Buyers' Dynamite Model because the Buyers did not base their offer on the future EBITDA revenues; instead, they based it on the Resort's future lease revenue. Finally, the Respondents contend that Dr. Barocci's attempt to use the "initial offering price" as the basis for damages is improper because, although the offering price remained the same, several terms of the deal and parties to the transaction changed throughout the negotiation process. The Court addresses the Respondents' arguments in turn.
In New Hampshire, a party is entitled to only those damages that are reasonably certain; a court may not award damages for speculative losses. Miami Subs Corp. v. Murray Family Trust, 142 N.H. 501, 517 (1997). Furthermore, the "reasonable certainty" requirement is not relaxed merely because a party introduces expert testimony. Instead, Rule 702's requirement for scientific knowledge "connotes more than a subjective belief or unsupported speculation." Daubert, 509 U.S. 579, 590 (1993).
Dr. Barocci's calculation of the "probable discount rate" is unduly speculative and, therefore, inadmissible under Rule 702 and RSA 516:29-a. Dr. Barocci assumes that the Buyers used a discount rate to reduce the initial offering price. However, petitioners never asked the Buyers' representative, Baxter Underwood, to what extent the Buyers actually reduced the offering price. Mr. Underwood testified that he was aware that the Cog and the Resort were related entities, and, even though he had access to the Resort's books, he "priced that in" to the transaction. But even Dr. Barocci recognizes that such information is exclusively within the Buyers' knowledge. Therefore, Dr. Barocci's attempt to estimate the number is improper. See Highland Capital Mgmt. v. Schneider, 379 F. Supp. 2d 461, 469 (S.D.N.Y. 2005) (excluding expert opinion that contained an expert's "own speculation regarding the state of mind and motivations of certain parties who were involved in the relevant transaction").
The Respondents also argue that Dr. Barocci misinterpreted the Dynamite Model by assuming that the Buyers relied upon future EBITDA revenues in reaching their initial offering price. This argument is persuasive. The Respondents' expert, Brandon Hawks, explained that the Buyers did not rely on the EBITDA cash flow, but instead relied on the amount of the total lease basis. Mr. Hawks provides that CNL is a "real estate investment trust." As a result, although CNL could "own" the Resort, it could not "operate" it. Because the EBITDA measures cash flow earnings from operating the Resort, the EBITDA would be unhelpful to CNL when determining whether its investment was prudent.
Rather, Mr. Hawks explained that CNL's Dynamite Model was a "lease evaluation." By that, Mr. Hawks means that CNL's investment does not rest upon the $44.96 million in equity valuation, but the $46.31 million total lease basis listed on the transaction summary. Mr. Hawks continues:
[I]f Mr. Barocci's discount rate of 15% is representative of the buyer's uncertainty given the premise of diverted resources, as he has suggested, utilizing the actual anticipated investment returns to the leased fee and sandwich interests contemplated by the buyer . . . results in a projected offering price of $31.3 million, substantially below that which was offered ($44.96 million). This fact suggests then that the buyers offered a significant premium (43.6%) for the resort operating assets.Hawks's Op., at 4, Ex. DDDDDDD.
Because Dr. Barocci's opinion rests, largely, on the premise that the Buyers reached their initial offer based upon future EBITDA revenues, his failure to account for the "lease basis" is fatal. In other words, the flaw so infects his procedure as to make his results unreliable. See State v. Langill, 157 N.H. 77, 88 (2008).
Finally, apart from all this, the Respondents argue that the initial offering price is an improper measure of damages. Again, the Court agrees. Unquestionably, Dr. Barocci bases his conclusion on the initial offering price of $45 million. Although the $45 million stayed the same throughout the parties' negotiations, the property included in the deal and the parties to the transaction did not. Over the course of the negotiations, the deal became more favorable to MWHLP, thereby reducing the effect of any possible discount rate. To base a damages award on the initial non-binding offer under such circumstances would be error. See Park v. First Am. Title Co., 136 Cal. Rptr. 3d 684, 690-91 (Cal. Ct. App. 2011).
D
In sum, in its pre-trial ruling, this Court was skeptical of Dr. Barocci's methods. Dr. Barocci's testimony did little to dispel that skepticism. The Court finds that Dr. Barocci's opinion: is too speculative; does not account for any "lease basis"; and improperly relies on the Buyers' initial offer. These flaws render Dr. Barocci's opinion unreliable and, therefore, inadmissible. The Court GRANTS the Respondents' Motion to Exclude. Even assuming that the Respondents diverted some assets to the Cog and failed to keep appropriate records, the Petitioners have failed to prove that they suffered harm as a result. As a result, the Petitioners are not entitled to judgment on any of their causes of action, legal or equitable. Therefore, the Court finds for Respondents on the Petitioners' claims.
Petitioners have argued that they are entitled to damages on behalf of those partners who did not bring suit. However, because the Petitioners have failed to sustain their burden of showing that they are entitled to any damages, the Court need not address whether they are entitled to collect on behalf of non-parties.
IV
The Respondents have brought a counterclaim for defamation. Typically, "[a] plaintiff proves defamation by showing that the defendant failed to exercise reasonable care in publishing a false and defamatory statement of fact about the plaintiff to a third party, assuming no valid privilege applies to the communication." Thomas v. Telegraph Publ'g Co., 155 N.H. 314, 320 (2007) (citation and quotation omitted). New Hampshire recognizes an absolute privilege for statements made by witnesses, parties, or counsel during a judicial proceeding. Provencher v. Buzzell-Plourde Assocs., 142 N.H. 848, 854 (1998). New Hampshire has extended this privilege to statements made before litigation:
We join those courts which have concluded that pertinent pre-litigation communications between a witness and a litigant or attorney are absolutely privileged from civil liability if litigation was contemplated in good faith and under serious consideration by the witness, counsel, or possible party to the proceeding at the time of the communication.Id. at 855; cf., McGranahan v. Dahar, 119 N.H. 758, (1979) (holding that client statements to attorneys cannot form the basis for defamation claim but not directly addressing the defense theory of advice of counsel). Additionally, some jurisdictions appear to recognize a limited privilege for statements made at any time if based upon advice of counsel. See Giddings v. Principal Fin. Grp., Inc., slip op. No. 07-CV-370, 2008 WL 2002652 at *2 (E.D.Wis. May 6, 2008) (denying the defense based on timeliness but recognizing it as a theory).
Here, the Respondents assert that on October 15, 2006, at the general partner's meeting, the Petitioners circulated a letter that essentially claims the Respondents engaged in an ongoing conflict of interest that was detrimental to the MWHLP. The letter accuses Mr. Bedor and Mr. Presby, in their individual and official capacities, of breaching their fiduciary duties. The letter further explains that if the Board rescinds its prior approval to pay Mr. Presby a $300,000 bonus for negotiating the sale of the Resort, then the Petitioners would drop their claim for breach of fiduciary duties. The Petitioners received this letter from Attorney Robert Upton II, who advised them regarding this issue. Jack and Jeremiah Eames distributed copies of this letter to the general and limited partners, pursuant to their counsel's advice.
Here, the Petitioners are entitled to absolute immunity for the statements embodied in the October 15, 2006 letter because they relied on the advice of counsel in circulating it and they were, or they have, contemplated litigation in good faith. Provencher v. Buzzell-Plourde Assoc., 142 N.H. at 855; Provencher, 142 N.H. at 855. However, even if litigation was not contemplated in good faith as of October 2006, the Petitioners are not liable, because they undertook an investigation of the facts contained in the letter prior to circulating it. For a speaker or author to be liable for defamation of a private figure, the actor must be negligent in making information public that is harmful and false. Lassonde v. Stanton, 157 N.H. 582, 589 (2008).
The Petitioners conducted research to ensure there was a basis for the allegations in the letter. Specifically, the Petitioners claim that they investigated the factual allegations in the letter for about one year, or more. The Petitioners' investigation began after meeting with Mr. Bedor and Ms. Towle in October 2005, where they learned the Cog had not paid the Resort's marketing director for work done on the Cog's behalf. Pet'rs' Post-Trial Brief 24. They further assert that the investigation ended at the beginning of October 2006 when they met with their own counsel, Attorney Upton. During this time, the Petitioners asked Mr. Bedor to prepare a report of the transactions between the Cog and the MWHLP, but he never provided such a report. Pet'rs' Post-Trial Brief 24.
Thus, even if the Petitioners are not absolutely immune for the statements contained in the letter, as contemplating litigation, the Petitioners' investigation combined with their reliance on the advice of counsel demonstrates they did not act negligently in circulating the October 15, 2006 letter. Accordingly, the Respondents have failed to prove Petitioners' dissemination of the letter defamed them.
SO ORDERED.
______________________
DATE Richard B. McNamara
Presiding Justice
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