Mart v. Severson

Bradley Mart (plaintiff) and Leland Severson (defendant) were each 50 percent owners of Bay World Trading Ltd. (Bay World). On February 24, 2000, Mart signed a written consent to wind up and dissolve Bay World and delivered the consent to Severson the following day. Severson threatened to sue Mart for breach of fiduciary duty, alleging that Mart intended to establish a competing company. Mart subsequently filed a petition in California Superior Court, seeking court supervision of the wind-up proceedings. In an effort to avoid dissolution, Severson elected to exercise his statutory right to have Bay World purchase Mart’s shares at their fair value. The superior court appointed three appraisers, and on November 30, 2000, the appraisers issued a report valuing Bay World at $5.6 million. Severson objected to the appraisers’ report, arguing that the appraisers used an incorrect valuation methodology. In response, the court ordered the appraisers to supplement their report and further explain their valuation process. The appraisers explained that they utilized a going-concern valuation that took into account Bay World’s client relationships, brand name, and historical and projected earnings. The appraisers did not, however, take into account Severson’s threat of litigation or the possibility of new market competition. The court found that the appraisers’ valuation would be approved only on the condition that Mart sign an effective noncompete agreement. Through counsel, Mart drafted a noncompete agreement, but the court found that it was too narrow. Accordingly, the court ordered that appraisers revalue Bay World on a piecemeal basis, although it offered Mart the opportunity to submit a revised noncompete agreement. On March 19, 2001, the appraisers issued a report finding that the piecemeal value of Bay World was $1.48 million. At a hearing on April 4, Mart submitted a revised noncompete agreement, but the court again found that it was not fully effective. The court confirmed the appraisers’ revised report. Then, on April 17, the court decreed that in order to avoid dissolution, Bay World or Severson could purchase Mart’s shares for $740,000 plus interest. Mart then filed an appeal. On appeal, Mart argued that the valuation of Bay World was erroneous as a matter of law.