Vortex Corp. v. Denkewicz – 9/16/2014
Arizona Court of Appeals Division One Holds That Parties Do Not Create a Partnership Merely by Intending or Attempting to Change a Business Structure.
This case concerns business deals gone bad. A corporation and its two majority shareholders brought various claims against the company’s founder and the company’s former CEO. The founder, together with the former CEO, in turn counterclaimed. After a trial, the jury made awards to both sides, but the awards netted out to less than $1000 in favor of the corporation and the majority shareholders. The founder and former CEO appealed several rulings.
On appeal, the Court of Appeals made several holdings. Two holdings involved issues of first impression.
First, the Court of Appeals rejected the claims of the founder and former CEO that they should have been entitled to an advance of litigation expenses. A.R.S. § 10-851 and several other statutes permit a corporation to pay for litigation expenses in advance of a final disposition. Under the plain text of those statutes, however, the corporation may pay the litigation expenses, but is not required to. Because of the permissive words used in the statutes, the Court of Appeals affirmed the trial court’s rejection of the request for an advance of litigation expenses.
Second, the Court of Appeals rejected the claims of the founder and former CEO that the parties had formed a partnership. A.R.S. § 29-1012(A) provides that “the association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership.” That provision, however, does not apply if the association is organized under another statutory form, such as a corporation or an LLC. Here, the parties had already been doing business together in the forms of both a corporation and an LLC. The founder and former CEO pointed to an alleged agreement that would have formed another LLC. On these facts, the trial court dismissed the claims of partnership formation. The Court of Appeals affirmed, holding that the partnership formation rule does not apply when the parties intended or attempted to change their business structure but did not express intent to create a partnership.
In addition to these two issues of fist impression, the Court of Appeals made several other holdings. Nearly half of the opinion concerns the valuation of the corporation at issue. The founder and former CEO were each entitled to a portion of the valuation of the corporation. The trial court adopted the valuation advanced by the corporation and its majority shareholders (about $60,000), but the founder and former CEO advocated for a valuation of more than $20 million. Both sides presented extensive expert testimony. Both experts relied in part on discounted cash flow analyses. The parties disputed the inputs and assumptions of those analyses. In particular, they disputed whether and how to account for an asset transfer from the corporation to another entity. The trial court determined that the transaction was not an arms-length transaction, and thus the asset transfer need not affect the valuation. The Court of Appeals held that the evidence supported this finding, and therefore the valuation adopted by the trial court was not clearly erroneous.
The Court of Appeals also held that the former CEO’s wife raised her challenge to personal jurisdiction too late. Finally, even though the jury made awards to both sides, the Court of Appeals affirmed an award of attorneys’ fees on a “prevailing party” standard because one side was awarded a few hundred dollars more than the other.
Judge Gemmill authored the opinion; Judges Thumma and Howe joined.