Petitioner Henry A. Digeser commenced this special proceeding on April 30, 2013, seeking the judicial dissolution of the two respondent business corporations: Gould Erectors & Rigging, Inc. ("Gould") and Flach Crane & Rigging Co., Inc. ("Flach Crane"). Alleging that petitioner holds minority interests comprising at least 20% of the shares of both corporations, with the remaining majority interests owned by respondent John C. Flach ("respondent"), the petition seeks dissolution of the corporations under Business Corporation Law § 1104-a, based principally upon allegations of oppressive conduct.

Following the completion of extensive fact discovery, the Court ordered a trial on the dissolution allegations of the petition. During the course of the six-day trial, the Court heard the testimony of 17 witnesses and received almost 100 documents into evidence. In a Decision, Order & Judgment dated November 5, 2015 ("Prior Decision"), the Court determined that petitioner was the owner of 24 of 98 issued shares of Gould and the owner of 25 of the 100 issued shares of Flach Crane. The Court further determined that petitioner had established grounds for the dissolution of both Gould and Flach Crane under Business Corporation Law § 1104-a (a) (1).

With respect to a remedy, the parties agreed that it would be appropriate to require respondent to purchase petitioner's shares in Gould and Flach Crane at their fair value as of the date of commencement of this proceeding, April 30, 2013, in lieu of dissolution. Following the completion of fact and expert discovery pertaining to the valuation of the corporations, a three-day trial was held before the Court starting on June 7, 2016.

At trial, the parties stipulated that the value of petitioner's interest in Flach Crane is $842,000. The Court heard the testimony of six witnesses and received 26 exhibits into evidence, including many expert reports and evaluations. Post-trial briefing was completed on or about October 14, 2016, but the Court reserved decision on this application pending resolution of respondent's appeal from the Prior Decision.^[FN1] Now, based upon the credible testimony and evidence adduced, the Court hereby makes the following findings of fact and conclusions of law.

The lengthy background to this proceeding is detailed in the Prior Decision and will not be repeated here. In brief, Gould is a domestic C corporation formed in or about 1970 to perform commercial construction work. Flach Crane was formed in late 1988 by Gould's owners as a separate corporation to insulate Gould's assets from the potential liabilities associated with crane work.

From about 1990 until late 2012, Gould and Flach Crane were managed jointly by petitioner and respondent. Petitioner focused primarily on the day-to-day operations of Gould, including bidding and project management. Respondent, a licensed crane operator, exercised a more general oversight role with respect to Gould, with a particular emphasis on projects involving crane work. Respondent also was actively involved with Flach Crane with respect to the bidding of jobs, the setup and operation of cranes, and the supervision of crane work.

Through the efforts of both respondent and petitioner, Gould and Flach Crane became [*2]very successful and profitable, which allowed the parties to draw substantial compensation, totaling more than $2 million per year at times. In most years, respondent's compensation came in the form of "bonuses" and other compensation from Flach Crane, of which he was an employee. Petitioner's compensation came in similar form, but exclusively from Gould. Neither corporation declared dividends.

Following the tragic death of respondent's son in September 2012, the parties' relationship deteriorated. Ultimately, petitioner commenced this proceeding for judicial dissolution on April 30, 2013.

In a report dated February 29, 2016, petitioner's expert, Duff W. Driscoll, C.P.A., valued petitioner's interest in Gould at $3,812,000. In arriving at this figure, Driscoll relied on Gould's reported earnings and profits for fiscal year ("FY") 2012, which ended on September 30, 2012. He did not give any weight to Gould's fiscal performance in prior years. Driscoll then normalized Gould's earnings to reflect the economic realities of the business and Gould's capacity for future earnings. This normalization included adjustments for depreciation, auto-racing expenses, excess owner compensation, charitable contributions, and non arm's length payments made to Flach Crane.

After arriving at normalized pre-tax earnings of $3,451,921, Driscoll reduced this sum by $862,980, reflecting an assumed corporate tax rate of 25%. In applying this reduction Driscoll assumed that a hypothetical purchaser of Gould would elect to convert the corporation into an S corporation in order to avoid double taxation. This resulted in a normalized, after-tax income of $2,588,941 for FY 2012.

Driscoll then applied a valuation methodology that principally relied upon capitalization of earnings. Using a 20.1% capitalization rate for current year's earnings, Driscoll determined that Gould's operating assets had a total un-discounted value of $12,880,000. To this, he added the sum of $4,407,000, representing Gould's non-operating assets, including excess working capital, unimproved real estate and auto-racing equipment. The total of $17,287,000 then was discounted by 10% lack for marketability, leaving the full value of the business at $15,558,000, of which petitioner's interest was valued at $3,812,000.

In a supplemental report dated June 2, 2016, Driscoll identified an error in the normalization adjustment for payments made by Gould to Flach Crane. The original report included an adjustment of $338,500, but Driscoll explained that the correct normalization adjustment should be $158,500. Thus, given that Gould paid Flach Crane the sum of $370,000 in FY 2012, Driscoll's normalization effectively stated that Gould had overpaid Flach Crane by $181,500. With the normalization error corrected, the value of petitioner's interest in Gould declined to $3,664,000.

Respondent's appraiser, Scott DeMarco of SaxBST LLP, submitted an expert report valuing petitioner's shares at $2,330,000. DeMarco's application of the income approach differed from Driscoll's in three key respects: (1) DeMarco relied upon a weighted average of four fiscal years, rather than simply relying upon FY 2012; (2) in normalizing Gould's income, DeMarco [*3]found that Gould had underpaid Flach Crane by $856,404 for its services in FY 2012;^[FN2] and (3) DeMarco applied a combined taxation rate of 38.7%, reflective of Gould's current status as a C corporation.^[FN3] Finally, while basing his valuation principally on the income approach, DeMarco did apply the market approach to valuation, to which he assigned a 20% weighting.

In a supplemental report dated June 3, 2016, Driscoll responded to DeMarco's report by presenting 12 alternative scenarios. In seven of these scenarios, Driscoll modified DeMarco's analysis by: eliminating some or all of the normalization for payments from Gould to Flach Crane; using different weightings in averaging Gould's earnings; applying an assumed tax rate of 25%; and/or using his own normalization adjustment for Gould/Flach Crane transactions. In the other five scenarios, Driscoll modified his own analysis by using certain of DeMarco's assumptions. Driscoll's alternative scenarios resulted in valuations between $2,550,000 and $3,638,000 for petitioner's interest in Gould.

DeMarco then responded with a supplemental report dated June 6, 2016, which applied certain of his assumptions to Driscoll's valuation model. These alternative scenarios valued petitioner's interest in Gould at between $2,203,000 and $3,137,000.

In valuing petitioner's shares, Driscoll relied solely upon Gould's income for FY 2012. According to Driscoll, more recent years of operation tend to be better indicators of future performance. Further, Driscoll cited the fact that Gould's normalized income had increased steadily over preceding fiscal years, and revenues and expenses from the first seven months of FY 2013 showed that Gould's increases in revenues and profits in the two prior fiscal years were not aberrations. Thus, Driscoll declined to "blindly average" prior year results. He further opined that a willing seller would rely on Gould's FY 2012 financials, particularly in light of the corporation's strong performance in the first seven months of FY 2013. On cross-examination, however, Driscoll recognized the additional risk associated with a valuation based upon a single year.

In contrast, DeMarco relied upon a weighted average using income from four fiscal years. Specifically, DeMarco assigned FY 2012 a weight of three, FY 2011 a weight of two, FY 2010 a weight of one and FY 2008 a weight of one. DeMarco opined that this weighting was proper based upon Gould's substantial increase in gross profits in FY 2012. In particular, DeMarco emphasized that only three jobs accounted for 38% of Gould's gross profits in FY 2012. These major projects, which occur at most every three to five years and are competitively bid, earned Gould $1.675 million in revenues, of which $1.344 million was profit. DeMarco dismissed [*4]Driscoll's reliance on the interim financials for FY 2013, concluding that Gould's performance during that time was not necessarily reflective of the full fiscal year and, in any event, was meaningless in the absence of normalization. Thus, DeMarco took the position that it would be inappropriate to rely exclusively on FY 2012.

The Court agrees with DeMarco that some weighting of Gould's income is appropriate. A willing purchaser is more likely to consider a business's fiscal performance over a period longer than a single year; Gould was unusually profitable in FY 2012; and the interim numbers for FY 2013 relied upon by Driscoll were not shown to be reliable. However, given Gould's substantial growth in income starting in FY 2011, the Court does not believe that any weight should be given to the corporation's performance in FY 2010 or FY 2008. Moreover, while DeMarco attempts to characterize Gould's income in FY 2012 as aberrational, the corporation had shown three years of consistent growth and, in fact, had higher sales in FY 2011 than in FY 2012. Under the circumstances, the Court finds that a willing purchaser would rely upon the corporation's performance in FY 2011 and FY 2012, and both years should be weighted equally in valuing the corporation.

The second dispute between the parties concerns the extent to which Gould's income should be normalized to reflect non arm's length transactions with Flach Crane. The parties agree that an adjustment is required, but disagree as to the magnitude of the adjustment.

With respect to FY 2012, in which Gould paid Flach Crane the sum of $370,000 for services rendered, Driscoll opined that Gould had overpaid Flach Crane by $181,500. At the trial, Driscoll testified that this opinion was based upon information obtained from his client. In his testimony, petitioner recognized the non arm's length nature of transactions between the corporations, but asserted that the parties generally were aware of the volume of work that Flach Crane did for Gould and tried to be reasonable in allocating funds between the corporations. He further detailed the expenses that Gould paid on behalf of Flach Crane, including real estate, utilities, fuel, certain crane parts and ancillary equipment, transportation, and overhead. Petitioner also emphasized that Gould initially had infused Flach Crane with the capital needed to purchase some of its cranes and other equipment.

In contrast, DeMarco's analysis relied upon a detailed spreadsheet prepared by respondent for purposes of this litigation that looked to: (1) the actual labor hours recorded by Flach Crane employees on Gould jobs, including crane operation and mechanical work; (2) the market-based rental costs of the crane and lift equipment supplied by Flach Crane; and (3) the actual charges to Gould from Flach Crane. In compiling the spreadsheet, respondent relied upon business records from the corporations. Respondent testified at trial that petitioner was overstating Gould's contribution to Flach Crane, asserting that Flach Crane had purchased much of its own parts and equipment. Nonetheless, respondent acknowledged that Gould did make substantial payments that benefitted Flach Crane.

Petitioner, in turn, took issue with many of the assumptions reflected in respondent's spreadsheet. With respect to labor, he testified that Flach Crane would often send non-essential workers to Gould jobs when the crane company had downtime. Petitioner further asserted that the charge for vehicle maintenance claimed by respondent— totaling more than $134,000 in FY 2012 — was unreasonable. According to petitioner, the full-time mechanic that serviced vehicles [*5]for both corporations was paid only about $60,000 per year, and much of his work was performed for the benefit of Flach Crane. As to crane rental, petitioner took issue with the daily rental rate applied by respondent. According to petitioner, Gould would not pay a daily rate for long-term rentals, and it would purchase cranes and other lift devices where the cost of ownership is less than long-term rental.

In the Court's view, respondent's analysis represents a good-faith effort to examine the business records of the two corporations and estimate what Gould would have paid for the crane and mechanical services if Gould had done business with Flach Crane or another crane company on an arm's-length basis. In contrast, there simply is no record basis to support the adjustment applied by petitioner's expert. Driscoll testified that his adjustment is based upon information obtained from petitioner, but petitioner could not comment on the specific adjustment applied by Driscoll, nor could he testify to specific, evidentiary facts supporting the proposed adjustment. Thus, there is simply no record support for Driscoll's opinion.

Nonetheless, the Court finds that certain of the adjustments applied by respondent and his expert are excessive and should be reduced. A general construction company such as Gould would not hire a part-time mechanic on an hourly basis from a crane company for double the cost of hiring its own full-time mechanic. Nor would Gould pay daily rates for rent cranes intended for long-term use; it would, at a minimum, receive discounts for weekly or monthly rentals. Moreover, as a large crane customer, Gould would be in a position to negotiate more favorable pricing. Further, Gould would purchase its own forklifts and other equipment used in the regular course of its business, rather than rely on rentals. And with respect to labor, the Court agrees with petitioner that there simply was no financial incentive to ensure that only essential Flach Crane personnel showed up to Gould jobs. Finally, Gould did make non-monetary contributions to Flach Crane that do not appear to be reflected in respondent's analysis.

The Court therefore accepts respondent's analytical approach, but finds that the arm's-length charges computed by respondent should be reduced in the following respects: (1) the labor cost associated with the provision of mechanic services should be reduced by 50%; (2) the labor charges for crane operations should be reduced by 25%; (3) the charges for crane rental should be reduced by 25%; and (4) the cost of lift rentals should be reduced by 50%. As so reduced, the total imputed payments from Gould to Flach Crane shall be $859,103 for FY 2012 and $688,111 for FY 2011. This represents an increase of $489,103 over the $370,000 that Gould actually paid Flach Crane in FY 2012, and a decrease of $687,749 from the $1,375,860 actually paid in FY 2011.

The third major disagreement between the parties concerns the tax rate to be applied to Gould's net income, which is needed under the income approach in order to compute the net cash flow to equity. Respondent's valuation applied a combined 38.7% tax rate to Gould's income. Both DeMarco and John Gross, a tax partner at SaxBST, testified that this was the combined standard tax rate in effect in 2012 for C corporations, such as Gould.

In contrast, Driscoll applied a 25% combined tax rate. According to Driscoll, the owners of Gould effectively have operated the corporation as a pass-through entity and avoided the double taxation attendant to C corporations by distributing de facto dividends in the form of excessive compensation and payment of the owners' personal expenses (e.g. auto racing). [*6]Driscoll further testified that it would be a simple matter for a purchaser of Gould to convert to S corporation status. On cross-examination, Driscoll did acknowledge that this conversion would not be available if Gould were purchased by a C corporation.

Petitioner also relies upon the testimony of Jennifer Boll, an expert in taxation. According to Boll, Gould had an effective tax rate of about 28% from 2009 through 2012. She further testified that corporations with more than $10 million in assets paid an effective tax rate of 21% as of 2012.

The Court finds that the 38.7% combined taxation rate proposed by respondent should be applied in valuing petitioner's shares in Gould. While it is possible that a purchaser of Gould would be in a position to elect S corporation status, it is equally possible that a larger C corporation would be the purchaser, thus rendering conversion unavailable. Further, the conversion of Gould to an S corporation prior to a sale would limit the universe of potential buyers.

Likewise, while it is possible that a hypothetical buyer of Gould would be able to continue to operate the corporation as a de facto S corporation, there are no assurances that this approach would be feasible. Moreover, such a buyer likely would have to grapple with the legal risks associated with continuing the tax-minimization strategies employed by Gould's current owners. And, of course, Gould was a C corporation, not an S corporation, on April 30, 2013, the pertinent valuation date.

Moreover, respondent has failed to supply a sufficient basis for his assumed 25% tax rate. An S corporation is not a taxable entity, and the 25% rate relied upon by Driscoll is well below the marginal income tax rate that would be applied to dividends and excess compensation from such an entity. The Court further agrees with respondent's experts that any reliance on average tax rates is misplaced.

For all these reasons, the Court finds that respondent has failed to supply a basis for deviating from the 38.7% combined taxation rate generally applicable to C corporations such as Gould.

Both sides relied principally upon the income approach to valuation.^[FN4] However, respondent also applied the market approach, which looks to historical transactions of comparable publicly traded or privately held businesses. Based upon a review of four, private company market databases, DeMarco opined that Gould had a total value of $5.8 million. His valuation then assigned the income approach an 80% weighting and the market approach a 20% weighting. Driscoll did consider application of the market approach, but testified that he was unable to identify sufficiently comparable businesses.

As DeMarco acknowledged in his testimony, the market approach had "only limited applicability to Gould", and he felt the income approach was the most reasonable to use (T 353). For that reason, DeMarco employed the market approach "as more of a reasonableness analysis" (T 354). Further, there is no record basis for concluding that the contractors selected by DeMarco actually are comparable to Gould. Indeed, Driscoll rejected application of the market [*7]approach due to the absence of comparables. For all these reasons, the Court declines to accord any weight to respondent's application of the market approach.

"[I]n fixing fair value, courts should determine the minority shareholder's proportionate interest in the going concern value of the corporation as a whole, that is, what a willing purchaser, in an arm's length transaction, would offer for the corporation as an operating business" (Matter of Friedman v Beway Realty Corp., 87 NY2d 161, 168 [1995]; see Matter of Seagroatt Floral Co. [Riccardi], 78 NY2d 439, 445 [1991] ["interest in a going concern"]). Fair market value is a "question of fact [and, thus,] depend[s] upon the circumstances of each case; there is no single formula for mechanical application" (Seagroatt, 78 NY2d at 445).

In valuing petitioner's shares in Gould, the Court begins with the analysis supplied by DeMarco, which the Court finds persuasive, credible and well-supported, except to the extent specifically indicated herein. Thus, the Court begins with Gould's normalized income for fiscal years 2011 and 2012, and then modifies respondent's proposed normalization for non arm's length transactions between Gould and Flach Crane in accordance with the foregoing. The Court then computes an average of the revised normalized incomes for the two fiscal years ($2,691,938). After reducing this figure by the combined income tax rate (38.7%) and non-owner's market-based replacement compensation, and further adjusting for expected non-cash charges, expected capital expenditures and working capital reserves, the Court determines the net cash flow to equity, which is $1,419,287.

Application of the discount rate proposed by DeMarco, which the Court finds reasonable and substantially similar to the rate applied by Driscoll, then results in a capitalized value for Gould of $7,797,826. With the addition of the non-operating assets owned by Gould, the total fair value of the corporation as of April 30, 2013 is found to be $11,415,976, and the value of petitioner's shares on such date is found to be $2,795,750.

Petitioner seeks an award of interest from April 30, 2013. "In proceedings pursuant to Business Corporation Law § 1104-a and § 1118, the court is not precluded from making such orders as justice requires. Although the aforementioned statutes . . . do not specifically provide for the payment of interest on the fair value of the shares, justice requires that in [such] cases . . . , interest be paid. The appropriate rate is to be determined by the court, and the interest should run from the date prior to the filing of the petition until the date of payment, unless a determination is made that petitioner has acted in bad faith" (Blake v Blake Agency, Inc., 107 AD2d 139, 150 [2d Dept 1985]). The Court is not required to impose the statutory interest rate of nine percent but, instead, may impose interest at an "equitable rate" (Matter of Murphy v United States Dredging Corp., 74 AD3d 815, 820 [2d Dept 2010]).

In arguing against an award of interest, respondent first contends that petitioner is guilty of bad faith, citing the same "multiple acts of wrongful behavior" that allegedly justified his exclusion of petitioner from Gould. For the reasons stated in the Prior Decision, the Court finds that petitioner did not act in bad faith and that a tacit agreement existed over the years between the two shareholders to use corporate funds to personally benefit the Flach and Digeser families [*8]in various ways.^[FN5]

Respondent further contends that interest should not be awarded because petitioner has been competing against Gould since the filing of the dissolution petition. While this argument has some superficial appeal, the fact remains that it was respondent who terminated petitioner's employment with Gould and deprived him of any economic benefit associated with his shares in Gould and Flach Crane. Given petitioner's decades of experience in the commercial construction industry and his need for remunerative employment, the Court does not see bad faith in petitioner's decision to work for 3D Rigging, a corporation owned by petitioner's wife. "Interest is not awarded as a penalty or to punish a party, it is a cost imposed for having the use of another party's money over a period of time" (Giaimo v Vitale, 101 AD3d 523, 526 [1st Dept 2012]).

Finally, in the absence of any evidence at trial regarding an equitable rate of interest, the Court shall apply the statutory rate of 9% (see CPLR article 50; Ferolito v Arizona Beverages USA, LLC, 2014 NY Slip Op 32830 [U] [Sup Ct, Nassau County 2014]).

Based on the foregoing, it is

ADJUDGED that the fair value of petitioner's shares in Gould Erectors as of April 30, 2013 is $2,795,750; and it is further

ORDERED that, absent an agreement of the parties to the contrary, respondent shall have sixty (60) days from entry of judgment in which to purchase petitioner's shares in Gould and Flach Crane;^[FN6] and finally it is

This constitutes the Decision, Order and Judgment of the Court. The original Decision, Order and Judgment is being transmitted to petitioner's counsel for filing and service; all other papers are being transmitted to the Albany County Clerk. The parties shall retrieve their original trial exhibits from Chambers within twenty (20) days; otherwise, they will be discarded. The signing of this Decision, Order and Judgment shall not constitute entry or filing under CPLR Rule 2220. Counsel is not relieved from the applicable provisions of that Rule respecting filing, entry and Notice of Entry.