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UNITED STATES DISTRICT COURT DISTRICT OF MAINE RICHARD E. KAPLAN, PLAINTIFF v. FIRST HARTFORD CORPORATION AND NEIL ELLIS, DEFENDANTS ) ) ) ) ) ) ) ) ) ) )

CIVIL NO. 05-144-B-H

DECISION AND ORDER ON THE REPORT OF THE SPECIAL MASTER In this corporate oppression case, I appointed Attorney George J. Marcus as Special Master to determine whether the corporation is financially able to purchase the oppressed shareholder's shares and under what circumstances; and, if the corporation cannot do so, whether the controlling shareholder can. The Special Master filed his Report on September 14, 2009. The primary

issues now are whether the Special Master followed my Order in what he did and did not address in his Report; whether the buyout schedule he devised is appropriate; and the nature and computation of pre- and postjudgment interest. The plaintiff filed objections to the Special Master's Report; the

defendants filed a motion to modify it; other shareholders as amici curiae filed a legal memorandum in support of the defendants' position.

After notice and a hearing on November 16, 2009, and upon de novo review of the issues that the parties raise,1 I ADOPT the Report of the Special Master with one exception noted below. SUSTAINED
IN PART

The plaintiff's Objections are I

as to postjudgment interest but otherwise OVERRULED.

DENY the defendants' Motion to Modify the Report of the Special Master to strike references to prejudgment interest and GRANT the plaintiff's request for prejudgment interest on the terms described below. BACKGROUND This case began in March 2005. Richard Kaplan, a nineteen-percent

(19%) shareholder of First Hartford Corporation ("First Hartford"), sued the company and its controlling shareholder, Neil Ellis, alleging, among other things, shareholder oppression.2 The litigation proceeded in three stages.

First, after a bench trial in November 2006, I ruled that First Hartford and Ellis had treated minority shareholders oppressively.3 Second, in November 2007, after the parties extensively briefed the remedy issue, I determined that First Hartford should buy Kaplan's shares.4 Third, after further briefing and a

bench trial at which the parties presented opinion evidence on First Hartford's fair value from three experts, I found that First Hartford was worth $15 million
See Fed. R. Civ. P. 53(f)(3-4). The defendant Ellis's lawyer argued at the hearing on November 16, 2009 that the Master's interpretation of my Order concerning what he should consider was a procedural decision subject to review for abuse of discretion under Rule 53(f)(5), but I conclude that it is substantive and subject to de novo review. 2 The details of the case are contained in my Findings of Fact and Conclusions of Law ("Liability Decision") (Docket Item 81) and in the Report of the Special Master (Docket Item 213). I will not repeat them here. 3 Liability Decision at 44. 4 Findings of Fact and Conclusions of Law Part 2: Remedy at 4 ("Remedy Decision") (Docket Item 116).
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(or $4.87 per share) as of September 15, 2005, the date Kaplan filed his complaint.5 With liability, remedy, and valuation decided, the parties tried to reach an agreement on the mechanics of the buyout, but could not settle on a solution. After consulting with the parties and other shareholders, whom I had allowed to intervene as amici curiae, I appointed Attorney Marcus as Special Master and ordered him to determine:
1. Whether First Hartford Corporation has the capacity to buy outright and promptly the Richard Kaplan shares as I have defined them at the value I have assigned, without adversely impacting the corporation's ability to do business and to continue as a viable company in its business pursuits for the benefit of other shareholders. 2. If outright and prompt purchase is not possible, the most reasonably speedy schedule for doing so and commercially reasonable terms providing fair protection for Richard Kaplan to secure any delayed or extended payment. 3. If First Hartford Corporation cannot purchase the shares, whether Neil Ellis can purchase the shares and under what circumstances, with commercially reasonable assurance of payment to Richard Kaplan. 4. [T]he impact of the assessment of prejudgment interest on the answer to question #1 and, if relevant, #2, and if relevant, #3.6

As detailed in the Special Master's Report, he met with the parties on several occasions in July, August, and September 2009.7 Both parties submitted

documents and information to the Special Master, responded to questions
5 Findings of Fact and Conclusions of Law Part 2: Valuation at 25 and n.43 ("Value Decision") (Docket Item 192). Given this valuation and under the assumption that Kaplan owns 591,254 shares of First Hartford stock, Kaplan is entitled to $2,879,406.98. Report at 3. 6 Order Appointing Special Master at 1-2 (Docket Item 209). 7 Report at 4-9.

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posed by him, and submitted comments and objections to the Special Master's draft report.8 2009. The Special Master found that while First Hartford could not buy Kaplan's shares outright and promptly (Question #1), it could pay $500,000 immediately; execute a note for and pay the remainder of the purchase price of Kaplan's shares at $4.87/share over five years, which the Special Master determined was a reasonably speedy schedule (Question #2); offer Kaplan commercially reasonable security (Question #2); and pay prejudgment interest without affecting First Hartford's ability to perform the buyout and continue in business (Question #4).9 Since the Special Master found that First Hartford could buy Kaplan's shares on a reasonably speedy schedule with commercially reasonable security, he did not evaluate Ellis's ability to purchase the shares (Question #3).10 DISCUSSION
(A) The Special Master's Decision Not to Assess Ellis's Finances

The Special Master issued his final report on September 14,

Kaplan contends that after finding that First Hartford could not buy his shares outright and promptly, the Special Master should have determined not only the most reasonably speedy schedule on which First Hartford could perform with commercially reasonable security to Kaplan, but also how Ellis's ability to purchase the shares could assist First Hartford in performing the
Id. Id. at 18-21. 10 Id. at 20.
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buyout.11 Kaplan's objection poses two questions: whether the Special Master properly understood my Order; and, if he did, whether his conclusion that First Hartford could perform satisfies the standards that I established in my Order. I review such mixed questions of fact and law de novo. The Special Master properly understood his duties. Once the Special

Master found that First Hartford could purchase the Kaplan shares under the terms described in question two of my Order, he did not need to answer question three. That would have been necessary only if First Hartford could not purchase the shares on a commercially reasonable basis.12 The plaintiff's objection regarding the scope of the Special Master's duties is OVERRULED.
(B) The Special Master's Finding of a Reasonably Speedy Buyout

Kaplan objects that the Special Master's proposed five-year buyout schedule is not "reasonably speedy" given the circumstances of this case. Specifically, he contends that the Special Master settled for the "best FHC can do" rather than focus on my requirement that a buyout be accomplished with reasonable speed.13 Kaplan notes that there is no generally accepted definition of "reasonably speedy" in connection with applying the Maine Business Corporation Act14 and argues that the Special Master was wrong to take guidance from standards established by Chapter 11 of the Bankruptcy Code

Pl. Richard E. Kaplan's Objections to the Report of the Special Master at 2 (Docket Item 216). Question #4 of my Order states that the Special Master should determine how a prejudgment interest award would affect the answer to "question #1 and, if relevant, #2, and if relevant, #3." Order at 2. Question#4 therefore clearly contemplates that the Master could stop his inquiry at Question #2, without proceeding to Question #3. 13 Pl.'s Objections at 3-4. 14 Oral Argument Tr., Nov. 16, 2009.
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and voluntary private-company buyouts.15 Kaplan maintains that the Special Master should have determined what is reasonably speedy from Kaplan's point of view: "an oppressed shareholder who has had to resort to extraordinarily costly litigation over a period of [four] years."16 Kaplan submits that from this point of view, the five-year buyout is unreasonably long because it is longer in duration than the underlying litigation and threatens to "leave Kaplan's interests subjugated to FHC and Ellis."17 While recognizing that Kaplan had prevailed at trial and was entitled to a remedy, I charged the Special Master with creating a remedy that recognized other interests as well. Specifically, my Order precluded any schedule so

speedy as to affect adversely "the corporation's ability to . . . continue as a viable company in its business pursuits for the benefit of other shareholders."18 It was therefore wholly appropriate for the Special Master to consult both the Bankruptcy Code and commercial practice for guidance on standards of commercial reasonableness. He noted, for example, that it is customary for

shareholders in close corporations to be bought out over time19 and that it is a reasonable commercial expectation that a shareholder buyout will typically be funded over "five to ten years with no security or junior security and with modest interest if any."20 He also considered how current economic conditions affect First Hartford's core business and First Hartford's financial condition as
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Pl.'s Objections at 5-6. Id. at 7. Id. at 2. Order at 1. Report at 43 n.20. Id. at 23. 6

he assessed the schedule by which First Hartford could buy Kaplan's shares at the 2005 price, a price far above that supported by today's market. The Special Master noted that First Hartford's "operating performance . . . has been marginal and unsteady,"21 that it has a "very thin margin of available working capital"22 and that it must rely on "opportunistic" liquidations and refinancings to meet its "existing obligations."23 I agree with his conclusion that, given its business model, First Hartford needs flexibility in meeting its existing business obligations and its obligations to Kaplan. Given current economic conditions, the Special Master found that five years would provide reasonable confidence in First Hartford's ability to perform.24 He quite reasonably did not speed up the buyout by assigning net sales proceeds to Kaplan because of the consequences for First Hartford's operations and because the five-year schedule is already on the speedier end of the spectrum of shareholder buyouts. I agree with the Special Master that the five-year buyout is

reasonably speedy for a shareholder buyout, and I conclude that the Special Master has crafted a reasonably speedy, commercially reasonable buyout schedule. The plaintiff's objection to the five-year term is OVERRULED.
Id. at 15. Id. at 17. 23 Id. at 18. 24 Id. at 43 n.20. Kaplan has argued that the Special Master has failed to consider how the proceeds from a recent sale of property in Bangor could speed up the buyout. Pl.'s Mem. in Opp'n to Defs.' Mot. to Modify Report of the Special Master at 3-5 (Docket Item 222). Kaplan no longer contends that First Hartford failed to disclose the sale. Oral Argument Tr., Nov. 16, 2009. But he suggests that First Hartford's initial payment of $500,000 could be increased with the $900,000 net on the Bangor sale. Pl.'s Mem. in Opp'n at 5. The Special Master not only had access to First Hartford's disclosure of the sale but also assumed that the company was already using the proceeds of the sale to fund the initial payment. See Report at 36 n.10. There is thus no need to ask the Special Master to consider how the Bangor sale could affect the speed of the buyout.
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(C)

The Special Master's Finding of Commercially Reasonable Security

Kaplan contends that he is entitled to "the kind of protections that any lender would reasonably require"25 and that the Special Master has failed to provide them.26 Specifically, since First Hartford cannot provide security liens in the equity of its operating properties because of restrictions on its mortgages, Kaplan wants Ellis to pledge his shares as security for the promissory note to Kaplan.27 First Hartford and Ellis counter that a pledge of the Ellis shares would hamstring First Hartford's ability to get necessary operating loans from other lenders,28 because other lenders are likely to require the Ellis shares as security for loans during the buyout term. I agree with the Special Master's determination that First Hartford's business model requires flexibility and that it can perform the buyout only if it has the latitude it needs to continue its operations. Thus, it is commercially reasonable not to require Ellis to pledge his shares as security for Kaplan's note. It is also reasonable to require Kaplan to release his security interest in any asset upon tender of the fair market value of that asset by First Hartford, so that the company can continue with its business of disposing of its real estate from time to time.29 I also find that the Special Master has provided Kaplan with commercially reasonable security. Kaplan will receive first priority interests in: (a) First Hartford's 50% interest in CP Associates, which is worth more than

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Pl.'s Objections at 6. Id. at 10. Oral Argument Tr., Nov. 16, 2009. Id. Report at 42. 8

$3.2 million; (b) First Hartford's 50% interest in Trolley Barn Associates, which is worth at least $225,000 just in the value of unencumbered land; (c) First Hartford's rights to service and fee income from its agreements with CVS, which was $1.47 million in 2008 and $3.02 million in 2009, yielding a net income of $407,000 and $964,000 respectively; (d) an estimated $600,000 per year from three cash-generating properties; and (e) Kaplan's own beneficially owned stock.30 Kaplan therefore receives security in assets far exceeding the value of his promissory note, sufficient to give him reasonable confidence that First Hartford will be able to pay the estimated $470,000 annual payments on his note. I note that in addition Ellis has personally guaranteed the payments on the note. Without disclosure of the Ellis financial statements, I cannot

place a value on the guarantee,31 but it does create some incentive to paying the note. Second, the proposed escrow account provides confidence-building transparency. Kaplan will be able to see that First Hartford has made

contributions to the account to service his note, and First Hartford cannot withdraw money from the account once it is deposited. I conclude that Kaplan will receive commercially reasonable security, and his objections on this issue are OVERRULED.32

Defs.' Resp. to Pl.'s Objection to the Report of the Special Master at 8 (Docket Item 221); see also Report at 38-43. 31 The Special Master did not consider Ellis's guarantee to be part of the commercially reasonable security. Report at 35. The plaintiff's objection to the guarantee is therefore inapposite. 32 This includes Kaplan's request to be able to participate in the sale or merger of First Hartford on equal terms with other shareholders. Pl.'s Objections at 11-12. Whatever happens to the value of First Hartford's stock, Kaplan is guaranteed a value of $4.87 per share.
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(D)

Prejudgment Interest

Prejudgment interest is controlled by Maine law.33

The parties agree

that, under Maine law, I have discretion to award prejudgment interest34 and that Maine law has a presumption in favor of such awards.35 The defendants do not challenge the Special Master's finding that First Hartford can pay prejudgment interest,36 but they do contend that an award of prejudgment interest would be inequitable in this case and that to the extent that there is a presumption in favor of the award, either Kaplan has lost the benefit of the

14 M.S.R.A.

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