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Carver v. Quality Inspection & Testing, Inc. (10/31/97), 946 P 2d 450
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
WILLIAM CARVER, )
) Supreme Court No. S-7346
) Superior Court No.
v. ) 4FA-94-519 CI
QUALITY INSPECTION AND )
TESTING, INC. (I), CHRISTIAN ) O P I N I O N
GRASS and KAREN JOHNSON, )
QUALITY INSPECTION AND ) [No. 4898 - October 31, 1997]
TESTING, INC. (II), )
Appeal from the Superior Court of the State of
Alaska, Fourth Judicial District, Fairbanks,
Ralph R. Beistline, Judge.
Appearances: Thomas R. Wickwire, Fairbanks,
for Appellant. No appearance for Appellees.
Before: Compton, Chief Justice, Matthews,
Eastaugh, Fabe, and Bryner, Justices.
William Carver appeals from the superior court's judgment
valuing his one-third ownership interest in a closely-held
corporation, Quality Inspection and Testing, Inc. (QIT-I),
following its dissolution. Carver claims that the trial court
erroneously (1) accepted the conclusions of the opposing valuation
expert; (2) made fact findings underlying its valuation of QIT-I;
(3) found the corporation's value to be the amount of QIT-I's
initial start-up loan; (4) found that failing to give creditors
notice of QIT-I's dissolution was harmless; and (5) failed to rule
on Carver's claim for conversion. We affirm.
II. FACTS AND PROCEEDINGS
In 1991 William Carver, Christian Grass, and Karen
Johnson formed QIT-I, incorporated in Alaska. They were QIT-I's
directors and shareholders, and each owned one-third of the
corporate stock. The start-up capital for QIT-I was a $20,000
Carver, Grass, and Johnson initially worked full-time for
the corporation. In 1992 Carver began working part-time for
another firm, Ocean Technology, because QIT-I's business had slowed
and the cash flow was not sufficient to pay the salaries of all
In March 1993 Carver notified Johnson and Grass that he
had accepted a full-time position with Ocean Technology; thereafter
he performed no work for QIT-I. Carver's full-time employment
outside QIT-I led to a continuing dispute between the parties, and
Carver informed Johnson and Grass that he wanted either to sell his
one-third share to them or to dissolve QIT-I. Grass and Johnson
felt that QIT-I had no value and were unwilling to pay Carver for
his share. Carver then requested dissolution of QIT-I. In August
1993 the shareholders dissolved QIT-I, and were issued a
Certificate of Dissolution.
In July 1993, before QIT-I's dissolution, Johnson and
Grass received a $125,000 loan from Key Bank. Johnson and Grass
asked Carver to provide them with financial information for the
loan application, but Carver refused. Johnson and Grass then
falsely stated on the application that they each had a fifty-
percent interest in QIT-I. Grass admitted at trial that he and
Johnson misrepresented their ownership interest because Carver
refused to help get the loan and QIT-I needed the money to stay
afloat. At dissolution, QIT-I retained $73,000 of the loan
proceeds, and had paid all of its accounts payable.
In August 1993 Johnson and Grass formed a new corporation
called Quality Inspection and Testing, Inc. (QIT-II). QIT-II
assumed all debts of QIT-I and retained possession of QIT-I's
assets and equipment.
Carver sued QIT-I, QIT-II, Grass, and Johnson in 1994,
alleging that Johnson and Grass failed to comply with the corporate
dissolution statute because they failed to inform QIT-I's creditors
of the dissolution, converted the assets of QIT-I, and violated the
corporate dissolution statutes that protect minority shareholders.
Carver's claims were heard in a bench trial in 1995. Two
business valuation experts, Paul Taylor, an economist, and Gerald
Richards, a certified public accountant, testified about QIT-I's
dissolution value. Their opinions about QIT-I's value varied
greatly. Taylor was Carver's expert. He testified that upon
dissolution QIT-I was worth $139,000 under the capitalization of
earnings method, and was worth $43,000 under the liquidation value
method. Richards was the expert for Johnson, Grass, QIT-I, and
QIT-II. He opined that QIT-I had a zero or negative value under
The trial court entered final judgment for Carver,
finding that QIT-I's value at dissolution was $20,000. The court
awarded one-third of that value plus interest to Carver. Although
the superior court determined that QIT-I had no liquidation value,
the court arrived at the $20,000 value based upon the "unique
situation"resulting from QIT-II taking possession of all of QIT-
I's assets. The court found that because Johnson and Grass
transformed QIT-I into a new entity with nearly all of the same
characteristics as QIT-I, additional value was transferred to QIT-
II that would not have existed if the assets of QIT-I had been
liquidated. Carver appeals.
A. Testimony of the Defense Expert, Gerald Richards
Stating that it found the testimony of Gerald Richards,
QIT-II's expert, "particularly credible,"the superior court
significantly relied upon his testimony in reaching its decision.
Carver claims that Richards was not qualified to offer
expert testimony on business valuation. [Fn. 1] Richards testified
at trial that he had personally evaluated approximately eight to
ten businesses during his twenty-year accounting career, and had
been involved in fifteen to twenty business evaluations performed
by his accounting firm. His experience gave him the ability to
understand financial statements and Generally Accepted Accounting
Principles (GAAP). The testimony from both experts focused upon
their interpretation of QIT-I's financial statements, and the use
of GAAP. The court certified Richards as an expert for this
reason. It was not an abuse of discretion to qualify Richards as an
Carver also contends that the trial court erred in
relying upon Richards's testimony because Richards based his
conclusions on unreliable financial information that Johnson
prepared and that Richards did not audit for accuracy. Because
Johnson admitted that she lied on her Key Bank loan application,
Carver contends that the court should not have trusted the accuracy
of the information she gave Richards. [Fn. 2]
The superior court asserted that its decision did not
depend solely upon the testimony of one witness, but that it
instead relied upon "the totality of the evidence." The trial
judge was able to assess Johnson's demeanor and credibility when
she testified about preparing the financial statements upon which
Richards relied. The court did not err in relying upon Richards's
Carver also contends that the income statements Johnson
prepared contained a mixture of cash-based and accrual accounting
and did not conform to GAAP, making their reliability suspect.
Richards testified that he had Johnson make several adjustments to
the statements so that the portion he relied upon to form his
conclusions did conform to GAAP. Taylor conceded that Richards
based his opinion on the portion of the statements that Richards
stated conformed to GAAP.
Carver asserts that the trial court erred in accepting
Richards's conclusions as particularly credible because Richards
did not examine all of the financial information available for
QIT-I while Taylor did. Richards testified that he and Taylor used
very similar valuation methods, and then, using Taylor's numbers,
Richards explained why his conclusions differed so greatly from
Taylor's. The alleged deficiencies in both the financial
information and in Richards's conclusions go to the weight and
credibility of the evidence. These are matters for the fact
finder. The trial court did not err in relying upon Richards's
B. Trial Court's Additional Factual Findings
The trial court found that "[a]t the time of dissolution
[QIT-I] had one contract in place that . . . did not result in a
net profit." Carver argues that QIT-I was having success with its
contracts, and thus, that the finding was clearly erroneous.
Johnson testified that QIT-I had contracts in place prior to
dissolution, but that they were completed by July or August 1993.
Whether QIT-I had more than one contract in place at the time of
its dissolution is irrelevant because the court reasonably could
have found that QIT-I did not make a net profit from its contracts,
given its negative net income.
The trial court determined that QIT-I did not appear to
have any significant goodwill upon dissolution. [Fn. 3] Carver
contends that the trial court erred in finding that QIT-I had no
goodwill because he was aware of customers who were satisfied with
QIT-I's work and whom he expected to give QIT-I repeat business.
Richards, however, opined that QIT-I had minimal or zero goodwill,
and neither expert factored goodwill into his valuation of QIT-I.
The court did not err in finding that QIT-I had no significant
Carver contends that the trial court clearly erred in
finding that QIT-I had a "negative cash flow"upon dissolution.
[Fn. 4] Richards testified, however, that the income statement
accurately reflected a net income of -$10,000. Given our holding
that the trial court did not err in relying upon Richards's
valuation of QIT-I, it was not clear error to find that QIT-I had
negative cash flow at dissolution.
Carver argues that the trial court clearly erred in
finding that no reasonable investor would have desired QIT-I at the
time of its dissolution. Carver's expert conceded that QIT-I's net
worth over the course of its operating history was minimal; its net
worth was only $4,000 the first year of operation and $1,000 the
second year. Our review of the record leads us to conclude that
the trial court did not err.
C. Valuation of QIT-I at $20,000
The trial court concluded that QIT-I had a negative
liquidation value at the time of dissolution. It nevertheless
found that Johnson and Grass received value from having QIT-I's
assets assembled and in place when they incorporated QIT-II. The
trial court then assigned a "nominal"value of $20,000 as QIT-I's
dissolution value, based upon the $20,000 loan the shareholders had
used to start QIT-I in 1991. The court awarded Carver one-third of
this amount plus interest.
Carver contends here that it was error to base QIT-I's
dissolution value on the amount of its initial start-up capital,
instead of its value at dissolution. A trial court's valuation of
a business will only be set aside upon a finding of clear error.
Moffitt v. Moffitt, 813 P.2d 674, 676 (Alaska 1991).
We need not determine whether the trial court erred
because the alleged error was harmless. Alaska R. Civ. P. 61.
Given the trial court's acceptance of QIT-II's expert's conclusion
that QIT-I had a negative liquidation value upon dissolution,
Carver was not prejudiced by possible error in assigning a positive
dissolution value of $20,000 to QIT-I. Had the trial court simply
applied the liquidation value method, Carver would have received
nothing for his one-third share, instead of the affirmative award
the court gave him. The alleged error did not harm Carver.
D. Failure to Provide Notice of Dissolution to Creditors
Alaska Statute 10.06.615(c) governs the procedure for a
voluntary dissolution or "winding up"of a corporation. [Fn. 5]
All three shareholders agreed to QIT-I's dissolution.
Nevertheless, the trial court found, and Johnson and Grass
conceded, that none of QIT-I's creditors was given written notice
of its dissolution.
Carver requested that the trial court order Johnson and
Grass to notify QIT-I's creditors of the dissolution and to set a
specified time period for creditors to make claims against QIT-I.
The superior court denied Carver's request, finding that the
failure to notify creditors was harmless because QIT-I's bills had
been paid with the Key Bank loan proceeds and because Johnson and
Grass personally guaranteed the Key Bank loan. The trial court
also noted that Johnson and Grass had agreed in QIT-I's Articles of
Dissolution that QIT-II assumed all debts of QIT-I upon QIT-II's
Carver contends that the superior court erred in
concluding that the failure of Johnson and Grass to notify QIT-I's
creditors of its dissolution was harmless because he is personally
liable for any remaining debt. Carver does not explain how he will
remain personally liable for QIT-I's debts. In general, corporate
directors are not personally liable for the debts of the
corporation. See 3A Fletcher Cyclopedia of the Law of Private
Corporations 1117 (rev. ed. 1994) ("In the absence of some
exception, neither the officers nor the directors are personally
responsible for the debts of the corporation merely because they
are officers or directors of that corporation.").
Although AS 10.06.615(c) requires a corporation to notify
creditors of its dissolution, nothing in the Alaska Corporations
Code imposes personal liability on directors solely because they
have failed to notify creditors of the dissolution, absent some
kind of prejudice to the creditors. E.g., Holliday v. Henry I.
Seigel Co., 643 S.W.2d 519, 520 (Tex. App. 1982) (holding that
directors' failure to give required notice to creditors upon
dissolution of corporation did not, in and of itself, render
directors liable as individuals for corporate debts), aff'd, 663
S.W.2d 824 (Tex. 1984).
Carver requested that the court place QIT-II's assets,
taken from QIT-I, in trust until all of QIT-I's remaining debts
were paid. The trial court denied this request, but ordered
QIT-II, Johnson, and Grass to indemnify Carver if any creditors of
QIT-I sued him. Aside from QIT-I's Key Bank loan, which Johnson
and Grass personally guaranteed, Carver presented no evidence of
the existence or amount of QIT-I's outstanding debt. Given the
lack of evidence of any remaining debt, it was not error to limit
Carver's remedy to indemnification. The court properly found that
the failure to notify QIT-I's creditors of its dissolution was
E. Carver's Claim for Conversion
Carver alleged that Johnson and Grass committed
conversion by retaining QIT-I's assets and failing to compensate
him for his share of those assets. The trial court did not make
findings regarding Carver's conversion claim. Carver contends that
this was error.
The tort of conversion is "an intentional exercise of
dominion and control over a chattel which so seriously interferes
with the right of another to control it that the actor may justly
be required to pay the other the full value of the chattel."
Dressel v. Weeks, 779 P.2d 324, 328 (Alaska 1989) (citation
omitted). Damages in a conversion action are generally the item's
value at the time of conversion plus interest. Id. The court
found that QIT-I had a negative liquidation value upon dissolution.
If QIT-I's assets had been sold, Carver would have received nothing
for his one-third share. If Carver were to receive damages for
conversion in addition to the court-determined value of his share
of QIT-I's assets, he would receive a double recovery. The trial
court's failure to make findings on Carver's conversion claim is
not reversible error.
Alaska Rule of Evidence 702(a) provides that "[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."
We review a trial court's admission of expert testimony
for an abuse of discretion. Sweet v. Sisters of Providence in
Washington, 895 P.2d 484, 494 n.10 (Alaska 1995).
We review a trial court's factual findings under the clearly
erroneous standard. See Alaska R. Civ. P. 52(a). A finding is
clearly erroneous if it leaves us with a definite and firm
conviction on the entire record that a mistake has been made. City
of Hydaburg v. Hydaburg Co-op Ass'n, 858 P.2d 1131, 1135 (Alaska
1993). We review de novo the application of law to the relevant
facts. See Luedtke v. Nabors Alaska Drilling, Inc., 834 P.2d 1220,
1223 (Alaska 1992).
Witness credibility is for the trial court to determine;
we defer to those determinations. Alaska R. Civ. P. 52(a); Evans
v. Evans, 869 P.2d 478, 480-81 (Alaska 1994).
Issues of corporate valuation, including the calculation of
goodwill, present fact questions. Wright v. Wright, 904 P.2d 403,
405 n.1 (Alaska 1995). When valuing business goodwill, the trial
court must first determine whether goodwill exists. Id. at 406.
If the court finds that no goodwill exists, it should not be
considered in valuing the business. Id.
When the trial court referred to QIT-I's cash flow, presumably
it meant QIT-I's net income, which was described as -$10,000 on the
income statement prepared by Johnson.
AS 10.06.615(c) provides in part that "[t]he board shall give
written notice of the commencement of the proceeding for voluntary
winding up by mail to all shareholders and all known creditors and
claimants . . . ."