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Willis v. Adams and Smith Inc.

Court of Appeals of Utah

May 16, 2019

Gordon Willis and Jeffrey Darby, Appellees,
v.
Adams and Smith Inc., Morgan Humphries, James L. Smith, and Dawn Smith, Appellants.

          Fourth District Court, Provo Department The Honorable Kraig Powell No. 150401341

          Rodney R. Parker, Danica N. Cepernich, and Adam M. Pace, Attorneys for Appellants

          Robert L. Jeffs, Attorney for Appellees

          Judge Diana Hagen authored this Opinion, in which Judges Gregory K. Orme and Ryan M. Harris concurred.

          HAGEN, JUDGE.

         ¶1 Adams and Smith Inc., Morgan Humphries, James L. Smith, and Dawn Smith (collectively, the company) appeal the district court's entry of judgment in favor of Gordon Willis and Jeffrey Darby. After resigning from employment with the company on January 20, 2015, Willis and Darby filed a complaint in the district court demanding that the company purchase their stock in accordance with the company's Restrictive Stock Agreement (the stock agreement). The parties moved for summary judgment on the issue of which of two audited financial statements should provide the book value[1]of the company upon which the purchase price for the stock should be based. Interpreting the plain language of the stock agreement, the district court agreed with Willis and Darby and determined that the purchase price should be based on the company's book value as reflected in the audited financial statement for the 2013 calendar year, which was completed on April 15, 2014.

         ¶2 At trial, Willis testified to the value of the company's equipment as a non-retained expert witness. The company objected, arguing that Willis and Darby had not complied with rule 26(a)(4)(E) of the Utah Rules of Civil Procedure in disclosing Willis as a non-retained expert witness. The district court disagreed and ruled that Willis had been sufficiently designated and that his testimony was therefore admissible. The parties also disputed what equipment should be included when adjusting the purchase price based on the "fair market value of any equipment" as provided in the stock agreement. At the conclusion of trial, the district court interpreted this provision to refer to all equipment the company owned "that would stand alone and be able to be used to perform work."

         ¶3 The company argues that the district court erred in making these three determinations. Because the district court correctly interpreted the contract terms as a matter of law and acted within its discretion in admitting Willis's expert testimony, we affirm.

         BACKGROUND

         ¶4 The plaintiffs, Willis and Darby, began working for the company in the early 1990s. The company initially hired Willis to work as a field engineer, but he rose through the ranks and later became vice president of operations and a shareholder. Between 2008 and 2009, Willis served as a director on the company's board of directors and as the company's president. In those roles, he became more involved with the company's accounting practices. According to Willis, the company's annual financial statements were prepared on a calendar-year basis and the final audited statements would be available "in March or April of the following year." Willis was also involved with purchasing equipment for the company and performing the valuation of that equipment in connection with the buyout of another shareholder.

         ¶5 The company hired Darby to work as a project engineer. He became a shareholder in 2000, and from that time until he resigned, Darby worked as vice president of engineering and served on the board of directors.

         ¶6 In 2009, Willis, Darby, other shareholders and the company's trustees entered into the stock agreement. Among other things, the stock agreement provides:

Upon the termination of employment . . . of a Shareholder, all shares of the Stock of [the company] owned by the terminated Shareholder shall be sold to [the company] and/or the other Shareholders and [the company] and/or the other Shareholders shall purchase the Stock at the price and upon the terms set forth in Sections 6 and 7.

         Section 7, the provision at issue on appeal, provides that the purchase price for each share of stock in the company

shall be the per share adjusted book value . . . as of the last audited financial statement of [the company] preceding the event requiring the determination of the purchase price . . . . Book value shall be determined from the audited financial statement of [the company] according to the accounting practices previously utilized by the regular accountant of [the company] who customarily prepares [the company's] financial statement. Adjustment to the book value shall be made by taking into account the fair market value of any equipment with fair value in excess of ten thousand dollars ($10, 000).

         ¶7 On January 20, 2015, Willis and Darby resigned from the company. At the time, they believed that one of the shareholders, James Smith, was going to retire in early 2015 and, after discussing "the financial issues of what would happen when [Smith] retired," Willis and Darby decided they did "not want[] to work there if the other didn't work there."

         ¶8 After Willis and Darby resigned, they demanded that the company purchase their stock in accordance with the stock agreement. In response, the company offered to purchase their stock for a price based on the company's "audited December 31, 2014 financial statements," which had been completed in March 2015 (the 2014 financial statement). Due to a loss contingency, the 2014 financial statement showed a substantial reduction in book value from the prior year. Willis and Darby objected to the use of the 2014 financial statement under section 7 of the stock agreement, which required that the value of their shares be calculated based on "the last audited financial statement." Because the audit of the 2014 financial statement had not been completed prior to their retirement date, they asserted that the audited financial statement for 2013, which had been completed on April 15, 2014 (the 2013 financial statement), was the "last audited financial statement" on which the value of their shares must be based. They filed a complaint with the district court, alleging that the company had failed to comply with the stock agreement and requesting, among other things, that the district court make "a determination of the purchase price" of their shares and enter a judgment in the amount of that purchase price.

         ¶9 In their rule 26 initial disclosures, Willis and Darby named themselves as individuals "who [were] likely to have discoverable information and who [were] likely to be called in [their] case in chief." The disclosures stated that Willis and Darby had "information regarding the accounting practices of [the company], the valuation of equipment, prior purchases of minority shareholders' interest, and discussions of the parties." Willis and Darby also attached an equipment valuation Willis had prepared and the supporting documents on which he had relied. In its first set of interrogatories after receiving this information, the company asked Willis to "explain in detail how you calculated . . . the fair market value of equipment in the computation of damages that you included with your initial disclosures" and to "identify all documents that support[]" that calculation. Willis individually responded to the first set of interrogatories, explaining his method of equipment valuation.

         ¶10 Before trial, Willis and Darby moved for partial summary judgment, arguing that the purchase price of their stock "must be determined using the audited financial statements for the year 2013" in accordance with the plain language of the stock agreement. In response, the company filed a cross-motion for partial summary judgment, arguing that the language in section 7 reflects "an ambiguity regarding the parties' intent" as to whether the 2014 or 2013 financial statements should be used to calculate the stock price and ...


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