Court of Appeals Upholds Trial Court Order Confirming Appraisal of Buyout Interest

ByDouglas C. Melcher

On October 25, 2012, the District of Columbia Court of Appeals decided Adkins Limited Partnership v. O Street Management, LLC, Nos. 11-CV-1181 & 12-CV-89, slip op. (D.C. Oct. 25, 2012) in which it was called upon to review a trial court order confirming an appraisal of a buyout interest in a limited liability company.

By way of background, O Street Management, LLC (“OSM”) brought suit against Adkins Limited Partnership and representatives of its former partners (“Adkins”) to enforce its contractual right to buyout Adkins’ seventy-five percent interest in a company known as O Street Roadside, LLC (“OSR”). Id. at 1-2. The trial court issued a declaratory judgment which held that OSM was entitled to exercise the buyout right. Id. at 2. The Court of Appeals affirmed the judgment, thus leaving only the buyout price to be determined in subsequent proceedings. Id. at 2-3.

Pursuant to the operating agreement for OSR, the buyout price was to be determined by appraisal. Id. at 3-4. OSR’s primary asset was a commercial real property in Washington, D.C., which was encumbered by a long-term lease. Id. at 2-3. The parties’ respective appraisers substantially disagreed on the value of the property and thus the buyout price. Id. at 4-6. As a result, in accordance with the operating agreement, a neutral appraiser was called upon to appraise the seventy-five percent interest in OSR. Id. The appraiser requested instructions from the trial court regarding whether to value the property as being subject to the encumbrance (i.e., as a “leased fee interest”) or as not being subject to the encumbrance (i.e., as a “fee simple interest”). Id. at 6-7. The trial court instructed the appraiser to value the property as a leased fee interest. Id. As a result, the appraiser determined that the seventy-five percent interest in OSR was worth substantially less than Adkins claimed it was worth. Id. The trial court confirmed the appraisal and ordered settlement in accordance with the operating agreement. Id. at 9. Adkins appealed. Id.

Three main issues were presented on appeal. First, the Court of Appeals considered whether it was proper for the trial court to give instructions to the appraiser. Id. at 12-15. The Court of Appeals noted that it was not even obliged to consider this issue because Adkins “did not object [in the proceedings] below to the appraiser’s request for instructions.” Id. at 12. It nonetheless considered the issue and concluded that giving instructions was proper. Id. at 12. The Court explained, inter alia, that “[t]he interest that the parties intended the appraiser to value [was] a question of contract interpretation” (i.e., interpretation of the operating agreement) and thus was “a question of law” for the trial court to decide in the first instance and for the Court of Appeals to review de novo. Id. at 14.

Second, the Court of Appeals considered whether the trial court erred in instructing the appraiser to value the property as a leased fee interest. Id. at 15-17. It concluded that the operating agreement provided that the buyout price was to be determined by fair market value and that “[a]n assessment of the fair market value of the [subject] property at the time of the buy-out — what a willing buyer would pay a willing seller having knowledge of the relevant facts — must incorporate the lease.” Id. at 17. It therefore ruled that “[i]t was appropriate . . . for the trial court to instruct the . . . appraiser to use the leased fee interest in determining the fair market value of the [subject] property.” Id.

Third, the Court of Appeals considered whether the trial court erred in denying Adkins’ request for discovery of certain financial documents and agreements. Id. at 18-20. It stated that, pursuant to Super. Ct. Civ. R. 70-I(b), proceedings to confirm an appraisal are summary and discovery is permitted only upon a showing of good cause. Id. at 18. The Court of Appeals concluded that the record did not show good cause; specifically, the record did not show that the financial documents and agreements sought by Adkins would be relevant to the valuation of the subject property (at the time of buyout), that the appraiser lacked any information or documents required to perform the appraisal, or that denial of the discovery request caused any “undue hardship or injustice.” Id. at 19-20. Accordingly, the Court of Appeals ruled that the trial court did not abuse its discretion in denying the discovery request. Id.

Finding no error, the Court of Appeals upheld the trial court’s judgment. Id. at 20.

Douglas C. Melcher

I am a licensed attorney with about twenty years of experience in the private practice of law. I focus my practice on advising and representing individuals, small businesses, and non-profits in civil litigation, including trial court proceedings, appeals, administrative hearings, mediation, and arbitration. I have written numerous articles for D.C. Law Blog and other publications, and am the author of Tort Claims and Defenses in the District of Columbia, which is a handbook for lawyers about civil claims for injury to persons, property, reputation, and commercial interests. Please feel free to contact me if you would like to inquire about assistance with a legal matter. I can be reached at dmelcher@melcherlaw.com or 202-427-5753. For further information about my background, click here.