Irvine Co. Wins Ruling Slashing Smith’s Interest
In a ruling on a small point of law, a state court referee made a decision here Tuesday that could save the Irvine Co. up to $80 million and bring the seven-year dispute between chairman Donald L. Bren and heiress Joan Irvine Smith to a close.
Referee Robert B. Webster said he would deny Smith’s motion that the company pay her 12% interest on a $149-million award for company stock sold by her and her mother, Athalie Clarke. Interest on the award will be calculated for a period of seven years.
Nonetheless, the company is likely to be ordered to pay Smith, the granddaughter of the founder of the sprawling Irvine Ranch, interest of between $100 million and $125 million--based on a rate of slightly more than 9%.
The Irvine Co. hailed the decision as a big victory. “We won almost everything,” said William B. Campbell, an Irvine Co. attorney, after the ruling.
Smith’s attorney, Howard I. Friedman, said he was neither much surprised nor disappointed by the referee’s decision. He said it was too early to tell whether Smith would appeal it.
Regardless, Smith, who earlier this year claimed victory in the dispute, is likely to end up with at least $250 million.
Neither Bren, 58, nor Smith, 57, attended the hearing.
The protagonists, both highly private and immensely wealthy, have been locked in a bitter battle of egos and principles since 1983. That was when Bren, a billionaire home builder, won control of the Irvine Co. and its vast real estate holdings, which span nearly one-sixth of Orange County. Smith, a feisty and independent-minded woman, agreed to sell her 11% interest in the company but balked at the price offered--$114 million.
What followed is the stuff of prime-time soap operas. The public battle was waged in a 150-day trial in which there was a ruling in June that the company owed Smith $149 million--$35 million more than originally offered but far less than the $330 million she wanted.
But several major issues remained to be resolved. The largest of these was the interest the company owed Smith for the $149 million over seven years. Smith had asked for a compound interest rate of as much as 12%, which would have amounted to an interest payment of about $180 million.
The referee elected to follow a new Michigan law that sets the interest rates in such cases at the company’s average bank borrowing rate. That would average a little more than 9% over the seven years since Smith sold her shares, the company says.
At simple interest, which the company is insisting on, that would amount to about $100 million; compounded, it would come to about $125 million. The referee has yet to rule on whether the interest should be computed on a simple basis, in which each year’s interest is not added to the amount on which interest is figured, or on a compounded basis.
Still, Webster’s preliminary rulings on the interest rate and on several other unresolved matters brings the long, complicated case nearly to a close.
Acting surprisingly quickly in what had been expected to be two days of hearings, Webster also disclosed how he would rule on several other matters after only a day’s worth of argument by the attorneys. Among the issues:
By choosing to follow the new Michigan law, Webster made it extremely unlikely that he would award the millions of dollars in attorney’s fees Smith had requested, Irvine Co. lawyers said Tuesday. The new law makes it more difficult for either side to collect its legal fees from the other in such cases, the lawyers said. Combined legal fees and costs have climbed to more than $30 million, according to those close to the dispute.
Webster denied Smith’s motion to impose sanctions of more than $300,000 on the company for what her attorneys argued was the company’s unwillingness to produce documents her attorneys needed for their case.
Webster said he would impose sanctions on Smith because her attorneys caused a two-month delay in the middle of the lengthy trial by springing surprise evidence on the Irvine Co. He did not indicate the amount, however. The company is seeking $700,000.
Webster denied the company’s request to find that Smith had caused the lawsuit to be filed for the sole purpose of being “vexatious.” Under Michigan law, such a finding might have allowed the company to collect its costs and attorney’s fees from her.
The Irvine Co. and Smith both contended the referee made errors in computing the value of the company. The company said he should reduce Smith’s award by $17 million, and Smith said he should raise it by $20 million. Webster seemed disinclined to change the estimate much, although he did concede one mistake that might bring Smith an additional amount of about $2 million.
The lawsuit was brought in Michigan because the Newport Beach company is incorporated there. It was heard by a referee so as not to tie up Michigan courts for years.
The dispute began when Bren put a value of $1 billion on the company in 1983 for purposes of buying the two-thirds of the company’s stock he did not already own. Most of the shareholders, who were earning returns of more than 3,000% on their investment at that price, sold their shares to him. Smith agreed to sell but insisted that the company was worth far more. (The company was formed to manage the family ranch in the 19th Century, and it now owns about 64,000 acres in Orange County in what is said to be the largest urban landholding in the nation.)
Smith said the company was worth more than $3 billion, and she forced Bren to sue her. At that price, her 11% stake would have been worth $330 million, not the $114 million Bren offered her.
In June, Webster said the company’s estimate of its value in 1983 was closer to the mark. He awarded Smith $149 million based on his own estimate of the company’s value--$1.4 billion. Both sides claimed victory. This week’s hearings had been expected to bolster the claims of one side or the other, based on how the referee ruled on the interest question.
Smith’s attorneys had argued that an old Michigan law in effect in 1983, when Bren bought the company, should govern the decision on the interest rate. That law left the decision up to the discretion of the judge, within a limit of 12%. It also seemed to lean toward computing the interest on a compound basis.
But the judge followed the company’s recommendation that he use a Michigan law passed only last year that sets the rate at the average of the company’s bank borrowing rate. That law leans toward the use of a simple interest rate, the company’s lawyers contend.
Besides the question of compound or simple interest, there are a few other matters still to be ironed out between the two sides in regard to the provisions of the new Michigan law--most of them over how the average borrowing rate should be computed for the seven-year period.
Smith, who has battled the company for decades, has yet to receive any of her money, and she will not until the final details are resolved and the results certified by the Michigan courts.
Webster asked that the two sides resolve those differences before a final hearing on the case, which will probably be set for November in this affluent Detroit suburb.
“The November hearing should be the last,” said Friedman as he packed his briefcase with legal documents Tuesday afternoon.
