Clean Up on Aisle Five: Exiting The Family Business Can Create a Mess

Mark Briol 

It highlights an issue in these cases where one person just doesn’t want to be in the company anymore. They don’t want to be a shareholder, they want to cash out and use the money to do the things they want to do in their life, rather than watch somebody else get richer and richer and richer, you know, running an enterprise. 

Pat Milan 

Hi, guys, been a little while since we’ve seen each other, which is given me some time to read the book. You know, there is a chapter in there that is really unlike any of the other cases we’ve talked about on the podcast. This is one where there’s the owners of a family business. In this case, it’s what’s known in Minnesota very well the Lunds and Byerley grocery chains. And there’s just a family member who simply wanted out. And you know, it’s funny, because as you start to read it, you’re like, what’s the big deal? And just to set it up for people, maybe a lot of people in Minnesota know, but Kim Lund, who was the granddaughter of the founder, Russell Lund Senior. And she just didn’t want to grow the company. She didn’t want to sell the company, she didn’t even really want to live off the profits it was producing. There really wasn’t anything bad there. There’s no sibling rivalry, but she wasn’t even vying for any kind of a job title, like we’ve seen in some of these other cases. She wasn’t looking for decision making power, she just wanted out. And she wanted to be essentially compensated for her shares in the business. I just keep looking at this, and I go, how can this be so difficult, but it proved to be really complicated. Scott, can you take a minute just to kind of lay it out? I mean, how do we get to the point where you have one family member who just wants out of the family business, and it just gets – the applecart just completely gets turned over? 

Scott Benson 

Well, even before you get to the grandchildren, it is that one story is just a fascinating story to begin with. Russell Lund Sr. came from Wisconsin to Minnesota to go to Augsburg College and couldn’t afford it. So he started working in a grocery store and grew his familiarity with the grocery business towards just working as a clerk in this grocery store on Lake Street. He later went on to form this popcorn business, went out to California, got involved in this popcorn business, made some money, came back, bought into the grocery store, took it over, grew this little enterprise into this huge operation. And you know, if you look for a sterling founder of a company, it’d be Russell Lund Sr. He was good to his employees, he was great to his customers. I mean, the customer service that he offered at Lund’s grocery store was amazing. He was philanthropic, created many philanthropic enterprises including Community Emergency Services, which is still serving the families here in Minneapolis; CES, it’s a huge enterprise that still operates, and so had many irons in the fire. His son Russell Jr. wasn’t interested at all in the business and really had more of a mathematical mind, scientific mind about him, got into an aviation business which failed. There’s a fascinating story about Russell Lund Jr. which really culminates in him going through a very messy divorce. He ends up killing his wife and ends up committing suicide while either in prison, I think, or an institution, but in any case, he ends up committing suicide and passing. Russell Lund Sr just a few months before that had passed, so the company comes down to Russell Lund Sr’s, four grandchildren.

Pat Milan 

So the company started by Senior is really being run by the grandchildren because the son wanted nothing to do with it, right?

Scott Benson 

And Russell Lund Jr’s oldest son, Tres, had always been interested in the business he was Russel Lund Sr’s little shadow, following him around, wanting to be involved in in the grocery store business, really from a very young age. Now all the Lund grandchildren were somewhat involved in you know, working in the stores, etc. But it was Tres Lund coming from Russell Lund the Third.

Pat Milan 

Trey’s a lot like his grandfather, if you think about it, he came in, watched it, and he worked his way all the way up. Seemingly in good hands.

Scott Benson 

Right. Started at the lowest level, worked his way up. His older sister, Kim, was not involved in the business, she was a teacher. Noble profession, involved in teaching fifth grade was, you know, off doing that. And the other two grandchildren, also, though as kids, they worked in the business, were not really involved in the business. So that’s kind of what brings us to where we are when Kim decides she wants to get out of the business. 

Pat Milan 

And just to say, in a very, very compressed period of time, Russell Lund Sr. passes away, Russell Lund Jr. kills his wife, commits suicide. So you’ve got trust and other things going on. But now it’s the grandchildren.

Scott Benson 

Right. And you’re right to point out there are trusts involved that Russell Lund Sr. set up for his grandchildren and for their children, too. So those are kind of involved in the mix as well.

Pat Milan 

And we get to this point, and Kim just wants out. And Mark, the siblings, you know, these grandchildren siblings really aren’t interested in Kim wanting to get out and be divested of it. What happens there?

Mark Briol 

Well, Kim, who had her philosophy on life very similar to her grandfather’s, which was to be very successful in business, but to also be philanthropic, wanted to take – she wanted to cash out of the company, figure out how much money her family needed to live on, and give the rest away in philanthropy. And the others didn’t want that to happen. They wanted to keep the thing just running. This one is not quite as ugly as, I mean it turns out to be ugly. But the purpose for which she wanted out of the company was very, very worthwhile.

Pat Milan 

Yeah, it was an honorable thing she wanted to do, which is interesting, because in the book, you guys pointed out the dividend on an annual basis was $2.7 million. I mean, they were being paid handsomely. She just wanted to cash out so she could have a shot, which I think she really wanted a portfolio, the way I read it, to be able to do philanthropic things at a bigger level.

Mark Briol 

Exactly. And, you know, it’s too bad and highlights an issue in these cases where one person just doesn’t want to be in the company anymore. They don’t want to be a shareholder, they want to cash out and use the money to do the things they want to do in their life, rather than watch somebody else get richer and richer and richer, you know, running an enterprise. And I think her goals were laudable. And I think she had a right to get out and and the court ultimately determined she did have a right to get out. So then the fight was about how much and when would you get paid? And that was ultimately what happened.

Pat Milan 

And the amounts were pretty staggering. I mean, like we said, you know, they’re getting like 2.7 on an annual basis, right on the dividend. And then someone had to do an assessment of the value of the company. This is where it always starts to get ugly, right? 322 million is the estimate. She’s one of four. So it’s almost, it’s like 80 and a half million dollars, I guess.

Scott Benson 

That was her appraisal. 

Pat Milan 

Oh, it’s her appraisal? Oh, okay. 

Scott Benson 

Tres’s appraisal was a lot lower.

Pat Milan 

I’m shocked! How’d that happen? 

Mark Briol 

So that’s what always happens in these cases, is two people get two different experts. One comes in – we tried a case not too long ago where our expert came in at like 400 million, and their expert came in at like 6 million. It just is. And then it’s up to the judge, often who’s not a business person and who’s simply, you know, a judge and is trying to resolve disputes, to determine all the discounting methods and what should be applied here and what should be applied there. And coming up with a number ultimately, that’s going to be fair. That’s ultimately what happened here.

Pat Milan 

You know, I was just thinking about this question, because you were in a bankruptcy proceeding, the judge is representing the company, right, they want to see what they can do to make the entity survive. What’s the judge role in this one where it’s two different owners who are disputing it? Is the judge just looking for a fair settlement? What is the judge’s role? Is he thinking on behalf of the survival of the company or what’s fair for the four?

Scott Benson 

Well, you know, under the statute in Minnesota, what the judge should be looking at is what’s the fair market value here. There’s a difference between fair value and fair market value, of course. So it really depends on Minnesota under this, if it’s purely the statute deciding, it should be fair value. If the documents for the company say that shareholder winds up gets fair market value than its fair market value, so it depends on, somewhat on what the documents say. So in any case, when a minority shareholder proves they have a right to get out, and should be able to get out, normally, because they’re being oppressed, and they have a right to get out because of the oppression, and there’s no documents to the contrary, the judge should award the fair value of their shares, which is what’s the value of the company? What percentage do you own? That’s what you get. This was a complicated case, because they had some pension liabilities to employees to consider in determining what the company value was. It’s a very competitive business. And the competition in the Twin Cities market had substantially increased from the days of course, when Russell Lund Sr. grew the company. But on the other hand, there had been some fairly recent valuations, because, as you pointed out, Lunds bought Byerlys and became Lunds Byerlys, kind of the two upscale big chains that existed and they had to do valuations at the time. And the combined value of the company, of course, really well exceeded what Tres Lund’s appraiser thought the value was. So there were a lot of complications here in determining the value of that company. 

Pat Milan 

And this was never going to be settled in a conference room. It was going to have to end up in a courtroom, right?

Scott Benson 

Yeah, I mean, I think Kim started trying to get out of this in the early 90s. Now we’re in the mid 2015/2016 time period. And yeah, she had been trying to get out for a long time.

Pat Milan 

When you take a look at this case, you’ve got Tres who’s trying to represent and grow a company and doesn’t want to incur debt, and you got the pension fund in the middle. And you got Kim that wants out. I’m just curious, when you look at what they did, and how they went about it, is there something you guys would have done differently either for Kim, or for Tres in how this played out? Because the pension fund makes it complicated? 

Mark Briol 

Well, and the family used that against Kim. 

Pat Milan 

She said they were using it against her, right? 

Mark Briol 

They create the pension fund in I think, you know, at a time when you know, they wanted to make the most out of what the issues were with the company. The only thing I think that we would have done different is push it faster, should never have taken this long. I mean, it becomes easy, it would have been a lot easier to settle when the values of the company were much lower, instead of you know, getting the company up here. And all of a sudden, you’re taking this massive company that’s doing extremely well, and someone wants to cash it out and cut into the cash flow. It just makes it more difficult. And you know, she had wanted to do this. I think when she made her decision that she wanted to do this she should have pulled the trigger on it. 

Pat Milan 

And so Kim started out at 80 million, 80 point something million, should be her cash out. It ended up at what, 45 million, little more than half of what she thought. And it took, ood Lord, how many years for this to happen? When you take a look at this, I’m just trying to figure out, what’s the lesson for a well run family company, people engaged and somebody just wants to get out. I think, Mark, your point is the single biggest thing here that was the worst is the period of time it took just to get through this. What do you do when you’re caught up in one of these, and it’s just taking too long? I mean, what do you have in your pocket that can accelerate it when you just want to get to the end?

Mark Briol 

Just litigate it. Just push towards the trial date. It’s what you always have to do in every single case is you have to push towards the trial date, because nothing happens until you’re actually going to trial, that you’re actually going to be in front of a jury or the judge is a fact finder of what’s going on and making the determination. That’s why you just have to push, push, push, push to get the thing to trial and then things happen.

Pat Milan 

Do we have to read the chapter in the book to find out if Kim was happy? Or are you guys gonna tell us?

Scott Benson 

You know, I think she was happy. I don’t know for sure. You know, there were a whole bunch of trust issues that were involved in this case that we talked about in the book that we haven’t mentioned here. One of them being, she didn’t want her kids to have this source of income from the moment they hit adulthood. She really wanted her kids to have to experience what it was like to have to earn their own living until they got to 35 and then have access to their trust assets. That was also a part of this case. Interesting enough her kids, at least testified that that’s what they wanted too. I’m not sure I would have that emotional maturity at that age. So I mean, that was part of it. And, so I think she was happy. But frankly, maybe Mark remembers if there was more of an indication of whether or not she was happy. And frankly, I think if we had been advising Tres and his other two siblings in the company, we would have said, Let’s try to get this done earlier, too, because obviously, the company grew and expanded and was worth more money when it finally got done.

Pat Milan 

I guess my takeaway is, if you’re not happy with $45 million, you got bigger problems. 

Mark Briol 

You have to remember, she’s paid out over 20 years at what. 2.75% interest. You know, right now 2.75% interest is not the going rate of interest out there. 

Pat Milan 

Yeah, whoever gets to play the bank in that one is doing well. Yeah, that’s true. Hey, Tres should have hired you guys. Because as we try to tell folks, if you’re in one of these situations, you guys are the best at helping navigate these complex family business and shareholder challenges. And this is everything from minority shareholder rights, securities fraud, high networth divorce, or patent litigation, you really are prepared and you’re willing to answer questions, which by the way, people can ask questions, even on this podcast, they can ask it. But we really encourage anybody who’s watching this, has an issue, it’s something that’s bothering you. Go to briollaw.com. If you have questions about your family business, or any other complex commercial cases, just send them to us by emailing podcast@briollaw.com. To subscribe to the podcast, you can find us on Apple, Spotify, or YouTube. Mark and Scott, thanks for your time today. We’ll see you on the next podcast. Between now and then I’m going to make my list of what I’d spent $45 million, on I’ll let you know.

Mark Briol

Over 20 years!