Chapter 36



Chapter 36

Partnerships and Limited Liability Partnerships

Case 36.1

679 N.W.2d 165

Court of Appeals of Minnesota.

Martin MOREN, as parent and guardian of Remington MOREN, a minor, Respondent,

v.

JAX RESTAURANT, Appellant, John Doe, et al., Defendants.

and

Jax Restaurant, defendant and third-party plaintiff, Appellant,

v.

Nicole Moren, third-party defendant, Respondent.

No. A03-1653.

April 27, 2004.

CRIPPEN, Judge. [FN*]

FN* Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.

Remington Moren, through his father, commenced a negligence action against appellant Jax Restaurant for injures he sustained while on appellant's premises. The district court granted a summary judgment, dismissing appellant's third-party negligence complaint against respondent Nicole Moren, a partner in Jax Restaurant and the mother of Remington Moren. Because the court correctly determined that liability for Nicole Moren's negligence rested with the partnership, even if the partner's conduct partly served her personal interests, we affirm.

FACTS

Jax Restaurant, the partnership, operates its business in Foley, Minnesota. One afternoon in October 2000, Nicole Moren, one of the Jax partners, completed her day shift at Jax at 4:00 p.m. and left to pick up her two-year-old son Remington from day care. At about 5:30, Moren returned to the restaurant with Remington after learning that her sister and partner, Amy Benedetti, needed help. Moren called her husband who told her that he would pick Remington up in about 20 minutes.

Because Nicole Moren did not want Remington running around the restaurant, she brought him into the kitchen with her, set him on top of the counter, and began rolling out pizza dough using the dough-pressing machine. As she was making pizzas, Remington reached his hand into the dough press. His hand was crushed, and he sustained permanent injuries.

Through his father, Remington commenced a negligence action against the partnership. The partnership served a third-party complaint on Nicole Moren, arguing that, in the event it was obligated to compensate Remington, the partnership was entitled to indemnity or contribution from Moren for her negligence. The district court's summary judgment was premised on a legal conclusion that Moren has no obligation to indemnify Jax Restaurant so long as the injury occurred while she was engaged in ordinary business conduct. The district court rejected the partnership's argument that its obligation to compensate Remington is diminished in proportion to the predominating negligence of Moren as a mother, although it is responsible for her conduct as a business owner. This appeal followed.

ISSUE

Does Jax Restaurant have an indemnity right against Nicole Moren in the circumstances of this case?

ANALYSIS

On appeal from summary judgment, the reviewing court is to ask whether there are any genuine issues of material fact and whether the district court erred in its application of the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn.1990). In addressing these two questions, we must "view the evidence in the light most favorable to the party against whom judgment was granted." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn.1993) (citation omitted). But we are not to defer to the district court's decision on a question of law. Frost-Benco Elec. Ass'n v. Minn. Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn.1984).

[1] Under Minnesota's Uniform Partnership Act of 1994(UPA), a partnership is an entity distinct from its partners, and as such, a partnership may sue and be sued in the name of the partnership. Minn.Stat. § § 323A.2-10, 323A.3- 07 and 323A.12-01 (2002). "A partnership is liable for loss or injury caused to a person ... as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership." Minn.Stat. § 323A.3- 05(a) (2002); see also Bedow v. Watkins, 552 N.W.2d 543, 546 (Minn.1996); Shetka v. Kueppers, Kueppers, Von Feldt, & Salmen, 454 N.W.2d 916, 919 (Minn.1990). Accordingly, a "partnership shall ... indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership...." Minn.Stat. § 323A.4-01(c) (2002). Stated conversely, an "act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partners." Minn.Stat. § 323A.3-01(2) (2002). Thus, under the plain language of the UPA, a partner has a right to indemnity from the partnership, but the partnership's claim of indemnity from a partner is not authorized or required.

[2][3] The district court correctly concluded that Nicole Moren's conduct was in the ordinary course of business of the partnership and, as a result, indemnity by the partner to the partnership was inappropriate. It is undisputed that one of the cooks scheduled to work that evening did not come in, and that Moren's partner asked her to help in the kitchen. It also is undisputed that Moren was making pizzas for the partnership when her son was injured. Because her conduct at the time of the injury was in the ordinary course of business of the partnership, under the UPA, her conduct bound the partnership and it owes indemnity to her for her negligence. Minn.Stat. § § 323A.3-05(a) and 323A.4-01(c).

Appellant heavily relies on one foreign case for the proposition that a partnership is entitled to a contribution or indemnity from a partner who is negligent. See Flynn v. Reaves, 135 Ga.App. 651, 218 S.E.2d 661 (1975). In Flynn, the Georgia Court of Appeals held that "where a partner is sued individually by a plaintiff injured by the partner's sole negligence, the partner cannot seek contribution from his co-partners even though the negligent act occurred in the course of the partnership business." Id. at 663. But this case is inapplicable because the Georgia court applied common law partnership and agency principles and, like appellant, makes no mention of the UPA, which is the law in Minnesota.

Appellant also claims that because Nicole Moren's action of bringing Remington into the kitchen was partly motivated by personal reasons, her conduct was outside the ordinary course of business. Because it has not been previously addressed, there is no Minnesota authority regarding this issue. But there are two cases from outside of Minnesota that address the issue in a persuasive fashion. Grotelueschen v. Am. Family Ins. Co., 171 Wis.2d 437, 492 N.W.2d 131, 137 (1992) (An "act can further part personal and part business purposes and still occur in the ordinary course of the partnership."); Wolfe v. Harms, 413 S.W.2d 204, 215 (Mo.1967) ("[E]ven if the predominant motive of the partner was to benefit himself or third persons, such does not prevent the concurrent business purpose from being within the scope of the partnership."). Adopting this rationale, we conclude that the conduct of Nicole Moren was no less in the ordinary course of business because it also served personal purposes. It is undisputed that Moren was acting for the benefit of the partnership by making pizzas when her son was injured, and even though she was simultaneously acting in her role as a mother, her conduct remained in the ordinary course of the partnership business.

The district court determined, and appellant strenuously disputes, that Amy Benedetti authorized Nicole's conduct, or at least that her conduct of bringing Remington into the kitchen was not prohibited by the rules of the partnership. Because under Minnesota law authorization from the other partners is merely an alternative basis for establishing partnership liability, we decline to address the issue of whether Nicole Moren's partner authorized her conduct. [FN1]

FN1. As stated earlier, under Minn.Stat. § 323A.3-05 a "partnership is liable for loss or injury caused to a person ... as a result of a wrongful act ... of a partner acting in the ordinary course of business of the partnership or with authority of the partnership." And under Minn.Stat. § 323A.4-01(c) a partnership must indemnify a partner for liabilities incurred by the partner in the ordinary course of the business of the partnership.

DECISION

[4] Because Minnesota law requires a partnership to indemnify its partners for the result of their negligence, the district court properly granted summary judgment to respondent Nicole Moren. In addition, we conclude that the conduct of a partner may be partly motivated by personal reasons and still occur in the ordinary course of business of the partnership.

Affirmed.

Case 36.2

133 P.3d 997, 2006 WY 58

Wilbur K. WARNICK; Dee J. Warnick; and Warnick Ranches, Appellants (Defendants),

v.

Randall M. WARNICK, Appellee (Plaintiff).

No. 04-244.

May 12, 2006.

, Justice.

[¶ 1] Wilbur K. Warnick, Dee J. Warnick and Warnick Ranches (collectively, Warnick Ranches) appeal the district court's determination of the amount owed to a withdrawing partner. Warnick Ranches claims the district court should have considered evidence of costs of a hypothetical asset sale to reduce the buyout price. We affirm.

ISSUE

[¶ 2] Warnick Ranches states its issue on appeal as:

Did the District Court abuse its discretion in excluding evidence offered by [Warnick Ranches] regarding the costs of liquidating partnership assets in determining the buy-out price of a dissociated partner under ?

FACTS

[¶ 3] We have previously had occasion to review this matter, issuing our opinion in That decision sets forth the underlying facts, which we will not restate here. Generally, this case involves the dissociation of Randall Warnick as a partner of Warnick Ranches as of April 14, *999 1999, and the amount he should receive for his interest in the partnership.

[¶ 4] In we affirmed the district court's determination that Randall Warnick was entitled to a remedy as a dissociated partner. Because the partnership agreement did not specify how the partnership would be valued or how to calculate a partner's interest upon withdrawal, the district court determined the value of Randall Warnick's interest and entered judgment in his favor. We concluded that the amount of the judgment was incorrect because the district court had not properly calculated the buyout price. The source of error was the district court's failure to take into consideration advances made by each partner to the partnership. We remanded the matter to the district court to recalculate the amount to be paid to Randall Warnick as a dissociated partner.

[¶ 5] Upon remand, with the issue of liabilities largely resolved by the focus turned to another aspect of valuing Randall Warnick's share in the partnership. For the first time, Warnick Ranches asserted that for purposes of calculating the buyout price, the value of ranch assets should be less than the amount reflected in its appraisal. Specifically, it requested that the district court deduct $50,000 from the appraised value of the ranch assets for real estate commissions and expenses of sale, including those associated with selling livestock and equipment. Randall Warnick objected to a reduced value, claiming the deduction amounted to unsupported speculation.

[¶ 6] On July 21, 2004, the district court held an evidentiary hearing on the matter. At the hearing, the district court denied evidence proffered by Warnick Ranches regarding expenses of a hypothetical sale of partnership assets. On August 12, 2004, the district court issued its decision letter in which it noted that it had previously ruled that “possible costs of sale are not an offset regarding asset value.”

[¶ 7] Thereafter, the district court entered its final order determining the amount to be paid to Randall Warnick. The amount was calculated by first valuing the partnership assets and deducting advances made to the partnership by each partner to arrive at a net value of the partnership of $133,901.68. Randall Warnick's percentage of ownership (34%) was then applied to the net value, to arrive at his proportionate share of the partnership of $45,526.57. Adding this amount to the amount of Randall Warnick's loan to the partnership, $70,256.56, the district court determined a buyout price of $115,783.13. In its order, the district court also found “[t]hat any possible costs of sale associated with selling the assets of the partnership as an offset to the estimated value of the assets is too speculative and inadmissible.” Warnick Ranches appealed.

The actual amount awarded to Randall Warnick was $95,767.99, which included interest on the buyout amount from April 14, 1999, minus an amount of $62,049.00 which had been previously deposited with the district court.

STANDARD OF REVIEW

[¶ 8] Evidentiary rulings are left to the sound discretion of the trial court and will not be overturned where the record reveals a legitimate basis for the ruling. . Resolution of this case also involves the application of (LexisNexis 2003). Our principles of statutory interpretation are well established:

In interpreting statutes, our primary consideration is to determine the legislature's intent.... [I]n ascertaining the meaning of a given law, all statutes relating to the same subject or having the same general purpose must be considered and construed in harmony. Statutory construction is a question of law, so our standard of review is de novo. We endeavor to interpret statutes in accordance with the legislature's intent. We begin by making an inquiry respecting the ordinary and obvious meaning of the words employed according to their arrangement and connection. We construe the statute as a whole, giving effect to every word, clause, and sentence, and we construe all parts of the statute in *1000 pari materia. When a statute is sufficiently clear and unambiguous, we give effect to the plain and ordinary meaning of the words and do not resort to the rules of statutory construction.

. The statute at issue is part of the Wyoming Revised Uniform Partnership Act (RUPA), et seq. (LexisNexis 2003). RUPA directs that we construe and apply its provisions to “effectuate its general purpose to make uniform the law with respect to the subject of this chapter among states enacting it.” (LexisNexis 2003).

The Wyoming legislature adopted RUPA in 1994 as a replacement for the Uniform Partnership Act.1993 Wyo. Sess. Laws ch. 194.

DISCUSSION

[¶ 9] In calculating the buyout price for Randall Warnick's interest in the partnership, the district court valued the partnership assets without making any deduction for expenses that Warnick Ranches argued would be incurred if those assets were sold. On appeal, Warnick Ranches claims that the district court should have allowed expert testimony concerning costs associated with the sale of ranch assets and challenges the district court's ruling that costs of sale were too speculative.

Calculation of the buyout price

[¶ 10] The district court was charged with calculating the amount owed to Randall Warnick pursuant to the applicable provisions of RUPA, (LexisNexis 2003) and . That amount, or the buyout price, is the amount that would have been paid to the dissociating partner following a settlement of partnership accounts upon the winding up of the partnership, if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the business as a going concern without the dissociating partner. and (LexisNexis 2003); . “[P]artnership assets must first be applied to discharge partnership liabilities to creditors, including partners who are creditors.” . The interplay between and requires that obligations to known creditors must be deducted before a partner distribution can be determined. “[T]hus, the buyout price is the net of all known liabilities.” John W. Larson, . Stated another way, “[i]n computing the buyout price, the amount the dissociating partner receives is reduced by his or her share of partnership liabilities.” Donald J. Weidner and John W. Larson, The .

[¶ 11] The purpose of the remand was for the district court to consider liabilities-partner advances, which had previously been omitted from its calculation. Warnick Ranches makes no argument that costs associated with a hypothetical sale of ranch assets should be considered a partnership liability. Its argument focuses solely upon the valuation of the partnership's assets under . Accordingly, our review is similarly limited, and we need not consider costs of sale as a liability, affecting the amount that would have been “distributable” to Randall Warnick under or the settlement of partnership accounts.

discusses the settlement of partner accounts, and subsection (b) states:

Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business. In settling accounts among the partners, the profits and losses that result from the liquidation of the partnership assets shall be credited and charged to the partners' accounts. The partnership shall make a distribution to a partner in an amount equal to that partner's positive balance. A partner shall contribute to the partnership an amount equal to that partner's negative balance only to the extent that negative balance is attributable to an obligation for which that partner is personally liable under .

*1001 [¶ 12] At this juncture, Warnick Ranches claims that the district court erred in the first step of its calculation of the buyout price by overvaluing the ranch assets. The asserted error is the district court's failure to deduct estimated sales expenses of $50,000 from the value of the partnership assets. As the basis for its argument, Warnick Ranches states that the appraiser was prepared to testify about the “liquidation value” of the ranch assets. A common understanding of liquidation is “[t]he act or process of converting assets into cash.” Black's Law Dictionary 950 (8th ed.2004). Warnick Ranches appears to assume that the liquidation value of the ranch is the amount of cash that would remain following a sale. This assumption is not supported by the pertinent statutory language and the circumstances of this case.

[¶ 13] Critical to our determination in this case is the recognition that the assets of this partnership were not, in fact, liquidated. Instead, the record reflects that the assets were retained by Warnick Ranches. Randall Warnick's dissociation from the partnership did not require the winding up of the partnership. We acknowledge that when a business is not actually dissolving, “valuation may be difficult and will have to be based to some extent on estimates and appraisals.” (Lehman, J., dissenting, with whom Kite, J., joins). However, the district court held its hearing several years after the date of valuation, and there was no question that the partnership's ranching operations had continued following Randall Warnick's departure. There was no evidence of any actual, intended, or pending sale before the district court at the time of dissociation, and, therefore, asset liquidation was only hypothetical. Accordingly, the deduction urged by Warnick Ranches is for hypothetical costs. See (costs of sale are hypothetical where the property is not actually being sold). As we will explain, because of the hypothetical nature of the urged $50,000 deduction, we find that the district court's calculation was not erroneous.

[¶ 14] If, in applying , we were to interpret the term “liquidation value” in isolation, we might envision an amount representing the net proceeds resulting from a distress sale. However, that interpretation is precluded by the language contained in the statute. The full text of provides:

Liquidation value can be defined as “1. The value of a business or of an asset when it is sold in liquidation, as opposed to being sold in the ordinary course of business. 2. See liquidation price ....” Black's Law Dictionary 1587 (8th ed.2004). Liquidation price is “[a] price that is paid for property sold to liquidate a debt. Liquidation price is [usually] below market price [fair market value].” Id. at 1227.

The buyout price of a dissociated partner's interest is the amount that would have been distributable to the dissociating partner under if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date. In either case, the sale price of the partnership assets shall be determined on the basis of the amount that would be paid by a willing buyer to a willing seller, neither being under any compulsion to buy or sell, and with knowledge of all relevant facts. Interest shall be paid from the date of dissociation to the date of payment.

differs somewhat from the Uniform Laws version of the same provision, which does not include the second to last sentence:

The buyout price of a dissociated partner's interest is the amount that would have been distributable to the dissociating partner under Section 807(b) if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date. Interest must be paid from the date of dissociation to the date of payment.

, 6 U.L.A. 175 (1997).

*1002 In analyzing this provision, we must consider all of the language contained therein:

We are guided by the full text of the statute, paying attention to its internal structure and the functional relation between the parts and the whole. Each word of a statute is to be afforded meaning, with none rendered superfluous. Further, the meaning afforded to a word should be that word's standard popular meaning unless another meaning is clearly intended. If the meaning of a word is unclear, it should be afforded the meaning that best accomplishes the statute's purpose.

(internal citations omitted). When read as a whole and in a manner consistent with its purpose, we find the statute does not support Warnick Ranches' proposed meaning of liquidation value.

[¶ 15] Liquidation value is one of two identified methods for valuing the partnership assets. Application of the two methods to the same partnership may yield two distinct values. The Massachusetts Supreme Court compared the two methods, noting:

The method of valuation of a partnership interest in a going concern necessarily differs from the valuation of the same interest at the point of liquidation. The liquidation value looks to the value of the partnership's assets less its liabilities and determines each partner's appropriate share. When valuing a going concern, however, the market value of the partnership interest itself is what is at stake, rather than the percentage of net assets it represents. Depending on circumstances, the market value of the partnership interest may be more or less than the value of the same percentage of net assets.

. By providing two approaches, contemplates variations that could result from differing appraisal techniques and varying business circumstances.

The rationale of the drafters in providing these alternative methods of valuation has been explained:

First, it cuts through some of the confusion in the cases concerning the term going concern value. To many, going concern value is a term used to explain that assets that are a part of a going concern have greater value than the sum of the values of individual assets. On the other hand, recent partnership cases in the estate tax context state that going concern value is lower than liquidation value if the assets cannot be liquidated because they are committed to a going concern. In effect, dedication to a going concern is considered an encumbrance. [RUPA] [s]ection 701 is intended to indicate that, however value is perceived, the higher of the two values is to be used. Second, valuation of the going concern “without the dissociating partner” is intended to emphasize that the partner being bought out need not be paid for his or her human capital.

Donald J. Weidner and John W. Larson, The (emphasis in original) (footnotes omitted).

[¶ 16] Significantly, the buyout price under involves use of the greater value resulting from the alternate valuation methods. Warnick Ranches' argument seems to assume that the district court's calculation incorporated the liquidation value of the partnership assets. We see room for disagreement based upon the record. The district court did not specify which valuation method was selected, and it was therefore possible that the value used in the buyout price calculation represented the going concern value of the ranch. *1003 Warnick Ranches makes no argument that costs of sale should also be deducted from the going concern value because, under its rationale, the $50,000 deduction is required only as part and parcel of liquidation value. Were we to conclude that the district court used a figure which represented the going concern value, our analysis could end here without further discussion of hypothetical costs of sale.

It does not appear that either party presented evidence specifically addressing the going concern value of the ranch. It seems that the parties agreed, or acquiesced, to the value established by the appraisal as representing the sale price of the ranch without specifying a particular valuation method.

Although the language of does not indicate that one method is more likely to yield a higher value over the other, courts tend to view going concern value as more favorable to the departing business member. The RUPA provisions allowing the district court to determine the buyout price are modeled after dissenters' rights remedies in corporate statutes. Donald J. Weidner and John W. Larson, The . Dissenting shareholders are generally entitled to a valuation of their shares under a going concern valuation method, rather than a liquidation method, unless the corporation is undergoing an actual liquidation. (collecting cases). By using the going concern value, issues concerning deductions for transactional costs are often avoided because if those costs would be incurred subsequent to the dissenter's objection, then those costs should not be assessed against the dissenting shareholder. Under the former version of the Uniform Partnership Act, use of the going concern method of valuation has been held to be correct as a matter of law when the remaining partners choose to continue the business. (whether liquidation value or going concern value should be used presented issue of first impression). With this understanding in mind, Warnick Ranches' assumption that liquidation value was used by the district court seems less likely.

[¶ 17] However, even if the district court valued the partnership assets using liquidation value, the deduction for costs associated with a hypothetical sale would not be warranted. Contrary to the interpretation asserted by Warnick Ranches, liquidation value is not the amount of the seller's residual cash following a sale. We find that the meaning of liquidation value in the statute is best understood by comparing it to the other method provided. When contrasted with “going concern value” it is clear that “liquidation value” simply means the sale of the separate assets rather than the value of the business as a whole.

[¶ 18] Additionally, under either valuation method, directs that the sale price be determined “on the basis of the amount that would be paid by a willing buyer to a willing seller, neither being under any compulsion to buy or sell, and with knowledge of all relevant facts.” The legislature chose to supplement the Uniform Laws version of this provision by adding this sentence, lending added significance to this language. This “willing buyer” and “willing seller” language does not present a novel legal concept, as it sets forth precisely what has long been the legal definition or test of “fair market value.” Black's Law Dictionary 1587 (8th ed.2004). “Fair market value is generally defined as the amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.” (citing Black's Law Dictionary 597 (6th ed.1990) and (LexisNexis 2001) (defining fair market value as used for taxation purposes)).

This language is similar to that found in commentary to , which provides, in part:

Liquidation value is not intended to mean distress sale value. Under general principles of valuation, the hypothetical selling price in either case should be the price that a willing and informed buyer would pay a willing and informed seller, with neither being under any compulsion to deal.

, 6 U.L.A. 177 (1997) (emphasis added).

[¶ 19] Warnick Ranches does not provide any analysis concerning the fair market value language contained in and does not explain how it can be reconciled with its urged meaning of liquidation value as involving a deduction for costs of sale. That reconciliation may be difficult. Simply stated, a deduction from fair market value yields an amount which is, by definition, less than fair market value. Warnick Ranches cites no authority supporting*1004 its proposed deduction of hypothetical sales expenses and does not contend that the deduction is necessary to arrive at fair market value. Regardless, we have expressed disapproval of such a deduction, stating: “[h]ypothetical costs have no relationship to an arms-length sale price which is the value to be established by recognized appraisal techniques when no sale occurs.” .

As one court noted:

... [L]ogic dictates that the “fair market value” of an item generally includes a component for costs of sale. When the willing, but not obligated, seller determines what price he will accept for a certain item of property, he takes into account those costs that he will incur in making the sale. These costs drive the seller's bottom line; i.e., the price below which he will not go. Therefore, the costs of sale have already been factored into the market value of the property when it is placed for sale. To allow a blanket deduction for costs of sale gives a windfall to the seller who has already accounted for them in his sales price.

.

See also (lower court properly denied any deduction from corporation's net asset value for speculative expenses relating to future sales that were not contemplated at valuation date); (rejecting costs of disposition, including real estate sales commission, five percent sales costs, and additional carrying costs as deductions to fair market value).

[¶ 20] Considering the language of as a whole, we conclude that “liquidation value” does not have the meaning that Warnick Ranches desires, i.e. the amount a seller would “net” upon liquidation. Rather, “liquidation value” represents the sale price of the assets based upon fair market value. “It is one thing to say that a business is worth little more than its hard assets. It is quite another ... to deduct the substantial cost of a liquidation which all parties agree will not take place.” . Where it is contemplated that a business will continue, it is not appropriate to assume “an immediate liquidation with its attendant transactional costs and taxes.” We therefore hold that, under , purely hypothetical costs of sale are not a required deduction in valuing partnership assets. We find no error in the district court rejecting the $50,000 deduction urged by Warnick Ranches in calculating the buyout price.

Partners may provide in their agreement for different treatment of hypothetical costs of sale. RUPA only supplies the default rules in the absence of an agreement. (LexisNexis 2005).

Evidentiary ruling

[¶ 21] Having clarified that the district court was not required to consider the costs of a hypothetical sale, we turn to the remainder of Warnick Ranches' argument that asserts the district court abused its discretion by refusing testimony from a qualified expert witness. Warnick Ranches claims that it makes no sense that the expert would be allowed to testify about some matters and not others, and that the inherent inconsistency of the district court's evidentiary ruling demonstrates an abuse of discretion. We disagree.

[¶ 22] The expert was a certified and experienced appraiser, who prepared a detailed report about his appraisal methodology and conclusions concerning ranch assets. The appraisal report states that the appraised value represents the “market value” of the subject property, meaning the “most probable price that a property is to bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably assuming the price is not affected by undue stimulus.” The appraisal report does not specify an amount for costs associated with a sale and provides no indication that the stated market value figure needed further adjustment.

[¶ 23] We can find no abuse of discretion in the district court's decision to exclude testimony from Warnick Ranches' expert concerning hypothetical costs of sale. The district court determined “[t]hat any possible costs of sale associated with selling the assets of the partnership as an offset to the estimated value of the assets is too speculative and inadmissible.” Again, the hearing on valuation took place several years after the April 14, 1999, valuation date. The district court's ruling was made in light of the fact that the partnership had continued after Randall Warnick's dissociation and no sale had taken place. Under these circumstances, hypothetical costs are speculative. More importantly, the proffered testimony was not pertinent to the district court's task of calculating the buyout price of Randall Warnick's partnership interest.

[¶ 24] Affirmed.

Case 36.3

724 N.W.2d 334, 2006 SD 98

In the Matter of the DISSOLUTION OF MIDNIGHT STAR ENTERPRISES, L.P., a South Dakota Limited Liability Partnership, by MIDNIGHT STAR ENTERPRISES, LTD., in its capacity as General Partner.

No. 24091.

Argued Oct. 3, 2006.

Decided Nov. 8, 2006.

, Justice.

[¶ 1.] Petition for dissolution of a partnership was brought by the general partner. The circuit court found the fair market value of the partnership was $6.2 million and ordered the majority partners to buy the business for that price within ten days or it would be sold on the open market. The general partner sought intermediate appeal raising two issues. Since the circuit court failed to use the hypothetical transaction standard to assess the fair market value of the partnership and ordered a forced sale, we reverse and remand.

FACTS

[¶ 2.] Midnight Star Enterprises, L.P. (Midnight Star) is a limited partnership, which operates a gaming, on-sale liquor and restaurant business in Deadwood, South Dakota. The owners of Midnight Star consist of: Midnight Star Enterprises, Ltd. (MSEL) as the general partner, owning 22 partnership units; Kevin Costner (Costner), owning 71.50 partnership units; and Francis and Carla Caneva (Canevas), owning 3.25 partnership units each. Costner is the sole owner of MSEL and essentially owns 93.5 partnership units.

[¶ 3.] The Canevas managed the operations of Midnight Star, receiving salaries and bonuses for their employment. According to MSEL, it became concerned about the Canevas' management and voiced concerns. Communications between the Canevas and the other partners broke down and MSEL decided to terminate the Canevas' employment. MSEL inquired whether the Canevas would participate in an amicable disassociation, but the Canevas declined.

[¶ 4.] MSEL then chose to dissolve Midnight Star pursuant to Article X, Section 10.1 of the Limited Partnership Agreement and brought a Petition for Dissolution. In order to dissolve, the fair market value of Midnight Star had to be assessed. MSEL hired Paul Thorstenson (Thorstenson), an accountant, to determine the fair market value. MSEL alleged the Canevas solicited an “offer” from Ken Kellar (Kellar), a Deadwood casino, restaurant, and hotel owner, which MSEL claimed was contrary to the provisions of the partnership agreement.

[¶ 5.] At an evidentiary hearing, Thorstenson determined the fair market value was $3.1 million based on the hypothetical transaction standard of valuation. Kellar testified he offered $6.2 million for Midnight Star. MSEL argued Thorstenson used the proper valuation standard and Kellar's offer did not establish the fair market value. The circuit court disagreed and found Kellar's offer of $6.2 million to be the fair market value of Midnight Star. *336 The circuit court ordered the majority owners to buy the business for $6.2 million within 10 days or the court would order the business to be sold on the open market.

[¶ 6.] MSEL appeals. The issues are:

1. Whether Article 10.4 of the partnership agreement requires the Midnight Star to be sold on the open market.

2. Whether the circuit court erred in finding the fair market value of Midnight Star was the actual offer price and not that of a hypothetical transaction.

3. Whether the circuit court abused its discretion by ordering a forced sale of Midnight Star.

STANDARD OF REVIEW

[¶ 7.] Interpretation of a partnership agreement, including the decision to force a sale of the partnership, is a question of law reviewed de novo. (noting the agreement is the “law of the partnership”). Our review of a circuit court's valuation of property is clearly erroneous. (additional citations omitted). Whether the circuit court used the correct method of determining fair market value is a question of law reviewed de novo.

[¶ 8.] 1. Whether Article 10.4 of the partnership agreement requires the Midnight Star to be sold on the open market.

[¶ 9.] Canevas claim the partnership agreement does not allow the general partner to buy out their interest in Midnight Star. Instead, the Canevas argue, the agreement mandates the partnership be sold on the open market upon dissolution. Specifically, Canevas ask this Court to interpret Article 10.4 to require the sale of the partnership. Article 10.4 provides:

After all of the debts of the Partnership have been paid, the General Partner or Liquidating Trustee may distribute in kind any Partnership property provided that a good faith effort is first made to sell or otherwise dispose of such property for cash or readily marketable securities at its estimated fair value to one or more third parties none of whom is an affiliate of any Partner. The General Partner or Liquidating Trustee shall value any such Partnership property at its fair market value and distribution shall then proceed as if the property had been sold for cash at such value with the resulting Net Profits and/or Net Losses allocated to the Partners as provided in Article VI and subsection 10.3.2 of this Agreement.

[¶ 10.] MSEL claims the Canevas interpretation of Article 10.4 renders other provisions of the partnership agreement meaningless. MSEL points to Article 10.3.1 to demonstrate their position. Article 10.3.1 provides in part:

Subject to 10.4 hereof, the assets of the Partnership shall be liquidated as promptly as is consistent with obtaining a fair value therefor, provided that no assets other than cash shall be sold or otherwise transferred for value to the General Partner, Liquidating Trustee, any other Partner, or any Affiliate or Related Person of any of the foregoing unless such assets are valued at their then fair market value in such sale or other transfer and fifteen (15) days prior written notice of such proposed sale or transfer ... is given to all Partners[.]

[¶ 11.] During oral arguments, MSEL claimed we need not interpret whether the partnership agreement provisions required a fair market valuation of Midnight Star or whether the partnership must be sold on *337 the open market. It claimed we could merely decide whether the circuit court erred in determining the fair market value of the business. However, if the Canevas interpretation of the partnership agreement provisions is correct, there would be no need to determine the fair market value. If correct, the value of the partnership would be determined solely by the sale of Midnight Star. Therefore, we reach the question whether the partnership agreement provisions require a fair market analysis or require a forced sale.

[¶ 12.] The partnership agreement is a contract between the partners and effect will be given to the plain meaning of its words. see also (noting the contract is interpreted using its language). “An interpretation which gives a reasonable and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable or of no effect.” (citing ). We must “give effect to the language of the entire contract and particular words and phrases are not interpreted in isolation.” (quoting ) (internal quotations omitted).

[¶ 13.] If we accept the Canevas' interpretation of the partnership agreement, it would mean that Article 10.4 requires the partnership to be placed on the open market and sold to the highest bidder. The plain meaning of Article 10.4 does not command that interpretation. This provision clearly states the General Partner “may distribute in kind any partnership property” if the property is first offered to a third party for a fair value. (Emphasis added). While the General Partner may offer the property on the open market, Article 10.4 does not require it. Simply, the General Partner has to offer the property for sale if it chooses an in kind distribution of assets. Sale is not mandatory.

[¶ 14.] This interpretation is reinforced when read together with Article 10.3.1. If the Canevas' interpretation is utilized, it would render Article 10.3.1 meaningless. Article 10.3.1 instructs that “no assets other than cash shall be sold or otherwise transferred to [any partner] unless the assets are valued at their then fair market value in such sale or other transfer” and all partners receive fifteen days prior notice of the proposed sale or transfer. If Article 10.4 requires a forced sale, then there would be no need to have the fair market value provision of Article 10.3.1.

[¶ 15.] We cannot interpret one provision to render another provision meaningless. Instead, we interpret the partnership agreement to require a sale only if a partner elects to distribute in kind. However, read as a whole, the partnership agreement does not require a mandatory sale upon dissolution. Instead, the general partner can opt to liquidate using either a sale or transfer under Article 10.3.1. This gives meaning to Article 10.3.1's fair market value provision. Because MSEL decided to pursue dissolution under Article 10.3.1, we decide the correct standard for determining the fair market value of the partnership.

[¶ 16.] 2. Whether the circuit court erred in finding the fair market value of Midnight Star was the actual offer price and not that of a hypothetical transaction.

[¶ 17.] MSEL claims the correct standard for appraising a business is the hypothetical transaction analysis, like the analysis employed by MSEL's expert Thorstenson. Canevas argue that the circuit*338 court correctly concluded the offer from Kellar represented the fair market value of Midnight Star.

[¶ 18.] Fair market value is defined as,

the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.

Internal , MSEL argues that since the Revenue Ruling was issued in 1959, “hundreds of courts, tribunals, textbooks, and articles have reiterated the mandatory requirement for hypothetical analysis.” In fact, MSEL contends that not “a single whiff of authority” can be found that supports the circuit court's decision to ignore the hypothetical transaction standard and instead apply an actual offer to determine the fair market value.

As of October 11, 2006 there were 2109 positive references citing on Westlaw. The 3 negative references indicate that the ruling has been modified by , but in a way not applicable to this case.

[¶ 19.] This Court has not decided a case involving this issue. However, in we noted, “ represents the most substantial body of official guidance for valuing an interest in a closely held corporation.” (quoting Oldfather, et. al, Valuation and Distribution of Marital Property, Vol. 2, Ch. 22.08[2][a] at 22-110 (1996)). Moreover, other jurisdictions have employed the hypothetical transaction to arrive at the fair market value in other situations. In , the United States Tax Court explained the “fair market value is the standard of determining the value of property for Federal estate tax purposes.” . The court went on to explain that the fair market value uses hypothetical sellers and buyers, “rather than specific individuals or entities, and their characteristics are not necessarily the same as those of the actual buyer or seller.” (citing (additional citations omitted)).

[¶ 20.] Importantly, courts have noted that the fair market analysis does not contemplate actual buyers. In , the court stated it was error for the lower court to “assume[ ] the existence of a strategic buyer[.]” (additional citations omitted). The court further emphasized that “fair market value analysis depends ... on a hypothetical rather than an actual buyer.”

[¶ 21.] MSEL goes to great lengths in its brief to demonstrate why the hypothetical transaction valuation standard, rather than an actual buyer, is the proper standard to determine the fair market value. MSEL lists sound policy reasons why an offer cannot be the fair market value. For example, what if a partnership solicited a “strawman” to offer a low price for the business? What if a businessman, for personal reasons, offers 10 times the real value of the business? What if the partnership, for personal reasons, such as sentimental value, refuses to sell for that absurdly high offer? These arbitrary, emotional offers and rejections cannot provide a rational and reasonable *339 basis for determining the fair market value.

[¶ 22.] Conversely, the hypothetical transaction standard does provide a rational and reasonable basis for determining the fair market value. This standard provides the basis by removing the irrationalities, strategies, and emotions from the analysis. Many articles and treatises that discuss fair market value specifically note that removing the irrationalities and biases is one of the rationales for the hypothetical transaction standard. See Z. Christopher Mercer, Valuing Enterprises and Shareholder Cash Flows: (noting that the “[u]se of available control premium studies as a basis for inferring minority interest discounts in a fair market value context is not appropriate, except when strategic buyers are the norm”). “[The world of fair market value] is a special world in which the participants are expected (defined) to act in specific and predictable ways. It is a world of hypothetical willing buyers and sellers engaging in hypothetical transactions.” Z. Christopher Mercer & Terry S. Brown, .

[¶ 23.] Finally, Section X of the partnership agreement itself requires a “fair market value” of the assets. The partnership agreement is a contract between the partners and effect will be given to the plain meaning of its words. (noting the agreement is the “law of the partnership”); see also The partnership agreement does not provide that the value of the business upon dissolution will be the highest and best offer the partnership can obtain.

[¶ 24.] The circuit court should have used the hypothetical transaction standard in determining the fair market value of Midnight Star. This standard is backed by years of testing and numerous positive citations endorsing it. Instead of employing the hypothetical transaction standard, the court used a single offer to determine that the fair market value was $6.2 million. It was error for the circuit court to ignore this established standard.

MSEL argued that the circuit court erred in accepting Kellar's offer as the fair market value because Kellar admittedly knew nothing about the Midnight Star besides who owned it. Since we determined the court erred in accepting Kellar's offer as the fair market value on different grounds, we need not discuss this issue.

[¶ 25.] 3. Whether the circuit court abused its discretion by ordering a forced sale of Midnight Star.

[¶ 26.] Since it was error for the circuit court to value Midnight Star at $6.2 million, it was also error to force the general partners to buy the business for $6.2 million or sell the business. However, because this issue could reappear should there be another appeal of this case after revaluation, we determine whether the circuit court can order a partnership to be sold on the open market when the majority owners want to continue to run the business.

[¶ 27.] Other jurisdictions have addressed the issue whether the business must be sold in order to liquidate after dissolution. Many of these jurisdictions allow the partnership to be sold to the willing partners even after dissolution. A withdrawing partner can be paid any contributions or profits due, but liquidation does not have to occur after dissolution. ; . These jurisdictions have noted that forced sales typically end up in economic waste and the *340 Revised Uniform Partnership Act's reforms primarily targeted the economic waste of compelled liquidation. In these jurisdictions' views, buyouts and other alternatives to forced sales may be utilized to wind up the partnership. , rev. denied, . See also In the court noted that the phrase “liquidation of partnership assets” merely guaranteed partners receive the fair value of their property interest upon dissolution, but did not require a forced sale. .

South Dakota adopted the Revised Uniform Limited Partnership Act in SDCL chapter 48-7. These provisions also indicate buyout is an acceptable alternative to liquidation. See (noting a withdrawing partner can receive any distribution or interest in the partnership to which he is entitled upon withdrawal).

[¶ 28.] We have stated that to sell an owner's “property without [his] consent is an extreme exercise of power warranted only in clear cases.” (citing (additional citations omitted)). That logic is true in this case. The owners of the majority interest, 93.5 partnership units, want to continue the business. Most jurisdictions have allowed the withdrawing partner to be bought out after dissolution and a forced sale is not necessary to liquidate. See ; ; ; .

[¶ 29.] We see no reason that rationale should not be applied in this case, especially in view of our construction of the contract provisions in the partnership agreement. Instead of ordering the majority partners to purchase the whole partnership for the appraised value, the majority partners should only be required to pay any interests the withdrawing partner is due. Upon remand, the majority partners should only be required to pay the Canevas the value of their 6.5 partnership units, if any value exists after revaluation. However, if the majority owners refuse to pay any amount owed to the Canevas after revaluation, then a forced sale is appropriate. See ; .

[¶ 30.] Since the circuit court erred in assessing the fair market value for Midnight Star and ordering a forced sale for $6.2 million, we reverse and remand for further proceedings consistent with this opinion.

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