Anastos v. Sable

• Decision Date: 01 November 2004
• Citation: 443 Mass. 146,819 NE 2d 587
• Parties: WILLIAM N. ANASTOS v. GARY M. SABLE & another.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

443 Mass. 146

819 NE 2d 587

WILLIAM N. ANASTOS v. GARY M. SABLE & another.¹

Supreme Judicial Court of Massachusetts, Middlesex.

November 1, 2004.

December 22, 2004.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

Andrew Lawlor for the plaintiff.

Christopher Weld, Jr., for the defendants.

SPINA, J.

This appeal addresses the proper valuation of a minority interest in a general partnership when the withdrawing partner caused a statutory dissolution in contravention of the partnership agreement and, rather than liquidate, the remaining partners elected under G. L. c. 108A, § 38, to continue the partnership's business for the remaining term of the partnership agreement.

1. Background. The plaintiff, William N. Anastos, and the defendants, Gary M. Sable and John A. Geishecker, Jr., entered into a written agreement in 1984 forming a partnership for the purpose of purchasing real estate improved with a manufacturing facility and subsequently collecting rents from the tenant. At the time of the original lease, the partnership members were all executive level employees and shareholders of the tenant. As amended, the partnership agreement runs until 2010 and each of the parties owned a one-third interest.

In 1996, the plaintiff filed a complaint in the Superior Court seeking dissolution of the partnership for cause under G. L. c. 108A, § 32. The defendants answered and asserted counter-claims, including a request for a declaration that the plaintiff's request to dissolve the partnership contravened the partnership agreement and therefore was wrongful, and that the defendants, who elected to continue the partnership business, were entitled to damages as a result of the plaintiff's wrongful dissolution. The parties filed cross motions for summary judgment. On June 8, 1998, a judge in the Superior Court denied the plaintiff's motion for summary judgment, and allowed the defendants' motion for partial summary judgment, concluding that the plaintiff's request for dissolution contravened the terms of the partnership agreement.

The matter proceeded to a bench trial on the issues of the value of the plaintiff's interest in the partnership at dissolution and the damages, if any, caused by the plaintiff's dissolution of the partnership in contravention of the partnership agreement. The judge found that, as of the date of dissolution, the value of the net assets of the partnership was $2,494,005. There is no dispute about this finding. The judge determined, however, that because the partnership was a going concern, the value of the plaintiff's one-third minority interest was not necessarily equal to one-third of the liquidation value. She found that the plaintiff lacked control over the financial, operational, and management decisions of the partnership, and that his interest was illiquid. She further found that there is no ready market for the purchase of a minority interest in a general partnership whose primary asset is real estate where the partnership agreement contains limitations and restrictions on the control that any minority owner can exercise. These factors led to the conclusion that, in this case, the value of the one-third partnership interest was less than the value of one-third of the partnership's net assets.

Based on expert testimony of comparable sales of general partnership interests and the literature regarding the appropriate discount to apply to determine the value of the plaintiff's minority interest, the judge concluded the appropriate discount here was forty per cent. Rounding out the final figure, the judge ultimately determined that the plaintiff's interest in the partnership had a value of $500,000.

As to the damages caused by the plaintiff's breach of the partnership agreement, the judge relied on a stipulation of the parties that legal fees and expenses, expert fees, and various other specified costs would comprise the elements of damages. On this basis, she determined that the amount of damages was $150,153. The amount owed to the plaintiff for his partnership interest correspondingly was reduced by this amount and judgment entered for the plaintiff in the amount of $349,847.

Prejudgment interest was a matter of contention. Initially, the judgment included prejudgment interest for the plaintiff in the amount of $236,594, resulting in a total award for the plaintiff of $586,441.49. The defendants filed a motion to alter or amend the judgment, which was allowed. The amended judgment included no prejudgment interest for the plaintiff, but it included prejudgment interest on the damages awarded to the defendants at the rate of twelve per cent per annum, or $101,200. A revised final judgment of $248,647 entered for the plaintiff, although the defendants were identified as the prevailing parties and were awarded costs. No new findings accompanied the amended judgment.

The plaintiff, represented by new counsel, filed his own motion to alter or amend the judgment, addressing the issues of prejudgment interest and the propriety of including the defendants' legal and expert witness fees and expenses in their claim for damages. The plaintiff's motion was denied. The plaintiff appealed, and alleges error in the application of a minority discount to his interest in the partnership, the award of attorney's fees and expert witness fees and expenses as part of damages, the failure to award him prejudgment interest, and the award of prejudgment interest to the defendants. We transferred the case to this court on our own motion. We affirm.

2. Minority partnership interest. The trial judge determined the value of the plaintiff's partnership interest using a methodology appropriate to evaluate a minority interest in a going concern. Sarrouf v. New England Patriots Football Club, Inc., 397 Mass. 542, 544-549 (1986) (fact finder to determine weight of various relevant factors when determining value of going concern). In reviewing the judge's decision, we accept her findings of fact unless they are clearly erroneous. Kendall v. Selvaggio, 413 Mass. 619, 620-621 (1992). The judge's legal conclusions are reviewed de novo. Marlow v. New Bedford, 369 Mass. 501, 508 (1976).

The plaintiff alleges error, claiming that, under G. L. c. 108A, § 38, valuation of his interest must be based on the liquidation value of the partnership's assets. When a partner causes the dissolution of a partnership in contravention of a partnership agreement (as happened here), the remaining partners may elect to continue the partnership's business for the remainder of the partnership term. See G. L. c. 108A, § 38 (2) (b). Whether to use the liquidation or going concern method for valuation of the departing partner's share in such a situation is a matter of first impression for this court.

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.

General Laws c. 108A, § 38, specifies the rights of partners on dissolution of a partnership. It was enacted in 1922 and is identical to § 38 of the Uniform Partnership Act (1914), 6 (Part II) U.L.A. 487 (Master ed. 2001). St. 1922, c. 486, § 1.² Section 38 provides two options when a partnership is dissolved in contravention of the partnership agreement. The partners who did not cause the wrongful dissolution may terminate the partnership business as if the dissolution were proper, but also recover damages for the breach of the agreement from the wrongfully dissolving partner. G. L. c. 108A, § 38 (2) (a). Or, alternatively:

"[I]f they all desire to continue the business in the same name, . . . [they] may do so during the agreed term for the partnership, and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully the value of his interest in the partnership at the dissolution, less any damages recoverable [for his wrongful dissolution]" (emphasis added).

G. L. c. 108A, § 38 (2) (b). The defendants chose to continue the business.

The plaintiff, having wrongfully caused the dissolution, has rights under G. L. c. 108A, § 38 (2) (c), which incorporates §§ 38 (1) and 38 (2) (a) (II). If the defendants had chosen to terminate the business of the partnership, the plaintiff would have been entitled under § 38 (2) (a) (I) to "have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners." This is essentially the liquidation valuation method discussed above. The plaintiff's share then would be reduced, under § 38 (2) (a) (II), by the amount of any damages caused by his breach of the agreement.

Because the defendants chose to continue the enterprise, the plaintiff's rights instead are governed by § 38 (2) (c) (II), which affords him,

"the right as against his co-partners . . . to have the value of his interest in the partnership, less any damages caused to his co partners by the dissolution, ascertained and paid to him in cash, or the payment secured by bond approved by the court . . . but in ascertaining the value of the partner's interest the value of the good will of the business shall not be considered."

The plaintiff claims there is a distinction between the value of his interest in the partnership when it was a going concern before the point of dissolution and the value of his "interest in the...