Campion v. Parkview Apartments, 20393

• Decision Date: 27 January 1999
• Docket Number: No. 20393,20393
• Citation: 1999 SD 10,588 N.W.2d 897
• Parties: Richard J. CAMPION, Joe Kirby, Tom Kirby, W. Ray Laird, III, Peter M. Mies, Richard Ogle, Martin F. Peterfeit, Ernest M.Sifrar, Marie G. Sifrar, Charles L. Tracer, and Robert Witt, Plaintiffs and Appellees, v. PARKVIEW APARTMENTS, a limited partnership, and Brutger Equities,Inc., Successor in Interest to Brutger Companies, Inc., Defendants and Appellants, and The South Dakota Housing Development Authority, Defendant.
• Court: South Dakota Supreme Court

Page 897

588 N.W.2d 897

1999 SD 10

Richard J. CAMPION, Joe Kirby, Tom Kirby, W. Ray Laird, III Peter M. Mies, Richard Ogle, Martin F. Peterfeit, Ernest M.Sifrar, Marie G. Sifrar, Charles L. Tracer, and Robert Witt, Plaintiffs and Appellees, v. PARKVIEW APARTMENTS, a limited partnership, and Brutger Equities,Inc., Successor in Interest to Brutger Companies, Inc., Defendants and Appellants and The South Dakota Housing Development Authority, Defendant.

No. 20393.

Supreme Court of South Dakota.

Argued Sept. 15, 1998.

Decided Jan. 27, 1999.

Joseph M. Butler of Bangs, McCullen, Butler, Foye and Simmons, L.L.P., Rapid City, for plaintiffs and appellees.

Michael A. Hauck of Quaintance, Hauck & Mullen, P.C., Sioux Falls, John A. Pecchia, Christoffel, Elliott & Albrecht, P.A., St. Paul, Minnesota, for defendants and appellants.

SABERS, Justice.

¶1 General Partner appeals a summary judgment ordering it to enroll the Limited Partnership in a new South Dakota Housing Development Authority plan which increases the amount of income available for distribution by redefining equity. We affirm.

FACTS

¶2 Parkview Limited Partnership (Limited Partnership) was formed in 1979 and consists of ten limited partners (Limited Partners) and one general partner, Brutger Equities, Inc. (General Partner). The Limited Partnership's purpose was to build, own, and operate a low-income housing unit (Project) in Madison, South Dakota. The parties entered into a limited partnership agreement (LPA) which provides for dissolution on December 31, 2020.

¶3 The Project was financed through the South Dakota Housing Development Authority (SDHDA). Part of the financing agreement with SDHDA required the Limited Partnership to enter into a Regulatory Agreement which limits the amount of income available for distribution to Limited Partners and General Partner. Initially the distributions were limited to 6% of the initial equity investment, which was defined by the Regulatory Agreement as the difference between the cost of the Project and the original mortgage. In 1990 SDHDA amended its regulations and increased the amount to 8%. General Partner did not oppose the 1990 increase.

¶4 The Regulatory Agreement also requires the Limited Partnership to deposit undistributed income into a Residual Receipts Reserve established and maintained by SDHDA. After the 1994 deposit, the balance in the Residual Receipts Reserve was $353,943.

¶5 The SDHDA mortgage will be repaid on July 1, 2020, and the SDHDA regulations will no longer apply.

¶6 The LPA provides for allocation of income, profits, and excess net cash receipts of 98% to Limited Partners and 2% to General Partner. For fiscal years 1991, 1992, 1993, and 1994, $7,607 was distributed according to those percentages.

¶7 In 1992, SDHDA again amended its regulations to offer an optional Redefined Equity Program (REP) which increases the allowed distributions by redefining the equity and increasing distributions to 10% of the redefined equity. Equity is redefined as the excess value of the Project over the then current loan balance. ^* Under the REP, allowed distributions for 1991 would have increased from $7,607 to $57,460. Enrollment in the REP would require using part of the Residual Receipt Reserve to fund the distributions.

¶8 General Partner opposed Limited Partners' request to enroll in the REP. It refused to enroll unless Limited Partners agreed to change the LPA to increase General Partner's share of the distributions from 2% to 30ntil Limited Partners receive their capital contributions, and then profits, gains, losses, and distributions would be divided equally.

¶9 General Partner claims that enrollment in the REP would deplete the Residual Receipt Reserve which it claims will be distributed equally between General Partner and Limited Partners at the expiration of the term or when the Limited Partnership is sold.

¶10 On December 12, 1994, Limited Partners filed a complaint seeking an order compelling General Partner to enroll in the REP. Amended complaints, filed on July 29, 1996 and August 12, 1996, added claims of breach of fiduciary duty and gross negligence and sought to have General Partner judicially ousted from the Limited Partnership.

¶11 Both parties sought summary judgment and stipulated that no genuine issue of material fact existed.

¶12 The trial court issued a memorandum decision on January 14, 1997 granting summary judgment for Limited Partners. The trial court stated that under the LPA § 2.6, the Residual Receipts Reserve is included in the definition of "Excess Net Cash Receipts" and would be distributed 98% to Limited Partners and 2% to General Partner if not for the SDHDA regulation. Therefore, the trial court reasoned that when the SDHDA regulation is lifted on July 1, 2020 (when the mortgage is repaid), the Residual Receipts Reserve is permitted to be distributed according to the 98/2% scheme. The trial court found that § 12.3 of the LPA, regarding liquidation, did not apply because this was not a sale, exchange, or refinancing of all or substantially all of the assets of the Limited Partnership. Finding a breach of fiduciary duties by refusing to enroll in the REP, the trial court ordered the removal of General Partner.

¶13 The parties entered a stipulation withdrawing Limited Partners' allegations of breach of fiduciary duty and providing that General Partner may remain as long as it enrolls in the REP. This stipulation is contingent upon whether the granting of summary judgment is affirmed on appeal.

¶14 Several sections of the LPA and the Regulatory Agreement are key to discussion of this case:

¶15 Section 2.6 of the LPA states:

"Excess Net Cash Receipts" of the Partnership means the net income of the Partnership for the fiscal year computed on the cash receipts and disbursements method consistently applied, plus the amount of any deduction for depreciation or amortization taken in such fiscal year and less the amount paid in such fiscal year on the principal of any mortgage or other encumbrance against the properties of the Partnership and less the amount of any reasonable reserve as determined by the General Partner as of the close of such fiscal year for working capital of the Partnership and/or for repair, replacement or improvement of the properties of the Partnership, plus any net proceeds from the sale of any part, but not substantially all, of the Project, plus any amount permitted to be distributed to the Partners from the Development Cost Escrow or any reserve. Proceeds from the refinancing of the Project and net proceeds from the sale, exchange or other disposition of substantially all the Project shall not be included.

(Emphasis added.)

¶16 Section 5.1 of LPA states, in pertinent part:

The allocation of income, profits, gains and losses among the Limited Partners and General Partner shall be as follows:

(a) To the Additional Limited Partners: 98% thereof (9.8% to the holder of each whole Unit that has been issued and is outstanding, with pro-rata interest to the holder of any fractional Unit); and

(b) To the General Partner: 2% thereof.

¶17 Section 5.4 of the LPA states, in pertinent part:

A separate Income Account shall be maintained by the Partnership for each Partner. Such Income Account of each Partner shall be credited or debited as the case may be with the amount of the net income of the Partnership for each fiscal year allocated to such Partner pursuant to Section 5.1 and shall be further debited with the amount of any cash distributions made by the Partnership to such Partner....

¶18 Section 5.5(a) of the LPA states, in pertinent part:

All distributions shall be made from the Operating Receipts and Expense Account pursuant to Section 10 of the Regulatory Agreement.... [T]he Partnership shall distribute to the Partners, in the same ratio as such Partners shared in the allocation of the net income of the Partnership for such fiscal year pursuant to Section 5.1, the Excess Net Cash Receipts of the Partnership.... [T]he General Partner may determine, in its absolute discretion, to make advance distributions to the Partners of the Excess Net Cash Receipts of the Partnership for the fiscal year to which the Partners will be entitled for such fiscal year....

(Emphasis added.)

¶19 Section 5.5(b) of the LPA states: "Distribution of any net proceeds upon the sale, exchange, or other disposition or refinancing of all or substantially all of the assets of the Partnership shall be made in accordance with the provisions of Section 12.3."

¶20 Section 12.3 of the LPA provides for liquidation and winding up of the Limited Partnership. It states, in part:

If dissolution of the Partnership should be caused by reason of (a) the expiration of the term as set forth in Section 1.5, ... (c) the sale, exchange or other disposition of all or substantially all of the Project ..., the assets and the property of the Partnership shall be distributed in the following order of priority:

(a) To the payment of all debts and liabilities of the Partnership, other than any loans or advances that may have been made by the Partners to the Partnership, in the order of priority as provided by law;

(b) To the establishment of any reserves deemed necessary by the General Partner or the person winding up the affairs of the Partnership for any contingent liabilities or obligations of the Partnership;

(c) To the payment of any loans or advances that may have been made by any of the Partners to the Partnership as pursuant to Section 4.7;

(d) To the payment of any outstanding Interest Bearing Income Receipts Notes, Residual Receipt Notes and Project Notes;

(e) To the Limited Partners, to the extent of any credit balance in their respective Income Accounts prior to and not including the allocation of any gain or income from the sale, exchange or other disposition of all or substantially all of the Project;

(f) To the Limited Partners to the extent of their cash...