Cannon v. Bertrand

• Decision Date: 21 January 2009
• Docket Number: No. 2008-C-1073.,2008-C-1073.
• Citation: 2 So.3d 393
• Parties: Kenneth John CANNON, Jr. v. Lenard BERTRAND, et al.
• Court: Louisiana Supreme Court

2 So.3d 393

Kenneth John CANNON, Jr. v. Lenard BERTRAND, et al.

No. 2008-C-1073.

Supreme Court of Louisiana.

January 21, 2009.

Durio, McGoffin, Stagg & Ackermann, Steven Gerald Durio, Lafayette, for applicant.

Guglielmo, Lopez, Tuttle, Hunter & Jarrell, James Clarence Lopez, Opelousas, for respondent.

TRAYLOR, Justice.^*

We granted this writ application in order to determine whether the courts below erred in applying a "minority discount" in determining the value of a one-third share of a partnership. For the reasons which follow, we reverse.

FACTS and PROCEDURAL HISTORY

In March 1997, Kenneth Cannon, Jr. (Cannon), the plaintiff, and Lenard Bertrand (Bertrand) and Wade Leger (Leger), the defendants, created LBC, L.L.P. (LBC), a limited liability partnership, by written agreement. The agreement, which contained no term, provided that each of the partners enjoyed an equal one-third share of the partnership, and that each partner was to have an equal voice in managing the partnership.

In April 1997, LBC purchased 562 acres of rural land in Jefferson County, Mississippi for $450,000. Sometime in the early spring or summer of 2006, Cannon notified Bertrand and Leger that he intended to withdraw from the partnership. After the partners were unable to reach agreement on the value of Cannon's one-third share of the partnership, Cannon filed suit in district court for a determination of the value of his share according to Civil Code Arts. 2823-25.

At trial, the parties each presented expert testimony as to the value of the assets of the partnership and of Cannon's one-third share of the same. The plaintiff's expert's appraisal found that the value of the partnership's assets was $1,324,203 and that plaintiff's one-third share of the partnership was worth $457,401, applying no discount. The defendants' expert's appraisal, on the other hand, found that the partnership's assets were worth $955,000, and that plaintiff's one-third share was worth $80,000, assuming a 75% minority discount. The district court found that the value of the underlying assets was $1,054,368 and that plaintiff's one-third share of the partnership was worth $228,447, after applying a 35% minority discount.

Determining that this court had ratified the use of minority discounts in its opinion in Shopf v. Marina Del Ray Partnership, 549 So.2d 833 (La.1989), the appellate court found that the district court had not abused its discretion in either choosing to apply a minority discount, or in setting the minority discount at 35%. Cannon v. Bertrand, 2007-1278 (La.App. 3d Cir.4/16/09), 981 So.2d 169. This court then granted plaintiff's application for writ of certiorari. Cannon v. Bertrand, 2008-1073 (La.9/19/08), 992 So.2d 967.

DISCUSSION

The effects of the withdrawal of a partner in a partnership and the rights of a withdrawing partner are delineated in Civil Code Arts. 2823-25:

Art. 2823. Rights of a partner after withdrawal

The former partner, his successors, or the seizing creditor is entitled to an amount equal to the value that the share of the former partner had at the time membership ceased.

Art. 2824. Payment of interest of partner

If a partnership continues to exist after the membership of a partner ceases, unless otherwise agreed, the partnership must pay in money the amount referred to in Article 2823 as soon as that amount is determined together with interest at the legal rate from the time membership ceases.

Art. 2825. Judicial determination of amount

If there is no agreement on the amount to be paid under Articles 2823 and 2824, any interested party may seek a judicial determination of the amount and a judgment ordering its payment.

Although these articles make clear that the withdrawing partner is due the "value that [his] share [ ] had at the time membership ceased," the term "value" is not defined. However, this court previously examined the valuation of a share of a partnership in the Shopf case cited above.

In Shopf, a minority partner (Shopf) in a real estate venture in St. Tammany Parish withdrew from the partnership and filed suit in district court to have the value of his share determined according to La. C.C. arts. 2823-25. At trial, the district court determined that the value of the share was zero, as the venture had a negative book value at the time of the Shopf's withdrawal.

This court reversed, deciding that a proper value of a withdrawing partner's share could be based on fair market value, or "the price that a willing buyer would pay to a willing seller for a certain piece of property in an arm's length transaction, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts."¹ Shopf, 549 So.2d at 839. The court then looked at the amount that the majority partner (Claitor) had paid to another withdrawing minority partner (Ray) for his share of the partnership six months before Shopf's withdrawal, $3,552.63 per point, and at the price that Claitor had offered Shopf for his share of the partnership three months before the withdrawal, the same $3,552.63 per point, as evidence of fair market value. The court found that although both Claitor and Ray were "willing and knowledgeable participants in the sale of [the] shares," because Claitor held shares in the same closely held business, the transaction occurred at less than arm's length dealing. Shopf, 549 So.2d at 839.

Because the transaction was not conducted at arm's length, and, therefore, the amount paid and offered was not truly "fair market value," the court discussed the method to be used to determine the fair market value of the share:

[T]he prices paid by Claitor to Ray and offered by Claitor to [Shopf] were necessarily based largely on development potential, which can be a significant factor in the appraisal of undeveloped or partially developed property. Therefore, the $3,552.63 per point price established in Claitor's dealings with his other partners, while subject to adjustment, is the most significant factor in the determination of fair market value.

The price of $3,552.63 per point must be adjusted to account for other considerations. Claitor's July, 1984 offer to [Shopf] to sell or buy at that price was made in an effort to compromise a dispute over [Shopf's] right to purchase a portion of the share Claitor had bought from Ray. Claitor's letter stated that the offer was only open for one week "after which we may or may not be interested at this price or some other price". Because of the dispute compromise element, this offer should not be accorded the same weight as a bona fide offer by a party interested only in buying the share.

The most significant adjustment must be made in recognition of the fact that [Shopf's] share is a minority interest in a closely held business. The determination of the value of a fractional share in a business entity involves more than fixing the value of the business and multiplying by the fraction being evaluated, especially when the share is a minority interest. A minority interest may be uniquely valuable to the owner, but may have considerably less value to an independent third party, because the interest is relatively illiquid and difficult to market.

Here, when Claitor paid Ray $3,552.63 per point and offered the same price to [Shopf], he already owned or controlled a majority of the shares and had more interest in increasing his percentage than an...