Dissolution of Midnight Star Enterprises, 24091.

• Decision Date: 08 November 2006
• Docket Number: No. 24091.,24091.
• Parties: 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.
• Court: South Dakota Supreme Court

Page 334

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.

Supreme Court of South Dakota.

Argued October 3, 2006.

Decided November 8, 2006.

Michael P. Reynolds of Barker Reynolds Law Firm, L.L.C., Rapid City, South Dakota, Attorneys for appellant Midnight Star Enterprises, LTD.

Richard A. Pluimer, Dylan Wilde, Brady & Pluimer, P.C., Spearfish, South Dakota, Attorneys for appellees Canevas.

SABERS, 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. 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. Liechty v. Liechty, 231 N.W.2d 729, 731 (N.D.1975) (noting the agreement is the "law of the partnership"). Our review of a circuit court's valuation of property is clearly erroneous. Priebe v. Priebe, 1996 SD 136, ¶ 8, 556 N.W.2d 78, 80 (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 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. Liechty, 231 N.W.2d at 731; see also Pauley v. Simonson, 2006 SD 73, ¶ 8, 720 N.W.2d 665, 668 (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." Nelson v. Schellpfeffer, 2003 SD 7, ¶ 14, 656 N.W.2d 740, 744 (citing Restatement (Second) Contracts § 203(a) (1981)). We must "give effect to the language of the entire contract and particular words and phrases are not interpreted in isolation." Jones v. Siouxland Surgery, 2006 SD 97, 724 N.W.2d 340 (quoting Hartig Drug Co. v. Hartig, 602 N.W.2d 794, 797-98 (Iowa 1999)) (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...