Kelly v. Silverwood Estates

• Decision Date: 28 September 1995
• Docket Number: No. 21103,21103
• Citation: 903 P.2d 1321,127 Idaho 624
• Parties: David Lamar KELLY and Annette W. Kelly, Plaintiffs-Appellants-Cross Respondents, v. SILVERWOOD ESTATES, a Utah Partnership, Howard McDonald, Joseph S. McDonald, Steven McDonald, and McDonald Brothers, Inc., Defendants-Respondents-Cross Appellants. Twin Falls, March 1995 Term
• Court: Idaho Supreme Court

Page 1321

903 P.2d 1321

127 Idaho 624

David Lamar KELLY and Annette W. Kelly, Plaintiffs-Appellants-Cross Respondents, v.SILVERWOOD ESTATES, a Utah Partnership, Howard McDonald, Joseph S. McDonald, Steven McDonald, and McDonald Brothers, Inc., Defendants-Respondents-Cross Appellants.

No. 21103.

Supreme Court of Idaho,

Twin Falls, March 1995 Term.

Sept. 28, 1995.

Parsons, Smith, Stone & Fletcher, Burley, for appellants.Randolph C. Stone argued, Burley.

Donald J. Chisholm, Burley, for respondents.

SCHROEDER, Justice.

I.BACKGROUND AND PRIOR PROCEEDINGS

On January 2, 1985, Silverwood Estates (Silverwood), a Utah partnership, entered into a contract with David LaMar Kelly and Annette W. Kelly(the Kellys) to acquire a one-half interest in K5 Ranch which consisted of deeded real estate located in Idaho and Utah, plus irrigation and farm equipment, livestock and grazing rights.The Kellys were the record owners of the realty and also held the K5 brand.Although this property was never formally transferred to the K5 partnership, the Kellys do not dispute that the brand and the realty were partnership assets.

At the time the partnership was formed, the Kellys agreed that their interest in the K5 Ranch partnership would be encumbered by their preexisting obligations in the approximate amount of $550,000.Additionally, the Kellys' debts were refinanced with a loan from Moore Financial of Utah, Inc.(now known as West One Bank) in the amount of $510,000.Silverwood was required to sign the loan as guarantor, and all of the partnership's real property was encumbered to secure the Kellys' loan that was refinanced.

On June 1, 1988, the Kellys advised Silverwood that they were withdrawing from the partnership.This effected a dissolution of the partnership as of that date.Idaho Code § 53-331(1)(b).¹Silverwood took sole possession of the partnership assets with the exception of about half of the livestock which the Kellys took on October 1, 1988.David Kelly testified that on several occasions after June 1 the Kellys attempted unsuccessfully to negotiate a winding up of the partnership with Silverwood, and that Silverwood's continuation of the partnership business was without the Kellys' consent.

As of the date of dissolution the Kellys owed West One Bank $627,301 in principal and interest on the debt consolidation loan which was secured by the partnership realty and guaranteed by Silverwood.On May 17, 1989, the Kellys filed a bankruptcy petition.The bankruptcy trustee issued a general order of abandonment finding that the Kellys had no equity in the real property securing the West One Bank debt either directly or indirectly through the K5 partnership.The Kellys received a discharge in bankruptcy on September 5, 1989, which included discharge of their debt to West One.Silverwood became obligated on the debt as a consequence of the guarantee, and the debt encumbered the real property of the partnership.

On October 24, 1989, the Kellys made a written demand upon Silverwood for the sum of $99,405 which they claimed represented half of the partnership assets as of June 1, 1988.They based the amount of their settlement demand on their mistaken belief that the partnership realty had been lost through foreclosure by West One Bank.

On January 10, 1990, the Kellys filed an action for a decree of dissolution, ² a formal accounting, ³ a wind up of partnership affairs, ⁴ and a distribution of their rightful share of the partnership assets.Silverwood counterclaimed for $35,800, the amount it believed the Kellys received from the sale of the partnership livestock they took in October of 1989.Silverwood also alleged that the Kellys had no equity in the K5 partnership as of June 1, 1988.

Following commencement of the action, the remaining livestock were sold and the proceeds of the sale deposited with the court.By stipulation of the parties, $32,909.27 of the proceeds was applied to a portion of the Kellys' debts, and $15,047 was applied to a partnership obligation to Farm Credit Leasing Services, Corp.

The partnership's realty was listed for sale at a price of $825,000, pursuant to stipulation of the parties.However, there were no offers, and the parties were advised by realtors they consulted that the price should be lowered to between $500,000 and $550,000.

On October 11, 1991, Silverwood negotiated with West One Bank to reduce to $220,000 the mortgage indebtedness on the partnership real property, which by then had reached $779,272.A down payment of $22,000 was paid from the registry of the court.

The district court found that on the date of dissolution the Kellys were obligated to the partnership in the amount of $716,878, including the $627,301 owed West One Bank on the debt consolidation loan which became the partnership's obligation when the Kellys were unable to pay the debt and were discharged in bankruptcy.The court also found that if the Kellys had paid all obligations owed to the partnership on June 1, 1988, they would have had a negative equity of $388,623.50, and Silverwood would have had a positive equity of $431,313.50.This finding was based on contemporaneous accounting records kept by the partnership bookkeeper and a realty valuation of less than $600,000.

The district court concluded that the Kellys had no equity in the K5 partnership as of the date of dissolution.As a result Silverwood was not required to liquidate the partnership assets, and the Kellys were not entitled to rental income or a set-off for Silverwood's alleged post-dissolution waste of the partnership assets.Further, Silverwood was entitled to recoupment from the Kellys for all debts owed by them to, or for, the partnership as of the date of dissolution, despite the discharge of their obligations in bankruptcy.The court concluded that the recoupment could be had through a withholding from the Kellys of partnership assets of equal value.The court also concluded that the Kellys were not entitled to share in the "buy-down" of the West One Bank mortgage because it occurred after dissolution.Finally, the court concluded that the Kellys' no-equity status continued from the date of dissolution through the final accounting.

II.THE TRIAL COURT CORRECTLY DETERMINED THAT THE KELLYS HAD NO EQUITY ON THE DATE OF DISSOLUTION

The trial court conducted a detailed analysis of the financial condition of the partnership as of June 1, 1988, and determined that the Kellys had no equity in the partnership, finding instead that they had a negative equity of an amount in excess of $300,000.The Kellys dispute some of the obligations attributed to them in this determination.However, the evidence established that they were obligated to the partnership in the amount of $627,301 as a consequence of the West One loan to them which became the obligation of the partnership by reason of the partnership's guarantee of that loan.That amount in and of itself placed them in a negative equity status with relation to the partnership.More than three years after the date of dissolution Silverwood negotiated a reduction of the indebtedness to the bank in the amount of $220,000 instead of the amount in excess of $600,000.The trial court correctly determined that the Kellys were not entitled to the benefit of this reduction.

III.THE TRIAL COURT PROPERLY AWARDED ALL OF THE PARTNERSHIP ASSETS TO SILVERWOOD BASED ON ITS FINDING THAT THE PLAINTIFFS HAD NO EQUITY AT THE TIME OF DISSOLUTION

Dissolution of a partnership "is the change in the relation of the parties caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business."Idaho Code § 53-329.Withdrawal of one partner constitutes dissolution of the partnership.Idaho Code § 53-331;Elliot v. Elliot, 88 Idaho 81, 396 P.2d 719(1964).Dissolution of the K5 Ranch partnership occurred on June 1, 1988, when the Kellys voluntarily withdrew from the partnership.Silverwood remained in possession of the partnership assets.Idaho Code § 53-333 sets forth the general effect of dissolution on the authority of a partner, generally terminating the authority of a partner to act for the partnership except as necessary to wind up the partnership or complete unfinished transactions.A partner who has not wrongfully dissolved the partnership has the right to wind up partnership affairs, and any partner may obtain winding up by the court.Idaho Code § 53-337.Generally, winding up is accomplished by an accounting and a liquidation of the partnership assets.59 Am.Jr.2d, Partnership§ 1100.

The Kellys maintain that they were entitled to have a winding up and distribution of the assets pursuant to Idaho Code § 53-338:

Rights of partners to application of partnership property.

1.When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his copartners and all persons claiming through them in respect of their interests in the partnership, unless otherwise agreed, may 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.But if dissolution is caused by expulsion of a partner, bona fide under the partnership agreement and if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under section 53-336, paragraph 2, he shall receive in cash only the net amount due him from the partnership.

Arnold v. Burgess, 113 Idaho 786, 791, 747 P.2d 1315, 1320(Ct.App.1987) describes the ordinary process that will occur:

Ordinarily in any action to terminate a partnership the trial court will order liquidation of the partnership assets by sale, with application of the proceeds according to the priorities set forth in Idaho Code § 53-340.See, e.g., Dunn v. Baugh, 95 Idaho 236, 506 P.2d 463(1973).

The trial court departed from the ordinary process described in Arnold, sup...