MacKay v. Hardy

• Citation: 896 P.2d 626
• Decision Date: 18 May 1995
• Docket Number: No. 940058,940058
• Parties: Keith MacKAY and State Stone Inc., Plaintiffs, v. Roy E. HARDY, J. Earl Jones, Bloomington Knolls Association, a Utah nonprofit corporation, Rex L. Jackson, a Utah limited partnership, and Rex Jackson, an individual, Defendants. J. Earl JONES, Cross-Claim Plaintiff and Appellee, v. Roy E. HARDY and Rex Jackson, Cross-Claim Defendants and Appellants.
• Court: Supreme Court of Utah

Page 626

896 P.2d 626

Keith MacKAY and State Stone Inc., Plaintiffs, v. Roy E. HARDY, J. Earl Jones, Bloomington Knolls Association,

a Utah nonprofit corporation, Rex L. Jackson, a

Utah limited partnership, and Rex

Jackson, an individual, Defendants.

J. Earl JONES, Cross-Claim Plaintiff and Appellee, v. Roy E. HARDY and Rex Jackson, Cross-Claim Defendants and Appellants.

No. 940058.

Supreme Court of Utah.

May 18, 1995.

James L. Barker, Salt Lake City, for Jones.

D. Williams Ronnow, Timothy A. Bodily, John J. Walton, St. George, for Hardy, Jackson, and Rex L. Jackson, Ltd.

J. MacArthur Wright, St. George, for Bloomington Knolls Assoc.

ZIMMERMAN, Chief Justice:

J. Earl Jones brought this cross-claim against Roy E. Hardy and Rex L. Jackson for an accounting and wind-up of a dissolved partnership pursuant to sections 48-1-34 and 48-1-40 of the Utah Code. The district court awarded Jones $76,673.23 for his interest in the partnership. Hardy and Jackson now contend that the district court erred in (i) concluding that the partnership held an equitable interest in forty-two lots subject to a lease held by Bloomington Knolls Association, (ii) valuing the partnership's interest in each of the forty-two lots at $3,500, and (iii) awarding Jones post-dissolution profits realized by the partnership on Jones' share of partnership assets. We affirm the district court's equitable-interest conclusion and valuation of the partnership's interest in the lots, reverse its award of post-dissolution profits, and remand for further proceedings consistent with this opinion.

Sometime in 1983, Jones and Hardy entered into an oral partnership agreement for the purpose of developing certain land located in Washington County, Utah, and owned by the state. Jones and Hardy planned to lease the proposed development site from the state and, accordingly, submitted a lease application to the Utah Division of State Lands and Forestry ("Division"). In response to this application, the Division required Jones and Hardy to form a corporation which would lease the site directly from the state as one parcel. In compliance with the Division's requirement, Jones and Hardy formed a nonprofit, nonstock corporation called Bloomington Knolls Association ("BKA"). Shortly thereafter, the state issued Special Use Agreement No. 593 ("agreement"), leasing the development site to BKA for fifty-one years and granting BKA the right to renew its lease for an additional fifty-one years. ¹

The development proceeded in three phases. During phase I, twenty-six of the seventy-three undeveloped lots comprising the development site were subleased to individuals, each for a term of fifty-one years and each in exchange for $3,750. Pursuant to written sublease agreements, $3,500 was to pay for off-site improvements and common area amenities and $250 was to be paid to the state, as required by the agreement. Although phase I was not designed to turn a profit, Jones and Hardy intended that it would generate sufficient income to meet the phase I development costs. In fact, however, phase I failed to generate sufficient funds to defray those costs.

Consequently, in June of 1986, the Jones/Hardy partnership began to experience financial problems. To alleviate these problems, Jones and Hardy associated Rex L. Jackson as a partner. Jackson received a 50% interest in the partnership in exchange for his agreement to arrange additional financing for the project. Jones' and Hardy's respective interests in the partnership were reduced to 25%.

The project proceeded under the Jones/Hardy/Jackson partnership until June 27, 1988, when Jones dissolved the partnership and requested that he be given subleases to fourteen lots as his share of partnership assets. Although the partnership had sustained losses totalling $46,800.99 as of the date of dissolution, forty-two of the original seventy-three lots had not been subleased and remained in BKA's inventory. Jones' request was not honored, and he never received any assets of the partnership. From the date of dissolution in 1988 until the project was completed in approximately December of 1992, the project continued under the direction of Hardy and Jackson.

Jones brought this cross-claim for an accounting and winding up of partnership affairs pursuant to sections 48-1-34 and 48-1-40 of the Utah Code. After a four-day bench trial, the district court entered judgment against Hardy and Jackson, jointly and severally, for $76,673.23, an amount the district court concluded represented Jones' interest in the partnership. In reaching this conclusion, the district court found and reasoned as follows: (i) BKA was "merely a straw man" of the Jones/Hardy/Jackson partnership formed at the state's request for the sole purpose of permitting the partnership to obtain and hold a lease of the development site from the state; (ii) therefore, the partnership held an equitable interest in the forty-two lots remaining in BKA's inventory at the time of dissolution; (iii) the value of the partnership's interest in each of the forty-two lots at the time of dissolution was $3,500; (iv) the value of Jones' corresponding interest in the forty-two lots at the time of dissolution totalled $36,750; (v) Jones' share of partnership losses on the date of dissolution was $11,700.24; ² (vi) the value of Jones' net interest in the partnership at the time of dissolution was $25,049.76; (vii) Jones' net interest in the partnership at the time of dissolution was equivalent to 7.15 lots, each valued at $3,500.00; (viii) each of the forty-two lots remaining in BKA's inventory at the time of dissolution was sold for a profit of $10,723.35; and (ix) therefore, "[t]he interest of J. Earl Jones in the partnership is $76,673.23, which is the sum of his share of partnership assets plus his share of the profits realized by the Jones-Hardy-Jackson partnership by using his share of the assets." ³ Hardy and Jackson appeal.

We first address Hardy and Jackson's contention that the district court erred in concluding that the partnership held an equitable interest in the forty-two lots remaining in BKA's inventory at the time of dissolution. Although this court may fashion its own remedy as a substitute for the judgment of the trial court in equity cases, we will disturb the trial court's judgment only where necessary to prevent manifest injustice. Penrose v. Penrose, 656 P.2d 1017, 1019 (Utah 1982); Jackson v. Jackson, 617 P.2d 338, 340 (Utah 1980). Moreover, we will not reverse the findings of fact of a trial court sitting without a jury unless they are " 'against the clear weight of the evidence,' thus making them 'clearly erroneous.' " In re Estate of Bartell, 776 P.2d 885, 886 (Utah 1989) (quoting State v. Walker, 743 P.2d 191, 193 (Utah 1987)); cf. State v. Pena, 869 P.2d 932, 939 n. 4 (Utah 1994) (" 'We review the factual findings underlying the trial court's decision to grant or deny a motion to suppress evidence using a clearly erroneous standard.' " quoting State v. Brown, 853 P.2d 851, 855 (Utah 1992))).

Applying these principles to the instant case, we do not think that either the district court's equitable-interest conclusion or the factual finding underlying that conclusion warrants reversal. The factual predicate underlying the district court's equitable-interest conclusion, i.e., that BKA "was merely a straw man" formed at the state's request for the sole purpose of obtaining a lease of the development site, was established by the uncontradicted testimony of both Jones and Hardy. Therefore, we cannot conclude that this finding was clearly erroneous.

Likewise, we do not believe that reversal of the district court's equitable-interest conclusion is necessary to prevent manifest injustice. "Equity regards the substance rather than the form of a transaction...." Powell v. Bastian, 541 P.2d 1127, 1131 (Utah 1975) (Maughan, J., dissenting); see also Erickson v. Beardall, 437 P.2d 210, 212 (Utah 1968) ("[I]t is the duty of the court to look to substance rather than to form."). Accordingly,

[w]here a corporate form is resorted to as an instrumentality of a partnership, the corporate form may be disregarded upon the dissolution of the partnership. This may be done by declaring the property in the name of the corporation to be assets of the partnership and making the distribution of property directly to the partners in the dissolution of the partnership.

McDonald v. McDonald, 53 Wis.2d 371, 192 N.W.2d 903, 910 (1972) (citing Fortugno v. Hudson Manure Co., 51 N.J.Super. 482, 144 A.2d 207 (App.Div.1958)). This is precisely what the district court did in the instant case. Therefore, we decline to reverse the district court's equitable-interest conclusion. ⁴

Hardy and Jackson argue further that even if the district court properly concluded that the partnership held an equitable interest in the forty-two lots, its valuation of the partnership's interest in each of those lots at $3,500 was clearly erroneous and should therefore be reversed. We disagree.

During trial, Hardy and Jackson's accounting experts testified that under generally accepted accounting principles, one proper measure of an asset's fair market value is its historical cost. Uncontradicted evidence established that the first twenty-six undeveloped lots were each subleased for $3,750. Hardy and Jackson argue that because $3,500 of the cost of each sublease was to pay for off-site improvements and common area amenities pursuant to written sublease agreements, each sublessee actually paid only $250 for the sublease itself. However, common sense belies this assertion. The fact that a portion of the cost of a sublease is earmarked for a particular purpose does not change the cost of the sublease. In the instant case, the first twenty-six lots were each subleased for a cost of $3,750. This cost is not affected by how the money was to be spent. We therefore affirm the district court's valuation of the partnership's...