Pear v. Grand Forks Motel Associates

Decision Date01 October 1996
Docket NumberNo. 960048,960048
Citation553 N.W.2d 774
PartiesDavid M. PEAR, Plaintiff, Appellant and Cross-Appellee, v. GRAND FORKS MOTEL ASSOCIATES, a North Dakota limited partnership, Defendant, Appellee and Cross-Appellant. Civ.
CourtNorth Dakota Supreme Court

Fisher, Olson, Daley & Bata, Ltd., Grand Forks, for plaintiff, appellant, and cross-appellee; argued by Michael F. Daley.

Pearson, Christensen, Larivee, Clapp, Fiedler & Fischer, Grand Forks, for defendant, appellee, and cross-appellant; argued by Jay H. Fiedler.

MESCHKE, Justice.

David M. Pear, a limited partner in Grand Forks Motel Associates, appealed a summary judgment that the statute of limitations barred collection of his $100,000 demand note from Associates. Associates cross-appealed a ruling that the demand note was not a capital contribution to the partnership. We affirm in part, reverse in part, and remand.

David's father, Charles Pear, and Stanford Hoye formed Associates as a limited partnership in 1983 to buy and operate a motel in Grand Forks. For initial capital of $153,000, Seymour Svirsky contributed $1,000 as a general partner; Hoye invested $1,000 as a general partner and $75,000 as a limited partner; Charles Pear $1,000 as a general partner and $45,000 as a limited partner; and David Pear $30,000 as a limited partner. In 1984, Hoye contributed $110,000 more capital; Charles Pear, $66,000 more; and David Pear, $44,000 more. Since then, bookkeeping losses have continuously decreased each partner's capital account to an enlarging negative figure. 1

During 1984 as well, the partners made demand loans to the partnership: $250,000 by Hoye; $150,000 by Charles Pear; and $100,000 by David Pear. David's demand note for $100,000, with interest at "prime +3%," was issued on October 5, 1984, and signed by both Hoye and Charles Pear, each as a "Gen. Partner."

Charles Pear died in 1985. In 1986, his estate sold his partnership share and his demand note to Hoye. Since then, Associates's annual financial reports have continuously shown, separately from the negative capital accounts, notes payable to partners of $400,000 to Hoye and $100,000 to David Pear.

In the early years, the partnership paid the interest on the notes but, after 1986, the partnership "expensed" the interest on the notes without paying it. Instead, the certified public accountants (CPAs), who annually audited the partnership business, informed David Pear each year that "accrued [interest] expenses of the partnership must be included as interest income for you," and also notified him of the exact interest amount to report. Since 1986, Associates has continuously accrued "[n]on-current interest payable," which came to $448,819 by 1993.

In 1993, Associates began a $900,000 project to refurbish and renovate the motel. When the other partners declined to help finance the project, Hoye personally advanced funds, guaranteed loans, and pledged personal collateral to finance it.

After that, Hoye, as managing general partner, still refused to pay out interest on the demand notes, and also decided to save some interest expense by delivering a renewal demand note to David Pear with interest reduced to "Prime." David Pear resisted the lower interest rate and, on December 3, 1993, he made a written demand on Hoye, as managing partner, for payment of the entire principal and interest accrued on his note, totaling $189,763.51.

When Associates did not pay the debt, David Pear sued Associates for it on February 16, 1994. Associates answered that the note "documents a capital contribution by [David Pear] which is reimbursable to him pursuant to the provisions of the Certificate of Limited Partnership," and alternately defended that, if the note was really debt, David Pear's claim was "barred by the applicable statute of limitations." Both sides moved for summary judgment.

The trial court recognized that the partnership agreement authorized interest on capital, the agreement restrained "withdrawal or the return of his capital contributions or any part thereof, except in accordance with this Agreement," and it contained nothing to prevent a partner from loaning money to the partnership. The court concluded both the partnership agreement and the demand note were "clear, certain, and unambiguous," applied the parol evidence rule to exclude proof of an oral agreement inconsistent with those written contracts, and decided the demand note was not capital controlled by the withdrawal restraints, but was debt barred by the contractual statute of limitations. The court decided that the statements of Pear's note as a partnership obligation, in the CPA's annual letters to him to report accrued interest for income taxes, were not sufficient written acknowledgments of the debt to deflect the statute of limitations because those letters were not signed by a general partner. The court ordered summary judgment dismissing Pear's suit to collect the note.

David Pear moved to reconsider and amend the judgment. His additional affidavit submitted copies of Associates's 1992 income tax return signed by Hoye; of minutes of a 1992 partnership meeting that reconfirmed Hoye as managing general partner and accepted the audit report for 1991; of the 1993-1994 audit report (showing Hoye had transferred his demand notes to Eileen K. Hoye); of a 1993 letter from the General Manager of Stan Hoye Associates to Pear, that enclosed the renewal note with reduced interest to replace the 1984 note; and of the renewal note.

The trial court adhered to its decision that the audit reports and letters, not signed by a general partner, were insufficient written acknowledgments of the debt. The court rejected the 1992 income tax return of the partnership, even though signed by Hoye, because "the mere listing of a debt on a partnership tax return [does not] constitute[ ][the] distinct, unqualified, and unconditional recognition of the debt" required under NDCC 28-01-36 by Huus v. Huus, 75 N.D. 392, 28 N.W.2d 385, 392 (1947). Finally, the court held David Pear could not use equitable estoppel to avoid the statute of limitations because "then [Associates] should also be given the same opportunity" to use equitable estoppel to avoid David Pear's claim on the debt that Associates asserted to be capital. The court denied reconsideration.

David Pear appeals, arguing the audit reports, letters with enclosures, and tax returns showed genuine issues of material fact about written acknowledgments of the debt to avoid the statute of limitations. He also argues there are material issues of fact on whether Associates should be equitably estopped from using the statute of limitations. In its cross-appeal, Associates argues the trial court "should have considered evidence of the circumstances under which the [note] instrument was drawn, executed and delivered in order to determine its true nature" as capital, not debt. Each side seeks a different summary judgment or a trial.

Summary judgment is a procedure to promptly dispose of a lawsuit without a trial if, after viewing the evidence and possible inferences most favorably to the party against whom judgment is sought, there is no genuine dispute about either the material facts or the inferences from undisputed facts, or if there is only a question of law. Diegel v. City of West Fargo, 546 N.W.2d 367 (N.D.1996); NDRCivP 56. A party resisting a summary judgment must present evidence, by affidavit or some other admissible and competent form, that shows a genuine issue of material fact. Borsheim v. O & J Properties, 481 N.W.2d 590 (N.D.1992). A summary judgment is proper when a party fails to raise a reasonable inference of an element essential to the claim that party must prove at trial.

1. Capital or Debt?

In its cross-appeal, Associates argues the "purported 'Promissory Note' was never intended to be a promissory note; rather it was intended to document the partners' capital contributions." Associates asserts the trial court "should have considered evidence of the circumstances under which the [note] instrument was drawn, executed, and delivered in order to determine its true nature" as capital.

Associates relies upon similar affidavits by general partner Hoye and by J. Hugh Shelnutt, Associates's principal CPA. Both asserted the "factual circumstances surrounding the execution of the purported Promissory Note ... are complex and involved technical interpretations of the Internal Revenue Code," but neither identified relevant tax statutes, regulations, or rulings. To finance the motel, Hoye said Associates was required by the lending bank to make "a minimum $1,160,000.00 in improvements" to the motel with only $375,000 of that to come from mortgage proceeds and "the remainder from the partners. This consisted of $353,000.00 capital and a capital contribution of $500,000.00." Hoye said he contributed $250,000 and Charles Pear did too, but $100,000.00 of Charles's "capital contribution" was "allocated" to David Pear. Hoye swore that he was "personally aware that the $250,000.00 contributed by Charles Pear was money ... borrowed from a financial institution and upon which [Charles] was required to pay interest. It was Mr. Pear's required interest payments that led to the partner's capital contributions being documented in the purported Promissory Notes."

Shelnutt asserted, because "the federal tax law allows a person to deduct 'investment interest expense' ... only if there is corresponding investment income," Charles Pear "could not contribute borrowed money to the Limited Partnership as a capital contribution and deduct the interest which he was paying on that money. In order to deduct the interest expense, he had to receive investment income." Since Charles Pear "was primarily responsible for business decisions and operation of the hotel in 1983 and until his death in 1986," Shelnutt said Charles Pear "decided that Promissory Notes would be issued for the...

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