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Disotell v. Stiltner (11/05/2004) sp-5841
Disotell v. Stiltner (11/05/2004) sp-5841
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
CARL DISOTELL, )
) Supreme Court No. S-10984
Appellant, )
) Superior Court No. 3AN-00-4749
CI
v. )
) O P I N I O N
EARL STILTNER, )
) [No. 5841 - November 5, 2004]
Appellee. )
)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Sen K. Tan, Judge.
Appearances: Ronald L. Bliss, Bliss, Wilkens
& Clayton, Anchorage, for Appellant. Kevin
G. Brady, Anchorage, for Appellee.
Before: Bryner, Chief Justice, Matthews,
Eastaugh, Fabe, and Carpeneti, Justices.
EASTAUGH, Justice.
I. INTRODUCTION
Two partners formed a partnership in 1997 for the
purpose of converting an existing building into a hotel. One,
Earl Stiltner, contributed the parcel of land bearing the
building that was to be converted. The partnership was dissolved
in 1998 after the partners reached an impasse. We consider here
whether the superior court, in winding up the partnership, should
have liquidated the partnership, rather than permitting Stiltner
to buy out Carl Disotell, the other partner. We affirm as to the
buyout, but remand because there was no evidence of the objective
value of buyout property. We also remand for correction of other
minor errors.
II. FACTS AND PROCEEDINGS
Carl Disotell is an Eagle River resident who develops
properties as a general contractor.1 His construction company is
Disotell Construction. Earl Stiltner is also an Eagle River
resident. Stiltner owned and operated a real estate office and
property management company in Eagle River from May 1990 until
December 1997. In 1994 he and his wife purchased Lots 10 and 11
of Block 12 of the Revised Plat of the Walter G. Pippel Addition
No. 2 (the hotel property) for $275,000. There was a two-story
commercial building on the property. Stiltners wife later
quitclaimed her interest in the property to him.
Disotell and Stiltner met in 1997. They discussed
Stiltners property and agreed to form an equal partnership to
develop, construct, and operate a hotel on the property. They
never entered into a written partnership agreement. They
intended to convert the two-story commercial building on the
property into a hotel that would open for business by May 15,
1998. Disotell Construction was to serve as general contractor;
it was to provide its services on a cost-only basis. Disotell
was to use his experience as a developer to plan the project and
obtain the necessary permits and licenses.
The parties agreed that Disotell would purchase a one-
half interest in the hotel property for $137,500, one-half of
Stiltners cost. They also agreed that the funds from which
Disotell would buy the one-half interest would come only from the
profits of the hotel. After Stiltner had recovered his original
cost basis in the property and certain other costs, he and
Disotell were to share profits on a fifty/fifty basis. The
parties dispute what those other costs included. Disotell argues
that they included the costs of art and equipment owned by
Stiltner that they had planned to use in the hotel and the cash
required to develop and construct the hotel. Stiltner asserts
that they only included the former.
Stiltner quitclaimed one-half of his interest in the
hotel property to Disotell on March 3, 1998. The parties
disputed who was obligated to put up the cash for the project.
Disotell later testified that Stiltner was to have provided all
of the cash; Stiltner claimed they were to contribute equally to
the expenses. The superior court later found that the partners
jointly would provide for the projects cash needs. The parties
agreed that neither would charge interest for the purchase of the
hotel property or for cash expenses.
After learning that it could acquire a liquor license
free of charge for a hotel of fifty or more rooms, the
partnership agreed to convert the two-story building into a four-
story hotel, bar, and restaurant. The partnership hired an
architect, structural engineer, and a civil engineering firm.
Disotell testified that he contributed hundreds of hours to
developing the project.
In 1998 the partnership decided to purchase a parking
lot for the hotel. Although the lot was purchased in Disotells
name, Stiltner provided the earnest money and down payment,
totaling $50,000. He also paid the mortgage for May through
October 1998 and made one property tax payment. Disotell paid
the mortgage from November 1998 through July 2001 and made
several tax payments.
In May 1998 Disotell advised Stiltner that the property
required a sewer line. Construction on the property had not yet
begun. Stiltner disagreed that a sewer line was necessary; he
thought there would be no increase in sewage from the property,
because Disotell had not yet commenced construction. He denied
Disotell the building access needed to assess the mechanical,
electrical, and other systems. He also refused to remove his
personal property from the building. The superior court later
found that a complete breakdown in the relationship between
Stiltner and Disotell occurred in May 1998, after which Stiltner
refused to continue the project.
The partnership never produced a profit. Stiltner has
exclusively possessed the hotel property since May 15, 1998. He
testified that he occupies the premises as his residence and has
stored his personal possessions there.
Disotell filed suit in the superior court, seeking
dissolution of the partnership, judicially supervised windup of
partnership affairs, appointment of a receiver, and damages.
Stiltner answered and later counterclaimed. He sought recission
of the partnership agreement. Following a two-day bench trial,
the court entered findings of fact and conclusions of law on
December 11, 2001. Disotell unsuccessfully moved to amend the
conclusions of law. On May 28, 2002 he moved to introduce
evidence of partnership asset and liability values. The court
denied this motion. It entered final judgment on February 7,
2003. Disotell appeals.
III. DISCUSSION
A. Standard of Review
Interpretation of the Alaska Uniform Partnership Act2
(the Act) presents a question of law to which we apply our
independent judgment.3 We review the superior courts factual
findings for clear error.4
B. It Was Not Error To Give Stiltner a Buyout Opportunity.
Disotell argues that the superior court failed to
follow the Act when the court gave Stiltner the option to
purchase Disotells partnership interest for $73,213.50, the value
of Disotells interest as calculated by the court. The superior
court proposed two alternative methods for winding up the
partnership. The first alternative allowed Stiltner to purchase
Disotells partnership interest. The court reasoned that this
would avoid the unnecessary cost of appointing a receiver and
would reduce economic waste. The second alternative was
available if Stiltner had insufficient funds to pay Disotell; the
court would then appoint a receiver to take possession of and to
sell the partnership property, to pay the costs of the receiver,
and distribute the remaining proceeds according to [its] findings
of fact and conclusions of law.
Disotell claims that the Uniform Partnership Act made
liquidation a matter of right. He argues that any partner who
has not wrongfully caused dissolution of the partnership may
demand liquidation. He asserts that the superior court erred
when it concluded that liquidation is not mandatory. He
therefore seeks a remand with instructions for appointment of a
receiver to take possession of the assets and liquidate them.
Alaska Statute 32.05.320 provided that [u]nless
otherwise agreed the partners who have not wrongfully dissolved
the partnership . . . may wind up the partnership affairs . . . .
Alaska Statute 32.05.330 provided in part:
(a) When dissolution is caused in any way,
except in contravention of the partnership
agreement, each partner, as against the
copartners and all persons claiming through
them in respect of their interest 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. . . .
(b) When dissolution is caused in
contravention of the partnership agreement
the rights of the partners are as follows:
(1) each partner who has not caused
dissolution wrongfully has (A) all the rights
specified in (a) of this section, and (B) the
right, as against each partner who has caused
the dissolution wrongfully, to damages for
breach of the agreement . . . .
Disotell argues that Stiltner breached the partnership
agreement by dissolution; Stiltner maintains that the superior
courts conclusion that neither party was at fault in causing the
dissolution of the partnership since . . . either party could
terminate it at will was not clearly erroneous. Because neither
party argues on appeal that Disotell wrongfully caused the
dissolution, he may invoke the rights granted by AS 32.05.330(a).
Disotell argues that the most reasonable and almost
universally accepted interpretation of AS 32.05.330(a) requires
sale of partnership assets, absent a partnership agreement to the
contrary. He claims that the Act makes the policy choice that a
sale is the most effective means of determining the fair market
value of partnership assets. Although this remedy may seem
harsh, he points out that partners are free to make alternative
provisions in the partnership agreement. Because the partnership
agreement did not address the consequences of dissolution, the
statutory provisions govern by default.
We have not previously considered whether liquidation
was discretionary under the Act. In Pieper v. Musarra, we
concluded that Pieper had failed to demonstrate that the superior
court made an error in applying the Alaska Uniform Partnership
Act when it allowed Piepers partner to purchase her partnership
interest.5 We did not explain the basis for this conclusion.
Because no Alaska decisions address the issue, we look to cases
from other jurisdictions interpreting the uniform statute.
In Dreifuerst v. Dreifuerst, cited by Disotell on
appeal, the Wisconsin Court of Appeals, construing a statute
identical to Alaskas, held that lawful dissolution gives each
partner the right to force liquidation.6 Other courts have
recognized that the winding up that follows partnership
dissolution generally involves liquidation of the partnership
assets.7 Indeed, the drafters official comment on the uniform
statute explains:
The right given to each partner [by the
statute], where no agreement has been made,
to have his share of the surplus paid to him
in cash makes certain an existing
uncertainty. At present it is not certain
whether a partner may or may not insist on a
physical partition of the property remaining
after third persons have been paid.[8]
Although the language of the Act and the general rule would seem
to favor liquidation and cash distribution absent agreement to do
otherwise, some courts construing statutes identical to section
.330 have refused to compel liquidation.9
We decline to follow the line of cases holding that the
statute requires liquidation. We hold that the superior court
did not err in reading subsection .330(a) to allow it to permit
Stiltner to buy out Disotells partnership interest. Careful
reading of the text of AS 32.05.330(a) does not convince us that
this subsection absolutely compels liquidation and forbids a
buyout. Under appropriate, although perhaps limited,
circumstances, a buyout seems a justifiable way of winding up a
partnership. The superior court reasoned that a buyout would
reduce economic waste by avoiding the cost of appointing a
receiver and conducting a sale. Even though there was no ongoing
business, the superior court noted that the expense of a sale
could total as much as twelve percent of the propertys value.
This was a valid reason and potentially benefitted both partners.
The potential savings were significant. The courts effort to
avoid further loss to both partners justifies its decision to
offer Stiltner the buyout option. Further, properly conducted, a
buyout guaranteed Disotell a fair value for his partnership
interest. Liquidation exposed Disotell to the risk that no buyer
would offer to pay fair market value for the property. A
liquidation sale in which no other buyers participated might have
given Stiltner an opportunity to buy the property for less than
fair market value, to Disotells disadvantage.
C. It Was Error To Permit a Buyout Without Objective
Evidence of the Value of Disotells Partnership
Interest.
Although it was not error to grant Stiltner the option
to buy out Disotells partnership interest, it was error to permit
the buyout without requiring some objective determination of the
value of all of the partnership assets, particularly the land and
building Stiltner contributed. The superior court used tax
appraisals to establish the value of the hotel property and
parking lot. The court relied on a report by an expert witness
who, to explain the accounting methodology set out in AS
32.05.350, assume[d], for illustrative purposes only, that the
hotel property and parking lot would sell for their tax-appraised
values. The tax appraisals were not introduced into evidence.
The expert discussed them only hypothetically to illustrate an
entirely different point, not as support for an opinion of
property values. Neither party introduced evidence of any
appraisal. Disotell and Stiltner both acknowledge that neither
offered any evidence of value of the partnership assets.
Because a buyout is appropriate only if it is for fair
market value, and there was no admissible evidence of fair market
value, we must remand. It will be necessary on remand to
determine the value of the assets before Stiltner attempts to buy
out Disotell. The parties may offer any evidence relevant to the
value of the partnership property.10 The partnership assets
include both the hotel property and the parking lot.
Contemporaneous appraisals of both will be necessary so that
neither party is prejudiced by a fluctuation in the value of one
asset. On appeal, Disotell claims that he had no pretrial notice
that the superior court would establish a value for the
partnership property. The remand will provide Disotell full
opportunity to introduce evidence or otherwise address the issue.
D. It Was Error To Characterize as Partnership Debt
Disotells Obligation To Pay for His Capital
Contribution.
Disotell argues that the court erred by characterizing
as partnership debt the obligation he incurred to pay for his
capital contribution.11 The parties stipulated that the partners
had agreed that the funds from which Disotell would pay for his
one-half interest in the hotel property would only come from the
profits of the hotel. The superior court found:
The partnership obligated itself to pay
Stiltner all the profits from the partnership
until he had recovered his original cost
basis of the Hotel property. . . . Further,
the partnership took on Disotells loan
obligation, and promised to pay Stiltner the
$137,500. Therefore, this court views the
$137,500 as a loan obligation the partnership
owes Stiltner.
The superior court classified the $137,500 as a partnership
liability, deducting it from the net value of the partnership.
Our primary concern is determining the partners intent.12
The partners litigation stipulation stated that they had agreed
that the funds from which Disotell would pay for his one-half
interest would only come from the profits of the hotel. This
stipulation is not reasonably susceptible to an interpretation
that the partnership assumed Disotells loan obligation.
Stiltners trial testimony is also inconsistent with any such
interpretation:
THE COURT: . . . [P]art of the
stipulation, paragraph 7G, essentially says
that you were then to receive all the profits
of the partnership until you had recovered
your original cost basis in the hotel
property. Can you explain to me how that
piece fits into your agreement?
[STILTNER]: Thats my purchase of the hotel.
THE COURT: Mm-hmm (affirmative).
A: That him paying for that half of the
hotel was delayed until the hotel started
turning a profit.
THE COURT: Okay.
A: The 150 that he would owe me for a 50
percent interest in the hotel, that was
delayed until the hotel started turning a
profit.
This testimony implies that the loan obligation was Disotells,
not the partnerships. It is unlikely that Stiltner would have
been willing to assume the obligation as a partnership debt and
thereby effectively agree to pay half of Disotells obligation.
We conclude, therefore, that it was error to characterize the
obligation as partnership debt.
The partners stipulated that Disotell had promised
Stiltner: (1) to supply development and construction services on
a cost-only basis to construct a hotel and (2) to contribute his
interest in the hotel property as capital and to subordinate his
interest in profits until Stiltner had recovered his original
cost basis in the hotel. The partners explicitly agreed that
Disotell would pay for his one-half interest only from profits.
It is not clear, however, whether the parties contemplated the
situation before us when they entered into the agreement. The
superior court did not enter any findings as to whether the
repayment only out of profits provision of the parties agreement
was intended to apply in the event that the partnership dissolved
before making profits. We therefore remand the case with
instructions to the superior court to determine whether the
parties intended the provision to apply in this context.
If the superior court finds that the provision was not
intended to apply in this situation, it may supply a provision
that is reasonable under the circumstances. Under section 204 of
the Restatement (Second) of Contracts, [w]hen the parties to a
bargain sufficiently defined to be a contract have not agreed
with respect to a term which is essential to a determination of
their rights and duties, a term which is reasonable in the
circumstances is supplied by the court.13 Comment d to Section
204 instructs on how the court should supply an omitted term:
The process of supplying an omitted term has
sometimes been disguised as a literal or
purposive reading of contract language
directed to a situation other than the
situation that arises. Sometimes it is said
that the search is for the term the parties
would have agreed to if the question had been
brought to their attention. Both the meaning
of the words used and the probability that a
particular term would have been used if the
question had been raised may be factors in
determining what term is reasonable in the
circumstances. But where there is in fact no
agreement, the court should supply a term
which comports with community standards of
fairness and policy rather than analyze a
hypothetical model of the bargaining
process.[14]
In considering what term is reasonable, the superior
court should consider the risks and obligations each party
assumed. In exchange for Stiltners contribution of the hotel
property to the partnership, Disotell agreed to renovate and
build the hotel. The agreement obliged Disotell to supply his
development and construction services to the hotel project.
Those services were part of the consideration he offered for the
one-half interest in the hotel property that he purchased from
Stiltner. If Disotell had completed construction of the hotel
but the project had proven unprofitable, we doubt that fairness
would demand that Disotell nevertheless repay the one-half
interest. In reality, however, the partnership dissolved before
Disotell fulfilled his obligations under the agreement. The
superior court has discretion to decide, therefore, that fairness
requires that Disotell only repay the difference between the
value of the services he contributed to the hotel property before
the project became impossible and the value of what he was
supposed to contribute.
E. The Superior Court Did Not Err by Refusing To Award
Damages for Wrongful Dissolution of the Partnership.
Disotell claims that he is entitled to recover damages
for Stiltners wrongful dissolution of the partnership. The Act
provided that [w]hen dissolution is caused in contravention of
the partnership agreement the rights of partners [include] . . .
the right, as against each partner who has caused the dissolution
wrongfully, to damages for breach of the agreement.15 The
superior court denied Disotells damages claim, determining that
neither party was at fault in causing the dissolution of the
partnership . . . . It found that the partnership was terminated
by the inability of the partners to agree on how the project
should proceed. We hold that the superior courts fact findings
are not clearly erroneous and affirm its decision to deny damages
for dissolution of the partnership.
The superior court found:
[T]he partnership dissolved in May of 1998.
The dissolution came about when the parties
disagreed on how the project should proceed.
Disotell wanted to put in the sewer line, but
Stiltner disagreed and did not want the sewer
line put in before Disotell started getting
permits and began the actual renovation
project.
We review for clear error fact findings determining the
causes of dissolution.16 Per AS 32.05.240, dissolution indicated
the point in time when the partners ceased to carry on the
business together.17
The courts findings are supported by the parties
stipulations. The parties agree that their dispute over the
sewer construction caused a complete breakdown in [their]
relationship. Because they disagreed over the necessity of the
sewer line, the project could not go forward. Trial testimony
also supports the finding that the impasse was not the fault of
either party; it resulted from a difference of opinion. It was
not clear error, therefore, for the superior court to find that
neither party was at fault in causing the dissolution and that
the dissolution arose out of disagreement on how the project was
to proceed.
F. It Was Error To Deny Disotell Damages for Stiltners
Post-Dissolution Use of the Property.
Disotell also argues that it was error not to award him
damages for Stiltners appropriation of the hotel property after
the dissolution. He maintains that he should recover the value
of Stiltners use of the property as determined by its rental
value for the months Stiltner occupied it. The superior court
gave three reasons for rejecting Disotells damages claim: (1) the
partnership purpose for which Disotell ha[d] an equal right with
the partners to possess specific property ended when the
partnership terminated in May 1998; (2) any wrongful possession
claims were premature because the superior court had yet to
determine the parties respective rights vis-a-vis the partnership
and its assets; and (3) no order had directed either party to put
the property to economic use. The court relied on Parker v.
Northern Mixing Co. for support.18 We there affirmed a superior
court ruling that the appellee partners were not entitled to the
rental value of the partnership property as damages for the
appellant partners post-dissolution possession of the property.19
We think that reliance on Parker is misplaced. In
Parker, the superior court had issued a pre-trial order that
authorized the partners continued possession of the property.20
The order did not require the partner to operate the plant during
that period.21 No such order was issued here.
The determination that Disotell no longer had an equal
right to possess the partnership property after the partnership
terminated in May 1998 is erroneous. Dissolution does not
terminate a partnership; it continues until the winding up of
partnership affairs is complete.22 Because a partner . . . has an
equal right with the partners to possess specific partnership
property for partnership purposes, it follows that a partner has
no right to exclude other partners from the property after
dissolution but before termination and distribution.23 As of
December 2001, Stiltner continued to occupy the hotel property.
The superior court found:
Although it is a commercial property,
Stiltner has spent most of his time at this
12,500 square foot building, including many
nights, and has done so as the sole building
occupant. Stiltner testified that he
occupies the premises as his residence and
has stored personal belongings there, and
also has, since May 1998, stored the goods
from his former real estate business.
Stiltner is accountable to the partnership for any benefit he
derived from his personal use of partnership property. Per
Alaska Statute 32.05.160(a),
Every partner shall account to the
partnership for any benefit, and hold as
trustee for it any profits derived by the
partner without the consent of the other
partners from any transaction connected with
the formation, conduct, or liquidation of the
partnership or from any use by the partner of
its property.
We therefore remand for determination of the value of Stiltners
personal use of the property.
IV. CONCLUSION
Because the Act did not prohibit the buyout option, it
was not error to grant Stiltner the option to buy out Disotells
partnership interest. It was error, however, to permit a buyout
without finding the fair market value of the property, based on
admissible evidence. We therefore REMAND. We also REMAND for a
determination of what each partner contributed to or took from
the partnership. This determination should consider the value of
the partnership assets and any difference between the services
Disotell was to contribute to the project and those he actually
contributed, but should not include the $137,500 loan obligation.
It should also take into account the value of Stiltners personal
use of the hotel property during the windup period.
_______________________________
1 Nearly all relevant facts were stipulated to by the
parties.
2 AS 32.05.040-.995. References to the Act are to AS
32.05.040-.995. Although the Act was repealed in 2000, effective
January 1, 2004, and replaced by AS 32.06.201-.997, it applies to
the Disotell-Stiltner partnership, which was formed in 1997. Ch.
115, 7, 8, 10, SLA 2000.
3 Pieper v. Musarra, 956 P.2d 444, 446 (Alaska 1998).
4 Alaska R. Civ. P. 52(a).
5 Pieper v. Musarra, 956 P.2d 444, 447 (Alaska 1998).
6 Dreifuerst v. Dreifuerst, 280 N.W.2d 335, 338 (Wis.
App. 1979).
7 See, e.g., Hyta v. Finley, 53 P.3d 338, 340 (Idaho
2002); Doting v. Trunk, 856 P.2d 536, 541 (Mont. 1993); Gull v.
Van Epps, 517 N.W.2d 531, 536 (Wis. App. 1994).
8 Uniform Partnership Act 38 cmt. (1914).
9 See, e.g., Nicholes v. Hunt, 541 P.2d 820, 827 (Or.
1975) (There is no express provision in [the Uniform Partnership
Act (UPA)] which establishes liquidation by sale as the exclusive
mode of distributing partnership assets after dissolution.); see
also Logoluso v. Logoluso, 43 Cal. Rptr. 678, 682 (Cal. App.
1965) (holding that court has authority to distribute partnership
property in kind); Swann v. Mitchell, 435 So. 2d 797, 800 (Fla.
1983) (stating that where circumstances exist which would render
distribution in kind, or another method of disposition, to be
more favorable to the interests of the parties, such a
distribution is permissible and desired); Creel v. Lilly, 729
A.2d 385, 399 (Md. 1999) (holding that nothing in Marylands UPA .
. . or any of our case law . . . supports an unequivocal
requirement of a forced sale); Rinke v. Rinke, 48 N.W.2d 201, 207
(Mich. 1951) (stating that it was not the intention of the
legislature in the enactment of the [UPA] to impose a mandatory
requirement that, under all circumstances, the assets of a
dissolved partnership shall be sold); Schoenborn v. Schoenborn,
402 N.W.2d 212, 214 (Minn. App. 1987) (holding that partnership
statute does not create an absolute right to a sale).
10 We have previously questioned the admissibility of tax
appraisals. Bennett v. Artus, 20 P.3d 560, 565 (Alaska 2001);
Four Separate Parcels of Land v. City of Kodiak, 938 P.2d 448,
454 (Alaska 1997) (quoting State v. 45,621 Square Feet of Land,
475 P.2d 553, 557 (Alaska 1970) (reiterating rule that evidence
of a tax assessment to establish fair market value is
inadmissible, since such an assessment is notoriously unreliable
as a criterion of true value )). Nonetheless, tax appraisals are
not necessarily inadmissible. Harrower v. Harrower, 71 P.3d 854,
862 (Alaska 2003) (holding that superior courts reliance on tax-
assessed values was not clearly erroneous).
11 Disotell also argues that the court erred by failing to
apply the partnership assets to satisfy the $38,075 (plus
interest) liability owed to third-party creditors for the
purchase of the parking lot. AS 32.05.350 required that [i]n
settling account between the partners after dissolution, the
assets be applied to the satisfaction of the liabilities. The
statute required that liabilities owed to creditors other than
partners be paid before liabilities owed to partners. AS
32.05.350(2).
12 AS 32.05.350.
13 Restatement (Second) of Contracts 204 (1981).
14 Id. at cmt. d (emphasis added).
15 AS 32.05.330(b)(1)(B).
16 Wyller v. Madsen, 69 P.3d 482, 485 (Alaska 2003).
17 AS 32.05.240.
18 Parker v. Northern Mixing Co., 756 P.2d 881 (Alaska
1988).
19 Id. at 891.
20 Id. at 890.
21 Id. at 891.
22 AS 32.05.250.
23 AS 32.05.200.
