Business Law Chapter 37 Homework Bracken Had Repay The Note Within Days

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Chapter 37

Partnerships and Limited

Liability Partnerships

Case 37.1

N.Y. 1928

Meinhard v. Salmon

249 N.Y. 458, 164 N.E. 545, 62 A.L.R. 1

Court of Appeals of New York.

MEINHARD

SALMON et al.

Dec. 31, 1928.

CARDOZO, C. J.

On April 10, 1902, Louisa M. Gerry leased to the defendant Walter J. Salmon the premises known as the Hotel Bristol at the northwest corner

of Forty-Second street and Fifth avenue in the city of New York. The lease was for a term of 20 years, commencing May 1, 1902, and ending

April 30, 1922. The lessee undertook to change the hotel building for use as shops and offices at a cost of $200,000. Alterations and additions

were to be accretions to the land.

Salmon, while in course of treaty with the lessor as to the execution of the lease, was in course of treaty with Meinhard, the plaintiff, for the

necessary funds. The result was a joint venture with terms embodied in a writing. Meinhard was to pay to Salmon half of the moneys requisite

to reconstruct, alter, manage, and operate the property. Salmon was to pay to Meinhard 40 per cent. of the net profits for the first five years

less than four months of the lease to run, he approached the defendant Salmon. The result was a new lease to the Midpoint Realty Company,

which is owned and controlled by Salmon, a lease covering the whole tract, and involving a huge outlay. The term is to be 20 years, but

successive covenants for renewal will extend it to a maximum of 80 years at the will of either party. The existing buildings may remain

unchanged for seven years. They are then to be torn down, and a new building to cost $3,000,000 is to be placed upon the site. The rental,

which under the Bristol lease was only $55,000, is to be from $350,000 to $475,000 for the properties so combined. Salmon personally

interest, there went, of course, a corresponding enlargement of his attendant obligations. The case is now here on an appeal by the

defendants.

[2] Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of

conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to

something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the

that was thus an incident of the enterprise, Salmon appropriate to himself in secrecy and silence. He might have warned Meinhard that the

plan had been submitted, and that either would be free to compete for the award. If he had done this, we do not need to say whether he

would have been under a duty, if successful in the competition, to hold the lease so acquired for the benefit of a venture than about to end,

and thus prolong by indirection its responsibilities and duties. The trouble about his conduct is that he excluded his coadventurer from any

chance to compete, from any chance to enjoy the opportunity for benefit that had come to him alone by virtue of his agency. This chance, if

Salmon had not given assent to a project more attractive. At all events, notice of termination, even if not necessary, might seem, not

unreasonably, to be something to be looked for, if the business was over the another tenant was to enter. In the absence of such notice, the

matter of an extension was one that would naturally be attended to by the manager of the enterprise, and not neglected altogether. At least,

there was nothing in the situation to give warning to any one that while the lease was still in being, there had come to the manager an offer of

extension which he had locked within his breast to be utilized by himself alone. The very fact that Salmon was in control with exclusive powers

Y. 556. The lease at hand with its many changes is not strictly a renewal. Even so, the standard of loyalty for those in trust relations is without

the fixed divisions of a graduated scale. There is indeed a dictum in one of our decisions that a partner, though he may not renew a lease, may

purchase the reversion if he acts openly and fairly. Anderson v. Lemon, 8 N. Y. 236; cf. 2 White & Tudor, Leading Cases in Equity (9th Ed.) p.

642; Bevan v. Webb, [1905] 1 Ch. 620; Griffith v. Owen, [1907] 1 Ch. 195, 204, 205. It is a dictum, and no more, for on the ground that he had

acted slyly he was charged as a trustee. The holding is thus in favor of the conclusion that a purchase as well as a lease will succumb to the

355. A different question would be here if there were lacking any nexus of relation between the business conducted by the manager and the

opportunity brought to him as an incident of management. Dean v. MacDowell, 8 Ch. Div. 345, 354; Aas v. Benham, [1891] 2 Ch. 244, 258;

Latta v. Kilbourn, 150 U. S. 524, 14 S. Ct. 201, 37 L. Ed. 1169. For this problem, as for most, there are distinctions of degree. If Salmon had

received from Gerry a proposition to lease a building at a location far removed, he might have held for himself the privilege thus acquired, or

so we shall assume. Here the subject-matter of the new lease was an extension and enlargement of the subject-matter of the old one. A

Subject to this adjustment, we agree with the Appellate Division that the plaintiff’s equitable interest is to be measured by the value of half of

the entire lease, and not merely by half of some undivided part. A single building covers the whole area. Physical division is impracticable

along the lines of the Bristol site, the keystone of the whole. Division of interests and burdens is equally impracticable. Salmon, as tenant

under the new lease, or as guarantor of the performance of the tenant’s obligations, might well protest if Meinhard, Claiming an equitable

interest, had offered to assume a liability not equal to Salmon’s, but only half as great. He might justly insist that the lease must be accepted

strict sense with active duties of agency laid on each of the two adventurers. The form of the enterprise made Salmon the sole manager. The

only active duty laid upon the other was one wholly ministerial, the duty of contributing his share of the expense. This he could still do with

equal readiness, and still was bound to do, after the assignment to his wife. Neither by word nor by act did either partner manifest a choice to

view the enterprise as ended. There is no inflexible rule in such conditions that dissolution shall ensue against the concurring wish of all that

the venture shall continue. The effect of the assignment is then a question of intention. Durkee v. Gunn, 41 Kan. 496, 500, 21 P. 637, 13 Am.

to these adventurers. The purpose of the assignment, understood by every one concerned, was to lower the plaintiff’s tax by taking income

out of his return and adding it to the return to be made by his wife. She was the appointee of the profits, to whom checks were to be

remitted. Beyond that, the relation was to be the same as it had been. No one dreamed for a moment that the enterprise was to be wound

up, or that Meinhard was relieved of his continuing obligation to contribute to its expenses if contribution became needful. Coadventurers

and assignee, and most of all the defendant Salmon, as appears by his own letters, went forward on that basis. For more than five years

Case 37.2

Ill.App. 1 Dist.,2009.

1515 North Wells, L.P. v. 1513 North Wells, L.L.C.

392 Ill.App.3d 863, 913 N.E.2d 1, 332 Ill.Dec. 406

Appellate Court of Illinois,

First District, Sixth Division.

1515 NORTH WELLS, L.P., Plaintiff-Appellee,

1513 NORTH WELLS, L.L.C., and Thomas Bracken, Indiv., Defendants-Appellants.

( 1513 North Wells, L.L.C., Thomas Bracken, and 1515 North Wells, L.P., Counterplaintiffs-Appellants and

Rehearing Denied July 15, 2009.

As Modified on Denial of Rehearing July 17, 2009.

Justice CAHILL delivered the modified opinion of the court:

The people and companies in this appeal and cross-appeal were part of a limited partnership formed in 1997 to build a condominium with

residential and commercial space on the site of an existing building at 1515-17 North Wells Street in Chicago. A health club with the address of

purchase price of the property. Bracken signed a promissory note to repay the loan not later than 15 days after he received an accounting

from the limited partnership. The note also required that if Bracken disputed the accounting, he would still pay off the note and receive a

refund later.

As noted, the general partner in the limited partnership was SP Development Corp., an entity created by Sutherland and Pearsall. The general

partner was responsible for hiring a general contractor. It obtained bids from three contractors, including a bid from yet another Sutherland

the financial statement provided by the limited partnership was inadequate as an accounting as a matter of law. On July 11, 2005, the general

partner moved for summary judgment on Bracken’s claim of breach of fiduciary duty. Sutherland and Pearsall argued that they did not

personally owe a fiduciary duty to Bracken and they could not be reached personally because Bracken had not included a count to pierce the

corporate veil.

Bracken then cross-moved for summary judgment on his claims of breach of fiduciary duty and breach of contract against Sutherland, Pearsall

had been obligated to repay the promissory note in the amount of $250,000 no later than January 8, 2002. The court denied Bracken’s motion

for summary judgment on his allegations of breach of contract and breach of fiduciary duty but found genuine issues of material fact. These

issues included: (1) whether the general partner breached its fiduciary duty to the limited partnership and Bracken; or (2) if the general

partner breached the limited partnership agreement by selecting a Sutherland and Pearsall company as general contractor and granting it

lucrative benefits. These benefits included a “cost plus fee” contract and the right to keep revenue generated by the sales of condominium

not only is it in improper form but it comes in a motion that was filed on an abbreviated briefing schedule and only weeks before their * * *

trial was scheduled to begin. In the interests of justice, judicial economy, and all parties’ right to due process, the [c]ourt finds that the time

for amendment has passed.”

The trial court entered a judgment of $447,839.31 against Bracken which included $250,000 due on the note, plus interest and late fees. The

order provided that interest would continue to accrue until the judgment was paid and the limited partnership would be allowed to seek

reconsider the earlier denial of Bracken’s request to amend his complaint to add piercing the corporate veil. As noted, the first judge in this

matter retired during its pendency. That judge, who had denied Bracken’s request to amend, was succeeded in August 2006 by the judge who

entered the May 15, 2007, order. As to this third ruling, the trial court agreed it was possible for Sutherland and Pearsall to be found

individually liable for breach of fiduciary duty under Illinois law, but that Bracken did not raise the argument in a timely fashion. The court

declined to reconsider the 2005 ruling on this issue, relying on the retired judge’s “privy to the timing of the circumstances.”

Insurance Co., 154 Ill.2d 90, 102, 180 Ill.Dec. 691, 607 N.E.2d 1204 (1992). “ Summary judgment is appropriate when there are no genuine

issues of material fact and the moving party is entitled to judgment as a matter of law.” Outboard Marine, 154 Ill.2d at 102, 180 Ill.Dec. 691,

607 N.E.2d 1204. “Construing the language of a contract is a matter of law appropriate for summary judgment.” USG Interiors, Inc. v.

Commercial & Architectural Products, Inc., 241 Ill.App.3d 944, 947, 182 Ill.Dec. 277, 609 N.E.2d 811 (1993). “If no ambiguity exists in the

writing, the parties’ intent must be derived by the circuit court, as a matter of law, solely from the writing itself.” Quake Construction, Inc. v.

See People v. Monroe, 118 Ill.2d 298, 300, 113 Ill.Dec. 233, 515 N.E.2d 42 (1987) (“Arguments * * * based [on] hypothetical factual settings will

not be considered by a reviewing court”). The trial court’s analysis and the record on appeal support the conclusion that Bracken received a

CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 565

compilation of financial information from plaintiffs and that this information was supplemented in response to his requests.

Bracken next argues that the trial court abused its discretion in denying his request to amend his counterclaims to include piercing the general

corporations. Another citation is to one of Bracken’s pleadings that quoted Franz v. Calaco Development Corp., 352 Ill.App.3d 1129, 1137, 288

Ill.Dec. 669, 818 N.E.2d 357 (2004): “ ‘[A] director, officer, or shareholder may be held personally liable for corporate acts only where there is

reason to set aside the corporate form.’ ” This citation appears to be a general proposition of law that Bracken did not connect to a plea for

piercing the corporate veils of the firms owned by Sutherland and Pearsall. We find no support for Bracken’s assertion that he repeatedly

asked to add a count of piercing the corporate veil before his formal request on August 2, 2005, just seven weeks before the trial was set to

2004).

[5][6][7][8] Illinois has a liberal policy of allowing the amendment of pleadings, but this right is not unlimited. Lee v. Chicago Transit Authority,

(1991). The factors in deciding whether a trial court abused its discretion on a motion to amend a pleading include: (1) whether the

amendment would cure a defect in the pleading; (2) whether the proposed amendment was timely, (3) whether the opposition would be

prejudiced or surprised by the amendment; and (4) whether there were earlier opportunities to amend the pleading. Lee, 152 Ill.2d at 467-68,

178 Ill.Dec. 699, 605 N.E.2d 493.

Bracken argues, and we agree, that his amendment would have satisfied the first factor by curing his failure to allege the liability of Sutherland

time frames, the trial court’s refusal in 2007 to revisit the 2005 denial of Bracken’s motion to amend was not improper under a reasonable

person standard. Illgen, 145 Ill.2d at 364, 164 Ill.Dec. 599, 583 N.E.2d 515.

As to the prejudice or surprise factor, this court in Tongate held that a trial court does not abuse its discretion in denying a motion to amend

where there were earlier opportunities to add a new cause of action and the late addition of the new claim could cause prejudice by requiring

additional time to prepare a response. Tongate, 220 Ill.App.3d at 970-71, 162 Ill.Dec. 801, 580 N.E.2d 1220. As we have noted, Bracken had

been produced before the amendment of a pleading to conform to the proof will be allowed. Harding v. Amsted Industries, Inc., 276 Ill.App.3d

483, 494, 213 Ill.Dec. 187, 658 N.E.2d 1208 (1995).

[10] Bracken argues in his petition for rehearing that his posttrial request to pierce the corporate veil was effectively a motion to conform the

pleadings to the proofs under section 2-616(c) (735 ILCS 5/2-616(c) (West 2004)). As stated earlier in this opinion, the factors to be considered

in deciding whether amendments to pleadings should be allowed are set forth in Lee, 152 Ill.2d at 467-68, 178 Ill.Dec. 699, 605 N.E.2d 493.

the corporate veil in a breach of contract situation.” Tower, 371 Ill.App.3d at 1034, 309 Ill.Dec. 686, 864 N.E.2d 927. Efforts to pierce the

corporate veil will be unsuccessful when the evidence shows the complaining party entered into the situation with full knowledge of the

relationships among the players and no injustice occurred. Tower, 371 Ill.App.3d at 1034-35, 309 Ill.Dec. 686, 864 N.E.2d 927.

Here, the record does not show and Bracken does not allege that he was deceived by misrepresentation or concealment by Sutherland and

Pearsall. Nor does he allege that he failed to understand that there were close interrelationships between Sutherland and Pearsall, the general

Ill.App.3d at 1033, 309 Ill.Dec. 686, 864 N.E.2d 927. We see no reason to depart from well-established Illinois law by adopting Bracken’s

proposed extension of USACafes to find that Sutherland and Pearsall are outside the corporate veil.

We now turn to the general partner’s cross-appeal of the trial court’s finding that it breached its fiduciary duty to the limited partnership. The

general partner argues that the trial court erred in failing to consider paragraph 1.7 of the limited partnership agreement. This paragraph

provided:

look at the situation in its totality, it’s not really a two-way street, but a one-way street allowing the general partner to go forward. Because

the limited partner is merely that[:] a limited partner invested in the partnership. The general partner is the managing partner of the

partnership and has these [fiduciary] duties in relation to the limited partnership.”

[15] The general partner argues that paragraph 1.7 did in fact relax the parties’ fiduciary duties to each other. It maintains that our review

must be de novo because we are reviewing the language of the agreement, citing LID Associates v. Dolan, 324 Ill.App.3d 1047, 1070-71, 258

duty, and (3) damages that were proximately caused by the defendant’s breach.” DOD Technologies v. Mesirow Insurance Services, Inc., 381

Ill.App.3d 1042, 1046, 320 Ill.Dec. 221, 887 N.E.2d 1 (2008).

[20][21] Under section 103(b)(3) of the Uniform Partnership Act, a partnership agreement may not “eliminate or reduce a partner’s fiduciary

duties.” 805 ILCS 206/103(b)(3) (West 2004). Language in an agreement that allows the partners discretion in certain areas “does not

metamorphose the document into an unrestricted license to engage in self-dealing at the expense of those to whom the managing partner

owes such a duty.” Labovitz v. Dolan, 189 Ill.App.3d 403, 416-17, 136 Ill.Dec. 780, 545 N.E.2d 304 (1989). There is no authority “for the

proposition that there can be a priori waiver of fiduciary duties in a partnership.” Labovitz, 189 Ill.App.3d at 417, 136 Ill.Dec. 780, 545 N.E.2d

304. “Nor is the practice of imposing purported advance waivers of fiduciary duties in limited partnership enterprises to be given judicial

recognition.” Labovitz, 189 Ill.App.3d at 417, 136 Ill.Dec. 780, 545 N.E.2d 304.

Here, there was ample evidence to support the court’s finding of a breach of fiduciary duty, including the “cost plus fee” contract that the

general partner awarded to the general contractor and the profits from condominium upgrades that went to the general contractor, not to

Case 37.3

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.

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

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. (noting the agreement is the “law of the partnership”). Our review of a circuit court’s valuation of property is clearly erroneous.

(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

[¶ 12.] The partnership agreement is a contract between the partners and effect will be given to the plain meaning of its words. see also

(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.” (citing ). We must “give effect to the language of the entire

contract and particular words and phrases are not interpreted in isolation.” (quoting ) (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.

CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 569

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 employed by

MSEL’s expert Thorstenson. Canevas argue that the circuit*338 court correctly concluded the offer from Kellar represented the fair market

value of Midnight Star.

[¶ 18.] Fair market value is defined as,

As of October 11, 2006 there were 2109 positive references citing on Westlaw. The 3 negative references indicate that the ruling

has been modified by , but in a way not applicable to this case.

[¶ 19.] This Court has not decided a case involving this issue. However, in we noted, “ represents the most substantial body of official

guidance for valuing an interest in a closely held corporation.” (quoting Oldfather, et. al, Valuation and Distribution of Marital Property, Vol.

2, Ch. 22.08[2][a] at 22-110 (1996)). Moreover, other jurisdictions have employed the hypothetical transaction to arrive at the fair market

value in other situations. In , the United States Tax Court explained the “fair market value is the standard of determining the value of

property for Federal estate tax purposes.” . The court went on to explain that the fair market value uses hypothetical sellers and buyers,

“rather than specific individuals or entities, and their characteristics are not necessarily the same as those of the actual buyer or seller.”

(citing (additional citations omitted)).

[¶ 20.] Importantly, courts have noted that the fair market analysis does not contemplate actual buyers. In , the court stated it was error

for the lower court to “assume[ ] the existence of a strategic buyer[.]” (additional citations omitted). The court further emphasized that “fair

market value analysis depends … on a hypothetical rather than an actual buyer.”

[¶ 21.] MSEL goes to great lengths in its brief to demonstrate why the hypothetical transaction valuation standard, rather than an actual

buyer, is the proper standard to determine the fair market value. MSEL lists sound policy reasons why an offer cannot be the fair market

value. For example, what if a partnership solicited a “strawman” to offer a low price for the business? What if a businessman, for personal

reasons, offers 10 times the real value of the business? What if the partnership, for personal reasons, such as sentimental value, refuses to

sell for that absurdly high offer? These arbitrary, emotional offers and rejections cannot provide a rational and reasonable *339 basis for