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Casey Ranch Limited Partnership v. Casey

IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA


September 23, 2009

CASEY RANCH LIMITED PARTNERSHIP (CRLP), MILLIRON BISON COMPANY, LLC (MBC), KEVIN CASEY, AS CRLP GENERAL AND LIMITED PARTNER AND MBC MEMBER, BRENDAN CASEY, AS MBC MANAGING MEMBER AND CRLP LIMITED PARTNER, DENNIS CASEY, AS CRLP LIMITED PARTNER AND MBC MEMBER, AND SEAN CASEY, AS CRLP LIMITED PARTNER AND MBC MEMBER, PLAINTIFFS AND APPELLANTS,
v.
PAULINE CASEY, DEFENDANT AND APPELLEE, AND MIKE CASEY, INTERVENER AND APPELLEE.

APPEAL FROM THE CIRCUIT COURT OF THE SEVENTH JUDICIAL CIRCUIT PENNINGTON COUNTY, SOUTH DAKOTA. HONORABLE JANINE KERN Judge.

The opinion of the court was delivered by: Zinter, Justice.

CONSIDERED ON BRIEFS ON AUGUST 24, 2009

[¶1.] Casey Ranch Limited Partnership (CRLP) and Milliron Bison Company, LLP (MBC) commenced this breach of contract action against Pauline Casey. The suit was based on oral agreements under which Pauline leased CRLP's and MBC's real property and agreed to pay for certain expenses associated with her use of the property to graze her cattle. The circuit court dismissed. With respect to MBC, the court concluded that the suit was outside the ordinary course of partnership business; that actions outside the ordinary course of business required unanimous consent of the partners; and, not all partners had consented to the suit. With respect to CRLP, the court concluded that the partnership agreement required a majority of the general partners to act and one of the two general partners had not consented to the suit. CRLP and MBC appeal. We reverse.

Facts and Procedural History

[¶2.] This dispute involves the Casey family children, partners in CRLP and MBC, and their mother Pauline Casey. In 1959, Dennis P. "Doc" Casey married Pauline. They had seven children: Kevin, Dennis, Brendan, Sean, Shannon, Mike, and John. In 1972, Doc and Pauline started Bear Country USA, Inc. (Bear Country), a drive-through wildlife park in Rapid City, South Dakota. Doc Casey operated this business until his death in 2000. Doc and Pauline's children were also involved in the ownership and operation of Bear Country. Before the filing of this suit, a conflict had apparently developed among the Casey children and a declaratory judgment action was initiated regarding the corporate governance of Bear Country. Although the outcome of that action has no legal significance in this litigation, it appears that the family split evidenced in that action has carried over into this litigation.

[¶3.] This suit involves two ranches owned by the Casey children. In 1998, the seven Casey children formed MBC, a limited liability partnership that owns real estate for ranching purposes. In 1999, CRLP, a limited liability limited partnership, was formed. Its principal asset is a 5,200 acre ranch. CRLP was owned and operated by two general partners (Doc and Pauline Casey) and seven limited partners (the seven Casey children). Upon Doc's death, Kevin Casey succeeded Doc as a general partner.

[¶4.] This suit arose out of oral cattle grazing leases between Pauline and these two partnerships. The complaint alleges that Pauline failed to pay amounts due for cattle expenses and lease payments relating to the ranch properties owned by CRLP and MBC. Pauline and Mike Casey (as an intervenor) moved to dismiss under SDCL 15-6-12(b)(5). They argued that MBC lacked authority to initiate suit because the suit to collect the debt was outside the ordinary course of business of the partnership, unanimous consent was necessary for extraordinary business, and unanimous consent for the suit had not been obtained. With respect to CRLP, they argued that Mike Casey was one of two general partners. They contended that CRLP lacked authority to sue because, under the partnership agreement, a majority of the general partners were necessary to act and Mike did not consent to the suit. After considering affidavits and other matters outside the pleadings, the circuit court agreed and dismissed.

Issues

1. Whether the circuit court erred in concluding that MBC's suit to collect a partnership debt was outside the ordinary course of business thereby requiring unanimous consent of the partners.

2. Whether the circuit court erred in determining that Mike Casey was a general partner of CRLP, and therefore, his consent was required for the partnership to sue.

Standard of Review

[¶5.] Although the circuit court proceedings began on Mike's and Pauline's motions to dismiss, the circuit court considered matters outside the pleadings in rendering its decision.*fn1 However, no party objected to the circuit court's consideration of those matters. Further, in response to the circuit court's expressed skepticism about the procedural posture of the case, the parties assured the court that the case was correctly postured for disposition by summary judgment. Therefore:

In determining our standard of review, we observe that although this matter is before us on a motion to dismiss, both parties submitted matters outside the pleadings, and the [circuit court] did not explicitly exclude them. However, we also observe that neither party objected to the [circuit court's] consideration of those matters and neither party raised the issue on appeal. Therefore, we review the [circuit court's] ruling as a motion for summary judgment. Tibke v. McDougall, 479 NW2d 898, 903-04 (SD 1992) (stating that when the record indicates that matters outside of the pleadings were considered by the trial court, motions to dismiss are reviewed and disposed of as motions for summary judgment).

Flandreau Pub. Sch. Dist. No. 50-3 v. G.A. Johnson Const., Inc., 2005 SD 87, ¶ 6, 701 NW2d 430, 433-34.

[¶6.] In reviewing a summary judgment, "we 'restrict our review to determining whether the record before us discloses any genuine issues of material fact and, if not, whether the . . . court committed any errors of law.'" Johnson Const., 2005 SD 87, ¶ 7, 701 NW2d at 434 (quoting Switlik v. Hardwicke Co., 651 F2d 852, 857-58 (3dCir 1981)). Legal questions concerning interpretation of partnership agreements are reviewed de novo. In re Dissolution of Midnight Star Enters., 2006 SD 98, ¶ 7, 724 NW2d 334, 336 (citing Liechty v. Liechty, 231 NW2d 729, 731 (ND 1975)) (noting the agreement is the "law of the partnership").*fn2

Analysis

1. Authorization for the MBC Suit

[¶7.] The circuit court concluded that initiation of this litigation was outside the ordinary course of partnership business, and therefore, it could only be undertaken upon consent of all partners. The circuit court reasoned that the partnership agreement was not controlling and that because the "initiation of this litigation [was] outside the ordinary course of business of the partnership, it [was] . . . subject to unanimous consent requirements under SDCL 48-7A-401(j)." That statute provides:

A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners.

SDCL 48-7A-401(j).

[¶8.] On appeal, MBC contends that the circuit court erred because consent to all business, whether ordinary or extraordinary, is controlled by the partnership agreement rather than SDCL 48-7A-401(j), and that under the agreement, a mere majority of the partners' interests were necessary to conduct any business.

Alternatively, MBC contends that the suit was initiated in the ordinary course of MBC business, and therefore, a majority was all that was required under either the partnership agreement or SDCL 48-7A-401(j).

[¶9.] To resolve these contentions, we first consider MBC's argument that the partnership agreement controls because it authorized both ordinary and extraordinary business to be conducted by a simple majority. We consider MBC's alternative ordinary course of business argument as two questions. First, was the underlying lease, which gave rise to the debt, made in the ordinary course of MBC business? If it was, we then determine whether initiation of suit to collect that debt was also in the ordinary courseof business. If commencing suit to collect the debt was within the ordinary course of business, then both the partnership agreement and SDCL 48-7A-401(j) only required a majority to act.

Section 6.1 of the MBC Partnership Agreement

[¶10.] MBC first claims we need not determine whether the lease or filing suit to collect debt under the lease is within the ordinary course of business because all business decisions, whether ordinary or extraordinary, are governed by section 6.1 of the partnership agreement and section 6.1 only requires a majority to act. Section 6.1 provides:

Each partner shall have a voice in the management of the Partnership business. Except as otherwise provide[d] in this Agreement, all decisions relating to the Partnership business shall be made by a vote of the partners who own a majority in amount of the total capital accounts of all partners. (Emphasis added.) MBC asserts that if this partnership provision governs all decisions, whether ordinary or extraordinary, the agreement supplants the default rule in SDCL 48-7A-401(j). See SDCL 48-7A-103(a) ("[R]elations among the partners and between the partners and the partnership are governed by the partnership agreement.").

[¶11.] In interpreting partnership agreements, we have stated:

The partnership agreement is a contract between the partners and effect will be given to the plain meaning of its words. Liechty, 231 NW2d at 731; see also Pauley v. Simonson, 2006 SD 73, ¶ 8, 720 NW2d 665, 668 (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." Nelson v. Schellpfeffer, 2003 SD 7, ¶ 14, 656 NW2d 740, 744 (citing Restatement (Second) Contracts § 203(a) (1981)). We must "give effect to the language of the entire contract and particular words and phrases are not interpreted in isolation." Jones v. Siouxland Surgery, 2006 SD 97, 724 NW2d 340 (quoting Hartig Drug Co. v. Hartig, 602 NW2d 794, 797-98 (Iowa 1999)) (internal quotations omitted).

Midnight Star, 2006 SD 98, ¶ 12, 724 NW2d at 337.

[¶12.] To support its interpretation of section 6.1, MBC focuses only on the "all decisions" language of the section without acknowledging the limiting language indicating that all decisions are only those "relating to Partnership business." Thus, MBC's interpretation reads a part of section 6.1 in isolation without considering all language in this section. The language "relating to Partnership business" modifies "all decisions." Therefore, when read as a whole, section 6.1 does not provide that all decisions, whether extraordinary and ordinary, may be made by a simple majority. On the contrary, the limiting language requires that "all decisions" must be those "relating to Partnership business;" i.e., ordinary partnership business. To read the "all decisions" language as contemplating extraordinary matters would render the phrase "relating to Partnership business" meaningless surplusage.*fn3 See Estate of Fisher v. Fisher, 2002 SD 62, ¶ 14, 645 NW2d 841, 846 ("A contract should not be interpreted in a manner that renders a portion of it meaningless." (citingBowen v. Monroe Guar. Ins. Co., 758 NE2d 976, 980 (IndCtApp 2001))). Moreover, to read the language as MBC suggests would change the agreement and make extraordinary non-partnership matters ordinary partnership business. "[I]t is not a function of the court to rewrite the parties' agreements." Hisgen v. Hisgen, 1996 SD 122, ¶ 17, 554 NW2d 494, 499 (Amundson, J., dissenting) (citations omitted). We therefore conclude that section 6.1 governs only ordinary partnership business.

Ordinary Course of Business

[¶13.] Having concluded that decisions regarding extraordinary matters were not authorized by majority vote in section 6.1, we must next determine whether the claim against Pauline for breach of contract arose within the ordinary course of MBC business. It appears that the circuit court, based on the "acrimony and bitterness" evidenced in the Bear Country litigation, treated the initiation of this suit as an action among or against partners rather than a suit to collect a partnership debt. However, Pauline Casey was not a partner and had no ownership interest in MBC. Furthermore, the complaint makes no claim regarding partnership governance, no claim of dispute regarding entitlement to partnership assets, and no mention of a dispute among the partners. The complaint only seeks to enforce what is claimed to be a partnership debt owed by a third party.*fn4

[¶14.] The asserted debt arose from a real estate lease with Pauline, which was a part of the ordinary course of MBC business. As stated in the "Purpose" section of the MBC Partnership Agreement, Article I, § 1.2:

[MBC] shall engage in the business of acquiring, owning, improving, operating, managing, selling, leasing, or mortgaging the real property . . . and otherwise to deal with said property or any other properties . . . and to do all other acts which may be necessary or desirable in order to accomplish any of the aforementioned purposes.

(Emphasis added.) Considering the express purpose of MBC, the leasing of the partnership's ranch property for cattle grazing and care was within its ordinary course of business. Therefore, Pauline's obligation under the lease was a partnership debt that arose in the ordinary course of business.

[¶15.] Additionally, initiating suit to collect a partnership debt is generally considered to be within the ordinary course of the business of a partnership. SDCL 48-7A-201 provides that "[a] partnership is an entity distinct from its partners." Partnerships also have authority to sue in the name of the partnership. SDCL 48-7A-307(a). Therefore, commencing a lawsuit on behalf of a partnership to enforce a partnership claim incurred in the ordinary course of business is itself a matter in the ordinary course of business. See Lane v. Krein, 375 SE2d 351 (SCCtApp 1988) (treating suit against third parties as an ordinary matter); Delbon Radiology v. Turlock Diagnostic Ctr., 839 FSupp 1388, 1392 (EDCal 1993) ("[E]nforcement of a partnership's claim will often be an ordinary matter and subject to [majority rule]." (quoting Bromberg & Ribstein, Bromberg and Ribstein on Partnership § 5.03(c), at 5:20-21 (1991))). See generally Alan R. Bromberg, Enforcement of Partnership Rights -- Who Sues for the Partnership?, 70 NebLRev 1, 10-13 (1991) (same).

[¶16.] For purposes of summary judgment, it must be assumed that Pauline Casey grazed her cattle on MBC's property and failed to pay amounts due on the governing leases. Considering that one of the purposes of MBC was to lease its ranch property, we conclude that the initiation of the breach of contract action against Pauline Casey, a third party, was within the ordinary course of partnership business. Because the decision to sue was within the ordinary course of business, and because more than 70% of the MBC partnership interests consented to the suit, the suit was authorized under the partnership agreement and SDCL 48-7A-401(j).*fn5

For these reasons, the circuit court erred in granting the motion to dismiss as to MBC.

2.Authorization for the CRLP Suit

[¶17.] The circuit court concluded that Mike Casey was one of two general partners and he had not consented to this suit as required by the partnership agreement. Based on this conclusion, the circuit court dismissed CRLP's claim.

[¶18.] Upon the death of Doc Casey in 2000, Kevin Casey became one of two general partners of CRLP (Pauline was the other). In 2006, Pauline decided to gift her interest in CRLP to her seven children (the general and limited partners). Under the proposed arrangement, Pauline would no longer be a general partner once she transferred her interests in CRLP. CRLP's counsel at the time advised that a new general partner would be required. To facilitate these changes, a partnership meeting was held on December 19, 2006. At that meeting, the partners unanimously voted that Mike Casey would become a general partner (joining Kevin Casey) if Pauline Casey gifted her ownership interest in CRLP to the other partners within one year.

[¶19.] Pauline gifted her ownership interests in CRLP to the other partners within the required year. As a result, the December 19, 2006 resolution became effective and Mike Casey became one of the two general partners of CRLP. In accordance with this December 19, 2006 resolution, CRLP continued to operate with Mike and Kevin Casey as general partners. On February 29, 2008, an Amended Certificate of Limited Partnership was filed with the Secretary of State reflecting Mike's status as a general partner.*fn6

[¶20.] However, questions subsequently arose among one faction of the Casey children regarding Mike Casey's appointment as general partner. On March 12, 2008, general partner Kevin Casey, along with limited partners Sean, Brendan and Dennis Casey, conducted a CRLP meeting. The minutes of that meeting reflect a concern was expressed that, contrary to the prior legal advice, a replacement general partner was not required when Pauline had transferred her interest. Therefore, those partners present at this meeting concluded that Mike Casey should not have been appointed as a general partner. Although not representing the 70% of the partnership interests necessary to remove a general partner, those present voted to remove Mike Casey as a general partner.

[¶21.] The record is not clear whether Mike and Pauline were given notice of this act. Further, the ability to remove a general partner without 70% of the partnership's interests apparently became an issue of concern. Therefore, out of what a July 28, 2008 partnership resolution described as an "abundance of caution," Kevin, Sean, Brendan and Dennis Casey purportedly removed Mike Casey again, this time under a CRLP partnership provision that allowed removal for malfeasance by a simple majority. A copy of the resolution of removal was offered and received without objection by the circuit court. Notwithstanding the resolution, the circuit court concluded as a matter of law that Mike Casey was a general partner whose consent was required.

[¶22.] CRLP advances two arguments supporting its contention that the circuit court erred in concluding Mike Casey's consent was required. First, CRLP argues that the partnership received erroneous legal advice regarding the need to replace Pauline as a general partner. CRLP contends that under the partnership agreement, Pauline was not required to be replaced, and therefore, Mike Casey did not become a general partner. Alternatively, CRLP contends that even if Mike became a general partner, he had since been removed for malfeasance.

Mike Casey's Succession of Pauline Casey as General Partner

[¶23.] CRLP notes that the partnership agreement defines a general partner as "[t]he Person or Persons designated as General Partners on Schedule A and any successor General Partners in accordance with the terms of this agreement. . . ." CRLP Agreement § XVII.V (emphasis added). CRLP points out that the partnership agreement contains specific terms for withdrawal and succession of general partners*fn7 and places limitations on the transferability of CRLP interests.*fn8 CRLP contends that because Pauline's interests were not transferred in compliance with these terms, and because a replacement general partner was not required under the agreement, the transfer, withdrawal, and succession was not "in accordance with the terms" of the partnership agreement. Because those terms were not followed, CRLP argues that Mike's election as a general partner was void.

[¶24.] For purposes of this appeal we may assume that the partnership agreement did not require a replacement general partner upon Pauline's withdrawal. We also assume that the assignment of interest provisions were not followed when Pauline's interests were transferred. We may make these assumptions because the failure to follow these partnership procedures for succession and transfer of interest are immaterial. They are immaterial because, by the December 19, 2006 resolution, the transfer, withdrawal, and replacement procedures were waived by unanimous consent of the partners. At that meeting, in electing Mike Casey and approving the proposed transfer, all partners unanimously adopted the following resolution: "[I]f Pauline gifts all of her partnership interests, such transfers are approved and such transfers will not constitute a wrongful withdrawal from the partnership, or a violation of any part of the Partnership Agreement as pertains to withdrawal by a General partner, or otherwise." (Emphasis added.) Consequently, notwithstanding any inconsistent partnership provisions, Mike Casey's election as an additional general partner was validated by the written, unanimous consent of all partners. See SDCL 48-7-401 (stating that additional general partners may be admitted with the written consent of all partners).*fn9

Mike Casey's Removal as a General Partner

[¶25.] We next determine if Mike Casey was removed as general partner. In the proceedings below, the circuit court admitted the CRLP removal resolution but the circuit court's decision did not mention the removal issue. On appeal, CRLP again asserts that Mike Casey was removed for malfeasance and therefore his consent was no longer required.

[¶26.] As previously noted, the motion to dismiss became a motion for summary judgment. In a summary judgment proceeding, "[t]he burden is on the moving party to clearly show an absence of any genuine issue of material fact and an entitlement to judgment as a matter of law." Dakota Indus., Inc. v. Cabala's.com, Inc., 2009 SD 39, ¶ 10, 766 NW2d 510, 513 (quoting Hayes v. N. Hills Gen. Hosp., 1999 SD 28, ¶ 12, 590 NW2d 243, 247). "While we often distinguish between the moving and non-moving party in referring to the parties' summary judgment burdens, the more precise inquiry looks to who will carry the burden of proof on the claim or defense at trial." Id. ¶ 11 (quoting Zephier v. Catholic Diocese of Sioux Falls, 2008 SD 56, ¶ 6, 752 NW2d 658, 662). Thus, CRLP, as the party affirmatively asserting Mike's removal for malfeasance, had the initial summary judgment burden to establish the absence of genuine issues of material fact and entitlement to judgment on this issue as a matter of law.

[¶27.] CRLP met their initial burden by introducing the removal resolution indicating that Mike had been removed for malfeasance. The resolution, dated July 28, 2008, was signed by a majority of the interests in CRLP and cited a host of acts of alleged malfeasance supporting Mike's removal.*fn10 Mike Casey did not dispute the allegations of malfeasance, and the resolution established a prima facie case of removal for malfeasance. "A prima facie case is established for summary judgment purposes when there 'are facts in evidence which if unanswered would justify persons of ordinary reason and fairness in affirming the question which the plaintiff is bound to maintain.'" Dakota Indus., 2009 SD 39, ¶ 14, 766 NW2d at 514 (quoting Fin-Ag, Inc. v. Pipestone Auction Livestock Mkt., Inc., 2008 SD 48, ¶ 33, 754 NW2d 29, 43) (citation omitted). Thus, CRLP met its initial summary judgment burden and the burden of production shifted to Mike Casey to identify disputes of facts or law regarding the removal. Id. (citing SDCL 15-6-56(e)).

[¶28.] In response to CRLP's prima facie showing, Mike did not dispute or raise any issue of fact or law contesting malfeasance. He only argued that proper "procedures" for removal under the CRLP Agreement were not followed, a question of law we review de novo. Midnight Star, 2006 SD 98, ¶ 7, 724 NW2d at 336.

[¶29.] The CRLP Agreement regarding removal is unambiguous. The relevant section provides in part: "The General Partner will . . . be removed upon at least a Majority in Interest agreeing if: . . . the General Partner commits any act or omission of fraud or malfeasance to the Partnership's injury." CRLP Agreement § VI.D; see also SDCL 48-7-402(3) ("The general partner is removed as a general partner in accordance with the partnership agreement."). Further, the July 28, 2008 resolution reflects that 57% of the partnership interests voted for removal for malfeasance. Mike Casey has not, however, identified (in the trial or this appellate proceeding) any partnership provision suggesting that the removal procedure was improper.*fn11 Because Mike Casey failed to identify any factual dispute regarding malfeasance, and because he has failed to identify any partnership provision suggesting an improper removal procedure, Mike and Pauline failed to carry their responsive summary judgment burden. Therefore, the circuit court erroneously concluded that Mike Casey remained a general partner whose consent to sue was necessary.

Conclusion

[¶30.] MBC's breach of contract claim against Pauline Casey arose in the ordinary course of MBC's partnership business of leasing its real property. Initiating legal remedies to enforce such a partnership debt against a third party was a matter within the ordinary course of MBC business. Because the partnership agreement authorized ordinary course of business acts upon a simple majority vote of the partnership interests, the circuit court erred in concluding that absent unanimous consent, MBC's suit was unauthorized.

[¶31.] Mike Casey became a general partner of CRLP upon the unanimous vote of the partners and the timely transfer of Pauline Casey's CRLP interests. Any CRLP partnership provisions that may have been violated with regard to the election and transfer were waived. Nevertheless, Mike Casey failed to raise a disputed issue of fact or law in response to CRLP's summary judgment showing that Mike Casey was subsequently removed. Because, for purposes of this summary judgment proceeding, we must therefore assume that Mike Casey was removed as a general partner, his consent was not necessary to maintain this suit. Because Mike Casey's consent to sue is not necessary, the circuit court erred in concluding that CRLP's suit was unauthorized.

[¶32.] Reversed.

[¶33.] GILBERTSON, Chief Justice, and KONENKAMP, MEIERHENRY, and SEVERSON, Justices, concur.


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