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Dysart v. Dragpipe Saloon, LLC

Supreme Court of South Dakota

September 4, 2019

TROY DYSART and RICHARD HEINRICH, Plaintiffs and Appellees,
v.
DRAGPIPE SALOON, LLC, Defendant, and PATRICK KERWIN and RAYMOND MEYERS, Defendants and Appellants.

          CONSIDERED ON BRIEFS ON MAY 28, 2019

          APPEAL FROM THE CIRCUIT COURT OF THE FOURTH JUDICIAL CIRCUIT LAWRENCE COUNTY, SOUTH DAKOTA THE HONORABLE MICHELLE K. COMER Judge

          MICHAEL W. STRAIN of Strain Morman Law Firm Sturgis, South Dakota Attorneys for plaintiffs and appellees.

          DYLAN A. WILDE Spearfish, South Dakota Attorney for defendants and appellants.

          SALTER, JUSTICE

         [¶1.] Two members of a limited liability company known as Dragpipe Saloon, LLC (Dragpipe) requested judicial dissolution ancillary to their efforts to sell their membership interests. Following a court trial, the circuit court ordered dissolution and the sale of Dragpipe's assets. The remaining members appeal, arguing the circuit court erred when it concluded that it was not reasonably practicable for Dragpipe to continue under the provisions of its operating agreement and that Dragpipe's economic purpose was unreasonably frustrated. We reverse.

         Background

         [¶2.] Raymond Meyers, Penney Weast, Troy Dysart, and Richard Heinrich formed Dragpipe in 2003. Each member contributed $10, 000 and received a 25% membership interest and voting rights. Dragpipe's operating agreement states that its purpose

is to engage in all lawful activities, including, but not limited to, owning, purchasing, taking, leasing, or otherwise holding or acquiring real property and any interest or right in real property and any improvements thereon, and to hold, own, operate, control, maintain, manage and develop such property and interests in any manner that may be necessary, useful or advantageous . . . [to the] company.

         [¶3.] The operating agreement also provides that Dragpipe may be dissolved and its affairs wound up with the unanimous vote of the members or by a decree of judicial dissolution pursuant to South Dakota's enactment of the Uniform Limited Liability Company Act. See SDCL ch. 47-34A. Individual members may also voluntarily resign their membership under the provisions of the operating agreement and obtain the "fair market value of [the member's] Ownership Interest, adjusted for profits and losses to the date of resignation." In the event of a resignation, the fair market value would be determined by a unanimous vote of the members or, failing that, by an independent appraiser.

         [¶4.] The members purchased 74 acres of land off Highway 79 northeast of Sturgis for approximately $135, 000 and built a bar that is open only during the Sturgis Motorcycle Rally (Rally), which runs for approximately ten days every year in August. Of the 74 acres purchased, 18 acres were used to operate the bar, and the remaining land was leased to a farmer. Dragpipe obtained a malt beverage license and opened for business during the 2004 Rally, selling beer, soft drinks, water, and t-shirts. The company also hosted food vendors and provided live entertainment.

         [¶5.] In January 2005, Penney Weast sold her membership interest to Patrick Kerwin. Dragpipe later expanded by opening a campground on the property in 2009. Camping was free until 2013, when the company began to charge camping fees in an effort to improve revenue. Dragpipe had its first profitable year in 2015 and posted modest profits in 2016 and 2017.

         [¶6.] Each member has invested approximately $80, 000 in the company. The members also provide labor during the Rally without compensation-typically working over 12 hours each day. The members have not received income distributions. However, Dragpipe's net income from 2015 to 2017 did allow it to pay the mortgage expense previously contributed pro rata by the members. The profits also allowed Dragpipe to reimburse the members for their out-of-pocket expenses.

         [¶7.] Following the 2015 Rally, Dysart and Heinrich (Appellees) advised Kerwin and Meyers (Appellants) that they wanted to sell their membership interests in Dragpipe. The Appellants expressed no objection, and the Appellees initially appeared to have found buyers for their combined one-half interest. However, one of the prospective buyers rescinded his offer, leaving the remaining purchaser to purchase one-quarter ...


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