G & S INVESTMENTS v. Belman
700 P.2d 1358, 145 Ariz. 258 (1984)
Rule of Law:
A partnership buy-out agreement that unambiguously sets a purchase price based on a specific accounting method, such as a partner's capital account, is valid and enforceable according to its literal terms, even if that price is substantially different from the fair market value of the partnership interest.
Facts:
- Century Park, Ltd., a limited partnership, was formed to own a 62-unit apartment complex, with G & S Investments and Thomas N. Nordale as general partners.
- Beginning in 1979, Nordale's cocaine use led to a personality change, causing him to become erratic, hostile towards his partners, and unable to communicate effectively.
- Nordale engaged in misconduct at the apartment complex, including sexually soliciting a minor tenant, refusing to pay rent on an apartment he occupied, and creating disturbances that caused at least one tenant to leave.
- Nordale made irrational business demands, such as converting the apartments to condominiums during a period of high interest rates and raising rents despite recent mass vacancies caused by a prior rent hike.
- The partnership agreement contained a buy-out provision (Article 19) allowing surviving partners to continue the business and purchase a deceased partner's interest.
- The buy-out formula in the agreement specified the purchase price as the sum of the deceased partner's 'capital account' plus an average of the prior three years' profits.
- At the time of the dispute, Nordale's capital account on the partnership's books had a negative balance.
Procedural Posture:
- On September 11, 1981, G & S Investments sued Thomas N. Nordale in the trial court, seeking a judicial dissolution of the Century Park, Ltd. partnership and the right to buy out Nordale's interest.
- While the suit was pending, Nordale died on February 16, 1982.
- G & S Investments filed a supplemental complaint against Nordale's estate, asserting their right under the partnership agreement to continue the business and purchase Nordale's interest.
- The trial court entered judgment for G & S Investments, holding that they had the right to continue the partnership and that the purchase price of Nordale's interest was determined by the 'capital account' formula in the partnership agreement.
- The Estate of Nordale, as appellant, appealed the trial court's judgment to the Arizona Court of Appeals.
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Issue:
Is a partnership buy-out agreement, which explicitly bases the purchase price on a partner's 'capital account', enforceable according to its literal terms even when that valuation is significantly less than the fair market value of the partnership interest?
Opinions:
Majority - Howard, Judge.
Yes. A partnership buy-out agreement is a contract that must be given full force and effect according to its plain terms, even if its enforcement seems harsh. The court reasoned that partnerships are creatures of contract, and the rights and liabilities of partners are governed by the agreements they make. The term 'capital account' is not ambiguous; it clearly refers to the partner's capital account as maintained on the partnership's books, which, under generally accepted accounting principles, is based on historical cost, not fair market value. The court rejected the argument that equity required substituting fair market value for the contractually agreed-upon formula, distinguishing prior case law suggesting such a possibility as non-binding dictum. Citing extensive precedent, the court affirmed that buy-out agreements are binding even when the purchase price is significantly more or less than the actual value of the interest, so long as the parties explicitly agreed to the valuation method and there is no evidence of fraud or duress.
Analysis:
This case solidifies the principle of freedom of contract within Arizona partnership law, establishing that courts will not use equitable doctrines to rewrite unambiguous buy-sell agreements. The decision serves as a strong precedent for strictly enforcing the literal terms of such provisions, even when they lead to a result that appears lopsided or financially disadvantageous to one party. It emphasizes that partners bear the responsibility for the valuation methods they choose, and if they intend for a buy-out to be at fair market value, they must explicitly state so in their agreement. This ruling provides certainty and predictability for business planning but also acts as a cautionary tale for partners to carefully consider and understand every term in their governing documents.
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