Gail M. Benson Living Trust v. Physicians Office Building, Inc.

#25762-rev & rem-DG

2011 S.D. 30

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

* * * *

GAIL M. BENSON LIVING TRUST,
LENORE G.L. JOHNSON LIVING
TRUST, SANFORD CLINIC, WILLIAM
WATSON, M.D., Plaintiffs and Appellants,

and

JEFFREY B. HAGEN, M.D., Plaintiff,

v.

PHYSICIANS OFFICE BUILDING, INC.,
JEREMIAH D. MURPHY, Defendants and Appellees,

and

ALFRED E. HARTMANN, M.D.,
RADIOLOGIC PARTNERS, ROBERT E.
VANDEMARK, JR., M.D. and SISTERS
OF THE PRESENTATION OF THE
BLESSED VIRGIN MARY OF ABERDEEN,
SOUTH DAKOTA, Defendants.

* * * *

APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA

* * * *

HONORABLE KATHLEEN K. CALDWELL
Judge

* * * *
CONSIDERED ON BRIEFS
ON MAY 23, 2011

OPINION FILED 06/29/11
KENT R. CUTLER
DAVID L. EDWARDS
KIMBERLY R. WASSINK of
Cutler & Donahoe, LLP
Sioux Falls, South Dakota Attorneys for plaintiffs
and appellants.

JAMES E. McMAHON
ROCHELLE R. SWEETMAN of
Murphy, Goldammer & Prendergast, LLP
Sioux Falls, South Dakota Attorneys for defendants
and appellees.
#25762

GILBERTSON, Chief Justice

[¶1.] Limited partners brought suit against general partners seeking a

declaratory judgment that the general partners’ change in allocation of the limited

partnership’s profits and losses violated the partnership agreement. After

considering cross-motions for summary judgment, the circuit court granted

summary judgment in favor of the general partners. The limited partners appeal.

We reverse and remand.

FACTS

[¶2.] A limited partnership, POB Associates, was formed in 1980 for the

purpose of “constructing, owning, maintaining, and operating” an office building on

the Avera McKennan Hospital campus in Sioux Falls, South Dakota. This building,

known as the Physicians Office Building, is the primary asset of POB Associates.

[¶3.] The two general partners of POB Associates are attorney Jeremiah

Murphy 1 and a non-profit corporation, POB, Inc. (collectively “General Partners”).

The president and director of POB, Inc. was Murphy. The beneficiary of POB, Inc.

is Presentation Sisters, Inc., the former corporate name for Avera McKennan.

Murphy worked for Avera McKennan for over 15 years as a lobbyist, served on its

board, and represented it in other legal matters. Murphy and other lawyers in his

firm drafted the POB Associates’ Certificate and Limited Partnership Agreement

(Partnership Agreement).

1. While not affecting the outcome, we note that Murphy, an attorney from
Sioux Falls, passed away while this appeal was pending.
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[¶4.] POB Associates was authorized to sell 32 limited partnership “units”

for $15,000 each. It is undisputed that only 15 of the authorized units were sold.

The nine Limited Partners owned all 15 of these units. 2 None of the General

Partners have purchased any partnership units, have invested any money in the

partnership, or paid any liabilities on the partnership’s behalf. The General

Partners had full, exclusive, and complete discretion in the management and

control of POB Associates, including the sale of partnership units.

[¶5.] The allocation of POB Associates’ profits and losses is governed by

Article I, § 1.06(b) of the Partnership Agreement. It provides:

All such profits and losses in the years 1980, 1981, and 1982
shall be allocated to the [L]imited [P]artners prorata in
accordance with the number of partnership units held by each.
Commencing in 1983, all profits and losses will be allocated
among the General Partners and Limited Partners in
accordance with the number of partnership units held by each.
In 1983 and in each year thereafter, each [L]imited [P]artner
will be allocated 1/32 of 98% of the profits and losses for each
partnership unit. The General Partners will be allocated in
1983 and each year thereafter all other profits and losses, except
that General Partner Jeremiah Murphy will in no year receive
more than 1% of the profits and losses. The percentage of profits
and losses allocated to the General Partners will never be
reduced below 2%.

[¶6.] From 1980 to 1982, the allocation followed the first sentence of §

1.06(b), as the distribution was apportioned “prorata in accordance with the number

of partnership units held by each.” From 1983 to 2007, the General Partners

annually allocated 98% of POB Associates’ profits and losses to the Limited

2. The identity of the Limited Partners is not relevant on appeal. They will
collectively be referred to as “Limited Partners.” Some of the partnership
units have been transferred or otherwise distributed since their initial
purchase. All necessary parties were made a part of this action.
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Partners in accordance with the number of units held by each. Because only 15

units had been sold, each unit was allocated 1/15th of 98% of the profits and losses

from each year. This allocation followed the second sentence of § 1.06(b).

Consistent with the fourth and fifth sentences, the General Partners were allocated

the remaining 2%. The 17 unsold and unissued units were not considered in the

allocation formula.

[¶7.] In 2008, the General Partners adopted a new allocation formula based

on a new interpretation of § 1.06(b). Murphy stated in a letter that he believed the

profits and losses had been improperly allocated since 1983. No explanation was

provided other than an intention to rely on the third sentence of § 1.06(b). Under

this new formula, 46% of POB Associates’ profits and losses were allocated to the

Limited Partners; the remaining 54% was allocated to the General Partners,

although Murphy received no more than 1%. This decision reallocated 17/32 of 98%

of the profits and losses to General Partner POB, Inc., thereby attributing

ownership of the 17 unissued and unsold units to that partner. The Limited

Partners’ interests were reduced to 1/32 of 98% for each unit that a Limited Partner

held. Murphy received 1% of the profits and losses regardless of how many units

were sold.

[¶8.] Several Limited Partners sued the General Partners in March 2009.

The Limited Partners alleged breach of contract, breach of fiduciary duty, and

requested a declaratory judgment in their favor regarding the allocation under the

Partnership Agreement. Both parties filed cross-motions for summary judgment

regarding allocation under § 1.06(b). The circuit court granted summary judgment

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in favor of the General Partners. On appeal, the issue is whether the circuit court

erred in granting summary judgment.

STANDARD OF REVIEW

[¶9.] Our standard of review for a motion for summary judgment is settled.

Summary judgment is authorized “if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact, and that the moving party is entitled to
judgment as a matter of law.” We will affirm only when there
are no genuine issues of material fact and the legal questions
have been correctly decided. All reasonable inferences drawn
from the facts must be viewed in favor of the non-moving party.
The 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.

W. Consol. Coop. v. Pew, 2011 S.D. 9, ¶ 19, 795 N.W.2d 390, 396 (quoting Discover

Bank v. Stanley, 2008 S.D. 111, ¶ 16, 757 N.W.2d 756, 761-62).

ANALYSIS

[¶10.] The circuit court granted summary judgment in favor of the General

Partners after concluding that § 1.06(b) was unambiguous. The circuit court

explained that the second sentence of § 1.06(b), “[c]ommencing in 1983, all profits

and losses will be allocated among the General Partners and Limited Partners in

accordance with the number of partnership units held by each,” provides the

“numerator for how profits and losses are supposed to be calculated.” The third

sentence, “[i]n 1983 and in each year thereafter, each [L]imited [P]artner will be

allocated 1/32 of 98% of the profits and losses for each partnership unit,” provides

the “denominator for how partnership units are allocated.” The circuit court stated

that:

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the only way one can read Section 1.06(b) is how [the General
Partners] read this section and therefore, the Partnership
Agreement is unambiguous. When reading Section 1.06(b) in its
entirety, it is unambiguous that the document is drafted in such
a way that starting in 1983 the Limited Partners would receive
1/32 of 98% of the profits and losses for each partnership unit
they own. . . . Although the parties offer different
interpretations of the contract, the intent of the contract is
nevertheless unambiguous.

The circuit court later clarified its decision, finding “that neither Murphy nor POB,

Inc. has ever held one of [the partnership] units[;] however, the unsold units, while

not owned by either the Limited Partners or the General Partners, were in essence

in limbo and the General Partners were entitled to the profits and responsible for

any losses while these units were unsold.”

[¶11.] This Court has previously stated that:

[a] contract is not rendered ambiguous simply because the
parties do not agree on its proper construction or their intent
upon executing the contract. Rather, a contract is ambiguous
only when it is capable of more than one meaning when viewed
objectively by a reasonably intelligent person who has examined
the context of the entire integrated agreement.

Pesicka v. Pesicka, 2000 S.D. 137, ¶ 10, 618 N.W.2d 725, 727 (quoting Singpiel v.

Morris, 1998 S.D. 86, ¶ 16, 582 N.W.2d 715, 719). Consequently, we review §

1.06(b) to determine whether it is capable of more than one meaning when viewed

by a reasonably intelligent person who has examined the entire agreement. We do

so “according to the natural and obvious import of the language, without resorting

to subtle and forced construction for the purpose of either limiting or extending

their operation.” Vollmer v. Akerson, 2004 S.D. 111, ¶ 6, 688 N.W.2d 225, 228

(quoting Citibank (S.D.) N.A. v. Hauff, 2003 S.D. 99, ¶ 12, 668 N.W.2d 528, 533).

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[¶12.] In reviewing the second and third sentences of § 1.06(b) along with the

undisputed fact that only 15 of the possible 32 units were sold, we conclude that the

language is ambiguous. If allocation is made under the second sentence, all profits

and losses would be “allocated among the General Partners and Limited Partners in

accordance with the number of partnership units held by each.” The problem with

this sentence is that the General Partners do not own any partnership units, yet

they do share in the profits and losses as provided in the final two sentences of §

1.06(b). If allocation is made under the third sentence, then “each [L]imited

[P]artner will be allocated 1/32 of 98% of the profits and losses for each partnership

unit.” Here, only 15 of the 32 units were sold. The resulting problem with

allocation under the third sentence is that it does not account for the 17 unissued

units.

[¶13.] Allocation can be made following either the second sentence or the

third sentence, but not both. If all 32 units had been sold, there would not be a

conflict. This ambiguity is supported by the change in allocations. The General

Partners distributed profits and losses according to the second sentence from 1983

to 2007. Beginning in 2008, however, the distribution followed the third sentence.

This history, the parties’ arguments, and our own review indicate that § 1.06(b) is

capable of more than one meaning when viewed by a reasonably intelligent person

who has examined the entire agreement.

[¶14.] We will affirm a grant of summary judgment only when all legal

questions have been correctly decided. W. Consol. Coop., 2011 S.D. 9, ¶ 19, 795

N.W.2d at 396. “Whether the language of a contract is ambiguous is . . . a question

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of law.” Union Pacific R.R. v. Certain Underwriters of Lloyd’s London, 2009 S.D. 70,

¶ 16, 771 N.W.2d 611, 616 (quoting All Star Const. Co., Inc. v. Koehn, 2007 S.D.

111, ¶ 33, 741 N.W.2d 736, 744). In this case, the legal question whether the

Partnership Agreement is ambiguous was incorrectly decided. Therefore, the circuit

court’s grant of summary judgment in favor of the General Partners is reversed.

[¶15.] The Limited Partners assert that if this Court reverses, remand is not

necessary. The Limited Partners argue that rules of contract construction allow

this Court to resolve the ambiguity of § 1.06(b) in their favor as a matter of law.

The first rule the Limited Partners ask this Court to apply is that “the construction

given by the parties themselves to the contract as shown by their acts, if reasonable,

will be accorded great weight and usually will be adopted by the court.” Malcom v.

Malcom, 365 N.W.2d 863, 865 (S.D. 1985). The second rule is that “ambiguities

arising in a contract should be interpreted and construed against the scrivener.”

Campion v. Parkview Apartments, 1999 S.D. 10, ¶ 34, 588 N.W.2d 897, 904 (quoting

Prod. Credit Ass’n of the Midlands v. Wynne, 474 N.W.2d 735, 740 (S.D. 1991).

[¶16.] This Court has stated that “when there is an ambiguous contract,

evidence must be introduced to determine what the intentions of the parties were

and . . . such evidence creates a question of fact, which must be resolved by the

jury.” Vollmer, 2004 S.D. 111, ¶ 9, 688 N.W.2d at 229 (citing North River Ins. Co. v.

Golden Rule Const. Inc., 296 N.W.2d 910, 912 (S.D. 1980)). Because we have

determined that the Partnership Agreement is ambiguous concerning allocation, it

is appropriate to reverse and remand the circuit court’s grant of summary judgment

to allow the introduction of evidence regarding the intentions of the parties.

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CONCLUSION

[¶17.] Because the Partnership Agreement is capable of more than one

meaning under the undisputed facts of this case, the circuit court’s grant of

summary judgment is reversed and remanded.

[¶18.] KONENKAMP, ZINTER, and SEVERSON, Justices, and

MEIERHENRY, Retired Justice, concur.

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