Filed 1/7/20 Delamore Lake Shore LLC v. Delamore Lake Shore LP CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

DELAMORE LAKE SHORE LLC,

Plaintiff and Appellant,

v.

DELAMORE LAKE SHORE LP,

Defendant and Respondent.

G057031

(Super. Ct. No. 30-2017-00953405)

O P I N I O N

Appeal from a judgment of the Superior Court of Orange County, James L. Crandall, Judge. Affirmed.

Brown Rudnick, Ronald Rus, Joel S. Miliband, and Shoshana B. Kaiser for Plaintiff and Appellant.

Vedder Price, Michelle Landry and Lowell B. Ritter for Defendant and Respondent.

* * *

This is a declaratory relief action seeking an interpretation of a partnership agreement. Plaintiff, the former general partner of the defendant limited partnership, contends the partnership forfeited its right to buyout his interest by failing to meet a deadline to exercise its option. The court entered summary judgment for the partnership, concluding the partnership agreement did not impose any hard deadlines, and thus the partnership had not forfeited its right to buyout plaintiff. We essentially agree with the court’s interpretation and affirm the judgment.

FACTS

Plaintiff Delamore Lake Shore LLC was the original general partner of defendant Delamore Lake Shore LP (the Partnership). The Partnership’s principal asset is an apartment complex in Ypsilanti, Michigan, valued at over $70 million.

On August 1, 2017, plaintiff was given notice that approximately 53 percent of limited partner units had voted to remove plaintiff as general partner and to replace plaintiff with an entity identified as Hernon Lakeshore LLC. In accordance with section 14.1, subdivision (d) of the partnership agreement, plaintiff’s removal as general partner of the Partnership was to be effective 90 days later, on October 30, 2017. During those 90 days, the principal of Hernon Lakeshore LLC attempted to negotiate a buyout of plaintiff’s interest, but the parties were unable to come to terms.

On October 31, 2017, plaintiff’s principal, John Packer, sent an e-mail to all of the partners informing them that under section 17.4 of the partnership agreement, the partners were entitled to buyout the general partnership interest. He stated, “Please advise me in writing by no later than close of business in California on Thursday, November 2, 2017, what election the Partnership intends to make under Section 17.4 of the Partnership Agreement.”

On November 2, 2017, which was three days after the removal became effective, having apparently received no response from the Partnership, plaintiff filed the present lawsuit asserting a single cause of action for declaratory relief. The crux of the dispute was that plaintiff contended that the partnership had until October 30, 2017 (extended three days by Packer’s e-mail) to elect whether to buy plaintiff’s partnership interest. Having failed to exercise that option, plaintiff argued, its interest converted to a special limited partnership unit and the Partnership had forfeited its right to purchase plaintiff’s interest.

The parties filed competing motions for summary judgment. The court ruled in favor of the Partnership, finding that the partnership agreement did not require the Partnership to make an election prior to the effective date of the removal of a general partner. Plaintiff appealed from the judgment.

DISCUSSION

This appeal boils down to one issue: Does section 17.4 of the partnership agreement impose a hard deadline by which the Partnership must elect to buyout a former general partner’s interest? We begin by setting forth section 17.4 in full. We then contrast the parties’ competing interpretations of that section, both of which have plausible aspects to them. Ultimately, we arrive at a middle ground. Our middle-ground interpretation does not result in a forfeiture of the Partnership’s buyout right, and thus we will affirm the judgment. There are no extrinsic facts bearing on the interpretation of the partnership agreement. Thus, we interpret the partnership agreement de novo. (American Alternative Ins. Corp. v. Superior Court (2006) 135 Cal.App.4th 1239, 1245.)

The Partnership Agreement Provisions

Under the partnership agreement, the process for removing a general partner begins with section 14.1, subdivision (d), which provides that the limited partners may remove the general partner with a majority vote. The removal becomes effective 90 days after the general partner is given notice of removal.

Section 17.4, which is at the heart of this appeal, determines what happens next. That section is entitled “Payment to Withdrawn or Removed General Partner.” In its original format, section 17.4 is a lengthy, uninterrupted wall of text. To make it more readable, and more easily referenced in this opinion, we have done two things: broken it up into multiple paragraphs, and added subdivisions. Although the entire section provides interpretive cues, our focus is principally on what we have marked as subdivisions (b) and (f).

Without further ado, section 17.4 provides, “[(a)] Upon the retirement, removal or Event of Withdrawal of a General Partner, the Partnership shall be required to pay such General Partner any amounts then accrued and owing to such General Partner under this Agreement. The method of payment to any such General Partner must be fair and must protect the solvency and liquidity of the Partnership.”

“[(b)] In addition, the Partnership shall have the right, but not the obligation, to terminate any such General Partner’s interest in Partnership income, losses, distributions and capital[ ] upon payment to his, her or it of an amount equal to the value of his, her or its interest in Partnership income, losses, distributions and capital on the date of such retirement, removal or Event of Withdrawal. Such interest shall be computed taking into account the General Partner’s economic interest in the Partnership under Articles 6 and 7 hereof, and shall be based upon the market value of the assets of the Partnership determined as if such assets were sold on the date of such retirement, removal or Event of Withdrawal.”

“[(c)] In the event such General Partner (or its representative) and the Partnership cannot mutually agree upon such value within ninety (90) days following such removal or withdrawal, such value shall be determined by arbitration before a panel of three appraisers, one of whom shall be selected by such General Partner (or its representative) and one by the Partnership, and the third of whom shall be selected by the two appraisers so selected by the parties. Such arbitration shall take place in Orange County, California and shall be in accordance with the rules and regulations of the American Arbitration Association then in force and effect. The expense of arbitration shall be borne equally by such General Partner and the Partnership.”

“[(d)] Payment to such General Partner of the value of its interest in Partnership income, losses, distributions and capital shall be made by the delivery of a promissory note (i) if the termination was voluntary, being unsecured, bearing no interest and having principal payable, if at all, from distributions which the General Partner would have otherwise received under this Agreement had the General Partner not terminated; or (ii) if the termination was involuntary, coming due in not less than five years and bearing interest at the rate of nine percent (9%) per annum, with principal and interest payable annually in equal installments.”

“[(e)] In addition, within one hundred twenty (120) days after the determination of the fair market value of the former General Partner’s interest, upon the vote of a majority of the Limited Partners, the Partnership may sell such interest to one or more Persons who may be Affiliates of the new General Partner or to the new General Partner and admit such Person or Persons to the Partnership as substitute General Partner or Limited Partners; provided, however, that the purchase price to be paid to the Partnership for the Partnership interest of the former General Partner shall not be less than its fair market value as determined by the appraisal described above. Such substitute General Partner or Limited Partners may pay said purchase price in installments in the manner set forth above.”

“[(f)] In the event that such General Partner’s interest is not terminated by the Partnership pursuant to the provisions set forth above, such interest shall convert automatically to a special limited partnership unit having the same interest in the Partnership’s income, losses, distributions and capital as was attributable to such interest as a General Partner. In either event, any such General Partner who has been removed or with respect to which an Event of Withdrawal has occurred shall have no further right to participate in the management of the Partnership.”

Broadly speaking, the parties agree on certain aspects of section 17.4. It creates an option for the Partnership to purchase the general partner’s economic interest. It does not, however, create an obligation. In the event the Partnership chooses not to exercise its buyout right, the outgoing general partner’s interest converts into a special limited partnership, which maintains the former general partner’s economic interest, but without management rights. Where the parties differ is when the Partnership must exercise its buyout right, in what manner, and under what circumstances the conversion to a special limited partnership occurs.

Thesis—Plaintiff’s Interpretation

Plaintiff interprets section 17.4, in a sense, chronologically: election, valuation, payment; otherwise, conversion. Plaintiff notes that subdivision (a) starts with “upon removal,” which would be 90 days after the notice of removal. Although the remainder of subdivision (a) is irrelevant, subdivision (b) starts with “In addition,” which suggests we are still at the time of removal. Subdivision (b) then sets forth the right, but not the obligation, to buyout the general partner’s economic interest. Plaintiff interprets that to mean that the Partnership must elect, at the time of removal, whether to buyout the general partner’s economic interest. Under subdivision (f), if the general partner’s economic interest is not bought out, it “converts automatically” to a special limited partnership unit. Under plaintiff’s interpretation, if the Partnership has not made its election by the time of removal, it forfeits its buyout right and is stuck with the special limited partner for all time.

The Partnership’s primary criticism of this interpretation is that the concept of an election is not explicitly mentioned anywhere in section 17.4. No variant on the word “election” appears, and there is no explicit timeframe set forth in which such an election would have to be made. To the extent section 17.4 addresses this issue, in subdivision (b) it says the Partnership terminates the former general partner’s economic interest “upon payment.” Payment cannot occur until a value has been set, and section 17.4 contemplates a valuation process that goes well beyond the effective date of the removal.

The Partnership notes that this stands in stark contrast to section 14.5 of the partnership agreement, which concerns the withdrawal of a limited partner. That section explicitly provides the Partnership “the option, for a period ending thirty (30) calendar days following the determination of the purchase price as provided in Section 14.7, to purchase the Unit(s) in the Partnership to which the option relates, at the price and on the terms set forth in Section 14.7 of this Agreement . . . .” Given that the partnership agreement explicitly set forth an exercise timeframe in section 14.7, the Partnership concludes that the conspicuous absence of an exercise period in section 17.4 was intentional.

We essentially agree with the Partnership’s criticism. We would add to that analysis that we generally try to avoid an interpretation that results in a forfeiture. Civil Code section 1442 provides, “A condition involving a forfeiture must be strictly interpreted against the party for whose benefit it is created.” Case law applying this axiom to the interpretation of a contract is legion. (See, e.g., Chase v. Blue Cross of California (1996) 42 Cal.App.4th 1142, 1157 [“Forfeiture of a contractual right is not favored in the law”]; Deutsch v. Phillips Petroleum Co. (1976) 56 Cal.App.3d 586, 592 [acknowledging the “statutory doctrine” that the law abhors forfeitures and will indulge a strict construction against the party seeking to benefit from the forfeiture]; Balian v. Rainey (1952) 115 Cal.App.2d 10, 18 [“The law abhors a forfeiture. [Citations.] It cannot arise by implication, but can be effected only by clear and unambiguous language”]; Milenbach v. C.I.R. (2003) 318 F.3d 924, 936 [“Where there are two possible interpretations of a contract, one that leads to a forfeiture and one that avoids it, California law requires the adoption of the interpretation that avoids forfeiture, if at all possible”].) In the absence of any explicit timeframe in which to exercise the buyout option, plaintiff’s interpretation would require us to find a forfeiture by implication, which we are loath to do.

Antithesis—The Partnership’s Interpretation

The Partnership views the chronology of section 17.4 differently. It agrees that the buyout right arises on the effective date of removal (90 days after notice). But that begins a 90-day negotiation period, followed, if necessary, by an arbitration to determine the value of the former general partner’s interest. Once the value has been fixed, the Partnership then has 120 days under subdivision (e) to decide whether to exercise its right. The exercise occurs “upon payment” (subd. (b)). Only upon choosing not to exercise its right, or by failing to exercise it in the 120 days following the valuation, does the former general partner’s interest convert into a special limited partnership unit. In the trial court, the Partnership’s counsel commented that “17.4 was drafted to give [the] Partnership the greatest amount of flexibility with this considerable asset so that the Partnership could understand and make a knowing decision about whether to purchase it and how to purchase it to protect the solvency and liquidity of the Partnership. It gives maximum flexibility.”

Plaintiff’s principal criticism of this interpretation is that it leaves the former general partner’s interest in limbo during the valuation period, which could last years. Plaintiff observes that, following removal, there is a 90-day negotiation period, followed by an arbitration. But there are no timeframes set forth for the arbitration, which, theoretically, could take years. In the meantime, what rights does plaintiff have? Is it still a partner, or not? If there are distributions during the valuation period, where do the general partner’s share of the distributions go?

What makes this situation challenging is the nature of the buyout right: The partnership has the right, but not the obligation, to buyout the general partner. This is not the usual procedure. In the absence of such a provision, the Uniform Partnership Act provides that when a partner is removed, the partnership shall buy the partner’s interest. (Corp. Code, § 16701, subd. (a).) In that case the outgoing partner’s relationship to the partnership is clear: they have parted ways. There may be a delay in receiving payment while the parties work out the final price, but their legal relationship is well defined. Not so under the partnership agreement here. Unless and until the partnership has exercised its buyout right, the outgoing general partner’s relationship to the partnership is undefined. The Partnership has no answer to this criticism, other than to note that section 17.4 specifies some defined timeframes. But that is not much of an answer to what we view as a valid criticism.

Synthesis

Section 17.4 leaves quite a bit to be desired. It does not clearly state what happens to the general partner’s economic interest during the valuation period, nor does it clearly specify the manner and timeframe in which to exercise a buyout option. As a result, we must arrive at these conclusions by way of inference and implication. There are plausible aspects of both plaintiff’s and the Partnership’s interpretations. Ultimately, as between plausible interpretations, we must adopt the one that is fair (Code Civ. Proc., § 1866), definite (Civ. Code, § 1643), and avoids harsh, unjust, or inequitable results (Chavez v. Indymac Mortgage Services (2013) 219 Cal.App.4th 1052, 1058).

Fortunately, there is a solution that incorporates the valid points of both plaintiff’s and the Partnership’s interpretations while avoiding their flaws. Both parties seem to be operating under the assumption that the buyout option and the automatic conversion provision are mutually exclusive. In other words, both parties seem to assume that once the conversion to a special limited partnership unit has occurred, the buyout option is foreclosed. Although both parties seem to make that assumption, neither provides any support for it, and we do not read the text that way.

As we interpret the partnership agreement, the outgoing general partner’s interest automatically converts to a limited partnership as soon as the removal is effective (90 days after the general partner was given notice). However, this does not foreclose the Partnership’s ability to exercise its buyout right. Instead, the negotiation and arbitration may proceed after the automatic conversion. During that process, the outgoing partner continues to enjoy the financial benefits of its economic interest pursuant the special limited partnership unit. However, if and when the partnership exercises its buyout right by paying the former general partner the value of its economic interest, the former general partner’s rights under the partnership agreement are entirely terminated, including any rights arising from the special limited partnership unit. That exercise must occur within a reasonable time after the valuation is determined. (See Civ. Code, § 1657 [“If no time is specified for the performance of an act required to be performed, a reasonable time is allowed”]; Alpern v. Mayfair Markets (1953) 118 Cal.App.2d 541, 547 [“When an option agreement is silent as to the time for exercise, the optionee must exercise his option within a reasonable time”]; Southern Christian Leadership Conference v. Al Malaikah Auditorium Co. (1991) 230 Cal.App.3d 207, 222 [same].)

This interpretation honors the omission of any requirement that the partnership exercise its buyout right prior to valuation, while at the same time avoiding putting the former general partner into legal limbo. This interpretation also has the added benefit of avoiding an implied forfeiture.

In addition to harmonizing the various parts of section 17.4, our interpretation is consistent with the language of section 17.4. Subdivision (f) provides for an automatic conversion “[i]n the event that such General Partner’s interest is not terminated by the Partnership pursuant to the provisions set forth above.” Under subdivision (a), the buyout right arises “[u]pon . . . removal . . . .” Both parties agree with that. And if, on that date, the Partnership has not exercised its buyout right, then the condition for automatic conversion is satisfied: the former general partner’s interest “is not terminated pursuant to the provisions set forth above.” That triggers the automatic conversion. Importantly, there is nothing in the text of section 17.4 that compels us to interpret that conversion as effecting a forfeiture of the buyout right.

Although our interpretation differs somewhat from the court’s, which simply adopted the Partnership’s interpretation, the essence of what plaintiff sought was a finding that the Partnership had forfeited its right to buyout plaintiff’s economic interest. The court correctly found plaintiff was not entitled to such a declaration. Accordingly, we affirm the judgment.

DISPOSITION

The judgment is affirmed. The Partnership shall recover its costs incurred on appeal.

IKOLA, J.

WE CONCUR:

O’LEARY, P. J.

ARONSON, J.