East Park Ltd. Partnership v. Larkin

DEBORAH S. EYLER, J. East Park Limited Partnership (“East Park”), the appellant, challenges a judgment of the Circuit Court for Anne Arundel County in favor of four of its former limited partners (“Withdrawing Partners”), the appellees, in a declaratory judgment action. The Withdrawing Partners are Barbara Larkin; Valeere Sass, as Trustee; Rosemary Krupnick; and the Charles L. Helferstay Residuary Trust. They sought a declaration that they properly had exercised a statutory right to withdraw as limited partners and an injunction against a capital call issued by East Park’s general partner, Joseph Della Ratta. They also sought payment of the “fair value” of their partnership interests in East Park, pursuant to Md.Code (1975, 1999 Repl.Vol.), section 10-604 of the Corporations & Associations Article (“CA”) and, alternatively, a declaration that East Park had been dissolved.

The circuit court ruled that the Withdrawing Partners properly withdrew as limited partners and, on that basis, permanently enjoined the capital call. It also ruled that East Park was dissolved as a matter of law, on account of certain actions of Mr. Della Ratta. On appeal, the Court of Appeals granted certiorari on its own initiative before the case was decided in this Court, and reversed the circuit court’s order requiring the dissolution of East Park. It affirmed the circuit court’s other rulings.

See Della Ratta v. Larkin, 382 Md. 553 , 856 A.2d 643 (2004). The Court vacated the judgment of the circuit court and remanded the case to that court for a determination of the fair value of the Withdrawing Partners’ limited partnership interests. After a two-day trial, the circuit court determined that the collective fair value of the Withdrawing Partners’ interests was $3,045,431, and entered judgment in their favor in that ⁶⁰³ amount. The Withdrawing Partners requested an award of prejudgment interest, which the court denied.

On appeal, East Park presents three questions for review, which we have combined and rephrased: I. Did the circuit court err by declining to apply lack of control and lack of marketability discounts in determining the fair value of the Withdrawing Partners’ partnership interests?

II

Did the circuit court commit reversible error by barring certain testimony of one of East Park’s witnesses? 1 The Withdrawing Partners noted a cross-appeal. They raise the following issue, which we also have rephrased: III. Did the circuit court err or abuse its discretion by refusing to award prejudgment interest? 2 For the following reasons, we shall affirm the circuit court’s judgment in part, vacate it in part, and remand the case for further proceedings not inconsistent with this opinion. FACTS AND PROCEEDINGS In 1969, East Park was formed under the name “Trinity Joint Venture,” for the purpose of developing and owning a ⁶⁰⁴ shopping center in northern Anne Arundel County.

Mr. Della Ratta was (and is) the sole general partner. The shopping center, named “Park 97,” began operations in the mid-1970s. By 2002, it consisted of 205,000 square feet of retail space, and housed tenants such as WalMart, Giant Foods, Fashion Bug, Pizza Hut, and Mobil Oil. Trinity Joint Venture was reorganized in 1981.

At that time, it had thirteen limited partners. In 1992, the name of the partnership was changed to East Park. In the ensuing years, the makeup of East Park changed. The interests of three of the limited partners were bought out by the other limited partners, and one limited partner’s interest was transferred to a family trust.

Four of the limited partners died. Their interests were transferred to their heirs or legatees. In three such cases, the deceased partner’s widow became a limited partner, and in one such case, the deceased partner’s family trust became a limited partner. These four limited partners are the Withdrawing Partners in the instant case.

They hold a 20.797% aggregate interest in East Park. In 1992, East Park obtained financing from Aegon (USA) Realty Advisors, Inc. (“Aegon”). East Park signed a $9,000,000 promissory note, payable to Aegon, which was secured by a mortgage on Park 97. The note’s maturity date was January 1, 2003.

As the maturity date approached, Mr. Della Ratta determined that East Park would not be able to make payment on the note. Instead of refinancing the loan, he decided to issue a capital call, due September 30, 2002. By letter of March 1, 2002, he informed the limited partners that they were to contribute, pro rata, the $7,528,499 balance due on the note. The Withdrawing Partners opposed the capital call.

They responded by giving timely written notice of their intention to withdraw from East Park as of September 29, 2002, pursuant to CA section 10-603(b), and demanding that they be paid the “fair value” of their partnership interests, under CA section 10-604. ⁶⁰⁵ Mr. Della Ratta denied that the Withdrawing Partners had a right to withdraw, and accelerated the due date of the capital call to September 1, 2002. On May 28, 2002, in the Circuit Court for Anne Arundel County, the Withdrawing Partners filed the instant suit for declaratory and injunctive relief, and for “fair value.” They sought a declaration that they had a statutory right to withdraw, an injunction barring the capital call, and payment of the fair value of their partnership interests. They later amended their complaint to seek dissolution of East Park on the ground that Mr. Della Ratta had transferred his general partnership interest in East Park to a trust for tax avoidance purposes. The Withdrawing Partners moved for summary judgment on the issues of their statutory right to withdraw and East Park’s purported dissolution.

They also moved for a preliminary injunction to stay enforcement of the capital call. On August 30, 2002, the circuit court issued a preliminary injunction, enjoining the capital call until trial. In a separate order issued the same day, it granted partial summary judgment to the Withdrawing Partners, declaring that they had a statutory right to withdraw from East Park, effective September 29, 2002. The court then bifurcated the case into a liability phase and a relief phase.

Trial on liability took place from January 22 to January 24, 2003. On March 28, 2003, the court issued a memorandum opinion and order permanently enjoining the capital call; finding that Mr. Della Ratta had breached his fiduciary duty to the limited partners and had acted in bad faith; and further finding that, because Mr. Della Ratta had transferred his entire general partnership interest into a trust, East Park had no general partner and was thus dissolved as a matter of law. Because the court’s earlier ruling about the Withdrawing Partners’ right to withdraw was thereby rendered moot, no trial was held on the issue of relief. ⁶⁰⁶ East Park appealed the circuit court’s decision to this Court. As noted above, before we decided the case, the Court of Appeals granted certiorari on its own initiative.

On August 20, 2004, the Court of Appeals filed an opinion holding that the circuit court correctly had determined that the Withdrawing Partners had a statutory right to withdraw, and therefore correctly had enjoined the capital call. The Court further held, however, that East Park was not dissolved as a matter of law, because an anti-assignment clause in the partnership agreement made Mr. Della Ratta’s attempted transfer of his interest void from its inception. Accordingly, the Court vacated the judgment of the circuit court and remanded the case for further proceedings. The only issue left pending, then, was the fair value of the Withdrawing Partners’ interests in East Park.

On remand, there was a trial on the issue of relief, i.e., “fair value.” Both the Withdrawing Partners and East Park presented expert testimony on that topic. One of the Withdrawing Partners’ experts, real estate appraiser M. Ronald Lip-man, testified that the fair market value of the Park 97 shopping center — the partnership’s only asset — was $19,500,000. 3 Another of their experts, William Bavis, C.P.A., testified that, after accounting for East Park’s liabilities, its “going concern” value was $14,643,606. He opined that, based on their 20.797% aggregate interest, the fair value of the Withdrawing Partners’ collective interest was $3,045,431. East Park introduced into evidence a Maryland State Department of Assessments and Taxation assessment for the real estate tax year beginning July 1, 2002, valuing Park 97 at $13,895,500.

It did not present any expert witness testimony on the issue of the fair market value of Park 97. East Park’s expert witness, Joel Charkatz, C.P.A., testified that the fair value of the Withdrawing Partners’ interests in East Park was less than the amount testified to by Mr. Bavis, because ⁶⁰⁷ discounts should be applied for lack of control and lack of marketability. In particular, Mr. Charkatz testified that, because the Withdrawing Partners hold only a minority interest in East Park, and thus do not have control over management of the partnership, a 25% lack of control discount should apply. He further testified that, because minority interests are undesirable and there is no ready market for the sale of an interest in a limited partnership, a 31.27% lack of marketability discount also should apply.

On March 24, 2005, the court entered separate judgments in favor of the Withdrawing Partners, totaling $3,045,431. In a memorandum opinion, the court explained how it reached its decision. First, it found that the fair market value of Park 97 was $19,500,000. Next, it added to that figure any cash on hand.

It then subtracted the partnership’s liabilities, which it found to be $4,856,994. That produced $14,643,606, a figure that the court agreed with Mr. Bavis was the net value of East Park as a going concern. The court then turned to the question of the fair value of the Withdrawing Partners’ interests. “Fair value” is not defined in CA section 10-604. The court found the phrase ambiguous and looked beyond the plain language of the statute to determine its meaning.

It found no useful legislative history, nor any caselaw directly on point. The court determined that “fair value” is not “fair market value.” It considered principles of statutory construction and the language of the Court of Appeals in Della Ratta, supra, 382 Md. 553 , 856 A.2d 643 . In pertinent part, the court wrote: Had the legislature intended the term “fair value” to mean “fair market value,” it would have used the latter term, which is a clearly understood expression defined by countless cases and found throughout the Annotated Code.... The only Maryland appellate decision to discuss [CA section 10-604] is the one in this very case.

There, the Court of Appeals stated: “The distribution upon withdrawal referred to in [CA section] 10-604 would be paid by the partnership, not by a third-party purchaser or individual ⁶⁰⁸ partners ... Harmonized, [CA sections] 10-603 and 10-604 essentially allow a partner to ‘cash out’ his or her equity before the partnership terminates.” Della Ratta, [supra,] 382 Md. at 576 , 856 A.2d 643 . The Court of Appeals drew a distinction between the right to “cash out” under [CA section] 10-604 and other provisions contained in East Park’s Partnership Agreement ..., where a partner would receive payment from a third party or from othér partners. This language leads to the conclusion that it would be erroneous to view the valuation of a withdrawing partner’s interest from the perspective of a third party such as would be done in a fair market value analysis.

Instead, the valuation must be viewed from the perspective of the withdrawing partners who are surrendering their interests back to the partnership. The court went on to consider the term “fair value” as used in CA section 3-202. That statute provides that, in the event of a fundamental corporate change, a dissenting shareholder has the right to withdraw from the corporation, and demand and receive payment of the fair value of his or her stock. Relying on out-of-state cases, the court stated, “Fair value, in the dissenting shareholder context, has been stated to require that the dissenting shareholder be paid for his or her proportionate interest in a going concern, or the intrinsic value of the shareholder’s economic interest in the corporate enterprise.

The determination should be made by taking the going concern value of the corporation as a whole, as opposed to the value of the individual shares.” (Citations omitted.) The court quoted from one of two Maryland cases that discuss the “fair value” of a dissenting shareholder’s stock— Warren v. Balt. Transit Co., 220 Md. 478 , 154 A.2d 796 (1959). 4 In that case, the Court of Appeals observed: The real objective is to ascertain the actual worth of that which the dissenter loses because of his unwillingness to go along with the controlling stockholders, that is, to indemnify ⁶⁰⁹ him. The textwriters and cases agree generally that this is to be determined by assuming that the corporation will continue as a going concern — not that it is being liquidated — and on this assumption by appraising all material factors and elements that affect value, giving to each the weight indicated by the circumstances, including the nature of the business and its operations, its assets and liabilities, its earning capacity, the investment value of its stock, the market value of the stock, the price of stocks of like character, the size of the surplus, the amount and regularity of dividends, future prospects of the industry and of the company, and good will, if any. Id. at 483 , 154 A.2d 796 .

In its presentation to the circuit court, East Park had relied on Warren, and Creel v. Lilly, 354 Md. 77 , 729 A.2d 385 (1999), to argue the proposition that fair value does not equal liquidation value, which is essentially the amount at which the court would arrive if it calculated 20.797% of East Park’s total value and did not apply any discounts. In Creel, supra, the personal representative of a deceased partner’s estate sought liquidation of the partnership’s assets. The Court of Appeals observed that, under the Uniform Partnership Act, a partnership automatically is dissolved upon the death of a partner unless the partnership agreement provides otherwise. The Court held, however, that the surviving partners could decide to continue the partnership and buy out the deceased partner’s interest by paying his estate his proportionate share of the partnership.

It further held that, while the estate could demand an accounting as of the date of dissolution, it could not force the partnership to liquidate its assets. Rather, the value of the deceased partner’s interest could be calculated from the assets and liabilities of the corporation, and the capital contributions of each of the partners. 5 ⁶¹⁰ Returning to the case at bar, in the circuit court’s memorandum opinion, it responded to East Park’s liquidation argument, stating, “A liquidation can occur under a variety of scenarios that range from fair market value to a distress sale. However, the term ‘liquidation’ generally implies that the sale of the entity’s assets will net less than if the entity were sold as a going concern.” The court continued, It is true that the Creel and Warren courts rejected a “liquidation theory” as the basis for valuing a partner’s interest. However, [East Park’s] argument obscures the facts of this case.

It must be remembered that East Park’s business consists of nothing more than ownership of the real estate. Unlike a business that loses value when it ceases to operate because of the loss of goodwill or other intangible assets, this particular business has no value other than the value of its underlying fixed assets. Under the facts of this case, there is no distinction between liquidation value and going concern value. The fair value of the partnership interests equal[s] the amount that the partners would receive if East Park sold its sole asset in an arms length transaction.

The court observed that, because the dissenting shareholder statute is meant to protect shareholders from being compelled to participate in a course of conduct they find objectionable, its application is relevant, by analogy, in a case such as this, in which the general partner breached his fiduciary duties to the limited partners and forced them to withdraw in order to avoid an oppressive capital call. Therefore, just as in the dissenting shareholder cases, the fair value of the Withdrawing Partners’ interests in this case should equal a proportionate share of the value of East Park as a going concern. The court also noted that, while the Revised Uniform Partnership Act (“RUPA”), codified at CA section 9A-101, et seq, is not directly applicable to this case, it shows the legislature’s intent not to apply discounts in determining the value of a ⁶¹¹ partnership interest when one withdraws from the partnership. The court went on to distinguish an Ohio case cited by East Park.

It explained that Conti v. Christoff, 2001 WL 1199056 (Ohio Ct.App.2001), is unlike the case at bar because, although Ohio has a statute identical to CA section 10-604, the Ohio trial court interpreted “fair value” by looking to another Ohio statute that employs the phrase “fair cash value.” Because no Maryland statute includes such a phrase, and because Ohio’s definition of fair cash value mirrors the definition of fair market value (which the court had already determined did not equal fair value), the court concluded that the Conti case was inapposite. The court rejected East Park’s assertion that lack of control and lack of marketability discounts should apply. It took into account that, in dissenting shareholder cases, the majority of states do not apply those discounts in determining fair value. The court observed that the Withdrawing Partners’ interests would not be sold on the open market.

It stated, “If the discounts were applied, the remaining partners would end up acquiring the interests of the withdrawing partners for less than they were worth if those interests had remained in the hands of the withdrawing partners.” The Court concluded that, “under the circumstances of this case, it is not appropriate to apply such discounts in order to determine the value of the interests of the withdrawing partners under [CA section] 10-604.” (Emphasis in original.) It therefore awarded the Withdrawing Partners the fair market value of East Park multiplied by their percentage interest (20.797%), or $3,045,431. 6 Finally, the court turned to the Withdrawing Partners’ request for prejudgment interest. It observed that, generally, ⁶¹² the decision whether to award prejudgment interest is discretionary. Prejudgment interest will be awarded as a matter of right, however, when “an obligation to pay is certain, definite and liquidated by a specific date prior to judgment so that the withholding of payment deprives the creditor of the use of the money.” The court found that the value of the Withdrawing Partners’ interests was not ascertainable before trial and, because CA section 10-604 does not specifically provide for prejudgment interest, the Withdrawing Partners were not entitled to it. After judgment was entered, on April 13, 2005, the parties executed a “Stipulation, Agreement and Consent Regarding Judgment,” in which East Park agreed that the fair value of the Withdrawing Partners’ interest was at least $969,022 (resulting from use of the assessed value of Park 97 and application of lack of marketability and minority discounts); and that it would pay that amount, plus interest from the date of judgment, to the Withdrawing Partners.

We shall include additional facts as necessary to our discussion of the issues. STATUTORY FRAMEWORK In Maryland, prior to 1981, the Uniform Partnership Act (“UPA”) governed all partnerships, whether general or limited, when no partnership agreement was in place. CA § 9-101 et seq. In 1981, the General Assembly enacted the Revised Uniform Limited Partnership Act (“RULPA”), which took effect in 1982.

See 1981 Md. Laws, ch. 801 (codified at CA § 10-101 et seq.). The provisions of the UPA still applied to limited partnerships, unless inconsistent with or modified by the RULPA. CA§ 10-108. In 1997, the General Assembly enacted the RUPA, which was phased in so as to completely replace the UPA as of January 1, 2003. 1997 Md. Laws, ch. 654. 7 ⁶¹³ The law that governs this case is the UPA, unless inconsistent with or modified by the RULPA.

Della Ratta, supra, 382 Md. at 568 , 856 A.2d 643 . Because only the RULPA addresses the right of a limited partner to withdraw from the partnership and receive “fair value” for his or her partnership interest, it is only that law with which we are directly concerned. Specifically, the RULPA provides, at CA section 10 — 603(b): A limited partner may withdraw on not less than 6 months’ prior written notice to each general partner at the general partner’s address on the books of the limited partnership if the following conditions are met: (1) The limited partnership was formed before October 1, 1998; (2) On October 1, 1998, the partnership agreement of the limited partnership did not specify in writing the time or the events on the occurrence of which a limited partner may withdraw or a definite time lor the dissolution and the winding up of the limited partnership; and (3) The limited partnership did not amend its partnership agreement on or after October 1, 1998 to specify in writing the time or the events on the occurrence of which a limited partner may withdraw or a definite time for the dissolution and winding up of the limited partnership. The RULPA further provides, at CA section 10-604: Except as otherwise provided in this subtitle, on withdrawal any withdrawing partner is entitled to receive any distribution to which the partner is entitled under the partnership agreement and, if not otherwise provided in the partnership agreement, the partner is entitled to receive, within a reasonable time after withdrawal, the fair value of the partner’s partnership interest in the limited partnership as of the date of withdrawal, based on the partner’s right to share in distributions from the limited partnership.

(Emphasis added.) “Fair value” is not defined in the RULPA, and no Maryland case addresses the meaning of the phrase in the context of limited partnerships. The only direct guidance on the subject ⁶¹⁴ is the observation of the Court of Appeals in this case, that “[h]armonized, [CA sections] 10-603 and 10-604 essentially allow a partner to ‘cash out’ his or her equity before the partnership terminates.” Della Ratta, supra, 382 Md. at 576 , 856 A.2d 643 . The phrase “fair value” appears in three sections of the Corporations and Associations Article that concern dissenting shareholders. See CA §§ 2-602, 3-106, 3-202.

As noted above, when a corporation undergoes certain fundamental change, a dissenting shareholder who meets certain requirements has the right to receive the “fair value” of his or her shares. The Maryland appellate courts have not considered whether discounts should be applied in dissenting shareholder cases. The majority of states that have considered the issue have concluded that discounts do not apply. See Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383, 401 , 734 A.2d 738 (1999) (observing that “equitable considerations have led the majority of states and commentators to conclude that marketability and minority discounts should not be applied when determining the fair value of dissenting shareholders’ stock”); Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 170 , 638 N.Y.S.2d 399 , 661 N.E.2d 972 (1995) (noting that “a minority discount has been rejected in a substantial majority of other jurisdictions”); see also 2 American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 7.22(a) (1994 & Supp.2005) (stating that fair value “should be the value of the [dissenting shareholders’] proportionate interest in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability”); Model Bus.

Corp. Act § 13.01(4) (2003) (stating that “fair value means the value of the corporation’s shares determined ... without discounting for lack of marketability or minority status”). Finally, the RUPA, which does not apply to this case but may provide some guidance, states that when a partner is “dissociated” from a partnership, [t]he buyout price of [his or her] interest is the amount that would have been distributable to the dissociating partner ⁶¹⁵ ... if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date. CA § 9A-701(b). DISCUSSION I. East Park’s principal contention on appeal is that the circuit court erred as a matter of law in calculating the fair value of the Withdrawing Partners’ interests by multiplying the fair market value of East Park by their percentage interests.

It argues that the court essentially “liquidated East Park on paper,” contrary to the Maryland caselaw holding that partnership interests should be valued as though the partnership were a going concern. While East Park does not argue that the circuit court should have used a fair market value analysis in valuing the Withdrawing Partners’ interests, it argues that the court should have applied the minority and marketability discounts that are pertinent to a fair market value analysis. East Park further maintains that the dissenting shareholder cases offer a poor analogy to this case because corporation law, unlike partnership law, allows shareholders to receive the fair value of their shares only when the corporation undergoes a fundamental change. Limited partners, on the other hand, may withdraw at any time, provided they meet the requirements