We Told You So - New Idaho Supreme Court Case Shows Perils of Failure to Plan
THE COUNSELOR
Volume 10 • Issue 3 • March 2020
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month's issue will discuss a recent business divorce case from the Idaho Supreme Court. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
While we don’t like to say we told you so, in our September 2019 newsletter we discussed the importance of planning for a business divorce. A recent supreme court case from the state of Idaho demonstrates just how troubling things can be if such planning does not exist.
In the case of Guenther v. Ryerson, Joseph Guenther and Michelle Ryerson were not married, but in a relationship. In June 2009, the couple purchased real property in Boise, Idaho to be used as a vineyard and formed a partnership known as West Foothills TIC. The partnership had no written partnership agreement, no clear oral agreement allocating contributions of labor or partnership expenses, and no clear oral agreement regarding responsibility for liabilities. In short, they formed a partnership, but never thought through what it means to be partners.
While the property was to be developed as a vineyard, it also was where Guenther, Ryerson, and Ryerson’s two children would live. Personal monies and partnership monies were indiscriminately co-mingled. Partnership liabilities were paid with money from individual checking accounts, personal credit cards, a joint checking account, and a credit card they held together. To build the home, Guenther and Ryerson obtained a $528,600 loan from Zions Bank. Both parties invested a considerable amount of personal funds and labor into the development of the vineyard and construction of the home.
In 2017, the Guenther-Ryerson personal relationship came to an end and it was decided that they could no longer work together as business partners either. While not needing a regular divorce, a business divorce was still necessary. Guenther filed a lawsuit seeking, among other things, dissolution of the partnership. Ryerson counter sued also seeking judicial dissolution of the partnership, as well as a determination that she owned 50% of the partnership. Following the dissolution of a business comes a period known as “winding-up.” As part of “winding-up” the business, Ryerson asked the court to liquidate the partnership’s assets by sale, including the land and improvements. Guenther, however, urged the court to allow him to buy out Ryerson’s interest in the property, so that he could continue to live on the property and work the vineyard.
After much back and forth on many different issues, including dealing with the Zion’s loan, the District Court ultimately decided that partnership property could be offered to each partner with the consent of the partnership and its third-party creditors. On appeal, Ryerson argued that the District Court got it wrong under the clear language of the Idaho Uniform Partnership Act. When parties to a partnership, limited liability company, or corporation do not enter into their own agreements, each state usually has a law or laws telling the parties what will be required. In this case, Ryerson argues that Idaho Code section 30-23-806 provides that sale of property on the open market and distribution of the partnership’s assets in the form of cash is the only means of winding-up a partnership’s affairs. The Idaho Supreme Court agreed and determined that Ryerson was entitled to 50% of the proceeds. This was despite the fact that Ryerson had abandoned the property at the time of dissolution and had not contributed to the ongoing expenses. As the court correctly explained: “A partnership does not terminate upon dissolution, but continues until its affairs have been completely wound up. Explained another way, before a partnership legally ends, three steps must be completed, (1) dissolution, (2) winding-up of the partnership’s business or liquidation, and (3) termination of the partnership.”
You may be saying to yourself: “I don’t have a partnership, I have an LLC. So this decision does not apply to me.” Well, the Idaho Uniform Limited Liability Company Act contains the exact same language. So, presumably the result would be the same. Don’t get too comfortable if your business is not located in Idaho. Many states have enacted similar laws.
The moral of the story is, it doesn’t matter who your business partner is, you still need to take the time to put your agreements in place and in writing. Make sure the agreements are signed and are reviewed and updated as needs be on a regular basis. Anything else, could likely result in lengthy and expensive litigation with a judge deciding the results.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.