In the Matter of the Dissolution of Midnight Star Enterprises, L.P.

Summary

The Supreme Court of South Dakota held that a partnership agreement did not require a mandatory open-market sale upon dissolution. The court ruled that fair market value must be determined using a hypothetical transaction standard rather than an actual offer, and that a forced sale was improper where the majority partners wished to continue the business. The court reversed and remanded for revaluation and further proceedings.

Holdings

1. Article 10.4 did not mandate an open-market sale upon dissolution. It required a sale only if the general partner elected to distribute partnership property in kind; the agreement permitted liquidation through either a sale or a transfer under Article 10.3.1.
2. When the partnership agreement requires determination of fair market value, the court must apply a hypothetical transaction standard rather than treating a single actual offer as conclusive fair market value.
3. The circuit court erred by ordering the majority owners to purchase the entire partnership for $6.2 million or suffer a forced sale. On remand, the majority owners could instead be required to pay the Canevas the value of their 6.5 partnership units after revaluation; a forced sale would be appropriate only if the majority owners refused to pay an amount owed.

Questions Presented

1. Whether Article 10.4 of the partnership agreement required the partnership to be sold on the open market upon dissolution.
2. Whether the circuit court erred by determining fair market value from an actual offer rather than applying a hypothetical transaction standard.
3. Whether the circuit court abused its discretion by ordering the majority owners to purchase the entire business or have it sold on the open market.

Disposition

reversed_and_remanded