Opinion ID: 2634486
Heading Depth: 3
Heading Rank: 4

Heading: It Was Error To Characterize as Partnership Debt Disotell's Obligation To Pay for His Capital Contribution.

Text: Disotell argues that the court erred by characterizing as partnership debt the obligation he incurred to pay for his capital contribution. [11] The parties stipulated that the partners had agreed that the funds from which Disotell would pay for his one-half interest in the hotel property would only come from the profits of the hotel. The superior court found: The partnership obligated itself to pay Stiltner all the profits from the partnership until he had recovered his original cost basis of the Hotel property. ... Further, the partnership took on Disotell's loan obligation, and promised to pay Stiltner the $137,500. Therefore, this court views the $137,500 as a loan obligation the partnership owes Stiltner. The superior court classified the $137,500 as a partnership liability, deducting it from the net value of the partnership. Our primary concern is determining the partners' intent. [12] The partners' litigation stipulation stated that they had agreed that the funds from which Disotell would pay for his one-half interest would only come from the profits of the hotel. This stipulation is not reasonably susceptible to an interpretation that the partnership assumed Disotell's loan obligation. Stiltner's trial testimony is also inconsistent with any such interpretation: THE COURT: ... [P]art of the stipulation, paragraph 7G, essentially says that you were then to receive all the profits of the partnership until you had recovered your original cost basis in the hotel property. Can you explain to me how that piece fits into your agreement? [STILTNER]: That's my purchase of the hotel. THE COURT: Mm-hmm (affirmative). A: That  him paying for that half of the hotel was delayed until the hotel started turning a profit. THE COURT: Okay. A: The 150 that he would owe me for a 50 percent interest in the hotel, that was delayed until the hotel started turning a profit. This testimony implies that the loan obligation was Disotell's, not the partnership's. It is unlikely that Stiltner would have been willing to assume the obligation as a partnership debt and thereby effectively agree to pay half of Disotell's obligation. We conclude, therefore, that it was error to characterize the obligation as partnership debt. The partners stipulated that Disotell had promised Stiltner: (1) to supply development and construction services on a cost-only basis to construct a hotel and (2) to contribute his interest in the hotel property as capital and to subordinate his interest in profits until Stiltner had recovered his original cost basis in the hotel. The partners explicitly agreed that Disotell would pay for his one-half interest only from profits. It is not clear, however, whether the parties contemplated the situation before us when they entered into the agreement. The superior court did not enter any findings as to whether the repayment only out of profits provision of the parties' agreement was intended to apply in the event that the partnership dissolved before making profits. We therefore remand the case with instructions to the superior court to determine whether the parties intended the provision to apply in this context. If the superior court finds that the provision was not intended to apply in this situation, it may supply a provision that is reasonable under the circumstances. Under section 204 of the Restatement (Second) of Contracts, [w]hen the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court. [13] Comment d to Section 204 instructs on how the court should supply an omitted term: The process of supplying an omitted term has sometimes been disguised as a literal or purposive reading of contract language directed to a situation other than the situation that arises. Sometimes it is said that the search is for the term the parties would have agreed to if the question had been brought to their attention. Both the meaning of the words used and the probability that a particular term would have been used if the question had been raised may be factors in determining what term is reasonable in the circumstances. But where there is in fact no agreement, the court should supply a term which comports with community standards of fairness and policy rather than analyze a hypothetical model of the bargaining process. [ [14] ] In considering what term is reasonable, the superior court should consider the risks and obligations each party assumed. In exchange for Stiltner's contribution of the hotel property to the partnership, Disotell agreed to renovate and build the hotel. The agreement obliged Disotell to supply his development and construction services to the hotel project. Those services were part of the consideration he offered for the one-half interest in the hotel property that he purchased from Stiltner. If Disotell had completed construction of the hotel but the project had proven unprofitable, we doubt that fairness would demand that Disotell nevertheless repay the one-half interest. In reality, however, the partnership dissolved before Disotell fulfilled his obligations under the agreement. The superior court has discretion to decide, therefore, that fairness requires that Disotell only repay the difference between the value of the services he contributed to the hotel property before the project became impossible and the value of what he was supposed to contribute.