Sproule v Johnson

In a direct appeal from the district court in North Dakota to the Supreme Court in North Dakota, the Supreme Court affirmed the decision of the district court to dissolve a partnership; a buyout of the plaintiffs’ indirect interest in a Canadian entity was appropriate; and there was no error in valuing the Canadian entity as of 2019, that appraisal being more accurate in determining the value of the business.

The partnership was primarily a farming partnership initially founded by two brothers. By 2014, the partnership ownership had spread on both sides to the brothers’ children’s siblings. In September 2014, the plaintiffs gave the defendants a written notice of dissociation. The defendants did not respond, and the plaintiffs sued for the dissolution of the partnership and distribution of the assets. 

Disagreements remained over the valuation of the partnership’s assets and the disposition of Shilo Farms (the Canadian entity). In April 2017, the parties agreed on the dissolution of the association, Johnson Farms. “The agreement included a provision on the distribution of Johnson Farms’ indirect ownership interest in Shilo Farms, a Canadian entity.” The district court ordered the division of farmland between the parties (December 2017) and the division of the machinery and equipment (May 2018).

A trial was held in July 2020. The disposition of Shilo was discussed, and evidence of its value was presented. The defendants relied on a 2017 appraisal of $40.7 million. The plaintiffs submitted a 2019 appraisal of $59.1 million. The district court made some slight adjustments to the values of the distribution of farmlands and brought up to date the remaining payments related to current operations to the plaintiffs.

Regarding the value of Shilo, the district court found the value of Shilo as of 2019 to be $47.3 million (USD). The district court did not deduct taxes in determining the award for Shilo to each of the plaintiffs ($5.3 million to each plaintiff from each defendant).

The defendants argued that the district court erred in dissolving the partnership and should have dissociated it, i.e., without winding up the partnership’s affairs. The district court determined that dissolution was the appropriate action to be taken for several reasons and activities of the association and partners.

The parties did not get along with each other and no longer wished to have any business arrangements together. The parties’ attorneys also agreed that they did not favor a stock distribution because of Canadian tax consequences. “The court did not err by ordering a buyout of the Plaintiffs’ indirect interests in Shilo to complete the dissolution of Johnson Farms.”

The defendants also argued that the district court erred in its valuation of Shilo. They assert that the district court was required to consider taxes in calculating the plaintiffs’ buyout. They also claimed the district court erred in using the 2019 appraisal instead of the 2017 appraisal.

The district court found that the principal agreement called for a valuation without a discount. The accounting firm for the defendants provided an analysis of what would happen if the assets of Shilo were liquidated. However, the district court found this speculative because the plaintiffs indicated there was no intention currently to liquidate Shilo’s assets. 

As to the use of the 2019 appraisal, the district court found that the 2019 appraisal was a more accurate and fair determination of Shilo’s value. Among other things, the district court found that “[t]he court finds the 2019 appraisals … and Shilo’s financial statements as of April 30, 2019, are the fair barometer of Shilo’s value because the Plaintiffs continued to contribute and pay tax, on undistributed income that resulted in the growth and increased productivity of Shilo.”