FILED
IN THE OFFICE OF THE
CLERK OF SUPREME COURT
MARCH 17, 2022
STATE OF NORTH DAKOTA
IN THE SUPREME COURT
STATE OF NORTH DAKOTA
2022 ND 51
Susan Sproule, Sandra Crary, and
Lynnell Stegman, Plaintiffs and Appellees
v.
Brian Johnson, Rodger Johnson, Lyle Johnson,
New Partnership, and Nor-Agra, Inc., Defendants and Appellants
and
Al Johnson, Defendant
No. 20210235
Appeal from the District Court of Grand Forks County, Northeast Central
Judicial District, the Honorable Donald Hager, Judge.
AFFIRMED.
Opinion of the Court by Crothers, Justice.
Douglas A. Christensen (argued) and Joseph E. Quinn (on brief), Grand Forks,
ND, for plaintiffs and appellees.
Todd E. Zimmerman (argued) and Abigale R. Griffin (on brief), Fargo, ND, and
Joseph A. Turman (appeared) Fargo, ND, for defendants and appellants Brian
Johnson, Rodger Johnson, Lyle Johnson, New Partnership, and Nor-Agra, Inc.
Sproule, et al. v. Johnson, et al.
No. 20210235
Crothers, Justice.
[¶1] Brian Johnson, Rodger Johnson, Lyle Johnson, New Partnership and
Nor-Agra, Inc. (Defendants) appeal from an amended judgment dissolving the
Johnson Farms partnership. The Defendants argue the district court erred in
its valuation and distribution of the partnership’s assets. We affirm.
I
[¶2] Brothers Bert and Lyle Johnson formed the Johnson Farms partnership
in 1974. Bert Johnson’s children, Susan Sproule, Sandra Crary, Lynnell
Stegman and Al Johnson, later became partners. Lyle Johnson’s children,
Brian Johnson and Rodger Johnson, also became partners.
[¶3] Bert Johnson died in July 2014. In September 2014, Susan Sproule,
Sandra Crary, Lynnell Stegman and Al Johnson gave the Defendants a written
dissociation notice demanding withdrawal from the partnership and
requesting distribution of assets. The Defendants did not respond to the
dissociation notice, and Susan Sproule, Sandra Crary and Lynnell Stegman
(Plaintiffs) sued for dissolution of the Johnson Farms partnership in October
2016.
[¶4] In April 2017, the parties’ attorneys executed and filed a joint statement
of counsel stating the parties agreed to the dissolution of Johnson Farms. The
statement indicated the parties reached agreements relating to the appraisal
and distribution of Johnson Farms’ numerous assets, including crops, farm
equipment and farmland. Following the joint statement of counsel, the
Plaintiffs’ attorney drafted an “Agreement in Principal for the Dissolution of
Johnson Farms,” which included more details on the appraisal and distribution
of Johnson Farms’ assets. The agreement included a provision on the
distribution of Johnson Farms’ indirect ownership interest in Shilo Farms, a
Canadian entity. The agreement was unsigned; however, at a November 2017
status conference, the Defendants’ attorney stated, “We had an Agreement in
Principal, and we are sticking to it.” The Defendants’ attorney also asked the
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district court to “give the agreement an opportunity to work the way it was
intended.”
[¶5] In reliance on the agreement in principal, the parties appraised the
partnership’s assets, including farmland and Shilo. In December 2017, the
district court ordered the division of the farmland between the parties, with
the Plaintiffs receiving “Farm Groups Three and Four,” and the Defendants
receiving “Farm Groups One and Two.” In May 2018, the court ordered the
division of the partnership’s machinery and equipment.
[¶6] Despite the joint statement of counsel and agreement in principal,
disagreements remained over the valuation of the partnership’s assets and the
disposition of Shilo Farms. At the July 2020 trial, the parties discussed the
disposition of Shilo and presented evidence on its value. The Defendants relied
on a 2017 appraisal of Shilo showing a value of $40,660,802 (CAD). The
Defendants also submitted a letter from Shilo’s accounting firm discussing the
tax consequences if Shilo’s assets were liquidated. The Plaintiffs submitted a
2019 appraisal of Shilo showing a value of $59,072,389 (CAD).
[¶7] After trial, the district court entered a judgment dissolving the
partnership and distributing the assets among the parties. The court found the
2017 balance sheet showed assets of $10,337,837. The court found each
Plaintiff was due $1,292,230, each was already paid $802,741, and the balance
due to each was $489,489. The court found the 2017 crop expenses paid in 2018
was $693,584 and each Plaintiff ’s share was $86,698. The court found that
under the April 1, 2017 appraisals of farmland, the Lyle Johnson family
defendants received farmland valued at $56,648,543.55. The Bert Johnson
family plaintiffs received farmland valued at $56,387,904.40. The court
awarded each Plaintiff $32,580 to make up the difference.
[¶8] The district court found the 2019 appraisal of Shilo was more accurate
than the 2017 appraisal because the Plaintiffs continued to contribute capital
and pay tax on undistributed income resulting in the growth and increased
productivity of Shilo from 2017 to 2019. The court found Shilo’s total value was
$59,072,389 (CAD), or $47,257,911 (US). As part of the partnership’s
2
dissolution the court ordered Lyle, Rodger and Brian Johnson to pay each
Plaintiff $5,316,515 (US) for their indirect interest in Shilo. The court did not
deduct taxes from the amount awarded to the Plaintiffs for their interests in
Shilo.
II
[¶9] We have explained our standard of review in an appeal from a bench
trial:
“In an appeal from a bench trial, the district court’s findings
of fact are reviewed under the clearly erroneous standard of
review, and its conclusions of law are fully reviewable. A finding of
fact is clearly erroneous if it is induced by an erroneous view of the
law, if there is no evidence to support it, or if, after reviewing all of
the evidence, this Court is convinced a mistake has been made. In
a bench trial, the district court is the determiner of credibility
issues and we will not second-guess the district court on its
credibility determinations. Findings of the trial court are
presumptively correct.”
Gimbel v. Magrum, 2020 ND 181, ¶ 5,
947 N.W.2d 891 (cleaned up).
III
[¶10] The Defendants argue the district court erred by dissolving Johnson
Farms. They claim the court should have dissociated the Plaintiffs from the
partnership without winding up the partnership’s business.
[¶11] Dissolution and winding up of partnership business is governed by
N.D.C.C. ch. 45-20. Chapter 45-19, N.D.C.C., governs the dissociation of a
partner when a partnership’s business is not wound up.
[¶12] In its April 2021 findings of fact, conclusions of law and order for
judgment, the district court explained why this action was for the dissolution
of Johnson Farms:
“Defendants argue post-trial this matter should be resolved
as a partnership dissociation, pursuant to NDCC Chapter 45-19.
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The court finds that this action is a dissolution, and not a
dissociation, as evidenced by the actions, inactions, and
agreements of the parties. The Complaint requests relief for
dissolution, the Agreement in Principal and the Joint Statement
of Counsel all identify this matter as one for dissolution. The court
made such a ruling in its Order Granting Plaintiffs’ Motion for an
Order Directing Division of Farm Real Property, Document No. 34,
filed December 1, 2017, in which the court at ¶ 5, stated, ‘[t]he
Court finds dissolution has been commenced for Johnson farms, a
general partnership, pursuant to N.D.C.C., Section 45-20-01.’ The
Defendants did not appeal that order, nor seek any injunctive relief
or writ to prohibit the dissolution process.
....
“The parties, by and through their attorneys, agreed to dissolve the
existing Johnson Farms partnership, and prepared to do so by
forming the ‘New Partnership.’ Thus, the partnership agreement
cannot violate the statutory rights of partners to dissolve an
existing arrangement, despite a constricted reading of the
agreement’s terms. NDCC § 45-18-02(1); NDCC § 45-13-03(2)(f).
“Had this matter been a disassociation and not a dissolution,
Defendants Lyle, Rodger and Brian for Johnson Farms failed to
comply with statutory requirements, and within 120 days after a
written demand for payment, to pay cash to the dissociated
Plaintiff partners, in [an] amount estimated to be the buyout price
and accrued interest, pursuant to NDCC, Section 45-19-01(5). . . .
There were no actions taken by the Defendants to follow the
requirements of dissociation—no liquidation or going concern
appraisals, or any money paid, or statutory statement given to the
Plaintiffs.”
[¶13] The Johnson Farms partnership agreement states the “partnership may
be terminated by operation of law.” The Plaintiffs and Al Johnson began the
process in September 2014 when they provided written notice of their
dissociation within 90 days of Bert Johnson’s death. See N.D.C.C. § 45-20-
01(2)(a) (providing for dissolution of a partnership when at least half of the
remaining partners express their will to wind up the partnership business
within 90 days of a partner’s dissociation by death). After the Plaintiffs sued
4
for dissolution, the joint statement of counsel provided “[t]he Parties have
agreed that Johnson Farms, a North Dakota general partnership, should be
dissolved, its activities wound-up, it debts and obligations discharged and
remaining assets should be distributed to the members of the Bert Johnson
Family and the Lyle Johnson Family.”
[¶14] The Defendants sought dissociation under N.D.C.C. ch. 45-19 after trial
and more than six years after the initial notice for dissolution. Despite their
eleventh-hour request for dissociation, the Defendants failed to comply with
the statutory requirements of N.D.C.C. ch. 45-19 to purchase the Plaintiffs’
partnership interests. The district court relied on the parties’ statements and
representations during this action and did not clearly err by finding this action
was for the dissolution of the Johnson Farms partnership.
[¶15] The Defendants also contend the district court erred by combining the
remedies of dissolution and dissociation in this action. The Defendants argue
the court employed a dissociation remedy by ordering a buyout of the Plaintiffs’
indirect interests in Shilo. See N.D.C.C. § 45-19-01(2) (providing for a buyout
of a dissociated partner’s interest when partnership business is not wound up).
[¶16] Johnson Farms owned an indirect interest in Shilo. Johnson Farms
owned J.F. Johnson Farm Co. Ltd., a Canadian entity. J.F. Johnson Farm owns
fifty percent of Shilo’s stock. Nor-Agra, Inc., a North Dakota corporation, also
owns fifty percent of Shilo’s stock. The Plaintiffs and Rodger Johnson, Brian
Johnson and Al Johnson are Nor-Agra shareholders. Thus, the parties
indirectly own Shilo through Nor-Agra and J.F. Johnson Farm.
[¶17] Although the district court ordered a buyout of the Plaintiffs’ indirect
interests in Shilo, the agreement in principal provided that either the Plaintiffs
or Defendants should own all of Shilo’s stock. The trial testimony established
the Plaintiffs and Defendants did not get along and did not want to continue
their business relationship. The court could have distributed the J.F. Johnson
Farm stock among the parties to complete the dissolution of Johnson Farms.
See N.D.C.C. § 45-20-03(3) (providing for the distribution of a partnership’s
assets during the winding up of a partnership’s business). However, the parties
5
would have remained shareholders of J.F. Johnson Farm and indirect owners
of Shilo, which they expressly did not want. Additionally, the parties’ attorneys
stated at trial they were not in favor of a stock distribution because of the
potential tax consequences in Canada.
[¶18] When supervising a partnership’s dissolution, “the district court acts as
a court of equity, giving it the discretion to determine what is fair and equitable
under the circumstances.” Puklich v. Puklich, 2019 ND 154, ¶ 24,
930 N.W.2d
593. Here, the Defendants have failed to show the court abused its discretion
by doing what was fair and equitable under the circumstances. The buyout of
the Plaintiffs’ indirect interests in Shilo satisfied the parties’ request to sever
their business relationship. The court did not err by ordering a buyout of the
Plaintiffs’ indirect interests in Shilo to complete the dissolution of Johnson
Farms.
IV
[¶19] The defendants argue the district court erred in its valuation of Shilo.
They assert the court was required to consider taxes in calculating the
Plaintiffs’ buyout of their Shilo interests. The Defendants also claim the court
erred in valuing Shilo on the basis of the 2019 appraisal instead of the 2017
appraisal.
[¶20] “Valuation is a question of fact.” Puklich, 2019 ND 154, ¶ 8. We presume
a district court’s valuations are correct, and a valuation within the range of
evidence presented at trial is not clearly erroneous.
Id.
A
[¶21] The Defendants assert the district court was required to consider taxes
in valuing the Plaintiffs’ indirect interests in Shilo.
[¶22] The district court did not consider taxes in its valuation of Shilo and did
not deduct taxes from Shilo’s gross value when calculating the Plaintiffs’
indirect interests in Shilo. The court found the agreement in principal “called
for valuation without a discount.” The court addressed the Defendants’ letter
6
from Shilo’s accounting firm discussing the tax implications if Shilo’s assets
were liquidated. The court found the Defendants’ position on taxes was
speculative because Rodger Johnson testified there were no immediate plans
to liquidate Shilo’s assets.
[¶23] The Defendants cite to cases holding taxes should be considered when
valuing a corporation. See, e.g., Daniels v. Holtz, 794 N.W.2d 813, 819 (Iowa
2010) (concluding an appraisal of a corporation could factor in capital gains tax
liability when the corporation was to be sold at a sheriff's sale); Estate of Jelke
v. Comm’r,
507 F.3d 1317, 1319 (11th Cir. 2007) (holding that for purposes of
estate tax determination, decedent’s minority interest in a closely held
corporation should be discounted for potential capital gains tax liability under
the arbitrary assumption that the corporation is liquidated on the date of death
and all assets sold); Eisenberg v. Comm’r,
155 F.3d 50, 59 (2nd Cir. 1998)
(concluding value of corporate stock could be reduced, for gift tax purposes, by
a corporation’s potential capital gains tax liabilities).
[¶24] The cases cited by the Defendants do not establish the district court’s
decision to exclude taxes was induced by an erroneous view of the law. This
case does not involve a sale of corporate assets or the valuation of corporate
stock for estate or gift tax purposes. The court found the Defendants’ evidence
relating to taxes was speculative because there were no immediate plans to
liquidate Shilo’s assets. After reviewing the record, we are not left with a
definite and firm conviction the court made a mistake by excluding taxes. The
court did not clearly err by excluding taxes in its valuation of the Plaintiffs’
indirect interests in Shilo.
B
[¶25] The Defendants contend the district court erred by using the 2019 Shilo
appraisal instead of the 2017 appraisal. The Defendants assert the agreement
in principal called for the use of the 2017 appraisal of Shilo.
[¶26] “A district court’s findings on valuation of property will not be reversed
unless they are clearly erroneous.” Puklich, 2019 ND 154, ¶ 8. A court’s finding
7
on valuation is not clearly erroneous if it falls within the range of evidence
presented at trial. Id.
[¶27] The district court found the 2019 appraisal of Shilo was a more accurate
and fair determination of Shilo’s value. The court found the Plaintiffs
continued their indirect ownership in Shilo through the trial. The court found
the Plaintiffs continued to “pay tax on their share of the earnings and which
Shilo retained, without making any distributions” to the Plaintiffs. The court
found “Shilo’s financial condition [since 2017] was significantly enhanced as a
result [of] the Plaintiffs’ ownership and use of retained earnings to leverage its
operations.” The court found:
“The Defendants . . . used Plaintiffs’ income shares, after
Plaintiffs paid tax on them, to greatly increase the Defendants’
own equity in Shilo. The Plaintiffs are not donors; they were kept
on as indirect owners, to their detriment, rather than the
Defendants buying their shares earlier and discontinue allocating
Shilo’s income to the Plaintiffs. The protracted delay in the
litigation by the Defendants appears to be planned to build up
Shilo at the Plaintiffs’ expense, but paying the Plaintiffs based on
an earlier, less profitable and less valuable timeline which would
have reflected a loss from the operations. . . . The 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.”
[¶28] The agreement in principal contemplated using the 2017 appraisal of
Shilo; however, the district court made findings and explained why the 2019
appraisal was a more accurate and fair determination of Shilo’s value. See
Puklich, 2019 ND 154, ¶ 24 (stating that in a proceeding for dissolution, a court
has discretion to decide what is fair and equitable under the circumstances).
Under the unique facts of this case, including the Defendants’ control of certain
assets since the litigation began in 2016, the court did not err in valuing Shilo
as of 2019.
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V
[¶29] The parties’ remaining arguments are either without merit or are not
necessary to our decision. The judgment is affirmed.
[¶30] Gerald W. VandeWalle
Daniel J. Crothers, Acting C.J.
Jerod E. Tufte
Douglas A. Bahr, D.J.
Bruce B. Haskell, S.J.
[¶31] The Honorable Douglas A. Bahr, D.J., sitting in place of McEvers, J.,
disqualified.
[¶32] The Honorable Bruce B. Haskell, S.J., sitting in place of Jensen, C.J.,
disqualified.
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