Opinion
No. C1-00-951
Filed January 23, 2001.
Appeal from Carver County District Court, File No. C6971446
Jody Winters, (for respondent)
Eric J. Braaten, (for appellants)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2000).
UNPUBLISHED OPINION
On appeal in a partnership dissolution proceeding, appellants allege that: (1) respondent was not entitled to compensation for the disparity in the income the partnership paid to partners; (2) even if respondent were entitled to compensation for the disparity, the district court miscalculated the parties' incomes; (3) respondent was not entitled to compensation for his interest in improvements that the partnership made to appellants' property during the partnership; (4) respondent was not entitled to reimbursement for improvements to appellants' property that he paid for personally both before and after the partnership was dissolved; (5) the record does not support the district court's valuation of certain equipment kept by respondent, as well as other miscellaneous amounts; and (6) appellants are entitled to rental payments for the equipment and land used by respondent after the termination of the partnership. We affirm in part, but because some of the district court conclusions were inconsistent with its findings and because some of its findings were not reasonably supported by the evidence, we reverse in part and remand.
FACTS
Respondent Russell Schlegelmilch has lived and worked his entire life on a 380-acre dairy farm in Carver County that is owned by his parents, appellants Ralph and Marian Schlegelmilch. From the early 1980s until 1994, appellant Ralph Schlegelmilch repeatedly promised respondent that he would sell respondent a portion of the farm. In 1982, respondent married, and he and his wife moved into the farmhouse previously occupied by his parents, who moved into another farmhouse on the property.
In January 1983, father and son entered a partnership agreement to run the farm together under the name "Schlegelmilch Farms." During the early years of the partnership, both families shared in the labor associated with the farming operation, for which each received a monthly income of $800. Appellant Marian Schlegelmilch, who managed the partnership's accounts, paid her husband an additional $204.50 per month as interest on a $30,000 loan that he made to the partnership in 1988.
In May 1990, because of tax and social-security considerations, the parties signed an addendum to the partnership agreement substituting appellant Marian Schlegelmilch for her husband as a named partner. The partnership bought out appellant Ralph Schlegelmilch's interest in the partnership with the money earned from that year's steer sales. After the addendum was signed, the distribution of labor among the parties changed. Respondent did the majority of the field work and farm chores. His wife managed the accounts and contributed significant farm labor. Appellant Ralph Schlegelmilch continued to work on the farm but contributed less labor than when he was a partner. Because respondent's wife had taken over the accounting, appellant Marian Schlegelmilch's labor contribution was also less than before. The partnership continued to make monthly payments of $1,000 to appellants.
Although the partnership agreement provided for equal sharing of profits, from 1985 to 1994, appellant Ralph Schlegelmilch received significantly more income from the partnership than did respondent, who appears to have acquiesced in the differential because of his father's repeated promises to sell him a portion of the farm. During this period the partnership paid for a number of farm improvements. Respondent also paid for some farm improvements personally.
In November 1993, the parties signed a "statement of clarification." Under this agreement, appellants received the benefit of having the partnership continue to file partnership tax returns, thus reducing their taxable income, and respondent received the benefit of continuing to use the "Schlegelmilch Farms" name. The statement also clarified the ownership of various farm assets.
In July 1994, appellant Marian Schlegelmilch gave respondent a handwritten note stating that she was terminating the partnership. At some point later that year, appellants signed a handwritten note stating their intent to sell respondent "some of the farm" and granting him permission "to operate it all for 1995 and beyond." The farming operations did not change significantly following termination of the partnership, and respondent continued to make improvements to the farm property. Respondent and his wife also continued to pay the electricity bills, insurance, and taxes for the entire farm property and paid appellants $1,000 per month in rent for use of the farm. Appellant Ralph Schlegelmilch continued to use some of the farm property to raise livestock.
In September 1997, respondent commenced an action requesting that the district court (1) wind up the partnership's affairs through a dissolution proceeding, (2) grant specific performance on appellants' promise to sell him part of the farm, and (3) order judgment against appellants for unjust enrichment arising from improvements that respondent made to the farm property in reliance on their promise to sell. In June 1998, after respondent had his crops in the ground, his father requested an additional $8,000 rent for that year. Respondent did not pay the additional amount, and his father rented the land to a third party for 1999.
In August 1998, the district court heard and denied appellants' motion to dismiss and granted the parties' request that the issues be bifurcated for trial. Following a hearing on the contract issue, the court concluded that because of uncertainty as to several essential terms, appellant Ralph Schlegelmilch's repeated promises and the July 1994 handwritten note stating appellants' intent to sell respondent some of the farm did not constitute a valid contract for the sale of land.
After a hearing on the unjust-enrichment issue, the court issued findings of fact and an order for judgment, which, following motions by both parties and an evidentiary hearing, it amended in March 2000. In the amended order, the district court awarded respondent $110,969.72. Appellants appealed from the judgment entered on that order.
DECISION
I. Income Differential
Appellants argue that the district court erred in ordering them to compensate respondent for the differential in incomes the partnership paid appellant Ralph Schlegelmilch and respondent. From 1983 to 1994, both received income from the partnership. No accounting information exists for the years 1983 or 1984, but the court determined that from 1985 until the 1994 dissolution, the partnership paid $83,379.45 less in income to respondent than to his father. Although the court could find "no evidence or explanation as to why this disparity was allowed or agreed upon," it determined that appellant Ralph Schlegelmilch owed respondent one-half of the differential because it was
reasonable to conclude, based upon the testimony and the ongoing working relationship between Ralph and Russ, that Russ acquiesced to the differential because he had been promised that someday the farm would be sold to him.
This conclusion seems to be based on a theory of unjust enrichment. Unjust enrichment is an equitable claim that arises when it would be morally wrong for one party to enrich himself at the expense of another and there is no valid contract completely governing the rights of the parties. Midwest Sports Mktg., Inc. v. Hillerich Bradsby of Canada, Ltd., 552 N.W.2d 254, 268 (Minn.App. 1996), review denied (Minn. Sept. 20, 1996). Awards for unjust enrichment are inappropriate when there is a valid agreement that completely governs the parties' rights and obligations. Stein v. O'Brien, 565 N.W.2d 472, 474-75 (Minn.App. 1997). Because there was a valid partnership agreement governing the parties' rights and obligations from 1983 to 1994, respondent cannot recover for the income differential during this period on a theory of unjust enrichment.
But the partnership agreement provided that the partners "shall participate in the profits and losses of the partnership on a fifty-fifty basis until otherwise agreed by them." It also provided that it could be modified only by a writing signed by the parties. A partnership is a contractual relationship. Wallner v. Schmitz, 239 Minn. 93, 95, 57 N.W.2d 821, 823 (1953). The interpretation of a contract is a matter of law. See West Bend Mut. Ins. Co. v. Armstrong, 419 N.W.2d 848, 850 (Minn.App. 1988), review denied (Minn. May 16, 1988). The parties did not execute a writing modifying the terms of their agreement. A written contract can be modified or rescinded by oral agreement of the parties, even if the contract provides that it shall not be modified or rescinded orally. Larson v. Hill's Heating Refrigeration of Bemidji, Inc., 400 N.W.2d 777, 781 (Minn.App. 1987), review denied (Minn. Apr. 17, 1987). The district court concluded that respondent acquiesced to the income differential because he had been promised that the farm would be sold to him. But no evidence was presented of an oral agreement modifying or rescinding the partners' original agreement regarding the sharing of profits and losses. Because the parties did not participate in the profits of the partnership on a fifty-fifty basis as required under the partnership agreement, the district court did not err in determining that appellants should compensate respondent for the income differential.
Appellants also argue that, even if respondent is entitled to compensation for the income differential, the district court's estimate of the parties' incomes was incorrect. They claim that respondent's summary of "income received from partnership and paid to Ralph Schlegelmilch," which the district court used in calculating the differential, contains items that were not income. The Minnesota Rules of Civil Procedure provide:
Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses.
Minn.R.Civ.P. 52.01. This court will not reverse due to mere disagreement with the district court's findings; rather, it will reverse only when those findings are clearly erroneous. Fletcher v. St. Paul Pioneer Press, 589 N.W.2d 96, 102 (Minn. 1999) (citing Minn.R.Civ.P. 52.01). "Findings of fact are considered clearly erroneous only if they are not reasonably supported by the evidence." Id. But findings that are inconsistent and irreconcilable will result in a remand. See Halvorson v. American Hoist Derrick Co., 307 Minn. 48, 56, 240 N.W.2d 303, 308 (1976), overruled on other grounds, Holm v. Sponco Mfg., 324 N.W.2d 207 (Minn. 1982).
First, appellants argue that the district court erred in adopting respondent's summary of income paid to appellant Ralph Schlegelmilch because it includes a September 1990 payment of $18,358.50. They assert that this amount was in fact part of $87,519.62 from steer sales that he received to buy out his interest in the partnership. The partnership ledger shows a September 1990 payment to appellant Ralph Schlegelmilch of $18,358.50 as a partnership expense. In a separate section, it shows a September 1990 payment of $18,357.97 as part of the buy-out. Respondent testified that the $18,357.97 was part of the buy-out and that he was not sure if the slightly different figures represent the same or two different payments. Appellant Ralph Schlegelmilch testified that he received a payment of approximately $18,000 as part of the buy-out. He also testified that this amount was incorrectly listed as a partnership expense. The district court made no finding as to whether the $18,358.50 was income or part of the buy-out, but it adopted the income summary that included this amount. It is unclear how, based on the evidence, the district court reached its implicit determination that the $18,358.50 was income. Therefore we remand for an explicit finding as to whether this amount was income paid to appellant Ralph Schlegelmilch or part of the buy-out of his interest in the partnership.
Second, appellants contend that the district court erred in considering as income a January 1990 payment of $7,000. Both the partnership ledger and the income summary show a January 1990 payment in that amount to appellant Ralph Schlegelmilch, who testified that when he left the partnership, he decided to reimburse himself that amount because he had invested it in the partnership. But he admitted on cross-examination that he did not have any records to support his assertion that he invested that amount in the partnership. Giving due regard to the opportunity of the trial court to judge the credibility of the witnesses, we cannot say that the district court's inclusion of the $7,000 as income paid to appellant Ralph Schlegelmilch is clearly erroneous.
Third, appellants note that the income summary adopted by the court includes an October 1988 payment of $420 described as "property taxes for house," which they contend was a partnership expense, not income to appellant Ralph Schlegelmilch. Here, the district court found that the partnership agreement required the partnership to pay all of appellant Ralph Schlegelmilch's real estate taxes; this is not inconsistent with the court's determination that the October 1988 payment, the only such payment before the court, was income to appellant Ralph Schlegelmilch. Minnesota tax law defines "income" to include "federal adjusted gross income as defined in the Internal Revenue Code." Minn. Stat. § 290A.03, subd. 3 (2000). The Internal Revenue Code defines "gross income" as income "from whatever source derived," including "[i]ncome from discharge of indebtedness." I.R.C. § 61(a)(12). Furthermore, the discharge by a third party of another's tax obligations is equivalent to receipt of income by the person whose obligation is so discharged. Diedrich v. Commissioner, 457 U.S. 191, 195, 102 S.Ct. 2414, 2417 (1982) (citing Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729, 49 S.Ct. 499, 504 (1929)). Thus, the district court's determination that this payment was income is not clearly erroneous.
Fourth, appellants note that the income summary adopted by the district court includes monthly payments of $204.50 from February 1990 through November 1990. They argue that these payments were not income but rather were interest on the $30,000 loan that appellant Ralph Schlegelmilch made to the partnership. The district court found that until January 1991, "in addition to the $800 per month that each family received from the partnership income, [the partnership] paid an additional $204.50 per month to Ralph as interest" on the loan. The court's finding that these payments were interest on the loan is not inconsistent with its finding that they were income to appellant Ralph Schlegelmilch. See, e.g., Swick v. Swick, 467 N.W.2d 328, 332 (Minn.App. 1991) (noting that under general principles of tax law, interest constitutes income to payee), review denied (Minn. May 16, 1991); I.R.C. § 61(a)(4) (defining "gross income" to include "[i]nterest"). Thus, the district court's determination that these payments were income is not clearly erroneous.
II.Improvements to the Farm Property; Equipment Acquired During the Partnership
Appellants argue that the district court erred in awarding respondent $57,500 as his one-half interest in improvements the partnership made to the farm property from 1988 to 1994. First, they contend that this award is inconsistent with the court's findings of fact. We agree. The original findings of fact show the total amount that the partnership paid for improvements as $190,065, with a depreciated value of $115,000. In amending its findings, the court retained $190,065 as the amount the partnership paid for the improvements but deleted its estimate of their depreciated value. It did not amend its conclusions of law accordingly. Instead, the court retained its original determination that appellants owed respondent $57,500 for the improvements, that is, one-half of the depreciated value that the court had deleted. This conclusion is not supported by the court's amended findings. Therefore we remand for a consistent finding and conclusion on this issue.
Appellants also argue that respondent is not entitled to compensation for improvements that the partnership made to the farm property because the partnership agreement makes no provision for such compensation. The partnership agreement provides that the partnership "shall make and pay for all necessary repairs to maintain the [farm buildings] in essentially the same condition as same now exist for the use and benefit of the partnership." But the record supports the district court's finding that these were improvements, not repairs. And the partnership agreement provides that each of the partners shall have a "fifty percent (50%) interest in and to all of the livestock and farm machinery, supplies, equipment, and other personal property hereafter acquired by the partnership." Thus, the district court did not err in concluding that respondent is entitled to compensation for his one-half interest in improvements made by the partnership.
Appellants also claim that, in dividing the partnership assets, the district court failed to consider several items of farm equipment purchased by the partnership but retained by respondent. These include a two-ton truck, an Allis combine, a John Deere corn planter, an H S self-unloading box, a tube elevator, a grinder/mixer, and a Dodge Ram pick-up truck. The district court made no specific findings that each of these items of machinery was not partnership property, but it did find that several other items of machinery were partnership property retained by respondent, for which he was required to compensate appellants.
With the exception of the corn planter, the self-unloading box, and the pick-up truck, the district court heard testimony from appellant Ralph Schlegelmilch that the equipment was partnership property and testimony from respondent that he purchased them with his personal funds. This court defers to the district court's findings based on credibility determinations. Vangsness v. Vangsness, 607 N.W.2d 468, 472 (Minn.App. 2000) (citing Sefkow v. Sefkow, 427 N.W.2d 203, 210 (Minn. 1988)). Therefore, with the exception of the corn planter, self-unloading box, and pick-up truck, the district court did not abuse its discretion in excluding these items from its list of partnership items retained by respondent.
With regard to the corn planter and self-unloading box, the district court heard testimony from appellant Ralph Schlegelmilch that they were partnership property, and there is no evidence in the record to the contrary. With regard to the pick-up truck, the district court heard testimony from respondent that it was purchased by the partnership, used for partnership business, and retained by him. The record does not reasonably support the court's exclusion of these three items from the list of partnership property items retained by respondent. Therefore we reverse the court's determination that these items were not partnership property retained by respondent, and remand for a determination of the amount of compensation due to appellants for these items.
Appellants also argue that the district court erred in awarding respondent $15,000 for a silo and grain bin, which it found respondent paid for from his personal funds during the partnership. They argue that, although respondent claimed these items as his personal property on the 1993 statement of clarification and testified that he paid for them personally, they were actually paid for by the partnership. The court, after hearing conflicting testimony about who paid for these items, determined that respondent paid for them personally. Its finding that "[m]ost of these improvements are not severable from the real estate" and its conclusion that respondent was entitled to reimbursement for them are reasonably supported by the record.
III. Post-dissolution Improvements and Expenses
Appellants argue that the district court erred in ordering them to reimburse respondent for improvements he made to the farm property after the partnership was dissolved in 1994. The district court based its award on a theory of unjust enrichment. It found that the improvements could not be severed from the farm property, that they increased the value of the property, and that respondent made the improvements because he had been promised that someday the farm would be sold to him. Having found this promise unenforceable under the statute of frauds, the district court concluded that appellants would be unjustly enriched if they were not required to reimburse respondent for these improvements. Appellants assert that the district court erred in making this award because they did not act in bad faith and because respondent, as a tenant, was not entitled to reimbursement for improvements made to property that he rented from them.
Awards for unjust enrichment may be based on failure of consideration, fraud, mistake, and "situations where it would be morally wrong for one party to enrich himself at the expense of another." Anderson v. DeLisle, 352 N.W.2d 794, 796 (Minn.App. 1984) (citations omitted). Generally, an unjust enrichment claim "does not lie merely because one party benefits from another's efforts and obligations," but rather it must be shown that a party was "unjustly enriched in the sense that the term `unjustly' could mean illegally or unlawfully." Custom Design Studio, a Div. Of L.B. Baron Properties, Inc. v. Chloe, Inc., 584 N.W.2d 430, 433 (Minn.App. 1998) (quoting First Nat'l Bank of St. Paul v. Ramier, 311 N.W.2d 502, 504 (Minn. 1981)), review denied (Minn. Nov. 24, 1998). But this court has upheld awards for unjust enrichment in the absence of an express finding of fraudulent or illegal acts where there was moral wrongdoing similar in nature to fraud. See, e.g., Anderson, 352 N.W.2d at 796 (upholding jury finding of unjust enrichment despite absence of fraud where vendors (1) stood silent and allowed plaintiff to make significant improvement to their property, (2) contracted to retain those improvements upon default, and (3) knew that because of plaintiff's financial problems there was little or no chance he could perform under the contract); Park-Lake Car Wash, Inc. v. Springer, 394 N.W.2d 505, 514 (Minn.App. 1986) (stating that unjust enrichment may be found absent fraud where a party's conduct has been "unconscionable by reason of a bad motive" or where the result induced by that conduct "will be unconscionable either in the benefit to himself or the injury to others." (quotation omitted)).
Here, after the dissolution of the partnership in 1994, respondent paid for improvements to the farm property. The district court determined that respondent made these improvements because of appellant Ralph Schlegelmilch's repeated promises that he would "sell him the farm or a part thereof." Granting equitable relief is within the sound discretion of the district court, and only a clear abuse of that discretion will result in reversal. Nadeau v. County of Ramsey, 277 N.W.2d 520, 524 (Minn. 1979) (citation omitted). The district court did not clearly abuse its discretion in concluding that appellants would be unjustly enriched if they were not required to reimburse respondent for improvements he made to the farm property after the partnership was dissolved.
Appellants also argue the award for unjust enrichment is contrary to In Re Estate of Vangen, in which this court held that a tenant could not recover for improvements made to farm property when there was no agreement as to the duration of the tenancy and no request from the owner to make improvements. In re Estate of Vangen, 370 N.W.2d 479, 481 (Minn.App. 1985). Here, respondent was a tenant on the farm after the partnership was dissolved, and there was no agreement as to how long he could rent the property. There was conflicting testimony regarding whether appellants were informed of or acceded to the improvements. But here, unlike in Vangen, there was a promise to sell respondent the farm. Tellingly, the Vangen court distinguished its decision from Roske v. Ilykanyics where the supreme court allowed a claim for quasi-contract damages against a landowner who refused to perform an oral contract for sale and then retained improvements that the potential buyer made in good-faith reliance on that promise. Id. (citing Roske v. Ilykanyics, 232 Minn. 383, 45 N.W.2d 769 (1951)). As in Roske, respondent is entitled to damages for "improvements to the farm [made] in anticipation of ownership." 232 Minn. at 387, 45 N.W.2d at 773.
Appellants argue that the district court erred in failing to grant them rent for farm machinery and buildings that belonged to them but which respondent continued to use after the dissolution. The district court found that, before June 1998, appellants did not request from respondent any rent in excess of the $1,000 per month paid by respondent and his wife. The evidence reasonably supports this finding.
IV. Miscellaneous Claims
Appellants argue that the district court erred in failing to credit them for (1) a dividend check that they claim was received by respondent but should have been paid to appellant Ralph Schlegelmilch, (2) the trade-in value of a twelve-ton wagon, and (3) one-half interest in the money remaining in the partnership checking account when it was dissolved. Because the district court heard conflicting evidence about whether respondent received the dividend check, it did not abuse its discretion in declining to credit appellants for the check. Appellant Ralph Schlegelmilch testified that the wagon was missing and that he assumed respondent had traded it in. Respondent testified that he loaned the wagon to a friend and that it was still available to appellants. Thus, the court's decision to exclude it from the list of traded-in items was reasonably supported by the evidence. The district court did not hear any testimony regarding the balance remaining in the partnership's checking account when the partnership was dissolved. It accepted into evidence a bank statement showing that there was $7,998.34 in the account when the partnership was dissolved, but the court made no finding regarding the balance in the account and no determination of how it was to be distributed.
We affirm the district court's determinations on all issues, except for the following, which are reversed and remanded for:
1. A finding regarding whether the September 1990 payment of $18,358.50 was income paid to appellant Ralph Schlegelmilch;
2. Elimination of the inconsistency between the finding that the partnership made improvements to the property worth $190,065 and the conclusion that respondent was entitled to $57,500 as compensation for his one-half interest in those improvements;
3. A determination of the amount of compensation due to appellants for partnership property retained by respondent, namely, the John Deere corn planter, the H S self-unloading box, and the Dodge Ram pick-up truck;
4. A finding regarding the balance remaining in the partnership checking account at the time the partnership was dissolved and a determination of how it is to be distributed.
The district court may in its sole discretion reopen the record on remand. We express no opinion on how the remanded issues should be decided.