Jones v. Siouxland Surgery Center Ltd. Partnership

#24049-a-JKK

2006 SD 97

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

* * * *

MICHAEL F.E. JONES, M.D., Plaintiff and Appellant,

v.

SIOUXLAND SURGERY CENTER
LIMITED PARTNERSHIP, Defendant and Appellee.

* * * *

APPEAL FROM THE CIRCUIT COURT OF
THE FIRST JUDICIAL CIRCUIT
UNION COUNTY, SOUTH DAKOTA

* * * *

HONORABLE STEVEN R. JENSEN
Judge

* * * *

SHEILA S. WOODWARD of
Johnson, Heidepriem, Miner,
Marlow and Janklow Attorneys for plaintiff
Yankton, South Dakota and appellant.

PATRICK L. SEALEY
JOEL D. VOS of
Heidman, Redmond, Fredregill,
Patterson, Plaza, Dykstra & Prahl, LLP Attorneys for defendant
Sioux City, Iowa and appellee.

* * * *

CONSIDERED ON BRIEFS
ON OCTOBER 2, 2006

OPINION FILED 11/08/06
#24049

KONENKAMP, Justice

[¶1.] In this contract dispute, we conclude that the circuit court correctly

interpreted a partnership agreement, and thus, we affirm.

Background

[¶2.] Siouxland Surgery Center is an Iowa Limited Partnership. The

general partner, Siouxland, and certain limited partners entered into a Certificate

and Agreement of Limited Partnership dated October 26, 1992. Dr. Michael Jones

was an original limited partner. On December 11, 1992, he executed two

subscription agreements to purchase eight limited partnership Units: four Units for

his individual retirement account and four Units for himself individually. Almost

two years later, he executed another subscription agreement. In this agreement,

dated October 24, 1994, he purchased two additional limited partnership Units for

his individual retirement account.

[¶3.] From 1992 until 2003, Dr. Jones was part of Siouxland’s active medical

staff. In May 2003, he announced his retirement. At that time, an Amended and

Restated Certificate and Agreement of Limited Partnership (Agreement), dated

March 6, 2000, was the controlling limited partnership agreement. Under the

terms of this Agreement, retirement was considered a “Triggering Event” that gave

Siouxland “an irrevocable option to purchase the pertinent Limited Partner’s

Interest within sixty (60) days from the date [Siouxland] receives actual notice” of

the Triggering Event. However, the Agreement also contained a provision that

delayed the Triggering Event “[w]ith respect to a Limited Partner that subscribed to

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its Limited Partnership Interest on or before December 31, 1992. . . .” This delay

provision has been termed the “Founding Fathers’ Clause.”

[¶4.] After Dr. Jones announced his retirement, Siouxland tendered

payment for the two limited partnership Units Dr. Jones purchased in 1994. It did

not seek to purchase his first eight Units, as those were obtained by him before

December 31, 1992, and were considered protected by the Founding Fathers’

Clause. However, Dr. Jones believed that all ten of his limited partnership Units

were protected by the Founding Fathers’ Clause. Therefore, he refused to sell his

two Units to Siouxland. Ultimately, the parties could not reach an agreement, and

Dr. Jones brought suit in circuit court seeking declaratory relief to ascertain the

meaning of the Founding Fathers’ Clause.

[¶5.] After the parties engaged in discovery, Dr. Jones moved for summary

judgment asserting that no dispute of material fact existed and the construction

and interpretation of the Agreement should be made as a matter of law by the

court. The parties concurred that the Agreement was governed by Iowa law. After

a hearing, the circuit court issued a letter decision. It held that only the limited

partnership Units subscribed to on or before December 31, 1992 were protected by

the Founding Fathers’ Clause. Although both parties offered extrinsic evidence, the

court declined to consider it, concluding that the Agreement was unambiguous. It

denied Dr. Jones’s motion for summary judgment, but it did not dismiss the

declaratory action because it only had Dr. Jones’s motion before it. Thereafter,

Siouxland moved for summary judgment. On December 29, 2005, in a letter opinion

incorporating the July 8 letter opinion, the court granted Siouxland’s motion.

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[¶6.] Dr. Jones appeals on two issues: (1) Does the Founding Fathers’

Clause delay Siouxland’s right to repurchase any of Dr. Jones’s partnership Units

until three years after his retirement; and (2) Is the Founding Fathers’ Clause

ambiguous?

Standard of Review

[¶7.] Summary judgment can be granted only when “‘there is no genuine

issue as to any material fact.’” St. Paul Fire & Marine Ins. Co. v. Engelmann, 2002

SD 8, ¶15, 639 NW2d 192, 199 (quoting SDCL 15-6-56(c)). “We will affirm only

when the legal questions have been correctly decided and there is no genuine issue

of material fact.” Goepfert v. Filler, 1997 SD 56, ¶4, 563 NW2d 140, 141-42 (citing

Koeniguer v. Eckrich, 422 NW2d 600, 601 (SD 1988); Bego v. Gordon, 407 NW2d

801, 804 (SD 1987)). In this case, the parties agree that the construction and

interpretation of the Agreement is governed by Iowa law. In Iowa, contract

interpretation is a question of law. American Family Mut. Ins. Co. v. Petersen, 679

NW2d 571, 575 (Iowa 2004) (citation omitted).

Analysis and Decision

[¶8.] Dr. Jones claims that he accepted the Agreement with the

understanding that the intent of the Founding Fathers’ Clause was to protect his

entire interest in the Partnership, not just those Units subscribed to on or before

December 31, 1992. Evidence of this intent, according to Dr. Jones, is in the terms

used in the Founding Fathers’ Clause. It states:

With respect to a Limited Partner that subscribes to its Limited
Partnership Interest on or before the [sic] December 31, 1992,
the occurrence of any Triggering Event under paragraph (i)
hereof shall be deemed not to have occurred until January 1,
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2000, or the third anniversary date of such event, whichever is
later; but, in no event shall the occurrence of a subsequent
Triggering Event under paragraph (i) hereof other than death
have the effect of extending or shortening such deemed date of
occurrence.

Dr. Jones contends that when interpreting the Founding Fathers’ Clause and

certain terms defined by the Agreement, it is clear that a Limited Partner’s entire

ownership in the Partnership is protected. “Limited Partnership Interest” is

defined as the “Interest of the Partner in the Partnership” and “Interest” is defined

as the “entire ownership of a Partner in the Partnership at any particular time.”

(Emphasis added). Therefore, Dr. Jones argues that if his “Limited Partnership

Interest” is his “Interest,” which is his “entire ownership,” then the only reasonable

interpretation is that all ten Units are protected.

[¶9.] Also, Dr. Jones relies on a provision that requires the Limited Partners

to determine the value of a Unit following the end of a fiscal year. Because each

Unit receives a value under Section 6.4, Dr. Jones asserts that the Limited

Partner’s Interest, i.e., entire ownership, must therefore be determined by

ascertaining the number of Units owned by the Limited Partner and taking that

number times the value per Unit assigned pursuant to Section 6.4. He also asserts

that a Limited Partner’s Interest in the Partnership is indivisible, because it is

made up of the total number of Units owned by the Limited Partner. Therefore, if

“Limited Partnership Interest” is, by definition, the Interest of a Limited Partner,

then “Limited Partnership Interest” must also be indivisible, according to Dr. Jones.

Finally, because his Limited Partnership Interest is indivisible and the Founding

Fathers’ Clause implicates his Limited Partnership Interest, he maintains that the

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parties intended to protect all ten Units and not just those purchased on or before

December 31, 1992.

[¶10.] Siouxland, on the other hand, argues that the language used in the

Agreement reveals that the intent of the parties was to protect only those Limited

Partnership Interests subscribed to on or before December 31, 1992. Had the

Founding Fathers’ Clause been drafted to protect an individual Limited Partner’s

entire ownership, Siouxland claims that it would have stated, “with respect to any

Limited Partner admitted to the Partnership on or before December 31, 1992.”

(Emphasis added). Instead, the availability of the delay, according to Siouxland,

depends on when the Limited Partnership Interests were acquired.

[¶11.] While Siouxland recognizes that the definition of “Interest” is the

“entire ownership of a Partner in the Partnership at any particular time,” it argues

that this definition cannot be read in isolation when interpreting the Founding

Fathers’ Clause. It acknowledges that a Limited Partner can have multiple Units,

but it disputes that this means a Limited Partner can only have one indivisible

Limited Partnership Interest. Rather, Siouxland claims that the parties intended

for a Limited Partner to have more than one Limited Partnership Interest,

evidenced by the definition of a Unit. A “Unit” is defined as “a Limited Partnership

Interest attributable, as of November 16, 1992, to a Capital Contribution of $12,500,

and thereafter attributable to a Capital Contribution equal to the value thereof as

determined pursuant to Section 6.4 hereof.” (Emphasis added). Siouxland argues

that if a Limited Partner can have multiple Units—each of which is “a Limited

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Partnership Interest”—then certainly a Limited Partner can have multiple Limited

Partnership Interests.

[¶12.] Siouxland further contends that Dr. Jones’s “interpretation is not

reasonably possible because it effectively nullifies portions of the Limited

Partnership Agreement.” According to Siouxland, it “would make the definition of

Unit nonsensical” and would require the Court to rewrite the definition of Unit to be

“a fraction of a Limited Partnership Interest.” This interpretation, Siouxland

asserts, fails to take into account that terms of the Agreement were intentionally

used in their singular form, and that under Section 1.1(B) the singular includes the

plural. If the term “Limited Partnership Interest” is read in plural form, then the

only reasonable interpretation, Siouxland insists, is that the parties intended only

those Limited Partnership Interests subscribed to on or before December 31, 1992

to be protected by the Founding Fathers’ Clause.

[¶13.] Contract interpretation refers to the process of determining the

meaning of the words the parties used in their agreement. Fausel v. JRJ Enter.,

Inc., 603 NW2d 612, 618 (Iowa 1999) (citing Fashion Fabrics of Iowa, Inc. v. Retail

Investors Corp., 266 NW2d 22, 25 (Iowa 1978)). Contract construction, on the other

hand, is the process by which a court determines the legal effect of the language in a

contract. Id. (citing Fashion Fabrics, 266 NW2d at 25). “A cardinal rule of contract

construction or interpretation is [that] the intent of the parties” at the time they

executed the contract “must control.” Hartig Drug Co. v. Hartig, 602 NW2d 794,

797 (Iowa 1999) (citing Whalen v. Connelly, 545 NW2d 284, 291 (Iowa 1996)). To

determine the parties’ intent, extrinsic evidence may only be considered if “the

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contract is ambiguous and uncertain[.]” Id. A disagreement between the parties on

the meaning of the contract does not render the contract ambiguous. Id. (citation

omitted). “Instead, an ambiguity occurs in a contract when a genuine uncertainty

exists concerning which of two reasonable interpretations is proper.” Id. (citing

Berryhill v. Hatt, 428 NW2d 647, 654 (Iowa 1988)).

[¶14.] The circuit court found that there was but one reasonable

interpretation of the Founding Fathers’ Clause, thereby rendering the provision

unambiguous. Dr. Jones’s suggested interpretation, the court held, “is incompatible

with a reading of all operable provisions [and] also defeats the clear intention

expressed in the language of the Agreement that a Partner purchasing an Interest

by December 31, 1992 receive the benefit of the three year delay for that Interest.”

Further, the court continued, if the Limited Partnership Interest protected by the

Founding Fathers’ Clause is not divisible as Dr. Jones asserted, “then it cannot be

said that [he] subscribed to that Interest on or before December 31, 1992” and none

of his ten Units would receive the benefit of the delay. Accordingly, because Dr.

Jones’s interpretation would nullify the protective intent of the Founding Fathers’

Clause, the court held that the parties intended to benefit only the Units subscribed

to on or before December 31, 1992.

[¶15.] We agree with the circuit court. If the Agreement is interpreted in

accord with Dr. Jones’s theory that he has one indivisible Interest, it will negate the

applicability of the Founding Fathers’ Clause with respect to all of his Units, since

he did not subscribe to his entire Limited Partnership Interest on or before

December 31, 1992. Neither party argues that this was their intent. Moreover,

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when interpreting the Agreement, “it is assumed in the first instance that no part of

it is superfluous; an interpretation which gives a reasonable, lawful, and effective

meaning to all terms is preferred to an interpretation which leaves a part

unreasonable, unlawful, or of no effect.” See American Soil Processing, Inc. v. Iowa

Comprehensive Petroleum Underground Storage Tank Fund Bd., 586 NW2d 325,

334 (Iowa 1998) (quoting Fashion Fabrics, 266 NW2d at 26 (quotation marks

omitted)). We are required to “give effect to the language of the entire contract,”

and “particular words and phrases are not interpreted in isolation. Instead, they

are interpreted in a context in which they are used.” Hartig Drug Co., 602 NW2d at

797-98 (internal citations omitted).

[¶16.] The only dispute in this case is whether the parties intended to

protect a Limited Partner’s entire ownership interest or only those Units purchased

on or before December 31, 1992. It is conceivable that the drafters did not

anticipate a situation where an original limited partner, who subscribed to some

Units before December 31, 1992, would thereafter obtain additional Units.

However, simply because the situation was unforeseen does not make the

Agreement ambiguous. Rather, an ambiguity will be found when conflicting

provisions cannot be reconciled to give meaning to all provisions and when they are

susceptible to more than one fair, honest, and reasonable interpretation. Id. at 797

(citing Berryhill, 428 NW2d at 654). Because we must give effect to the Agreement

as a whole, our review of the parties’ intent at the time the Agreement was executed

is limited to what they said in the Agreement itself. See id.; Harvey Const. Co. v.

Parmele, 113 NW2d 760, 768 (Iowa 1962).

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[¶17.] The language of the Founding Fathers’ Clause delays the Triggering

Event “with respect to a Limited Partner who subscribed to its Limited Partnership

Interest on or before the [sic] December 31, 1992.” Dr. Jones asserts that because

the definition of “Limited Partnership Interest” is the “Interest of the Limited

Partner in the Partnership” and “Interest” is the “entire ownership” of a Limited

Partner, then his entire ownership—all ten Units—should be protected by the

Founding Fathers’ Clause. While this interpretation appears reasonable when

examining the Founding Fathers’ Clause in isolation, it is not a fair, honest, and

reasonable interpretation in context with the Agreement as a whole.

[¶18.] The term “Limited Partnership Interest” is not solely used in the

Founding Fathers’ Clause. It is also used in the definition of Unit. A “Unit” is

defined as “a Limited Partnership Interest” and the parties agree that a Limited

Partner can have multiple Units. Therefore, if a Limited Partner can have more

than one Unit, then under the terms of the Agreement, such partner certainly can

have one or more Limited Partnership Interests. Consequently, if a Limited

Partner can have more than one Limited Partnership Interest, it is reasonable to

conclude that only those Limited Partnership Interests subscribed to on or before

December 31, 1992 are protected by the Founding Fathers’ Clause.

[¶19.] This interpretation is further supported by our review of other

provisions in the Agreement. Even though a term is used in the singular, when the

context requires, the Agreement provides that it be read in the plural. It is

improper to interpret the terms “Interest” and “Limited Partnership Interest” in the

singular and accept that the parties intended a Limited Partner to have only one

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indivisible interest in the Partnership. As stated before, if a Limited Partner has

an indivisible Limited Partnership Interest, that partner would have to have

subscribed to that entire Interest on or before December 31, 1992 to be protected by

the Founding Fathers’ Clause. Such an interpretation would be unreasonable

because it would negate the protective intent of the Founding Fathers’ Clause.

[¶20.] Therefore, we conclude that the language of the Agreement is not

ambiguous and the only reasonable interpretation is that the parties intended the

Founding Fathers’ Clause to protect only those Units subscribed to on or before

December 31, 1992. This interpretation gives effect to and is in harmony with not

only the protective intent of the Founding Fathers’ Clause, but also the Agreement

as a whole.

[¶21.] Affirmed.

[¶22.] GILBERTSON, Chief Justice, and SABERS, ZINTER and

MEIERHENRY, Justices, concur.

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