[00:00:00] Speaker 03:
Please proceed Good morning your honors.

[00:00:02] Speaker 03:
May it please the court.

[00:00:03] Speaker 03:
It's an honor to be here Let me start with the factual findings by judge Morris at the district court He got it right.

[00:00:12] Speaker 03:
He determined based on overwhelming evidence that farmhouse breached the limited partnership agreement by assigning all of farmhouses interest in the option and the entirety of control over the option process to Miss Burroughs and

[00:00:29] Speaker 03:
And in at least four places in the partnership agreement, it expressly prohibits an assignment of any of the general partner's interests.

[00:00:40] Speaker 01:
Well, but I'm not sure the general partner's interest itself was actually assigned.

[00:00:44] Speaker 01:
But that's not really the issue we're focused on, is it?

[00:00:49] Speaker 01:
If you were happy with that part of the district court's decision, he didn't stop there.

[00:00:54] Speaker 01:
So maybe we need to focus on the part that you're not happy with.

[00:00:58] Speaker 03:
You got a deal.

[00:00:59] Speaker 03:
I will do that.

[00:01:01] Speaker 03:
I'll say this very quickly, which is the evidence, because you did comment that maybe he got that wrong, but the evidence that farmhouses interest was in fact transferred was overwhelming.

[00:01:12] Speaker 03:
We had Dabney himself on the stand, Dabney the sole owner of

[00:01:17] Speaker 03:
the Dabney Company and the 90% owner of Farmhouse and the only person who ever acted on their behalf admit on cross-examination, not undirect, not in their briefing, on cross admit that he assigned all of Farmhouse's rights and control to Ms.

[00:01:34] Speaker 03:
Burroughs.

[00:01:35] Speaker 03:
So he himself admitted that.

[00:01:37] Speaker 03:
He assigned Farmhouse to her.

[00:01:40] Speaker 01:
I look at the agreement, and I don't want to get too far off the track here.

[00:01:42] Speaker 01:
I didn't see anything in the agreement that provides a control provision.

[00:01:47] Speaker 01:
I've seen lots of partnership agreements where control of the partnership or the key person, in this case, Mr. Dabney, I didn't see anything there that said that Dabney couldn't relinquish his interest in farmhouse.

[00:02:01] Speaker 03:
Does anybody else?

[00:02:03] Speaker 03:
Your Honor, 5.2 H3 specifically says that

[00:02:09] Speaker 03:
all that can be transferred is 49% of a general partner, very clearly saying control, which is 50 plus percent, cannot be transferred.

[00:02:20] Speaker 03:
So it's in 5.2 age.

[00:02:21] Speaker 03:
Of what?

[00:02:23] Speaker 03:
Of the general partner.

[00:02:24] Speaker 03:
Of the general partner or the general partnership?

[00:02:27] Speaker 03:
The general partner.

[00:02:29] Speaker 03:
That one is very specific to the general partner.

[00:02:32] Speaker 03:
And Your Honor, this is important because their entire reply brief says it was just a personal interest.

[00:02:39] Speaker 03:
But that ignores the partnership agreement.

[00:02:42] Speaker 03:
The partnership agreement 8.1 gives the option rights to farmhouse, not to Dabney, not to the Dabney Company.

[00:02:52] Speaker 03:
So Mr. Dabney can't transfer his personal rights to the option, he doesn't have any.

[00:02:58] Speaker 03:
The only person that holds, the only entity that holds those rights is farmhouse.

[00:03:04] Speaker 00:
Let me jump in here if I may.

[00:03:06] Speaker 00:
Sure.

[00:03:06] Speaker 00:
My understanding is that

[00:03:09] Speaker 00:
mister damn he recognized that by transferring if if we can assume for a moment that that occurred it was a default and yes great we won't get in for the minute how the district court said well it wasn't a material default but for the moment he recognized it was a default the agreement talks about events of default and a negative covenants uh... it had the

[00:03:36] Speaker 00:
decision been made to exercise those events of default.

[00:03:41] Speaker 00:
The general partner could have been removed.

[00:03:43] Speaker 00:
He could have been maybe have a return of some money and so on and so on.

[00:03:47] Speaker 00:
That didn't happen.

[00:03:48] Speaker 00:
Those are pretty serious rights.

[00:03:51] Speaker 00:
Did Judge Morris get that correct?

[00:03:53] Speaker 00:
I mean, how could a negative covenant that could yield those types of remedies, how could that not be material?

[00:04:02] Speaker 03:
That's where he went wrong.

[00:04:04] Speaker 03:
So we're not here saying redo his factual findings.

[00:04:08] Speaker 03:
He found that there was an assignment because the evidence was overwhelming.

[00:04:12] Speaker 03:
What he found was that it wasn't material.

[00:04:15] Speaker 03:
when you put in four different places in the partnership agreement, you can't sign it, of course it was material to the parties, and I'll explain why, but of course it was material.

[00:04:25] Speaker 03:
And what he also did is when he looked at this question of materiality, he focused on, well, we're terminating the limited partnership agreement.

[00:04:34] Speaker 03:
That's not what 8.1 says.

[00:04:35] Speaker 03:
8.1 says, if there's a breach, there is no option.

[00:04:41] Speaker 03:
So 8.1 doesn't say if there's a breach, you terminate the partnership agreement.

[00:04:45] Speaker 03:
It says if there's a breach, you, the general partner, get no option rights.

[00:04:51] Speaker 03:
Separately, as you're alluding to, Your Honor, there's covenants that say if you breach these various things, including assignments, we can remove you.

[00:05:03] Speaker 03:
And the limited partner didn't do that.

[00:05:05] Speaker 03:
But there's a reason.

[00:05:06] Speaker 03:
14.1 sets very different standards for removal.

[00:05:11] Speaker 03:
The parties were thoughtful.

[00:05:13] Speaker 03:
If you're gonna remove a general partner from a partnership like this, you must have a material breach to remove.

[00:05:21] Speaker 03:
And it goes on beyond that.

[00:05:22] Speaker 03:
It actually says you must have material detriment.

[00:05:25] Speaker 03:
So if we were to have tried to remove them, we would have had to go in and prove much higher standards.

[00:05:30] Speaker 03:
The parties agreed.

[00:05:31] Speaker 03:
Two very sophisticated parties said to remove from the entire partnership, standards are high.

[00:05:39] Speaker 03:
But if you want an option right, the standard is very simple.

[00:05:43] Speaker 03:
You can't be in breach.

[00:05:44] Speaker 03:
Why?

[00:05:46] Speaker 03:
Why?

[00:05:46] Speaker 03:
Because the option process is complicated.

[00:05:50] Speaker 03:
This idea that, oh, you just hire an appraiser and they'll go set value.

[00:05:55] Speaker 03:
Everything that happened in this case shows that that is so far from the truth.

[00:06:00] Speaker 03:
You have to hire an appraiser.

[00:06:01] Speaker 03:
You have to agree on documents to give the appraiser.

[00:06:03] Speaker 03:
You have disclosures about conflicts.

[00:06:05] Speaker 03:
What relationships do they have?

[00:06:07] Speaker 03:
You have to decide how are they going to value the property?

[00:06:11] Speaker 03:
You have the two original people to that contract, Mr. Dabney for Farmhouse and the limited partner who agree that the way you set value is you

[00:06:21] Speaker 03:
get a broker's opinion of value or an appraisal, that shows you what the project's worth, and you put it through the waterfall.

[00:06:27] Speaker 00:
But none of that is in the partnership agreement, is it?

[00:06:30] Speaker 03:
Understood.

[00:06:30] Speaker 03:
And let's get to that, right?

[00:06:32] Speaker 03:
It doesn't say it that clearly, right?

[00:06:34] Speaker 03:
But both of the original parties to the agreement, that's how they've always done it on every other project but this one.

[00:06:41] Speaker 01:
What experience did these two parties have at the time this agreement was entered into?

[00:06:46] Speaker 03:
They had two other projects that they owned together.

[00:06:49] Speaker 03:
Baxter and Comstock on both those projects.

[00:06:51] Speaker 03:
They did exactly what I'm saying.

[00:06:53] Speaker 03:
And when did they do that?

[00:06:54] Speaker 03:
They did it after the litigation was filed after Miss after the new Boroughs hired experts to say no, there's a new methodology But they didn't do it before the limited partnership agreement was entered into so there's not a course of dealing that your client can cite

[00:07:11] Speaker 01:
that it relied upon, can it?

[00:07:12] Speaker 01:
Absolutely, Your Honor.

[00:07:14] Speaker 01:
What the testimony is— What course of dealing did it rely upon when it entered the limited partnership agreement?

[00:07:20] Speaker 03:
I'll correct myself.

[00:07:21] Speaker 03:
When they signed it, there wasn't a course of dealing.

[00:07:24] Speaker 03:
But what we have is the two parties testified at trial, right?

[00:07:28] Speaker 03:
Mr. Sussman, who's here in the back, testified as to his intent.

[00:07:31] Speaker 03:
Always sale methodology.

[00:07:34] Speaker 03:
The other person to that agreement, Mr. Dabney for Farmhouse, said that he had never even heard of this new methodology that the attorneys for boroughs came up with.

[00:07:43] Speaker 03:
Never heard of it.

[00:07:44] Speaker 03:
So the two people to the contract admitted that they never intended this new, weird approach.

[00:07:50] Speaker 00:
Well, with respect, counsel, I know a lot has been made about Mr. Dabney, who I gather is a really smart, capable person.

[00:07:56] Speaker 00:
But the reality is this was not a personal services contract.

[00:08:00] Speaker 00:
If he had died, for example, God forbid, they would have lost him.

[00:08:04] Speaker 00:
any other number of things could happen.

[00:08:05] Speaker 00:
So there was nothing in the contract that said they had to deal with Mr. Dabney, right?

[00:08:10] Speaker 00:
Correct.

[00:08:10] Speaker 00:
Okay, so if we're tracing everything back to what Dabney would have done, I'm not sure how far that goes.

[00:08:16] Speaker 00:
And it seems like you're, as my partner, my colleague points out here, the reality is there was no course of dealing.

[00:08:24] Speaker 00:
You're just flying blind as to how this should be valued.

[00:08:27] Speaker 00:
And I can see where parties disagree about that.

[00:08:31] Speaker 00:
But,

[00:08:33] Speaker 00:
How does the partnership agreement resolve the issue of how the valuation should occur?

[00:08:40] Speaker 00:
You're saying that the option not to exist at all, right?

[00:08:43] Speaker 03:
No, no.

[00:08:44] Speaker 03:
So great questions, and let me direct answer them directly.

[00:08:49] Speaker 03:
The partnership says,

[00:08:51] Speaker 03:
You can't assign it to somebody without our approval.

[00:08:54] Speaker 03:
Why?

[00:08:54] Speaker 03:
Because all of these things we're talking about, the partner, 8.1 doesn't say you use a sale methodology.

[00:09:00] Speaker 01:
What if Mr. Dabney had died?

[00:09:02] Speaker 01:
The question that Judge Smith just asked.

[00:09:04] Speaker 03:
Then the parties would have to figure out who would take over, but they'd have to agree.

[00:09:08] Speaker 03:
The limited partner has to agree, Your Honor.

[00:09:10] Speaker 03:
And here's the thing.

[00:09:11] Speaker 03:
Mr. Dabney didn't die.

[00:09:13] Speaker 03:
Right?

[00:09:14] Speaker 03:
And these projects typically after 15 years, they do get sold.

[00:09:19] Speaker 03:
Every other project with Mr. Dabney, every one was sold because he wanted to retire.

[00:09:24] Speaker 03:
In the divorce agreement, he gave up the right to sell.

[00:09:27] Speaker 03:
That is a material change.

[00:09:30] Speaker 00:
Well, with respect, what I'm struggling with primarily is the fact that

[00:09:37] Speaker 00:
Your folks agreed that you got everything out of the partnership in terms of tax benefits and the like that you bargained for.

[00:09:44] Speaker 00:
There was nothing missing.

[00:09:46] Speaker 00:
The partnership agreement simply doesn't talk about the methodology for valuation, sale, any of those things.

[00:09:53] Speaker 00:
It really gets down to, does the option still exist?

[00:09:57] Speaker 00:
I know that's important for you.

[00:09:59] Speaker 00:
But the district judge seemed to be relying primarily on Montana case law,

[00:10:06] Speaker 00:
And I think Montana limited partnership act to come to the conclusion that he did.

[00:10:14] Speaker 00:
What did he miss there?

[00:10:14] Speaker 00:
I mean, there's no terms of materiality in the agreement that fits here, but that certainly seems to be the, if you will, the essence of what the Montana case and statutory law says.

[00:10:28] Speaker 00:
What am I missing?

[00:10:30] Speaker 03:
So I would disagree with that last comment.

[00:10:31] Speaker 03:
That's not what the law says.

[00:10:32] Speaker 03:
So let's talk about it.

[00:10:33] Speaker 03:
He got the facts right.

[00:10:35] Speaker 03:
This court reviews application of law de novo, contracts when you're applying law to fact de novo.

[00:10:41] Speaker 03:
Okay, so here he got two things wrong.

[00:10:44] Speaker 03:
He said materiality was required.

[00:10:47] Speaker 03:
So under Montana law, okay, the courts distinguish Davidson versus Barstead.

[00:10:56] Speaker 03:
The courts say if there is a condition precedent to the creation of the option, the contract,

[00:11:03] Speaker 03:
then you don't impose materiality.

[00:11:05] Speaker 03:
You enforce the condition precedent.

[00:11:07] Speaker 03:
Here, if you look at section 8.1, it says, if the general partner or any affiliate is not then in default under the terms of this agreement, the general partner shall have an option.

[00:11:19] Speaker 03:
It's an unequivocal condition precedent to the creation of the option.

[00:11:25] Speaker 03:
Now, these questions of factor of law, it was a bench trial, right?

[00:11:30] Speaker 03:
the judge decided as a matter of fact that it was a sign and that it it was a breach of the contract so that that's a question of fact that's a question of fact decided then you apply the law to it this contract says only if you're not in default you get an option

[00:11:49] Speaker 03:
That's a condition precedent.

[00:11:50] Speaker 03:
Here's what the Davidson versus Barstead Court said.

[00:11:53] Speaker 03:
To your question, Your Honor, Montana law.

[00:11:55] Speaker 03:
It says the failure of a non-satisfaction of a condition precedent to the contract formation renders the contemplated contract non-existent as never formed and thus non-binding and unenforceable.

[00:12:12] Speaker 01:
But that's not actually what you're arguing here.

[00:12:14] Speaker 01:
It is absolutely what I'm arguing.

[00:12:15] Speaker 01:
Well, you're arguing that the contract is enforceable on your terms.

[00:12:19] Speaker 01:
That is, you can deny the option which would exit your client from the partnership and leave it in a partnership with the party it says it doesn't trust anymore and doesn't want to be in a partnership with at the same time that

[00:12:35] Speaker 01:
the district court's factual finding unchallenged, cited previously by Judge Smith, that your client got everything it was entitled to up to that point, I'm lost here.

[00:12:47] Speaker 01:
Because at this point, they exercised the option, your client is out, your client has no continuing interest in the partnership, shouldn't matter to your client who's leading this partnership.

[00:12:59] Speaker 01:
Where's your client's interest been impaired in any fashion?

[00:13:03] Speaker 03:
$3.5 million, your honor.

[00:13:05] Speaker 03:
So yes, our client got tax benefits, but this contract has lots of pieces.

[00:13:13] Speaker 03:
You construct it, you get tax benefits, you get losses.

[00:13:16] Speaker 03:
And then after year 15, sometimes for some of these projects, oftentimes there's millions of dollars of equity that's built up.

[00:13:23] Speaker 03:
The partnership agreement also says how that equity

[00:13:28] Speaker 03:
is divided.

[00:13:29] Speaker 03:
11.2 says on a sale, the limited partner gets its capital back, and then the general partner gets most of it.

[00:13:36] Speaker 01:
Except you've got the option sitting there.

[00:13:38] Speaker 01:
And the question is, what interest does your client have to deny the option right, which clearly exists?

[00:13:50] Speaker 01:
You've cited the difficulty in valuation.

[00:13:54] Speaker 01:
I have to tell you, in practice,

[00:13:57] Speaker 01:
more than on this court, because we don't get those kind of cases very often.

[00:14:01] Speaker 01:
But in practice, I dealt with lots of valuation issues.

[00:14:04] Speaker 01:
Those are pretty routine, and it may be that you didn't like the approach taken by Ms.

[00:14:09] Speaker 01:
Burroughs.

[00:14:11] Speaker 01:
But you weren't going to roll over and play dead on that.

[00:14:14] Speaker 01:
If the two of you have to fight it out, you could fight it out.

[00:14:16] Speaker 01:
But valuation is something that courts accomplish all the time.

[00:14:21] Speaker 01:
So I'm having trouble figuring out how your client has been aggrieved in a way that justifies disregarding the option.

[00:14:32] Speaker 03:
and letting your client continue in a partnership it says it doesn't want to be in a partnership with two answers one is there is no option right unless they're not in breach so i get your question your honor but it's actually not what two sophisticated parties agreed on a point one the option agreement says

[00:14:50] Speaker 03:
There is no option if you're in breach.

[00:14:52] Speaker 03:
And it's undisputed.

[00:14:53] Speaker 03:
The court's held that there's a breach.

[00:14:55] Speaker 01:
It's undisputed, obviously not undisputed by your colleagues over there, undisputed or as a part of the conclusion reached by the district court.

[00:15:05] Speaker 01:
Yes.

[00:15:05] Speaker 01:
And it's an issue we may ultimately have to deal with because they pushed it forward.

[00:15:10] Speaker 01:
But I'm still more interested in the second part.

[00:15:13] Speaker 03:
Okay, and materiality.

[00:15:14] Speaker 01:
How is it materiality?

[00:15:16] Speaker 01:
And that's of concern to me.

[00:15:17] Speaker 01:
You said that, well, the word material doesn't appear here.

[00:15:20] Speaker 01:
So any default, no matter how trivial,

[00:15:24] Speaker 01:
matters.

[00:15:25] Speaker 01:
And I'm not sure I understand Montana law in the same way that you've just argued it.

[00:15:29] Speaker 01:
I don't think Montana law reads materiality out, and I don't see how the parties clearly did so in a contract where they use material in some places and use the word default without material in others.

[00:15:42] Speaker 01:
Is that all we have to go on?

[00:15:43] Speaker 03:
It's not all we have to go on.

[00:15:44] Speaker 03:
We have

[00:15:45] Speaker 03:
the language of the contract, where the parties used, specifically here said it's a condition precedent.

[00:15:51] Speaker 03:
We have Davidson versus Barstead, which makes the exact distinction I'm talking about.

[00:15:56] Speaker 03:
Condition precedent, you don't use materiality, but if you're now talking about performance once the option's created, then you look at materiality.

[00:16:06] Speaker 03:
So I ask you to look at that.

[00:16:08] Speaker 03:
It does make this clear distinction, but let's go to materiality, because you're saying, hey, option processes are easy.

[00:16:14] Speaker 03:
Your honor, I do litigate.

[00:16:15] Speaker 03:
Easy, but I made a living out of it for a while, but they get accomplished.

[00:16:20] Speaker 03:
So do I, and here's what I would tell you.

[00:16:22] Speaker 03:
This isn't a normal option process.

[00:16:24] Speaker 03:
Look at Hobbs.

[00:16:25] Speaker 03:
Hobbs was an option.

[00:16:26] Speaker 03:
You pay $230,000.

[00:16:29] Speaker 03:
It doesn't matter if John or Bill pay it.

[00:16:31] Speaker 03:
You get $230,000.

[00:16:32] Speaker 03:
So we're not Hobbs.

[00:16:34] Speaker 03:
The court in Hobbs specifically found there was no damage from an assignment.

[00:16:38] Speaker 03:
What we have here is a process that can be manipulated.

[00:16:44] Speaker 03:
is manipulated, and we have the two people who were the original parties to the agreement who have never supported the argument being made by Ms.

[00:16:52] Speaker 03:
Burroughs.

[00:16:52] Speaker 03:
So you say, what did our clients lose?

[00:16:54] Speaker 03:
How are they being damaged?

[00:16:56] Speaker 03:
Their chosen partner, which is respected under Montana law, we gave you our sights.

[00:17:03] Speaker 01:
I realize you're running out of time, so I'm going to jump ahead.

[00:17:08] Speaker 01:
established that there wasn't a course of dealing that gave your client a basis to trust on Mr. Dabney's way of doing things because they didn't have prior experience with Mr. Dabney.

[00:17:18] Speaker 01:
So I'm having trouble understanding how this limited partnership agreement encompasses all these understandings

[00:17:27] Speaker 03:
Conduct after the fact, your honor.

[00:17:28] Speaker 03:
So yes, they signed the agreement.

[00:17:30] Speaker 03:
The two people to that agreement, even after they, Ms.

[00:17:34] Speaker 03:
Burroughs, develops an attorney memo that says it's supposed to be done this other way, language that doesn't exist in the contract, you have to wait 36 years for a sale, all value built up in the equity goes to the general partner.

[00:17:46] Speaker 03:
None of that exists in 8.1 either.

[00:17:48] Speaker 03:
They prepare a memo that says that's how it's done, discounted cash flow only.

[00:17:54] Speaker 03:
Mr. Dabney, who's the sole person for Farmhouse, said that was never the intent.

[00:17:58] Speaker 03:
He never even read that, never approved it, and has never used it in any other project.

[00:18:02] Speaker 03:
So course of conduct can occur before a contract is signed.

[00:18:05] Speaker 03:
It can also occur after.

[00:18:07] Speaker 01:
And it speaks after to what should be done here.

[00:18:11] Speaker 01:
It does not speak after to what the parties agreed to 15 years before.

[00:18:16] Speaker 03:
But the parties agreed.

[00:18:18] Speaker 03:
that they get to deal with farmhouse, not Miss Burroughs.

[00:18:21] Speaker 03:
And this personal services concept.

[00:18:23] Speaker 01:
I did not agree that they got to deal only with Mr. Dabney, because Mr. Dabney could have passed away along the way.

[00:18:28] Speaker 03:
OK, so they make that argument.

[00:18:30] Speaker 03:
There's a lot of creative legal arguments.

[00:18:32] Speaker 03:
$4 million only goes to the general partner.

[00:18:37] Speaker 03:
But Your Honor, I'd like to say, this is a creative legal argument.

[00:18:39] Speaker 03:
What are they saying?

[00:18:40] Speaker 03:
They're saying, hey, if Merce Burroughs had actually taken Dabney's interest in the Dabney Company or become the officer of the Dabney Company, then transferring control to her might have been allowed.

[00:18:51] Speaker 03:
Even though we have four provisions that specifically say, can't transfer control, can't transfer any interest in the general partner or the partnership,

[00:18:59] Speaker 03:
or any allocation or distributions without limited partner approval.

[00:19:03] Speaker 03:
But this argument is, well, we could have accomplished the same thing if Miss Burroughs had just stepped into control of the Dabney Company or Farmhouse.

[00:19:13] Speaker 03:
But here's the facts.

[00:19:14] Speaker 03:
There's no evidence of that in the record.

[00:19:16] Speaker 03:
It never happened.

[00:19:18] Speaker 03:
So this concept is a fiction.

[00:19:21] Speaker 03:
And so the last point I want to make, Your Honor.

[00:19:23] Speaker 00:
Excuse me, what is a fiction?

[00:19:25] Speaker 03:
The idea that he just assigned personal interest because she just came in and took control of the option process because she took over somehow Dabney's position.

[00:19:35] Speaker 03:
But that would mean she became an officer, a director, an employee, or gained some ownership of Farmhouse or the Dabney Company.

[00:19:42] Speaker 03:
No evidence of that.

[00:19:43] Speaker 03:
All evidence is one thing.

[00:19:46] Speaker 03:
Mr. Dabney has always been and remains the sole shareholder of the Dabney Company.

[00:19:52] Speaker 00:
primarily transactions law for thirty seven years i gotta tell you what you got here you didn't draft well enough somebody didn't foresee these things so now you're trying to graft onto it what you believe the reasonable parties would have done but this mr dabney could have died there was no personal services contract here

[00:20:10] Speaker 00:
You didn't know who was gonna be there, you hoped.

[00:20:12] Speaker 00:
Maybe he was, but you had no guarantee.

[00:20:15] Speaker 03:
Your Honor, 5.2H does actually deal with you can't transfer control.

[00:20:19] Speaker 03:
It deals with it expressly.

[00:20:20] Speaker 00:
What if he died?

[00:20:21] Speaker 00:
So let me go to this.

[00:20:22] Speaker 03:
Answer that question.

[00:20:23] Speaker 03:
Sorry, go ahead.

[00:20:25] Speaker 03:
What if he died?

[00:20:27] Speaker 03:
If Mr. Dabney dies, and they then have to decide who's gonna take over the Dabney Company, they have the right to do that.

[00:20:34] Speaker 03:
They're transferring control now.

[00:20:36] Speaker 03:
If they transfer more than 49,

[00:20:39] Speaker 03:
percent interest, the limited partner has approval rights.

[00:20:42] Speaker 03:
That's what the contract says.

[00:20:43] Speaker 01:
The limited partner keeps saying no.

[00:20:47] Speaker 01:
I mean, realistically, the answer to that question is no, that it couldn't.

[00:20:50] Speaker 03:
Right.

[00:20:50] Speaker 03:
The court would assume, like the law suggests, that a reasonableness standard applies.

[00:20:55] Speaker 03:
Ms.

[00:20:56] Speaker 03:
Burroughs has never run a light tech project, has never been approved by the governing agencies for low income housing to run a light tech project.

[00:21:02] Speaker 00:
Well, let me say this.

[00:21:03] Speaker 00:
Your time is up.

[00:21:04] Speaker 00:
You're a good lawyer.

[00:21:05] Speaker 00:
We appreciate your argument.

[00:21:07] Speaker 00:
But let's hear from the other side.

[00:21:09] Speaker 03:
Okay, can I say one quick thing your honor?

[00:21:12] Speaker 00:
Is it a prayer or what is it?

[00:21:13] Speaker 03:
It's not a prayer It's a third point which is this can't be remanded to the trial court for miss Burroughs to handle the option because Montana law is very clear on this thing Anti-assignment provisions are enforced miss Burroughs

[00:21:28] Speaker 03:
That assignment, by law, cannot be respected by the court.

[00:21:32] Speaker 03:
What this judge has said is it now goes back to the court for Ms.

[00:21:35] Speaker 03:
Burroughs to deal with it.

[00:21:37] Speaker 00:
By law, that's forbidden.

[00:21:38] Speaker 00:
We appreciate your argument.

[00:21:39] Speaker 00:
Thank you very much.

[00:21:40] Speaker 00:
Thank you.

[00:21:40] Speaker 00:
All right.

[00:21:42] Speaker 00:
So I imagine it's going to be Mr. Black or Black?

[00:21:49] Speaker 00:
Black.

[00:21:49] Speaker 00:
Black.

[00:21:49] Speaker 02:
Thank you.

[00:21:51] Speaker 00:
I imagine you disagree with your colleague.

[00:21:53] Speaker 02:
Well, on some things.

[00:21:57] Speaker 02:
May I please the court, Mike Black, attorney for Farmhouse.

[00:22:00] Speaker 02:
I'm here with Sid Best, who helped me try the case and was instrumental in the briefing.

[00:22:04] Speaker 02:
I'm a sole practitioner in Helena, Montana.

[00:22:06] Speaker 02:
It's a pleasure to be here in San Francisco.

[00:22:11] Speaker 02:
There are three things that I really wanna talk about here, and I know that I'll be answering your questions, but first of all, we need to talk about what the contract says.

[00:22:22] Speaker 02:
whether there was a breach and whether the breach is material.

[00:22:24] Speaker 02:
But I really want to go back to this 5.2 H3 control provision because it's very clear.

[00:22:32] Speaker 02:
We have a very sophisticated party on the other side.

[00:22:34] Speaker 02:
This contract is 86 pages long of text.

[00:22:38] Speaker 02:
There are 100 provisions by my count that allow the limited partner to consent to anything.

[00:22:46] Speaker 02:
And if you look at 5.2H3, what they need to do, you need to get the consent of the limited partner for the transfer, assignment, pledge, conveyance of any partnership interest in the partnership, or more than a 49% interest of any general partner of the partnership.

[00:23:04] Speaker 00:
Let me ask you this.

[00:23:05] Speaker 00:
Under Montana law, let's assume, arguing that Dabney and his wife were just the best.

[00:23:12] Speaker 00:
They just were lovey-dovey, and he died.

[00:23:16] Speaker 00:
and she inherited everything under Montana law, where would that have put this case?

[00:23:23] Speaker 00:
Would they have had a right to object?

[00:23:26] Speaker 00:
I don't think so.

[00:23:27] Speaker 00:
Her inheriting his interest in the property?

[00:23:30] Speaker 02:
No, and I don't mean to interrupt, Your Honor.

[00:23:31] Speaker 02:
No, not at all, for two reasons.

[00:23:33] Speaker 02:
One is there is no provision here.

[00:23:35] Speaker 02:
This provision talks about transfer of control of the general partner.

[00:23:39] Speaker 02:
The general partner is Farmhouse Partners Limited Partnership, not the Dabney Company.

[00:23:45] Speaker 02:
Mr. Dabney, as we all know, is the sole shareholder of the company that is the general partner of the general partner.

[00:23:53] Speaker 02:
And the distinction is extremely important here, because we have a LIHTC project.

[00:24:00] Speaker 02:
You have 10 years to get the tax credits, you have 15 years to comply, and if anything goes wrong within those 15 years, the IRS can come back in and disallow those tax credits.

[00:24:12] Speaker 02:
And so, if in fact, you know, Mr. Dabney died, this is structured in a way so that they're not going to lose the tax credits.

[00:24:21] Speaker 02:
It's structured in a way that whoever's heirs or devotees are at law, whether it be his wife or maybe she pre-diseases, who knows.

[00:24:29] Speaker 02:
But if Mr. Dabney died in 2013, the Dabney Company would have

[00:24:34] Speaker 02:
new equity holders, but it would still be the general partner of the general partner.

[00:24:38] Speaker 02:
Somebody else might be elected to be president of the Dabney Company and would exercise management control.

[00:24:46] Speaker 00:
Under this arrangement, would the limited partner have had a right to object to whomever was entitled as a matter of law to take Dabney's place?

[00:25:01] Speaker 02:
Absolutely not.

[00:25:02] Speaker 00:
So that wasn't thought of.

[00:25:04] Speaker 02:
Well, I don't know if they thought about it or not.

[00:25:05] Speaker 02:
They don't have the right under the limited partnership agreement.

[00:25:07] Speaker 00:
Right, exactly.

[00:25:08] Speaker 00:
They don't have that right.

[00:25:09] Speaker 02:
I mean, they thought about a lot of things.

[00:25:11] Speaker 02:
Like I said, I counted 100 provisions where the limited partner could withdraw consent to any particular actions.

[00:25:18] Speaker 02:
None of them have to do with who is managing the Dabney company or even who the agents of farmhouse are.

[00:25:26] Speaker 02:
So this thing is structured so, I mean, Mr. Dabney was 54 years old when he executed this contract.

[00:25:34] Speaker 02:
The contract has a term of 55 years.

[00:25:37] Speaker 02:
The LIHTC compliance period lasted until he was 69.

[00:25:41] Speaker 02:
I assume that the extra three years were a statute of limitations, so he couldn't even exercise the option until he was in his early 70s.

[00:25:51] Speaker 02:
Now, one of the factual assertions made by counsel, which I disagree with, has to do with these other two projects that were liquidated.

[00:26:01] Speaker 02:
Both of these liquidations occurred after this contract was entered into.

[00:26:07] Speaker 01:
The Baxter... He acknowledged he doesn't have a course of dealing argument.

[00:26:10] Speaker 01:
He does not.

[00:26:10] Speaker 01:
That leads up to the limited partnership agreement.

[00:26:13] Speaker 01:
That's right.

[00:26:13] Speaker 01:
We did have some confusion, but he's acknowledged that.

[00:26:15] Speaker 02:
Exactly right.

[00:26:16] Speaker 02:
There is no course of dealing.

[00:26:17] Speaker 02:
There was no option in Comstock.

[00:26:19] Speaker 02:
The option in Baxter

[00:26:21] Speaker 02:
was the same option as here, but it didn't ripen for three more years.

[00:26:25] Speaker 02:
It would be ripe this month had there not been a decision to strike while the iron was hot, while the real estate market was good in Bozeman, and while interest rates were low.

[00:26:36] Speaker 00:
Well, just to finish my earlier point, you point out that Mr. Dabney was 55-ish when the contract was drafted.

[00:26:44] Speaker 00:
If the contract was supposed to last for 50 years, odds are he wouldn't live to be 105.

[00:26:49] Speaker 00:
So, at some point he was going to die.

[00:26:52] Speaker 00:
Exactly.

[00:26:53] Speaker 00:
And what if anything did the contract say about that and its impact?

[00:26:57] Speaker 02:
Nothing.

[00:26:58] Speaker 00:
Nothing, okay.

[00:26:59] Speaker 02:
And that's really important here because we all know that there are no restrictions under the contract for there to be any transfer of equity in the Dabney company, whether it be by devise or sale or anything.

[00:27:13] Speaker 02:
There's no restrictions under the contract with how the Dabney company or even farmhouse raises capital to pay for the options.

[00:27:20] Speaker 02:
And the option itself provides that at closing, Farmhouse has the absolute discretion to designate who shall take by assignment.

[00:27:29] Speaker 02:
So whether the decision was made based upon a dissolution agreement where I've got this opportunity in the future, because as demonstrated at trial, because of Mr. Dabney's rule, he traditionally had the opportunity to buy the limited partner interest.

[00:27:48] Speaker 02:
through farmhouse.

[00:27:49] Speaker 02:
And nothing in that marriage settlement agreement was an immediate transfer of anything having to do with the Bridger One project.

[00:27:56] Speaker 00:
Let me ask you this.

[00:27:57] Speaker 00:
Mr. Dabney, of course, is alive and well, as far as I know.

[00:28:03] Speaker 00:
And when the valuation issue came up, putting aside for a moment whether the transfer was appropriate,

[00:28:10] Speaker 00:
Did he have anything to say as to the valuation?

[00:28:15] Speaker 00:
Was there any kind of a proceeding involved in which the valuation could have been disputed or he could have testified?

[00:28:22] Speaker 02:
I don't know that we got to that point.

[00:28:23] Speaker 02:
The judge said that, you know, I'm not going to listen to valuation testimony.

[00:28:26] Speaker 00:
Got it.

[00:28:27] Speaker 02:
What happened was is that after Mr. Dabney retained the counsel who took the case on and filed the lawsuit in September of 2020, they engaged an appraiser, they engaged Mr. Strain, and

[00:28:42] Speaker 02:
They looked at it to determine what they thought it would be.

[00:28:46] Speaker 02:
And when they exercised the option, which everybody acknowledges was timely, they provided a copy of the appraisal and the opinion letter.

[00:28:53] Speaker 02:
I don't think that that's unusual.

[00:28:55] Speaker 02:
I mean, these are sophisticated parties.

[00:28:57] Speaker 01:
Well, and that may be what helps to land us here, because the argument being made by multi-housing is that the approach used was

[00:29:10] Speaker 01:
radically different than the approach that would have been used.

[00:29:13] Speaker 01:
You didn't have much testimony about valuation, but it did seem to me as I went through, and I can't put my finger on it now, but it seemed to me that the valuation proposed in that

[00:29:27] Speaker 01:
purported exercise of the option.

[00:29:30] Speaker 01:
It was pretty far away from the value of the property the district court appeared to recognize without getting deep into valuation.

[00:29:37] Speaker 02:
And I'm happy to discuss that, Your Honor, because really what we've got are two different issues here.

[00:29:42] Speaker 02:
You look at the Comstock II project, there was no option language.

[00:29:46] Speaker 02:
So if we're going to look at selling the project and selling the property,

[00:29:53] Speaker 02:
That was one of the benchmarks that they used in negotiation.

[00:29:57] Speaker 02:
That negotiation took seven years for Mr. Dabney to obtain the limited partner interest in the Comstock project.

[00:30:07] Speaker 02:
He individually got it, Farmhouse remained the general partner, then they decided to dispose of the project.

[00:30:12] Speaker 02:
There was no option.

[00:30:13] Speaker 02:
So you look at how you're gonna value this, you don't have a benchmark.

[00:30:18] Speaker 02:
With respect to Baxter, again, the option had already been exercised in this case before there were any negotiations as to what to do with Baxter.

[00:30:29] Speaker 01:
You don't have a benchmark based on history, but going back to what I'd said before, valuation comes up pretty commonly in dealing with, in this case, a potential exercise option or a dissolution.

[00:30:43] Speaker 01:
There are lots of events that trigger valuations in court

[00:30:49] Speaker 01:
is the proposal and the argument that I've heard, and I think I understand it, is that it matters who you're dealing with.

[00:30:58] Speaker 01:
And as a general proposition, that's true.

[00:31:00] Speaker 01:
As a law partner, I cared about who my partner was.

[00:31:03] Speaker 01:
So if you're in this project, you have an interest in who you're dealing with.

[00:31:09] Speaker 01:
And the complaint, really, is that Ms.

[00:31:11] Speaker 01:
Burroughs

[00:31:13] Speaker 01:
was a wild card, and that's not who they had reason to deal with.

[00:31:16] Speaker 01:
And so there wasn't perfect performance of what has been described as a condition precedent for exercise of the option.

[00:31:27] Speaker 01:
And the substance of that appears to be the approach to valuation proposed by the new entrant was something off the table.

[00:31:37] Speaker 01:
Now, the district court didn't get into valuation, but did say things that suggested the value was probably higher than that proposal had suggested.

[00:31:47] Speaker 01:
So what do we make of all of this?

[00:31:48] Speaker 02:
Well, the value of the real estate is separate from the value of the limited partner's interest.

[00:31:53] Speaker 02:
We have to understand that the testimony at trial is that this, and it was found by the district court that the option language in section 8.1 was drafted by

[00:32:05] Speaker 02:
the limited partner, which is an affiliate of MHTCP, the current limited partner.

[00:32:10] Speaker 02:
It's used in at least 20, maybe 30 of their limited partnership agreements across the country, and they had up to 275 of them.

[00:32:18] Speaker 02:
And so the valuation of the limited partner interest, not the property, not the liquidation of the property that would come under the waterfall provision of 11.2B, I believe it is,

[00:32:33] Speaker 02:
Specifically, the definition of fair market value in 8.1C1 provides what the appraiser shall be instructed to do.

[00:32:50] Speaker 02:
Now, we can have disagreements ultimately as to what that means, and maybe we will get to that if this court affirms the specific performance part of the judgment.

[00:33:00] Speaker 02:
But they're instructed essentially to say, you will assume that you will continue to use this property as a low-income housing tax credit project.

[00:33:12] Speaker 02:
And what that means is we've got rents that are 15 to 20% below market.

[00:33:17] Speaker 02:
It instructs them to go back and look how to determine what the rent is.

[00:33:21] Speaker 02:
And so if we're exercising an option where we have essentially 37 more years of this partnership, and you're to instruct the appraiser that you're gonna continue to use this,

[00:33:38] Speaker 02:
at least the impression of the consultants engaged by farmhouse.

[00:33:44] Speaker 02:
And frankly, Mr. Dabney said he never even thought about it.

[00:33:49] Speaker 02:
He's not an appraiser, he's not a lawyer.

[00:33:51] Speaker 02:
He didn't spend a lot of time looking at this option.

[00:33:53] Speaker 02:
He just knew it was there and thought it was valuable.

[00:33:55] Speaker 02:
But the approach that was taken is that you discount the rents to be received and the economic benefits over the next 37 years to present value,

[00:34:07] Speaker 02:
and then you figure out what the liquidation result would be in 37 years as far as the waterfall provisions, and you discount that to present value.

[00:34:19] Speaker 02:
The problem from the limited partner's economic perspective is when you discount it to present value, it's not gonna be as lucrative as if you force

[00:34:31] Speaker 02:
liquidate a share of the real estate.

[00:34:33] Speaker 01:
No, I get that.

[00:34:34] Speaker 01:
You probably understand it better than me.

[00:34:36] Speaker 01:
The question I'm trying to get to here is that the argument I've heard from multi-housing, and I can't remember the acronym, so I'll just say multi-housing, and you know who I'm talking about, is that in that context, who the person on the other side of the table matters.

[00:34:57] Speaker 01:
And I think as a general proposition,

[00:35:00] Speaker 01:
At least those of us who have been law partners understand that.

[00:35:06] Speaker 01:
And if you've got a valuation process that, I mean, the district court ultimately said we don't have, it's not simply a mechanical application of a clearly defined valuation.

[00:35:21] Speaker 01:
There's some work ahead that's going to have to be done.

[00:35:25] Speaker 01:
Now, why is it that multi-housings argument that to engage in that effort, they ought to have control over who the other person is?

[00:35:36] Speaker 01:
Why isn't that enough to make this, I don't avoid the word, I almost said material, so strike that, to make this the exercise of a condition precedent for which default is important?

[00:35:52] Speaker 01:
And I'm leaving aside the issues whether it's been default, and we've talked about that before.

[00:35:57] Speaker 01:
But if we accept for a proposition, the district court has concluded as a matter of law, there's been a default and injected materiality into it.

[00:36:08] Speaker 01:
I'm posing the question without the word materiality, why shouldn't that make a difference?

[00:36:13] Speaker 02:
Well, it's a long question, Your Honor, and to the extent I understand it, please clarify me if I'm wrong.

[00:36:17] Speaker 01:
I guarantee that you can understand it based on what I just said.

[00:36:19] Speaker 02:
Well, first of all, the choice of the general partner is Farhouse.

[00:36:25] Speaker 02:
always has been, always will be.

[00:36:28] Speaker 02:
Farmhouse is still the general partner.

[00:36:29] Speaker 02:
I recognize what the court has said.

[00:36:31] Speaker 02:
Farmhouse has the right to engage any consultants, any lawyers they want, smart lawyers, dumb lawyers, crazy lawyers.

[00:36:39] Speaker 02:
We've dealt with them all the time in our practice over the years.

[00:36:43] Speaker 02:
And just because you don't like the lawyer on the other side or they're being difficult doesn't make it a breach, doesn't make it a failure of a condition preceding to the contract.

[00:36:54] Speaker 02:
And while Mr. Dabney may not have analyzed this provision and used it before, because it was only in the Baxter one, it's not that it hasn't happened.

[00:37:10] Speaker 02:
MHTCP, the limited partner, has experience with other appraisers who have taken this very same approach.

[00:37:16] Speaker 02:
They don't like it, as I understand it, because they would much rather push towards liquidation of the project and get their equity back.

[00:37:25] Speaker 02:
But the contract provides, this is the process we use.

[00:37:30] Speaker 02:
If we can't, we're supposed to agree on an appraiser, we get it.

[00:37:34] Speaker 02:
We made a proposal as to who the appraiser should be and what the value is.

[00:37:38] Speaker 02:
You don't like it.

[00:37:39] Speaker 02:
Well then propose an appraiser.

[00:37:41] Speaker 01:
Let's work on that part of the process.

[00:37:50] Speaker 01:
was crafted by the affiliate of multi-housing.

[00:37:54] Speaker 01:
Is that true for all of Article 8?

[00:37:57] Speaker 01:
We know where this provision came from?

[00:37:59] Speaker 02:
That's what the court found.

[00:38:00] Speaker 02:
And it's consistent across a number of different limited partner agreements.

[00:38:05] Speaker 02:
It's multi-housing.

[00:38:07] Speaker 02:
Whoever the original limited partner was who substituted in in September of 2002, I believe is the general partner of what is now the limited partner now.

[00:38:17] Speaker 02:
I had to go back and look at the signature blocks.

[00:38:19] Speaker 02:
It's actually pretty clear what's going on here, that there's still an affiliate.

[00:38:23] Speaker 02:
And I believe Mr. Sussman, who was the entity representative at trial, testified he works for one of those entities.

[00:38:31] Speaker 02:
So there's multiple layers here, but this particular provision was drafted by the limited partner.

[00:38:39] Speaker 02:
It didn't change from the very beginning.

[00:38:40] Speaker 02:
It was proposed.

[00:38:42] Speaker 02:
The testimony's pretty clear on that.

[00:38:44] Speaker 00:
So from your perspective,

[00:38:46] Speaker 00:
You've got a very sophisticated party.

[00:38:49] Speaker 00:
They didn't foresee what happened in this particular case.

[00:38:55] Speaker 00:
Had they done so, they would have had particular rights, but they got the full benefit of their bargain in terms of all the tax benefits, et cetera, et cetera, et cetera.

[00:39:03] Speaker 00:
There was no right to have Mr. Dabney personally involved.

[00:39:06] Speaker 00:
You have an entity that could have any other general partner, but he was the general partner of the general partner.

[00:39:14] Speaker 00:
he was not directly involved and if you don't have him, you don't have him.

[00:39:18] Speaker 00:
Is that basically your position?

[00:39:19] Speaker 02:
Essentially, I don't know if they didn't foresee this result or they changed their mind.

[00:39:23] Speaker 02:
It doesn't really matter.

[00:39:25] Speaker 00:
When you put together what was said a minute ago,

[00:39:30] Speaker 00:
He was 55 when it was drafted.

[00:39:31] Speaker 00:
The documents will add to 50 years.

[00:39:33] Speaker 00:
He clearly would have died at some point.

[00:39:35] Speaker 00:
Somebody should have thought of that if that was important.

[00:39:38] Speaker 02:
Well, that's right.

[00:39:39] Speaker 02:
And I think Mr. Dabney did think about it because that's why he set up an entity to be the general partner of the general partner because it was important to him as the developer slash general partner to make sure that these tax credits were awarded and they could be properly used.

[00:39:56] Speaker 02:
And that's why it's so important to point out

[00:40:00] Speaker 02:
that the district court found, and we demonstrated through the evidence, that every benefit that the limited partner was entitled to under this contract has been achieved.

[00:40:09] Speaker 02:
The contract was designed to provide their economic benefit, and clearly that happened.

[00:40:16] Speaker 02:
So when we talk about materiality, these LITECH projects, and this is the first case I've ever had, and hopefully the last one,

[00:40:26] Speaker 02:
It's a very unique type of circumstance, but the limited partnership is designed simply to attract capital and to have an exit strategy.

[00:40:39] Speaker 02:
And the exit strategy happens after year 15 because they get all their economic benefits.

[00:40:45] Speaker 02:
And when we look back, and I'm happy to answer more questions, but at this point, I might as well just go.

[00:40:52] Speaker 00:
May I ask whether either of my colleagues have a question?

[00:40:56] Speaker 02:
Yeah, you know, if we look at the public policies that are involved here.

[00:41:01] Speaker 02:
I mean, you got the congressional public policy in for the light tech projects to attract capital for the 15 year compliance period and then essentially

[00:41:12] Speaker 02:
the limited partner or the equity partner exits.

[00:41:15] Speaker 02:
And then there's an opportunity to redevelop and get tax credits again.

[00:41:18] Speaker 02:
The whole point is to provide low income housing.

[00:41:21] Speaker 02:
This has been very successful.

[00:41:23] Speaker 02:
So for the congressional public policy, that has been achieved here and there's been substantial compliance by the general partner.

[00:41:31] Speaker 02:
But the Montana public policy is really important too.

[00:41:34] Speaker 02:
We want certainty in contracts, we want

[00:41:38] Speaker 02:
The entity veils and the entities to be respected.

[00:41:42] Speaker 02:
And when people get divorced, there has to be a way, if all of their wealth is in these light tech projects, to deal with the opportunity that may come up later.

[00:41:54] Speaker 02:
And so if you put all those together, all farmhouse is trying to do is enforce a contract.

[00:42:01] Speaker 00:
Well, thank you.

[00:42:02] Speaker 00:
Thank you, Your Honor.

[00:42:03] Speaker 00:
Now, Mr. Quigley, you've used all your time, but let me ask my colleagues, do either of you have additional questions that you want to pose to Mr. Quigley?

[00:42:13] Speaker 00:
I think not.

[00:42:15] Speaker 00:
I know you are, and we're grateful for it.

[00:42:18] Speaker 00:
The case just argued is submitted.

[00:42:20] Speaker 00:
I know we could talk about this forever, but thank you for your arguments and for your briefs.

[00:42:25] Speaker 00:
Thank you very much.