No. 87-65
IN THE SUPREME COURT OF THE STATE OF MONTANA
1987
LOWELL SPRINGER, d/b/a SPRINGER
GROUP ARCHITECTS and LAND PLANNERS,
Plaintiffs and Respondents,
-vs-
HARRY M. OPSAHL, RAY L. INGALLS,
WALTER W. DEINES, ALAN M. HART,
and CARROLL M. HART,
Defendants and Appellants.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin,
The Honorable Joseph Gary, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Sullivan, Baldassin & Mitchell; Zane K Sullivan argued,
Missoula, Montana
-
For Respondent :
J. David Penwell argued, Bozeman, Montana
Submitted: September 14, 1987
Decided; October 29, 1987
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Clerk
Mr. Justice John Conway Harrison delivered the Opinion of the
Court.
Plaintiff-respondent, Lowell Springer, filed suit
against the five named defendants to recover money alleged
due under an oral contract. Plaintiff was never able to
serve a summons on defendant Ray Ingalls. A bench trial was
held before the Honorable Joseph B. Gary in Gallatin County
and he concluded that the remaining four named defendants
were indebted to plaintiff Springer in the amount of
$17,392.70 together with interest thereon at the rate of 10%
per annum from December 1979. We affirm, but remand for the
correction of the percentage rate on the award of prejudgment
interest.
The plaintiff architect, Lowell Springer, entered an
oral contract to design certain restaurants for an entity
consisting of the five named defendants. Springer was paid
only $1,000 for his services and he filed suit to recover the
remainder. The major issue of this case involves the nature
of the entity consisting of the five defendants. Springer
contends he contracted with a partnership, thus making the
individual defendants liable. The defendants-appellants
contend that Springer contracted with a corporation, thus
making the corporation liable on the contract but not each
individual defendant.
On June 20, 1978, the five named defendants entered a
partnership agreement. The partnership was named "Crosswinds
Enterprises." Article 1.4 of the agreement stated the
business of the partnership was to own and operate "one or
more restaurants and any other business related thereto, and
such other husiness as the partners shall determine." The
agreement gave defendant Harry Opsahl the general authority
to operate and manage the initial restaurant venture.
Additionally, Article 4.1 stated the partnership agreement
would govern the rights, duties, and obligations of Opsahl
until an employment contract was entered between Opsahl and
the partnership. In July of 1978 the partnership Crosswinds
Enterprises acquired property in Dillon, Montana, for the
purpose of developing a restaurant.
On March 1, 1979, the partners signed an addendum
altering certain portions of the original partnership
agreement. The name of the partnership was changed from
"Crosswinds Enterprises" to "Carousel Properties." The
addendum altered the manner in which the agreement governed
Opsahl's duties as operator-manager by providing that such
duties would be governed solely by a separate contract of
employment and that the provisions of the partnership
agreement related only to his status as a partner. An
employment contract between Opsahl and the partnership
Carousel Properties was never entered. The addendum also
provided that unless written consent was obtained from the
partnership, all partners were prohibited from: (1) borrowing
money in the name of the partnership or lending money
belonging to the partnership; and (2) making any purchase in
the partnership name or for which the partnership could be
liable.
On March 30, 1979, the partnership registered and
certified the trade name Carousel Properties with the
Secretary of State. However, the registration document
itself does not appear to indicate that the name "Carousel
Properties" was specifically intended to replace the name
"Crosswinds Enterprises" for that particular partnership. On
that same date, the five named defendants formed a new
corporation and incorporated under the name "Crosswinds
Enterprises." The corporate name is somewhat confusing since
it is the former name of the partnership Carousel Properties.
According to appellants, the partnership Carousel Properties
made an assignment of all right, title, and interest in the
name "Crosswinds Enterprises'' to the newly formed
corporation, Crosswinds Enterprises. The assignment was
alleged to occur on the same day of incorporation, but the
specific mechanics are somewhat blurry since defendants did
not demonstrate the assignment with any written documentation
other than the document registering and certifying the trade
name Carousel Properties.
After the incorporation of Crosswinds Enterprises, the
status of the business entities under the control of the five
named defendants consisted of: (I) a partnership, Carousel
Properties, with the five named defendants as partners; and
(2) a corporation, Crosswinds Enterprises, with the five
named defendants as shareholders. Defendant Opsahl entered
an employment contract with the corporation, Crosswinds
Enterprises, on June 1, 1979.
On Z u l y 25, 1979, defendant Ray Ingalls contacted
Springer and asked him to develop certain building designs
for restaurants. A written contract was never entered.
Springer testified that Ingalls indicated he would be paid
according to the number of restaurants and the size of the
restaurants. Two "prototypes" were envisioned: a 3,800
square foot restaurant design and a smaller 3,400 square foot
restaurant design. Springer testified he was to receive
$4,500 for each smaller prototype and $7,500 for each larger
prototype. Springer testified that Ingalls estimated that as
many as 42 restaurants would eventually be built. Springer
testified that Ingalls referred to his other business
associates as his "partners," but did not specifically state
he represented a partnership or a corporation.
Springer indicated his acceptance of the offer and was
sent a retainer check for 51,000 drawn on the account of
"Crosswinds of Dillon." The check gives no specific
indication that the entity is a partnership or a corporation.
The check was signed by defendants Alan Hart and Ray Ingalls.
Plans developed by Springer were used to construct three
Wyoming restaurants and few changes were implemented. In
November 1979, Opsahl discharged Springer and informed him
his services were inadequate. On August 28, 1980, Springer
received a letter from Alan Hart stating his work was
unsatisfactory and no further payment was intended. Springer
has never received further payment.
On July 14, 1981, Springer filed suit against the
corporation, Crosswinds Enterprises, to recover his fees. On
February 18, 1982, Crosswinds Enterprises filed for
bankruptcy. Due to the automatic stay required by 11 U.S.C.
362(a), the lawsuit proceedings came to a halt. On October
19, 1984, Springer filed this lawsuit against the five named
defendants on the theory that he contracted with them as a
partnership.
The cause proceeded to a bench trial and Judge Joseph
B. Gary found in favor of plaintiff Springer. Findings of
fact and conclusions of law with a supporting memorandum were
issued on September 19, 1986. The conclusions of law state
that Springer entered an oral contract with a partnership,
consisting of the five named defendants as partners, in which
Springer was to design and supervise the construction of 42
restaurants. It was also concluded that three restaurants
were constructed utilizing Springer's plans and that
defendants were indebted to Springer in the amount of
$17,392.70 ($16,500 in contract damages plus $1,892.70 in
actual expenses minus $1,000 received as a retainer fee)
together with interest thereon at the rate of 10% per annum
from December 1979. Ingalls was never served with a summons
and therefore judgment was not rendered against him.
Defendants appeal from this judgment.
Five issues are presented for our review on appeal:
the plaintiff recover from the individual
defendants by alleging he contracted with a partnership and
not a corporation?
2. Should plaintiff Springer be estopped from alleging
he contracted with a partnership when he has previously dealt
with that entity as a corporation?
3. Did the trial court commit error by making findings
that were not supported by the evidence?
4. Did the trial court commit error by admitting
inadmissible evidence?
5. Was the rate of prejudgment interest properly
entered?
Before reviewing each individual issue, we must note
the applicable scope and standard of review. The District
Court's findings of fact will not be reversed unless clearly
erroneous. Rule 52 (a), M. R.Civ. P. in dings are not clearly
erroneous if supported by substantial credible evidence.
Additionally, the following statement applies to the standard
of review to be exercised in this case:
In a nonjury trial, the credibility of
witnesses and the weight of their
testimony are matters for the District
Court to determine. The sufficiency of
the evidence must be reviewed from the
perspective most favorable to the
prevailing party. The District Court's
findings and judgment are presumed
correct and will not be overturned unless
the appellant meets the burden of proving
with a preponderance of evidence that
they are wrong. Merely showing the
evidence establishes reasonable grounds
for reaching a different conclusion is
insufficient to reverse the District
Court findings.
Frank L. Pirtz Const. v. Hardin Town Pump (Mont. 1984), 692
I. May the plaintiff recover from the
individual defendants by alleging he
contracted with a partnership and not a
corporation?
Springer contends he contracted with a partnership
entity and that the individual defendants are therefore
liable. The defendants contend that Springer contracted with
a corporation, thus making the corporation liable on the
contract and not each individual defendant. The District
Court concluded Springer contracted with a partnership by
stating:
That in the month of July, 1979, the
Plaintiff and the partnership consisting
of Harry M. Opsahl, Ray N. Ingalls,
Walter W. Deines, Alan M. Hart and
Carroll M. Hart, entered into an oral
agreement whereby the services of the
Plaintiff architect were to be obtained
for the purpose of designing and
supervising the construction of forty-two
(42) restaurants.
Defendants attack this issue in several different ways.
First, defendants contend the corporation, Crosswinds
Enterprises, should not be held to consist of an actual
partnership. The contention is that no actual partnership
named Crosswinds Enterprises existed between the defendants
at any time during the relationship between Crosswinds
Enterprises and Springer. Defendants state that by the time
Springer and Ingalls entered the oral agreement the entity
known as Crosswinds Enterprises was incorporated and properly
assumed its name which was formerly held by the partnership
Carousel Properties. They argue that the partnership
Crosswinds Enterprises ceased to exist by that name when the
addendum was entered on March 1, 1979 changing the
partnership name and restricting each partner's authority.
Second, defendants contend that Crosswinds Enterprises should
not be held to consist of a partnership by estoppel because
there is insufficient evidence demonstrating the entity was
held out as a partnership and Springer did not rely on any
such representations.
Third, defendants contend that the individual
defendants should not be held liable by virtue of their
partnership status in Carousel Properties. Defendants point
out that all of Springer's dealings were with the entity
Crosswinds Enterprises, and that all of Springer's pleadings
and allegations have been against Crosswinds Enterprises.
Also, defendants state Opsahl had no authority to bind the
partnership Carousel Properties. According to the
partnership agreement and the addendum filed on March 1,
1979, he had no actual authority to bind the partnership
without the approval of the other partners. Finally,
defendants allege that if any liability does result, it
should extend to only Opsahl because he did not disclose the
identity of his principal to Springer.
In sum, defendants' tactic is to systematically rebut
each possible theory resulting in the conclusion that
Springer contracted with a partnership. However, we find
that the substance of the transaction is that Springer
entered an oral contract with a partnership. Defendants
contend this conclusion is incorrect since the partnership
Crosswinds Enterprises no longer existed and the partnership
Carousel Properties was unknown to Springer. However, we
refuse to follow this reasoning and place form over
substance.
More specifically, we believe the facts demonstrate a
partnership by estoppel. Partnership by estoppel has two
basic elements requiring: (1) that a person or entity
represent to a third. party that he is dealing with a
partnership, even though no such partnership exists; and
(2) that the third party rely to his detriment. See, Gamble
Robinson Co. v. Carousel Properties (Mont. 1984), 688 P.2d
283, 288, 41 St.Rep. 1757, 1762 (a case involving these same
five defendants in which this Court reversed a summary
judgment which found partnership liability). Partnership by
estoppel is controlled by S 35-10-308, MCA, which states in
part :
(1) When a person by words spoken or
written or by conduct represents himself
or consents to another representing him
to anyone as a partner in an existing
partnership or with one or more persons
not actual partners, he is liable to any
such person to whom such representation
has been made who has on the faith of
such representation, given credit to the
actual or apparent partnership, and if he
has made such representation or consente6.
to its being made in a public manner, he
is liable to such person, whether the
representation has or has not been made
or communicated to such person so giving
credit by or with the knowledge of the
apparent partner making the
representation or consenting to its being
made. When a partnership liability
results, he is liable as though he were
an actual member of the partnership.
When no partnership liability results, he
is liable jointly with the other persons,
if any, so consenting to the contract or
representation as to incur liability,
otherwise separately.
At the time the contract was negotiated and entered,
Ray Ingalls did not specifically state he represented either
a partnership or a corporation. However, Springer testified
that Ingalls did refer to the other individuals involved as
his "partners." This representation could lead a reasonable
person to believe he was dealing with a partnership. After
the contract was entered, Springer received a retainer check
drawn on the account "Crosswinds of Dillon." The check fails
to classify the business entity and it would not have been
unreasonable for Springer to continue to believe he
contracted with a partnership. The defendants do not contend
that there was a corporation organized under that name and
the retainer check failed to notify Springer he was dealing
with a corporation. Regardless of their intentions the
record clearly indicates that they would have benefitted
financially by having the plaintiff perform the contracted
work.
A similar issue was presented to the Supreme Court of
Wisconsin in Phillip Lithographing Co. v. Babich (Wis. 1 9 6 5 ) ,
135 N.W.2d 343. In determining whether certain partners were
individually liable on a contract, the court stated:
The general rule is that partners who
continue to hold themselves out as such
after the formation of a corporation
cannot escape responsibility for
contracts entered into after the change
in business status without adequate
notice that the partnership has been
dissolved. This is especially true when
the corporation operates under the same
name and circumstances as the
partnership.
Id. at 344. Admittedly, the Wisconsin Court was faced with
slightly different facts in that the complaining party had
dealt with the business entity in question both before and
after incorporation. Here, Springer contracted with the
defendants only after the incorporation. However, we believe
the situations are sufficiently analogous for the above
general rule to have a persuasive effect.
Defendant Harry Opsahl testified he believed Springer
worked for the partnership entity. Ray Ingalls referred to
the other individuals involved as his "partners." The
retainer check drawn on the account of "Crosswinds of Dillon"
did not notify Springer he contracted with a partnership, and
a search for this particular corporate name with the
Secretary of State still would not have notified Springer.
Sufficient evidence exists to find that the entity was held
out as a partnership. Additionally, Springer's subsequent
efforts and work demonstrate he relied on this "holding out"
to his detriment. Although the District Court simply found
Springer contracted with a partnership and did not
specifically conclude there was a partnership by estoppel,
the effect of the District Court's conclusion is the same.
We therefore agree with the result of the District Court's
conclusion and will not reverse on this issue.
11. Should plaintiff Springer be
estopped from alleging he contracted with
a partnership when he has previously
dealt with that entity as a corporation?
Defendants assert Springer has previously treated the
entity Crosswinds Enterprises as a corporation and therefore
he should now be estopped from claiming it is a partnership.
On July 14, 1981, Springer attempted to recover his fees b:7
filing a lawsuit against "Crosswinds Enterprises, A Montana
Corporation." Springer obviously addresses Crosswinds
Enterprises as a corporation throughout the complaint.
Defendants contend Springer could not later elect to sue the
individual defendants on the theory they acted as partners.
Defendants also point out that on January 28, 1982, Springer
signed an affidavit in support of a petition for a
prejudgment writ of attachment and referred to Crosswinds
Enterprises as a corporation.
Defendants' argument is based primarily upon Sun River
Stock and Land Co. v. Montana Trust and Savings Bank (1928),
81 Mont. 222, 262 P. 1039. In that case, this Court stated
that one who recognizes an entity as a corporation by dealing
with it as such is prohibited from later holding the members
of the corporation as partners. Sun River Stock and
Land Co., 262 P. at 1045. However, the facts of the present
case are distinguishable. Sun River Stock and Land Co.
involved individuals attempting to assert that a corporation
was actually a partnership, after these same individuals
clearly recognized and treated the entity as a corporation
throughout their entire dealings. As a stockholder and
director, one of the plaintiffs, Charles Power, was
substantially involved in the incorporation and subsequent
operation of the entity as a corporation. In contrast,
Springer did not clearly address Crosswinds Enterprises as a
corporation until he attempted to recover his fees by filing
a complaint in July of 1981. The contract was formed
approximately two years earlier and Springer's services were
terminated in November of 1979. Until the time Springer
filed suit against Crosswinds Enterprises, one could not
characterize Springer as having treated that entity as a
corporation. The sole exception to this was when Springer's
office addressed an inspection report to "Crosswinds
Enterprises, Inc." on September 17, 1979. Despite many
contacts between Springer and Crosswinds Enterprises,
including at least nine bill demands, defendants are only
able to point out this one occasion where the entity is
specifically designated with the abbreviation "Inc."
Springer did not address Crosswinds Enterprises as a
corporate entity until he attempted to recover his fees by
filing suit against the corporation. This subsequent attempt
to recover his fees will not be interpreted so as to estop
Springer from alleging he originally contracted with a
partnership.
There is an additional reason why we find Springer is
not estopped from his claim. Essentially, defendants contend
that under these facts Crosswinds Enterprises is a
corporation by estoppel. The theory of corporation by
estoppel has heavy roots in equity. The basic rationale for
the theory is that it is usually inequitable to allow a party
to deny that an entity is a corporation after he has already
dealt with it as a corporation. See, 8 Fletcher Cyclopedia
Corporations § 3912 (1982). Under the facts presented
however, the opposite is true. It is undisputed that
Springer received only $1,000 in compensation. The District
Court found that despite his termination, Springer's plans
were utilized to build three restaurants. Evidence heard at
trial indicated that a reasonable architect's fee would be
much higher than what Springer demanded. The $1,000 retainer
fee constituted only a small fraction of a reasonable fee.
Equity and fairness dictate that Springer should not he
estopped from contending he contracted with a partnership.
111. Did the trial court commit error by
making findings that were not supported
by the evidence?
Defendants contend the trial court erroneously
determined the timing of the name change of the partnership
from Crosswinds Enterprises to Carousel Properties.
Defendants focus on finding of fact number 22 and contend it
indicates the name change occurred after the contract was
entered with Springer. We agree that the evidence
demonstrates that the name change occurred before the
agreement was entered. However, in light of the previous
portion of this opinion, we find that this constitutes
harmless error.
Defendants also state finding of fact number 22 is
erroneous in that it states defendants Opsahl and Ingalls
represented that the restaurants were to be owned by the
partnership and that the restaurant owners were substantial
investors with capabilities of constructing 42 restaurants.
The record demonstrates that Ingalls indicated the entity
which he represented was comprised of other individuals which
he referred to as his "partners." Further, at the time
Springer was informed that as many as 42 restaurants were
planned, it was impliedly represented that the individuals
involved were "substantial" investors. F?e refuse to find
that these findings are clearly erroneous.
IV. Did the trial court commit error by
admitting inadmissible evidence?
Defendants assert the trial judge heard three items of
evidence that should have been ruled inadmissible. First,
defendant Opsahl was allowed to testify that Springer worked
for the partnership and not the corporation. Error is
alleged because Opsahl also testified he knew little about
the contract with Springer as well as the addendum to the
partnership agreement. Defendants claim Opsahl should not
have been allowed to give his opinion as to the ultimate
issue of the trial when he admitted he knew little about the
contract itself. A lay witness may give testimony in the
form of an opinion if the testimony is "rationally based on
the perception of the witness and helpful to a clear
understanding of his testimony or the determination of a fact
in issue." Rule 701, M.R.Evid. Opsahl was substantially
involved with the affairs of the business and his statements
were rationally based on his own perceptions. Further, his
statements were helpful to the determination of a fact in
issue. "Testimony in the form of an opinion or inference
otherwise admissible is not objectionable because it embraces
an ultimate issue to be decided by the trier of fact." Rule
704, M.R.Evid. Opsahlls testimony that he knew little about
Springer's contract and the addendum to the partnership
agreement goes to the weight of his testimony and not the
admissibility. Therefore, the statements by Opsahl were
admissible
Second, defendants claim a deed to property located in
Dillon, Montana, was improperly admitted into evidence since
title to the property was irrelevant. The deed was for the
property acquired by the former partnership, Crosswinds
Enterprises, to develop their first restaurant. Defendants
contend the trial court erroneously used the deed to conclude
that the partnership owned all of the restaurant facilities
operated as Crosswinds restaurants. Even if it is assumed
that the deed was irrelevant and should not have been
admitted, defendants fail to adequately demonstrate that the
District Court would have arrived at a different decision.
Therefore, the admission of the deed was no more than
harmless error.
Finally, defendants assert that certain character
evidence was improperly admitted. Counsel for Springer
demonstrated that prior to the bankruptcy, the former
Crosswinds restaurant in Dillon was transferred to a
corporation controlled by defendant Alan Hart's mother.
Defendants claim this was irrelevant character evidence which
tended to imply a fraudulent transfer and resulted in
prejudice. However, defendants fail to demonstrate the
conclusions of the court would have been different if the
allegedly inadmissible character evidence had not been
admitted. Defendants state that evidence of the prejudicial
effect can be seen in the District Court memorandum where it
is stated,
There was a considerable number of hours
spent by the respective architects at a
very reasonable fee which was much less
than the accountant [defendant] Mr. Hart
charged at the time.
In view of the evidence presented in the transcript, we agree
with this statement by the District Court. Further, we find
no indication that the statements by Springer's counsel
necessarily tainted the trial judge's decision.
V. Was the rate of prejudgment interest
properly entered?
The District Court awarded interest on the amount of
the judgment at the rate of 10% per annum from December 1979.
Defendants state the legal rate of interest should be
governed by S 31-1-106, MCA (1979), as that law appeared at
the time of the Springer-Crosswinds Enterprise dealings. The
rate of interest provided at that time was 6%. In 1985, the
legislature amended the statute and provided for an interest
rate of 10%. 1985 Mont. Laws 263. Defendants contend that
if any portion of the trial court judgment is affirmed, the
interest on that judgment amount should be only 6% per annum
from November 1979 until judgment was entered.
We find the newly provided interest rate should be
applied as of the date the law became effective. The session
law, 1985 Mont. Laws 263, indicates no effective date.
Section 1-2-201, MCA, indicates an effective date of October
1, 1985 unless the legislation provides otherwise or is an
appropriation of public funds for a public purpose.
Therefore, we hold the applicable interest rate is 6% until
October 1, 1985, and 10% thereafter. See, Byrne v. Terry
(Mont. 1987), P. 2d , 44 St.Rep. 1620, 1624.
We remand to the District Court for the correction of
the percentage rate on the award of prejudgment interest.
For the foregoing reasons, the District Court's decision is
affirmed on all of the remaining issues.
Ws&
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Justices