Bolen v. Hamilton Orchards

Filed 10/9/07 Bolen v. Hamilton Orchards CA3

NOT TO BE PUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Butte)

----

In 1984, John Bolen, James Bartels and Terrence Devine entered into a partnership agreement for the operation of defendant Hamilton Orchards, a California general partnership, for the purpose of engaging in farming and related activities. In December 2001, John Bolen died and his wife, plaintiff Karen Bolen, sought a buyout of his interest in the partnership.

Devine and Bartels initially believed a buyout of John Bolens interest was required by the partnership agreement and proceeded accordingly. However, in October 2002, Devine was reminded of a provision in the partnership agreement that appeared to eliminate the interest of any partner upon his death. Devine thereafter refused to pay plaintiff anything on John Bolens interest.

Plaintiff initiated this action against Hamilton Orchards, Devine, and defendant Patricia Bartels, the wife of James Bartels, who died several months after John Bolen. Plaintiff sought a buyout of John Bolens interest and a declaration of her rights under the partnership agreement.

In a bifurcated proceeding, the trial court concluded that, under the terms of the partnership agreement, John Bolens interest in Hamilton Orchards ended with his death, thereby leaving plaintiff with no right or interest in the partnership. The court entered judgment for defendants.

Plaintiff appeals, contending, among other things, the trial court erred in its interpretation of the partnership agreement and, in particular, in refusing to consider extrinsic evidence of the parties conduct on the issue of contract interpretation.

We conclude the extrinsic evidence the trial court refused to consider did not render the partnership agreement susceptible to a meaning that would have preserved John Bolens interest in the partnership after his death. We therefore affirm the judgment.

Facts and Proceedings

In January 1980, John Bolen, James Bartels, Terrence Devine and John Davis formed Hamilton Orchards, a California general partnership, to conduct farming and related activities. The partnership agreement (the 1980 Partnership Agreement) was signed both by the general partners and by their spouses, including Karen Bolen and Patricia Bartels. John Bolen, James Bartels and Terrence Devine were each given a 30 percent interest in the business and made managing partners, while John Davis was given a 10 percent interest.

Paragraphs XIV and XVI of the 1980 Partnership Agreement provided that, in the event any partner voluntarily withdraws from the partnership, is adjudged incompetent or insane, becomes insolvent, makes an assignment for the benefit of creditors, is declared a bankrupt, has his assets administered in a creditors proceeding, becomes disabled, or dies, the remaining partners shall pay the withdrawing, retiring, expelled or estate of deceased partner a sum equal to the value of such partners interest in the partnership.

In December 1984, Davis withdrew as a member of the partnership and the original partnership was dissolved. A new partnership was formed under the same name, and a new partnership agreement (the 1984 Partnership Agreement) was signed by John Bolen, James Bartels and Terrence Devine. John Bolen, James Bartels and Terrence Devine were each assigned a one-third interest in the partnership and Devine was designated as the managing partner.

The 1984 Partnership Agreement provides that any partner may withdraw from the partnership at any time by giving at least 60 days written notice. Upon receipt of such notice, the remaining partners have the option of either purchasing the withdrawing partners interest or permitting the withdrawing partner to sell his interest to another. The agreement further provides that the partnership may be dissolved at any time by majority vote of the partners or by operation of law. Regarding the death of a partner, paragraph 17 of the 1984 Partnership Agreement reads: The death of a partner shall immediately terminate all right, title and interest that partner has in the partnership, its business, profits or losses. (Hereafter, this provision shall be referred to as paragraph 17.)

Over the ensuing years, John Bolen dedicated his full time efforts to the operation of Hamilton Orchards. Each of the partners shared in the profits of the business through monthly draws.

In 1997, John Bolen informed plaintiff the partners had agreed that if anything happened to any of them, draws would be continued to the surviving spouse until a buyout of the partners interest can be arranged.

John Bolen died of a heart attack on December 2, 2001. He was survived by his wife, plaintiff Karen Bolen, to whom he had been married throughout his tenure with Hamilton Orchards.

Immediately following John Bolens death, Devine informed plaintiff that Hamilton Orchards would pay her monthly draws from the business until such time as a buyout of John Bolens interest could be worked out. James Bartels was present when this statement was made. Devine thereafter wrote checks to plaintiff for monthly draws and health insurance from January 29, 2002 through April 30, 2002.

Devine and James Bartels attempted to come up with a valuation for the partnership in order to determine John Bolens share.

In January or February of 2002, James Bartels developed colon cancer and sought the assistance of Richard Hardin, the attorney for Hamilton Orchards, in preparing a will. Hardin prepared a will for James Bartels that disposed of his one-third interest in Hamilton Orchards. James Bartels died on March 15, 2002.

Also in January or February 2002, Devine met with Hardin and Daryl Kaiser, the accountant for Hamilton Orchards. During this meeting, Devine and Hardin discussed the 1984 Partnership Agreement and what happens when a partner dies. When they came to paragraph 17, Hardin said, It says what it says.

Devine provided information to Hardin to be sent to Nels Christensen, plaintiffs attorney, on the partnerships assets. On April 1, 2002, Hardin sent Christensen a letter with an enclosed Valuation Recap dated November 30, 2001 for Hamilton Orchards along with supporting documentation. This letter was sent to Christensen to give him some idea of what John Bolens interest was worth. The valuation recap listed a net value for John Bolens one-third interest of $261,957.91.

On September 9, 2002, Ernest Mieske, an attorney hired by Devine to negotiate a buyout of John Bolens interest, sent a letter to Christensen indicating he represented Devine and expected to represent Patricia Bartels as well. Mieske explained that he understood Devine and Patricia Bartels have agreed to continue in partnership as Hamilton Orchards. Mieske further explained: We are interested in negotiating a buy-out of John Bolens partnership interest. I understand you and your client wish to investigate further the value of John Bolens partnership interest before you are in a position to respond to any offer or make any demand for payment . . . .

Up until October 2002, Devine believed Hamilton Orchards was obligated by the 1984 Partnership Agreement to buy out John Bolens interest. However, in October, Devines new attorney, Raymond Sandelman, advised Devine that paragraph 17 meant John Bolens interest was eliminated upon his death and plaintiff was not entitled to any buyout. According to Devine, he had forgotten about paragraph 17 until that moment but then remembered that in 1984, John Bolen told him Christensen had revised the 1980 Partnership Agreement and Bolen had taken the marked up document to the partnerships attorney, William Ward, who prepared the 1984 Partnership Agreement from it. Ward had called Devine at the time and told him that paragraph 17 meant if a partner dies he forfeits all interest in the partnership. Devine told Ward he was not concerned, because he did not expect the partnership to last much longer anyway.

Devine refused to pay plaintiff anything for John Bolens interest in Hamilton Orchards.

Plaintiff initiated this action against Hamilton Orchards, Terrence Devine and Patricia Bartels. The complaint contained two causes of action, one seeking payment of the buyout price and the other alleging breach of fiduciary duty for Devines refusal to open up the partnerships accounts to her. Hamilton Orchards and Devine demurred and the trial court sustained the demurrers with leave to amend.

Plaintiff filed a first amended complaint containing the same two causes of action plus a new one for declaratory relief. Hamilton Orchards and Devine again demurred. The trial court sustained the demurrers only as to the third causes of action for declaratory relief, again with leave to amend. Plaintiff filed no further amendments, and the court granted Devine and Hamilton Orchards motion to dismiss the third cause of action.

Defendants filed answers, and Hamilton Orchards and Devine filed a cross-complaint alleging, among other things, that John Bolen owed the partnership money at the time of his death.

The trial court bifurcated the issue of whether plaintiff is entitled to a buyout of John Bolens interest in Hamilton Orchards and ordered that issue tried first.

Following trial of the bifurcated issue, the court issued a statement of decision finding that paragraph 17 is not reasonably susceptible to the interpretation sought by plaintiff, i.e., that the death of a partner does not eliminate all of that partners interest in the partnership. The court concluded that while evidence of conduct of the parties may be relevant to prove the meaning of a contract provision, there was no such conduct here. According to the court, [d]iscussions regarding a buyout unaccompanied by an agreement or actual action are not legally sufficient to constitute conduct, and continued payment of draws is unrelated to any buyout rights.

The court entered judgment for all defendants and dismissed the cross-complaint as moot.

Discussion

I

Introduction

Plaintiff has filed 128 pages of briefing discussing over a dozen issues and many more sub-issues regarding the trial courts rulings. However, the primary thrust of that briefing is a challenge to the courts conclusion that paragraph 17 eliminated all of John Bolens interest in Hamilton Orchards upon his death. Hence, the primary issue presented in this case is one of contract interpretation.

The interpretation of a written agreement is subject to well-settled principles. A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful. (Civ. Code,  1636.) The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity. (Id.,  1638.) The circumstances under which a contract was made may also be considered. (Id.,  1647.)

A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties. (Civ. Code,  1643.) The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other. (Id.,  1641.)

Parole evidence may be considered in construing a written agreement only when the language of the agreement is ambiguous. (Winet v.Price (1992) 4 Cal.App.4th 1159, 1165.) The test of whether parol [sic] evidence is admissible to construe an ambiguity is not whether the language appears to the court to be unambiguous, but whether the evidence presented is relevant to prove a meaning to which the language is reasonably susceptible. [Citation.] (Ibid.) This requires a two-step inquiry: first, consideration of the extrinsic evidence to determine if the language of the instrument is reasonably susceptible to the interpretation urged by the proponent; next, if the first question is answered in the affirmative, an interpretation of the instrument in light of the extrinsic evidence. (Ibid.)

The first question--whether the language of the instrument is reasonably susceptible to the interpretation suggested by the extrinsic evidence--is a question of law subject to independent review. (Equitable Life Assurance Society v.Berry (1989) 212 Cal.App.3d 832, 840.) Whether the second inquiry is also a question of law depends on the nature of the extrinsic evidence. Where the evidence is in conflict, requiring credibility assessments, any reasonable construction by the trial court will be upheld if supported by substantial evidence. (Winet v.Price, supra, 4 Cal.App.4th at pp. 1165-1166.)

As noted above, plaintiff has filed briefing that raises a large number of issues. In some instances, arguments are preceded by appropriate headings and supported by citations to authority. In other instances, plaintiff has merely thrown in an argument among other matters. Arguments are often repeated and, on occasion, appear to have little relevance to the section in which they are found. In the following sections, we have endeavored to synthesize the arguments into some coherent format and to address each of the arguments that are properly raised.

II

The Trial Courts Ruling

As explained above, the critical provision of the 1984 Partnership Agreement is paragraph 17, which reads: The death of a partner shall immediately terminate all right, title and interest that partner has in the partnership, its business, profits or losses.

In its statement of decision, the trial court summarized the competing interpretations of this provision urged by the parties: Devine contends that Paragraph 17 . . . means that, upon the death of John Bolen, his entire interest in the partnership, including 1) the right to participate as a partner in the management of the partnership business, 2) the right to thereafter participate in the profits and/or losses of the partnership and 3) his entire interest in all of the assets of the Partnership, terminated and passed to the surviving partners . . . . [Plaintiff] contends that Paragraph 17 means that, upon the death of John Bolen, he ceased to be a partner in the partnership, with the result that his successor in interest could not thereafter exercise the rights of a partner with respect to the operation and management of the partnership, and with the further result that his successor in interest would not thereafter share in the profit and/or losses of the partnership, but his interest in the assets of the partnership did not terminate or pass to the surviving partners.

The court ultimately concluded, based on a preponderance of the evidence, that Paragraph 17 is not reasonably susceptible to the interpretation urged by [plaintiff]. According to the court, such an interpretation would flatly contradict the clear and unambiguous language that the death of a partner terminates all rights that the partner has in the partnership.

On the critical issue of the intent of the parties, the court cited the following testimony of Terrence Devine: Mr. Devine testified that Paragraph 17 was inserted into the amended partnership agreement for the express purpose of providing that a surviving spouse would not receive any partnership assets. He also testified that attorney William Ward told him that there was a paragraph in the draft that provided if a partner died, he would lose all of his interest. Mr. Devine further testified that he talked it over with James Bartels and they agreed with the provision. He thought that the partnership property would be sold in the near future before anyone died. Mr. Devine testified that he had forgotten about this conversation in 1984 until his current counsel was retained in October of 2002.

The court was further persuaded by the fact that the 1980 Partnership Agreement contained express provisions for the buyout of a deceased partners interest, but no such provisions were included in the 1984 Partnership Agreement.

Standing alone and without considering extrinsic evidence, the foregoing is substantial evidence supporting the trial courts determination as to the meaning of paragraph 17. The language of the provision appears to encompass all of a deceased partners interest in the partnership, and the testimony of Terrence Devine supports a conclusion that the parties understood at the time of contracting that paragraph 17 would have this effect.

III

Extrinsic Evidence of Intent

Plaintiff contends the trial courts ultimate determination of the meaning of paragraph 17 is nevertheless flawed by its failure to consider extrinsic evidence of the parties conduct that suggested a different meaning. According to plaintiff, for nearly a year, the parties acted as if plaintiff retained a right to a buyout of John Bolens partnership interest after his death.

As noted above, in matters of contract interpretation, the intent of the parties at the time of contracting controls. (Civ. Code,  1636.) In most cases, the language of a written agreement reveals such intent. (Id.,  1638.) However, the conduct of the parties after entering into the contract may reveal an intent at odds with the normal construction of the words used. (Mitau v. Roddan (1906) 149 Cal. 1, 14.) [W]hen a contract is ambiguous, a construction given to it by the acts and conduct of the parties with knowledge of its terms, before any controversy has arisen as to its meaning, is entitled to great weight, and will, when reasonable, be adopted and enforced by the court. [Citation.] The reason underlying the rule is that it is the duty of the court to give effect to the intention of the parties where it is not wholly at variance with the correct legal interpretation of the terms of the contract, and a practical construction placed by the parties upon the instrument is the best evidence of their intention. (Universal Sales Corp. v. Cal. Press Mfg. Co. (1942) 20 Cal.2d 751, 761-762.) The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. (Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37.)

This rule of practical construction is predicated on the common sense concept that actions speak louder than words. Words are frequently but an imperfect medium to convey thought and intention. When the parties to a contract perform under it and demonstrate by their conduct that they knew what they were talking about the courts should enforce that intent. [] . . . [E]ven if it be assumed that the words standing alone might mean one thing to the members of this court, where the parties have demonstrated by their actions and performance that to them the contract meant something quite different, the meaning and intent of the parties should be enforced. In such a situation the parties by their actions have created the ambiguity required to bring the rule into operation. If this were not the rule the courts would be enforcing one contract when both parties have demonstrated that they meant and intended the contract to be quite different. (Crestview Cemetery Assn. v. Dieden (1960) 54 Cal.2d 744, 754.)

Of course, the conduct of the parties cannot override otherwise clear contract language. Where contract language appears unambiguous on its face, the conduct must be such as to lend the contract language a meaning to which it is reasonably susceptible. For example, contract language that provides for the payment of monthly draws to the partners in the amount of $1,000 could not be contradicted by evidence that draws in the amount of $2,000 had instead been paid over a period of time.

Thus, in order to determine if evidence of conduct by the parties is relevant and admissible on the interpretation of paragraph 17, the first step in the analysis is to determine if the language of paragraph 17 is reasonably susceptible to the meaning suggested by that conduct. However, with respect to most of the evidence presented by plaintiff, the trial court never reached this stage of the analysis. In its statement of decision, the court identified the following extrinsic evidence:

(a) On December 3, 2001, the day after John Bolens death, counsel for [plaintiff] asked the partnerships accountant for copies of the partnership agreements which were sent that day . . . .

(b) On January 14, 2002, a little more than a month after the death of John Bolen, counsel for [plaintiff] stated that he believed that the partnership could either buyout [sic] John Bolens interest in the partnership or alternatively the partnership could be terminated and dissolved . . . .

(c) On April 1, 2002, Richard Hardin, counsel for Devine, wrote Nels Christensen, counsel for [plaintiff], a letter exchanging information concerning the valuation of Hamilton Orchards . . . .

(d) Documents were prepared in the administration of the estate of James Bartels, stating that he had a partnership interest at his death . . . . Mr. Hardin, the attorney whose office prepared the documents, testified that he never thought about whether the estate of James Bartels had a 33.3% interest in Hamilton Orchards . . . .

(e) On September 9, 2002, Ernest Mieske, the new counsel for Devine, wrote Nels Christensen a letter . . . . Mr. Mieske testified that the letter was part of settlement negations [sic]. . . .

(f) On September 23, 2002 and October 16, 2002, James Holt, an accountant representing [plaintiff], wrote letters to accountant Daryl Kaiser seeking financial information concerning the partnership . . . .

The trial court concluded none of this evidence amounted to conduct of the parties relevant to the issue of contract interpretation. The court explained: This evidence shows that there were discussions and investigation regarding the value of the business, but there was no conduct amounting to a buyout or an offer for a buyout. Mere discussions that do not result in an agreement or actual action are not legally sufficient to constitute conduct relevant to a [sic] making contract language susceptible to a particular interpretation.

The trial court provided no citation to authority for its interpretation of the term conduct. In Heston v. Farmers Ins. Group (1984) 160 Cal.App.3d 402, an insurance agency agreement provided that, upon termination, the company would pay the agent the contract value for the agency, where contract value was specifically defined. (Id. at p. 407.) Following termination of the plaintiffs agency agreement, the company offered the contract value but the plaintiff refused to accept it. (Id. at pp. 407-409.) The plaintiff argued he had the option of accepting or rejecting the contract value, whereas the defendant argued plaintiff had no such option. (Id. at p. 410.) In interpreting the agreement, the trial court admitted into evidence a brief filed by counsel for the defendant with the National Labor Relations Board in which counsel argued at length that agents had the option to refuse a tender of the contract value upon termination. (Id. at pp. 413-414.) The Court of Appeal found no error, concluding the evidence was properly admitted to prove a meaning of the contract to which it was reasonably susceptible. (Id. at pp. 414-415.)

In Southern Cal. Edison Co. v. Superior Court (1995) 37 Cal.App.4th 839 (Southern Cal.), the defendant had long-term contracts to purchase electricity generated by wind-powered turbines owned by the plaintiffs. Each contract covered a number of turbines and was divided into two periods, with the defendant required to pay a substantially higher price during the first 10-year period. A dispute arose between the parties over when the first period began to run. The plaintiffs contended each turbine had a separate first period commencing when that turbine began generating electricity, whereas the defendant contended there was only one first period for all turbines, which commenced when the first wind turbine began producing electricity. (Id. at pp. 843-844.)

The trial court granted summary judgment to the plaintiffs, concluding the contract was not reasonably susceptible to the interpretation urged by the defendant that there was only one first period. (Southern Cal., supra, 37 Cal.App.4th at p. 844.) However, the court refused to consider extrinsic evidence presented by the defendant consisting principally of written statements by one of the plaintiffs and its president to potential investors representing that the higher first period rates would end in 1995, 10 years after the first turbines achieved firm operation. (Id. at p. 850.) The defendant also produced a letter from the company president to the defendant in which he acknowledged the first period would end 10 years after the first turbine was placed into operation and sought an extension. (Id. at pp. 849-850.)

The Court of Appeal concluded the trial court erred in refusing to consider this evidence on the issue of contract interpretation. The court explained that both words and acts of the parties may be conduct relevant to the proper interpretation of contract language. (Southern Cal., supra, 37 Cal.App.4th at p. 851.) The court further concluded the evidence created an issue of fact regarding the proper interpretation of the contract. (Ibid.)

Defendants contend the foregoing cases are distinguishable because here, neither Devine nor his attorneys ever made written representations or admissions that a deceased partners interest in specific partnership property has economic value. They further contend the conduct at issue was not relevant to interpreting paragraph 17 because, rather than acknowledging the existence of a buyout obligation, [t]he parties were exchanging information to see whether or not John Bolen had any interest.

Defendants arguments are belied by the simple fact that Terrence Devine, the sole remaining partner of Hamilton Orchards, admitted he believed until October 2002 that plaintiff had a right to a buyout of John Bolens interest. Therefore, it is not surprising that the parties conduct would reflect that belief. However, this raises the question of whether the parties conduct consistent with a right of buyout was a manifestation of the intent of the contracting parties or, as Terrence Devine testified, a reflection of the parties failure to recall the terms of the 1984 Partnership Agreement.

It would appear then that the trial courts determination that none of the evidence amounted to conduct relevant to a proper interpretation of paragraph 17 was in error. But, as we shall explain, the critical question remains whether the language of the 1984 Partnership Agreement, and in particular paragraph 17, is reasonably susceptible to a meaning consistent with the conduct of the parties during the period between John Bolens death and October 2002, i.e., that plaintiff was entitled to a buyout of John Bolens interest. If not, the trial courts failure to consider the evidence in making its determination of the contracts meaning is of no concern.

IV

Interpretation of Paragraph 17

The trial court concluded paragraph 17 is not susceptible to the interpretation suggested by plaintiff. However, it does not appear the court made this determination as a basis for refusing to consider extrinsic evidence of conduct. Rather, the court first decided most of the extrinsic evidence was not admissible because it did not reflect conduct of the parties. The court then concluded, based on the other evidence presented, that paragraph 17 can only mean a deceased partner loses all rights in the partnership, including rights in specific partnership property. Hence, the court never reached the question of whether the contract language was susceptible to the interpretation suggested by the conduct.

As noted above, in matters of contract interpretation, we consider the contract as a whole (Civ. Code,  1641) and the circumstances under which it was written (id.,  1647). In reaching its conclusion about the meaning of paragraph 17, the trial court was persuaded by the fact the 1980 Partnership Agreement contained express provisions for the buyout of a deceased partners interest but no such provisions were included in the 1984 Partnership Agreement. The court explained:

Paragraph 17 is found in an amended partnership agreement which was drafted and executed a few years after the execution of the original partnership agreement. Paragraph XV of the original partnership agreement provided for valuation based upon book value except for real estate which was to be valued at fair market value. Paragraph XVI of the original partnership agreement provided for payment to the estate of the deceased partner of the amount determined under Paragraph XV of the original partnership agreement. Paragraph XVII of the original partnership agreement provided for arbitration in the event of a dispute as to valuation under Paragraph XV.

Unlike the original partnership agreement, the amended partnership agreement did not provide that upon the death of a partner, there would be a valuation based upon book value and/or fair market value. Unlike the original partnership agreement, the amended partnership agreement did not provide that upon the death of a partner there would be a payment to the estate of the deceased partner. The differences between the two partnership agreements show a clear intent to eliminate provisions for the buyout of a partner who died.

Plaintiff contends the trial court misinterpreted the changes between the 1980 Partnership Agreement and the 1984 Partnership Agreement. She argues the purpose of the changes in the latter were not to eliminate buyout rights but to change the agreement from one in which the partnership would continue to exist following the death of a partner (in which case buyout would be required) to one in which the partnership would dissolve upon the death of a partner (in which case buyout would be unnecessary).

Plaintiff cites paragraph 25 of the 1984 Partnership Agreement, which provides that the partnership shall be dissolved on a vote of partners or by operation of law. (Italics added.) Plaintiff further cites paragraph 24 of the 1984 Partnership Agreement, which permits the purchase of all of the partnership on termination or dissolution of the partnership either by operation of law or by a decision of the necessary majority of partners. (Italics added.) In the event there is no purchase of the entire partnership upon termination or dissolution, [t]he net assets of the partnership shall be distributed to the partners on a pro rata basis.

Plaintiff argues that, under partnership law in effect in 1984, the death of a partner resulted in dissolution of the partnership by operation of law unless the partnership agreement provided otherwise. (See Corp. Code, former  15031, subd. (4); Stats. 1963, ch. 718,  3, p. 1726.) Because the 1984 Partnership Agreement did not provide otherwise, plaintiff argues, the parties intended the default provisions to apply, i.e., the death of a partner would result in dissolution and pro rata distribution of the partnerships assets. Plaintiff further argues that the change from an agreement providing for continuation of the partnership after death of a partner to one providing for dissolution had tax advantages to the partners.

The primary defect in plaintiffs arguments is that they completely ignored paragraph 17. If the purpose of the changes in the 1984 Partnership Agreement was to take advantage of default provisions in the law that required dissolution upon the death of a partner, why include paragraph 17 in the agreement? Paragraph 17 specifies what happens to the deceased partners interest in the partnership. However, even if we accept plaintiffs interpretation that this provision does not encompass the partners rights in specific partnership property, what purpose does paragraph 17 serve? If the death of a partner was intended to result in dissolution of the partnership by operation of law, then the deceased partners interest in the partnership would end, just as the interests of all the other partners would end. Unless any of the remaining partners chose to purchase the entire partnership, the partnership would cease to exist and each partner would be entitled to a pro rata distribution of the partnerships assets. In other words, the result plaintiff seeks would have been accomplished without paragraph 17.

Any contract must be construed as a whole, with the various individual provisions interpreted together so as to give effect to all, if reasonably possible or practicable. [Citations.] Courts must interpret contractual language in a manner which gives force and effect to every provision, and not in a way which renders some clauses nugatory, inoperative or meaningless. (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 473.)

Plaintiffs arguments also ignore Corporations Code former section 15025, subdivision (2)(d), which provided in 1984: On the death of a partner, the partners right in specific partnership property vests in the surviving partner or partners . . . . (Stats. 1982, ch. 497,  84, p. 2186.) If, as plaintiff argues, paragraph 17 was not intended to encompass a deceased partners rights in specific partnership property, and the 1984 Partnership Agreement was written so as to take advantage of the default provisions of the law at the time, then the death of a partner would result in his rights in specific partnership property vesting in the remaining partners, the very interpretation plaintiff seeks to avoid.

Plaintiff next argues that paragraph 17 refers to the termination of a deceased partners right, title and interest in the partnership, but, in 1984, a partners right, title and interest in the partnership did not include a right to specific partnership property. Plaintiff cites Corporations Code former section 15024, which read: The property rights of a partner are (1) his rights in specific partnership property, (2) his interest in the partnership, and (3) his right to participate in the management. (Stats. 1949, ch. 383,  1, p. 680.) Thus, plaintiff argues, the law at the time considered an interest in specific partnership property as being distinct from an interest in the partnership and, because paragraph 17 referred only to the partners interest in the partnership, the parties did not intend it to encompass the partners interest in specific partnership property.

We disagree. Corporations Code former section 15025 defined the partners rights to specific partnership property. It read:

(1) A partner is coowner with the other partners of specific partnership property holding as a tenant in partnership.

(2) The incidents of this tenancy are such that:

(a) A partner, subject to the provisions of this chapter and to any agreement between the partners, has an equal right with the other partners to possess specific partnership property for partnership purposes; but a partner has no right to possess such property for any other purpose without the consent of the other partners.

(b) A partners right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property.

(c) A partners right in specific partnership property is not subject to enforcement of a money judgment, except on a claim against the partnership. When partnership property is levied upon for a partnership debt, the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the exemption laws.

(d) On the death of a partner, the partners right in specific partnership property vests in the surviving partner or partners, except where the deceased was the last surviving partner, when the deceased partners right in such property vests in his or her legal representative. Such surviving partner or partners, or the legal representative of the last surviving partner, has no right to possess the partnership property for any but a partnership purpose.

(e) A partners right in specific partnership property is not subject to dower, curtesy, or allowances to widows, heirs, or next of kin, and is not community property. (Stats. 1982, ch. 497,  84, p. 2186.)

The foregoing provision recognized partnership property as a distinct form of property. It was a right of possession only, and then only for partnership purposes. (Kenworthy v. Hadden (1978) 87 Cal.App.3d 696, 701.) It was not an assignable right, could not be subjected to enforcement of a money judgment against the partner, was not community property, and passed to the surviving partners on death rather than to the partners heir. Most of the incidents of ownership were held by the partnership itself as a separate entity. (Munkdale v. Giannini (1995) 35 Cal.App.4th 1104, 1111; Bartlome v. State Farm Fire & Casualty Co. (1989) 208 Cal.App.3d 1235, 1241-1242.)

Under partnership law existing in 1984, the only present interest a partner had in the partnership was his share of the profits and surplus. (Corp. Code, former  15026; Stats. 1949, ch. 383,  1, p. 681.) As explained in Comstock v. Fiorella (1968) 260 Cal.App.2d 262, 267: Surplus has been defined in Blacks Law Dictionary (4th ed.) as meaning: That which remains of a fund appropriated for a particular purpose; the remainder of a thing; the overplus; the residue. [] Piedmont Publishing Co. v. Rogers (1961) 193 Cal.App.2d 171, 190, adopted the following definition of surplus: Ballentine defines surplus as: The term surplus means the excess of assets at book value (all proper deductions having been made), over liabilities plus stated capital. (Ballentine, 1949 ed.,  136, p. 184.)

Thus, at the time the parties entered into the 1984 Partnership Agreement, the law recognized that the only partnership interest held by an individual partner that could be passed on to his heirs was the right to share in profits and surplus, where the latter refers to the partners pro rata share of the excess in partnership assets over liabilities. The partners right in specific partnership property was a limited right of possession that passed to the surviving partners upon death.

Plaintiff contends paragraph 17 is nevertheless ambiguous because, while it says that all right, title and interest of a deceased partner is terminated, it does not say what happens to that interest. In other words, it does not say, as in Corporations Code former section 15025, subdivision (d), that the interest vests in the surviving partners. Plaintiff argues the language of paragraph 17 is not as clear in this regard as that involved in Pluth v. Smith (1962) 205 Cal.App.2d 818, a case relied upon by the trial court.

In Pluth v. Smith, several parties entered into a partnership agreement that provided, among other things, It is further mutually understood and agreed by and between the parties hereto that in the event of a partners [sic] death the whole of the partnership assets shall be and become the property of the surviving partners or partner in the same manner as would a joint tenant under a joint tenancy deed. (Id. at p. 820.) However, in that case, the Court of Appeal was not required to determine the meaning or validity of this provision, inasmuch as the trial court properly concluded the agreement ended before one of the partners died. Cases are not authority for propositions not considered therein. (McKeon v. Mercy Healthcare Sacramento (1998) 19 Cal.4th 321, 328.)

At any rate, we cannot agree with plaintiff that the absence of an express statement as to what happens to a deceased partners interest makes the provision ambiguous. From the standpoint of plaintiff, it does not matter what happens to the partnership interest. All that matters is that the interest terminated and, therefore, could not be enforced by plaintiff.

Plaintiff next contends paragraph 17 must be viewed in light of paragraph 16 of the 1984 Partnership Agreement, which addresses what happens when a partner wishes to withdraw. Plaintiff argues these two provisions make up a section of the 1984 Partnership Agreement entitled, CHANGE OF PARTNERS. According to plaintiff, both provisions are designed to assure that a new partner will not be forced upon the partnership without approval of the other partners. Thus, plaintiff argues, paragraph 17 must be read to mean that death of a partner terminates the right of that partner, and hence his heirs, to participate in the management and profits of the partnership but does not terminate the interest in the partnerships assets.

However, this argument is refuted by the plain language of paragraph 17. It says the death of a partner shall immediately terminate all right, title and interest that the partner has in the partnership, its business, profits or losses. (Italics added.) If this provision were intended to mean what plaintiff claims, it would instead have said the death of a partner terminates the right of that partner or his heirs to participate in the management or profits of the business.

Plaintiff contends it is illogical and against human nature to interpret paragraph 17 to mean the death of a partner eliminates any right of his heirs to benefit from his labors. She cites Civil Code section 1643, which reads: A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.

We cannot say what would have motivated the parties to enter into an agreement that terminated a partners interest upon his death and thereby resulted in everything going to the last man standing and that mans heirs. However, it should be noted the agreement provided that any partner could have terminated the partnership at any time and thereby obtained a pro rata share of the partnership assets on liquidation. Therefore, while the parties appear to have been taking a gamble on their own mortality, that gamble was perhaps not so great after all. Furthermore, if Terrence Devine is to be believed, the parties did not really expect the partnership to last very long anyway.

Plaintiff contends the trial courts interpretation of paragraph 17 amounted to a forfeiture of John Bolens interest in the partnership, and such forfeiture is against public policy. Plaintiff argues a forfeiture provision in a partnership agreement is unenforceable, citing as support Hill v. Hearron (1952) 113 Cal.App.2d 763. In Hill v. Hearron, the parties entered into a partnership for the purpose of growing potatoes and their agreement provided that if any partner should default in his or her performance under the agreement, that partner shall forfeit all interest in the crop. (Id. at p. 764.) The Court of Appeal concluded such a provision is an unenforceable penalty because the loss visited on the breaching party bears no relation to the actual damages suffered by the non-breaching parties.

For obvious reasons, Hill v. Hearron is distinguishable. The issue there was breach of the partnership agreement and the damages that may be recovered for such breach. The law prohibits imposition of a penalty for breach of contract and, therefore, the damages imposed must bear some reasonable relationship to the injury suffered by the nonbreaching party. The present matter, by contrast, does not involve a breach or damages. John Bolen is not being penalized for dying. The parties voluntarily entered into an agreement providing that the last man standing gets it all. There was no breach of that agreement and so no occasion to determine if the gain to the remaining partners from termination of John Bolens partnership interest was reasonably related to the damages suffered by them.

Finally, plaintiff contends John Bolens interest in Hamilton Orchards was community property, and John Bolen could not contract away her one-half interest in that property without her consent. A partners interest in a partnership, as distinct from the partners possessory interest in specific partnership property, is a present interest in personal property subject to community property laws. (See Kenworthy v. Hadden, supra, 87 Cal.App.3d at p. 701.) However, community property laws concern the rights of spouses vis--vis each other with respect to property acquired during the marriage. Each spouse owns an equal share in the property. But this raises the question of what the property interest might be. If that interest has no value, then the spouse has a right to half of nothing.

While it may be true that John Bolen could not have given away plaintiffs one-half interest in the partnership, that is not what occurred here. John Bolen entered into an agreement that provided for a contingent interest in the partnership. If John Bolen had been the last man standing, plaintiff would have had a community property interest in half of the entire partnership. However, if he was not, as eventually occurred, she got nothing.

The trial court rejected certain evidence because it did not reflect conduct of the parties for purposes of contract interpretation. Based on the remaining evidence, the court concluded, by a preponderance of the evidence, that paragraph 17 means what it says, i.e., that the death of a partner terminates all right, title and interest of the partner in the partnership. Substantial evidence supports the trial courts determination.

We have concluded that, even if the court erred in rejecting extrinsic evidence as not reflecting conduct of the parties, the evidence was nevertheless inadmissible because the language of paragraph 17 is not susceptible to the meaning suggested by that evidence. Therefore, the courts ultimate determination on the meaning of paragraph 17 is not adversely impacted by such evidentiary rulings.

V

The 1980 Partnership Agreement

Plaintiff contends she had property rights under the 1980 Partnership Agreement that could not be eliminated without her consent. Plaintiff signed the 1980 Partnership Agreement but not the 1984 Partnership Agreement. She argues she was both a third party beneficiary of the 1980 Partnership Agreement and a direct beneficiary of that agreement by virtue of her community property rights.

The short answer to plaintiffs contentions is that she did not sue defendants to secure her rights under the 1980 Partnership Agreement. The parties to the 1980 Partnership Agreement were John Bolen, James Bartels, Terrence Devine and John Davis. Although the wives of John Bolen, James Bartels and Terrence Devine also signed the agreement, their signatures were merely acknowledgement and approval of its contents. They promised not to transfer any interest they may have in the agreement by virtue of their status as spouses of the parties.

However, in December 1984, the parties to the 1980 Partnership Agreement dissolved the original partnership and John Bolen, James Bartels and Terrence Devine formed a new one under the terms of the 1984 Partnership Agreement. Therefore, the only partnership that existed at the time of John Bolens death was that formed in 1984.

In the proceedings below, neither the complaint nor the first amended complaint mentioned the 1980 Partnership Agreement except by way of background. Although the complaints alleged plaintiff had certain rights by virtue of the partnership, without mentioning either partnership agreement, the only partnership that existed at the time of John Bolens death was the one formed in 1984. Devine and Hamilton Orchards moved to sever the issue of interpretation of paragraph 17, arguing resolution of that issue in their favor would resolve the matter and eliminate the need for further litigation. Plaintiff did not oppose the motion. In her trial brief, plaintiff made no claim of rights under the 1980 Partnership Agreement.

As a general matter, we will not consider arguments or theories raised for the first time on appeal unless the issue is one of law based on undisputed facts. (Johanson Transp. Service v.Rich Pikd Rite, Inc. (1985) 164 Cal.App.3d 583, 588.) The issue of plaintiffs rights under the 1980 Partnership Agreement is not one of law based on undisputed facts. The trial court was never asked to consider if plaintiff had any rights in the 1980 Partnership Agreement that survived dissolution of the original partnership and formation of a new one. Therefore, no factual record on this issue was created.

VI

Declaratory Relief Claim

Plaintiff takes issue with the trial courts order sustaining demurrers to the third cause of action of the first amended complaint. In that claim, plaintiff alleged, on information and belief, that Terrence Devine disputes her interpretation of paragraph 17. She further alleged a judicial determination is necessary to ascertain the respective rights and obligations of the parties in Hamilton Orchards. The trial court sustained the demurrers of Devine and Hamilton Orchards on the ground the third cause of action failed to state a claim against those parties. After plaintiff declined to amend the complaint, the court granted the motion of Devine and Hamilton Orchards to dismiss the third cause of action.

Plaintiff contends the court erred in sustaining the demurrers, because the third cause of action stated a claim for declaratory relief, inasmuch as it alleged the existence of a dispute between the parties and the need for judicial determination. Plaintiff further contends the court erred in dismissing the third cause of action, inasmuch as Patricia Bartels had not demurred.

However, even if we accept plaintiffs contentions, this avails her nothing. In an action for declaratory relief, a complaint is sufficient against a general demurrer if it sets forth facts showing the existence of an actual controversy relating to the rights and duties of the parties and requests that those rights and duties be adjudged. (Code Civ. Proc., 1060.) If the complaint satisfies these requirements, the court must declare the rights of the parties whether or not the facts alleged establish that the plaintiff is entitled to a favorable declaration. (Bennett v. Hibernia Bank (1956) 47 Cal.2d 540, 550.)

Strictly speaking, a general demurrer is not an appropriate means of testing the merits of the controversy in a declaratory relief action because plaintiff is entitled to a declaration of [her] rights even if it be adverse. [Citations.] However, where the issue is purely one of law, if the reviewing court agreed with the trial courts resolution of the issue it would be an idle act to reverse the judgment of dismissal for a trial on the merits. In such cases the merits of the legal controversy may be considered on an appeal from a judgment of dismissal following an order sustaining a demurrer without leave to amend and the opinion of the reviewing court will constitute the declaration of the legal rights and duties of the parties concerning the matter in controversy. (Herzberg v. County of Plumas (2005) 133 Cal.App.4th 1, 24.)

We have already determined the trial court did not err in concluding plaintiff is not entitled to a buyout of an interest in Hamilton Orchards because of the plain terms of paragraph 17. Therefore, it would be an idle act for us to return this matter to the trial court for consideration of the declaratory relief claim. This opinion shall serve as a declaration of the rights and duties of the parties concerning the controversy alleged in the third cause of action.

Disposition

The judgment is affirmed.

HULL, J.

We concur:

DAVIS, Acting P.J.

MORRISON , J.

Publication Courtesy of California attorney directory.

Analysis and review provided by Oceanside Property line attorney.