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Sharing an Interest
by Ron Davis
Can one partner in a shopping center joint venture unilaterally sell his interest to satisfy a debt? Or must he let the other partner have the right to first refusal in such a sale?
Those were the key questions in a recent court case in Utah in which one partner, Pinecrest Investment Co., owner of half interest in a Logan shopping center, had to assert its right to the interest of its debt-ridden partner.
The financial problems of the other partner ultimately led to a filing for Chapter 11 bankruptcy protection. And since the partnerís only asset was the 50 percent interest in the shopping center, his creditors went after that.
The partner agreed to assign the joint venture interest to the primary creditor. But when Pinecrestís principals learned of that agreement, they claimed that it did not comply with the requirements of the joint venture arrangement or with state partnership law.
The creditor refused to concede, however, that it was not entitled to the assignment and sued Pinecrest to prevent its principals from blocking the deal. Pinecrest responded by countersuing, claiming the right to first refusal in such a change of ownership.
Fortunately for Pinecrest, the joint venture arrangement seemed to anticipate a default by the other partner. And included among the events of default were two separate provisions for bankruptcy and for the assignment of a partnerís interest to creditors. Under the agreement, any event of default triggered a remedy whereby the nondefaulting partner could elect to purchase the interest of the defaulting partner.
And the Utah Supreme Court agreed that Pinecrest must have the right to first refusal in the assignment of the other partnerís ownership. Explained the justices, "Pinecrest is entitled to exercise its contractual right of first refusal vis-ŗ-vis the bona fide offer of purchase contained in the settlement agreement between the other partner and its creditor. The creditor is only entitled to reimbursement for the amount it paid in the settlement for the partnerís joint venture interest. (DCM Invest. Corp. v. Pinecrest Invest. Co., 34 P.3d 785 [Utah 2001])
Decision: October 2001
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