HomeMy WebLinkAbout95-3528 EquityPNC BANK, NATIONAL
ASSOCIATION and DAVID W.
MAGARO, EXECUTORS of the
ESTATE OF WILLIAM G.
MAGARO, deceased, late trading
as MAGARO and PI[ELAN,
a partnership,
Plaintiffs
IN THE COURT OF COMMON PLEAS
OF CUMBERLAND COUNTY,
PENNSYLVANIA
CIVIL ACTION- EQUITY
RICHARD E. PHELAN,
liquidator of Magaro and
Phelan, a partnership,
Defendant
No. 95-3528 EQUITY TERM
IN RE: EXCEPTIONS TO AUDITOR'S REPORT
BEFORE OLER~ J.
AND NOW, this
ORDER OF COURT
~l-~/-day of July, 2000, upon consideration of Defendant's
Exceptions to Auditor's Report, and for the reasons stated in the accompanying opinion,
the exceptions are dismissed. By separate order, a Supplemental Decree will be entered
in accordance with the Report.
John M. Eakin, Esq.
Eakin and Eakin
Market Square Building
Mechanicsburg, PA 17055
Attorney for Plaintiffs
BY THE COURT
Wesley Oler, J~. '
Mark D. Bradshaw, Esq.
One South Market Square Building
213 Market Street
Harrisburg, PA 17101
Attorney for Defendant
Samuel L. Andes, Esq.
525 N. 12th Street
Lemoyne, PA 17043
Auditor
PNC BANK, NATIONAL
ASSOCIATION and DAVID W.
MAGARO, EXECUTORS of the
ESTATE OF WILLIAM G.
MAGARO, deceased, late trading
as MAGARO and PHELAN,
a partnership,
Plaintiffs
IN THE COURT OF COMMON PLEAS
OF CUMBERLAND COUNTY,
PENNSYLVANIA
CIVIL ACTION- EQUITY
RICHARD E. PHELAN,
liquidator of Magaro and
Phelan, a partnership,
Defendant
No. 95-3528 EQUITY TERM
IN RE: EXCEPTIONS TO AUDITOR'S REPORT
BEFORE OLER~ J.
OPINION and ORDER OF COURT
Oler, J., July3/,2000.
This case arises from the dissolution of Magaro and Phelan, a partnership
(hereinafter Partnership). On June 6, 1990, William G. Magaro, partner, died leaving
Richard E. Phelan, sole remaining partner, responsible for the liquidation and distribution
of assets of the Partnership.
Upon Richard E. Phelan's alleged failure to perform this duty, the present suit
was commenced on June 30, 1995, by executors of the estate of William G. Magaro.
Relief requested in the complaint included: (1) appointment of a liquidator of the
Partnership, with authority to transact business in the Partnership name as might be
necessary to wind up the Partnership affairs and effect distribution of Partnership assets;
(2) a direction that the liquidator prepare and file a complete accounting of Partnership
affairs; (3) an order directing full and complete liquidation by sale of Partnership assets
and payment in cash of net amounts due to the estate; (4) a direction that the liquidator
determine the value of Magaro's interest in the Partnership as of the date of dissolution;
(5) an order enjoining Defendant from transacting any further business in the name of
Magaro and Phelan; and (6) such other relief as the court deemed fair and equitable.
On February 20, 1998, an Auditor, Samuel L. Andes, Esq., was appointed to
determine the date of death value of Partnership assets. The Auditor thereafter filed a
report, to which Defendant has filed nineteen exceptions. The exceptions filed by
Defendant are the subject of this opinion.
For the reasons stated in this opinion, Defendant's exceptions will be denied and a
decree in accordance with the recommendations of the Auditor will be entered.
STATEMENT OF FACTS
Plaintiffs are PNC Bank, N.A., and David W. Magaro, Co-Executors of the Estate
of William G. Magaro (hereinafter Plaintiffs).~ Defendant is Richard E. Phelan,
liquidator of Magaro and Phelan, a Partnership (hereinafter Defendant).2
The Partnership was formed by William G. Magaro and Richard E. Phelan.3 The
Partnership was in the business of acquiring and developing real estate, making provision
for items related to the use of real estate for restaurant purposes, including leasehold
improvements (such as a heating and cooling systems), fixtures, furniture, and
Complaint, para. 1; Answer, para. 1.
N.T. 4, Auditor's Hearing, March 9, 1999; Auditor's Exhibit 1, para. 22.
Auditor's Exhibit 1, para. 2.
2
equipment, and leasing of said facilities and materials to restaurant operators.4 No
written partnership agreement was entered into; instead, the partners acted pursuant to
oral agreement and understanding.5 The Partnership owned the following real estate: (1)
Rod's Road House Caf6 in Harrisburg, Pennsylvania; (2) the Gingerbread Man in
Shippensburg, Pennsylvania; and (3) Fast Eddie's Billiard Parlor in Carlisle,
Pennsylvania.6
The Partnership also provided leasehold improvements, fixtures, furniture, and
equipment for the operation of the Gingerbread Man restaurant in Severna Park,
Maryland.7 The Partnership owned the furniture, fixtures, and equipment at Severna Park
and paid for the leasehold improvements at that location,8 but a third party actually
owned the real estate in Severna Park? A written lease was in place concerning the
property at Severna Park, between Crow-Park Station Limited Partnership as lessor and
Gingerbread Man of Severna Park, Inc., as lessee. ~0
In addition to the Partnership, Magaro and Phelan formed a corporation,
Gingerbread Man of Severna Park, Inc., to run the restaurant at Severna Park.n A
Auditor's Exhibit 1, para. 4.
N.T. 7, Auditor's Hearing, March 17, 1999.
N.T. 64-65, Auditor's Hearing, March 9, 1999.
N.T. 40-41, Auditor's Hearing, March 17, 1999.
N.T. 65-66, Auditor's Hearing, March 9, 1999.
Defendant's Exhibit 24.
~0 Defendant's Exhibit 24.
~ N.T. 68, Auditor's Hearing, March 9, 1999.
corporate form of business was selected by Magaro and Phelan because it offered a
prospect of limited liability.~2 While the Corporation ran the restaurant, buying and
selling food, beer, and liquor, it also paid rent to the Partnership for use of the leasehold
improvements, fixtures, furniture, and equipment, which were owned by the
Partnership.~3 Corporations were also formed for purposes of operating restaurants at the
other locations; at these locations, the Partnership owned the land and buildings, but
rented them to the corporations, along with fixtures, furniture, and equipment.~4
On June 6, 1990, William G. Magaro died.~ Since then Defendant has collected
all money owed to the Partnership and has continued to conduct the business of the
Partnership.~6 The Partnership has not been liquidated,~7 and this suit was filed on June
30, 1995, to force the liquidation of the Partnership.~8 After the parties were unable to
resolve objections to the accounting filed by Defendant, the court appointed Samuel L.
Andes, Esq. as Auditor.~9 The Auditor was appointed to consider the objections and
~2 N.T. 8, Auditor's Hearing, March 17, 1999; N.T. 68-69, Auditor's Hearing, March 9,
1999.
~3 N.T. 65-8, Auditor's Hearing, March 9, 1999.
~4 N.T. 65-9, Auditor's Hearing, March 9, 1999.
~ Auditor's Exhibit 1, para. 3.
~6 Complaint, para. 11; Answer, para. 11.
~7 Complaint, para. 12; Answer, para. 12.
18 Complaint; Answer.
19 Order of Court, February 18, 1998.
4
accounting previously filed, and to file a report.:° The Auditor held hearings throughout
March, 1999 and one in April, 1999.9,~ Then on December 9, 1999, the Auditor filed his
report concerning the Partnership assets.22
The Auditor set forth five findings of fact: (1) that William G. Magaro died on
June 6, 1990; (2) that at the time of Magaro's death, he and Richard E. Phelan were equal
partners in a partnership known as "Magaro and Phelan' or "Magaro and Phelan Realty";
(3) that on the date of Magaro's death, the Partnership had assets with a total value of
$2,525,077.00; (4) that on the date of Magaro's death, the Partnership had total debts and
liabilities of $1,850,832.00; and (5) that the net value of the Partnership on the date of
Magaro's death was $674,245.00.9,3 These findings of fact were reached after careful
consideration of the testimony given at the Auditor's Hearings and all additional evidence
presented to the Auditor.
The Auditor's duty was to value Magaro's interest in the Partnership at the date of
his death?4 This responsibility required adoption of a methodology for valuing furniture
and equipment owned by the Partnership and used at the several restaurant locations.9,5
The parties stipulated as to the original cost of furnishings and equipment at Kod's
20 Order of Court, February 18, 1998.
2~ Auditor's Hearings, March 9, 1999, March 17, 1999, April 21, 1999.
9,2 Auditor's Report.
9,3 Auditor's Report at 3-5.
9,4 Auditor's Report at 9. The Auditor stated that he would not make a recommendation
as to the present value of Magaro's distributive share of the Partnership.
~5 Auditor's Report at 10.
Roadhouse, the Gingerbread Man of Shippensburg, and Fast Eddie's.26 The Auditor
considered the parties' proposals and an expert opinion on how the assets should be
valued?? The Auditor, relying on an affidavit of Phelan and the opinion of J.A. Weiss,
chairman of United Restaurant Equipment, Inc., decided that the best method of valuing
furniture and equipment less than six months old (their age being calculated from when
they were placed in service) was to reduce the original cost of the items by 15 percent.2s
As to the furniture and equipment at Fast Eddie's, the Auditor determined their
value to be 85 percent of the original cost of the assets?9 In reaching this result, the
Auditor considered that the items were purchased the same month as Magaro's death, that
none of the Rems was removed or sold, and that all of the items continued to be used at
Fast Eddie's for years after Magaro's death.3°
As to the furniture and equipment at Rod's Roadhouse, the Auditor concluded
that the method used to value assets at Fast Eddie's could not be used, without further
adjustment, to value items at Rod's Roadhouse, because the items were more than six
months old at the time of Magaro's death? After considering expert testimony, the
Auditor decided that the most reasonable method of valuation was to reduce the purchase
price of the Rems by 15 percent, to reflect the initial decline in value, and then to apply an
26 Auditor' s Report at 11-12.
27 Auditor's Report at 12-13.
22 Auditor's Report at 13-14.
29 Auditor's Report at 11-12, 14.
3o Auditor's Report at 15.
3~ Auditor's Report at 16-17.
6
interpolation method.32 The interpolation method calculated the difference between the
reduced purchase price and the amount received upon subsequent sale of the items.33
That amount was then divided by the number of months between the initial decline period
and the sale.34 After computing the amount of reduction per month, the Auditor
determined how many months passed between the date of purchase and Magaro's death,
applied the decline per month from purchase to that point, and arrived at the value of the
assets on the date of Magaro's death.35
The Auditor then had to value furniture and equipment used at the Gingerbread
Man of Shippensburg. The items were not subsequently sold; therefore, the same
information was not available for the interpolation method.36 The Auditor, nevertheless,
applied the same rate of decline in value to the assets, as used to value the items at Rod's
Roadhouse, to determine the value of the assets at the time of Magaro's death? The
Auditor reduced the original cost of the furniture and equipment by 15 percent, then
applied the previously determined rate of decline to the months from when the items were
placed into service until Magaro's death.3s
32 Auditor's
33 Auditor's
34 Auditor's
35 Auditor's
36 Auditor's
37 Auditor's
38 Auditor's
Report at 17-18.
Report at 18-19.
Report at 19.
Report at 19.
Report at 19.
Report at 19.
Report at 20.
As to the furniture, fixtures, equipment, leasehold improvements made to real
estate, and other materials at Severna Park, the Auditor had to first determine whether the
leasehold improvements were assets of the Partnership, before determining the value of
all the assets at this location? In making this determination, the Auditor considered the
lease agreement applicable to the Severna Park property that stated: "[a]ll alterations,
additions, improvements and fixtures (other than unattached, movable trade fixtures)
which may be made or installed by either party upon the Demised Premises shall remain
upon and be surrendered with the Demised Premises and become the property of
Landlord at the termination of this lease...".4°
The Auditor also considered the value of the improvements. The Auditor found
that the Partnership spent a total of approximately $1,100,000.00 to fit out and furnish the
Severna Park facility.41 The parties stipulated that $486,702.00 was spent to purchase
furniture, fixtures, and equipment at that location.42 The Auditor then calculated the
difference between the total amount spent and the amount stipulated for furniture,
fixtures, and equipment, finding that a total of $613,298.00 was therefore spent on the
leasehold improvements.43 After considering both parties' arguments, the lease
39 Auditor's Report at 20. The Auditor distinguished between (a) furniture and
equipment, (b) fixtures, and (c) leasehold improvements by stating that furniture and
equipment at Severna Park included tables, chairs, and the like, while fixtures included
items such as mirrors, brass railings, and similar finishes. Finally, leasehold
improvements included heating, air conditioning, plumbing, wiring, and the like.
4o Defendant's Exhibit 24 at 5.
41 Auditor's Report at 22.
42 Auditor's Report at 22-23.
43 Auditor's Report at 23.
8
agreement, evidence that the Partnership depreciated the leasehold improvements on a
1990 tax return, the substantial value of the improvements, and other circumstances
surrounding the property, the Auditor concluded that the leasehold improvements were
Partnership assets.44
After concluding that the leasehold improvements were Partnership assets, the
Auditor then had to determine the value of these improvements, in addition to the value
of the furniture, fixtures, and equipment at Severna Park. The Auditor considered that the
furniture, fixtures, equipment, and leasehold improvements had been placed in service
only two months prior to Magaro's death and that they were used by Phelan, in his
operation of the restaurant, for another seven years before he sold all the items for almost
one-third of their original COSt.45 The original cost of the items, consisting of furniture,
fixtures, equipment, and leasehold improvements, was approximately $1,100,000.00; and
the items were sold seven years later to a third party, who would also operate a restaurant
at that location, for $352,000.00.46 Given the newness of the items at the time of
Magaro's death and Phelan's continued use of the items before they were sold in place
seven years later, the Auditor decided to consider the value of the items in their use,
rather than their sale value.47 In making this determination, the Auditor relied on F&M
44 Auditor's Report at 22; Accounting Submitted by Defendant, Appendix C, 1990
Income Tax Return.
45 Auditor's Report at 23-24.
46 Auditor's Report at 23-24.
47 Auditor's Report at 24.
Schaeffer Brewing Co. v. Lehigh County Bd of Appeals,4~ which stated that value-in-use
methods are appropriate in certain situations where an appraisal is required. Value-in-use
represents the value a specific property has to a specific user under the circumstances.49
The Auditor then decided that it was necessary to reduce the cost of the items to reflect
their initial decline in value? After deducting 15 percent from the original cost of all the
items, including furniture, fixtures, equipment, and leasehold improvements, the Auditor
concluded that the assets at Severna Park had a value of $935,000.00 at the time of
Magaro's death.5~
The final discussions in the Auditor's Report related to a determination of the
amount of Partnership liabilities at the time of Magaro's death,52 and the Auditor's fees
and costs? After making such determinations, the Auditor concluded that the net value
of the Partnership was $674,245.00 on the date of Magaro's death, with distribution to be
determined by the parties or the COUrt.54
Defendant filed nineteen exceptions to the Auditor's Report,55 which are the
subjects of this opinion. Defendant's exceptions read as follows:
4a 530 Pa. 451,610 A. 2d 1 (1992).
49 Id. at 457, 610 A.2d at 3.
50 Auditor's Report at 26.
5~ Auditor's Report at 26.
52 Auditor's Report at 26.
53 Auditor's Report at 32.
54 Auditor's Report at 35.
55 Defendant's Exceptions to Auditor's Report.
10
o
10.
The auditor erred in concluding that leasehold improvements in property
the Partnership leased in Severna Park, Maryland (such as plumbing
fixtures, electrical fixtures and wiring, and heating, ventilation and air
conditioning equipment) should be valued as a Partnership asset.
The auditor erred by ignoring the plain language of the lease agreement
entered into by and between the Gingerbread Man of Severna Park, Inc.
and the commercial landlord in Severna Park, relating to the ownership of
leasehold improvements.
The auditor erred by failing to deduct from his 'leasehold improvement
valuation' any amount for labor, design work or other 'non-tangible'
aspects of the Severna Park restaurant's buildout.
The auditor erred in concluding that Richard Phelan 'chose' to continue to
operate the Severna Park location. In so doing, the auditor ignored
uncontradicted testimony regarding (i) the ten (10) year term of the lease
involved, (ii) the Magaro estate's $400,000 Certificate of Deposit pledged
to guaranty performance under the lease, and (iii) the certainty that a
default under the lease would have brought economic disaster to the Estate
of William G. Magaro (hereinafter the "Estate") and Plaintiff.
The auditor erred in utilizing the stated sale price of $352,000 for the
Partnership assets at Severna Park, without reference to the fact that
$84,000 of that consideration was never received by the Partnership.
Arguendo the propriety of the auditor's formula for valuing Partnership
assets at locations other than Severna Park, the auditor erred in deviating
from this formula with respect to the value of the partnership assets at
Severna Park.
The auditor erred in employing a 'use value' rather than a market value
approach in valuing the Partnership's assets.
The auditor's employment of a 'use value' analysis in valuing partnership
assets context is unsupported by any legal authority.
The auditor ignored caselaw applicable to the liquidation of partnership
assets, specifically Tobias v. Tobias, 117 Dauphin Co. Rep. 1 (1997).
The auditor erred by failing to confine his inquire to the date of death
value of the Partnership assets, as required by law, and as required by the
parties' stipulation.
11
11.
12.
13.
14.
15.
16.
17.
18.
19.
The auditor erred by attempting to determine the value of the Partnership
assets as of the date of death in hindsight, i.e., by utilizing events
occurring in the mid-1990's in an attempt to value the Partnership's
property as of June 6, 1990.
The auditor erred by basing his valuation of Partnership assets upon sale
figures which even the auditor acknowledged were not necessarily
reflective of market value, and were, instead, arbitrary.
Specifically, the auditor erred by valuing certain equipment owned by the
Partnership by utilizing sales figures obtained by the Partnership from
third parties, where such sales occurred many years following the date of
Magaro's death and where such 'values' were driven by tax considerations
unrelated to market value.
The auditor erred in ignoring the Estate's litigation position that all
Partnership property should have been liquidated and reduced to cash as of
June 6, 1990.
The auditor erred by failing or refusing to utilize 'traditional market or
resale methods' of valuation.
The auditor erred in utilizing as a starting point for valuation Mr. Weiss'
suggestion that new equipment, sold in place within six (6) months would
be worth 85% of its price when new, in the absence of any evidence that
any of this equipment was, or could have been, 'sold in place' within six
(6) months of their purchase.
The auditor erred in overlooking the distinction between what a used
restaurant equipment vendor would purchase equipment for (i.e., the value
to be realized by the Partnership upon such sale), and the price such a
vendor would ultimately sell such equipment to a third party for.
The auditor erred with regard to his Finding of Fact No. 3, in that his
valuation of the assets of the Partnership on the date of Mr. Magaro's
death is overstated
The auditor erred with respect to his Finding of Fact No. 5 that the net
value of the Partnership on the date of Mr. Magaro's death was
$674,245.00.56
Defendant's Exceptions to Auditor's Report.
12
DISCUSSION
Statement of Law
Standard of Review and Burden of Proof. As early as 1890, the Pennsylvania
Supreme Court stated that it would not reverse the findings of a master except upon clear
evidence of plain mistake. Stocker v. Hutter, 134 Pa. 19, 23, 19 A. 566, 566 (1890). This
standard, applicable to a "master," is also applicable to an auditor. Rowley v. Rowley,
294 Pa. 535, 540, 144 A. 537, 539 (1928). More recently the Court held that findings of
fact made by an auditor will not be disturbed by the court if the findings are in accord
with testimony and the auditor has not capriciously disbelieved evidence, abused his
discretion, or committed an error of law. Estate of Allen, 488 Pa. 415, 422, 412 A.2d
833, 836 (1980). A party challenging
demonstrating its error. Tobias v. Tobias,
an auditor's report bears the burden of
117 Dauph. 1, 21 (1997), citing Bracht v.
Connell, 313 Pa. 397, 170 A. 297, 300 (1934).
Dissolution ofa Partnership. A partnership is an association of two or more
persons to carry on as co-owners of a business for profit. 15 Pa. C.S.A. {}8311.
Dissolution of a partnership occurs when there is a change in the relations of the partners
caused by any partner ceasing to be associated in the carrying on of the business. 15
Pa.C.S.A. {}8351. One cause of dissolution is the death of a partner. 15 Pa.C.S.A. {}8353;
Hansel v. Hansel, 300 Pa. Super. 548, 556, 446 A. 2d 1294, 1298 (1982). A partnership is
therefore dissolved on the date of any partner's death. Hansel v. Hansel, 300 Pa. Super
548, 556, 446 A. 2d 1294, 1298 (1982).
The right to an account of the partner's interest shall accrue to any partner or his
legal representative as against the surviving partner at the date of dissolution. Id. at 556,
13
446 A.2d at 1299; 15 Pa.C.S.A. §8365. When a partnership is dissolved by the death of a
partner, it is the duty of the surviving partners to wind up partnership business and settle
its affairs without delay. Wisocki, Admx. v. Howell, 37 D. & C.2d 666, 670 (Franklin
County 1965). Liability of the surviving partner to account to the deceased partner's
estate continues until payment is made. Spivak v. Bronstein, 367 Pa. 70, 76, 79 A.2d 205,
207-08 (1951). Interest, at the legal rate, will be added from the date of the partner's
death until the date his portion of the partnership's net value is distributed. Id. at 76, 79
A. 2d at 207-08.
Ownership ofLeaseholdlmprovements. In determining the ownership of
leasehold improvements for real estate tax purposes, the test is whether "there are indicia
that the title to the improvements, as well as the leasehold itself, remains in the lessee
during the term." In re Blue Knob Recreation, Inc., Assessment Appeal, 122 Pa.
Commw. 156, 158, 551 A.2d 9, 10 (1988), appeal denied, 522 Pa. 597, 562 A.2d 321
(1989); Venango Federal Savings and Loan Association v. County of Venango, 73 Pa.
Commw. 313, 315, 457 A. 2d 1340, 1341 (1983).
ability of the lessee to remove the improvements.
One factor to be considered is the
Cf. Venango Federal Savings and
Loan Association v. County of Venango, 73 Pa. Commw. 313, 315, 457 A. 2d 1340, 1341
(1983), and ln re Blue Knob Recreation, Inc., Assessment Appeal, 122 Pa. Commw. 156,
158, 551 A.2d 9, 10 (1988). The ability of the lessee to remove structures is not
determinative, however, as courts also consider the intent of the parties. In re Blue Knob
Recreation, Inc., Assessment Appeal, 122 Pa. Commw. 156, 158, 551 A. 2d 9, 10 (1988).
Courts carefully review the language in the lease agreement to determine the intent of the
parties with respect to leasehold improvements. See generally id at 158-60, 551 A.2d at
14
10-11; Venango Federal Savings and Loan Association v. County of Venango, 73 Pa.
Commw. 313, 315-18, 457 A.2d 1340, 1341-42 (1983). Where the language of the lease
states that ownership of leasehold improvements "will pass" to the lessor at the expiration
of the lease, ownership up until such time will remain in the lessee, regardless of the
ability of the lessee to remove the improvements. In re Blue Knob Recreation, Inc.,
Assessment Appeal, 122 Pa. Commw. 156, 158, 551 A.2d 9, 10 (1988).
Valuation ofLeasehoMImprovements. When determining the value of
partnership assets, such as fixtures and equipment, courts may consider the price paid for
the assets, including labor costs. Certo v. Spadaro, 160 Pa. Super, 10, 12, 49 A.2d 841,
842 (1946). Cost is relevant in determining an item's value when only a short amount of
time has passed between the date of purchase and the date as of which its value is to be
determined, because an item will, as a general rule, not have materially depreciated in a
short amount if time. Id. at 13, 49 A.2d at 842. Valuation of fixtures or improvements
may also be determined by taking the amount invested by the partnership less any
depreciation. Tobias v. Tobias, 117 Dauph. 1, 11 (1997).
In a determination of the value of assets following dissolution of a partnership, the
methods employed for real estate tax assessment purposes are instructive. In tax
assessment cases, when improvements are made to real property, such property must be
reassessed to determine value. Penn's Grant Associates v. Northampton County Board of
Assessment Appeals, 733 A. 2d 23, 27 (Pa. Commw. 1999). In determining the value of
real property, indirect costs, such as legal fees, insurance premiums, and taxes, are
considered. Icl. at 29.
15
Approaches to Valuation. For real estate tax assessment purposes, real estate is
assessed according to actual value, otherwise defined as market value; in this regard,
three approaches to valuation are to be utilized. F & M Schaeffer Brewing Co. v. Lehigh
County Board of Appeals, 530 Pa. 451, 456, 610 A. 2d 1, 3 (1992). These three
approaches, to be considered in conjunction with one another, are the cost, comparable
sales, and income approaches. Id. at 456-57, 610 A.2d at 3. Actual value, or market
value, is defined as "the price which a purchaser, willing but not obliged to buy, would
pay an owner, willing but not obliged to sell, taking into consideration all uses to which
the property is adapted and might in reason be applied." Id. at 457, 610 A.2d at 3.
The first approach to valuation, the cost approach, is determined from the cost of
reproduction or replacement less depreciation. Id at 456-57, 610 A. 2d at 3. In some
circumstances, this approach is the most accurate method of valuation. Reichard-
Coulston, Inc. v. Revenue Appeals Board Northampton County, 102 Pa. Commw. 227,
233,517 A.2d 1372, 1375 (1986), appealdenied, 517 Pa. 611,536 A.2d 1335 (1987). In
Tobias, while the court utilized the sale price obtained for equipment, it also employed an
approach similar to the cost approach in valuing improvements and fixtures, taking the
dollar amount invested by the partnership less the amount of depreciation. Tobias v.
Tobias, 117 Dauph. 1, 9-11 (1997).
Another approach to valuation is known as the use value approach. This
approach, which is sanctioned for purposes of a determination of fair market value in the
Eminent Domain Code,57 has been described as follows:
See F & M Schaeffer Brewing Co. v. Lehigh County Board of Appeals, 530 Pa. 451, 58
n.2, 610 A.2d 1, 4 n.2 (1992).
16
equity,
liquidation. Hankin v. Hankin, 507 Pa. 603, 609, 493 A.2d 675,
Pa. 168, 177-78 (1868).
Use value is a concept based on the productivity of an
economic good. Use value is the value a specific property
has for a specific use. Use value may vary, depending on
the management of the property and external conditions
such as changes in the business.
F & M Schaeffer Brewing Co. v. Lehigh County Board of Appeals, 530 Pa. 451,457, 610
A.2d 1, 3 (1992). The court also stated that value-in-use methods are appropriate in
certain situations where an appraisal is required. Id. at 457, 610 A.2d at 3.
Finally, the Pennsylvania Supreme Court has stated that a trial court, sitting in
is vested with wide discretion when deciding matters related to partnership
677 (1985); Slemmer, 58
Application of Law to Facts
Dissolution of Partnership. Upon William G. Magaro's death, on June 6, 1990,
Richard E. Phelan, as sole surviving partner, had a duty to liquidate Partnership assets
and account to Magaro's Estate for his interest in the Partnership. Magaro's Estate
acquired a right to an accounting for Magaro's partnership interest as of June 6, 1990, the
date of dissolution, against Richard Phelan.
Ownership of LeasehoM Improvements. After careful review of the language in
the lease, Pennsylvania case law, and circumstances surrounding the leasehold
improvements at Severna Park, the court is of the view that such improvements were
assets of the Partnership and properly characterized as such in the Auditor's Report.
Article IX, Section 9.1, of the lease governing the Severna Park property provides that
"[a]ll alterations, additions, improvements and fixtures (other than unattached, movable
trade fixtures) which may be made or installed by either party upon the Demised
17
Premises shall remain upon and be surrendered with the Demised Premises and become
the property of Landlord at the termination of this lease..."? This language, comparable
to the language in the lease in In re Blue Knob,~9 refers to the future transfer of leasehold
improvements. The lease states that improvements "shall remain" and "be surrendered"
to the Landlord "at the termination of [the] Lease.''6° It may be inferred from such
language that the intent of the parties was that any improvements made to the property
would remain Partnership property until the expiration of the lease term. In order for
improvements to "be surrendered" at a later date they must currently be subject to an
interest of the lessee, and therefore Partnership assets.
Additional indicia that the Partnership owned the improvements made to the
Severna Park property is that the Partnership tax return for 1990 claimed the Severna
Park improvements as depreciable assetsfi~ Also, Defendant continued to operate a
restaurant at the location after Magaro's death? It would be unfair to excuse Defendant
from accounting for the benefits he received from his continued use of the improvements,
paid for by the Partnership, after Magaro's death. See Certo v. Spadaro, 160 Pa. Super.
10, 12, 49 A.2d 841,842 (1946). The improvements were placed in service less than two
months before Magaro's deathfi3 It was reasonable for the Auditor to conclude that the
58 Defendant's Exhibit 24 at 5.
59 122 Pa. Commw. 156, 551 A.2d 9 (1988).
60 Defendant's Exhibit 24 at 5.
6~ Accounting Submitted by Defendant, Appendix C, 1990 Income Tax Return.
62 Auditor's Report at 24.
63 Auditor's Report at 23.
18
improvements had not materially depreciated in such a short amount of time. la[ at 12-
13, 49 A. 2d at 842. The improvements were of benefit to Defendant in his restaurant
business and in his later sale of the restaurant to another party, who would also operate a
restaurant at that location.64
Finally, it is unreasonable to conclude that the Partnership made a gift of over
$600,000.00, the value of the leasehold improvements, to the landlord.65 The Auditor
determined that $613,298.00 was spent on leasehold improvements.66 While Defendant
claims that the Auditor erred in making this calculation, the evidence supports his
finding. Defendant argues that the total amount spent on the Severna Park location, equal
to approximately $1.1 million dollars, included contributions from the Corporation, and,
therefore, that the Auditor erred in subtracting $486,702.00, the stipulated cost of
furniture, fixtures, and equipment, from $1.1 million dollars to arrive at the amount spent
by the Partnership on leasehold improvements.67 Defendant testified, however, that "the
Partnership" was renovating the building,6s and "the Partnership" spent over $1.1 million
dollars on Severna Park.69 Defendant also testified that, while the Corporation was
forced to pay for some of the improvements that the Partnership should have paid for,
ownership of the furniture, fixtures, equipment, and leasehold improvements was
64 Auditor's Report at 22.
65 Auditor's Report at 23.
66 Auditor's Report at 23.
67 Auditor's Exhibit 1 para. 20.
es N.T. 63, Auditor's Hearing, March 17, 1999.
69 N.T. 156, Auditor's Hearing, March 17, 1999.
19
transferred to the Partnership.TM Given Defendant's own statements and evidence that the
Partnership claimed depreciation on Severna Park leasehold improvements on its 1990
tax return,TM the Auditor did not err in starting with $1.1 million dollars to determine the
amount spent on leasehold improvements. Exceptions one and two will therefore be
denied.
Valuation of LeasehoM Improvements. The Auditor's inclusion of the amount
spent on labor, design work, and similar non-tangible aspects of the Severna Park
restaurant's buildout in the leasehold improvement valuation is supported by case law.
Defendant concedes that labor contributes value, arguing, nevertheless, that a dollar value
should not be assigned to the resultant asset for the labor.TM Defendant's argument is that,
although labor contributes value, in that it was of benefit to the Partnership, a dollar
amount cannot be placed on such a benefit when calculating the dollar value of
Partnership assets. This argument fails to recognize, however, that a dollar value was
previously determined when the Partnership paid for "labor.''73 Defendant continued to
benefit, for seven years after Magaro's death, from the use of lighting, heating, and air
conditioning that was installed. Furthermore, when the restaurant was sold to a third
party who would also operate a restaurant at the location, the buyer likely negotiated the
sale price he did because the improvements were already installed. If the buyer knew he
?0 Exhibit A, Defendant's Answers to Plaintiff's Interrogatories at 6; N.T. 96, Auditor's
Hearing, March 17, 1999.
?~ Accounting Submitted by Defendant, Appendix C, 1990 Income Tax Return.
72 Defendant's Brief in Support of Exceptions to Auditor's Report at 10.
73 Defendant's Exhibit 10.
20
would have to pay to have the leasehold improvements, such as heating and air
conditioning, installed, it is unlikely that he would have paid the same price for the
restaurant. The Auditor correctly included the costs of labor, design, and other non-
tangible assets in his leasehold improvement valuation. Defendant's Exception 3 will
therefore be denied.
Approaches to Valuation. The majority of Defendant's remaining exceptions
refer to the Auditor's utilization of the "use value" approach and other approaches. In
order to better evaluate Defendant's argument, the exceptions in this regard will be
separated as they relate to the assets at Severna Park, assets at the other Partnership
locations, and the methodology that was used on all the assets.
A. ASSETS AT SEVERNA PARK. In determining the date of death value of the
assets at Severna Park, which included leasehold improvements, furniture, fixtures, and
equipment, the Auditor decided that the best method of valuation was a use-value
analysis. Defendant argues that this method is unsupported by any legal authority. The
Auditor relied on a Pennsylvania Supreme Court case, however, in rendering his report.
The court in F & M Schaeffer Brewing Co. v. Lehigh County Bd of AppealsTM recognized
that a use-value analysis may be appropriate in certain cases. Furthermore, the
Pennsylvania Supreme Court held that wide discretion is vested in a court of equity with
regard to partnership liquidation matters. Hankin v. Hankin, 507 Pa. 603, 609, 493 A.2d
675, 677 (1985). Given the circumstances under which the Severna Park assets had to be
valued, including the newness of the items at the date of death and Defendant's continued
use of the premises for seven years after Magaro's death, we believe that the Auditor was
74 530 Pa. 451,610 A.2d 1 (1992).
21
justified in employing a "use value" technique. Defendant's Exception's 6, 7, and 8 will
be denied.
Two additional exceptions relate to the Severna Park property. Defendant claims
that the Auditor erred in concluding that Richard Phelan "chose" to continue to operate
the Severna Park location; and that the Auditor erred in utilizing the stated sale price of
$352,000 for the Partnership assets at Severna Park. Neither of these exceptions is
entirely comprehensible to the court. While both of these factors were referred to in the
Auditor's analysis, they were not determinative in the Auditor's conclusion as to the
value of Partnership assets. In any event, the record supports the Auditor's statement that
Phelan "chose" to continue to operate the Severna Park location; while Defendant notes
the existence of a ten-year lease, Defendant in fact sold the restaurant to another party
within those ten years, thereby transferring the lease obligations to the buyer. The
Auditor's conclusion that Defendant "chose" to continue to operate a restaurant at that
location for a period is therefore not unreasonable.
Severna Park assets, Defendant earlier stipulated to
Defendant's Exceptions 4 and 5 will therefore be denied.
As to the purchase price of the
the $352,000 sale price.75
B. ASSETS AT OTHER PARTNERSHIP PROPERTIES. Defendant challenges
the Auditor's method of valuation of assets at Partnership locations other than Sevema
Park. In determining the value of the assets at these locations, the Auditor reduced the
initial cost of the items by 15 percent and then, when necessary, applied the interpolation
method, which considers the sale price to determine the rate of decline. In utilizing this
approach, it was necessary for the Auditor to consider not only the initial cost of the
Auditor's Exhibit 1, Stipulation para. 22.
22
items, but also the price they produced upon any subsequent sale. Defendant claims that
the Auditor erred in considering events that happened after Magaro's death and in basing
his valuation upon sales figures obtained by the Partnership from third parties, arguing
that such figures are not necessarily reflective of actual market value.
As to Defendant's claims that the Auditor erred in considering events that
happened after the date of dissolution, the unusual circumstances in this case gave the
Auditor no choice but to consider events occurring after Magaro's death. Defendant's
failure to promptly liquidate Partnership assets after Magaro's death resulted in the
difficulty of valuing assets and liabilities. At the time the Auditor had to determine the
value of Partnership assets, eight years after the death of Magaro, many of the assets no
longer existed, were no longer owned by the Partnership, or had been used 'for eight
years. This delay, caused by the Defendant's own failure to promptly liquidate assets,
necessitated the use of information and events occurring in the mid-1990's to determine
the value of Partnership assets on the date of Magaro's death. Defendant's Exceptions
10, 11, and 14 will therefore be denied.
Defendant also claims that the Auditor erred in basing his valuation of Partnership
assets upon sale figures obtained from third parties, which might not have been reflective
of market value, and in ignoring caselaw applicable to the liquidation of partnership
assets. Defendant's suggestion on the proper way to value Partnership assets, however,
may also obtain prices that are not necessarily reflective of market value. Defendant
contends that the assets should be valued at the price they could expect to bring if they
were removed from the premises and sold at public auction. Defendant relies on Tobias76
76 117 Dauph. 1 (1997).
23
to support his argument. The Auditor distinguished Tobias in his report by noting that
the items in that case were insignificant in value compared to the total assets in dispute.
The Auditor also noted that at the time of valuation of the assets in Tobias, the
partnership had ceased all operations and liquidated the majority of its assets. That
situation is distinguishable from the case at hand, where the equipment continued to be
used for years after the date of valuation, where it was virtually brand new at the date of
valuation, and where much of it was customized for the particular restaurant location.??
In addition to these distinctions, it should be noted that the court in Tobias
accepted the auction sale price as a means to value equipment, nevertheless holding that
the proper way to value improvements and fixtures is to use the depreciated value
method, which calculates the amount invested by the partnership less any depreciation.
Tobias v. Tobias, 117 Dauph. 1, 9-12 (1997). The court did not mandate the use of a
public auction sale price, but merely found nothing in the record to render such a method
inappropriate. Id at 9. Prices obtained from a sale at a public auction, however, are
similar to prices that may be obtained from any third party buyer. While the competition
and type of buyers at a public auction may differ from a private sale, it is unlikely that
one is more likely to achieve a price more reflective of market value. Considering
Defendant's own failure to liquidate Partnership assets after Magaro's death and failure
to hold a public auction in 1990, immediately after dissolution of the Partnership, the
Auditor's consideration of the sale prices obtained by the Partnership and decision not to
employ the Tobias methodology was not error. Defendant's Exceptions 9, 12, 13, and 15
will therefore be denied.
77 Auditor's Report at 13.
24
C. VALUATION METHODS APPLIED TO ALL PARTNERSHIP ASSETS.
Defendant claims that the Auditor erred in utilizing Mr. Weiss' suggestion that new food
service equipment sold in place within six months would be worth 85 percent of its price
when new, thereby overlooking the distinction between what a used restaurant equipment
vendor would purchase equipment for and the price such a vendor would sell equipment
for. After careful consideration of Weiss' opinion, the distinction between what a used
restaurant equipment vendor would purchase equipment for and the price such a vendor
would sell equipment for, and the type of equipment being resold in this case, including,
among other things, tables, chairs, and the like that may actually decline in value less
rapidly than food service equipment, the Auditor determined that a 15 percent initial
decline in value was appropriate. The record supports the Auditor's position; therefore,
Defendant's Exceptions 16 and 17 will be denied.
In conclusion, Defendant is unable to demonstrate the plain mistake that is
necessary to reverse the findings of the Auditor.
the Auditor has not capriciously disbelieved
The record supports the conclusion that
evidence, abused his discretion, or
committed an error of law. Finding no error in the Auditor's Report, this court finds
itself in agreement with the auditor's conclusion as to the net value of the Partnership on
the date of Magaro's death. Defendant's Exceptions 18 and 19, relating to the ultimate
correctness of the Auditor's valuation of Partnership assets and the net value of the
Partnership on the date of Magaro's death, will be denied.
25
ORDER OF COURT
AND NOW this 31st day of July, 2000, upon consideration of Defendant's
Exceptions to Auditor's Report, and for the reasons stated in the accompanying opinion,
the exceptions are dismissed. By separate order, a Supplemental Decree will be entered
in accordance with the Report.
BY THE COURT,
/s/J. Wesley Oler, Jr.
J. Wesley Oler, Jr., J.
John M. Eakin, Esq.
Eakin and Eakin
Market Square Building
Mechanicsburg, PA 17055
Attorney for Plaintiffs
Mark D. Bradshaw, Esq.
One South Market Square Building
213 Market Street
Harrisburg, PA 17101
Attorney for Defendant
Samuel L. Andes, Esq.
525 N. 12t~ Street
Lemoyne, PA 17043
Auditor
26