Darr v. D.R.S. Invs. - 232 Neb. 507, 441 N.W.2d 197 (1989)

Rule:

A reformation of a partnership agreement may be decreed where there has been a mutual mistake or where there has been a unilateral mistake caused by the fraud or inequitable conduct of the other partner. Proof of such mistake must be shown by clear, convincing, and satisfactory evidence. Reformation is decreed in order to set forth the real agreement of the parties when the written instrument does not represent their true intent. Such reformation may be decreed with respect to a mutual mistake, and in that situation the erroneous written agreement is conformed to the antecedent agreement of the parties entered into prior to the execution of the erroneous written agreement.

Facts:

David Darr and defendants James Stephens and Erwin Rung entered into an agreement creating a partnership known as D.R.S. Investments (DRS). The partnership agreement provided that the books would be maintained on a cash basis. A partner's retirement caused its dissolution unless the remaining partners continued and paid the retiring partner the value of his interest. A year after the partnership was created, on the advice of its accountant, the partnership accounting for income tax purposes was changed to an accrual method to provide greater tax losses for the parties. When Darr gave his notice of retirement, the partners offered him only his initial contribution and, subsequently, prevailed on their counterclaim for the negative amount in his capital account.

Issue:

Should the partnership agreement be reformed for mutual mistake with respect to the provision determining the value of a retiring partner's share in the partnership?

Answer:

No.

Conclusion:

The court rejected Darr’s claim that the parties did not contemplate a negative amount being due to a retiring partner. There was no evidence of a mutual mistake warranting reformation. The agreement did not provide for appreciated values and was not unconscionable. However, the court reversed the judgment because the valuation of Darr’s capital account was incorrectly determined on an accrual basis. Remanding the case, the court ordered determination of his interest on a cash basis pursuant to the agreement.