Opinion ID: 2284361
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Heading Rank: 2

Heading: Post-Dissolution Earnings as Partnership Assets

Text: Appellants assert that Farmer was not entitled to receive a full share of the Laker contingent fee, invoking the rule that when the partnership business is continued by others after dissolution, a partner who contributed only personal services which ceased upon dissolution should not share in profits earned by the post-dissolution entity. Annotation, Rights in Profits Earned by Partnership or Joint Adventure after Death or Dissolution, 55 A.L. R.2d 1391, 1418 (1957). See also Hilgendorf v. Denson, 341 So.2d 549, 551 (Fla. App.1977); Griffeth v. Fehsel, 61 Cal. App.2d 600, 605-06, 143 P.2d 522, 524-25 (1943). We conclude that this rule does not apply to fees earned or received for winding up unfinished business of the dissolved partnership when one partner has exercised his right to compel liquidation and distribution of surplus, as Farmer did here. Application of the rule is properly limited to situations where the outgoing partner elects not to exercise his right to force a liquidation, but instead permits continuation of the business by the other partner(s), or when the partners agree to settle their accounts contemporaneously with dissolution with the understanding that one or more will continue the business. In these instances, unfinished business loses its character as partnership property, and the outgoing partner severs the fiduciary association that binds him to the post-dissolution entity. To apply the rule urged by appellants in circumstances where, while some partners wish to carry on the partnership's business, an outgoing partner seeks to wind up the business, would defeat the right of each partner, conferred by the Partnership Act, to require liquidation and distribution of surplus upon rightful dissolution. Under the Act, dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business. D.C.Code § 41-128; Warren v. Chapman, 535 A.2d 856, 858 (D.C.1987). Farmer contends that he was expelled from the partnership, [22] but we conclude the association was terminated by the express will of Beckman. See D.C.Code § 41-130(1)(B) (absent contrary agreement, partnership terminable at will of any partner). Because the dissolution was not wrongful in the sense that it violated the partnership agreement, the partners' rights in partnership property are governed by D.C.Code § 41-137(a), which provides: When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his copartner and all persons claiming through them in respect to their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. We must determine whether Farmer was entitled to a share of fees received after dissolution of the partnership as part of the net amount owing to him.
Absent a contrary agreement, the general rule is that [a]ll of the partners of the dissolved firm ... are ... entitled to share in fees for pre-dissolution work in process paid after dissolution to the dissolved partnership or to withdrawing partners. A. BROMBERG & L. RIBSTEIN, supra § 7.08(e), at 7:81-82 (citations omitted). Such fees, however, may lose their status as assets subject to distribution by an agreement of the partners to divide them upon dissolution when one or more partners wants to continue the business. See, e.g., Hudson v. Kemper, 153 A.2d 316, 318 (D.C.1959). Winding up can be contemporaneous with dissolution when the partners expressly or impliedly agree to transfer their shares of the business to the continuing partner. Gibson v. Deuth, 270 N.W.2d 632, 635 (Iowa 1978), citing Wolf v. Murrane, 199 N.W.2d 90 (Iowa 1972). The transfer is for a sum which may include the out-going partner's percentage of profits from unfinished business earned before the date of dissolution, id., at 635, and can take the form of an agreed-upon accounting concurrent with dissolution. The sole case from the District of Columbia cited by appellants is in harmony with this approach. In Hudson v. Kemper, supra , this court recognized: Generally, it is the rule that a partner, who, after dissolution of the firm, makes profits from continued operations shall be accountable to his coadventurer.... Here, we have, however, an agreement in which a settlement or balance was struck disposing of the partnership assets, such as the trade name, money in the bank, office furniture, catalogs, etc.... Apparently the parties intended, with the dissolution agreement, a complete severance of their relationship, for appellant had knowledge of the [disputed] contingent building contracts and made no provision for them. 153 A.2d at 318. Accord, Griffeth, supra, 61 Cal.App.2d at 606, 143 P.2d at 525 ([i]n the instant action there was ... a dissolution proved and an accounting agreed upon). Besides assigning his rights in partnership property to the continuing partners for an agreed-upon compensation, a partner may consent, affirmatively or by acquiescence, to their continuation of the business without formal assignment. D.C. Code §§ 41-140(a), (c), 41-141. In this case the Partnership Act entitles him to an election. He may receive, at his option, either the value of his interest at the date of dissolution (with interest) or the profits attributable to the use of his right in the property of the dissolved partnership as an ordinary creditor of the partnership, subordinated to other creditors. Id. § 41-141. But the continuation of the business cases just discussed do not deal with the case where one partner insists on a winding up and liquidation of the partnership on dissolution, and no settlement of accounts including unfinished business takes place. When a partnership is dissolved without violating the partnership agreement, each partner has an absolute right to demand liquidation and distribution of surplus, unless otherwise agreed. See D.C.Code § 41-137(a). That one or more partners wants to continue the business does not affect this right. Absent wrongful dissolution, or expulsion of a partner under a provision in the partnership agreement, see note 22, supra, if one partner elects to liquidate upon dissolution, the others cannot continue the partnership business. A. BROMBERG & L. RIBSTEIN, supra, § 7.13, at 7:118 (business may be continued when all of the partners elect to permit continuation rather than to exercise the liquidation right (emphasis added)). Accord, J. CRANE & A. BROMBERG, LAW OF PARTNERSHIP § 86(c) (1968) (non-continuing partner can elect to force a liquidation of business or permit it to continue and claim as creditor the value of his interest at dissolution). [23]
If a partner insists on liquidation, then the line of demarcation for determining the amount owing to the respective partners, D.C.Code § 41-137(a), is not dissolution but completion of winding up the partnership's business. Between dissolution and that point, the fiduciary obligation of each partner to account to the partnership for any benefit, and hold as a trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the ... conduct, or liquidation of the partnership, continues in force. Id. § 41-120 (emphasis added). The Partnership Act specifically grants a winding up partner the power to bind the partnership after dissolution by any act appropriate for ... completing transactions unfinished at dissolution. Id. § 41-134(a)(1). It follows that any profits derived from completion of such unfinished business inure to the partnership's benefit, even if received after dissolution. On the basis of these principles, other courts confronted with dissolution of law partnerships have held that pending cases are uncompleted transactions requiring winding up after dissolution, and are therefore assets of the partnership subject to post-dissolution distribution. See, e.g., Ellerby v. Speizer, 138 Ill.App.3d 77, 80-81, 92 Ill.Dec. 602, 605, 485 N.E.2d 413, 416 (1985); Jewel v. Boxer, 156 Cal.App.3d 171, 178-79, 203 Cal.Rptr. 13, 18 (1984); Rosenfeld, Meyer & Susman v. Cohen, 146 Cal. App.3d 200, 216-17, 194 Cal.Rptr. 180, 189-90 (1983); Resnick v. Kaplan, 49 Md.App. 499, 508, 434 A.2d 582, 587 (1981); In re Mondale & Johnson, 150 Mont. 534, 437 P.2d 636 (1968); Frates v. Nichols, 167 So.2d 77, 81 (Fla.Dist.Ct.App.1964). The reason is that dissolution does not terminate or discharge pre-existing contracts between the partnership and its clients, and ex-partners who perform under such contracts do so as fiduciaries for the benefit of the dissolved partnership. See Ellerby, supra, 138 Ill.App.3d at 80-81, 92 Ill.Dec. at 605, 485 N.E.2d at 416; Resnick, supra, 49 Md.App. at 506-07, 434 A.2d at 587; Rosenfeld, supra, 146 Cal.App.3d at 216-17, 194 Cal.Rptr. at 190-91. Fees received are to be shared regardless of which former partner provides services in the case after dissolution. Jewel, supra, 156 Cal.App.3d at 174, 203 Cal.Rptr. at 15.
To apply these principles, it is necessary to decide whether Farmer agreed to a winding up contemporaneously with dissolution in the July 6 Separation of Practice Agreement, as suggested by appellants, or otherwise waived his right to compel liquidation by acquiescing in the continuation of partnership business by Beckman and Kirstein. If so, he would have no right to fees earned after dissolution, and would only be entitled to the value of his interest in the Laker antitrust and Manson estate fee ascertained as of the dissolution date. See D.C.Code § 41-141. Conversely, if Farmer exercised his right to compel liquidation by seeking a winding up of partnership business and a final accounting, Beckman and Kirstein, in performing post-dissolution work on the Laker antitrust case and collecting the fee, acted as fiduciaries for the benefit of all the partners. [24] See id. § 41-137(a). Judge Weisberg in essence submitted this issue to the jury by instructing it to decide whether, under all the circumstances, Farmer had waived his rights to the Laker contingent fee by executing the Separation of Practice Agreement on July 6, 1984. It is true the jury was not asked specifically to find whether Farmer had waived his right to compel liquidation of the partnership, or whether the Separation of Practice Agreement constituted a winding up contemporaneous with dissolution. We conclude, however, that the jury's ultimate finding that Farmer did not agree to give up his interest in the Laker fee in the agreement encompassed these basic facts. We further conclude there was evidence sufficient to support the jury's determination. [25] Trial exhibits reveal that Farmer wrote Beckman and Kirstein letters requesting performance of an accounting by a neutral professional on June 26, July 31, August 17, and September 11, 1984. All of these letters were entitled Winding Up of Partnership. These letters set out Farmer's position on distribution of profits, and discussed accounts receivable and payable generally, and the Laker case specifically. Later letters objected to Beckman's and Kirstein's refusal to account and demanded a prompt winding up. Notably, earlier letters proposed amounts Farmer would accept in settlement of the partnership accounts, including the Laker fee, which, had they been acted upon, would have constituted a final accounting and termination of the partnership. Appellants rely on the Separation of Practice Agreement itself, but this agreement, on its face and in the context of the parties' dealings, does not compel a conclusion that Farmer intended to waive his right to a final accounting. On July 2, four days before the agreement was executed, Farmer wrote Beckman and Kirstein a letter entitled Separation of Practice in which he referred to his June 26 memo regarding winding up of the partnership and noted, I still believe we must come to grips with winding up the partnership as soon as possible.... You should not take this letter as an indication that a response to my June 26, 1984 letter is any less urgent. The letter was occasioned by what Farmer described as another crisis that had arisen when Beckman informed him he planned to effect a unilateral separation of practices by giving instructions that firm telephones were to be answered Beckman and Kirstein and by using Beckman & Kirstein stationery. In an attempt to provide a mutually agreeable basis for dealing with the situation that was created by Bob's decision to dissolve the partnership, and his decision to force an immediate separation of our practices, Farmer's letter proposed specific solutions to the problems created by the dissolution, but clearly distinguished between what Farmer called separation of practice issues and winding up issues. On July 6, 1984, the parties executed the Separation of Practice Agreement. Its first paragraph said: RMB, DF and DMK agree to attempt to reach agreement on the terms for winding up their practice as Beckman, Farmer & Kirstein as soon as possible. Without prejudice to anyone's position with respect to the winding up of Beckman, Farmer and Kirstein, RMB, DF, and DMK agree to operate their practices according to the terms of this agreement. As this paragraph reflects the parties' intent that the agreement was to have no effect on the winding up of the partnership, it cannot be said to show Farmer's acquiescence in the continuation of the partnership's business. Neither does the document evidence a final accounting among the partners. It distinguishes between details surrounding separation of the practices and the ultimate winding up of the business, over which the parties had not reached agreement when the document was signed. Also, an agreement to finally settle accounts as of the date of dissolution would be inconsistent with Farmer's continued demands for a winding up and final accounting thereafter. The jury adopted this view, finding that by entering the agreement, Farmer did not intend to relinquish any rights in the Laker case or other accounts receivable at dissolution. Some provisions of the document, to be sure, lend support to appellants' theory that the parties agreed to treat the firm's clients as assets, and to divide those assets as of the date of dissolution. The parties agreed that, while Farmer was holding over on the premises of the former partnership, Farmer would not solicit or perform services for certain listed clients (including Morris, the Laker liquidator) and Beckman and Kirstein would not solicit or perform services for others. This provision acknowledged that Farmer could perform services for clients on Beckman's side of the list if expressly requested to do so by the client or RMB [Beckman], and vice versa. Listed clients' files and mail were to go to the designated parties. Paragraph 12 of the document stated that [w]ork and bills from July 1, 1984, on shall be for the separate accounts of RMB and DMK, or DF. The duty to wind up partnership business does not disable the former partners in a law firm from accepting employment from former clients of the dissolved partnership, provided the new employment does not relate to work in progress at the time of dissolution. See Rosenfeld, supra, 146 Cal.App.3d at 221, 194 Cal.Rptr. at 192. Thus, to the extent the references in the agreement to work and bills and the client lists related to future work, as opposed to work in progress, the agreement was consistent with Farmer's position that the Laker fee was still negotiable as part of the winding up and accounting. Paragraph 8 of the document, however, addressed past servicescertain work Farmer performed in June 1984 for Princess Casinos, Inc.by providing that Farmer was to bill Princess for his services in that month and keep the revenues. All other work performed by Farmer during June 1984 was to be billed on Beckman & Kirstein stationery, and Beckman and Kirstein were to keep the revenues. Farmer explained this provision as related to the interim draw problem. This was a means of just splitting up the income we made from the work done during the month of June. The work and bills provision, Farmer's interim draw remarks, and the Princess Casinos provision reflect an understanding that certain work done during June of 1984 and thereafter would be billed, and fees retained, for the separate accounts of the partners. Appellants seize on this, arguing that it would be inequitableand contrary to the parties' understandingto allow Farmer to keep fees received for work performed for Princess Casinos and other clients while requiring Beckman and Kirstein to account to Farmer for a full share of the Laker contingent fee. Farmer's trial testimony illuminated the circumstances surrounding the work and bills and Princess Casinos provisions. He testified that after July 6, 1984, he performed work for and billed some of the clients listed in the addendum, and kept the revenues, without accounting to Beckman and Kirstein. He indicated he had performed a substantial amount of work billed on an hourly basis before June 1984, representing the firm's principal source of revenue for that period. Among this work was what he characterized as a very hefty bill to Princess. Princess, he acknowledged, was in a sense unfinished business of the partnership. When pressed to explain the difference between the Laker fee and the Princess fee, Farmer said the parties understood that the work and bills provisions related solely to work performed on an hourly basis after July 6, 1984, but not to the large contingent fee case or other accounts receivable, which would still be the subject of negotiations for the final winding up and accounting. [26] In contrast, Beckman testified that the parties had agreed that the work and bills provision and the client lists amounted to a final accounting and division of assets, and in particular that Farmer was agreeing to give up any interest in the Laker fee in exchange for the arrangement on Princess and other clients. Faced with this conflicting testimony, the jury accepted Farmer's version and rejected Beckman's. While, as observed earlier, the jury did not specifically find that Farmer did not waive his right to compel liquidation, or that the Separation of Practice Agreement did not constitute a final accounting contemporaneous with dissolution, its ultimate finding that Farmer did not waive his interest in the Laker fee or the Manson estate implicitly resolved these issues. Consistent with the jury's finding, we conclude that by the Separation of Practice Agreement the parties agreed to only one aspect of the winding updisposition of hourly fees billed and received by or after June 1984thus removing that issue alone from the accounting. In seeking a winding up and a final accounting, for which he eventually had to resort to court, Farmer exercised his right to compel liquidation of the partnership. Thus all work performed on partnership business unfinished at the date of dissolution and unaddressed by the Separation of Practice Agreement, including the Laker contingent fee case and administration of the Manson estate, was done for the benefit of the dissolved partnership. See Ellerby, supra, 138 Ill.App.3d at 80-82, 92 Ill.Dec. at 605, 485 N.E.2d at 416; Resnick, supra, 49 Md.App. at 506-07, 434 A.2d at 587; Rosenfeld, supra, 146 Cal.App.3d at 219, 194 Cal.Rptr. at 191. The trial court did not err in awarding Farmer a share of fees received after dissolution, or in failing to calculate Farmer's interest based on the value of assets as of the date of dissolution.
Appellants further argue that they were entitled to compensation beyond their distributive share of surplus for their services in completing the Laker case. [27] They argue that it would be inequitable to deny them that compensation while giving Farmer a share of the Laker fee even though he did not work for the partnership's benefit in winding up unfinished business. The trial court ordered the accountant to reduce the Laker fee by an amount representing Beckman & Kirstein's overhead expenses incurred in collecting the fee, [28] and adopted the resulting figure. We conclude this is the limit of appellants' right to reimbursement. D.C.Code § 41-117(6) states unambiguously: No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs. Authorities that have focused upon this language are in accord that a partner winding up the business of a partnership rightfully dissolved for any reason other than the death of a partner cannot recover compensation for completing unfinished business above his distributive share. Ellerby, supra, 138 Ill.App.3d at 82-83, 92 Ill.Dec. at 606, 485 N.E.2d at 417; Berkson v. Berryman, 62 Md.App. 79, 92-94, 488 A.2d 504, 511-12 (1985); Resnick, supra, 49 Md. App. at 506-07, 434 A.2d at 587; Jewel, supra, 156 Cal.App.3d at 176-77, 203 Cal. Rptr. at 17; Frates, supra, 167 So.2d at 81. But see Cofer v. Hearne, 459 S.W.2d 877, 879 (Tex.Civ.App.1970). Indeed, in Jonathan Woodner Co. v. Laufer, supra, 531 A.2d at 286, this court read § 41-117(6) to foreclose entirely a joint venturer's entitlement to quantum meruit damages upon dissolution. Commentators have recognized that the rule may yield harsh results in some applications. E.g., Comment, Winding Up Dissolved Partnerships: The No-Compensation Rule and Client Choice, 73 CALIF.L. REV. 1597, 1610-11 (1987). Even these critics recognize, however, that the rule is a creature of statute and that attempts by courts to evade it are inappropriate. Id. at 1641. Moreover, as the court noted in Jewel v. Boxer, supra , If there is any disproportionate burden of completing unfinished business here, it results from the parties' failure to have entered a partnership agreement which could have assured that such a result would not occur. 156 Cal.App.3d at 180, 203 Cal.Rptr. at 19. Finally, we perceive no inequity in the application of the rule here. Farmer testified, without serious contradiction, that before June 1984 his work represented the firm's principal source of revenue and allowed Beckman to concentrate on the as-yet unpaid Laker work.