Opinion ID: 2284361
Heading Depth: 4
Heading Rank: 1

Heading: Operation of Firm on Cash Method

Text: Appellants first point out that the partnership, during the course of its existence, maintained its accounts on a cash basis and that partners' distributions were based upon net annual profits. It seems apparent, at the outset, that the reasons why a firm operates on a cash or accrual basis during its life may bear no relation to fixing the relative interests of the partners on dissolution. [29] As previously explained, the general rule is that fees for pre-dissolution work in progress paid after dissolution are treated as assets of the firm subject to distribution on liquidation. A. BROMBERG & L. RIBSTEIN, supra, § 7.08(e). Does the manner in which the firm treated the fees for accounting purposes while in operation affect their treatment as firms assets? Although the issue has not been addressed in the District of Columbia, case law from other jurisdictions persuades us that, ordinarily, a firm's accounting method is not dispositive in deciding whether accounts receivable, including contingent fees, are assets subject to distribution after dissolution. In Bader v. Cox, 701 S.W.2d 677 (Tex.Ct. App.1985), the widow of a deceased partner sued for her husband's interest in partnership income received after his death on contingent fee cases pending at the time of dissolution. Faced with contentions remarkably similar to those in the case at bar, the Court of Appeals of Texas held: [P]ending contingent-fee cases are partnership property which may or may not have value, depending upon the evidence. Thus, we cannot agree with Bader and Cox's contention that because the partnership operated on a cash-basis accounting system and because the value of the contingent-fee files at the time of decedent's death is not readily or easily ascertainable, the files are not assets of the partnership. The fact that fees are not earned until a case is concluded by settlement or judgment does not compel the conclusion that the files lose their characterization as partnership assets.... Id. at 682. In reaching this result, the court noted that, as here, the pending cases were undergirded with binding contracts, and that the surviving partners' duty to wind up included a duty to complete all the firm's executory contracts and to conclude unfinished partnership business. Id. Similarly, in Seale v. Sledge, 430 So.2d 1028 (La.Ct.App.), writ refused, 437 So.2d 1155 (La.1983), the Court of Appeal of Louisiana concluded that former partners had an interest in a contingent fee received on settlement of a personal injury suit when the partnership agreement contained no specific language concerning dissolution, despite the fact that the firm maintained its accounts on a cash basis. The court rejected a per se rule from an earlier Louisiana case [30] that, when the accounting is on that basis, work in progress does not become an asset until the work is completed and the fee received. Id. at 1030-31. In deciding that the contingent fee should have been considered a partnership asset on dissolution, the court rejected the trial judge's finding that the partnership had no interest in the fee even though one partner had obtained the client and filed the suit prior to joining the firm, and devoted more time to it than any other lawyer after joining the firm. In Bailey & Williams v. Westfall, 727 S.W.2d 86 (Tex.Ct.App.1987), the court refused to set aside an arbitrator's conclusion that a withdrawing partner in a law partnership had no interest in accounts receivable because the firm operated on a cash accounting system. There, however, the partnership agreement expressly provided for payments to a withdrawing partner: Within 90 days after the effective date of withdrawal, an amount of cash shall be paid to the partner who is withdrawing, equal to the amount to which he is entitled under normal bookkeeping procedures utilized by the firm on the effective date of his withdrawal, less any charges against his account which have been made. Id. at 88 (emphasis added). In Bader and Seale, supra, as in the instant case, the partnership agreement was either inconclusive or silent on distributions after dissolution, a point stressed by the Bailey court: In Bader, we held that under the Texas Uniform Partnership Act, absent a partnership agreement, the widow of a deceased partner was entitled to her husband's share of his law firm's accounts receivable at his death, even though the firm used a cash basis accounting system. Where there is a partnership agreement, however, as there is in the present case, the rights of a withdrawing partner are governed by that agreement and not by statute. 727 S.W.2d at 90 (citations omitted; emphasis added). We adopt as sound the Bader/Bailey rule: absent a contrary agreement specifically governing post-dissolution accounting, pending contingent fee cases are partnership property and, therefore, assets subject to distribution on dissolution regardless of the fact that the firm operated under a cash method of accounting. As discussed below, since Farmer did not agree to forego an interest in accounts receivable for partnership work performed before dissolution, it was not error to treat certain fees as accruals on the date of dissolution.