Opinion ID: 2284361
Heading Depth: 3
Heading Rank: 3

Heading: Use of the Accrual Method in the Accounting

Text: Appellants contend that the in-court accounting should have been performed on a cash basis, and that if it had been, Farmer would have been found to have received everything to which he was entitled. Because the Laker fee was not actually received until 1985, some time after dissolution of the firm on May 31, 1984, under a cash method it could not be counted as an asset of the firm subject to distribution under the accounting order. Appellants base this contention upon two arguments, neither of which is persuasive.
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.
Appellants contend that the handwritten amended paragraph 13 in the July 6, 1984 Separation of Practice Agreement embodied an agreement by all parties to conduct the post-dissolution accounting on a cash basis. They argue that, because the agreement for an out-of-court accounting provided for a cash basis methodology, it was error to conduct the in-court accounting using the accrual method. This contention lacks merit. The master was appointed by consent of the parties to determine the respective interests of each of the partners as of the date of dissolution, according to a profit-sharing formula set out in the partnership agreements and repeated in the reference order. The order appointing the master prescribed in detail the methodology for this accounting, and expressly provided for the use of accruals for some component items. [31] Appellants, in essence, would disregard the clear provisions of the consent order, which the parties drafted, and hold that the accounting should have been conducted pursuant to a prior agreement of the parties. We conclude that the consent order, not the agreement, should govern the in-court equitable proceeding. This is so not because the consent order constituted a waiver of any objection as to the methodology used in the accounting, [32] but because the Separation of Practice Agreement is not nearly as conclusive as appellants urge. Their assertions that the Superior Court ignored new paragraph 13 of the parties Separation of Practice Agreement which the parties wrote out in handwriting as their agreed accounting in lieu of `winding up', and that there is no dispute that this accounting was to be performed on a cash basis, are but variations of the same argument eventually resolved against them by the jury: that Farmer agreed to waive his rights in certain accounts receivable when he signed the agreement. Judge Weisberg did not err in declining to accept Beckman's interpretation of Paragraph 13. In relevant part it said no more than: Revenues and expenses will be accounted for with a closing date of May 31, 1984.... Although Beckman read this clause to mean that the partners intended the accounting to be limited to determining cash revenues received in the period January 1 through May 31, 1984, and cash expenses paid in that period, the trial judge was not obliged to accept that interpretation. When an accounting has been referred to a special master, the trial court is required to adopt the master's findings of fact unless clearly erroneous. See Rosendorf v. Toomey, 349 A.2d 694, 699 (D.C.1975); Super.Ct.Civ.R. 53(e)(2). The master's findings are presumptively correct, Case v. Morrissette, 155 U.S.App.D.C. 31, 38, 475 F.2d 1300, 1307 (1973), and the party excepting to them bears the burden of showing clear error. See Oil, Chemical & Atomic Workers Int'l Union, AFL-CIO v. NLRB, 178 U.S.App.D.C. 278, 283, 547 F.2d 575, 580 (1976), cert. denied, 431 U.S. 966, 97 S.Ct. 2923, 53 L.Ed.2d 1062 (1977). Once the trial court adopts the master's findings, moreover, they become those of the court, Super.Ct.Civ.R. 52(a); 9 C. WRIGHT & A. MILLER, FEDERAL PRACTICE AND PROCEDURE, § 2615 (1983), reversible on appeal only if clearly erroneous. Rosendorf v. Toomey, supra, 349 A.2d at 699. Because Judge Weisberg was not clearly wrong in adopting the master's findings, which reflected the accrual method set out in the consent order, there is no basis on which to disturb the results of the accounting. [33]