Opinion ID: 2284361
Heading Depth: 3
Heading Rank: 1

Heading: Exclusivity of the Accounting Remedy

Text: Both argue that the wrongful withholding of one partner's share of a dissolved partnership's assets is compensable only by an equitable action for an accounting. Beckman argues that the trial court erred in creating a new tort which lacked the essential element of proof of harm. He maintains that, because the District of Columbia Uniform Partnership Act afforded Farmer the remedy of an accounting for the alleged wrongful withholding of his share, Farmer could demonstrate no legal injury from a breach of fiduciary duty necessary to support a cause of action in tort. Kirstein argues, relatedly, that an action for an accounting under the Partnership Act has entirely subsumed and replaced any cause of action for breach of fiduciary duty arising from the withholding of a former partner's share after dissolution. The trial judge framed this issue in his order denying Defendants' post-trial motions as follows: Where a breach of fiduciary duty is proven, but the essence of the tort is the wrongful withholding of a partner's share on the dissolution of the partnership, does the statutory equitable remedy of an accounting preempt the common law tort remedy of a suit for damages? This appears to be a question of first impression in this jurisdiction, and this court answers it in the negative. For the reasons discussed below, we agree with the trial court.
The District of Columbia has long followed the traditional rule that ordinarily a partner may not sue a co-partner in an action at law with respect to partnership transactions until an accounting in equity, a settlement, or a promise to pay has been obtained. See Wright v. Armwood, 107 A.2d 702, 703 (D.C.1954); Boyle v. Smith, 64 A.2d 428, 429 (D.C.1949). To some extent the rule is a vestigial reflection of the historical division between courts of law and equity, but it also serves a function arising from characteristics of the partnership relation. It recognizes that partners hold partnership property in undivided interests, and that no contractual debtor/creditor relationship can arise between partners until there has been an accounting or its equivalent. Boyle, supra, 64 A.2d at 429. Aside from the problem presented by the undifferentiated manner in which partnership property is held while the enterprise exists, practical difficulties commend the settlement of accounts before an action at law between partners can be maintained. The value of partners' respective interests cannot be determined while accounts are in flux, but only after partnership liabilities are satisfied, all assets are marshalled, the partners' capital accounts adjusted, and the amount of any surplus ascertained. Bromberg and Ribstein explain: The practical reasons for the exclusivity rule focus on the type of claim involved and the necessity of resolving it together with all other claims of the partners in a single proceeding. First, no rights of the partners can accurately be determined until a balance is struck ... Second, without regard to the need for a balance, it is most efficient to resolve multiple claims dealing with related facts in a single proceeding. A. BROMBERG & L. RIBSTEIN, supra, § 6.08, at 6:100-01. The general rule is subject to several exceptions reflecting its basic rationale. If the partnership's business involves a single completed transaction or only one or a few items, and no complicated accounts are involved such that no accounting or appraisal is necessary to fix the amount due the plaintiff, a partner may sue at law for a share of partnership assets. Boyle, supra, 64 A.2d at 429. Also, resort to equity may not be necessary when breach of the partnership agreement, wrongful dissolution, fraudulent breach of trust, or misappropriation of money clearly belonging to another partner is charged. Id. This exception envisions tortious behavior by the defendant partner beyond the scope of rightful partnership activity. [39] In this case, the applicability of these exceptions is not clear cut. The trial judge took Farmer's claims of fraud, conversion, and wrongful dissolution away from the jury, leaving only the breach of fiduciary duty count. Yet we recognize that the essence of Farmer's claim was that his rights as a partner were denied for the purpose of depriving him of a share of the Laker fee. The facts of this case thus approach situations in which courts have recognized an exception for tortious acts by one partner against another. It is not necessary, however, to decide whether Farmer's cause of action falls within the scope of any of the exceptions to the rule. That is because the judge determined the final state of partnership accounts before trying the remaining legal issues to the jury. By adopting the special master's report settling the partnership's accounts and establishing the relative shares of the partners in the surplus, the judge fulfilled the purposes of the common law prerequisite to an action at law: a balance was struck, in that the jury was charged that the accounting established Farmer's shares of partnership assets as conclusive facts for purposes of trial of the legal issues; and sequential trial of Farmer's equitable and legal claims served the goal of efficiency by resolving all claims and defenses in a single action before final judgment was entered. [40] Appellants contend, however, for separate reasons, that the determination of Farmer's interest in the accounting barred his tort claims of breach of fiduciary duty based upon failure to wind up and render an account. We treat these arguments in turn.
Beckman contends that the remedy of an accounting nullifies a legal claim for fiduciary breach by cancelling out any special damages: the plaintiff can prove no injury in fact when he has a right to recover in equity. We reject this contention. First, contrary to Beckman's claim, a breach of fiduciary duty arising from a failure to render an account is not a novel theory of tort recovery. The Partnership Act recognizes a partner's duty to account as a trustee to the partnership for any profits derived without the consent of the other partners in any transaction connected with the conduct or liquidation of the partnership. D.C.Code § 41-120(a). Considering this statutory scheme, it is not startling that a refusal to wind up and to account for profits received during the liquidation phase should be treated as a fiduciary breach. Cases cited earlier involving retention of legal fees received by former partners after dissolution for unfinished business of the partnership follow the sound rule that each partner has a clear duty to wind up unfinished business for the partnership's benefit. E.g., Ellerby, supra, 138 Ill.App.3d at 80-81, 92 Ill.Dec. at 605, 485 N.E.2d at 416; Rosenfeld, supra, 146 Cal.App.3d at 216-17, 194 Cal.Rptr. at 189-90. In completing unfinished business, each partner remains accountable as a fiduciary to the former partners, Resnick, supra, 49 Md.App. at 506-07, 434 A.2d at 587, and any diversion of benefits for the former partner's own personal or professional gain is also a breach of fiduciary duty. See Rosenfeld, supra, 146 Cal.App.3d at 217, 194 Cal.Rptr. at 190. [41] The present case thus involves no unheard-of new tort, but rather a failure to observe the duties of loyalty and fair dealing that partners have been recognized to owe one another for centuries. [42] Second, Beckman is incorrect in assuming that the availability of equitable remedies renders it impossible to make out a prima facie case in tort. Once some injury for which the law provides a remedy has been pleaded and proven, tort damages quantify and compensate the harm suffered by the plaintiff. W. PROSSER & W. KEETON, THE LAW OF TORTS, § 1, at 5-6 (5th ed. 1984). Beckman correctly notes that a breach of fiduciary duty is not actionable unless injury accrues to the beneficiary or the fiduciary profits thereby. Day v. Avery, 179 U.S.App.D.C. 63, 74 n. 56, 548 F.2d 1018, 1029 n. 56 (1976), cert. denied, 431 U.S. 908, 97 S.Ct. 1706, 52 L.Ed.2d 394 (1977). The trial court here concluded that compensatory damages in tort were co-extensive with the amount to which it found Farmer entitled in the accounting. Injury quantified as damages flowing from a breach of a fiduciary duty to wind up and account may equal the amount determined to be due in an accounting, but it hardly follows that no injury in fact occurred just because it is redressable in equity. It is basic that the same set of facts can support claims for legal and equitable relief, and that these claims may be tried in the same action. Indeed, Boyle and Wright appear to contemplate and encourage trial of legal causes in the same action as the accounting. Boyle, supra, 64 A.2d at 430 (rule that accounting must precede trial of legal claims is no ground for dismissing suit for wrongful conversion of partnership funds and fraudulent breach of duty; separate action for accounting was not necessary; it could have been had in the same cause); Wright, supra, 107 A.2d at 704 (even if partner's suit against co-partner for contribution for payment of partnership debt did not fall within single transaction exception to exclusivity rule, claim should not have been dismissed because accounting and legal claims could be tried in same action). Moreover, it is not difficult to conceive of situations where harm flowing from a breach of a partner's duty to wind up and account results in damages that would go unredressed solely in an equitable action for an accounting. As the jury found in this case, harm may be willful or malicious enough to provide a basis for punitive damages. And while punishment and deterrence may be proper goals of civil damages in certain limited circumstances, Harris v. Wagshal, 343 A.2d 283, 288 n. 13 (D.C.1975), it is not the role of courts of equity to punish wrongful conduct. See Stern v. Lucy Webb Hayes Training School for Deaconesses & Missionaries, 381 F.Supp. 1003, 1018 (D.D.C. 1974); SCRAP v. United States, 353 F.Supp. 317, 322 (D.D.C.), vacated on other grounds, Aberdeen & Rockfish R. Co. v. SCRAP, 414 U.S. 1035, 94 S.Ct. 532, 38 L.Ed.2d 326 (1973). [43]
Kirstein, relying on a related preemption theory, contends that adoption of the Partnership Actspecifically the right to an account under § 41-121abrogated any common law right to seek damages in tort for breach of a partner's duty to wind up unfinished business and render an account. However, he points to nothing in the Act or its history demonstrating that the drafters intended a formal accounting under § 41-121 to be the exclusive remedy for a breach of the duties imposed by § 41-120. Not only is the Act silent on the issue of exclusivity of remedies, but the history of the Uniform Partnership Act, which our statute replicates, suggests that the provision for an accounting was meant to expand, not restrict, remedies available to a partner aggrieved by a fiduciary breach. Before the Act recognized a partner's right to demand a formal accounting when a co-partner breached the duty to account, it was necessary to formally dissolve the partnership, with the consequence of liquidation and destruction of the business. See Commissioner's note to UNIFORM PARTNERSHIP ACT § 22, 6 U.L.A. 284 (1969) (ordinarily, a partner is not entitled to a formal account, except on dissolution). To relieve the dilemma of the partner who seeks a predissolution account, the drafters of the U.P.A. broadened the grounds for an accounting so that it is not contingent on dissolution. A. BROMBERG & L. RIBSTEIN, supra, § 6.08, at 6:97. Provision for a pre-dissolution accounting is weak evidence of an intent to subsume and replace a common law right of action for failure to wind up and account in good faith. Moreover, anticipating situations where its language is silent, our statute declares: in any case not provided for in this chapter the rules of law and equity, including the law merchant, shall govern. D.C. Code § 41-104. As discussed earlier, our decisions suggest that a determination of the partners' respective rights in an equitable action for accounting is (subject to exceptions) a prerequisite but not a bar to an action at law. Wright, supra, 107 A.2d at 703-04; Boyle, supra, 64 A.2d at 429-30. Accord, Weil v. Markowitz, 264 U.S. App.D.C. 381, 388 & n. 13, 829 F.2d 166, 173 & n. 13 (1987) (accounting condition precedent to action at law between partners; construing District of Columbia and New York law). This rule is particularly sound where, as in the present case, legal disputes affecting the partners' entitlements established in the accounting remained unresolved after that proceeding. Kirstein cites authority from other jurisdictions construing their Partnership Acts as having abolished common law remedies. E.g., Jennison v. Bierer, 601 F.Supp. 1167, 1178 (D.Vt.1984) (Vermont Partnership Act establishes the right and provides the remedy for breach of fiduciary duty). But since our statute is silent on the issue of exclusivity and implies that matters unaddressed therein are controlled by common law rules, we see no reason to interpret the statute in a manner inconsistent with Boyle and Wright.