Bailey v Fish & Neave

[*1] Bailey v Fish & Neave 2005 NY Slip Op 50713(U) Decided on May 12, 2005 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on May 12, 2005
Supreme Court, New York County

W. Edward Bailey and KEVIN J. CULLIGAN, Plaintiffs,

against

Fish & Neave, a New York general partnership, and FISH & NEAVE, LLP, a New York limited liability partnership, and ROPES & GRAY LLP, as successor by merger to Fish & Neave and Fish & Neave LLP, Defendants.



650132/04

Bernard J. Fried, J.

Defendants Fish & Neave, Fish & Neave, LLP and Ropes & Gray LLP move to dismiss the amended complaint, and plaintiffs W. Edward Bailey and Kevin J. Culligan cross-move to have this pre-answer motion converted to one for summary judgment.

This is an action by attorneys, who were formerly partners in defendant Fish & Neave ("Firm"), against that firm and its successor firms, for their capital contributions, accrued compensation, and share of contingency fees upon their withdrawal from the firm. Plaintiff attorneys assert that the defendant Firm, by a mere majority vote of partners, in violation of New York Partnership Law § 40 (8) and of the partnership agreement, unlawfully amended the partnership agreement to alter compensation to withdrawing partners, without accounting to them for the moneys they were owed. Defendants contend that the amendment was valid under the partnership agreement.

Defendant Fish & Neave has a written partnership agreement, entered into as of January 1, 1970 (the Partnership Agreement). The Partnership Agreement has no amendment provision. It, however, has been amended many times. The Partnership Agreement provides, in Section 6, entitled "Majority to Rule," that:

[i]n all questions relating to the partnership business (including dissolution of the partnership) the decision of a majority in interest of the partners, based upon their existing respective percentages referred to in Section 4 hereof at the time any such question arises for decision, shall be conclusive upon and bind all partners, except as otherwise provided herein.

(Exhibit A to Affidavit of W. Edward Bailey, dated February 15, 2005, at 3). It also contains provisions regarding payments made to partners upon leaving the Firm. Section 11 provides specifically for payments to be made upon the withdrawal of a partner (id. at 9-13). It provides that the ex-partner shall receive compensation for work done prior to the date of his withdrawal, [*2]his share of the firm's profits prior to withdrawal, and his share of the firm's capital (id.). The payment to a withdrawing partner for prior work done, including the partner's share of contingency fees, was referred to as the "pipeline." Section 16.5, entitled "Return of Capital Advances to Partners, Certification of Amounts Due, and Discharge of Partners' Interests in Firm," states, in part, that amounts standing to the credit of a partner upon, among other things, withdrawal, shall be paid within a reasonable time, but not more than 14 months after the date of withdrawal (id. at 20, § 16.5 [a]).

Plaintiffs allege that, throughout their time as partners, they paid substantial sums to meet the firm's obligations to retired partners, with the understanding that, under the Partnership Agreement, they were likewise entitled to receive substantial sums from the firm upon their retirement (Amended Complaint, Exhibit B to Affirmation of Jeffrey A. Jannuzzo, dated February 15, 2005, ¶¶ 18-19).

In December 2003, and again in March 2004, the Firm enacted two "standstill" agreements, adopted in contemplation of a permanent amendment changing the rights of withdrawing partners to receive capital and accrued income (Exhibits 2 and 3 to Affidavit of William J. Glasgow, dated February 3, 2005). On December 23, 2003, the first interim amendment to the Partnership Agreement was passed by a majority vote (Exhibit 2 to Glasgow Aff., at 4). This amendment states that it was made because the partners were considering amending provisions of the Partnership Agreement that could affect the amount or timing of payments made to withdrawing partners. It provided that the rights of any partner who voluntarily withdrew from the Firm prior to the enactment of a permanent amendment addressing the rights to receive payment from the partnership, would be governed by the permanent amendment ultimately enacted.

Similarly, on March 15, 2004, another "standstill" amendment was adopted, again by a majority vote (Exhibit 3 to Glasgow Aff.). It states that, on "December 23, 2003, the partners adopted an interim amendment . . . amending the Partnership Agreement insofar as it affects payments to withdrawing partners by adding a new Section 11C to the Partnership Agreement" (id. at 1).[FN1] It stated that it was enacted to give the partners additional time to consider and [*3]approve the permanent amendment (id.). This second "standstill" amendment provided that it would expire on June 1, 2004 (id.).

On April 16, 2004, plaintiff Bailey gave formal notice of his withdrawal from the Firm, effective upon the conclusion of a trial he was working on (Exhibit E to Bailey Affidavit). He also requested a waiver of the 60-day withdrawal provision in Section 8 of the Partnership Agreement, so that he could leave as soon as possible (id.). On May 12, 2004, Bailey sent a follow-up letter, stating that the trial was concluded, and that he was withdrawing as a partner effective on May 14, 2004 (Exhibit F to Bailey Aff.). On that same date, plaintiff Culligan also sent a letter, notifying the Firm that he was withdrawing, and requesting that the 60-day withdrawal provision be waived so that he could leave as soon as practicable (Exhibit G to Affidavit of Kevin J. Culligan, dated February 15, 2004). Culligan actually withdrew on June 25, 2004 (Culligan Aff., at 3, Exhibit G). Both plaintiffs enclosed proxies made out to certain designated partners, and specifying that their vote on any amendment to the Partnership Agreement, any extension of the "standstill" agreement, any adoption of a proposal to change the amount and timing of payments to withdrawing partners, and any changes in a partner's rights to repayment of capital or payment of the "pipeline," must be "no" (Exhibit F to Bailey Aff., and Exhibit G to Culligan Aff.).

On or about May 21, 2004, by a majority vote, the partners of the Firm passed the permanent amendment (the Amendment), which transited the Firm from an accrual-based accounting system to a cash-based accounting system, and eliminated the "pipeline," or the right of each partner to receive his or her accrued income upon withdrawal. The Amendment provided, in part, that:

Notwithstanding Sections 4 and 11 of the Partnership Agreement, all accounts receivable and work in process shall be assets of the Firm, and no Partner shall have any specific interest in or claim to them or the proceeds that result from their conversion into cash or possess any claim resulting from the elimination of the Firm's accounting system in effect prior to January 1, 2004.

Exhibit 1 to Glasgow Aff., Section II of Attachment I to Amendment. Under the Amendment, partners withdrawing from the Firm, instead of receiving their share of accrued income, would receive a "Special Distribution" in an amount specified in a "Schedule A" attached to the Amendment (id.). The Amendment states that this "Special Distribution" was to be paid out to withdrawing partners over a 60-month period when they reach the age of 65 (id., Section II.4, at 3). Plaintiff Bailey's "Special Distribution" is $340,690, and plaintiff Culligan's "Special Distribution" is $431,929 (id., Schedule A).

The Amendment further provided that the withdrawing partners would be repaid their capital "in accordance with the procedures set forth in the 1997 memorandum approved by the Partners relating to the return of capital" (id., Section III.1, at 4). This 1997 memorandum outlined a capital restructuring plan for the Firm (Exhibit 4 to Glasgow Aff.). It required that partners who withdraw from the Firm maintain his or her capital in the Firm for a one- to four- year period (id. at 3).

Plaintiffs claim that prior to the purported amendment of the Partnership Agreement, and [*4]for 34 years, withdrawing partners were entitled to their share of the accounts receivable and work in process (work done but not yet paid for), based on the partner's percentage interest in the Firm. They were also entitled to receive a portion of the contingent fees collected by the Firm after departure. Finally, they were entitled to the return of their capital by the end of the fiscal year in which they departed. Plaintiffs assert that they had an established right to these payments, and, then, the majority voted for the monies to "go into their own pockets."

The amended complaint asserts seven causes of action. The first cause of action is for breach of contract, seeking the return of plaintiffs' capital. In this claim, plaintiffs assert that the 1997 memorandum, delaying the right to receive capital payments, was not validly approved by the partnership, and that the Amendment could not alter plaintiffs' rights regarding the return of capital or payment of accrued income (Amended Complaint, ¶¶ 22-26, 43-60). The second cause of action is also for breach of contract, seeking payment of accrued income. Plaintiffs assert that under Section 11 of the Partnership Agreement, they are entitled to their accrued income, including contingent fee income, which they have not been paid. Again, the claim asserts that the Amendment was invalid (id., ¶¶ 61-69). The third cause of action alleges that defendants breached their fiduciary duty to plaintiffs by failing to repay them their capital and accrued income (id., ¶¶ 70-77). In the fourth and fifth causes of action, left over from the original complaint, plaintiffs specifically withdraw their claims for constructive trust and preliminary and permanent injunction (id., ¶¶ 78-79). The sixth cause of action seeks a declaration that the Amendment is invalid as to plaintiffs, and has no effect on defendants' obligation to pay plaintiffs their share of income from contingent fee cases (id., ¶ ¶ 80-86). Finally, the seventh claim seeks a declaration that plaintiffs have not breached any fiduciary or contractual duty to the Firm (id., ¶¶ 87-94).

Defendants move to dismiss on several grounds. First, they contend that the documentary evidence demonstrates that: (1) the Partnership Agreement permits amendment by majority vote; and (2) the Partnership Agreement was properly amended by the Amendment which altered the payment structure with regard to withdrawing partners, allowing payment of a specified amount of accrued income upon the attainment of age 65, the repayment of capital over a one- to four- year period, and which made all accounts receivable and work in process, including contingent fees, the property of the Firm, not individual partners. Defendants maintain that NY Partnership Law § 40 (8) does not apply. Based on this, they contend that the first, second, third, and sixth causes of action should be dismissed. They also contend that the fourth and fifth causes of action should be dismissed, because the plaintiffs have withdrawn their claims for constructive trust and injunction, although they are still set forth in the amended complaint. Finally, they urge that the seventh claim seeks a declaration about an issue that is not in controversy, because defendants have not brought a claim or counterclaim against plaintiffs for a breach of fiduciary duty.

The motion is granted, and the first, second, third, and sixth causes of action are dismissed based on the documentary evidence; the fourth and fifth causes of action are dismissed for failing to state a claim; and the seventh cause of action is dismissed, without prejudice, for failing to present a justiciable controversy. The cross motion to convert this into a summary judgment motion is denied.

The first, second, third, and sixth causes of action, for breach of contract, breach of fiduciary duty, and for a declaration of rights, all revolve around breach of the Partnership [*5]Agreement, and the validity of the Amendment. There is a long-settled principle that partnership rights and duties may be fixed by agreement between the partners (see Lanier v Bowdoin, 282 NY 32, 38 [1939]; Corr v Hoffman, 256 NY 254 [1931]; Urban Archeology Ltd. v Dencorp Invs., Inc., 12 AD3d 96 [1st Dept 2004]). The partners may include in their written contract any agreement they wish regarding the sharing of profits and losses as long as no part of the agreement conflicts with "prohibitory provisions of the statutes or of rules of the common law relating to partnerships, or considerations of public policy" (Lanier v Bowdoin, supra at 38; see also Urban Archeology Ltd. v Dencorp Investments, Inc., supra). The courts lack authority to alter express provisions of a partnership agreement (Urban Archeology Ltd. v Dencorp Investments, Inc., supra).

With these basic common-law principles in mind, I turn to the provisions of the Partnership Agreement. Section 6 specifically provides that "[i]n all questions relating to the partnership business (including dissolution of the partnership) the decision of a majority in interest of the partners" shall be binding upon the partners "except as otherwise provided herein" (Exhibit A to Bailey Aff., at 3). On its face, this provision permits all questions, even the most significant one of dissolution, to be decided by a majority vote, unless there was another provision in the agreement. To argue, as plaintiffs do, that Section 6 does not include the question of changing the amount and payment structure with respect to withdrawing partners, considerably narrows what was clearly intended to be a broad majority rule provision based on the language used. Indeed, it would be anomalous for the Partnership Agreement to permit the Firm to be dissolved entirely by majority vote, but then to bar amendment to the partner payment process without unanimous consent.

In addition, where the partnership sought to be governed by something other than majority rule, thus, falling within the language "except as otherwise provided herein," it made its intent clear. Thus, for example, Section 9 of the Partnership Agreement specifically provides that a partner may be severed from the partnership only by a vote of at least two-thirds of the partnership (Exhibit A to Bailey Aff., § 9). Again, it would be anomalous to require unanimity for an amendment to the withdrawing partner payment structure, as plaintiffs urge, but to require less than unanimous consent for the termination of a partner.

Further, while the Partnership Agreement contained a provision specifying that a retired partner's rights could not be changed without his or her consent, it did not contain any such provision for withdrawing partners. Thus, in Section 16, entitled "Partners Over the Age 65, and Partners Who Retire or Die Before Reaching Age 70," subsection 16.7 (a) provides that the provisions of section 16 could not be changed with respect to any partner who was a partner at the time the plan became effective in May 1967, or at the time of any proposed change, except with his or her written consent (Exhibit A to Bailey Aff., § 16.7 [a], at 22). That subsection goes on to provide that with respect to any other partners, other than the foregoing, section 16 may be changed with the written consent of a majority of the then living partners of the Firm (id., § 16.7 [a]). This was a grandfather provision, protecting retired partners, and plaintiffs as withdrawing, not retiring, partners do not fall within this provision.

Section 11 of the Partnership Agreement, entitled "Upon Withdrawal of Partner," which specifically addresses the rights of withdrawing partners and which was the section amended by [*6]the Amendment, does not qualify the majority rule provision in Section 6 (id., § 11). It does not contain any provision about amending those rights, and the vote required for such amendment.

Reading these provisions together, it is evident that the Partnership Agreement permits an amendment, regarding the amount and timing of payments to a withdrawing partner, such as the one at issue here, to be made by a majority vote. Here, the documentary evidence shows that, first, the partnership passed, by majority votes, the two "standstill" amendments in anticipation of the permanent amendment. Then, it passed, by a majority vote, the Amendment. As set forth above, the Amendment changed the Firm from an accrual-based accounting system to a cash-based accounting system, and eliminated the "pipeline," by adding a new Section 11C to the Partnership Agreement, which specified the timing and amount of the payments to all withdrawing partners. Accordingly, unless, as plaintiffs argue, the majority rule provision, in Section 6 of the Partnership Agreement, conflicts with prohibitory provisions of the statutes or of common-law rules, or public policy considerations, the Partnership Agreement was appropriately amended by a majority vote, and unanimous consent was not required.

Section § 40 (8), which is relied on to support the argument that unanimous consent was required to amend the Partnership Agreement, does not apply. This subsection explicitly provides, in the opening clause, that "[t]he rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules" (emphasis provided). Subsection 8 further provides that any differences as to "ordinary matters" connected with the partnership business may be decided by majority vote, but that "no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners". This statute is a gap-filler provision. It is applicable only where the parties have not expressly agreed otherwise in their partnership agreement. Thus, contrary to plaintiffs' contention, it is not meant to be applied, instead of, and contrary to, the actual agreement between the partners (see Lanier v Bowdoin, supra; see also Rodman v Reid & Priest, 167 AD2d 310 [1st Dept 1990], lv dismissed 77 NY2d 874 [1991]). The Amendment, which was passed by a majority vote, in accordance with the terms of the Partnership Agreement, effected change to the method of payment to withdrawing partners, was not invalidated by Section § 40 (8), and was effective as of January 1, 2004, before either of the plaintiffs withdrew.

The case law is not to the contrary. As discussed above, the rules for determining the rights of partners are subject to the agreement between them (see Lanier v Bowdoin, 282 NY at 38). The cases plaintiffs rely upon with respect to their argument under Partnership Law § 40, are factually distinguishable. For example, in Borgeest v Wilson, Elser, Moskowitz, Edelman & Dicker (283 AD2d 245 [1st Dept 2001]), the law firm sought to terminate its original partnership agreement, and replace it with a new one. The original agreement required that for termination, there must be a unanimous written vote by the executive committee. The Court held that there was no such vote, and thus the fact that there was majority approval, and that the members of that committee approved and signed the new agreement, did not result in termination of the original agreement as between plaintiffs and the remainder of the partners. In other words, because the explicit termination provision was not followed, the partnership had not been terminated (see also Curtin v Glazier, 94 AD2d 434 [4th Dept 1983][involuntary removal of partner to avoid making payments to him violated partnership agreement]). Here, there was no requirement of a unanimous vote by the executive committee. Instead, the Agreement provided for majority rule [*7]on all questions relating to the partnership business, including dissolution.

Duell v Hancock (83 AD2d 762 [4th Dept 1981]), relied upon in Borgeest (supra), and relied upon by plaintiffs here, is also distinguishable. In Duell, based on the limited facts stated in the reported decision, there was not a previous overall partnership agreement or any agreement between the partners about admitting new partners, the challenged action, or even that the partnership could act on a majority vote. Recognizing that there was no specific agreement, the Court turned to section 40 (8) to determine the parties' rights and obligations. Here, of course, the Agreement contains a majority rule provision.

Plaintiffs also rely on Evans v Winston & Strawn (303 AD2d 331 [1st Dept 2003]). There, a law firm was merging with another firm, and adopted an amendment changing the rights of withdrawing partners. Because the amendment specifically stated that it was to take effect on the date the merger was completed, which was more than a week after the plaintiffs withdrew, it was held that the rights of plaintiffs had to be determined in accordance with the old partnership agreement. Here, in contrast, the Amendment was effective as of January 1, 2004, before the dates of the plaintiffs' withdrawals.[FN2]

Plaintiffs' additionally contend that they were the specific targets of the Amendment. This, however, is contradicted by the documents, and the sequence of events. The "standstill" amendments were passed in December 2003, and then in March 2004, before plaintiffs gave notice to the Firm of their intention to withdraw. In addition, the change to a cash-based accounting system, and the elimination of the "pipeline", were uniformly applied firm-wide.

Plaintiffs' also assert that the Amendment violates DR 2-108 (A), because it prevents partners from leaving the Firm. However, DR 2-108 (A) of the New York Code of Professional Responsibility, which provides that a lawyer may not participate in a partnership agreement with another lawyer that restricts the right of a lawyer to practice law after termination of the relationship created by the agreement, has a different purpose. "The purpose of the rule is to ensure that the public has the choice of counsel" (see Cohen v Lord, Day & Lord, 75 NY2d 95, 98 [1989]). It reflects public policy, making certain anti-competition clauses unenforceable (Denburg v Parker Chapin Flattau & Klimpl, 82 NY2d 375, 380 [1993] [clause applying only to withdrawing partners who went into private practice, and, thus, in competition with firm, is unenforceable]). A partnership provision which is a financial disincentive against competition would violate this rule (see Rotenberg v Chamberlain, D'Amanda, Oppenheimer & Greenfield, 248 AD2d 1021 [4th Dept 1998]). For example, a provision conditioning the payment of earned [*8]but uncollected revenues upon the withdrawing partner's obligation to refrain from competing with the former firm constitutes an unenforceable restraint on the practice of law (Cohen v Lord, Day & Lord, supra). On the other hand, however, a provision which "applies to all withdrawing partners regardless of whether they subsequently practice law in competition" with the former firm does not (Rotenberg, 248 AD2d at 1022, citing Hackett v Milbank, Tweed, Hadley & McCloy, 86 NY2d 146, 156-57 [1995] [where decreased payments applied to a withdrawing partner's earned income from any source, provision is not anticompetitive]).

Here, the restructured and reduced payments to withdrawing partners set forth in new Section 11C applies to all withdrawing partners, and does not discriminate against such partners who go into competition with the Firm. Rather, all partners are treated consistently, as required by DR 2-108 (A).

Accordingly, the Amendment was valid under the Partnership Agreement, the partnership law, and there are no public policy considerations warranting a contrary conclusion. Thus, the first, second, third, and sixth causes of action are dismissed.

The fourth and fifth causes of action are dismissed for failure to state a claim, because the allegations state that plaintiffs have withdrawn the constructive trust and injunction claims.

Finally, the seventh cause of action is dismissed without prejudice. This claim seeks a declaration that plaintiffs have not breached their fiduciary duties to the Firm by their actions in connection with their withdrawal from the Firm (see Amended Complaint, ¶¶ 87-94). To obtain a declaratory judgment, the plaintiff must show that there is a present, justiciable controversy between the parties (see CPLR 3001; Evans v Winston & Strawn, 303 AD2d at 333; Salomon Bros., Inc. v West Virginia State Bd. of Invs., 152 Misc 2d 289, 291-94 [Sup Ct, NY County], affd 168 AD2d 384 [1st Dept 1990], lv denied 77 NY2d 807 [1991]). In Evans v Winston & Strawn (supra), the plaintiffs, withdrawing law partners, brought an action against their former firm, seeking post-withdrawal payments. They asserted claims for a declaratory judgment, declaring that they did not breach any fiduciary duty to defendant firm. The Court held that, because the defendant had not asserted any counterclaims in the action, and did not pursue a counterclaim from the discontinued arbitration between the parties, there was no justiciable controversy. Therefore, the declaratory judgment claim was dismissed. Similarly, here, defendants have not asserted any counterclaims against these plaintiffs. Thus, the cause of action for a declaratory judgment is dismissed, without prejudice.

In light of the above conclusions, plaintiffs' cross- motion seeking to have this pre-answer motion to dismiss converted into a summary judgment motion, is denied.

Accordingly, it is

ORDERED that the motion to dismiss is granted and the first through sixth causes of action are dismissed, and the seventh cause of action is dismissed without prejudice, and the complaint is dismissed with costs and disbursements to defendants as taxed by the Clerk of the Court; and it is further

ORDERED that the cross motion is denied; and it is further

ORDERED that the Clerk is directed to enter judgment accordingly. [*9]

Dated: ____________________

ENTER:

__________________________

J.S.C. Footnotes

Footnote 1:Section 11C provides, as follows: C. Notwithstanding Sections 4 , 11A and 11B of this Agreement, no payment pursuant to Section 11 or any other Section of this Agreement shall be made to any partner who withdraws from the partnership effective as of a date that is on or after December 23, 2003 and on or before May 31, 2004. The rights of any partner who withdraws effective on or after December 23, 2003 and on or before May 31, 2004, to receive payments from the partnership after the effective date of such partner's withdrawal, shall be governed solely by the provisions of the Partnership Agreement, as in effect on June 1, 2004, or, if adopted on an earlier date, the provisions of any further amendment to the Partnership Agreement, adopted and made effective after the date hereof and prior to June 1, 2004, that explicitly addresses the rights of withdrawing partners to receive payments from the partnership after their effective date of withdrawal. Exhibit 3 to Glasgow Aff., at 2.

Footnote 2:The other cases relied upon by plaintiffs are similarly unavailing (see Gibbs v Breed, Abbott & Morgan, 271 AD2d 180 [1st Dept 2000] [claims that withdrawing partners breached their fiduciary duties by taking their desk files with them upon leaving, and providing confidential employee information from their old firm to their new firm]; Wolfson v Rosenthal, 210 AD2d 47 [1st Dept 1994], lv dismissed 85 NY2d 924 [1995] [the acquisition by another firm of a firm's assets and obligations constituted termination of the former firm, notwithstanding how the majority sought to characterize it, entitling a former partner to collect the value of his partnership participation]; Kushner v Winston & Strawn, 195 AD2d 317 [1st Dept 1993] [upon merger, new firm could not contravene express terms of merger agreement]).