William J. Troupe et al., Appellants, v. Milford J. Seby et al., Appellees, 416 F.2d 514 (9th Cir. 1969)

This is an appeal in a diversity of citizenship action by two citizens of Kansas City, Missouri, where they maintain their principal office for the practice of their profession as Certified Public Accountants. Plaintiffs sue as copartners of Troupe, Kehoe, Whiteaker and Kent, an Arizona partnership (hereinafter T.K.W.K.-Ariz. or Arizona Partnership). They sue the defendants, who are both citizens of Arizona, and who maintain their offices to practice their profession as Certified Public Accountants and resident partners of T.K.W.K.-Ariz. in Arizona.

The cause of action as expressed is one for a partnership accounting, dissolution of the partnership, and damages for breach of contract. Judgment was recovered for $14,403.85 against defendant Henricks and for $11,298.66 against defendant Seby; the Arizona partnership was dissolved; and an accounting rendered. The amount awarded as damages against each defendant is precisely the amount of the deficit in each defendant's partnership capital account. Appellants protest the inadequacy of the damages awarded.

Appellants alleged and defendants admitted that the recovery sought exceeds $10,000, exclusive of interest and costs. Jurisdiction in the district court rested on 28 U.S.C. § 1332, and rests here on 28 U.S.C. § 1291.

The record before us is lengthy, complicated and confusing. It would serve little purpose to detail all the circumstances surrounding this dispute, and we will refer only to such factual evidence as may be necessary or convenient to explain our decision. Because of the unusual factual background, this opinion will be of little, if any, precedential value.

We start with the explanation that appellants were not only partners in the Arizona partnership, but likewise partners in "Troupe, Kehoe, Whiteaker and Kent," of Kansas and Missouri (hereinafter sometimes called the "Executive Office Partnership," or E.O.P. or TKWK-EOP).

We next turn to the court's Amended Findings of Fact (C.T. 664) and the Amended Judgment (C.T. 674). We quote material portions in the margin.¹  PAGE CONTAINED FOOTNOTES PAGE CONTAINED FOOTNOTES As one example of the problems in the presentation of this case on appeal, appellants vigorously assert that the rights of the parties must be determined by Plaintiffs' Exhibit 4 (the partnership agreement of January 3, 1962), as amended by Plaintiffs' Exhibit 5, dated January 2, 1964. This is an unusual position to maintain in view of (a) partnership law, as expressed generally in the Uniform Partnership Act, and in the Arizona law based on the cases arising before that state adopted the said Act, and hereafter, and (b) the following facts:

1. One of the partners, Kenneth S. Hammes, purportedly withdrew from the partnership as of June 30, 1964 by means of a document (Ex. 6) dated May 2, 1964, and signed only by William J. Troupe and K. S. Hammes. It was never executed by either defendant (R.T. 564) or by a third resident partner, McMorris.

2. One of the partners, Benard R. McMorris, withdrew from the partnership by agreement dated February 3, 1965. (Ex. 7.) Defendant Seby took no part in the negotiations resulting in McMorris' withdrawal, and gave no consent thereto, either in writing or orally. (Amended Finding of Fact No. 6.)

3. A "termination agreement" was purportedly entered into on June 23, 1965 (prior to defendants' alleged breach) between TKWK (Ariz.), TKWK (EOP) and Benard R. McMorris. (Ex. 8.) If it be considered the valid act of each partnership with respect to the other, and with respect to McMorris, and if it is binding on all Arizona partners involved, it acknowledges that:

"Each of the respective covenants in the * * * agreements [i. e., (1) the partnership agreements of January 2, 1961, (2) of January 3rd, 1962, (3) of February 3, 1965, and (4) the buy and sell agreement of November 13, 1960, as amended May 4, 1964 and February 3, 1965] are [sic] hereby acknowledged to be fulfilled, satisfied and terminated and all sums which may be due to the respective parties under said agreements are hereby deemed paid in full." (Emphasis added.)

Thus the previous partnerships were dissolved, and an accord and satisfaction entered into at least between those partners signing the agreement.

Arizona adopted the Uniform Partnership Act (hereinafter U.P.A.) in 1954. (A.R.S.-(Anno.) §§ 29-201 to 29-244.) It is identical with the Uniform Partnership Act adopted by California in 1954 as far as the first 43 sections are concerned. Cal.Corp.Code §§ 15001-15045 (West 1955).

Each contains identical sections 29,²  which read:

"The 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."

Each contains identical sections 18,³  which set up "rules" reading:

"All partners have equal rights in the management and conduct of the partnership business."

"No person can become a member of a partnership without the consent of all the partners."

These general rules are each qualified by the proviso that they are "subject to any agreement between" the parties.

The view that the parties intended to terminate the partnership is strengthened by the subsequent negotiations between Whiteaker and Henricks during early August 1965 with respect to the formation of a new Arizona partnership. Seby did not take part in these negotiations, although Henricks requested he be allowed to do so, Whiteaker refusing (R.T. 1371-74).

The view that the parties did not intend to terminate the Arizona partnership by reason of the June 23, 1965 document is supported by Henricks' giving a 90 day notice of termination on August 7, 1965 (Ex. 24) as required by the January 3, 1962 agreement; and Seby's subsequent notice of termination which did not conform to the 90 day requirement of the January 3, 1962 agreement, but which did recognize the then existence of a partnership relationship.

The usual rule of law with respect to partnerships is that the death or withdrawal of one partner terminates a partnership for all purposes except winding it up. A new partnership must be organized if the business is to be carried on.

Arizona adopted the definition hereinabove quoted of what constitutes a dissolution of a partnership.

In one of the leading Arizona cases the Court of Appeals of that state states:

"It is a well-established general rule than [sic] an existing partnership is dissolved and a new partnership is formed whenever a partner retires or a new one is admitted. In other words, every change in the personnel of a firm works a dissolution. 40 Am. Jur. Partnership § 242. This general rule would apply unless something in the agreement provides otherwise." Johnson v. Hill, 1 Ariz.App. 290, 402 P.2d 225 at 226 (1965) (emphasis added).

Plaintiffs' Exhibit 4 in this case does not provide a plan or method for the admission of new partners.⁴  Thus the general rule would apply and the original partnership dissolved "whenever a new partner was admitted." It might be urged that the parties orally agreed that an existing partner could leave, or a new one could enter the partnership. But as we have seen (Example No. 2, supra), partner Seby not only did not consent; he never knew of the arrangement. (See also Example No. 1, supra.)

The Johnson v. Hill case, supra, at 227, also states that the U.P.A. "is silent as to the possible continuance of written articles into a new oral agreement, so we must turn to case law. A.R.S. § 29-205, Wild v. Commissioner of Internal Revenue, (C.C.A.2, 1933), 62 F.2d 777."

After an inconclusive discussion it permits the issue to rest on the findings and judgment of the trial court based upon conflicting evidence. "`Under such circumstances the evidence will be taken in the strongest manner in favor of the plaintiff and in support of the court's findings, and the judgment will not be disturbed when there is any reasonable evidence to support it.' (Citations) Bohmfalk v. Vaughan (1960), 89 Ariz. 33, 357 P.2d 617." Johnson v. Hill, supra at 227.

We recognize that the district court here made no finding that the partnership was dissolved. The parties have made no claim that Exhibit 8 terminated the earlier partnership agreement,⁵  despite its express terms, except for a recital of that fact in Appellees' Brief (pp. 6-7) with a reference to the court's amended finding of fact No. 8 (which merely states that Exhibit 8 was entered into by the parties signing it), and without reference to the court's conclusion of law No. 2 "that defendants were * * at all material times * * * partners in the Arizona partnership." (Emphasis added.) (C.T. 669.) We will not examine the 1600 pages of testimony to determine whether "termination" was ever urged below. Apparently the case was not tried on the theory that that issue was raised. The trial court held a partnership existed, and it found defendants had wrongfully terminated it. Appellees have not appealed from the judgment against them, and the issue therefore cannot here be raised by them.

Appellants have not raised the legal problem perhaps because of the provisions of Article V of the January 3, 1962 agreement which provides that "if the Resident Partner withdraws as provided in Article XI * * * Resident Partner will not be liable to pay to the Arizona Partnership any debit balance in his capital account." These debit balances totalled approximately $25,700 in mid-1965. But we prefer to assume that appellants' position was based on trial strategy; that of following the best legal theory which might support the largest award of damages. That, of course, is their right. The whole thrust of their appeal is that the Arizona partnership was a "continuing partnership."⁶ 

Appellees urge that the entire course of conduct of appellants indicates they "treated the assets of the partnership as though they [appellants] were the sole owners thereof, and in fact they so considered them. (Tr. 658.)" (Appellees' Brief, p. 13.) This statement appears to be accurate.

As one example, plaintiffs entered into an agreement with Central Broadcasting, Inc., whereby it was to transfer to plaintiff Whiteaker 12,750 shares of common stock of Central. (Ex. A-4.) In return the Arizona partnership was to perform all accounting services for three years. None of the defendants consented to this agreement, and defendant Seby never knew of it.

As a second example, on May 2, 1964, Troupe and Hammes executed Plaintiffs' Exhibit 6 — an agreement affecting the assets and liabilities of the Arizona partnership. It was never executed by either defendant partner, nor by partners McMorris or Whiteaker individually, or by any partner acting for either the Arizona or EOP partnerships.

As a third example, the February 3, 1965 agreement (Plaintiffs' Ex. 7), whereby McMorris withdrew as a partner of the Arizona partnership, was executed by the two partnerships and McMorris, but without the consent or knowledge of partner Seby (Amended Finding of Fact No. 6, C.T. 670). Seby had been consulted previously about the sale of the Phoenix practice. (Plaintiffs' Ex. 80.)

As a fourth example, the July 1, 1964 agreement (Plaintiffs' Ex. 76) was signed by Whiteaker, Troupe and Henricks individually but not by either partnership, nor by defendant Seby. Yet it purported to increase the EOP partnership "cut" of the Arizona partnership business from 30% to 40%; to increase Henricks' "cut" from 18% to 28%; it eliminated Hammes' cut entirely; and it left Seby with no increase.

Having found the partnership existed at all material times, and that defendants had wrongfully withdrawn as partners, to plaintiffs' damage, the court also found "the plaintiffs and [Arizona] partnership had failed and neglected to mitigate damages, and had failed to use due diligence to mitigate such damages." (Amended Finding of Fact No. 5, C.T. 669.)

Balancing the equities, the trial court then concluded that, as damages, the defendants should pay an amount equal to their respective capital account deficits, as shown on Plaintiffs' Exhibit 79, and that plaintiffs should recover no other sums and no other moneys against defendants. (Amended Finding of Fact No. 6, C.T. 670.) The court further rendered an accounting; terminated the partnership; and ordered each party to pay costs. (C.T. 670, 673-74.)

We note that there was no finding, either at the preliminary hearing before another judge, or at the trial, that either defendant had solicited former partnership business.

We need not give a full recital here of the circumstances supporting the finding of a lack of due diligence on the part of the plaintiffs and appellants in attempting to mitigate damages.⁷  While some evidence was conflicting, we are clearly convinced the preponderance of evidence favored such a finding and conclusion. The trier of fact, under Arizona law, was not bound to accept one partner's testimony in an action by a copartner against a partner for accounting and dissolution, since each partner was an interested party. Carrasco v. Carrasco, 4 Ariz.App. 580, 422 P.2d 411 (1967).

Appellants also urge that the evidence as to damages was so clear that the amount awarded — equal to the defendants' deficits in their partnership capital accounts — was inadequate.

The evidence on damages was in complete conflict, and vigorously disputed. Even the meanings of common terms used in Art. X of Exhibit were disputed.⁸  The dispute raised the further question of alleged inadequacies and inaccuracies of Plaintiffs' Exhibits 71 and 72, upon which their claim of money damages rests.

Fourteen such inaccuracies or inadequacies are set forth in Appellees' Brief (pp. 14-15). Appellants' Reply purports to answer one or two specifically, but is largely content to urge upon us that Plaintiffs' Exhibits 71 and 72 were "exactly that called for by Art. X of the partnership agreement (Ex. 4),⁹  and defendants' present contentions — never raised in any manner in the trial court is [sic] completely fallacious."

The trial court did not agree, nor do we. We refuse to set aside Findings of Facts and Conclusions of Law based on conflicting evidence, Johnson v. Hill, supra; Bohmfalk v. Vaughan, supra, unless clearly erroneous.

We find no error in determining the amount of damages payable nor in finding the plaintiffs made little, if any, effort to mitigate their damage. The negotiations in writing between the parties looking toward a new partnership agreement during the months from April to July, 1965, and the absolute knowledge that one partner was withdrawing (made known to the plaintiffs on August 7, 1965) required the plaintiffs to do something more than to send one Higdon to Phoenix on September 27, 1965 and Tucson on September 30, 1965. The trial court found the plaintiffs intentionally sent no aid to the Arizona partnership until those dates, despite earlier promises to do so. (Amended Findings of Fact 21 and 22; C.T. 667.) And when Higdon arrived, he stayed only a few days in both Phoenix and Tucson, contacted "very few" accounts in Tucson, and but 11 out of 142 accounts in Phoenix. He did no accounting work in either place except for one partnership client. (Amended Findings of Fact 23 and 24, C.T. 667-668.)

Aside from our reading of the evidence, we also have Amended Finding of Fact 25, that "the plaintiffs wrongfully made no attempt to employ any full time employees or Certified Public Accountants for either the Phoenix or the Tucson office * * *." (Emphasis added.) Cf. also Amended Finding of Fact No. 28.

Based on the foregoing findings, among others, the trial judge made his ultimate Finding No. 29, that "the plaintiffs have failed to prove to what extent they were damaged by the conduct of the defendants insofar as any breach of the partnership agreement is concerned." (Emphasis added.)

"Damages are not recoverable for harm that the plaintiff should have foreseen and could have avoided by reasonable effort without undue risk, expense or humiliation." Restatement of the Law, Contracts, Sec. 336, p. 535.

The Arizona Supreme Court has said:

" [I]t is the duty of the party injured by a breach of contract to minimize the damages as much as he reasonably can * * *." Rio Grande Oil Co. v. Pankey, 50 Ariz. 529, 73 P.2d 707, 710 (1937).

See also 25 C.J.S. Damages § 71. Nello L. Teer Co. v. Hollywood Golf Estates, Inc., 324 F.2d 669 (5th Cir. 1963), and Commodity Credit Corp. v. Rosenberg Bros. & Co., 243 F.2d 504, 511 (9th Cir. 1957), where it was said:

"It is the general rule that one who is injured by the wrongful acts of another, whether as the result of a tort or of a breach of contract, is bound to exercise reasonable care and diligence to avoid loss or to minimize or lessen the resulting damage, and, to the extent that his damages are the result of his active and unreasonable enhancement thereof, or due to this failure to exercise such care, he cannot recover. He is bound to protect himself if he can do so with reasonable exertion or at a trifling expense, and can recover from the delinquent party only such damages as he could not, with reasonable effort, have avoided. He must do nothing to aggravate his loss, but must do all he can to mitigate or reduce it. Campfield v. Sauer, 6 Cir., 189 F. 576." (Emphasis supplied).

In short, we hold the Findings, Conclusions and Judgment of the district court are supported by substantial evidence, and under well recognized law; we cannot disturb them.

We affirm the judgment rendered below.