Starr v. Fordham

• Citation: 420 Mass. 178,648 N.E.2d 1261
• Parties: Ian M. STARR v. Laurence S. FORDHAM & others. 1
• Decision Date: 01 May 1995
• Court: United States State Supreme Judicial Court of Massachusetts

Page 1261

648 N.E.2d 1261

420 Mass. 178

Ian M. STARR v. Laurence S. FORDHAM & others. ¹

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued Feb. 6, 1995.

Decided May 1, 1995.

David A. Hoffman (John M. Kahn, with him), Acton, for plaintiff.

Brian W. LeClair, Boston, for Loyd M. Starrett & others.

Harold Hestnes, Boston, for Laurence S. Fordham & another.

Before LIACOS, C.J., and ABRAMS, NOLAN, LYNCH and GREANEY, JJ.

NOLAN, Justice.

The plaintiff, Ian M. Starr, was a partner in the Boston law firm Fordham & Starrett (firm). After the plaintiff withdrew from the firm, he commenced this action to recover amounts to which he claimed that he was entitled under the partnership agreement. The plaintiff also sought damages for breach of fiduciary duty and fraudulent misrepresentation. The defendants, his former partners at the firm, counterclaimed that the plaintiff had violated his fiduciary duties to his partners and breached the terms of the partnership agreement.

After a jury-waived trial, a Superior Court judge concluded that Fordham, P.C., and Starrett, P.C. (founding partners), had violated their fiduciary duties to the plaintiff as well as the implied covenant of good faith and fair dealing in the partnership agreement when they determined the plaintiff's share of the firm's profits for 1986. The judge awarded the plaintiff damages of $75,538.48, plus interest from the date on which the plaintiff filed his complaint. The judge also found that Fordham, in his individual capacity, had misrepresented to the plaintiff the basis on which the founding partners would allocate the firm's profits among the partners. The judge rejected, however, the plaintiff's claim that he was entitled to a "fair share" of the firm's accounts receivable and work in process for 1986. Finally, the judge entered judgment for the plaintiff on the defendants' counterclaims.

The plaintiff appeals from the judge's entry of judgment against him on his claim for a share of the firm's accounts receivable and work in process for 1986. The plaintiff also claims that the judge erred in awarding him prejudgment interest on his damages award only from the date on which he had filed the complaint. The founding partners and Attorneys Fordham and Starrett, in their individual capacities, cross appeal from the judge's finding that they violated their fiduciary duties and the implied covenant of good faith and fair dealing. ² In addition, Attorney Fordham appeals from the judge's finding that he engaged in fraudulent misrepresentation. We affirm.

1. Facts. We summarize the judge's findings of fact. In 1984, the plaintiff was a partner in the Boston law firm Foley, Hoag & Eliot (Foley Hoag). The plaintiff specialized in corporate and business law. Although the plaintiff had become a partner at Foley Hoag in 1982, he was actively seeking to leave the firm in early 1984. During this time, the founding partners were also partners at Foley Hoag. Both men enjoyed outstanding professional reputations among their colleagues. Nevertheless, they agreed that they would withdraw from Foley Hoag in early 1985 in order to establish a new law firm with another established Boston attorney, Frank W. Kilburn.

Fordham invited the plaintiff to join the new law firm Kilburn, Fordham & Starrett in January, 1985. At first, the plaintiff was somewhat hesitant to accept the offer because he was not known as a "rainmaker" (i.e., an attorney responsible for significant client origination) at Foley Hoag. Fordham, however, assured the plaintiff that business origination would not be a significant factor for allocating the profits among the partners. Relying on this representation, the plaintiff withdrew from Foley Hoag on March 1, 1985. The founding partners and another attorney, the defendant Brian W. LeClair, withdrew from Foley Hoag on March 4, 1985.

Prior to executing the partnership agreement, the plaintiff informed Fordham that certain provisions in the agreement disturbed him. The source of the plaintiff's disquiet was Paragraph 1 of the partnership agreement which vested in the founding partners and Kilburn, the authority to determine, both prospectively and retrospectively, each partner's share of the firm's profits. Despite his concern, the plaintiff did not claim at this time that the agreement contradicted Fordham's representations to him that rainmaking would not be a significant factor in distributing the firm's profits. Fordham summarily dismissed the plaintiff's concerns, telling him, in effect, to "take it or leave it." On March 5, 1985, the founding partners, Kilburn, and LeClair each executed the partnership agreement for Kilburn, Fordham & Starrett. The plaintiff also signed the agreement without objection and without making any revisions. The defendant Barry A. Guryan joined the new firm on March 11, 1985.

In August of 1985, Kilburn withdrew from the firm. Subsequently, the firm assumed the name Fordham & Starrett. In September, 1985, the partners met to consider entering into a ten-year lease for office space. The partners were anxious about both the length of the lease and the additional cost; the new lease rate was double the rate that they had been paying. After individually confirming their commitment to shoulder the additional burden, the partners agreed to enter into the lease.

The founding partners had divided the firm's profits equally among the partners in 1985. Each of the five partners received $11,602. In 1986, the firm's financial fortunes improved significantly. On December 31, 1986, the firm's profits were $1,605,128. In addition, the firm had $1,844,366.59 in accounts receivable and work in progress.

The plaintiff withdrew from the firm on December 31, 1986. The partners remaining in the firm were the founding partners, LeClair, and Guryan. When the plaintiff withdrew from the firm, the sum of the plaintiff's accounts receivable and work in process was $204,623. The firm eventually collected $195,249 of the plaintiff's total receivables. The founding partners determined the plaintiff's share of the firm's profits for 1986 to be 6.3% of the total profits. In allocating the firm's profits among the partners, the founding partners did not consider any of the firm's accounts receivable or work in process. In addition, the founding partners refused to assign any of the firm's accounts receivable or work in process to the plaintiff when he withdrew from the firm. The founding partners claimed that the express provisions of Paragraph 3 of the partnership agreement barred the plaintiff from recovering any share of his accounts receivable or work in process because the firm's liabilities exceeded its gross accounts receivable and work in process.

2. Standard of review. Under Mass.R.Civ.P. 52(a), 365 Mass. 816 (1974), a judge's finding is not to be set aside "unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses." We apply this standard both to findings of subsidiary facts and to ultimate findings. Page v. Frazier, 388 Mass. 55, 61, 445 N.E.2d 148 (1983).

3. 1986 profits. We address the defendants' arguments on cross appeal first, followed by the plaintiff's arguments. ³ The founding partners assert several arguments on appeal from the judge's finding that they violated their fiduciary duties and the implied covenant of good faith and fair dealing when they allocated to the plaintiff only 6.3% of the firm's profits for 1986. We address each in turn.

A. The burden of proof. The founding partners claim that the judge erroneously imposed on them the burden of proving the fairness of their profit distribution to the plaintiff. We disagree.

Partners owe each other a fiduciary duty of the highest degree of good faith and fair dealing. Cardullo v. Landau, 329 Mass. 5, 8, 105 N.E.2d 843 (1952). Shelley v. Smith, 271 Mass. 106, 115, 170 N.E. 826 (1930). When a partner has engaged in self-dealing, that partner has the burden to prove the fairness of his actions and to prove that his actions did not result in harm to the partnership. See Meehan v. Shaughnessy, 404 Mass. 419, 441, 535 N.E.2d 1255 (1989). In the present case, it is clear that the judge concluded that the founding partners had engaged in self-dealing. The judge found that the founding partners' determination of the plaintiff's share of the profits "positioned them on both sides of the transaction" because the percentage of the profits which they had assigned to the plaintiff had a direct impact on their own share of the profits. We cannot say that this conclusion was clearly erroneous. The founding partners were responsible for dividing the partnership's profits and assigning to each partner his respective share of the profits. Thus, the founding partners had some self-interest in designating each partner's respective share of the profits because the percentage of profits which they were assigning to the other partners had a direct effect on their own percentage of the profits. See Sagalyn v. Meekins, Packard & Wheat, Inc., 290 Mass. 434, 439, 195 N.E. 769 (1935). As a result, we conclude that there was no error in the judge's imposing on the founding partners the burden of proving that their distribution of the firm's profits to the plaintiff was fair and reasonable. See Meehan v. Shaughnessy, supra.

B. The business judgment rule. The founding partners argue next that the judge erred in concluding that the business judgment rule does not preclude judicial review of their determination of the plaintiff's share of the 1986 profits. There was no error.

The test to be applied when one partner alleges that another partner has violated his duty of strict faith is whether the allegedly violating partner can demonstrate a legitimate business purpose for his action. See Zimmerman v. Bogoff, 402 Mass. 650, 657, 524 N.E.2d 849 (1988). Nevertheless, the business judgment rule does not...