Davidovich, In re

• Citation: 901 F.2d 1533
• Decision Date: 02 May 1990
• Docket Number: No. 89-1035,89-1035
• Parties: Bankr. L. Rep. P 73,372 In re Nathan DAVIDOVICH and Amy Jill Davidovich, Debtors. Nathan DAVIDOVICH and Christine Jobin, Trustee, Plaintiffs-Appellants, v. Charles WELTON, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1533

901 F.2d 1533

Bankr. L. Rep. P 73,372

In re Nathan DAVIDOVICH and Amy Jill Davidovich, Debtors Nathan DAVIDOVICH and Christine Jobin, Trustee, Plaintiffs-Appellants, v. Charles WELTON, Defendant-Appellee.

No. 89-1035.

United States Court of Appeals Tenth Circuit.

May 2, 1990.

Nathan Davidovich of Nathan Davidovich & Associates, P.C., Denver, Colo., for plaintiffs-appellants.

Robert R. Marshall, Jr. (Jeffrey L. Dykes with him, on the brief), Elrod, Katz, Preeo & Look, P.C., Denver, Colo., for defendant-appellee.

Before BRORBY and EBEL, Circuit Judges, and JOHNSON, ^* District Judge.

PER CURIAM.

In this action, brought by the debtor and bankruptcy trustee against the debtor's former law partner, plaintiffs seek confirmation of an arbitration award resolving disputes arising out of dissolution of the law partnership and a judgment awarding plaintiffs the proceeds from this award. The bankruptcy court dismissed their petition upon finding that any amount due plaintiffs under the arbitration proceeding was entirely offset by mutual debts determined in this same proceeding and by costs incurred by the defendant in connection with a real estate partnership between the former law partners and others. Plaintiffs appeal this ruling and other aspects of the bankruptcy court judgment. We affirm in part and reverse in part.

Background

The following facts are undisputed unless otherwise noted:

On January 1, 1980, debtor-appellant Nathan Davidovich and defendant-appellee Charles Welton formed a partnership to engage in the general practice of law. Just less than three years later, the two joined with four others to form the OSM Partnership. This Partnership owned and managed a small commercial building which housed the Davidovich & Welton law firm and several other tenants. Under the OSM Partnership Agreement, Davidovich and Welton each owned a 30% share of this partnership and were its managing partners. Both parties, as well as the other OSM partners, were also jointly and severally liable on an OSM Partnership note totaling approximately $460,000.

Dissolution of the law partnership. On September 1, 1984, Davidovich and Welton dissolved their law partnership. In April of the following year, they agreed to binding arbitration of all disputes attendant to the dissolution of the partnership before the Denver Bar Association Intraprofessional Committee (Committee). Although Welton requested that the Committee also address issues relating to the OSM Partnership in this proceeding, the Committee declined on the grounds that resolution of these issues would be binding on non-parties to the arbitration, namely the other OSM partners and the OSM Partnership itself.

In its October 29, 1986 decision, as supplemented on February 27, 1987 (collectively the "Arbitration Award"), the Committee, among other things, found that the parties had agreed that the attorneys' fees generated by cases pending at the time of the law firm dissolution should be distributed between them according to the following formula: The attorney retaining the case received 50% of any fee generated after the partnership's dissolution; the attorney responsible for bringing the case into the partnership would receive 25% of any fees and Davidovich and Welton would split the remaining 25% of any fees generated. The Committee further found that the parties' agreement applied to all pending personal injury cases which were listed in the parties' respective position papers. Upon noting that the parties disagreed on application of the distribution formula to one case, the Trujillo matter, the Committee resolved the dispute by finding that the case was referred to the partnership jointly, thus requiring Davidovich and Welton to split the 25% "fee generating" share. The Committee did not find that the parties disputed application of the fee formula to any other cases identified in their position papers.

In its initial 1986 decision, the Committee calculated that Welton owed Davidovich $38,583.29 for cases resolved since the firm's dissolution and for other partnership expenses and that Davidovich owed Welton $25,515.02 on the same basis. The net result of these calculations, therefore, was a debt of $13,068.27 owed by Welton to Davidovich. This net result was subject to readjustment, however, for fees collected in former partnership cases resolved after the Committee's initial decision and certain other matters addressed in the Arbitration Award. According to a July 1988 accounting prepared by Welton, these adjustments resulted in a net debt of $15,256.84 owed by Welton to Davidovich. Defendant's Ex. 1. This total was subject to further adjustment upon resolution of four remaining partnership cases, one retained by Davidovich and three by Welton. Id. At the time of this appeal, one of these cases, the McCafferty case retained by Welton, was awaiting appeal of an $800,000 jury verdict awarded to Welton's client. According to Welton's submittal to the Committee, which was not disputed by Davidovich in the arbitration proceeding, Davidovich is entitled to receive 12.5% of any fee ultimately collected in this case.

Bankruptcy of Davidovich. On August 14, 1985, while the Committee arbitration was still underway, Davidovich filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Soon thereafter, plaintiff-appellant Christine Jobin was appointed trustee of the bankruptcy estate. On January 29, 1986, the court granted Davidovich a discharge of all debts arising before that date. Welton did not file a proof of claim against Davidovich's estate in this proceeding. The Bankruptcy Court approved a stipulation for relief from stay to allow the arbitration proceeding to continue.

OSM Partnership events. Shortly before Davidovich declared bankruptcy, the OSM Partnership fell behind in payments on its bank loans and consequently issued a partnership call for a total of $10,000. Defendant's Ex. 85. Davidovich did not pay his 30% share of this call, which came due two weeks after he filed for bankruptcy. In case of such a partner default, the OSM Partnership Agreement permitted the nondefaulting partners to (1) ignore Davidovich's default or (2) to pay his share themselves and then either require him to execute a promissory note payable to the parties who advanced his share or to essentially cede his partnership share to those parties. Defendant's Ex. 2, p 3.05. Some or all of the nondefaulting OSM partners, including Welton, apparently opted to pay Davidovich's share and then distribute his partnership share among themselves.

Sometime after the partnership call and Davidovich's bankruptcy filing, the bank foreclosed on the deed of trust securing the OSM Partnership note. As a result of the negotiations and litigation that followed, Welton claims to have contributed an additional $52,000 to the OSM Partnership to help redeem the commercial building owned by the Partnership and settle the deficiency remaining on Partnership's original note. Doc. 7 at 4.

This proceeding. On November 18, 1987, Davidovich and the trustee for the bankruptcy estate filed this adversary proceeding against Welton, seeking confirmation of the Arbitration Award, an accounting under the Award, discharge of the amount Davidovich was required to pay Welton under the Award and a judgment on the Award. Doc. 1. In their complaint, plaintiffs alleged that the proceeds from the Arbitration Award were necessary to satisfy the remaining debts of the bankruptcy estate, with any remainder to be paid to Davidovich. Sometime after initiating this action, plaintiffs also requested that the court determine that Davidovich was entitled to 25% of any fees generated by the McCafferty case, rather than the 12.5% stated in papers submitted to the Committee in the arbitration proceeding.

Welton argued before the bankruptcy court that the Arbitration Award was binding on the parties and (1) limited Davidovich to recovery of 12.5% of whatever fees were collected in the McCafferty case and (2) mandated an offset for the more than $25,000 Davidovich owed Welton under that Award. Welton also argued that any net debt owed to Davidovich pursuant to the Award was more than offset by the $52,000 Welton had contributed to the OSM Partnership after Davidovich's bankruptcy to redeem the OSM property and prevent a deficiency judgment from being entered against himself and the other parties, including Davidovich, on the OSM Partnership note. In support of both requested offsets, Welton cited both the setoff provisions of 11 U.S.C. Sec. 553 (1982 & Supp. III 1985) and the equitable doctrine of recoupment.

The Bankruptcy Court accepted each of Welton's arguments and dismissed this action pursuant to Welton's motion at the close of plaintiffs' case. On appeal to the U.S. District Court for the District of Colorado, the bankruptcy court's judgment was affirmed in its entirety. This appeal timely followed.

Discussion

We review the decision of the bankruptcy court under the same standards of review that govern appellate review in other cases. See Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1543 (10th Cir.1988). Accordingly, we review the bankruptcy court's legal determinations de novo, Heins v. Ruti-Sweetwater, Inc. (In re Ruti-Sweetwater, Inc.), 836 F.2d 1263, 1266 (10th Cir.1988), and its factual findings under the clearly erroneous standard. Fed.R.Civ.P. 52(a). A finding of fact is clearly erroneous if it is without factual support in the record or if, after reviewing all of the evidence, we are left with the definite and firm conviction that a mistake has been made. LeMaire v. United States, 826 F.2d 949, 953 (10th Cir.1987).

Plaintiffs raise three primary issues on appeal: (1) whether the bankruptcy court erred in holding that Welton's debt to Davidovich under the Arbitration Award was entirely offset by obligations arising out of the Arbitration Award and the OSM Partnership; (2) whether the...