Anderson v. Aspelmeier, Fisch, Power, Warner & Engberg

• Court: Iowa Supreme Court
• Writing for the Court: Considered by McGIVERIN; NEUMAN; IV. The partnership agreement in effect when Anderson withdrew was silent with respect to a withdrawing partner's obligation towards the pension fund established for two of the firm's retired partners
• Citation: Anderson v. Aspelmeier, Fisch, Power, Warner & Engberg, 461 N.W.2d 598 (Iowa 1990)
• Decision Date: 17 October 1990
• Docket Number: No. 89-196,89-196
• Parties: H. Eugene ANDERSON, Appellee, v. ASPELMEIER, FISCH, POWER, WARNER & ENGBERG, Appellant, and Kenneth A. Aspelmeier, James F. Fisch, William Scott Power, Robert A. Engberg and Craig D. Warner, Intervenors-Appellants.

Page 598

461 N.W.2d 598

59 USLW 2311

H. Eugene ANDERSON, Appellee, v. ASPELMEIER, FISCH, POWER, WARNER & ENGBERG, Appellant and Kenneth A. Aspelmeier, James F. Fisch, William Scott Power, Robert A. Engberg and Craig D. Warner, Intervenors-Appellants.

No. 89-196.

Supreme Court of Iowa.

Oct. 17, 1990.

Patrick M. Roby and Diane Kutzko of Shuttleworth & Ingersoll, P.C., Cedar Rapids, for appellants.

Robert Allbee and Steven K. Gaer of Ahlers, Cooney, Dorweiler, Haynie, Smith & Allbee, Des Moines, for appellee.

Considered by McGIVERIN, C.J., and HARRIS, SCHULTZ, NEUMAN, and SNELL, JJ.

NEUMAN, Justice.

This appeal concerns a contract for the value of a withdrawing partner's interest in a law firm. The law firm challenges a judgment entered in favor of its former partner, claiming the partner's act of withdrawal was detrimental to the firm and justified a forfeiture of his share. Also in dispute is the extent of the withdrawing partner's obligation to contribute to the pension of retired partners. We transferred the case to the court of appeals which, on a divided vote, affirmed the district court by operation of law. We granted further review and now affirm the judgment of the district court.

I. H. Eugene Anderson graduated from the Iowa College of Law in 1968 and obtained an L.L.M. in taxation from George Washington University in 1972. Shortly thereafter he became associated with, and later a partner of, the Burlington law firm then known as Pryor, Riley, Jones & Walsh. Over the course of the thirteen years that he was with the firm, he built up a very successful tax practice, and traditionally had among the highest billable hours of any of the firm's partners.

Anderson withdrew from the partnership effective February 28, 1985. The partnership conducted a number of meetings to work out the mechanics of Anderson's termination with the firm. Mutual concern was expressed that there be a smooth transition for the sake of the firm's clients. The firm notified 329 of its clients that Anderson intended to leave the partnership; 325 elected to follow him. With respect to associates, Anderson informed his partners that he would not invite any to leave with him without the firm's consent. With full knowledge and consent of the partners, one associate and two secretaries chose to join Anderson.

Although relations were fairly congenial during Anderson's departure, tension later arose over the buy-out price of Anderson's partnership interest. Anderson had acquired a 16.905% interest in the firm. Each percentage point was valued at 1% of 66% of the previous fiscal year's gross income, or $6758. Therefore, Anderson's interest was worth $114,243.99 (16.905 X $6758). Of this amount, $38,743 represented the cash Anderson had actually invested in the firm (his net purchase price) and the remainder signified the growth in the value of his partnership interest.

The 1982 partnership agreement in effect at the time of Anderson's departure provided for a two-tier payment plan. For two years, the firm would make monthly payments to a withdrawing partner for the net purchase price paid, less any debts to previously withdrawn partners (for the purchase of their shares). For the next eight years, the firm obligated itself to monthly payments for the value of the withdrawing partner's interest above the net purchase price. This latter obligation, however, could be reduced (or eliminated entirely) if the remaining partners determined that the withdrawing partner "committed an act which is detrimental to the partnership which affects the value of the remaining partners' interest in the partnership."

Pursuant to the agreement, the firm made twenty-four monthly payments covering Anderson's net purchase price ($1614.53), less money he owed to previously withdrawn partners ($769.14). Each month the firm also deducted, however, the sum of $526.93 which represented Anderson's share of the firm's monthly pension obligation to two retired partners. Anderson objected that this was not his individual obligation, but belonged to the partnership as a whole.

A further dispute arose when, at the end of the two-year period, the firm informed Anderson that it would not be paying him for the value of his interest beyond the net purchase price on the ground that he had committed acts detrimental to the partnership. The detrimental acts cited were (1) Anderson's continued practice in Burlington in competition with the firm, (2) his taking an associate and two secretaries with him, and (3) the substantial business retained by Anderson and the resulting loss to the firm. The firm also informed Anderson that it expected him to continue making monthly payments toward the pension fund for the remaining lives of the retired partners.

Anderson sued the partnership for his full interest as provided by the partnership agreement. The law firm, now Aspelmeier, Fisch, Power, Warner & Engberg, and its partners as intervenors, filed a counterclaim seeking a declaratory judgment that Anderson had a continuing obligation to pay his share of the monthly retirement payments owed to the two retired partners. Following a bench trial, the court found that the "detriment" clause was tantamount to a covenant not to compete. Short of ruling the clause invalid on ethical grounds, however, the court simply concluded that Anderson had committed no act giving rise to the partnership's right to reduce the buy-out price of his share.

With respect to the retirement obligation, the court held that the plain language of the parties' contract created an obligation for the firm as a whole as opposed to the individual partners. Accordingly, the court awarded Anderson $88,186.71 plus interest. It is from this award that the law firm has appealed.

II. Two questions are posed on appeal: (1) Did the court err by failing to find that the partnership acted within its contractual rights when it restricted Anderson's payout to the net purchase price of his partnership interest? (2) Did the court err by failing to find that the firm had the right under the partnership agreement to deduct Anderson's proportionate share of the retired partners' pension and collect from Anderson future payments toward these benefits?

Resolution of these issues turns on the construction of the partnership agreement, that is, the ascertainment of its "legal effect." Pathology Consultants v. Gratton, 343 N.W.2d 428, 433 (Iowa 1984). Neither the trial court nor either party suggests that the relevant provisions of the partnership agreement are ambiguous. When construing a written contract, we are guided by the rule that the intent of the parties controls and, except in cases of ambiguity, intent is determined by what the contract itself says. Id. at 433-34; Fashion Fabrics v. Retail Investors Corp., 266 N.W.2d 22, 25 (Iowa 1978); Allen v. Highway Equip. Co., 239 N.W.2d 135, 138-39 (Iowa 1976). Extrinsic evidence may shed light on the intention of the parties but it may not be used to modify, enlarge, or curtail the contract terms. Hamilton v. Wosepka, 261 Iowa 299, 306-07, 154 N.W.2d 164, 169 (1967); Fashion Fabrics, 266 N.W.2d at 25.

Because this action was tried at law, our review is for the correction of errors at law. Iowa R.App.P. 4. The court's findings of fact are binding upon us if supported by substantial evidence. Iowa R.App.P. 14(f)(1). We view the evidence in the light most favorable to the trial court's judgment. Hamilton, 261 Iowa at 304, 154 N.W.2d at 166.

III. Appellants' first argument is two-pronged. First, they contend that the court disregarded substantial proof of financial detriment to the firm caused directly by Anderson's departure. It is true that the firm's earnings dropped markedly in the first fiscal year following Anderson's withdrawal. The trial court acknowledged this downturn. Other persuasive evidence indicated, however, that within three years after Anderson left the remaining partners enjoyed greater earnings than previously in the history of the firm.

At the heart of this controversy is appellants' second contention: that the court rejected the proof of financial loss on the erroneous conclusion that the "detriment" clause is in effect a covenant not to compete. The trial court found that the firm's action toward Anderson was punitive in nature and that any loss it sustained was attributable solely to the clients' election to follow Anderson. Appellants respond by conceding that the detriment clause might serve as a disincentive to withdrawing partners. Appellants insist, however, that neither the contract's terms nor the partners' action betray an intent to restrict Anderson's practice.

The Code of Professional Responsibility clearly prohibits lawyers from using covenants not...