Bailey v. Fish & Neave

• Decision Date: 13 April 2006
• Docket Number: 7524A.,7524.
• Citation: 814 N.Y.S.2d 104,30 A.D.3d 48,2006 NY Slip Op 02821
• Parties: W. EDWARD BAILEY et al, Appellants, v. FISH & NEAVE et al., Respondents.
• Court: New York Supreme Court — Appellate Division

30 A.D.3d 48

814 N.Y.S.2d 104

2006 NY Slip Op 02821

W. EDWARD BAILEY et al, Appellants, v. FISH & NEAVE et al., Respondents.

7524.

7524A.

Appellate Division of the Supreme Court of the State of New York, First Department.

April 13, 2006.

APPEAL from an order and a judgment of the Supreme Court, New York County (Bernard J. Fried, J.), entered May 12, 2005 and May 18, 2005, respectively. The order granted defendants' preanswer motion to dismiss the amended complaint and denied plaintiffs' cross motion to convert the motion into one for summary judgment and to grant summary judgment in their favor on the issue of liability. The judgment dismissed the amended complaint.

Bailey v Fish & Neave, 7 Misc 3d 1023(A), 2005 NY Slip Op 50713(U), affirmed.

Jeffrey A. Jannuzzo, New York City, for appellants.

Simpson Thacher & Bartlett LLP, New York City (Roy L. Reardon, William H. Efron and Craig S. Waldman of counsel), for respondents.

OPINION OF THE COURT

WILLIAMS, J.

Plaintiffs were partners at defendant Fish & Neave, an intellectual property law firm. W. Edward Bailey was a partner for over 22 years and the managing partner from 1994 until mid-2000. Kevin J. Culligan worked at the firm for 24 years and was a partner for 15 years. Defendant Ropes & Gray LLP is the successor firm to Fish & Neave by way of a merger, effective January 1, 2005. Fish & Neave was governed by a partnership agreement that went into effect on January 1, 1970. Section 6 of the partnership agreement provided as follows:

"MAJORITY TO RULE

"In all questions relating to the partnership business (including dissolution of the partnership) the decision of a majority in interest of the partners . . . shall be conclusive upon and bind all the partners, except as otherwise provided herein."

In late December 2003, Fish & Neave, feeling the market pressures in its field of practice and experiencing an increase in the withdrawal of partners, began to reconsider its policy relative to withdrawing partners, an area addressed in sections 11 and 16.5 (a) of its partnership agreement. Essentially, the then-existing policy was based upon an accrual accounting system, i.e., partners did not receive their share of profits for completed work until the client paid the firm. Hence, a withdrawing partner was entitled to receive his share of accrued compensation, disbursements on behalf of clients, and contingency fees for work completed prior to his withdrawal, upon the firm's receipt of payment. A withdrawing partner's rights vested upon the date of his withdrawal, and the amounts due would be ascertained "as of the close of business on the date of the ex-partner's withdrawal" and were to be paid as soon as possible. In addition, the withdrawing partner was to be repaid his capital interest in the firm "within a reasonable time, but not more than 14 months after" the date of withdrawal. The latter provision, contained in section 16.5 (a) of the partnership agreement, was amended in 1986 to provide that the withdrawing partner was entitled to capital repayment "not later than the conclusion of the then current taxable year of the partnership."

While considering the change in policy, the law firm passed, by majority vote, two "standstill" amendments to the partnership agreement. The first standstill amendment, passed on December 23, 2003 and expressly applicable to all active partners, provided in relevant part:

"Notwithstanding [the applicable sections of the agreement] . . . [t]he rights of any partner who voluntarily leaves the partnership effective on or after December 15, 2003 and on or before March 31, 2004, to receive payments from the partnership after the effective date of such partner's leaving, shall be governed solely by the provisions of the Partnership Agreement, as in effect on January 1, 2005, 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 January 1, 2005, that explicitly addresses the rights of partners who voluntarily leave the partnership to receive payments from the partnership after their effective date of withdrawal."

By its terms, the first standstill amendment expired on March 31, 2004; however, as that date approached, the law firm had not completed its revision of the policy. Consequently, on March 15, 2004, it adopted a second standstill amendment, also by majority vote, that extended the time "to consider and approve permanent amendments to the Partnership Agreement" on the issue of withdrawal of partners. Now, the right to payments of a partner who withdrew between December 23, 2003 and May 31, 2004 was to be governed by the provisions of the partnership agreement as in effect on June 1, 2004. Also, the second standstill amendment expressly affirmed the validity of the first. Both plaintiffs were partners of the firm when each of the standstill amendments was passed; Culligan voted in favor of each of them.

On May 17, 2004, the law firm passed, by a majority vote of the partnership's shares, the amendment at issue, effective January 1, 2004. Essentially, the firm's accounting system was transformed from accrual-based to cash-based, which, in turn, changed the amount and timing of payments of partnership income to withdrawing partners. The "pipeline" that existed under the accrual-based system was eliminated and replaced by a "Special Distribution," which amount was specified in a "Schedule A" attached to the amendment and was to be paid to withdrawing partners over a five-year period upon the later of retirement or reaching the age of 65, or upon death if payment had not already commenced. The amendment also ratified a 1997 restructuring of the partnership capital and of the timing and amount of its repayment to withdrawing partners, set out in a "Schedule B" attached to the amendment.

Plaintiffs withdrew from the firm to assume positions at another law firm. Bailey gave notice of his intent to withdraw from the firm on April 16, 2004, requesting that the firm waive its 60-day notice requirement. On May 12, 2004, he sent a follow-up letter stating that his withdrawal was effective as of May 14, 2004. After some uncertainty about the terms of his departure, Bailey was finally released from the firm, effective May 28, 2004. Culligan gave his notice on May 12, 2004, also requesting waiver of the notice requirement. Culligan withdrew from the firm on June 25, 2004.

Plaintiffs commenced this action on November 10, 2004. On January 11, 2005, they filed an amended complaint alleging causes of action for breach of contract, breach of fiduciary duty, imposition of a constructive trust, and declaratory judgment, and seeking, inter alia, money damages in the amount of $2.4 million for their capital and unpaid accrual income. Defendants moved to dismiss the complaint, pursuant to CPLR 3211 (a) (1), (2) and (7), based on documentary evidence, lack of a justiciable controversy and failure to state a cause of action. Plaintiffs opposed and cross-moved to convert the motion to one for summary judgment on the issue of liability. The motion court granted the motion to dismiss with prejudice, finding the amendment valid pursuant to the partnership agreement, and denied the cross motion.

The pivotal issue on this appeal is whether or not the parties' partnership agreement, which provides that a majority partnership interest vote is conclusive on "all questions relating to the partnership business (including dissolution of the partnership)," was properly amended by majority vote on the issue of the compensation of withdrawing partners. We agree with the motion court that the amendment was proper, since the amended section, the provision governing withdrawal of partners, does not qualify the majority rule provision, since the agreement clearly evinces the partners' intent to be governed by other than majority rule when they choose to do so, and since the amendment was voted in accordance with Partnership Law § 40, which states in relevant part:

"The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules: . . .

"8. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners." (Emphasis added.)

It is a long-settled principle in New York law that partners are allowed to agree among themselves how their partnership will be governed, and that section 40 is a default provision only applicable absent such an agreement (see Lanier v Bowdoin, 282 NY 32, 38 [1939]; Corr v Hoffman, 256 NY 254, 272 [1931]; Urban Archaeology Ltd. v Dencorp Invs., Inc., 12 AD3d 96, 102-103 [2004]; Rodman v Reid & Priest, 167 AD2d 310, 310-311 [1990], lv dismissed 77 NY2d 874 [1991]).

The parties' partnership agreement, as noted, supra, not only provides for majority rule, but makes it clear that majority rule extends even to the decision to dissolve the partnership, the most momentous business decision the partnership could take. Also noteworthy is the "except as otherwise provided herein" language, because the agreement does specify, in sections 9 ("SEVERANCE OF PARTNERS") and 16.7 (a) ("MISCELLANEOUS" with respect to changes in a retired partner's rights), that these decisions require, respectively, a two-thirds vote of the partnership and the consent of the retired partner. These provisions, taken in sum, demonstrate that, indeed, the partnership agreement reflects an intent to govern the rights of withdrawing partners by majority vote, not unanimously; more important decisions like dissolution and removal of a partner...