Chioffi v. Martin

• Decision Date: 17 April 2018
• Docket Number: AC 38443
• Citation: 181 Conn.App. 111,186 A.3d 15
• Court: Connecticut Court of Appeals
• Parties: Mark P. CHIOFFI v. Christopher G. MARTIN et al.

181 Conn.App. 111

186 A.3d 15

Mark P. CHIOFFI

v.Christopher G. MARTIN et al.

AC 38443

Appellate Court of Connecticut.

Argued October 12, 2017

Officially released April 17, 2018

William H. Champlin III, with whom, on the brief, was Mark S. Gregory, for the appellant-appellee (named defendant).

Timothy G. Ronan, Stamford, with whom, on the brief, was Assaf Z. Ben–Atar, Bridgeport, for the appellee-appellant (plaintiff).

Lavine, Elgo and Beach, Js.

BEACH, J.

This action arises out of the dissolution of a registered limited liability partnership. The defendant Christopher G. Martin¹ appeals, following a trial to the court, from the judgment rendered in favor of the plaintiff, Mark P. Chioffi, on the count of the plaintiff's complaint which alleged breach of contract. The trial court awarded Chioffi $34,120 in compensatory damages, $103,000 in attorney's fees, and $6226.73 in costs. The defendant claims on appeal that the court erred in (1) finding a breach of § 3.02 of the parties' partnership agreement; (2) finding a breach of § 4.03 of the partnership agreement; (3) ordering the defendant to pay damages directly to the plaintiff rather than ordering a reduction in the defendant's capital account in the partnership; and (4) awarding attorney's fees to the plaintiff. The plaintiff cross appealed, claiming that the court (1) erred in not finding a breach of fiduciary duty, as alleged in count one of his complaint; (2) erred in its calculation of damages; and (3) abused its discretion in holding that the plaintiff waived his claim for an accounting. We agree with the defendant's second and fourth claims and the plaintiff's first claim. Accordingly, we reverse in part the judgment of the court and remand the case for a hearing on attorney's fees. We otherwise affirm the court's judgment.

The parties, partners in Martin Chioffi LLP, a law firm, entered into a partnership agreement in 2012; the agreement by its terms was to be effective retroactively to January 1, 2010. The agreement comprehensively described and prescribed the operations of the partnership; a copy of the partnership agreement was an exhibit before the court.

The agreement contemplated that revenue was to be allocated between three capital accounts: the corporate account, for which Martin was responsible; the trusts and estates account, for which Chioffi was responsible; and the "remaining" account, into which all other revenues were allocated. See § 3.01 (c). The balance of each account was to be adjusted periodically by adding to it the appropriately allocated share of partnership revenue, and subtracting from it the allocable share of expenses and distributions to partners. See § 2.02.

The process used to determine the "calculation and allocation of net profits and losses" was set forth in article III of the agreement. As previously mentioned, there were three capital accounts corresponding to the three departments: corporate, trusts and estates, and everything else. Section 3.02 (b). Revenues were initially allocated to the appropriate account. Section 3.02 (c). Expenses were also allocated among the three departments. "Direct expenses" of each department were to be allocated accordingly; "indirect expenses," such as rent, utilities, and costs of administrative personnel, were allocated among the departments "in proportion to the number of billing professionals" in each department. Section 3.01 (d) (ii). The net profits or losses for each department were determined by subtracting the direct and indirect expenses attributed to each department from the revenue so attributed. The net profits for the corporate account were then allocated to Martin's capital account, those of the trusts and estates department to Chioffi's capital account, and net profits for the "remaining," or other, department were divided between Martin's capital account and Chioffi's capital account in proportion to the ownership percentage of each partner. Section 3.01 (e) and (f). Martin's ownership interest was 57 percent and Chioffi's 43 was percent. Schedule 1 of the partnership agreement.

The allocation process did not in itself cause the actual, physical transfer of funds; rather, the process simply sorted revenues and expenses into separate capital accounts. Distribution of funds to partners was governed by § 3.02 of the agreement: "Distributions shall be made monthly and at such other times as the partners agree such that, following any such distribution, the capital account balances of the partners shall be directly proportionate to the ownership percentages of such partners. Monthly distributions for determining net income shall include cash paid to each partner, 401 (k) contributions, all related expense for business, automobile, and certain entertainment for certain clients not considered joint as it relates to the firm consistent with past practices of the partnership."

The management of the partnership was consistent with the allocation of revenues. Martin was the managing partner. Section 4.01. Article IV, entitled "Management; Restrictions," indicated that the partnership was to be "managed and the conduct of its business ... controlled (except as otherwise specifically provided herein) by the partners" such that "any decisions pertaining to the provision of corporate services [were to] be made by Martin in his sole discretion," and Chioffi enjoyed identical authority as to the trusts and estates department. Section 4.02. Other decisions were to be made by mutual consent.

Article IV also listed, in § 4.03, seven specific actions which a partner was prohibited from performing except with the consent of the other partner. These "restrictions" included, in part, compromising partnership claims, committing the partnership to financial obligations, and selling or assigning an interest in the partnership. Any losses or expenses, including attorney's fees, arising from such transgressions were to be "allocated exclusively to such partner's capital account." Section 4.03.

Further sections governed a partner's withdrawal from the partnership and its dissolution. Section 7.01 provided that a partner could withdraw at any time, provided that the withdrawing partner was to give at least ninety days notice before the effective date of the withdrawal. Section 7.02 provided that upon the withdrawal of a partner, "the partners shall dissolve and liquidate the partnership pursuant to [article VIII]."

Article VIII, in turn, set forth the procedures for dissolution and liquidation. The partners were to "work together in good faith" to "immediately" wind up the affairs and to "minimize to the greatest extent possible the costs incurred" by the partnership or any partner. Section 8.01. The costs which were incurred were to be "allocated and apportioned to the partners in accordance with the departmental profit calculation."² Id.Section 8.02 provided for liquidation. If the partnership were dissolved, the partners were to be the "liquidating trustees" and were to take appropriate actions, including making "final distributions" pursuant to § 8.03 and the Connecticut Uniform Partnership Act (act), General Statutes § 34–300 et seq. The costs of dissolution and liquidation were to be expenses of the partnership, and were "to be allocated and apportioned between Martin and Chioffi in accordance with their ownership percentages ...." Section 8.02. The partners were to continue to operate the affairs of the partnership "until final distributions have been made ...." Section 8.02.

According to § 8.03, the assets of the partnership, "net of partnership liabilities," were to be distributed "upon liquidation ...." The net assets to be distributed at that time included "all accounts receivable, works in progress and contingent fees with respect to any partner [which were to] be allocated in accordance with the departmental profit calculation,"³ and any "special allocations" were to be determined in accordance with the respective ownership percentages of the partners, unless otherwise agreed by the parties. Any other assets were also to be distributed in accordance with the ownership percentages. Id.

The following facts, as found by the trial court, and procedural history are relevant to our resolution of the claims on appeal. As the court stated in its memorandum of decision: "This action arises out of the dissolution of a limited liability partnership formed for the practice of law. The dissolution was occasioned by the voluntary withdrawal from the partnership of the defendant Martin, who owned a 57 percent interest in the partnership. The plaintiff was the only other [equity] partner. He owned a 43 percent interest....

"This dissolution did not occur under the best of circumstances. Besides ... deficient communication between the partners and ... different points of view, the dissolution was plagued by two particularly troublesome and substantial issues. The first dealt with the lease, to which the partnership was a party, and the second dealt with the disproportionate balances reflected in the partners' capital accounts." (Footnotes omitted.)

In its memorandum of decision, the court described the partnership's lease and its ramifications for the dissolution as follows: "In June, 2012, the partnership entered into a lease that did not expire until December 31, 2017. The base monthly rent of the lease was $24,916.67. Both parties described the lease as both a liability and an asset. The lease required substantial payments and was a substantial liability to the partnership. The rent payable was viewed by the parties to be below fair market value and therefore was considered a significant asset. Moreover, the partnership as a tenant had various subtenants whose rent covered $11,961.67 of this partnership's monthly rental obligation. Because each party intended to form [his] own firm upon dissolution of the partnership, each partner initially had a desire to remain in the premises or, at least, in a portion of the...