Denburg v. Parker Chapin Flattau & Klimpl

• Court: New York Court of Appeals Court of Appeals
• Writing for the Court: KAYE; SIMONS, TITONE, HANCOCK, SMITH and LEVINE, JJ., concur with KAYE; BELLACOSA; BELLACOSA
• Citation: Denburg v. Parker Chapin Flattau & Klimpl, 604 N.Y.S.2d 900, 82 N.Y.2d 375, 624 N.E.2d 995 (N.Y. 1993)
• Decision Date: 18 November 1993
• Parties: , 624 N.E.2d 995, 62 USLW 2403 Howard S. DENBURG, Respondent, v. PARKER CHAPIN FLATTAU & KLIMPL, Appellant.

Page 900

604 N.Y.S.2d 900

82 N.Y.2d 375, 624 N.E.2d 995, 62 USLW 2403

Howard S. DENBURG, Respondent, v. PARKER CHAPIN FLATTAU & KLIMPL, Appellant.

Court of Appeals of New York.

Nov. 18, 1993.

[82 N.Y.2d 376] [624 N.E.2d 997] Parker Chapin Flattau & Klimpl, New York City (Alvin M. Stein, Mark Abramowitz and Amos Alter, of counsel), appellant pro se.

[82 N.Y.2d 377] Fried, Frank, Harris, Shriver & Jacobson, New York City (Sheldon Raab, Honey L. Kober and Dino Fusco, of counsel), for respondent.

OPINION OF THE COURT

KAYE, Chief Judge.

In this dispute between a law firm and a former partner, we agree with the Appellate Division that a provision in the partnership agreement requiring certain payments upon a partner's withdrawal is unenforceable under Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 551 N.Y.S.2d 157, 550 N.E.2d 410. Nevertheless, we conclude that the Appellate Division erred in granting the former partner's summary judgment motion because there are disputed factual issues surrounding a purported settlement agreement. Accordingly, we modify and remit to the trial court for further proceedings.

I.

In 1983, the partners in the Manhattan law firm Parker Chapin Flattau & Klimpl--including plaintiff--executed an amended partnership agreement requiring withdrawing partners to pay certain specified sums to the partnership upon demand. In substance, subparagraph 18(a) of the agreement provided that if a withdrawing partner practiced law in the private sector prior to July 1988, the former partner had to pay the firm greater of (i) 12.5% of the firm's profits allocated to the partner over the two previous years or (ii) 12.5% of billings to former Parker Chapin clients made by the partner's new firm over the ensuing two years. The agreement provided an exception to this requirement, however, for departing partners whose previous year's profit allocation was less than $85,000--but only if the partner's new firm did no work for Parker Chapin clients over the next two years. The agreement also provided that the firm could apply the partner's capital account--which would otherwise have been disbursed at the end of the fifth fiscal year after withdrawal--to satisfy the partner's obligation. ^*

In early 1984 plaintiff left Parker Chapin to join a New Jersey law firm, and allegedly continued serving some of the same clients. In August 1986 Irving Rosenzweig, a member of the Parker Chapin's executive committee, wrote to plaintiff requesting information about his new firm's billings to Parker Chapin clients from March 9, 1984 through March 9, 1986 so that plaintiff's liability under the agreement could be computed. According to Rosenzweig, he spoke to plaintiff shortly afterwards, and plaintiff suggested that Parker Chapin simply keep the balance of his capital account in satisfaction of the obligation, whereupon Rosenzweig agreed on behalf of the firm and the account was "written off." Plaintiff disputes these allegations.

The matter was dormant until February 1990--two months after our decision in Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 551 N.Y.S.2d 157, 550 N.E.2d 410, supra--when plaintiff commenced an action against Parker Chapin asserting four causes of action. The first sought a declaration that subparagraph 18(a) was void as against public policy and directing defendant to repay sums illegally withheld, alleged to be at least $24,800; the second was for breach of the contract provision that would ordinarily require the capital account to be disbursed at the end of the fifth fiscal year following withdrawal; the third sought an accounting; and the fourth was for an "account stated."

Defendant answered, raising affirmative defenses and counterclaims, and plaintiff moved for summary judgment and dismissal of the counterclaims. Parker Chapin defended the disputed clause on the ground that it was not a void forfeiture-for-competition provision in the Cohen mold, but was designed instead to assure that partners who left the firm equitably shared in the burden of extraordinary obligations it would be assuming in connection with a move to new quarters. Specifically, Parker Chapin submitted evidence that the firm entered into a new lease commencing December 1, 1983 at a six-fold rent increase and borrowed $4.5 million in June 1984, allegedly to finance the move and refurbish the space. According to the firm, moreover, it predicted that it would take at least five years to recover from the impact of these increased expenses and accordingly restricted subparagraph 18(a) to that duration. Parker Chapin additionally contended that any issues relating to plaintiff's obligations under subparagraph 18(a) were finally settled in 1986, when plaintiff agreed that the balance in the capital account should simply be taken to resolve the matter.

Distinguishing Cohen, Supreme Court declined to declare subparagraph 18(a) invalid because it might be shown to be a "reasonably limited arrangement for recoupment of partnership liabilities." It also denied summary judgment on the breach of contract claim because of the factual dispute surrounding plaintiff's purported settlement agreement. The court similarly denied plaintiff's request for an accounting, and denied summary judgment on the "account stated" cause of action. The court did, however, grant plaintiff's motion for dismissal of the counterclaims.

On plaintiff's appeal, the Appellate Division modified by granting him summary judgment on the first three causes of action and remitting for an accounting. It held that while paragraph 18 might have had as an incidental objective the recoupment of partnership liabilities in connection with the firm's relocation, its principal function was to prevent withdrawing partners from competing with the firm, and was thus as much an improper forfeiture-for-competition provision as the one in Cohen.

In response to defendant's settlement argument, the court observed that even if plaintiff did agree to set off his capital account as alleged, it was "merely repetitive of, and no more enforceable than" the provision in subparagraph 18(a) permitting the firm to apply the capital account in satisfaction of the obligations arising under the paragraph (184 A.D.2d 343, 345, 586 N.Y.S.2d 107). Accordingly, the court remitted for an accounting (third cause of action). Finally, the parties have consented to dismissal of the account stated claim.

On remittal, the accounting revealed a capital account balance of $24,933.62. Final judgment was entered in that amount, and this Court granted defendant leave to appeal. We now modify by affirming to the extent subparagraph 18(a) was declared unenforceable and remit for further proceedings.

II.

Analysis begins with Cohen v. Lord, Day & Lord. There, we held that DR 2-108(A) of the Code of Professional Responsibility--which states that a lawyer may not "participate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement"--reflects public policy, rendering certain anticompetition clauses void and unenforceable.

As we made clear, restrictions on the practice of law, which include "financial disincentives" against competition as well as outright prohibitions, are objectionable primarily because they interfere with the client's choice of counsel: a clause that penalizes a competing attorney by requiring forfeiture of income could "functionally and realistically discourage" a withdrawing partner from serving clients who might wish to be represented by that lawyer, 75 N.Y.2d, at 98, 551 N.Y.S.2d 157, 550 N.E.2d 410.

In Cohen, we voided a provision that required withdrawing partners to relinquish their share of revenues earned but uncollected by the firm if they worked in private practice or as in-house counsel in any State where the firm had an office, or in neighboring States. We concluded that the "significant monetary penalty it exacts, if the withdrawing partner practices competitively with the former firm, constitutes an impermissible restriction on the practice of law." 75 N.Y.2d, at 98, 551 N.Y.S.2d 157, 550 N.E.2d 410.

We acknowledged, however, a law firm's legitimate interest in its own survival and economic well-being and cautioned against a "categorical interpretation or application" of the decision, 75 N.Y.2d, at 101-102, 551 N.Y.S.2d 157, 550 N.E.2d 410. Parker Chapin thus argues that subparagraph 18(a) had the legitimate purpose of assuring some restitution to the firm by partners who abandoned the enterprise just as the firm undertook extraordinary relocation expenses. Defendant emphasizes the limited duration of the clause, and argues that no anticompetitive effect was intended or realized because of the modest sums involved and the fact that plaintiff, as well as other partners, did leave the firm notwithstanding the clause.

While defendant criticizes the Appellate Division's finding (184 A.D.2d, at 345, 586 N.Y.S.2d 107) that the "principal function" of the clause was to discourage competition--it argues that the intended function is a fact issue--we note that in the present context focus should essentially be not on the intent of the clause but on its effect.

Even crediting Parker Chapin's assertions as to the purpose of subparagraph 18(a), we conclude that its effect is to improperly deter competition and thus impinge upon clients' choice of counsel. First, it applies only to lawyers continuing in private practice--and thus potentially in competition with the firm--but not other practitioners (for example, government lawyers) who do not threaten the firm's client base. Ability to pay cannot explain this discrimination because a departing partner becoming a high-paid corporate officer or embarking on a lucrative business venture is exempt from the required payment but an attorney starting a sole practice is not.

The provision, moreover, requires a departing...