Gull v. Van Epps, 93-0710

• Decision Date: 19 May 1994
• Docket Number: No. 93-0710,93-0710
• Citation: 185 Wis.2d 609,517 N.W.2d 531
• Parties: Jerome E. GULL, Plaintiff-Appellant, v. Ruth VAN EPPS, and David L. Werth, Defendants-Respondents.
• Court: Wisconsin Court of Appeals

Page 531

517 N.W.2d 531

185 Wis.2d 609

Jerome E. GULL, Plaintiff-Appellant, v. Ruth VAN EPPS, and David L. Werth, Defendants-Respondents.

No. 93-0710.

Court of Appeals of Wisconsin.

Submitted on Briefs Nov. 3, 1993.

Opinion Released May 19, 1994.

Opinion Filed May 19, 1994.

Before GARTZKE, P.J., and DYKMAN and SUNDBY, JJ.

SUNDBY, Judge.

In this case we decide that the law partnership of Van Epps, Gull and Werth continued after dissolution solely for the purpose of winding up the affairs of the partnership. Therefore, the withdrawing partner, plaintiff-appellant Jerome E. Gull, is not entitled to share in fees from new business earned by Van Epps and Werth during the winding up of the partnership affairs. However, as to work in progress at the time of dissolution of the partnership, the net fees earned by all three partners remain the property of the partnership and are to be shared according to the sharing formula in effect at the time of dissolution. The fees include those earned The trial court denied Gull any share of the fees earned by the remaining partners after dissolution on the grounds that such sharing would constitute unethical fee-splitting. We conclude that as to fees earned on work in progress, the trial court erred. We therefore affirm the judgment insofar as the parties stipulated to Gull's share of accounts receivable and the furniture, furnishings and library, but reverse the judgment as to Gull's claim to fees earned on work in progress and remand this matter to the trial court with directions to wind up the affairs of the partnership according to the principles set forth in this opinion.

by Gull on work in progress on accounts he took with him when he left the partnership.

BACKGROUND

Gull, Ruth E. Van Epps, and David L. Werth practiced law in an at-will partnership from January 1, 1984, until Gull withdrew effective December 31, 1987. Gull continued to serve his clients in the partnership offices until February 19, 1988, when he opened his own office in the same city. He took with him his clients and his files.

Despite serious attempts, the parties were unable to wind up the affairs of the partnership. Gull began this action for an accounting December 11, 1990. On December 10, 1991, during trial, the parties stipulated to Gull's share of the accounts receivable and the furniture, furnishings and library. However, the parties were unable to settle Gull's claim that he is entitled to his customary percentage of the "profits" of the partnership earned during the wind-up period, January 1, 1988 to December 10, 1991.

On December 23, 1992, the trial court entered judgment in favor of Gull according to the stipulation. However, the court denied Gull's claim for any share of the fees earned by Van Epps and Werth during the wind-up period. The court concluded that it would be unethical fee-splitting for Van Epps and Werth to share such fees with Gull.

FEE-SPLITTING

We first address the fee-splitting issue. Van Epps and Werth cite Wisconsin Supreme Court Rule 20:1.5(e) (Callaghan 1994) which provides in part: "A division of fee between lawyers who are not in the same firm may be made only if:...." (Emphasis added None of the enumerated exceptions apply here.

Section 178.25(2), STATS., of the Uniform Partnership Act, ¹ provides: "On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed." After Gull's withdrawal, the partnership was dissolved, but until its affairs were wound up, the partnership remained intact for that purpose. Supreme Court Rule 20:1.5(e) does not apply to the division of fees in concluding the affairs of the partnership because, until that process is completed, the lawyers are in the same firm. We recognize that winding up the affairs of a law partnership involves non-economic responsibilities which the partners have to their clients. The discharge of those responsibilities does not present issues in this appeal.

CONTINUATION OF PARTNERSHIP

We next consider Gull's claim that he consented to the continuation of the partnership and therefore, under Lange v. Bartlett, 121 Wis.2d 599, 360 N.W.2d 702 (Ct.App.1984), he may elect to share in the "profits" of the partnership earned after dissolution. We construe his claim to extend to fees earned by Van Epps and Werth on new work contracted for and performed during wind-up.

Gull's claim is based on § 178.37, STATS., which was applied in Lange. That statute provides:

When any partner retires ² or dies, and the business is continued under any of the In Lange we noted that different rules apply depending on whether a partnership is winding up its affairs or the business is continued. Lange, 121 Wis.2d at 602, 360 N.W.2d at 704. Regardless of Gull's intent, the conditions under which the partnership could be continued under § 178.37, STATS., do not exist in this case. Section 178.37 applies if the business is continued "without any settlement of accounts ..."; § 178.36(1), STATS., applies "if the business is continued without liquidation of the partnership affairs...." In this case, the partners are settling their accounts and liquidating the partnership affairs. Section 178.37 does not apply when the partnership is continued only for the purpose of winding up its affairs. See Hurley v. Hurley, 33 Del. Ch. 231, 91 A.2d 674 (1952) (construing the corresponding section of the U.P.A.

conditions set forth in s. 178.33(2)(b) or 178.36(1), (2), (3), (5) and (6), without any settlement of accounts ... he ... may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option ..., in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership.... [Footnote added.]

When a partnership is liquidated, as here, § 178.33(1), STATS., controls. First Nat'l Bank v. Schaefer, 91 Wis.2d 360, 376, 283 N.W.2d 410, 419 (Ct.App.1979). We therefore conclude that Gull did not have the option under § 178.37, STATS., of receiving, in lieu of interest on his partnership interest, the profits of the partnership from new work contracted for and performed by Van Epps and Werth after dissolution.

Further, § 178.37, STATS., limits the "profits" a withdrawing partner may receive to those "attributable to the use of his right in the property of the dissolved partnership...."

The rationale for such a result is clear. The reason for awarding a retiring partner his share of the "profits attributable to the use of his right in the property of the dissolved partnership" is not because he still retains an interest in the business but rather "is intended to give him a return on assets belonging to him which still are being employed in the business by the remaining partner[s]."

Oliker v. Gershunoff, 195 Cal.App.3d 1288, 241 Cal.Rptr. 415, 424 (1987) (quoting Sechrest v. Sechrest, 248 Wis. 516, 518, 22 N.W.2d 594, 596 (1946)).

In a partnership performing professional services, the "profits" of the partnership are not ordinarily derived from the investment of capital but are attributable to the performance of services. "The profits of a professional, whether he works individually or jointly with other professionals in his field, are recognized as personal service income since the return attributable to capital rather than individual skill and labor is negligible." Laura L. Crum, Comment, Dissolution of a Law Partnership--Goodwill, Winding up Profits & Additional Compensation, 6 J. LEGAL PROF. 277, 289 (1981).

In the dissolution of a property management partnership, the Wyoming Supreme Court refused to award the outgoing partner any post-dissolution profits where the only physical assets consisted of office furniture and a truck and the partnership profits were attributable to the remaining partner's labor. Weisbrod v. Ely, 767 P.2d 171, 175 (Wyo.1989).

In winding up a real estate sales partnership, the Florida Court of Appeals held that the withdrawing partner was not entitled to profits earned by the remaining partner after dissolution. The court said:

It must be borne in mind that the profits of the partnership were the result primarily of the performance of personal services. In the absence of particular circumstances affecting the situation, a partner whose only contribution to the firm is personal services or skill is not entitled to share the profits earned after dissolution of the partnership when his services ended upon the dissolution.

Hilgendorf v. Denson, 341 So.2d 549, 551 (Fla.Dist.Ct.App.1977) (per curiam). See also Blut v. Katz, 13 N.J. 374, 99 A.2d 785 (1953) (where profits were primarily due to the surviving partners' skill and services, no part of them was allocable to the deceased's capital).

No specific provision of the Uniform Partnership Act (U.P.A requires the result reached in these cases. "The U.P.A.'s general approach to partnership dissolution is suited to closely held businesses, which do not ordinarily desire continuity of operations, but is not well adapted to businesses that ordinarily desire continuity, such as large law, accounting, and investment firms." 2 ALAN R. BROMBERG & LARRY E. RIBSTEIN, BROMBERG AND RIBSTEIN ON PARTNERSHIP § 7.01(c) (1994).

The U.P.A.'s maladaptation to the dissolution and liquidation of professional partnerships may be due in part to the fact that it was drafted at a time when such partnerships were relatively uncommon. ³ The subject of the Uniform Law on Partnership was first taken up by the Conference of Commissioners on Uniform State Laws in 1902. UNIF. PARTNERSHIP ACT Commissioners' Prefatory Note, 6 U.L.A. 5 (1914). The U.P.A. was approved by the Conference in 1914. Id. at 7.

Uniform Partnership Act § 42, and Wisconsin's corresponding § 178.37, STATS., follow the English Partnership Act of 1890. Note, Winding up...