Howard v. Babcock
| Decision Date | 06 December 1993 |
| Docket Number | No. S027061,S027061 |
| Citation | 863 P.2d 150,25 Cal.Rptr.2d 80,6 Cal.4th 409 |
| Court | California Supreme Court |
| Parties | , 863 P.2d 150, 62 USLW 2373, 28 A.L.R.5th 811 Theodore R. HOWARD et al., Plaintiffs and Appellants, v. George H. BABCOCK et al., Defendants and Respondents. |
Layman, Jones & Dye, Stanley R. Jones and Ren R. Hayhurst, for plaintiffs and appellants.
Kenneth E. Owen, Diane C. Yu, Paul W. Vapnek, Quinn, Kully & Morrow, Margaret J. Morrow, Lisa S. Kantor, Dickson, Carlson & Campillo, William B. Fitzgerald and Hall R. Marston as amici curiae on behalf of plaintiffs and appellants.
Morgan, Wenzel & McNicholas and Thomas H. Vickers, for defendants and respondents.
Howarth & Smith, Don Howarth, Barbara Gregg Glenn, Cotkin & Collins, Bradley C. Withers and Jeffrey L. Garland as amici curiae on behalf of defendants and respondents.
We granted review to decide whether an agreement between law partners is enforceable if it requires withdrawing partners to forego certain contractual withdrawal benefits if they compete with their former law firm. We conclude that an agreement among law partners imposing a reasonable toll on departing partners who compete with the firm is enforceable. We reverse the judgment of the Court of Appeal to the extent it holds the agreement unenforceable and orders an accounting to plaintiffs on that basis. We order the matter remanded to the trial court for a determination whether under the facts of this case the terms of the agreement are reasonable.
In 1982, partners in the law firm of Parker, Stanbury, McGee, Babcock & Combs executed a partnership agreement. Article X of the agreement provided in pertinent part that: "Should more than one partner, associate or individual withdraw from the firm prior to age sixty-five (65) and thereafter within a period of one year practice law ... together or in combination with others, including former partners or associates of this firm, in a practice engaged in the handling of liability insurance defense work as aforesaid within the Los Angeles or Orange County Court system, said partner or partners shall be subject, at the sole discretion of the remaining non-withdrawing partners to forfeiture of all their rights to withdrawal benefits other than capital as provided for in Article V herein." 1
Article V provided that a general partner who withdraws from the partnership shall be paid his or her capital interest, and a sum "equal to the share in the net profit of the firm that the withdrawn ... partner would have received during the first twelve months following the withdrawal ... if he had remained with the firm ... during the said twelve month period." Plaintiffs Howard, Moss and Loveder and defendants Babcock Combs, Kinnett, Waddell, Bergsten and Schaertel signed the partnership agreement.
In January 1984, participating partners Loveder and Schaertel were elevated to general partners and Osborne and Cicotte were admitted as participating partners. Strickroth and Mori were admitted as participating partners in 1985 and Barrett was admitted as a participating partner in 1986. The partnership agreement was not amended, nor did the new partners admitted after 1982 ever sign it.
On December 8, 1986, plaintiffs (Howard, Moss, Loveder and Strickroth) notified the remaining members of the firm that they were terminating their relationship with the firm, and that they would begin practice in competition with the firm in January 1987. They asserted that article X was unenforceable. Defendants notified plaintiffs that they would withhold a portion of plaintiffs' withdrawal benefits because of plaintiffs' violation of article X. Plaintiffs replied that the partnership agreement was no longer effective, and published notice of dissolution of the firm, effective December 31, 1986.
On January 2, 1987, plaintiffs entered business in Orange County as a general partnership under the name of Howard, Moss, Loveder & Strickroth, handling, among other cases, liability defense work for insurance companies and self-insured companies. Defendants operated as a new general partnership under the name of Parker, Stansbury, McGee, Babcock & Combs.
The assets of the original Parker firm on December 31, 1986, included the capital of the firm, namely, the profits shown on the balance sheet; the accounts receivable, that is, work performed and billed, but in which the bill had not been paid; and the unfinished business, that is, open files that required additional work that would be billed in the future.
Defendants tendered payment to plaintiffs for their share of the capital of the firm, but refused to compensate them for the accounts receivable or to acknowledge that they had any interest in the work in progress or unfinished business of the firm.
Clients of the original Parker firm substituted the Howard firm in approximately 200 cases.
Plaintiffs' first amended complaint was filed on June 24, 1987, and sought an accounting of the original Parker firm's assets and liabilities as of December 31, 1986, and of the profits attributable to each party, including those arising from the unfinished business of the firm after December 31, 1986. The second cause of action alleged a breach of fiduciary duty, in that defendants had refused to account to plaintiffs for profits and unfinished business of the firm, that they refused to release plaintiffs from certain lease guaranties, and that they refused to acknowledge the right of plaintiffs to dissolve the firm and be paid for their share of the accounts receivable, unfinished business and goodwill of the firm. Plaintiffs also sought a declaration that the partnership agreement was not in effect in December 1986, and that even if it was in effect, article X of the agreement was unenforceable. Plaintiffs also sought a declaration of the rights and duties of the parties under the agreement, and their ownership interest in the accounts receivable, unfinished business and goodwill of the firm.
In their answer, defendants denied that the partnership had dissolved before plaintiff's withdrawal, and denied that any partner had refused to be bound by the written partnership agreement before December 1986. In addition, they asserted many affirmative defenses, including claims that article X of the agreement is authorized by Business and Professions Code section 16602 and other provisions, that the partnership agreement could not be dissolved absent the consent of all the partners, estoppel, unclean hands and laches.
Defendants filed their cross-complaint on September 21, 1987, alleging that the partnership agreement contemplated the addition of new partners, and that the addition of new partners who did not execute the agreement was not intended to dissolve the partnership. The cross-complaint also alleged causes of action against plaintiffs for breach of contract, breach of the covenant of good faith and fair dealing, bad faith denial of contract, breach of fiduciary duty, conversion, fraud, a common count for money owed, an accounting, and declaratory relief. The cross-complaint sought a judicial declaration that the partnership agreement and, particularly, article X was enforceable, that plaintiffs' purported dissolution of the partnership was contrary to the terms of the agreement, and that plaintiffs had no ownership interest in the accounts receivable, fees, unfinished business, assets or goodwill of the former firm.
By stipulation of the parties, the issue of the validity and enforceability of the partnership agreement and of article X of that agreement was tried first and separately. The parties waived jury trial as to that issue only.
The trial court first decided that article X was valid and enforceable and was not against public policy, but that under Corporations Code section 15031, subdivision (7), dissolution of the partnership had occurred on January 1, 1984, when new partners were added without a new partnership agreement, a written amendment of the agreement, or the new partners' execution of the existing agreement. The court then took up the issue of what the terms of the partnership were at the time plaintiffs withdrew. After an evidentiary hearing, it determined that although the partnership was dissolved by operation of law in 1984, the partnership agreement remained binding in all its terms. 2 Under the agreement, all that the plaintiffs were entitled to was their share of the profits for 1986. They were not entitled to any payment for goodwill or any share of the profits after 1986.
The court filed an interlocutory judgment ordering plaintiffs to provide defendants with an accounting of the net profits plaintiffs had billed or collected from clients who wanted plaintiffs to continue work in progress when plaintiffs left the Parker firm. The parties were ordered to meet and confer to resolve differences, and to apply to the court if differences could not be resolved. Defendants were ordered to account to plaintiffs for plaintiffs' shares of unpaid profits of the firm for the year 1986. The interlocutory judgment repeated that the partnership was dissolved in 1984, "but was continued as a valid partnership by agreement of the defendants and plaintiffs, who were signatories to it, at least until December 31, 1986, ... and that article X was valid and enforceable."
Plaintiffs sought a stay and writ of mandate in the Court of Appeal, arguing that the trial court had gone beyond the stipulated issues in deciding that plaintiffs owed defendants an accounting, and that all partners of a dissolved law firm must account for the unfinished business of the firm. The Court of Appeal issued the stay and solicited informal opposition, then summarily dissolved the stay and denied the writ petition.
The trial court then entered the final judgment prepared by defendants, ordering plaintiffs to pay defendants the sum of $382,686 and finding that defendants owed plaintiffs no...
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