Jackson v. Hunt, Hill & Betts

• Citation: 78 A.L.R.2d 272,196 N.Y.S.2d 647,164 N.E.2d 681,7 N.Y.2d 180
• Parties: , 164 N.E.2d 681, 78 A.L.R.2d 272 Robert M. JACKSON, Appellant, v. HUNT, HILL & BETTS et al., Respondents.
• Decision Date: 30 December 1959
• Court: New York Court of Appeals

Page 647

196 N.Y.S.2d 647

7 N.Y.2d 180, 164 N.E.2d 681, 78

A.L.R.2d 272

Robert M. JACKSON, Appellant, v. HUNT, HILL & BETTS et al., Respondents.

Court of Appeals of New York.

Dec. 30, 1959.

Whitman Knapp, Robert McLeod Jackson, Herbert P. Polk and David Simon, New York City, for appellant.

William R. Meagher, Barry H. Garfinkel and Elizabeth Head, New York City, for respondents.

VAN VOORHIS, Judge.

On December 31, 1954 there were 13 partners in the New York City law firm of Hunt, Hill and Betts. Two estates of deceased partners were likewise interested in the firm. Thirteen seems to have been an unsatisfactory number, for three of the partners A. V. Cherbonnier Mahlon Dickerson and Robert McLeod Jackson (plaintiff herein) withdrew from the firm as of that date. Agreements were made with Cherbonnier and Dickerson under which they were to receive certain earned but uncollected fees when paid. No similar agreement was made with Jackson who now sues to establish his right to participate in fees that were earned but unpaid at the time of his withdrawal, and to participate in the physical assets of the partnership. He won in the trial court, but the judgment was reversed and the complaint dismissed by the Appellate Division, First Department.

Before the trial the complaint had been dismissed at Special Term under rule 106 for insufficiency in law. This earlier judgment was reversed by the Appellate Division (2 A.D.2d 971, 157 N.Y.S.2d 394, 395) which remanded the action for trial in a memorandum stating: 'There is sufficient ambiguity in the law partnership agreement in respect of the distributable interest of plaintiff as a retiring partner to indicate a trial rather than a disposition of the first two causes of action on the pleading. We hold merely that there is ambiguity enough to warrant the consideration of such proof as to actual practice in the firm and other evidence in support of what was understood and acted upon by the partners.'

Thereafter the action proceeded to trial as has been stated, the trial court resolved the ambiguity in plaintiff's favor but the Appellate Division resolved it against him by a devided court. It seems to us that the trial court was correct both on the law and on the facts. In the absence of a formal partnership agreement, upon the retirement of a partner, the firm would have to be dissolved and, when uncollected fees had been paid, they would have to be collected for the benefit of the members of the firm in liquidation. From this it follows that unless this partnership agreement established a different relationship between the partners, plaintiff, as well as Cherbonnier and Dickerson, is entitled to what he would have received on dissolution and winding up under the Partnership Law, Consol.Laws, c. 39, § 1 et seq. He would not be divested of these participations by a partnership contract which was obscure or which conferred upon him similar property rights to those which he would have possessed in the absence of a formal agreement. The practical construction placed upon this partnership agreement, as disclosed by the evidence taken by the trial court, in our judgment preponderates in favor of the findings and concludions made by the trial court.

This agreement provides that any partner may withdraw from the firm upon 90 days' notice, unless the executive committee of the firm causes such withdrawal to take effect before the expiration of 90 days. In event of withdrawal by any partner, section 2 of article V provides that he shall be entitled to receive

'(b) His share of the Net Profits as determined under the provisions of Article IV Section 2(b) as his full participating interest in the net fees of the firm; provided, however, the firm shall have the option to delay such payment, in whole or in part, for one year from the effective date of such withdrawal.'

Referring back to section 2 (par. (b)) of article IV, by which the net profits are to be determined that part of the agreement provides as follows:

'Section 2. The gross fees in all matters, other than the net fees of the so-called APC cases, whether billed or unbilled, unless distribution has been made prior to the date of this amended agreement, shall accrue to the current firm and the Net Profits as defined in Article III, Section 2, shall be distributed in accordance with the Participation Schedule in effect in the year in which such fee or fees are paid, except:

'(a) In the event of death of a Partner his estate shall receive his proportionate share of net fees in all matters pending at the time of death, whether billed or unbilled. Such payment of net fees shall be made as if the Partner had remained alive; provided, however, the individual Partners hereby specifically authorize and empower their respective distributees, executors or administrator to make an agreement with the surviving Partners for settlement at any time of all claims the estate of the deceased Partner has against the firm.

'(b) In the event of the withdrawal of a Partner from the firm an estimate shall be promptly made of the Net Profits of the firm as of the date of such withdrawal, such estimate shall be made by Charles B. Hill and in the event that he does not act, then by the three senior Active Partners and either of such estimates shall be deemed the actual Net Profit of the firm as of the date of such withdrawal; the firm shall have the option to delay payment, in whole or in part, of any Net Profits due the withdrawing Partner for one year from the effective date of such withdrawal.'

Some distinction is here drawn between the procedure, at least, in event of a partner dying and what happens in the case of a partner's withdrawal from the firm. This distinction is the principal basis for plaintiff's having been defeated at the Appellate Division. In case of the death of a partner, the interest of his estate extends to the 'net fees in all matters pending at the time of death, whether billed or unbilled.' Such payment of net fees is to be made as if the partner had remained alive. That signifies that the personal representatives of a deceased partner are entitled to an accounting of the total assets of the firm, including the professional fees earned but not collected, as of the time of the partner's death.

In event of the withdrawal of a partner from the firm, an accounting of his interest in the uncollected fees is dispensed with, but in lieu thereof 'an estimate shall be promptly made of the Net Profits of the firm as of the date of such withdrawal * * * such estimates shall be deemed the actual Net Profit of the firm as of the date of such withdrawal'.

Under this construction of the agreement, there is no distinction between what is collectible from the firm by a withdrawing partner and the estate of a deceased partner, except that it was anticipated that greater expedition would be desirable in case of a withdrawing partner so as to close out his relationship to the firm quickly to the end that he could more readily become active in another firm without the embarrassment of conflicting interests or loyalties with respect to the clients who might follow him out of the firm. This was the express interpretation of these clauses given by A. V. Cherbonnier who drew the agreement. In withdrawal the estimate is in lieu of an accounting.

The decision of the appeal hinges on whether the term 'net profits', as used in this agreement, includes fees that are earned but uncollected, or only such as shall have been collected at the time when a partner withdraws.

Net fees and net profits, as respondents' brief says, mean exactly the same thing, except as net profits are net fees less 10% allocated to capital. There is no dispute about the capital accounts of the partners, hence this difference is unimportant for present purposes.

The net profits to be estimated as of the date of the withdrawal of a partner and paid to him under section 2 (par. (b)) of article IV and section 2 (par. (b)) of article V are described in section 2 of article IV as being 'Net Profits as defined in Article III, Section 2'. The latter section in the agreement states: 'Section 2. At the end of each year ten percent (10%) of the net fees shall be allocated to the capital fund and the remainder shall be known as the Net Profits for the year.'

But in order to ascertain what is meant by 'net fees', one has to look back to section 1 of article III which says that 'The net fees in each year shall be the balance remaining after all expenses incurred by the offices of the firm are subtracted from the gross fees earned by the offices of the firm for that year.'

The last words indicate that the gross fees, which determine the amount of the net fees by the deduction of expenses, are not merely such as were collected during the year but comprise fees 'earned * * * for that year.' If this is not already clear, it is demonstrated by the language of section 2 of article IV, which provides that 'The gross fees in all matters, other than the net fees of the so-called APC cases, whether billed or unbilled, unless distribution has been made prior to the date of this amended agreement, shall accrue to the current firm'. (Italics supplied.)

In other words, it is provided that unbilled gross fees accrued to the current firm while plaintiff was a member, and no other disposition is made of the uncollected earnings at the year end except that, in the case of partners remaining in the firm, such portion of the net profits as has not been collected during the year 'shall be distributed in accordance with the Participation Schedule in effect in the year in which such fee of fees are paid'. The term 'net profits' has to include more than cash collections during the current year, since otherwise there would be nothing left to be distributed in subsequent years in which the uncollected portion of such fees are paid. It would be self-contradictory to provide, as this...