McLean, Koehler, Sparks & Hammond v. Schnepfe

• Decision Date: 01 September 1986
• Docket Number: No. 102,102
• Citation: 524 A.2d 86,309 Md. 399
• Parties: McLEAN, KOEHLER, SPARKS & HAMMOND v. Howard A. SCHNEPFE et al. ,
• Court: Maryland Court of Appeals

Page 399

309 Md. 399

524 A.2d 86

McLEAN, KOEHLER, SPARKS & HAMMOND v. Howard A. SCHNEPFE et al.

No. 102, Sept. Term, 1986.

Court of Appeals of Maryland.

April 22, 1987.

William B. Dulany (Dulany, Parker & Scott, on brief), Westminster, for appellant.

John H. Zink III (Cynthia M. Hahn and Cook, Howard, Downes & Tracy, on brief), Towson, for appellees.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, RODOWSKY, COUCH, McAULIFFE and ADKINS, JJ.

RODOWSKY, Judge.

This appeal in general involves the problem of unfunded retirement benefits. In particular it involves the interpretation of the terms, "any unpaid or accrued expenses," as used in the voluntary withdrawal provisions of a partnership agreement between certified public accountants. The parties disagree over the applicability of the quoted terms to unfunded obligations to pay, monthly, determinable amounts to retired former partners for ten years after retirement. The trial court, sitting nonjury, concluded that those obligations to retired partners were not "expenses" under the agreement. Before the appeal was heard by the Court of Special Appeals, we granted certiorari on our own motion. For reasons set forth below, we shall affirm.

Appellant and defendant below, McLean, Koehler, Sparks & Hammond (the Firm), adopted a written partnership agreement on October 1, 1979. ¹ Howard A. Schnepfe (Schnepfe) became a partner in the Firm on January 1, 1980. ² On December 31, 1984, Schnepfe voluntarily withdrew from the Firm. On that same date another partner retired. The Firm's statement of changes in financial position as of December 31, 1984, reported that payments required to be made to retired partners during calendar 1985 would be $68,245, an increase of $28,395 over the figure reported in the balance sheet as of December 31, 1983, for retirement payments to be made during calendar 1984. The Firm's December 31, 1984, balance sheet also reported $344,209 as the "Long-Term Retirement Liability." ³ As of the date of Schnepfe's withdrawal from partnership the Firm's current (1985) and long-term retirement liability totaled $412,454 on the balance sheet. In accounting to Schnepfe the Firm set off against the amount payable to Schnepfe his partnership percentage of that total retirement liability. Schnepfe, disputing that the set off was authorized under the agreement, brought the instant action.

The partnership agreement of October 1, 1979, was prepared within the Firm by a committee of three partners, including Terry W. Weller (Weller), who has been chairman of the Firm's management committee since 1980. The contract's format uses catch words or headings in the margin next to each numbered paragraph. Five paragraphs are particularly relevant to the arguments of the parties. Paragraph 10, "EXPENSES," reads:

All expenses, debts, losses or deficiencies which shall be incurred in carrying on the said practice of accountancy shall be paid out of the funds of the partnership. In case of any deficiency thereof, such deficiency shall be paid by the partners in the proportion in which they are entitled to share in the net profits of the partnership.

Paragraph 12, "BOOKS OF ACCOUNT," states:

The books of account will be maintained on a cash basis and all tax returns will be prepared on the same basis.

Paragraph 14, dealing with "RETIREMENT," in relevant part reads:

[T]he retiring partner shall be entitled to receive the following:

(a) ... the balance in the retiring partner's capital account....

(b) An annual retirement or death benefit, payable monthly, computed as follows:

(i) The sum of an amount computed as follows: 1 1/4% of the retiring partner's average total earnings credited to his capital account for the four year period during which such earnings are the highest multiplied by the lesser of his full years of accredited service to the firm or 25; and

(ii) There shall be added to the amount computed under (i) above 1% of the average total earnings credited to his capital account referred to above multiplied by his full years of service in excess of 25; but in no event will the maximum aggregate annual retirement benefit exceed 40% of said average total earnings.

Paragraph 16 states that the retirement payments "will be for a period of ten (10) years to the retired partner or, in the case of death, to his spouse or estate."

"VOLUNTARY WITHDRAWAL" is the subject of p 18 which in relevant part reads:

Upon voluntary withdrawal of a partner, he shall surrender his interest in the partnership and be entitled to the following:

(a) The balance in the withdrawing partner's capital account....

(b) His percentage of accounts receivable on the books at the date of his withdrawal which are collected within two years of the date of such withdrawal reduced by his percentage of the recorded value of work in process of clients taken by the withdrawing partner and any unpaid or accrued expenses as of such date. The amounts to be paid under this paragraph shall be paid within thirty days after the end of the fiscal quarter in which such collections occur. Before any moneys are paid to the withdrawing partner pursuant to this paragraph, such withdrawing partner shall make satisfactory arrangements to pay any moneys owing by him to either the partnership or to any other partner or partners. Until all such debts to the partnership or other partners are fully paid, the partnership shall have the right to apply all payments due against such debts without further authorization from the withdrawing partner. Should the obligation for work in process exceed the partner's share of accounts receivable, that amount shall be reimbursed to the partnership. [Emphasis added.]

The Firm says, and Schnepfe denies, that the $412,454 liability to retired partners as of December 31, 1984, is an "unpaid or accrued expense[ ]." At that time Schnepfe had a 10.5% interest in the Firm. Applying, or not applying, that percentage to the retirement liability produces a "swing" of $43,307.67. Under the Firm's interpretation Schnepfe would owe the Firm money. The trial court, adopting Schnepfe's position, entered judgment in his favor for $36,742. ⁴

Schnepfe testified that an "[a]ccrued expense is an expired cost for which you have not received or normally will not receive an invoice." In reference to the requirement for "books of account [to] be maintained on a cash basis," Schnepfe explained that "to have expenses recorded [they] must be paid," while under the accrual method "expenses are recorded whether paid or unpaid." Schnepfe introduced into evidence the Firm's computer generated report of income and expense for the month and the eleven months ending November 30, 1984. "[R]etirement expense" is listed under the general category "other expenses." The amount actually paid in November to retired partners was $3,320.90 and the year to date amount paid to retired partners was $36,529.90. Turning to the December 31, 1984, balance sheet and related statements Schnepfe explained that the payments made in 1984 to retired partners were included in the category "other expenses" on the statement of income and partners' capital. On the balance sheet, the statement of current and long-term liability for retired partners was presented on an accrual basis.

Counsel for Schnepfe read into the record from the deposition of Weller who acknowledged that the expenses referred to in pp 10 and 18 of the partnership agreement are the same.

Weller, testifying in the Firm's case, said that the requirement for cash basis accounting in p 10 of the partnership agreement was only for tax purposes and that accountants generally accept using an accrual basis for stating the true financial position of an account. Weller said the retirement obligation was an unpaid or accrued expense as of the date of Schnepfe's withdrawal because the obligation had been carried on the accrual basis balance sheet.

There had been one prior instance of the withdrawal of a partner under the 1979 Firm agreement, that of Thomas Jess Crouch (Crouch) who withdrew June 30, 1984. Minutes of a Firm meeting of September 4, 1984, reflect that Weller reviewed at that meeting "the Crouch Settlement Proposal dated August 30, 1984" and that "[t]he partners approved the proposed settlement which shows that Mr. Crouch should settle with [the Firm] for a payment to us of $815.00." The Firm also introduced through Weller a single page tabulation headed, "Second Revision--Crouch Settlement Proposal--October 18, 1984," on which appears a computation following the steps of p 18 of the partnership agreement. The exhibit uses Crouch's percentage of $400,000 of "[r]etirement liability" to compute a deduction from accounts receivable. The exhibit as typed and as revised by $68 in handwriting reflected a balance to Crouch of $3,064.

The circumstances of Crouch's withdrawal from the Firm are also described in portions of Weller's deposition read into evidence by Schnepfe's counsel.

Question: As I understand it you, Mr. Weller, were authorized by the partnership to negotiate a financial settlement with Mr. Crouch including an immediate lump sum payment as opposed to the stretched out accounting if you will of the collection of accounts receivable, isn't that correct? Answer: No, that is predicated on Crouch's desire to handle it by withdrawal in that manner. Question: He wanted a deposit payment and have it done with, is that correct? Answer: That is correct. Question: And that was a negotiated settlement? Answer: Effectively, yes.

Crouch testified in the Firm's case. He "was aware that on the accrual basis financial statements [he] had seen during [his] association with the firm that that number [representing retirement liability] was there." Crouch further testified, "I believe the treatment of the liability as an accrued expense was consistent with the treatment of that amount." By a November 6, 1984, letter from Weller for the Firm and countersigned by...