Rosenfeld, Meyer & Susman v. Cohen

• Decision Date: 18 August 1983
• Citation: 146 Cal.App.3d 200,194 Cal.Rptr. 180
• Court: California Court of Appeals Court of Appeals
• Parties: ROSENFELD, MEYER & SUSMAN, Plaintiff, Appellant and Cross-Respondent, v. Peter R. COHEN and Deborah D. Riordan, as Administratrix of the Estate of Edward J. Riordan, Deceased, Defendants, Respondents, and Cross-Appellants. Civ. 62372.

Page 180

194 Cal.Rptr. 180

146 Cal.App.3d 200

ROSENFELD, MEYER & SUSMAN, Plaintiff, Appellant and Cross-Respondent, v. Peter R. COHEN and Deborah D. Riordan, as Administratrix of the Estate of Edward J. Riordan, Deceased, Defendants, Respondents, and Cross-Appellants.

Civ. 62372.

Court of Appeal, Second District, Division 5, California.

Aug. 18, 1983.

As Modified Sept. 15, 1983.

Hearing Denied Nov. 9, 1983.

Gary A. Schlessinger, Sondra Berchin, Clifford W. Gilbert, Rosenfeld, Meyer & Susman, Beverly Hills, and Harney & Moore, Los Angeles, for plaintiff, appellant and cross-respondent.

William I. Chertok, Belcher, Henzie, Biegenzahn, Chertok & Walker and Peter R. Cohen, Los Angeles, Horvitz & Greines, Irving H. Greines and Alan G. Martin, Encino NEBRON, Associate Justice. ^*

for defendants, respondents and cross-appellants.

This is an appeal from a judgment on the pleadings, a partial summary judgment and a nonsuit rendered by two departments--one a law and motion department and the other a trial department. In this appeal we are concerned only with the rulings of the law and motion department and the trial department relative to appellant's third, fourth and fifth causes of action.

The issue which underpins all three causes of action here involved may be generally stated as follows: Given the facts of this case, does a former partner of a partnership at will owe any fiduciary duty to former partners after dissolving the partnership and subsequently agreeing with former clients of the dissolved partnership to accept and carry on business which was originally a portion of the assets of the dissolved partnership?

The answer is clearly in the affirmative and for reasons hereafter set forth, the rulings of the lower courts as to counts III, IV and V are reversed and the case is remanded back to the trial department for further proceedings.

STATEMENT OF FACTS

Appellant Rosenfeld, Meyer and Susman (hereinafter called RM & S) consists of the 17 former partners of a dissolved at will law partnership suing in the name of the dissolved RM & S partnership as both winding up partners and in their individual capacities. Respondents Peter R. Cohen and Deborah D. Riordan, as administratrix of the estate of Edward J. Riordan, deceased, (hereinafter called C & R) are the two former partners who dissolved that at-will partnership. International Rectifier Corporation (hereinafter called Rectifier) is a former client of the dissolved RM & S partnership.

In late 1968, Rectifier, which was engaged in the manufacture and sale of rectifiers and pharmaceuticals, primarily broad spectrum antibiotics, sought attorneys to bring a major patent antitrust action on a contingent fee basis against the five main domestic manufacturers and distributors of broad scope antibiotics. (Pfizer, Cyanamid, Bristol-Meyers, Squibb and Upjohn.) After considering the proposals of several law firms, Rectifier entered into a written agreement with RM & S in March 1969, employing RM & S to represent Rectifier in that litigation. The RM & S-Rectifier agreement provided that RM & S would be paid limited fees of $30 per hour up to a maximum of 1,000 hours per year for five years against one-third of any recovery and that Rectifier would bear all costs and expenses. ¹

Most of the attorney services rendered by RM & S were performed by C & R, the two senior litigators at RM & S, both experienced in antitrust litigation. From March 1969 through April 30, 1974, RM & S attorneys spent in excess of 19,000 hours on the case. Moreover, RM & S also supervised almost 60,000 hours of paralegal and document clerk services. Other than C & R, no partner had anything but a passing acquaintance with the Rectifier case. The Rectifier account substantially increased RM & S's expenses. RM & S was required to rent additional office space, hire additional support personnel for the Rectifier action and employ additional attorneys to handle matters which otherwise would have been attended to by C & R Cohen joined RM & S as an associate in 1959 and became a partner in 1963; Riordan was employed by RM & S as an associate in 1969 and became a partner in 1970.

From the time Cohen became a partner, each partner's profit percentage was fixed by a committee and approved by the partnership. Profits were determined only after fees were received by RM & S and then divided among the partners pursuant to their current partnership percentage, regardless of a partner's work on any particular matter. Throughout the five years that C & R handled the Rectifier action, they received approximately $800,000 from RM & S, despite the fact that they produced virtually no income for the firm during this period. The other partners of RM & S expected to share in the fee from the Rectifier action should it eventually materialize.

By late 1973, C & R believed the trial of the Rectifier action would commence in the fall of 1974 and that the case would settle for between $20 million and $50 million, or, if tried, that the judgment would be approximately $100 million before trebling. Sometime in December 1973, or January 1974, C & R demanded that they be allocated double their partnership percentage of the fee to be paid by Rectifier in connection with the Rectifier action. C & R threatened that if RM & S did not agree to change the partnership allocation, they would withdraw from RM & S. Thereafter, RM & S partners negotiated with C & R to avoid their withdrawal or to make arrangements for C & R to complete the Rectifier action should they withdraw from the firm. As these negotiations progressed, C & R made new demands and stated to two of the partners of RM & S that they would never settle the dispute which they had created. As late as March 26th, or 27th, Riordan told a third partner that C & R no longer needed RM & S. Riordan stated his belief that if C & R withdrew from the firm Rectifier would hire C & R to complete the case, ² and would provide the necessary financing.

On March 28, 1974, RM & S partners and C & R met with Rectifier's president (Lidow) and vice-president/general counsel (Koris). RM & S described the problem at the firm and explained that the firm was willing to make concessions to C & R, but that C & R would not agree . RM & S also assured Rectifier that if C & R withdrew, RM & S would do whatever was necessary to pursue the case, such as assigning other partners to work on the case and/or retaining, at RM & S's expense, skilled antitrust attorneys as co-counsel. Rectifier's officers stated that they wanted C & R to remain on the case and that C & R should do whatever was necessary to achieve that result.

On April 11, 1974, C & R by memorandum to the other partners gave notice of their withdrawal from the firm effective April 30, 1974. During the first week of May 1974, C & R formed the law firm of Cohen and Riordan. At that time Cohen had no prospective clients, but he believed that Rectifier would ultimately discharge RM & S and hire C & R to complete the antitrust action.

On May 14, 1974, Rectifier mailed a letter of discharge to RM & S and on the following day hand delivered a similar letter of discharge to RM & S. On May 16, 1974, Rectifier retained C & R as attorneys in the Rectifier action.

The C& R-Rectifier agreement provided that Rectifier would pay to C & R $250,000 per year and 8 3/4 percent of the recovery in the Rectifier action. The agreement further provided that C & R would indemnify Rectifier against its total attorney's fees (including fees payable to C & R and RM & S) exceeding 1/3 of Rectifier's recovery in the antitrust action, and that the 8 3/4 percent contingent fee would be held in escrow for C & R until the amount of the total fees was resolved.

The C & R-Rectifier agreement permitted C & R to receive approximately two times their RM & S partnership percentage of the Rectifier fee. The 8 3/4 percent contingent fee provided for equals approximately 26 percent of the fee that Rectifier was obligated to pay RM & S under the RM & S-Rectifier agreement. It is also approximately 2.2 times C & R's claimed 1973 partnership percentage of 12 percent in RM & S's 33 1/3 percent contingent fee. Thus, both C & R and Rectifier were to financially benefit by the new C & R-Rectifier agreement.

Trial of the Rectifier action commenced in November 1974, and in August 1975 the action was settled for $33 million and royalty free licenses authorizing Rectifier to manufacture and sell certain broad scope antibiotic drugs. Pursuant to the C & R-Rectifier agreement, Rectifier paid C & R $337,000 in current compensation for the period May 1974 through August 1975, and placed $2.4 million in escrow as C & R's 8 3/4 percent contingent fee. In October 1975, RM & S commenced the present action.

The rulings of the law and motion department and the trial department concerning the three causes of action involved in this appeal.

(1) As to the third cause of action (Breach of Fiduciary Duty): The third cause of action alleges that C & R breached their fiduciary duty as partners of RM & S by dissolving RM & S in bad faith to cause Rectifier to discharge RM & S and obtain increased compensation for themselves (Bad Faith Dissolution); further, that the Rectifier action was the unfinished business of the dissolved RM & S partnership and that C & R breached their fiduciary duties by failing to complete the case for the dissolved partnership and that they held the sums received from Rectifier for completing the case as constructive trustees for the dissolved RM & S (Unfinished Business).

The law and motion department denied C & R's motion for summary judgment on the third cause of action, but found that the following issues regarding the third cause of action for breach of fiduciary duty were without substantial controversy: (a) That RM & S was a partnership at will; (b) that RM & S had failed to state a cause of action because a partner in a partnership at will may exercise...