Sheets v. Firm

• Decision Date: 11 May 2010
• Docket Number: No. 20090231.,20090231.
• Citation: 2010 ND 85,782 N.W.2d 48
• Parties: Jeffrey L. SHEETS, Plaintiff and Appellantv.FARHART LAW FIRM, and Moody Farhart, personally, Defendants and Appellees.
• Court: North Dakota Supreme Court

782 N.W.2d 48

2010 ND 85

Jeffrey L. SHEETS, Plaintiff and Appellantv.FARHART LAW FIRM, and Moody Farhart, personally, Defendants and Appellees.

No. 20090231.

Supreme Court of North Dakota.

May 11, 2010.

Jeffrey L. Sheets (argued), self-represented, Minot, ND, plaintiff and appellant.

Tom P. Slorby (argued), Minot, ND, for defendants and appellees.

KAPSNER, Justice.

[¶ 1] Jeffrey Sheets appeals from a district court decision finding he was entitled to $11,982.18 in additional compensation under the terms of an employment agreement, but offsetting this amount against $13,000 plus interest due under two promissory notes executed in favor of defendants Farhart Law Firm and Moody Farhart. We hold the district court's finding that Sheets was only entitled to $11,982.18 was not clearly erroneous and affirm the judgment in favor of defendants offsetting the two awards.

I.

[¶ 2] Farhart and Sheets are both attorneys. In July 2004, Farhart contacted Sheets to ask whether Sheets was interested in moving to Minot and joining Farhart's law practice. Sheets agreed and signed a letter agreement regarding “Employment” drafted by Farhart. The agreement provided the name of Farhart's professional corporation would be changed to “Farhart & Sheets, P.C.” (“Farhart & Sheets”), and Farhart would continue to personally own Farhart & Sheets “until such time as a written agreement is drafted and executed reflecting a change of ownership.” The agreement also described how Sheets would be compensated:

The firm will employ a two-system credit fund concerning fees based on the following percentages, to wit:

a) You shall receive 100% of the fees on all files you are bringing into the office initially.

b) You shall receive 80% fee credit on all files opened after July 1, 2004, by you wherein fees are billed and collected including cases taken on contingency fee basis c) You shall be entitled to receive 50% fee credit on all files opened after July 1, 2004, by me wherein fees are billed and collected including contingency fee files.

d) You will be entitled to receive 20% fee credit on all files presently open at my office wherein you render legal services thereon. If any of the files that are open go to trial, you will be entitled to receive 50% credit. I am excluding [four specific cases]. Also excluded are all open accounts to date and judgments entered of record. It is distinctly understood that the above files, judgments, and records shall be owned by me and/or the professional corporation.

The agreement did not address whether Sheets would receive fee credits on case files opened by any other attorneys subsequently hired by Farhart & Sheets. The agreement also did not explicitly state how the firm's expenses would be split, but an example indicated Sheets and Farhart would each pay 50 percent.

[¶ 3] The employment agreement also mentioned Farhart's future retirement plans. It stated Farhart's “primary concern” was closing out active files, after which he would “be in a position to discuss [Sheets] taking over the entire practice on [his] own.” Finally, the employment agreement provided “either of us may terminate our association at any time.” If either Sheets or Farhart terminated their association, the agreement called for accounts receivable collected within thirty-five days to be allocated according to the above compensation structure. However, after thirty-five days, the employment agreement stated all accounts receivable became an asset of Farhart & Sheets.

[¶ 4] After Sheets began working at Farhart & Sheets, the defendants loaned him $3,000 and $10,000, and he executed two promissory notes in their favor. Sheets also helped recruit a third attorney, Bonnie Humphrey, to join Farhart & Sheets in early 2005. Beginning in mid-2005, Sheets and Humphrey began negotiations with Farhart over the purchase of Farhart & Sheets. However, before the parties could agree to terms, Farhart terminated his professional association with both Sheets and Humphrey in October 2005. Two months later, Sheets filed a complaint against Farhart Law Firm ¹ and Moody Farhart personally, claiming he was owed at least $50,000 for work he performed prior to the association being terminated. Sheets' complaint also claimed that, when he signed the employment agreement, he and Farhart formed a legal partnership. The defendants filed a counterclaim, alleging Sheets actually owed the firm over $11,000 under the employment agreement and $13,000 plus interest under the two promissory notes.

[¶ 5] The defendants moved for summary judgment in January 2007. The district court found Sheets and Farhart did not form a partnership because the employment agreement clearly provided Farhart was the sole owner of Farhart & Sheets. The district court also found Sheets owed $13,000 plus interest to the defendants under the promissory notes. Therefore, the district court granted summary judgment in favor of the defendants on those two issues. However, the district court found the parties disputed material facts about whether either party owed money to the other under the employment agreement. As a result, the district court denied summary judgment on the remainder of the parties' claims.

[¶ 6] In October 2008, the district court held a bench trial to determine whether either Sheets or Farhart Law Firm owed additional money to the other under the employment agreement. Sheets generally testified Farhart & Sheets under-compensated him during his fifteen months with the firm. Sheets stated the firm failed to compensate him for time he spent reviewing Farhart's active case files upon joining the firm. He testified the firm's general ledger erroneously listed $6,000 as an advance rather than a client fee. Sheets also testified the firm incorrectly determined the percentage of fee credits he was entitled to on numerous cases. Sheets stated the firm charged him “far over what should have been my fair share of the expenses.” Sheets believed he and Farhart would split expenses pro rata “according to the income figures and the caseload that we each respectively had.” Finally, Sheets stated he deserved compensation for cases Humphrey brought to the firm. While Sheets acknowledged the employment agreement did not specifically provide he was entitled to fees for cases brought to Farhart & Sheets by attorneys other than Farhart, he stated: “I cannot understand how I could possibly be required to pay a share of the expenses for anybody else brought in and not receive a percentage of income.”

[¶ 7] Sheets also testified Farhart & Sheets failed to bill clients after August 2005 and thereby reduced the compensation to which he was rightfully entitled. While negotiating the purchase of the firm, Sheets stated he and Humphrey accessed Farhart & Sheets' computerized accounting records in early October 2005. Sheets testified the records indicated Farhart & Sheets had failed to send out bills since early August 2005, which caused the firm's collections to drop dramatically. Sheets submitted a graph printed from the firm's accounting records into evidence, which he stated demonstrated Farhart & Sheets' failure to bill clients during this period. Sheets testified he submitted bills to the firm's bookkeeper, Judith Bloms, from August to October 2005, and the firm would have been able to collect payments from the vast majority of his clients. Because the employment agreement provided accounts receivable became the sole property of Farhart & Sheets more than thirty-five days after either he or Farhart terminated their association, Sheets stated the firm's failure to bill clients in a timely manner resulted in the firm getting to keep money he had rightfully earned. In total, Sheets claimed Farhart & Sheets owed him over $150,000 in additional compensation and trust account distributions. Sheets submitted a demonstrative exhibit showing how he calculated this amount, as well as other exhibits showing the specific cases on which he worked but allegedly did not receive proper fee credit.

[¶ 8] Farhart testified that, when he drafted the employment agreement, he intended to split expenses equally with Sheets. Farhart said he did not ask Sheets to review his active case files when Sheets joined the firm. Farhart generally testified to a lack of knowledge regarding Farhart & Sheets' billing and accounting practices or how Sheets' compensation was calculated. Rather, Farhart stated bookkeeper Bloms oversaw the billing and accounting. Farhart testified he gave Bloms a copy of the employment agreement and she calculated Sheets' fee credits.

[¶ 9] Bloms testified about the ordinary billing and accounting practices at Farhart & Sheets. Bloms said she sent bills to clients based upon the attorneys' time sheets. When clients were billed, Bloms testified she would enter a debit into the firm's computerized accounting program; when clients paid a bill, she would enter a credit. For payroll, Bloms stated she would first calculate the attorneys' fee credits, and she would then take the payroll sheet to the firm's accountant, who would calculate the proper payroll deductions. Bloms testified she determined the allocation of fee credits by referencing the attorneys' time sheets and looking at the date the case file was opened, as indicated by the case file number.

[¶ 10] Bloms testified Farhart & Sheets billed clients and received payments from August to October 2005 despite Sheets' claims otherwise. However, Bloms added the firm was adopting a new billing system during this period, so she was behind on entering information into the existing accounting program. Nevertheless, Bloms testified she always recorded debits and credits in the firm's checkbook balance sheet. With regard to Sheets' compensation, Bloms stated she reviewed Farhart & Sheets' accounting records at...