Weiss v. Carpenter, Bennett & Morrissey

• Citation: 143 N.J. 420,672 A.2d 1132
• Court: United States State Supreme Court (New Jersey)
• Decision Date: 06 March 1996
• Parties: Stanley WEISS, Jerome E. Sharfman and Thomas J. Lennon, Plaintiffs-Respondents, v. CARPENTER, BENNETT & MORRISSEY, Edward F. Ryan and Michael S. Waters, Defendants-Appellants, and John Doe-1 through John Doe-10, partners of Carpenter, Bennett & Morrissey, Defendants. CARPENTER, BENNETT & MORRISSEY, Edward F. Ryan and Michael S. Waters, Plaintiffs-Appellants, v. Stanley WEISS, Jerome E. Sharfman, and Thomas J. Lennon, Defendants-Respondents.

Page 420

143 N.J. 420

672 A.2d 1132

Stanley WEISS, Jerome E. Sharfman and Thomas J. Lennon, Plaintiffs-Respondents, v. CARPENTER, BENNETT & MORRISSEY, Edward F. Ryan and Michael

S. Waters, Defendants-Appellants,

and

John Doe-1 through John Doe-10, partners of Carpenter,

Bennett & Morrissey, Defendants.

CARPENTER, BENNETT & MORRISSEY, Edward F. Ryan and Michael

S. Waters, Plaintiffs-Appellants, v. Stanley WEISS, Jerome E. Sharfman, and Thomas J. Lennon,

Defendants-Respondents.

Supreme Court of New Jersey.

Argued Sept. 27, 1995.

Decided March 6, 1996.

Jerome J. Graham, Jr., Morristown, for appellants (Ribis, Graham & Curtin, attorneys; George C. Jones, on the briefs).

Stanley Weiss, West Orange, pro se.

Jerome E. Sharfman, River Edge, pro se and for respondent Thomas J. Lennon.

The opinion of the Court was delivered by

STEIN, J.

In Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 607 A.2d 142 (1992), we held that a law firm's "Service Termination Agreement" that withheld termination compensation only from those firm members who within one year of termination represented clients of the firm or solicited employees of the firm to engage in law practice violated Rule 5.6 of the Rules of Professional Conduct (RPCS ). Id. at 22, 607 A.2d 142. At issue in this appeal is the enforceability of a provision in a law firm's partnership agreement that withholds the right to receive distribution of a partner's capital account only from partners who withdraw from the firm for any reason other than death, permanent disability, attainment of age sixty-five, or appointment to the judiciary. Pursuant to the partnership agreement, the claims of three withdrawing partners that the agreement's effect contravened our holding in Jacob, supra, were referred to an arbitrator selected by the parties, who determined that the challenged provisions violated RPC 5.6. Relying on Jacob, 128 N.J. at 36, 607 A.2d 142, the arbitrator further determined that one of the withdrawing partners was equitably estopped from challenging the enforceability of the invalid provisions because of his influential role as a member of the firm's Executive Committee and his acquiescence in the firm's enforcement of those provisions against partners who previously had withdrawn from the firm.

In a reported opinion, the Appellate Division affirmed the arbitrator's decision to the extent that it held invalid under Jacob the provisions restricting capital-account distributions to certain withdrawing partners. Weiss v. Carpenter, Bennett & Morrissey, 275 N.J.Super. 393, 404, 646 A.2d 473 (1994). Invoking a public-policy exception to the general rule of noninterference with arbitration awards, see Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 135 N.J. 349, 358, 640 A.2d 788 (1994), the Appellate Division concluded that the arbitrator's application of estoppel principles to the claim of one of the withdrawing partners would violate RPC 5.6, and therefore vacated the judgment of the Chancery Division confirming the award. Weiss, supra, 275 N.J.Super. at 408-09, 646 A.2d 473. We granted the law firm's petition for certification, 142 N.J. 446, 663 A.2d 1354 (1995). Accordingly, we must address the extent to which arbitration awards implicating the validity under RPC 5.6 of law firm agreement termination provisions are subject to enhanced judicial scrutiny because of their public-policy implications.

I

We base our summary of the material facts primarily on the arbitrator's factual determinations, supplemented as required by other portions of the record.

Procedurally, this appeal is the outgrowth of consolidated civil actions. Stanley Weiss (Weiss), Jerome E. Sharfman (Sharfman), and Thomas J. Lennon (Lennon), former partners of the New Jersey law firm of Carpenter, Bennett & Morrissey (CB & M), instituted the first action as a result of disagreements concerning the amounts to which they were entitled as withdrawing partners of the firm. They sued CB & M to recover their claimed shares of the firm's capital and earnings, and to recover damages for alleged breaches of fiduciary duties and other tortious conduct. On CB & M's motion, all claims, except for a defamation claim asserted by Weiss, were referred to arbitration. The parties designated the Honorable Sidney Schreiber, a former Associate Justice of this Court, to serve as arbitrator. Following hearings on the liability issues, the arbitrator issued a comprehensive opinion holding unenforceable under RPC 5.6 the provision of the CB & M partnership agreement that required Weiss, Sharfman, and Lennon to forfeit their equity interests in the firm because they had withdrawn as partners prior to age sixty-five for reasons other than death, disability, or judicial appointment. The arbitrator determined that Sharfman and Lennon should receive their equity interests in the firm, that Weiss was equitably estopped from contesting the forfeiture provision, and that each of the withdrawing partners should receive his share of CB & M's 1991 net income but not the additional share of net income to which he would have been entitled on withdrawal at age sixty-five or for death, disability, or judicial appointment. The arbitrator issued his award after the parties stipulated the amounts to which the withdrawing partners were entitled.

CB & M then instituted a summary proceeding to confirm the award, and the withdrawing partners counterclaimed to vacate portions of the award and confirm the balance. The trial court confirmed the award in all respects, consolidating for purposes of appeal the initial action that had been stayed with the summary proceeding instituted to confirm the award.

The disagreement between CB & M and its withdrawing partners concerned provisions of the partnership agreement specifying the payments to which partners leaving the firm would be entitled. CB & M, a well-established Newark law firm, had adopted the practice of revising its partnership agreement every three years since 1970; on execution, the revised agreement would take effect retroactively on the date following the termination of the prior agreement. Weiss, Sharfman, and Lennon, as well as the other partners, had signed the partnership agreement in question, which took effect January 1, 1988, and which by its terms contemplated that the partnership would enter into a successor agreement during 1991. The 1988 agreement provided that the percentage interests allocated to the partners would continue in effect until December 31, 1990, and that between that date and the execution of the successor agreement the compensation of all partners would be determined by a majority vote of the senior partners.

Weiss, a senior partner and a member of CB & M's Executive Committee, joined the firm in 1959 and became a junior partner in 1963. Weiss headed one of CB & M's nine working groups; Sharfman and Lennon were junior partners and members of the working group headed by Weiss.

Weiss's withdrawal from the firm was triggered by the negotiations leading to the adoption of a partnership agreement that would replace the 1988 agreement. Weiss submitted a proposed outline of an agreement that apparently contemplated increased compensation and voting rights for Weiss and two other Executive Committee members, which the Executive Committee approved by a divided vote. The senior partners, however, rejected Weiss's proposal and adopted an alternative proposal that was substantially consistent with the 1988 agreement. Primarily because of the partners' vote on the terms of the successor agreement, Weiss decided in May 1991 to leave CB & M. Later that month, Sharfman and Lennon determined that they would join Weiss in forming a new law firm. The three withdrawing partners left CB & M on June 30, 1991.

After their departure, Weiss, Sharfman, and Lennon sought payment of the amounts allegedly due under the 1988 partnership agreement. The pertinent provisions are Paragraphs 9 and 10. Paragraph 9 applies only "in the event of the retirement of any partner from the firm by reason of becoming totally and permanently disabled, or to accept a judicial appointment, or after attaining his or her sixty-fifth (65th) birthday, or in the event of the death of any partner." Pursuant to Paragraph 9, if a partner's withdrawal occurs for any one of the specified reasons, the firm will pay to the retiring partner (or his or her estate): (1) the partner's pro-rata share of the firm's net income in the year of retirement calculated on the basis of the portion of the year that the partner worked, plus 25% of that amount (but not exceeding 100% of the partner's share of the full year's income); (2) the amount of the partner's interest in CB & M's building fund; and (3) a specified sum, constituting the amount of the partner's capital account in the firm, calculated under Paragraph 9(f) by adding to the sum initially credited to the account on admission to partnership an annual amount equal to the partner's capital contributions for the purchase of fixed assets and the partner's share of CB & M's repayment of its loan from First Fidelity Bank.

CB & M contended that the rights of the withdrawing partners were controlled by Paragraph 10(a), which provided:

10. (a) In the event of the termination or withdrawal of any partner for any reason other than provided in Paragraph 9 hereof, his or her interest in the firm property of every nature, including good will, shall terminate and be forfeited, except as otherwise expressly provided in subparagraph (b) of this Paragraph 10, and his or her distributable share of firm income shall be limited to a percentage of the net income to which he or she would be otherwise entitled with respect to the calendar year of such withdrawal, such percentage to be computed in the ratio that his or her completed months worked in such year as a partner shall bear to twelve (12) months.

Paragraph 10(b) provided that all withdrawing partners were...