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The plaintiff, Ian M. Starr, was a partner in the Boston law firm Fordham & Starrett (firm). After the plaintiff withdrew from the firm, he commenced this action to recover amounts to which he claimed that he was entitled under the partnership agreement. The plaintiff also sought damages for breach of fiduciary duty and fraudulent misrepresentation. The defendants, his former partners at the firm, counterclaimed that the plaintiff had violated his fiduciary duties to his partners and breached the terms of the partnership agreement.
After a jury-waived trial, a Superior Court judge concluded that Fordham, P.C., and Starrett, P.C. (founding partners), had violated their fiduciary duties to the plaintiff as well as the implied covenant of good faith and fair dealing in the partnership agreement when they determined the plaintiffâs share of the firmâs profits for 1986. The judge awarded the plaintiff damages of $75,538.48, plus interest from the date on which the plaintiff filed his complaint. The
The plaintiff appeals from the judgeâs entry of judgment against him on his claim for a share of the firmâs accounts receivable and work in process for 1986. The plaintiff also claims that the judge erred in awarding him prejudgment interest on his damages award only from the date on which he had filed the complaint. The founding partners and Attorneys Fordham and Starrett, in their individual capacities, cross appeal from the judgeâs finding that they violated their fiduciary duties and the implied covenant of good faith and fair dealing.
1. Facts. We summarize the judgeâs findings of fact. In 1984, the plaintiff was a partner in the Boston law firm Foley, Hoag & Eliot (Foley Hoag). The plaintiff specialized in corporate and business law. Although the plaintiff had become a partner at Foley Hoag in 1982, he was actively seeking to leave the firm in early 1984. During this time, the founding partners were also partners at Foley Hoag. Both men enjoyed outstanding professional reputations among their colleagues. Nevertheless, they agreed that they would withdraw from Foley Hoag in early 1985 in order to establish a new law firm with another established Boston attorney, Frank W. Kilburn.
Fordham invited the plaintiff to join the new law firm Kilburn, Fordham & Starrett in January, 1985. At first, the plaintiff was somewhat hesitant to accept the offer because
Prior to executing the partnership agreement, the plaintiff informed Fordham that certain provisions in the agreement disturbed him. The source of the plaintiffâs disquiet was Paragraph 1 of the partnership agreement which vested in the founding partners and Kilburn, the authority to determine, both prospectively and retrospectively, each partnerâs share of the firmâs profits. Despite his concern, the plaintiff did not claim at this time that the agreement contradicted Ford-hamâs representations to him that rainmaking would not be a significant factor in distributing the firmâs profits. Fordham summarily dismissed the plaintiffâs concerns, telling him, in effect, to âtake it or leave it.â On March 5, 1985, the founding partners, Kilburn, and LeClair each executed the partnership agreement for Kilburn, Fordham & Starrett. The plaintiff also signed the agreement without objection and without making any revisions. The defendant Barry A. Guryan joined the new firm on March 11, 1985.
In August of 1985, Kilburn withdrew from the firm. Subsequently, the firm assumed the name Fordham & Starrett. In September, 1985, the partners met to consider entering into a ten-year lease for office space. The partners were anxious about both the length of the lease and the additional cost; the new lease rate was double the rate that they had been paying. After individually confirming their commitment to shoulder the additional burden, the partners agreed to enter into the lease.
The founding partners had divided the firmâs profits equally among the partners in 1985. Each of the five partners received $11,602. In 1986, the firmâs financial fortunes improved significantly. On December 31, 1986, the firmâs prof
The plaintiff withdrew from the firm on December 31, 1986. The partners remaining in the firm were the founding partners, LeClair, and Guryan. When the plaintiff withdrew from the firm, the sum of the plaintiffâs accounts receivable and work in process was $204,623. The firm eventually collected $195,249 of the plaintiffâs total receivables. The founding partners determined the plaintiffâs share of the firmâs profits for 1986 to be 6.3% of the total profits. In alioeating the firmâs profits among the partners, the founding partners did not consider any of the firmâs accounts receivable or work in process. In addition, the founding partners refused to assign any of the firmâs accounts receivable or work in process to the plaintiff when he withdrew from the firm. The founding partners claimed that the express provisions of Paragraph 3 of the partnership agreement barred the plaintiff from recovering any share of his accounts receivable or work in process because the firmâs liabilities exceeded its gross accounts receivable and work in process.
2. Standard of review. Under Mass. R. Civ. P. 52 (a), 365 Mass. 816 (1974), a judgeâs finding is not to be set aside âunless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses.â We apply this standard both to findings of subsidiary facts and to ultimate findings. Page v. Frazier, 388 Mass. 55, 61 (1983).
3. 1986 profits. We address the defendantsâ arguments on cross appeal first, followed by the plaintiffâs arguments.
Partners owe each other a fiduciary duty of the highest degree of good faith and fair dealing. Cardullo v. Landau, 329 Mass. 5, 8 (1952). Shelley v. Smith, 271 Mass. 106, 115 (1930). When a partner has engaged in self-dealing, that partner has the burden to prove the fairness of his actions and to prove that his actions did not result in harm to the partnership. See Meehan v. Shaughnessy, 404 Mass. 419, 441 (1989). In the present case, it is clear that the judge concluded that the founding partners had engaged in self-dealing. The judge found that the founding partnersâ determination of the plaintiffs share of the profits âpositioned them on both sides of the transactionâ because the percentage of the profits which they had assigned to the plaintiff had a direct impact on their own share of the profits. We cannot say that this conclusion was clearly erroneous. The founding partners were responsible for dividing the partnershipâs profits and assigning to each partner his respective share of the profits. Thus, the founding partners had some self-interest in designating each partnerâs respective share of the profits because the percentage of profits which they were assigning to the other partners had a direct effect on their own percentage of the profits. See Sagalyn v. Meekins, Packard & Wheat, Inc., 290 Mass. 434, 439 (1935). As a result, we conclude that there was no error in the judgeâs imposing on the founding partners the burden of proving that their distribution of the firmâs profits to the plaintiff was fair and reasonable. See Meehan v. Shaughnessy, supra.
B. The business judgment rule. The founding partners argue next that the judge erred in concluding that the business judgment rule does not preclude judicial review of their determination of the plaintiffs share of the 1986 profits. There was no error.
The test to be applied when one partner alleges that another partner has violated his duty of strict faith is whether
C. Fiduciary duties and covenant of good faith. The founding partners argue that the judgeâs conclusion that they had violated both their fiduciary duties and the implied covenant of good faith and fair dealing when they allocated only 6.3% of the firmâs profits for 1986 to the plaintiff was clearly erroneous. We disagree.
An implied covenant of good faith and fair dealing exists in every contract. See Drucker v. Roland Wm. Jutras Assocs., 370 Mass. 383, 385 (1976), quoting Uproar Co. v. National Broadcasting Co., 81 F.2d 373, 377 (1st Cir.), cert. denied, 298 U.S. 670 (1936). Thus, an unfair determination of a partnerâs respective share of a partnershipâs earnings is a breach not only of oneâs fiduciary duty, see Stratis v. Andreson, 254 Mass. 536, 539 (1926), but also of the implied covenant of good faith and fair dealing. See Drucker v. Roland Wm. Jutras Assocs., supra at 385. A court has the power to determine whether a partnerâs share of the profits is fair and equitable as a matter of law. Noble v. Joseph Burnett Co., 208 Mass. 75, 82 (1911). In the present case, the judge âvigorously scrutinizedâ the founding partnersâ determination of the plaintiffâs share of the profits. See Houle v. Low, 407 Mass. 810, 824 (1990). The judge then made extensive findings concerning the fairness of the plaintiffâs share of the profit distribution. The judge found that the plaintiff had produced billable hour and billable dollar amounts that constituted 16.4% and 15%, respectively, of the total billable hour and billable dollar amounts for all of
We disagree, however, with the judgeâs finding that the founding partners should have considered the plaintiffs accounts receivable and work in process at the end of 1986 in determining his share of the profits for 1986. The founding partners determined the firmâs profits for 1986 on a cash basis. The founding partners, therefore, did not consider any of the firmâs $1.8 million in accounts receivable and work in process when they distributed profits. As a result, the founding partners were not unfair in refusing to consider the plaintiffs accounts receivable and work in process for 1986 when they determined his share of the profits. The judge concluded that the founding partners were liable because they refused to consider billable hour and billable dollar figures when they
4. Misrepresentation. Fordham argues that the judgeâs conclusion that he had misrepresented to the plaintiff the basis on which the firmâs profits would be allocated among the firmâs partners was clearly erroneous. We disagree.
Statements of present intention as to future conduct may be the basis for a fraud action, if âthe statements misrepresent the actual intention of the speaker and were relied upon by the recipient to his damage.â McEvoy Travel Bureau, Inc. v. Norton Co., 408 Mass. 704, 709 (1990), citing Barrett Assocs. v. Aronson, 346 Mass. 150, 152 (1963). In the present case, the judge found that Fordham had represented to the plaintiff that business origination would not be a significant factor in determining the plaintiffs share of the firmâs profits. The judge also noted that Fordham had made this representation to the plaintiff in January, 1985, while the plaintiff was still working at Foley Hoag. The judge found that the plaintiff had relied on this representation when he had left Foley Hoag to join Kilburn, Fordham & Starrett. Nevertheless, the judge decided that Fordham had intended client origination to be the dominant factor for allocating profit shares when he made his representation to the contrary to the plaintiff. In addition, the judge determined that the founding partners had assigned profit shares for 1986 based primarily on each partnerâs contribution to business originatian. As a result, the judge concluded that Fordham had tortiously misrepresented to the plaintiff the basis on which the founding partners would distribute the firmâs profits to the partners.
Fordham claims that the judge erred in concluding that the plaintiffs reliance on Fordhamâs representations was reasonable because the partnership agreement was a fully integrated instrument. We disagree.
Fordham argues next that the judge erred in concluding that the plaintiff was not unreasonable in relying on Ford-hamâs representations because the plaintiff was a sophisticoted corporate attorney. We reject this argument. The plaintifFs sophistication did not relieve Fordham of his obligation to deal with the plaintiff in an honest manner. MeEvoy Travel Bureau, Inc. v. Norton Co., supra at 712-713.
Finally, Fordham argues that the judge erred in concluding that he had engaged in misrepresentation because his representations were true and that the founding partners had allocated the plaintiffâs profits to him in accordance with Fordhamâs representations. We reject this argument for two reasons. First, Fordhamâs contention directly contradicts the judgeâs finding that Fordham had intended business origination to be the dominant factor in allocating the firmâs profits, despite his assurances to the contrary to the plaintiff. Second, Fordhamâs contention that he had allocated the firmâs profits in accordance with his representations directly contradicts the judgeâs finding that client origination was the dominant factor in determining each partnerâs share of the firmâs profits.
5. Accounts receivable and work in process. The plaintiff claims that the judgeâs interpretation of Paragraph 3 of the partnership agreement improperly denied him his right to a âfair shareâ of the net value of the firmâs accounts receivable and work in process minus liabilities, reasonable reserves, and allowances.
We have stated that â[c]ontract interpretation is largely an individualized process, with the conclusion in a particular case turning on the particular language used against the background of other indicia of the partiesâ intention.â Shea v. Bay State Gas Co., 383 Mass. 218, 222-223 (1981), quoting United States v. Seckinger, 397 U.S. 203, 213 n.17 (1970). Thus, we must âconstrue the contract with reference to the situation of the parties when they made it and to the objects sought to be accomplished.â Shea v. Bay State Gas Co., supra at 223, quoting Bryne v. Gloucester, 297 Mass. 156, 158 (1937). As a result, the scope of a partyâs obligations cannot âbe delineated by isolating words and interpreting them as though they stood alone. Commissioner of Corporations & Taxation v. Chilton Club, 318 Mass. 285, 288 (1945). Not only must due weight be accorded to the immediate context, but no part of the contract is to be disregarded.â Boston Elevated Ry. v. Metropolitan Transit Auth., 323 Mass. 562, 569 (1949).
In the present case, the judge cited our decision in Boston Elevated Ry. v. Metropolitan Transit Auth., supra, to support his conclusion that â[a] contractual obligation to pay monies is a liability.â See id. at 568. The judge then decided that the firmâs long-term office lease constituted a âliabilityâ because it was a contractual obligation to pay money. The judge concluded, therefore, that the plaintiff was not entitled to any percentage of the firmâs work in process or its accounts receivable because the â[f]irmâs existing liabilities, in-eluding a long term lease, exceeded the [f]irmâs work in process and accounts receivable by nearly [a] two to one margin without any reserves and allowances.â
The plain meaning of the word âliabilities,â in the context of the partnership agreement, certainly encompasses the firmâs office lease. A partner is jointly liable for all debts and obligations of the partnership. G. L. c. 108A, § 15 (6) (1992 ed.).
The plaintiff argues next that the judgeâs interpretation of the word âliabilitiesâ to include the lease was clearly erroneous because it fails to give Paragraph 3 of the partnership agreement effect as. a rational business instrument. We disagree.
âWe have said that a contract should be construed to give it effect as a rational business instrument and in a manner which will carry out the intent of the parties.â Shane v. Winter Hill Fed. Sav. & Loan Assân, 397 Mass. 479, 483 (1986). Similarly, the Restatement expounds that âan interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.â Restatement (Second) of Contracts § 203 (a) (1981). According to the plaintiff, the judgeâs interpretation of Paragraph 3 denies it the effect of a rational business instrument because a withdrawing partner would rarely be granted a share of the work in process and accounts receivable. We reject this argument.
At dissolution, a partner is entitled to firm profits only after all of the partnershipâs creditors have been satisfied and all capital contributions have been repaid. G. L. c. 108A, § 40 (6) (1992 ed.). Similarly, if the partnershipâs liabilities exceed its assets, then each partner must contribute toward the losses. G. L. c. 108A, §§ 18 (o) & 40 (d) (1992 ed.). The judgeâs interpretation of Paragraph 3 of the partnership agreement has the same effect as G. L. c. 108A, §§ 18 (a) & 40 (b) (1992 ed.). The plaintiff, as a withdrawing partner, is entitled to share in the partnershipâs accounts receivable and work in process which exceed the sum of the amounts owed to creditors and to contributors of capital as well as reasonable reserves and allowances. The lessor of the partnershipâs offices is a creditor of the firm. See Gilman v. Taylor, 266 Mass. 346, 347 (1929) (lessor was creditor of deceased where lesseeâs obligation to pay was definitely and
The plaintiff claims next that the judgeâs interpretation of the term âliabilitiesâ to include the lease was unreasonable and inequitable because it precluded him from sharing in the accounts receivable and work in process to which he was âentitled.â We disagree.
The plaintiff acquiesced to the terms of Paragraph 3 when he signed the partnership agreement. As a result, the plaintiff agreed that his interest in accounts receivable and work in process at withdrawal would be junior to the claims of creditors. If the business of the partnership had been âwound upâ after dissolution, the plaintiff would have been jointly liable, with his partners, for the monetary obligation due on the lease. G. L. c. 108A, § 15 (b). The judge found that the amount due on the lease alone exceeded the firmâs accounts receivable and work in process, without considering the partnershipâs additional liabilities at dissolution. The judgeâs interpretation of the term âliabilities,â therefore, was neither unreasonable nor inequitable. The plaintiff was âentitledâ only to a âfair shareâ of the accounts receivable and work in process which exceeded the firmâs liabilities, reserves, and allowances.
The plaintiff asserts several additional arguments claiming that the judge erred in interpreting the provisions of Paragraph 3 of the partnership agreement, thereby denying the plaintiff a fair share of the firmâs work in process and ac
6. Prejudgment interest. The plaintiff claims that the judge erred in assigning prejudgment interest to him only from the date of the filing of the lawsuit. We disagree.
General Laws c. 231, § 6C (1992 ed.), provides for prejudgment interest on damages in âall actions based on contractual obligationsâ from the date of the demand or the breach. The implied covenant of good faith and fair dealing is a contractual obligation. Fortune v. National Cash Register Co., 373 Mass. 96, 102 (1977). The plaintiff recovered a damage award of $75,538.48 on his claim that the founding partners had violated their fiduciary duties. The judge then awarded the plaintiff prejudgment interest on the damages award from the date on which the plaintiff filed his complaint. The plaintiff claims that the judge should have awarded him prejudgment interest from the date of the breach.
We have stated that âprejudgment interest is to be calculated from the date of the breach or demand, if established. If the date of the breach or demand is not established, pre
Judgment affirmed.
Pursuant to Mass. R.A.P. 16 (i), 365 Mass. 860 (1974), the plaintiff at trial has been designated the appellant for this appeal.
LeCIair and Guryan filed a single brief. Meanwhile, each of the founding partners has filed a separate brief. Nevertheless, they have incorporated by reference the arguments of their codefendants. See Mass. R. A. P. 16 (j), 365 Mass. 860 (1974).
The plaintiff received $101,025.60. Meanwhile, the defendants Guryan and LeClair each received 18.75% ($301,025.60) of the firmâs total profits. As a result, each of the managing partners kept for himself a 28.1 % share of the profits, or $451,025.60 each. The judge did note, however, that the founding partners were not unfair in allocating to the plaintiff 7.2% of the firmâs expenses in 1986.
The judge compared the plaintiffâs work performance directly to the work performance of the defendants Guryan and LeClair. The judge con-eluded that the plaintiffâs âbillable hours by working attorneyâ were 85 % of the total billable hours that Guryan had worked and 77 % of the total billable hours that LeClair had worked. The plaintiffâs share of the profits, however, was only 34% of the amount which Guryan and LeClair each had received.
The judge noted that Fordham and Starrett were the sole shareholders of Fordham, P.C., and Starrett, P.C., respectively. As the sole shareholders of a corporate general partner, the judge concluded that Fordham and Starrett were personally liable for the breaches of fiduciary duty by the founding partners. See Tobias v. First City Natâl Bank & Trust Co., 709 F. Supp. 1266, 1278 (S.D.N.Y. 1989). See also Goldstein v. Barron, 9 Mass. App. Ct. 644, 647 n.3, 650 (1980).
The judge found that 11% of the profits was a more accurate reflection of the plaintiffâs contribution to the firmâs 1986 profits after considering the plaintiffâs billable hour and billable dollar totals. In addition, the judge
We also note that the judgeâs conclusion that the partnership agreement was not fully integrated was not clearly erroneous. A fully integrated agreement is a statement which the parties have adopted as a complete and exclusive expression of their agreement. Restatement (Second) of Contracts § 210 (1) (1981). We have stated that âthe question of integration is one of fact reserved for the trial judge, whose resolution of that issue will not be reversed unless clearly erroneous.â Cambridgeport Sav. Bank v. Boersner, 413 Mass. 432, 436-437 n.7 (1992). In the present case, the judge found that Attorneys Fordham and Starrett had agreed that they would divide equally between themselves their combined share of the firmâs profits before they signed the partnership agreement. The judge noted, however, that the partnership agreement did not express this private agreement. The judge concluded, therefore, that the agreement was not fully integrated. There was no clear error.
Fordham also argues that the judgeâs finding of misrepresentation was distinct from the misrepresentation which the plaintiff" had alleged. This issue was not raised in the Superior Court. Thus it is not properly before us. See Porter v. Treasurer & Collector of Taxes of Worcester, 385 Mass. 335, 338 n.5 (1982).
Paragraph 3 of the partnership agreement provides: âExcept as hereinafter provided, upon retirement from the practice of law or withdrawal
The Restatement (Second) of Contracts supports this practice of interpreting a word in accordance with the context in which it is used. The Restatement declares that â[t]he interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in the light of the circumstances ....â Restatement (Second) of Contracts § 212 (1) (1981). One comment accompanying § 212 states in relevant part that â[a]ny determination of meaning or ambiguity should only be made in the light of the relevant evidence of the situation and the relations of the parties, the subject matter of the transaction, preliminary negotiations and statements made therein, usages of trade, and the course of dealing be
A partner is jointly and severally liable for the wrongful acts of his partners. G. L. c. 108A, §§ 13 & 15 (a) (1992 ed.). A partner is also jointly and severally liable for another partnerâs misapplication of money or property. G. L. c. 108A, §§ 14 & 15 (a) (1992 ed.).