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Chance v. McCann

405 N.J. Super. 547, 966 A.2d 29 (App. Div. 2009)

PARTNERSHIPS; AGREEMENTS; LACHES — Where a partner breaches a material obligation in a partnership agreement, the other partners may be excused from their obligations, even to make payments, and if the breaching partner takes no action to collect those payments after a long period of time, the doctrine of laches may shorten the period within which the partner or the partner’s estate may sue for those payments.

Two lawyers formed a partnership, but they did not have a written partnership agreement. The attorneys also formed a partnership to own the building where they practiced law. Under their oral agreement, all fees were to be deposited in the firm’s bank account. Each partner was permitted to withdraw funds from the account in proportion to the fees generated by that partner. Even though one partner withdrew a greater percentage of the income, for tax purposes both were listed as if they divided the fees equally. The partners then decided to enter into a written partnership agreement in anticipation of the firm’s breakup and the retirement of one of the partners. The written partnership agreement listed the retiring partner’s capital account balance at $630,000 which was to be paid by way of an initial payment of $20,000 and weekly installment payments of $1,000 each. The obligation was secured by a mortgage. In addition, the retiring partner’s ownership interest in the building was to be bought for $30,000. Lastly, the partnership agreement provided for the retiring partner’s cooperation in continuing the practice, for which he would be paid based on fees generated.

Without the remaining partner’s knowledge, the retiring partner sent letters to several of his clients advising them that the partnership was being dissolved but that the remaining partner would still be available to service their needs. As a result, several clients left the firm. When the remaining partner found out, he stopped making the installment payments. The remaining partner claimed that his former partner acknowledged that he breached the agreement and promised he would not seek further payments. He also claimed that the retiring partner had agreed to seek only $160,000 for his partnership interest instead of the $630,000 listed in the agreement. The retiring partner passed away four years after the partnership agreement was signed. His estate sued to collect the balance due based on the partnership agreement, as well as to foreclose the mortgage. The remaining partner argued that his former, now deceased, partner breached his obligations to cooperate in the continuation of the partnership and that the breach excused further performance. He also argued that his former partner agreed to seek only $160,000 and not the $630,000 listed in the written agreement. Lastly, he argued that the estate’s claim to the balance of the installment payments was barred by the doctrine of laches because the decedent never pursued payment of the weekly installments during the four years before his death.

The lower court granted the estate’s motion for summary judgment on its claim, and rejected the remaining partner’s laches defense. The remaining partner appealed. The Appellate Division rejected the remaining partner’s argument that he was entitled to provide oral testimony that his former partner intended to seek only $160,000 and not the full $630,000. The Court agreed with the lower court’s finding that such testimony was barred by the parole evidence rule. The parole evidence rule would only permit such testimony to clarify an ambiguity in the written agreement. However, in this case, the agreement was clear on its face and the testimony would be used to vary the terms of a clearly written agreement and not to clarify an ambiguity. On the other hand, the Court reversed the lower court’s grant of summary judgment in favor of the estate with respect to the remaining partner’s claim that his former partner’s breach of his obligation to cooperate in the continuation of the law practice excused his continued payment of the installment payments. The Court found that a rational fact-finder could have concluded that the former partner’s obligation to cooperate in the continuation of the firm was a material obligation, which if breached, could excuse some or all of the remaining partner’s obligation to continue making payments. Therefore, the Court remanded that count back for trial.

The Court also found that the lower court improperly dismissed the remaining partner’s defense of laches. The lower court originally held that there was no inordinate delay because the estate promptly filed its suit once it discovered the existence of the partnership agreement and the note, and that the suit was filed suit within the six-year statute of limitations for contract actions. The Court, however, agreed that the doctrine of laches was applicable in this case because of the former partner’s failure to take any action in the four-year period between the time the remaining partner stopped making installment payments and the former partner’s death. It noted that laches is an equitable remedy designed to shorten the applicable statute of limitations to promote justice in cases of unreasonable delays in pursuing a claim. In this case, the Court found that remaining partner was significantly prejudiced because there was no explanation in the record for the former partner’s failure to take action before he died other than the remaining partner’s claim that the former partner conceded that he breached the agreement and did not intend to pursue the additional payments. The former partner was deceased so he was not available to testify. In addition, because the former partner was deceased, the remaining partner was required to prove his claim with an enhanced burden of “clear and convincing evidence” as opposed to a “preponderance of the evidence” standard. Further, several other witnesses had also passed away. Therefore, the defense of laches should have been considered.


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