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Nadel v. Starkman

A-4204-08T1 (N.J. Super. App. Div. 2010) (Unpublished)

PARTNERSHIPS — Even though a court finds that parties may have intended to form a partnership, that intention is not, by itself, inclusive of the existence of a partnership and a court must examine the various facts and circumstances as between the punitive partners and then compare them to the indicia of a partnership listed in the Uniform Partnership Law.

A lawyer began working for a single-attorney law firm as a salaried associate. After two years, he and the law firm owner entered into a written agreement wherein the firm’s name would include the associate’s name. The agreement said that the name change did not represent a partnership. It indicated that, in addition to salary, the associate would be entitled to fees pursuant to specific provisions. Bonuses were to be payable to him at the owner’s discretion. A year later, they signed a new agreement. This second agreement referred to an arrangement between the attorneys in a practice owned by the original owner, under which the associate would not invest any capital. Annual remuneration was be paid to the associate based upon a percentage of the practice’s net income. The associate’s annual share of net profits was fixed at twenty-five percent with no guaranteed minimum payment. The agreement required each party to purchase term life insurance on the other’s life. The proceeds from the owner’s policy were characterized as full and complete payment for the value of his law practice business. The associate’s policy proceeds were not similarly characterized. The agreement characterized the associate as an independent contractor who would be solely responsible for his own taxes. The second agreement could be terminated for any reason by either party upon 60 days’ written notice. It established a procedure for the distribution of files upon termination, as well as for the disposition of fees for files subsequently taken by the associate. There was no similar provision for the disposition of fees received by the owner for the files he retained after the associate’s departure. During the entire period of the parties’ association, the firm’s checking accounts remained in the owner’s name, and the associate never had authority to sign checks.

Almost ten years later, the owner sought to convert his firm to a limited liability company (LLC). His aim was to organize it in a way that his agreement with the associate would not change. The two were to be the initial members, where the owner would own a ninety-nine percent interest, and the associate a one percent interest. The associate would be employed as an attorney-at-law, and would receive twenty-five percent of the net income of the LLC. The associate rejected the terms of the proposed LLC.

Seven years after the rejection of the proposed LLC, the owner fired the associate. Two months later, the associate sued, chiefly seeking the reasonable value of his interest in the law firm. The lower court interpreted the second agreement as having created a partnership. As such, the court found that the associate was entitled to twenty-five percent of the net income generated by all of the firm’s files that were open on the date the partnership was dissolved (i.e., the date he was fired). On appeal, the ruling was reversed by the Appellate Division so that a plenary hearing could be conducted to determine whether the parties intended to create a partnership.

On the remand, the lower court, after taking testimony from both attorneys, found for the associate that a partnership had been formed, awarded the same relief it has provided earlier, as well as twenty-five percent of all referral fees from cases referred to other counsel. The owner appealed again.

In this appeal, the Appellate Division reversed the award, finding no partnership and that the award was inconsistent with the actual agreement between the parties. The Court said the meaning of the governing agreement was central to the respective rights of each attorney, and the Court would not make a better contract than the one made by the parties. In reaching its decision, the Court was guided by the Uniform Partnership Law, which states that the receipt of a share of profits as “wages” does not support a partnership. Indicia of a partnership are an agreement, the sharing of profits and losses, ownership and control of partnership property and the business, a community of power, the character of the parties’ rights upon dissolution, and the conduct of the parties toward third persons.

The Court found the lower court’s conclusion that the parties intended to form a partnership was not, by itself, conclusive of the existence of a partnership. The governing agreement did not specifically state it was a partnership agreement and the word partnership was nowhere to be found in the document. The agreement did not permit the associate’s to exercise important rights of a partner – he did not undertake an obligation to share in firm losses; he was precluded from any role in firm management; and, no buyout was provided for in case of a firm dissolution. Further, the agreement had specific language that the original owner owned the firm. For those reasons, the Court concluded that the two attorneys had not created a true partnership by their governing agreement, and that the associate was only entitled, under the second agreement, to receive most of the profit from cases that he could take with him if the agreement was terminated (i.e., those cases marked with his initials). Thus, the Court reversed and remanded the matter to the lower court for a recalculation of damages based solely upon the associate’s contractual entitlement.

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