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Petriccione v. Friedrich

BER-C-3-07 (N.J. Super. Ch. Div. 2007) (Unpublished)

PARTNERSHIPS; ATTORNEYS — The purpose of the rules of professional conduct is to serve the public interest by preventing any limiting of access to attorneys to the public due to the financial disincentives of restrictive covenant agreements, but just because one party to a contract asserts that the other party’s attorney had been his or her attorney at one time, does not mean that the contract between the parties must be abrogated.

Three associates owned and operated two automobile franchises and three real estate entities. They had a shareholders’ agreement for one of the franchises and had a partnership agreement for the real estate entity which owned the land on which the same franchise was located. There was no shareholder agreement for the other franchise and there were no partnership agreements for the other two real estate entities. According to the shareholders’ agreement, termination by any party constituted an automatic offer to the remaining shareholders and to the corporation to purchase the terminating party’s shares at a price that was to be determined according to the provisions of the agreement. The partnership agreement required any withdrawing partner to offer his interest to the other two partners and also incorporated the shareholders’ agreement.

One of three business associates informed his other partners that he was going to be retiring and would be terminating the shareholders’ agreement. By letter from his attorney, he proposed a price to purchase his interest in the business, including a buy-out of his shares. There was disagreement over reducing the amount of loans made by the real estate entities to the franchises. They were the sole tenants of the real estate entities. The withdrawing associate contended that as a partner he never authorized such loans and that one of the other associates had previously assured him that the real estate entities and the franchises were separate from each other.

The withdrawing associate brought a partition action for each real estate entity and for his interest in each of franchises. The other two associates moved for an order of specific performance that would have required the departing shareholder to sell his stock in the franchise according to the terms of the agreement. They also indicated that they were willing to pay the amount asked for by the shareholder. Based on an earlier decision by the Court to deny an order to compel the sale of his shares at the previously agreed upon price, the shareholder objected to the associates’ motion.

The Court rejected the shareholder’s objection. It pointed out that the order was denied because there was insufficient proof of an offer and acceptance, but that its decision did not prevent the associates from seeking relief based on the amount originally requested by the withdrawing associate. The Court also rejected the withdrawing associate’s argument that loans made to the franchises should not have been considered when valuing the shares to be sold back to the other associates. It pointed out that the pricing mechanism in the partnership agreement implicitly included consideration of any loans when pricing the shares.

One of the withdrawing associate’s objections was based on rules of professional conduct for attorneys. It was also rejected. The withdrawing associate argued that one of his associates, an attorney, was his prior counsel and therefore the associate was bound by professional rules of conduct which prevented the enforcement of restrictive covenants between attorneys and their law firms. The Court pointed out that the purpose of such rules of conduct was to serve the public interest by preventing any limiting of access to attorneys to the public due to the financial disincentives of such agreements. The Court found that upholding the withdrawing associate’s objection would technically have abrogated the entire agreement between the parties even though such relief was not sought by him, and that he could still argue against a reduction of the buy-out based on the loans even if his former attorney was found to have violated the rules of professional conduct. The remaining associates’ request for an order to compel the sale of the withdrawing associate’s shares at the requested price was granted.

The remaining associates also requested a dismissal of the complaint and an order to compel arbitration for a determination on the buy-out of the partnership interest. The Court pointed out that state and federal law favor arbitration as a means of dispute resolution. It noted that although only the shareholders’ agreement contained an arbitration provision and that there was no mention of it in the partnership agreement, the incorporation of the shareholders’ agreement into the partnership agreement made the arbitration provision within the shareholders’ agreement applicable to the partnership agreement. Thus, the Court granted the remaining associates’ partial summary judgment but limited the arbitration requirement to the partnership that was governed by the partnership agreement. The Court did not compel arbitration of any dispute regarding the shareholder’s interest in the other real estate entities because they were not governed by any partnership agreements and therefore were not subsumed by the arbitration provisions contained in the shareholders’ agreement.

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