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Weiner Associates Certified Public Accountants v. Gersten, Slater & Co.

A-4445-02T5 (N.J. Super. App. Div. 2004) (Unpublished)

PARTNERSHIPS; DISSOLUTION—A court may appoint a special master to oversee the windup of a dissolving partnership and to make determinations as to allocation of fault between the partners, but the appointing court must follow certain procedures when doing so.

On January 1, 1991, two accounting firms formed an accounting partnership. For the first two years of the partnership, the firms operated as separate entities, each firm agreeing to have at least $320,000 of revenue during each year. The partnership was to continue until December 31, 2020, but either party could elect to dissolve the partnership by giving notice by December 31, 1992.

In the spring of 1992, the partnership began to unravel when one accounting firm learned that the other firm’s billable hours were falling. Also, the financial results for the fiscal year ending September 30, 1992 showed a wide disparity in profitability between the partners. The two firms then renegotiated the methodology for dividing partnership income. By early 1993, they agreed to several extensions of the time by which either could terminate their partnership. The last of these extensions permitted either party to do so by June 4, 1993.

The parties met on May 11, 1993. The higher grossing partner said that the other wanted to restate its reserves because they were inadequate and incorrect. The parties met again, and the lower grossing partner stated that its reserves had to be increased by $200,000. In a suit that followed, the higher grossing partner’s expert testified that the lower grossing partner’s understatement of reserves for accounts receivable and work in progress resulted in a $220,000 overstatement of its net income for the period ending September 30, 1992. On May 26, 1993, the higher grossing partner elected to terminate the partnership agreement.

On June 1, 1993, the higher grossing partner sued, claiming breach of contract, fraud, breach of fiduciary duty, breach of the covenant of good faith and fair dealing, and misrepresentation. More than three years later, the Chancery Division held a pre-trial conference. Since the lower court determined that the trial would take many days, it appointed a special master. The special master then found that the lower grossing partner had breached its fiduciary duty by overstating its income and restating reserves. Although the special master found no motive rising to the level of fraud, he found that the lower grossing partner owed a fiduciary obligation to the partnership. The lower court accepted the special master’s findings, but would not award pre-judgment interest.

On appeal, the higher grossing partner argued that the lower court erred in denying pre-judgment interest. It contended that the lower court was required to accept the findings of the special master, including his award of prejudgment interest, unless the award was contrary to the weight of the evidence. It further contended that because its claims were tort claims, as the successful party, it was entitled to prejudgment interest.

The Appellate Division disagreed. The special master’s decision noted that the award of prejudgment interest was within the discretion of the Court. He recognized that the award of interest could not be based upon the good or bad faith of the opposing parties, but concluded that the higher grossing firm was entitled to interest because the parties had been litigating their claims for about a decade. The Appellate Division agreed that a trial court is obligated to accept a special master’s findings of fact unless those findings are contrary to the weight of the evidence. In this case, the special master had made no findings of fact as to prejudgment interest. Further, referral of a matter to a special master does not limit a court’s authority to make a decision on any legal issue.

The Appellate Division agreed that a breach of fiduciary duty is tortious conduct. But, the tortious conduct in this case arose out of a contractual relationship. The fiduciary duty breaches were also breaches of the partnership agreement as well breaches of the implied covenant of good faith and fair dealing. Consequently, this particular award of damages could not be viewed solely as relief based on tort claims. Where, as in this case, a cause of action sounds in both tort and contract, the award of prejudgment interest does not depend upon the label placed on the action but rather on the nature of the injury inflicted on the plaintiff and the remedies requested by that party. Consequently, the Court held that the lower court did not err in concluding that the higher grossing partner had asserted a hybrid mix of claims in which the contract claims predominated. Therefore, the award of prejudgment interest was not compelled by R. 4:42-11(b), but rather the decision to grant an award of interest was committed to the sound discretion of the trial judge. The lower court found that the case had been over-litigated. The lower court also found that the claims simply did not present the sort of legal or factual complexity that would warrant litigation over almost a decade. It also found fault on both sides and decided that it would have been unfair to penalize the losing partner by imposing prejudgment interest.

The Appellate Division also felt that the matter should not have been referred to a special master. Under R. 4:41-1, reference of a civil action to a master is permitted only when the parties consent or where there are extraordinary circumstances. Here, there was no consent. What happened was that the judge who was managing the case at the time feared that the trial might take about fifteen days and this would adversely affect the Chancery Division’s calendar. According to the Appellate Division, that was not the kind of extraordinary circumstance that permits referral. Furthermore, the lower court failed to oversee progress of the litigation. This allowed numerous delays, caused in large part by the special master. For all of these reasons, the Court held that the lower court did not abuse its discretion in denying interest in the claim.

The lower grossing partner argued that the lower court had erroneously found that the partnership was dissolved pursuant to the agreement. The Appellate Division disagreed. The special master had found that the lower grossing partner understated its reserves, resulting in an overstatement of that partner’s net income. Furthermore, evidence supported the special master’s finding that the lower grossing partner had a motive to restate its reserves because it was clear, at that time, the partnership was probably going to break up. By restating its reserves and reducing its profit in May 1993, the lower grossing partner was able to reduce its profitability and value and, therefore, it stood to benefit by an equal division of partnership assets. Based on these findings, the Court held that the special master properly determined that the lower grossing partner breached its fiduciary duty to the partnership and that its actions were a breach of the partnership agreement. Its actions, therefore, were proper cause for dissolution of the partnership pursuant to the agreement.

The lower grossing partner also argued that it did not breach its fiduciary duties to the partnership because it eventually collected the reserved accounts that were understated. But what ultimately happened in respect to the collection of the accounts was not relevant to whether it had breached its fiduciary duties in 1992 and 1993. The lower grossing partner further contended that its understatement of reserves and overstatement of income was not a breach of fiduciary duty because one of the partners from the higher grossing firm was the managing partner of the partnership, and thus had a duty to review all of the reserves for the partnership. The Court disagreed, finding that both partners were essentially operating independently for the first two years of the partnership. In addition, the managing partner testified that he had no knowledge of the lower grossing firm’s manipulation of reserves. For all of those reasons, the Court affirmed the lower court’s decision and held that the lower grossing partner had breached its fiduciary duty to the partnership.


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