Mr. Singer of his role in the buyout several months before the transaction closed. I find that Mr. Scher was not obligated to share with or offer to Mr. Singer the opportunity to invest in Outlet in connection with the 1986 leveraged buyout.
It was the clear operating principle of the STS firm that individual partners' equity investments in clients were not to be offered to or shared with other members of the partnership. Such investments were a primary concern of Mr. Sundlun, Mr. Tirana, and Mr. Scher when they founded the firm. Mr. Sundlun maintained large, individual investments in firm clients throughout the life of the firm. Mr. Tirana also acquired partial equity ownership of firm clients. Again, when Mr. Singer and Mr. Scher agreed to practice law as Sundlun, Singer & Scher, they clearly did not intend to change the basic principles that had governed the firm from its inception.
The relationships between the STS partners and the firm's major corporate clients had been responsible for the success of the STS firm. The primary goal of Mr. Singer and Mr. Scher in embarking on the SSS venture was to maintain these relationships, and the legal fees they generated. Mr. Sundlun sought to ensure the continued availability to the companies he controlled of a law firm with which he was familiar, and which he trusted. All of the parties intended to perpetuate as much as possible the structure of the STS firm. All of them wanted to assure the continued existence, in essence, of the firm that had been STS.
At the time SSS was formed, Mr. Singer was aware that, had he demanded that partners' equity investments in client companies be treated as partnership property, there would have been no continuation of the STS partnership. Mr. Scher, who had a very close relationship with Outlet, and who served as its General Counsel, would not have agreed to sharing his Outlet investments with Mr. Singer. The Court cannot, at this time, rewrite the principles that controlled operation of the partnership. The Court finds that the intention of Mr. Singer and Mr. Scher in continuing the practice of law after Mr. Sundlun and Mr. Tirana left the partnership was to maintain at SSS the lucrative relationships that had benefitted STS. Consistent with this objective, Mr. Singer and Mr. Scher agreed to preserve the practices and understandings that had governed the STS partnership.
Under these practices and understandings, Mr. Scher was entitled to purchase Outlet stock without offering Mr. Singer the opportunity to participate in the buyout. In the STS firm, partners engaging in activities like the Outlet buyout did so as individuals, and the opportunities to make such investments were the exclusive prerogative of the individual partners. This was true of Mr. Sundlun's purchases of EJA stock, and of Mr. Tirana's purchases of EJA stock and Technics stock. Because the original arrangement among the STS partners as to what would constitute partnership income governed not only the STS firm but also the SSS partnership, Mr. Scher's Outlet purchase must be treated like the EJA and Technics purchases -- that is, as excludable from the partnership assets.
The stock purchased by Mr. Scher was not given to him in lieu of a fee for legal services provided by SSS. Rather, a small group of Outlet managers bought out the interests of the prior controlling shareholder. Mr. Scher, as an Outlet executive and as its General Counsel, became part of the investing group. The shares were not intended as payment to Mr. Scher for legal services.
In fact, Outlet provided a considerable amount of legal work for SSS during the period of the buyout, all of which was compensated at the firm's customary rate that applied to Outlet. The fees generated by this representation were shared equally between Mr. Singer and Mr. Scher. Mr. Singer was aware that the buyout transaction was providing SSS with a substantial infusion of additional revenue. This is an added reason why Mr. Singer's claim that he did not know of the buyout transaction at an early date defies credibility.
SSS's representation of Outlet yielded substantial fees not only during the buyout period, but throughout the life of the partnership. These fees, whether paid as hourly charges, retainer fees, or salaries, were always treated as partnership revenue. In 1986 Outlet paid Mr. Scher $ 330,000 in deferred compensation. Although Mr. Scher originally claimed the entire amount, he subsequently paid the money over to the partnership after realizing that deferred compensation was the sort of payment that was considered to be partnership revenue. The buyout transaction, in contrast, was like Mr. Scher's receipt of stock options, which were clearly treated by the parties as excluded from firm revenue. Stock options and stock purchases are different from fees and the parties have the right to treat them differently.
Law partnerships today are highly sophisticated enterprises. The traditional vision of a law firm, where the partners shared everything equally, no longer describes many present-day law partnerships. Many firms have adopted some of the revenue measuring and allocating techniques long employed by the businesses they represent. Indeed, some firms operate entirely on the guiding principle that a partner essentially "eats what he kills." Such a practice, as offensive as it may seem to some of the elders of the bar, is wholly consistent with the Uniform Partnership Act, which provides that partners' rights are ultimately derived from the partners' understandings and intent. See D.C. Code § 41-117.
The uncertainties of contemporary legal practice make it imperative for partners to set forth their agreements in writing. Where partners have abdicated this responsibility, the Court must determine what the parties had in mind when they commenced their association. In this case, it is clear that the income from all fee or revenue-generating activities was to be treated as partnership income. It is also abundantly clear that the parties never intended nor agreed that investment opportunities provided by firm clients were to be shared. Such opportunities were clearly to be excluded from the partnership revenues, as long as they were not provided to the partners in substitution for legal fees. Mr. Scher's opportunity to participate in the Outlet buyout was an opportunity outside the scope of his partnership with Mr. Singer. The Outlet stock is his exclusive property, and Mr. Singer's claim to a portion of the stock must be rejected.
These are my findings of fact and conclusions of law. Judgment in this case will be entered for the defendant Mr. Scher. An appropriate order accompanies these findings and conclusions.
ORDER -- February 21, 1991, Filed
After a full trial before the Court, and after hearing the arguments of counsel, and upon consideration of the entire record in this case, it is this 20 day of February 1991 hereby
ORDERED that judgment shall be entered in favor of the defendant Gerald Scher.
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