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ROBINSON v. NUSSBAUM

December 23, 1997

JEFFREY D. ROBINSON, et al., Plaintiffs,
v.
MICHAEL NUSSBAUM, Defendant.



The opinion of the court was delivered by: GREENE

OPINION

 This action arises out of the dissolution of a law partnership. Plaintiffs Jeffrey D. Robinson, Eric L. Lewis, Michael B. Waitzkin, Martin R. Baach, and James P. Davenport and defendant Michael Nussbaum were each partners in the Washington, D.C. law firm of Nussbaum & Wald. In their Amended Complaint, plaintiffs seek declaratory relief as well as monetary damages for fraud, misrepresentation, breach of contract, wrongful dissolution, and breach of fiduciary duty. The defendant, Mr. Nussbaum, filed a three-count counterclaim for declaratory relief and an accounting of his entitlements in the winding up of the partnership.

 The Court ordered separate trials for the jury and non-jury claims. It is to be noted, however, that in an Opinion issued before trial, the Court entered partial summary judgment in favor of defendant Nussbaum. The Court ruled that under the District of Columbia Uniform Partnership Act, D.C. Code §§ 41-101 et seq. and the District of Columbia Court of Appeals' opinion in Beckman v. Farmer, 579 A.2d 618 (D.C. 1990), Nussbaum is entitled to share in hourly fees earned by his former partners which stem from client matters that were pending but uncompleted at Nussbaum & Wald at the time of dissolution.

 In the current phase of the litigation, the Court tried Counts One and Three of plaintiffs' Amended Complaint without a jury from August 4, 1997 through August 8, 1997. In Count One, plaintiffs request a declaration that Jeffrey D. Robinson was an equity partner in Nussbaum & Wald from not later than January 1, 1995. This issue was resolved by stipulation during trial. *fn1" In Count Three, plaintiffs seek a declaration that Nussbaum & Wald did not have a partnership agreement, written or oral, with respect to the partners' shares in the profits, assets and liabilities of the firm for 1995 and 1996. *fn2"

 This Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.

 I

 Nussbaum & Wald was formed as a partnership in October of 1989. The firm was very successful. While it briefly operated with a net loss after its inception, Nussbaum & Wald went on to earn substantial profits over the next six years.

 It is undisputed that the partnership was never governed by a comprehensive written partnership agreement. As a result, the firm had to establish a procedure for dividing the profits and income of the partnership more or less on an ad hoc basis. Plaintiffs presented evidence that the process for determining partnership profit- and loss-sharing percentages changed each year. In general, however, because the partners had not agreed in advance on a formula for dividing profits, the partners would agree on percentage shares retrospectively. That is, they would decide how to divide the previous year's income at some point during the next calendar year.

 The first shares agreement was reached during April of 1991. On April 1, 4 and 5, the partners met and agreed upon the division of partnership income for 1990 only. See Ex. 48. The partners agreed to unequal shares in income for the several partners. *fn3" The minutes of these meetings reflected that the partners attempted to reach agreement with respect to percentage shares for 1991, 1992 and 1993, but that no final agreement was reached. See id. Instead it was proposed that Michael Nussbaum serve as a "committee of one," speaking to each partner individually about the fixing of shares. See id. The partners did not settle on a future means for dividing partnership income.

 These meetings (dubbed the "Vista meetings" because they took place in part at the Vista hotel) were characterized by each former partner as unpleasant and contentious. Mr. Waitzkin testified that the meetings were "ugly," damaging individual relationships to the point that they never really recovered. Following the meetings, James Davenport announced his intention to withdraw from the firm. See Ex. 49. Although he was persuaded to remain with Nussbaum & Wald, the partners never again met in person to determine percentage income shares. Rather, when it was necessary to determine shares, Nussbaum would present a proposed distribution of shares to Baach, and he would then go back and forth, negotiating with all of the other partners, until a consensus was achieved.

 In October of 1992, the partners reached agreement as to income shares for 1991. Michael Waitzkin testified, however, that these shares were agreed to only because the firm's partnership tax return for 1991 had to be filed by October 15, 1992. The partners decided on these percentages, not in a partnership meeting, but through memoranda and fax. Mr. Waitzkin testified that the partners did not hold a meeting in part to avoid reliving the previous year's unpleasantness at the Vista meetings. The income shares for 1991 were again unequal. *fn4"

 The following year the same tax deadline approached and again the partners had not agreed as to percentage shares. In October of 1993, only one day before the partnership tax returns were to be filed, the partners agreed that the income percentage shares for 1992 would be the same percentages used throughout that year to make monthly cash distributions. Exhibit 93. Mr. Waitzkin testified that it was clear to all the partners that the process of determining profit shares at the eleventh hour was causing serious problems at the firm. To avoid the last-minute fixing of income shares, in April of 1994 the partners reached an agreement for partnership percentages applicable to income from 1993 and 1994. *fn5" Mr. Waitzkin testified that, again, the partners did not hold a meeting. Michael Nussbaum proposed initial figures and the remaining equity partners circulated memoranda with comments and changes.

 II

 Because there was no comprehensive written partnership agreement throughout the tenure of Nussbaum & Wald, the partners were advanced money by the firm to meet their living expenses and quarterly tax payments. These advances were referred to as "cash draws" and "tax draws" respectively. There was a distinction between "draws" and "income:" draws being money advanced against future profits. The draws did not necessarily represent final compensation. As a matter of accounting, all draws were debited against (i.e. deducted from) an individual partner's capital account. When the partners agreed on income shares for a given year, which with the exception of the 1994 shares was done after the end of the year, the resulting income was credited (added) to each partner's capital account.

 The monthly cash draws did not track share percentages. Cash draws were for a fixed amount which was established early in the firm's existence. The tax draws, however, typically tracked prior share percentages. Again, because of the absence of a formal partnership agreement, the partners adopted the convention of using the previous year's share agreement to compute tax draws.

 The firm's administrator, Sharon Harris, distributed the tax draw checks with a cover memorandum. On April 14, 1992 the memorandum included the following language: "Marty Baach has asked me to be certain that this memorandum stated that these distributions are without prejudice and are understood to be subject to the partners' agreement on 1992 percentages." Exhibit 72 (emphasis added). This memorandum was the first of a series of tax draw memoranda that accompanied the partners' tax draw checks. See also Ex. 74, 86, 90, 101, 104, 113, 150, 168, 177, 187, 204, 206, 217, TTTT. In April of 1993, Sharon Harris circulated a similar memorandum announcing that draw checks would be distributed based on the percentages that were determined for 1991. See Ex. 86. This memorandum reiterated the "without prejudice" language because the partners had not yet agreed to the distribution for 1992 or 1993. Because the partners did not agree to shares for 1993 and 1994 until April 1994, the tax draw memoranda for the first quarter of 1994 noted that the draws were "understood to be without prejudice." Ex. 101. The tax draw memorandum for the remainder of 1994, however, did not include the "without prejudice" language because share percentages were established as of that April. All subsequent tax draw memos contained the "without prejudice" qualification, with the December 1995 and January 1996 memos containing slightly different language: "without prejudice to readjustment." Ex. 202. *fn6"

 III

 In September 1994, Robinson returned to the firm after working for the D.C. and federal governments. Robinson agreed to a fixed salary for 1994 because the partners had already agreed on shares for 1994. Robinson became an equity partner as of January 1, 1995. Prior to April 1996, Robinson received monthly draws but he did not receive tax draws because he said he did not need them when he first returned to the firm from government service. When Robinson requested a tax draw in April 1996, Nussbaum directed Harris to prepare a memorandum instructing that Robinson be paid an additional $ 47,000 at 1995 income. The April 1996 tax draw calculation based on Robinson's total draws for 1995 put Robinson's percentage of 1995 profits at 7.5%. The other partners' percentages were then recalculated to account for Robinson's tax draw percentage. *fn7" Harris used the resulting percentages for the remaining tax draws.

 Robinson testified that he understood that the partners eventually would agree on his share percentage and never took the 7.5% calculation as a final determination of his share. With the exception of Nussbaum, the other partners each testified that they never discussed or agreed to ...


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