Monday, August 1, 2011
Partnership, Not Individuals, Liable to Dissociating Partner—C.A.
By a MetNews Staff Writer
The Court of Appeal for this district has affirmed a trial judge’s calculation of a law firm’s obligation to a dissociating partner, but reversed the judge’s ruling that the remaining partners are individually liable for those amounts.
Div. Three Thursday upheld the award of nearly $230,000 to Jerry Rappaport for his interest in the firm once known as Gelfand Rappaport & Glaser LLP. Marvin Gelfand and Steven Glaser, who continued to practice for a time as Gelfand & Glaser LLP after Rappaport’s withdrawal, were absolved of individual liability.
The “apparent case of first impression,” Justice Walter Croskey explained, involved the interpretation of Corporations Code Sec. 16701(b), which provides:
“The buyout price of a dissociated partner’s interest is the amount that would have been distributable to the dissociating partner under subdivision (b) of Section 16807 if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership was wound up as of that date. Interest shall be paid from the date of dissociation to the date of payment.”
The essence of the statute, the justice explained, is that one who dissociates from a partnership, where there is no written agreement to the contrary, should be placed in the same position that he or she would be in if the firm were dissolved.
Gelfand and Glaser formed their law firm in 1986. Rappaport joined in 2000 and gave notice of dissociation in 2005, making a formal demand for compensation in 2006 after negotiations among the attorneys broke down.
In December 2006, Rappaport filed suit under Sec. 16701, arguing for greater compensation than his ex-partners had offered. The primary issues at trial were the valuation of the firm’s general accounts receivable, a contingency fee from a particular lawsuit, and receivables due from four separate pieces of litigation on behalf of a particular client, Beverly Hills ophthalmologist Dr. Morry Waksberg.
With respect to the general receivables, the defense expert said they were worth little more than $60,000, opining that those more than 90 days old were uncollectible and that those newer than that were worth 25 percent of face value.
The plaintiff’s expert, however, cited the firm’s recent success in collections and valued the receivables at 90 percent of face value for those less than 90 days old and 55 percent of face value for those 90 to 180 days old.
Los Angeles Superior Court Judge Linda Lefkowitz sided with the plaintiff on that issue.
Judge Sides With Plaintiff
With respect to the contingency matter, an employment discrimination suit in which the firm was to receive $800,000 if the judgment survived a pending appeal, the plaintiff’s expert said it should be valued at the amount due less 10 percent representing the risk of losing the appeal. The defense expert opined that the buyout value was no more than 50 percent of the potential fee.
The judge sided with the plaintiff on that issue as well.
As for the Waksberg matters, the judge sided with the plaintiff in part, concluding that Waksberg owed the firm about $1.283 million in fees, less a discount of two-thirds because Waksberg had fired the firm, which was going to have to rely on liens against the cases to collect.
After figuring in the firm’s office space lease liability, the judge concluded that Rappaport’s 31 percent share of the firm was woth $230,759.
Croskey, writing for the Court of Appeal, said the trial judge’s calculation methods were consistent with the Uniform Partnership Act.
The trial judge, he said, properly determined the partnership’s “liquidation value” as the price that a willing and informed buyer would pay a willing and informed seller, rather than its “distress sale” value.
“Thus, for purposes of section 16701, subdivision (b), ‘liquidation value’ does not incorporate the common definition of ‘liquidation,’ which generally implies some urgency for immediate cash. Under the remaining language of section 16701, subdivision (b), the ‘buyout price’ is the liquidation value, as defined above, discounted to present value as of the date the partner dissociated.”
The imposition of personal liability on Gelfand and Glaser, on the other hand, was error, the justice said, under the clear language of the statute.
The case is Rappaport v. Gelfand, B213168.
Copyright 2011, Metropolitan News Company