Monday, August 12, 2002
Court of Appeal Rules:
Not Fraudulent for Lawyers to Pay Themselves but Not Landlord
By KENNETH OFGANG, Staff Writer/Appellate Courts
Partners in a failing law firm who took partnership draws while the firm was not paying rent cannot be held liable to the landlord on a fraudulent conveyance theory, the Fourth District Court of Appeal has ruled.
The court late Thursday affirmed a summary judgment in favor of eight partners in the dissolved Newport Beach firm of Hamilton & Samuels. Div. Three agreed with Orange Superior Court Judge Raymond J. Ikola that the payment of partnership draws by an insolvent enterprise does not, in and of itself, violate the law against fraudulent conveyances.
The firm stopped paying rent to its landlord, Annod Corporation, in September 1995. Two months later the landlord sued the firm for breach of its lease, which explicitly provided that the landlord had no recourse against the individual partners for liabilities incurred.
The firm dissolved in January 1996, but founding partner Paul R. Hamilton—who later relocated to Jeffer, Mangels, Butler & Marmaro—remained on the premises as liquidating partner for about three months.
Judgment was entered against the law firm in 1997 for just under $840,000, which went unpaid.
In 1999, Annod sued the partners—Hamilton, Herbert N. Samuels, Inc., William L. Steel, Karen J. Lee, Philip W. Green, Mark S. Adams, Deborah Rosenthal, and Frederick H. Kranz—seeking to recover the draws, totaling about $400,000, plus damages.
Ikola ruled that the defendants had, as a matter of law, acted in good faith. He made detailed findings of fact, noting that the draws during the period of the firm’s financial difficulties were small in comparison to what the partners had been making before and in comparison to the number of hours they were billing.
Kranz, for example, was paid less than $100,000 for all of 1995, a year in which he billed $480,000. The lawyer earned over $400,000 the year after Hamilton & Samuels broke up, Ikola noted.
Similarly, Hamilton billed $150,000 for the firm during the liquidation period, but received no more than $35,000 in draws. He noted in a declaration that his draws for 1995 and 1996 were $200,000 less than his 1994 draws and more than $300,000 less than his draws in each of the three preceding years.
The trial judge noted that if the lawyers had not been willing to continue working in exchange for reduced draws during the time they were not paying rent, they would have been unable to pay the other employees and the total amount available to pay creditors would have been diminished.
On appeal, the plaintiff argued that Ikola should have allowed a trial to determine whether the transfers were made in good faith and for equivalent value. But Justice Eileen Moore, writing for the Court of Appeal, said the plaintiffs’ evidence of bad faith was insufficient as a matter of law.
Moore rejected the argument that the status of the partners as “insiders” and the fact that they took the draws with knowledge of the lease obligation, were by themselves sufficient to establish bad faith.
“Annod cites no authority for the proposition that accepting partnership compensation with the knowledge that lease payments are overdue is tantamount to the participation in a fraudulent scheme,” the justice wrote. “Similarly, Annod cites no authority to the effect that a partner is prohibited from receiving a partnership draw authorized by the relevant partnership documents if the partnership cannot make its rental payments.”
Whether it was “simply unfair and inappropriate” for the partners to take draws when they were behind in rent, the justice said, “is a moral issue we need not decide” and a risk the landlord knowingly accepted by entering into a no-recourse lease.
The appeal was argued by David J. Cook of Cook, Perkiss & Lew for the plaintiff. Two of the defendants, Hamilton and Kranz, argued before the panel.
Also arguing for the defendants were Mark A. Rodriguez of Borchard & Willoughby and Marc Zimmerman of Cox, Castle & Nicholson.
The case is Annod Corporation v. Hamilton & Samuels, 02 S.O.S. 4161.
Copyright 2002, Metropolitan News Company