W. Edward Bailey, et al. v. Fish & Neave, et al., ___N.E.2d___, 2007 W.L. 1319268 (N.Y. Ct. App.)

Brief Summary
The New York Court of Appeals concluded that under the terms of a law firm’s partnership agreement, a majority of the shares in interest of the partnership could amend the agreement to alter the terms of compensation for withdrawing partners. An action against the defendant firm was dismissed, rejecting arguments that the firm breached its contract with the withdrawing partners and violated New York Partnership Law § 40(8) by not requiring a unanimous vote for the amendment.

Complete Summary
Plaintiffs Bailey and Culligan were former equity partners at the defendant firm, Fish & Neave. The firm was governed by a partnership agreement dated Jan. 1, 1970, which provided that “[i]n all questions relating to the partnership business (including dissolution of the partnership), the decision of a majority in interest of the partners…shall be conclusive upon and bind all the partners, except as otherwise provided herein.” Id. at *1. The agreement included only two provisions that qualified the majority vote requirement, neither of which applied to this situation. It did not include a specific provision regarding amendments. Id. at *1.

In December 2003 the firm began steps to amend the partnership agreement to change the accrual-based accounting system to a cash-based system, which would affect the way withdrawing partners were compensated. Id. at *1. The firm had been advised to change its accrual-based system, which had proved costly due to the increasing number of withdrawing partners. It was also an impediment to attracting lateral partners or merger opportunities, such that the accounting system could detract from the firm’s success and possibly adversely affect its viability. Id. at *1.

The amendment permitted the firm to defer payment of “pipeline” income to withdrawing partners over a five-year period upon the later of retirement or age 65. The amendment also allowed the firm to spread out the return of those partners’ capital contributions. After two standstill amendments, the permanent amendment was passed on May 17, 2004, while both Bailey and Culligan were deemed to be active partners who had given notice of withdrawal from the partnership.

Bailey and Culligan sued Fish & Neave alleging breach of contract because the firm refused to honor their rights under the Agreement to return their capital and pay their shares of partnership and contingent fee income. They contended that the permanent amendment should be declared invalid and in violation of New York Partnership Law § 40 (8) because it was passed by a majority rather than unanimous vote of the partnership interests. Id. at *2. The Supreme Court dismissed the case and held that the Agreement permitted the amendment and was appropriately amended. The Appellate Division affirmed and this appeal ensued. Id. at *3.

The N.Y. Court of Appeals stated that it is well-settled that partners may determine their partnership rights and duties by agreement. See Lanier v. Bowdoin, 282 N.Y. 32 (1939).

The court also noted that New York Partnership Law § 40(8) provides that “[T]he rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules…Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no act in contravention of any agreement between the partners may be done rightfully without the consent of all partners.” Id. at *3.

The court held that the partnership agreement in this case unambiguously provided that “all questions related to the partnership, including its dissolution, may be decided by a majority vote, unless the Agreement provides otherwise.” The court noted the provisions of New York Partnership Law §40(8) are default provisions that kick in when there is an absence of agreement on the subject matter, which there was not in this case. Thus, the statute did not apply to this situation. In a type of expressio unius analysis, the court noted that the agreement itself provided two express exceptions from the majority-vote requirement and that amendment of the agreement was not one of them. It would not make sense, the court reasoned, that the partnership could dissolve itself by a majority vote, but could not change the compensation system without unanimous consent of the partners. 2007 WL 1319268 at *4. Accordingly, the court affirmed the dismissal of the action brought by the departing partners.

Significance of Case
The court in this case gave maximal credence to the terms of the partnership agreement and refused to find it ambiguous on the matter at issue, even though the agreement did not contain any specific amendment provision or definition of “majority vote”. It helped that the agreement in question had carved out two specific exceptions to the majority vote rule, neither of which included the process of amendment or the compensation system per se or the withdrawing partner scenario. Even though there was a general partnership statute requiring unanimous consent to acts in contravention of a partnership agreement, if the agreement did not provide otherwise, the court was unwilling to apply the statute to override a general majority-vote provision in a law firm partnership agreement.

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