New York Law Review

Tag: Partnership Agreement

  • Sheehy v. Clifford Chance Rogers & Wells, 3 N.Y.3d 585 (2004): Statute of Frauds and Oral Promises of Retirement Benefits

    3 N.Y.3d 585 (2004)

    An oral agreement to provide retirement benefits that extend beyond one year is unenforceable under the Statute of Frauds unless there is a written agreement subscribed by the party to be charged.

    Summary

    John Sheehy, a former partner at Rogers & Wells (later Clifford Chance Rogers & Wells), sued the firm for breach of contract, alleging he was wrongfully denied retirement benefits (SRPs) promised orally in exchange for early retirement. The firm argued the Statute of Frauds barred the claim because the agreement wasn’t in writing and performance extended beyond one year. The Court of Appeals held that the oral agreement was indeed barred by the Statute of Frauds, reversing the Appellate Division’s decision and reinstating the Supreme Court’s dismissal of the complaint because the firm’s obligation to make payments began five years after Sheehy’s retirement and extended until his death.

    Facts

    Sheehy was a partner at Rogers & Wells. The firm’s retirement plan provided different benefits for early (ages 60-64), normal (age 65), and mandatory (age 70) retirement. Early retirees received less, specifically no supplemental retirement payments (SRPs), unless the Executive Committee made a written exception. In December 1994, the firm asked Sheehy to resign, effective January 1, 1996. Sheehy claimed James Asher of the Executive Committee orally promised him the full retirement benefits, including SRPs, in exchange for his resignation. Sheehy, then 57, retired as senior counsel and received the four-year payout from 1996-1999, but the firm later refused to pay SRPs.

    Procedural History

    Sheehy sued for breach of contract, unjust enrichment, and breach of fiduciary duty. The firm raised the Statute of Frauds as a defense. Supreme Court granted the firm’s motion for summary judgment, dismissing the complaint. The Appellate Division modified, reinstating the breach of contract claim (except for future payments) and dismissing the firm’s Statute of Frauds defense. The Court of Appeals reversed the Appellate Division and reinstated the Supreme Court’s order dismissing the complaint.

    Issue(s)

    Whether an oral agreement promising retirement benefits, including supplemental retirement payments (SRPs) beginning five years after retirement, is barred by the Statute of Frauds where there is no written agreement authorizing such payments.

    Holding

    Yes, because the Statute of Frauds requires a written agreement for any contract that cannot be performed within one year. Here, the alleged oral agreement promised SRPs beginning five years after retirement and continuing for life, which is beyond the one-year limit.

    Court’s Reasoning

    The Statute of Frauds (General Obligations Law § 5-701(a)(1)) requires a written contract for agreements not performable within one year to prevent fraud. The court reasoned that Sheehy conceded no written agreement existed for SRPs and that payments wouldn’t begin until five years after his retirement. Sheehy’s reliance on Kane v. Rodgers, where an oral agency agreement was deemed enforceable despite stock transfers extending beyond one year, was misplaced. In Kane, the acts beyond a year concerned enforcing rights under a written agreement, not the oral agreement itself. Here, Sheehy had no right to SRPs under the written partnership documents. The court stated, “[U]nder the retirement plan, a partner taking early retirement is not entitled to receive SRPs unless the early retirement was made at the specific written request of the Executive Committee.” The oral promise to provide SRPs was a separate agreement, requiring a writing to be enforceable. The court rejected the Appellate Division’s theory that the parties could orally “deem” a written request to exist, finding no basis for this in the complaint or the agreement. The court concluded that absent a written agreement, the Statute of Frauds barred Sheehy’s claim.

  • Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 86 N.Y.2d 112 (1995): Fiduciary Duty and Solicitation of Clients by Departing Law Partners

    Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 86 N.Y.2d 112 (1995)

    Departing law partners breach their fiduciary duty when they secretly solicit firm clients for their personal gain before resigning, as this undermines the duty of loyalty among partners and exceeds the scope of permissible client communication.

    Summary

    This case concerns a dispute between a law firm and its departing partners, focusing on whether the partners breached their fiduciary duty by soliciting firm clients before their resignation. The New York Court of Appeals held that such pre-resignation, surreptitious solicitation is actionable, as it undermines the duty of loyalty partners owe each other. The court clarified that while attorneys can inform clients of their departure and remind them of their right to choose counsel, they cannot secretly lure clients away or lie about their rights. The court also addressed claims of breach of contract and fraud, finding material issues of fact that precluded summary judgment.

    Facts

    Irving Moskovitz and Seymour Graubard founded the plaintiff law firm in 1949. Moskovitz brought in F. Hoffman LaRoche & Co., Ltd. (Roche) as a client in 1959, with billings exceeding $1 million per year by the late 1980s. In 1982, the firm adopted a retirement program that included clauses stating retirees would not impair the firm’s client relationships and would integrate clients with other partners. After the phase-down period, Moskovitz, unhappy with the firm, contacted a legal search consultant about moving to another firm with his tax partners, Schiller and Young, indicating Roche would follow. Moskovitz negotiated with LeBoeuf Lamb Leiby & MacCrae, ensuring Roche’s approval before finalizing any arrangement.

    Procedural History

    The law firm sued Moskovitz, Schiller, and Young for fraud, breach of fiduciary duty, breach of contract, and unjust enrichment after they resigned and joined LeBoeuf. The trial court denied the defendants’ motion for summary judgment, except for claims based on guarantees of client retention. The Appellate Division affirmed, granting leave to appeal to the Court of Appeals. Only Moskovitz appealed.

    Issue(s)

    1. Whether a withdrawing partner breaches fiduciary duty by soliciting firm clients before announcing their resignation.
    2. Whether a contractual requirement that an attorney try to “integrate” or “institutionalize” clients into the firm is legally enforceable.
    3. Whether a cause of action for fraud is stated by alleging that a promisor lacked the intention to perform representations when making them.

    Holding

    1. Yes, because pre-resignation surreptitious solicitation exceeds what is necessary to protect client freedom of choice and undermines the duty of loyalty among partners.
    2. Yes, because such provisions do not compromise client freedom of choice or an attorney’s freedom to practice law, but simply obligate partners to use their best efforts to expose clients to other attorneys in the firm.
    3. Yes, because a false statement of intention is sufficient to support an action for fraud, even if it relates to an agreement between the parties.

    Court’s Reasoning

    The Court of Appeals balanced the fiduciary duty partners owe each other with the attorney’s responsibility to clients and client’s freedom to choose counsel. While attorneys can inform clients with whom they have a prior professional relationship about their impending withdrawal and new practice, and remind the client of its freedom to retain counsel of its choice, secretly attempting to lure firm clients to the new association is inconsistent with a partner’s fiduciary duties. The court emphasized that partners must maintain a “punctilio of an honor the most sensitive.” Regarding the breach of contract claim, the court found that the retirement agreement provision did not compromise client freedom. The court also held that a cause of action for fraud may arise when one misrepresents a material fact with no intention of complying with those representations. The court noted, “A false statement of intention is sufficient to support an action for fraud, even where that statement relates to an agreement between the parties.” Because there were material issues of fact the court determined that summary judgment was inappropriate.

  • Sutton v. East River Savings Bank, 55 N.Y.2d 550 (1982): Implied Reasonable Time for Contract Performance

    Sutton v. East River Savings Bank, 55 N.Y.2d 550 (1982)

    When a contract does not specify a time for performance, the law implies a reasonable time, the determination of which depends on the specific facts and circumstances of the case.

    Summary

    Sutton, as limited partners, agreed to a partnership where their interest would terminate on a specific date, with a clause allowing termination upon property disposal if written notice was given. After the property was transferred to a corporation and converted to cooperative apartments, the limited partners accepted profits for 22 months before attempting to terminate the partnership. The New York Court of Appeals held that the 22-month delay in providing notice was unreasonable, barring the limited partners from relief even if the property transfer triggered the termination clause. This case highlights the importance of timely action when a contract lacks specific deadlines.

    Facts

    Plaintiffs’ predecessors sold property with apartment buildings to defendant general partnership, receiving a mortgage in return. When the partnership struggled with payments, the plaintiffs became limited partners with a 20% profit share in exchange for consenting to mortgage refinancing. The partnership agreement stated that if the property was sold or disposed of before January 31, 1985, the partnership could terminate upon written notice by any partner. The agreement did not specify a time frame for providing this notice. In November 1982, the general partnership formed a corporation, transferred the apartment complex to it, and converted the property to cooperative apartments. The general partners then paid off the original mortgage. Approximately 20% of the cooperative shares were sold to individual apartment owners.

    Procedural History

    The plaintiffs, as limited partners, initially did not provide notice to terminate the partnership after the property transfer and cooperative conversion. They accepted their 20% share of profits, including proceeds from the apartment sales, for 22 months. Subsequently, they attempted to give notice of termination, which the general partners rejected. The lower courts ruled in favor of the general partnership, finding the delay in providing notice unreasonable. The case then reached the New York Court of Appeals.

    Issue(s)

    Whether a 22-month delay in providing notice to terminate a partnership, after a triggering event as defined in the partnership agreement, constitutes an unreasonable delay, thereby precluding the right to terminate.

    Holding

    Yes, because the 22-month delay was deemed unreasonable given the circumstances, even if the cooperative conversion triggered the right to terminate under the partnership agreement.

    Court’s Reasoning

    The Court of Appeals affirmed the Appellate Division’s order. The court stated that when a contract doesn’t specify a time for performance, a reasonable time is implied. The court cited Webster’s Red Seal Publs. v Gilberton World-Wide Publs., noting the principle that a reasonable time depends on the facts and circumstances of each case. They also cited Ben Zev v Merman. The court emphasized that the plaintiffs accepted profits for nearly two years after the property transfer before attempting to terminate the partnership. The court agreed with the Appellate Division’s conclusion that the 22-month delay was unreasonable. The court reasoned that, even if the cooperative conversion triggered the right to terminate, the plaintiffs’ unreasonable delay barred them from any relief. The Court’s decision turned on the practical implications of allowing a party to delay exercising a contractual right, especially when that delay prejudices the other party or allows the delaying party to benefit from the status quo before attempting to change it. As the court implied, a party cannot wait an unreasonable amount of time to see how things play out before attempting to enforce a contractual right. The court did not discuss any dissenting or concurring opinions.

  • Hackett v. Milbank, Tweed, Hadley & McCloy, 80 N.Y.2d 870 (1992): Arbitrability of Partnership Disputes

    Hackett v. Milbank, Tweed, Hadley & McCloy, 80 N.Y.2d 870 (1992)

    Broad arbitration clauses in partnership agreements encompass disputes over supplemental payments, and public policy arguments against arbitration are generally addressed after an award is rendered, not preemptively.

    Summary

    This case concerns a dispute over supplemental payments to a withdrawing partner from the Milbank, Tweed, Hadley & McCloy law firm. Hackett, the withdrawing partner, sought arbitration based on the partnership agreement. The firm attempted to stay arbitration, arguing that an award in Hackett’s favor would violate public policy. The Court of Appeals held that the dispute should be resolved by arbitration in the first instance due to the broad arbitration clause in the partnership agreement and existing factual disputes. The court emphasized that public policy concerns are typically addressed after an arbitration award is made.

    Facts

    Hackett withdrew from the Milbank, Tweed, Hadley & McCloy law firm. A dispute arose regarding Hackett’s right to receive supplemental payments upon his withdrawal. The partnership agreement contained a broad arbitration clause. The parties disagreed on which amendment to the partnership agreement applied and whether the supplemental payments were intended to approximate the withdrawing partner’s share of undistributed earned income.

    Procedural History

    Hackett sought to compel arbitration. The law firm petitioned to stay arbitration, arguing that an award of supplemental payments would violate public policy. The Appellate Division’s order, insofar as appealed from, was reversed by the Court of Appeals, and the petition to stay arbitration was denied.

    Issue(s)

    Whether a dispute over supplemental payments to a withdrawing partner from a law firm is subject to arbitration, given a broad arbitration clause in the partnership agreement and the firm’s argument that an award in favor of the withdrawing partner would violate public policy.

    Holding

    No, because of the broad arbitration clause in the parties’ partnership agreement and the existence of factual disputes between the parties, including which amendment of the agreement applies and whether the supplemental payments were intended to constitute an approximation of the withdrawing partner’s share of undistributed earned income. Petitioner’s claim that an arbitrator’s award denying him benefits would be contrary to public policy is insufficient to preemptively stay arbitration and may be addressed subsequently on a motion to vacate or confirm the award, if such an award is in fact made.

    Court’s Reasoning

    The Court of Appeals reasoned that the dispute should initially be decided by an arbitrator, citing the broad arbitration clause in the partnership agreement and the factual disputes between the parties. The court declined to preemptively stay arbitration based on a public policy argument. The Court stated that public policy concerns are better addressed after an arbitration award has been made, during a motion to vacate or confirm the award. The court cited Matter of Port Wash. Union Free School Dist. v Port Wash. Teachers Assn., 45 NY2d 411, 417-418 and Maross Constr. v Central N. Y. Regional Transp. Auth., 66 NY2d 341, 346 to support its position that preemption of arbitration based on public policy is generally disfavored. The court emphasized the importance of respecting the parties’ contractual agreement to arbitrate disputes. The decision underscores the limited circumstances in which courts will interfere with the arbitration process before an award has been rendered. The court implied that only in the most egregious cases should arbitration be stayed preemptively based on public policy grounds. The Court’s approach prioritizes the arbitral process as agreed upon by the parties, reserving judicial intervention for the post-award stage, where the specific contours of the arbitrator’s decision can be assessed against public policy considerations.

  • Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989): Enforceability of Restrictive Covenants in Law Partnership Agreements

    Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989)

    A clause in a law partnership agreement that conditions the payment of departure compensation on a withdrawing partner refraining from practicing law in certain jurisdictions constitutes an unenforceable and impermissible restriction on the practice of law.

    Summary

    The New York Court of Appeals held that a law partnership agreement provision requiring a departing partner to forego departure compensation if they continued to practice law in New York or California violated public policy and Disciplinary Rule 2-108(A) of the Code of Professional Responsibility. The court reasoned that such a provision financially penalizes a lawyer for competing with their former firm, thereby restricting a client’s choice of counsel. This restriction, the court found, impermissibly infringes on the client’s right to freely select an attorney. The court distinguished this provision from agreements concerning retirement benefits, which are permissible under DR 2-108(A).

    Facts

    Plaintiff, a former partner at the law firm Lord, Day & Lord, withdrew from the partnership. The partnership agreement contained a provision (article tenth (B)(d)) stating that departing partners would forfeit departure compensation if they practiced law in New York or California before a specific date. Cohen began practicing with a new firm in New York shortly after leaving Lord, Day & Lord. The firm refused to pay Cohen his departure compensation, citing his violation of the restrictive covenant.

    Procedural History

    Cohen sued Lord, Day & Lord to recover his departure compensation. The trial court granted summary judgment to Cohen, holding that the restrictive covenant was unenforceable as against public policy. The Appellate Division reversed, finding the provision permissible. The New York Court of Appeals reversed the Appellate Division, reinstating the trial court’s decision and holding the restrictive covenant unenforceable.

    Issue(s)

    Whether a provision in a law partnership agreement that conditions the payment of departure compensation on a withdrawing partner refraining from practicing law in certain jurisdictions violates public policy and DR 2-108(A) of the Code of Professional Responsibility.

    Holding

    Yes, because such a provision financially penalizes a lawyer for competing with their former firm, thereby restricting a client’s choice of counsel, which is against public policy.

    Court’s Reasoning

    The Court of Appeals reasoned that the challenged provision in the partnership agreement created a financial disincentive for departing partners to compete with their former firm, thereby restricting the client’s freedom to choose counsel. The court emphasized that “a lawyer’sীব right to practice should not be fettered” and that “clients are not merchandise.” The court found that DR 2-108(A) codified the existing public policy against such restrictions, stating that “[a] lawyer shall not be a party to or participate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement.” The court distinguished this situation from permissible restrictions tied to retirement benefits, as those serve a different purpose and do not directly impede a client’s choice of counsel. The court stated, “The significant and distinguishing factor here is that the financial disincentive to compete with the former firm directly restricts the departing lawyer’s right to practice and, thus, potentially injures the clients by depriving them of the lawyer of their choice.” Dissenting opinions argued that the provision fell within the “retirement benefits” exception of DR 2-108(A) or that it did not violate public policy because it was less restrictive than a complete prohibition on practice. The majority rejected these arguments, emphasizing the potential harm to clients arising from any financial disincentive that restricts a lawyer’s ability to practice.

  • Smithtown Gen. Hosp. v. Simons, 42 N.Y.2d 942 (1977): Fulfillment of Conditions Precedent to Arbitration

    Smithtown General Hospital v. Simons, 42 N.Y.2d 942 (1977)

    Fulfillment of conditions precedent to arbitration is a question for the court, not the arbitrator, to determine at least initially.

    Summary

    This case concerns a dispute over whether certain conditions precedent to arbitration, as outlined in a partnership agreement and a stockholders’ agreement, had been met before initiating arbitration proceedings. The New York Court of Appeals held that the fulfillment of these conditions precedent is a matter for the court to decide, at least in the first instance, not the arbitrator. This decision emphasizes the court’s role in ensuring that parties adhere to the agreed-upon procedures for resolving disputes before resorting to arbitration.

    Facts

    The appellant sought to reverse an order staying two arbitration proceedings she had commenced. One proceeding was against Smithtown General Hospital, a partnership, under a partnership agreement. The other was against Opan Realty Corp., the owner of the hospital property, under a corporate stockholders’ agreement. The stockholders were the same individuals as those who comprised the partnership. The partnership agreement dictated that disputes first be submitted to the partnership for determination, and a decision by 80% or more of the “capital contributions” would be final, barring arbitration. The stockholders’ agreement incorporated these partnership provisions regarding dispute resolution.

    Procedural History

    The appellant initiated arbitration proceedings. The lower court stayed the arbitration. The Appellate Division affirmed the stay. The appellant then appealed to the New York Court of Appeals.

    Issue(s)

    Whether fulfillment of conditions precedent to arbitration, as defined in the partnership and stockholders’ agreements, is a question for the court or the arbitrator to decide.

    Holding

    No, because fulfillment of conditions precedent to arbitration is a question, at least initially, for the court, not the arbitrator, to determine.

    Court’s Reasoning

    The Court of Appeals stated that while a liberal approach is taken when determining what matters are arbitrable, the parties’ established procedure for resolving disputes within the partnership and corporation must be followed before arbitration can be sought. The court cited several cases, including Matter of Raisler Corp. [N. Y. City Housing Auth.], 32 NY2d 274, 282; Matter of Wilaka Constr. Co. [N. Y. City Housing Auth.] 17 NY2d 195, 198-199; and Matter of Exercycle Corp. [Maratta], 9 NY2d 329, 334-335, to support its holding. These cases establish the principle that courts have the initial responsibility to determine whether parties have complied with conditions precedent to arbitration as outlined in their agreements. The court emphasized the importance of upholding the parties’ agreed-upon dispute resolution mechanisms. The court implied that allowing an arbitrator to decide whether such conditions were met would undermine the parties’ contractual intent and potentially force arbitration upon parties who had not yet exhausted the agreed-upon preliminary steps. The court did not explicitly address any dissenting or concurring opinions, as the decision was rendered per curiam, indicating a unanimous agreement among the judges. The ruling reinforces the principle that parties must adhere to the specific procedures they’ve established for dispute resolution before resorting to arbitration, and that courts have a role in ensuring such adherence.