Dawson v. White & Case, 88 N.Y.2d 666 (1996)

Partnership agreements govern the distribution of assets upon dissolution, and if the agreement explicitly states that goodwill is not to be considered an asset, or if such an understanding can be implied from the partners’ conduct, then goodwill is not a distributable asset.

Summary

This case concerns the dissolution of the White & Case law firm and the subsequent accounting of partner Evan Dawson’s interest. The key issues are whether the firm possessed distributable goodwill and whether its unfunded pension plan constituted a liability. The Court of Appeals held that, based on the specific facts and the partnership agreement, goodwill was not a distributable asset because the partners had agreed it was of no value. The court also found that the unfunded pension plan was not a liability of the dissolved firm, but rather an operating expense of the successor firm contingent upon profitability. This decision emphasizes the importance of partnership agreements in determining asset distribution upon dissolution.

Facts

Evan Dawson was a partner at White & Case. The firm negotiated to have him withdraw, and when negotiations failed, the firm dissolved and re-formed without him. Dawson sued, seeking an accounting of his partnership interest. A Special Referee included goodwill as an asset and excluded the unfunded pension plan as a liability. The Supreme Court confirmed the report, and the Appellate Division affirmed.

Procedural History

Dawson initially sued alleging wrongful termination and other claims. The Supreme Court ordered an accounting. The Special Referee’s report valued assets, including goodwill, and excluded the pension plan as a liability. The Supreme Court confirmed. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

Issue(s)

1. Whether the law firm of White & Case possessed distributable goodwill that should be included as an asset in the partnership accounting.

2. Whether the law firm’s unfunded pension plan should be considered a liability of the firm for accounting purposes.

Holding

1. No, because the partnership agreement and the conduct of the partners indicated an intent that goodwill not be considered a distributable asset.

2. No, because the pension payments were contingent operating expenses of the successor firm, not a liability of the dissolved firm.

Court’s Reasoning

Regarding goodwill, the Court relied on Partnership Law § 71(a)(I), which makes the distribution of assets “subject to any agreement to the contrary.” The Court emphasized that partners are free to exclude items from partnership property by agreement. The Court cited Matter of Brown, 242 N.Y. 1 (1926), and Siddall v. Keating, 8 A.D.2d 44 (1959), noting that a tacit understanding or course of dealing can indicate an agreement not to account for goodwill. Here, the White & Case partnership agreement explicitly stated that “no consideration has been or is to be paid for the Firm name or any good will of the partnership, as such items are deemed to be of no value.” The court rejected Dawson’s attempts to argue that these provisions were inapplicable. The court acknowledged evolving views on law firm goodwill, noting that “the ethical constraints against the sale of a law practice’s goodwill by a practicing attorney no longer warrant a blanket prohibition against the valuation of law firm goodwill when those ethical concerns are absent.”

Regarding the pension plan, the Court deferred to the Appellate Division’s reasoning that the payments were operating expenses contingent on the successor firm’s profitability, not a liability of the dissolved firm. The firm had also never included the unfunded pension plan as a liability in its financial statements. The partnership agreement also specified that pension payments could only be made out of profits and could not exceed 15% of profits.