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Landye Bennett Blumstein, LLP v. Jeffrey S. Mutnick, PC

Court of Appeals of Oregon

April 1, 2015

LANDYE BENNETT BLUMSTEIN, LLP, Plaintiff-Respondent Cross-Appellant,
v.
JEFFREY S. MUTNICK, PC, Defendant-Appellant Cross-Respondent, and Jeffrey S. MUTNICK, Defendant/Cross-Respondent

Argued and Submitted July 8, 2013.

Multnomah County Circuit Court. 071011291. R. William Riggs, Senior Judge.

Robert K. Udziela argued the cause and filed the briefs for appellant-cross-respondent Jeffrey S. Mutnick, PC, and cross-respondent Jeffrey S. Mutnick.

Meagan A. Flynn argued the cause for respondent-cross-appellant. With her on the brief were Preston, Bunnell & Flynn, LLP, and Kim T. Buckley and Esler Stephens & Buckley.

Before Duncan, Presiding Judge, and Haselton, Chief Judge, and Schuman, Senior Judge.[*]

OPINION

Page 1266

[270 Or.App. 160] DUNCAN, P. J.

This is an appeal from a judgment for plaintiff Landye Bennett Blumstein (LBB), a law partnership, in an action against its former partner, defendant Jeffrey S. Mutnick, PC (Mutnick PC) and Mutnick PC's principal, Jeffrey Mutnick.[1] The dispute arose in the context of Mutnick PC's withdrawal from the firm and the parties' inability to agree on the compensation owed to Mutnick PC upon its withdrawal and a division of attorney fees and costs on Mutnick PC's cases. LBB sought a declaration that, under the parties' partnership agreement, Mutnick PC's cases completed or in progress on the date of Mutnick PC's withdrawal from the firm were firm assets and subject to a lien for attorney fees earned and costs advanced under ORS 87.445.[2] LBB also requested an accounting and foreclosure of its lien. And, LBB alleged that defendants had breached the partnership agreement and their fiduciary duty to the firm, and LBB sought to have them enjoined from further breaches.

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Defendants answered LBB's amended complaint with affirmative defenses and counterclaimed for enforcement of partnership rights, wrongful interference with economic relations, and breach of partnership agreement. Defendants' counterclaim for breach of partnership agreement was based on LBB's failure to pay Mutnick PC a bonus from LBB's " bonus pool" after Mutnick PC's withdrawal from the firm. Defendants sought a judicial determination of a purchase price for Mutnick PC's interest in the partnership, and a bonus as part of Mutnick PC's compensation upon its withdrawal from the firm.

The case was tried to the court,[3] which granted LBB's claims against Mutnick PC for declaratory judgment, [270 Or.App. 161] an accounting, and injunctive relief, but denied its other claims. The court determined that significant portions of fees collected on Mutnick PC cases, for work before Mutnick PC's withdrawal from the firm, belonged to the partnership, and the court allocated those fees accordingly. The court rejected defendants' counterclaims but nonetheless determined that Mutnick PC was entitled to a bonus upon its withdrawal from the firm. Based on the court's allocation of fees on Mutnick PC's cases, offset by the amount the court determined that LBB owed to Mutnick PC as compensation upon its withdrawal from the firm, the court awarded LBB a judgment of $734,298.98. The judgment is stayed pending appeal.

On appeal, Mutnick PC raises three assignments of error,[4] and LBB raises five assignments of error on cross-appeal. We conclude that the trial court erred in two respects in its determination of the compensation owed to Mutnick PC upon its withdrawal from the firm but otherwise affirm.

I. BACKGROUND

We summarize the background of the case consistently with the trial court's extensive findings, which are supported by evidence in the record. Sutherlin School Dist. # 130 v. Herrera, 120 Or.App. 86, 91, 851 P.2d 1171 (1993). Jeffrey Mutnick has practiced law since 1972. While working as a civil trial attorney with the law firm of Pozzi, Wilson & Atchison, he developed a practice in personal injury asbestos litigation. In 1998, Mutnick left the Pozzi firm and entered into a nonequity partnership with LBB. As a nonequity partner, Mutnick had no obligation to contribute capital and had no ownership interest in the firm, but he shared in the firm's profits on a limited basis.

[270 Or.App. 162] When Mutnick joined LBB as a nonequity partner, he brought with him approximately 200 clients, many of whom had personal injury claims and almost all of whom were being represented by Mutnick on a contingency-fee basis. The nonequity partnership agreement provided that, if Mutnick were to leave the firm after becoming an equity partner, he would retain an interest in any contingent-fee matters he retained after his departure.

In January 2000, Mutnick PC became an equity partner in LBB, and the parties entered into an equity partnership agreement. Pursuant to that agreement--interpretation of which is at issue in this case--Mutnick PC transferred to LBB all of its interest in ongoing cases, including work in process on contingent fee cases and referral fees on cases referred to outside attorneys; in exchange, Mutnick PC received 10 partnership " points" (each point then having a value of $8,550). A " point" is a unit of ownership of LBB.[5] Points are used to determine the

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amount of capital each equity partner must contribute to the firm per point (point capital)[6] and the division of profits and losses among equity partners per point (point income).[7] The value of a point is determined by dividing the total value of the firm by the total number of points held by the equity partners.

The partnership agreement sets forth the annual distributions to equity partners. Specifically, Section 3 of [270 Or.App. 163] the partnership agreement provides that equity partners " shall receive an annual guaranteed payment paid in equal semi-monthly installments" ; bonuses, as determined by a majority vote of the equity partners, " to adjust guaranteed payments retroactively to compensate extraordinary performance of an Equity Partner relative to such Equity Partner's guaranteed payment" ; and a share of profits or losses for the year, based on the partner's ownership interest in the firm.[8]

[270 Or.App. 164] Another section of the partnership agreement, Section 9.03,[9] sets forth the distributions

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to an equity partner upon withdrawal from the firm: Section 9.03(a) provides that a voluntarily withdrawn equity partner " shall be entitled to receive" the partner's guaranteed payments, to the effective date of withdrawal and the partner's " point capital," less any partnership losses, to be paid within 30 days of withdrawal. In addition, Section 9.03(b) provides that a partner who voluntarily withdraws and does not engage in the practice of law shall also receive the partner's share of profits and losses, determined at year end, prorated to the effective date of withdrawal and payment for the partner's " ownership points," payable in 36 monthly installments.[10] The partnership agreement does not explicitly provide for the payment of a bonus to a withdrawing partner.

The trial court found that Mutnick PC voluntarily left the firm on July 31, 2007. Thereafter, the court found, LBB paid Mutnick PC its guaranteed payment up to the [270 Or.App. 165] effective date of withdrawal. And, within 30 days of withdrawal, LBB also paid Mutnick PC $112,000 for its point capital. Additionally, LBB paid Mutnick PC $71,670.40, as the value of its share of profits for 2007, prorated to its withdrawal date. Mutnick PC owned 15 ownership points at the time of its withdrawal from the firm (with an estimated value of $14,000 per point), and LBB began making payments for the purchase of those points, for a total purchase price of $210,000. Thus, despite Mutnick PC's continued practice of law, LBB paid to Mutnick PC the amounts described in Section 9.03(b) of the partnership agreement, otherwise subject to the noncompetition clause.

In the first seven months of 2007, Mutnick PC had outperformed the other partners' year-long production. At the end of 2007, LBB's equity partners awarded themselves payments from the bonus pool, but they did not compensate Mutnick PC from the bonus pool.

Until Mutnick PC withdrew from the firm in July 2007, no partner who had withdrawn from LBB had continued in the private practice of law. The partnership agreement did not provide for the transfer of files or the allocation of fees with a partner who continued in private practice, and the parties disputed the method for transferring files and trust funds to Mutnick PC on cases that Mutnick PC or Mutnick had originated. LBB wanted to protect its possessory lien over files for LBB clients that had originated with Mutnick PC or that Mutnick PC desired to take with it. It offered to " loan" the files to Mutnick PC so that Mutnick could continue working on pending cases, but Mutnick refused, insisting that LBB relinquish whatever lien rights it had in the files. After LBB initiated this action in October 2007, Mutnick agreed to protect LBB's lien right, and LBB then began to transfer client files and trust funds to Mutnick PC.

Thereafter, LBB turned over client files and transferred to Mutnick PC the full amount of funds in LBB's client trust accounts relating to the Mutnick PC-originated

Page 1270

files, without holding back fees and costs that were owed to LBB. Subsequently, Mutnick PC received recoveries on account of some of the Mutnick PC cases after LBB had [270 Or.App. 166] transferred the files, but delivered to LBB only a portion of LBB's costs advanced and none of the attorney fees owed to LBB.

LBB filed the present action. As mentioned, LBB sought a declaration that, under the parties' partnership agreement, Mutnick PC's cases completed or in progress on the date of Mutnick PC's withdrawal from the firm were firm assets and subject to a lien for attorney fees and costs advanced. LBB also sought an accounting and foreclosure of its lien. And, it alleged that defendants had breached the partnership agreement and their fiduciary duty to LBB, and LBB sought to enjoin them from further breaches. In response, defendants filed an answer and counterclaimed for enforcement of partnership rights, wrongful interference with economic relations, and breach of partnership agreement. Defendants requested that the court decide an allocation of fees between LBB and Mutnick PC under the Partnership Act, ORS chapter 67.

The parties' claims and counterclaims were tried in two phases. After the first phase, the court determined the validity and meaning of the partnership agreement in a manner that was largely consistent with LBB's interpretation. The court concluded that, under the terms of the partnership agreement, " [p]artnership records and files, including client files, and all work in process and accounts receivable for cases completed or in progress on Mutnick PC's date of withdrawal, are assets of the firm." The court further concluded that the noncompetition clause (Section 9.03(b)) was unenforceable and severable, and that the agreement was enforceable as modified. The court concluded that LBB had " fully performed all of its obligations to [defendants] that have become due to date under the termination provisions of the Partnership Agreement," and that LBB had not " breached its fiduciary and contractual duties to [defendants]." [11]

[270 Or.App. 167] Following the second phase of trial, the court issued a letter opinion in which it found that the parties had not been well suited as partners and that Mutnick PC's withdrawal from the firm could have been handled more efficiently.[12] However, the court rejected LBB's breach of fiduciary duty claims and defendants' counterclaims for breach of fiduciary duty and interference with economic relations. The court's letter opinion focused on a determination of the amounts the parties owed to each other.

The court first addressed the payments owed by LBB to Mutnick PC upon its withdrawal from the firm. The court reasoned that LBB's income for 2007 included considerable fees ($924,463.38) generated by Mutnick PC's cases, based on work performed before Mutnick PC's withdrawal from the firm.[13] The court attributed $462,213.69 of

Page 1271

that amount to the bonus pool for 2007. The court reasoned that, although the partnership agreement did not explicitly provide that a withdrawing partner was entitled to a share of the bonus pool, it did not prohibit such a payment. The court concluded that, in light of the implied duty of good faith and fair dealing, Mutnick PC was entitled to $229,483.99 from the bonus pool for 2007, an amount comparable to the [270 Or.App. 168] bonus that had been paid to LBB's highest earning equity partner.[14]

But, the court reasoned, because the value of Mutnick PC's points (and, therefore, the buyout payment) depended in part on the as-yet-uncollected fees on the Mutnick PC cases that the court had allocated to LBB and assigned to the bonus pool or that the court had allocated to [270 Or.App. 169] Mutnick PC, the payments to Mutnick PC for LBB's buyout of Mutnick PC's points pursuant to Section 9.03(b)(ii) of the partnership agreement would be duplicative. The court concluded, therefore, that the buyout payments should cease and that Mutnick PC should repay to LBB the amount that LBB had already paid ($64,166.63) for the purchase of Mutnick PC's points pursuant to Section 9.03(b)(ii).[15]

As noted, the court found that Mutnick PC's client files were assets of the firm, as were all fees generated before Mutnick PC's withdrawal.[16] But it also found that LBB

Page 1272

" had no intent or desire to interfere with Mutnick taking all cases he had originated and worked on." The court then systematically addressed the allocation to the parties of fees and costs on the client files that had originated by Mutnick or Mutnick PC, and that were at various stages of recovery at the time of Mutnick PC's withdrawal from the firm. After estimating the fees allocated to LBB to be $924,463.38, and taking into account Mutnick PC's entitled payments under the partnership agreement, the court concluded that LBB was entitled to a net award in the amount of $734,298.98.

II. ANALYSIS

A. Points

In its first assignment of error, Mutnick PC argues that the court erred in failing to award Mutnick PC the [270 Or.App. 170] value of its points and in requiring Mutnick PC to repay $64,166.63 to LBB. Mutnick PC contends that, without its noncompetition clause (which the court struck from the contract), Section 9.03(b)(ii) of the partnership agreement unambiguously required LBB to pay Mutnick PC the value of its points in 36 monthly installments, as LBB had begun to do. In Mutnick PC's view, the court erred as a matter of law when it determined that Mutnick PC should not receive payment for the buyout of his points. Mutnick PC is correct.

The partnership agreement, as modified by the partnership, governs the payments owed by LBB to Mutnick PC upon its withdrawal from the firm. See ORS 67.042 (providing that " relations among the partners and between the partners and the partnership are governed by the partnership agreement" ). No party challenges the trial court's determination that the noncompetition clause was unenforceable and could be severed from the agreement and that the agreement is otherwise enforceable. Without the noncompetition clause, Section 9.03(b)(ii) unambiguously required that a withdrawing partner be paid for the partner's points under Section 9.03(a)(ii).[17]

[270 Or.App. 171] As explained above, the trial court initially concluded that, under the partnership agreement, LBB was required to pay Mutnick PC for the value of its points but, after awarding Mutnick PC a portion of the bonus pool, the court declined to award Mutnick PC the value of its points, reasoning that a buyout of Mutnick PC's points would duplicate other aspects of the award to Mutnick PC.

We review a court's construction of a contract, such as the partnership agreement, for errors of law. Yogman v. Parrott, 325 Or. 358, 361, 937 P.2d 1019 (1997). When interpreting a contract, we begin by examining the text in the context of the document as a whole. If the provision is clear, the analysis ends there. Id. If the provision is ambiguous, we look to extrinsic

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evidence of the contracting parties' intent. Id. at 363. If the provision is still ambiguous, we employ appropriate maxims of construction. Id. at 364.

The trial court's initial conclusion regarding the partnership's requirement for the buyout of Mutnick PC's points was correct, based on the clear text of Section 9.03(b)(ii), which provides, in pertinent part, that voluntarily withdrawn equity partners " shall be entitled to receive" " [p]ayment for such Partner's Points." As Mutnick PC correctly notes, that payment is for the purchase of a partner's ownership interest in the firm; it is distinct from other distributions, including guaranteed payments. Furthermore, as Mutnick PC also correctly notes, nothing in the agreement authorizes an alternative payment (such as a bonus, which Mutnick PC contends is income for tax purposes) in lieu of a payment for the partner's points (which Mutnick PC contends is a capital gain for tax purposes). The trial court therefore erred when it failed to award Mutnick PC payment for the purchase of its points. Mutnick PC was entitled to be paid $210,000 for the purchase of its points.

B. Bonus Pool

In light of our conclusion that the trial court erred in not awarding Mutnick PC payment for its points pursuant to Section 9.03(b)(ii) of the partnership agreement, we next address LBB's contingent assignment of error on [270 Or.App. 172] cross-appeal (asserted only in the event that we modify the judgment), contending that the trial court erred in awarding Mutnick PC a portion of the bonus pool.

As we have previously noted, the partnership agreement governs the relationship among the partners. It explicitly sets forth the payments to which a withdrawing partner is entitled and does not mention payment from the bonus pool. The trial court recognized that, but nonetheless concluded that Mutnick PC was entitled to payment from the bonus pool in light of the obligation of good faith and fair dealing, based on Mutnick PC's high earnings in 2007, the partnership's past practice of awarding bonuses to the highest earning partners at year end, and the bonus that it had in fact awarded to the other partners at year end. LBB contends that the trial court's reasoning was flawed, because the partnership agreement makes no provision for the award of a bonus to a withdrawing partner, and the doctrine of good faith and fair dealing cannot be applied to impose an obligation contrary to the terms of the partnership agreement. See U. S. National Bank v. Boge, 311 Or. 550, 567, 814 P.2d 1082 (1991) (" The obligation of good faith does not vary the substantive terms of the bargain ***." ).

Although the partnership agreement does not explicitly require payment from the bonus pool to a withdrawing partner, Mutnick PC argues that payment of a bonus would not be inconsistent with the express terms of the agreement. In fact, it contends that the partnership agreement is plausibly subject to an interpretation that, despite the lack of an explicit provision, a payment from the bonus pool was required. Mutnick PC points out that, although Section 9.03 of the partnership agreement does not explicitly list bonuses among the distributions to a withdrawing partner, it does expressly state that a withdrawing partner is entitled to his or her " guaranteed payment," and that Section 3.02 states that the bonus pool is established " to adjust guaranteed payments retroactively to compensate extraordinary performance of an Equity Partner relative to such Equity Partner's guaranteed payment." Additionally, Mutnick PC points out that Section 3.02 provides that the bonus " shall" be paid. Based on that text, Mutnick PC contends that the [270 Or.App. 173] partnership agreement is plausibly subject to the interpretation that a withdrawn partner is entitled to a bonus to compensate for extraordinary performance.

For two reasons, we agree with LBB that the partnership agreement is not plausibly susceptible to the interpretation that a withdrawn partner is entitled to receive a performance bonus. First, Section 3 of the partnership agreement describes the compensation to be paid to equity partners: a guaranteed annual payment, a payment from the bonus pool (at the discretion of the equity partners), and a share of the profits and losses. With regard to bonuses, Section 3.02

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provides that " Bonuses shall be paid to partners as determined by Majority Vote of Equity Partners following a recommendation of the Management Committee after reviewing each Partner's performance during the preceding year." [18] A separate section of the partnership agreement, Section 9.03, lists the payments to which a withdrawing partner is entitled. It includes two of the three types of compensation paid to equity partners pursuant to Section 3 (guaranteed payments; shares in profits and losses), but makes no mention of a bonus. The exclusion of a bonus from the list of compensation described in Section 9.03 is a strong indication of an intention not to award a bonus to a withdrawing partner.

Second, bonuses paid under Section 3.02 are to be paid " as determined by Majority Vote of Equity Partners following a recommendation of the Management Committee." The necessary implication is that under the partnership agreement, the payment of a bonus is discretionary with the equity partners. Thus, even if it is construed to permit the award of a bonus to a withdrawn partner, there is no basis for concluding that the partnership agreement requires that equity partners award such a bonus.

Given the omission of a bonus from the types of compensation paid to withdrawn partners under Section 9 [270 Or.App. 174] and the discretionary nature of the bonus, we conclude that the partnership agreement cannot plausibly be construed to require payment of a bonus to a withdrawn partner for performance during the preceding year.

The trial court concluded that Mutnick PC was entitled to a bonus in light of the doctrine of good faith and fair dealing. " The purpose of the good faith doctrine is to prohibit improper behavior in the performance and enforcement of contracts." Best v. U.S. National Bank, 303 Or. 557, 562, 739 P.2d 554 (1987). In applying the doctrine, Oregon courts seek " to effectuate the reasonable contractual expectations of the parties." Id. at 563. It is the parties' objectively reasonable contractual expectations that are relevant to the parties' duty of good faith and fair dealing. Best, 303 Or. at 563. The terms of the contract inform what would have been objectively reasonable for the parties to expect in a particular set of circumstances. Uptown Heights Associates v. Seafirst Corp., 320 Or. 638, 647-48, 891 P.2d 639 (1995). As noted, the obligation of good faith does not vary the substantive terms of the bargain. Boge, 311 Or. at 567; Safeco Ins. Co. v. Masood, 264 Or.App. 173, 178, 330 P.3d 61 (2014) (implied duty of good faith and fair dealing cannot be construed so as to change or insert terms into a contract). Having concluded that the partnership agreement cannot be construed to require an award of a bonus to a withdrawn partner, we conclude, further, that the trial court erred in applying the doctrine of good faith and fair dealing to require LBB to award Mutnick PC a portion of the bonus pool.

C. Other Issues

In its second assignment of error, Mutnick PC contends that, under the terms of the partnership agreement, Mutnick PC's overall compensation for 2007 was too low, relative to Mutnick PC's " 80/20" production. In its third assignment of error, Mutnick PC contends that the trial court erred in its allocation of fees between the parties. In its third assignment of error on cross-appeal, LBB argues that the court erred with respect to its allocation of fees as to one client file. In its fourth and fifth assignments of error on cross-appeal, LBB asserts that the trial court erred in failing to conclude that Mutnick had breached his fiduciary [270 Or.App. 175] duty of loyalty to LBB. We have considered and reject each of those contentions without further discussion.

III. CONCLUSION

With respect to defendants' first assignment of error, we conclude that the trial court erred in failing to award Mutnick PC the value of its points, because the partnership

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agreement unambiguously requires LBB to pay Mutnick PC the value of those points. With respect to LBB's first and second assignments of error on cross-appeal, we conclude that the court erred in relying on the doctrine of good faith and fair dealing to award Mutnick PC a portion of the bonus pool payment. The remaining assignments of error on appeal and cross-appeal are rejected without further discussion.

On appeal, remanded for modification of judgment to award Jeffrey S. Mutnick, PC, payment for buyout of points pursuant to Section 9.03(b) of the partnership agreement; on cross-appeal, award of $229,483.99 to Jeffrey S. Mutnick, PC, from the bonus pool reversed; otherwise affirmed.


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