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Newburger, Loeb & Co. v. Gross

decided: November 19, 1979.

NEWBURGER, LOEB & CO., INC., AS ASSIGNEE OF CLAIMS OF DAVID BUCKLEY AND MARY BUCKLEY, PLAINTIFF-APPELLANT-CROSS-APPELLEE,
v.
CHARLES GROSS, CHARLES H. GROSS, EXECUTOR OF THE LAST WILL OF MABEL BLEICH, DECEASED, GROSS & CO., AND JEANNE DONOGHUE, DEFENDANTS-APPELLEES-CROSS-APPELLANTS, NEWBURGER, LOEB & CO., A NEW YORK LIMITED PARTNERSHIP, ANDREW M. NEWBURGER, ROBERT L. NEWBURGER, RICHARD D. STERN, WALTER D. STERN, AND ROBERT L. STERN AS EXECUTORS OF THE ESTATE OF LEO STERN, ROBERT L. STERN, RICHARD D. STERN, JOHN F. SETTEL, HAROLD J. RICHARDS, SANFORD ROGGENBURG, HARRY B. FRANK AND JEROME TARNOFF AS EXECUTORS OF THE ESTATE OF NED D. FRANK, FRED KAYNE, ROBERT MUH, PAUL RISHER, CHARLES SLOANE, ROBERT S. PERSKY, FINLEY, KUMBLE, WAGNER, HEINE, UNDERBERG & GRUTMAN, A PARTNERSHIP (FORMERLY KNOWN AS FINLEY, KUMBLE, UNDERBERG, PERSKY & ROTH AND FINLEY, KUMBLE, HINE, UNDERBERG & GRUTMAN) AND LAWRENCE J. BERKOWITZ, ADDITIONAL DEFENDANTS ON COUNTERCLAIMS-APPELLANTS-CROSS-APPELLEES.



Appeal from a judgment of the United Stats District Court for the Southern District of New York, entered on February 5, 1979 by Richard Owen, Judge, awarding damages for breach of fiduciary duty on remand from this court's affirmance of liability, 563 F.2d 1057 (1977). Affirmed in part, reversed in part, and remanded.

Before Lumbard, Mansfield and Meskill, Circuit Judges.

Author: Lumbard

This appeal presents another chapter in the litigation produced by the transformation of the brokerage house of Newburger, Loeb & Co. ("the partnership") into Newburger, Loeb & Co., Inc. ("the corporation") by the promoters of the new corporation and their counsel (hereafter "appellants")*fn1 over the objections of a former managing partner, Charles Gross, and two limited partners aligned with him, Mabel Bleich and Jeanne Donoghue (hereafter "appellees"). The facts are reported in our opinion in Newburger, Loeb & Co. v. Gross, 563 F.2d 1057 (1977), Cert. denied, 434 U.S. 1035, 98 S. Ct. 769, 54 L. Ed. 2d 782 (1978), in which we affirmed the district court's judgment of appellants' liability on Gross' counterclaims for breach of fiduciary duty and civil conspiracy and held that the appropriate measure of damages was "an accounting, indicating the assets and liability of the Partnership, and the capital interest(s) of" Gross, Bleich and Donoghue. The district court's damage award, however, was remanded for recomputation because the district court had (1) accepted certain proposed adjustments to Newburger, Loeb's 1970 financial statements without providing a record that could be reviewed effectively on appeal and (2) included in its award damages for conversion of certain stock warrants (hereafter "the warrants") owned by Gross but kept by him in his capital account with the firm.*fn2 On remand, Judge Owen made determinations as to each of the proposed adjustments to the 1970 financial statement of the partnership and rejected Gross' argument that he was entitled to recover for conversion of the warrants as part of his recovery for fiduciary breach. He entered judgment for Gross in the sum of $226,780, plus certain interest, and for Bleich and Donoghue in the sum of $76,868.75 each. We affirm all but two of Judge Owen's determinations as to the accounting adjustments and affirm his denial of damages for conversion. As we think that appellees are entitled to recover prejudgment interest on their award, we remand this case once again to the district court for the limited purpose of computing prejudgment interest, and interest upon interest.

In our prior opinion, we held that Gross, Bleich and Donoghue were entitled to an accounting of their capital interests in the firm as of February 11, 1971, the date of appellants' wrongful transfer of the assets of the partnership to the corporation. Appellants argue that any accounting performed by the district court should have been conducted on a "liquidating" basis, because, but for appellants' action in making the transfer, the Newburger, Loeb firm would have been forced into liquidation within a matter of days. Further, they call attention to statements in our previous opinion, in which we spoke of the illegal transfer of February 11, 1971 as effecting a "termination" of the partnership and declared that the appellees had been entitled to a "dissolution" of the partnership at that time. 563 F.2d at 1075. If a "liquidating basis" accounting of the Newburger firm were conducted, appellants contend, it would show the capital interests of the general partners to be (as of February 11, 1971) zero, since at that date the liabilities of the partnership exceeded its assets.

We reject appellants' argument on this point. The partnership continued in business after Gross, Bleich and Donoghue withdrew so that Article IX of the partnership agreement, which provided for liquidation if the partnership should end and if no general partners wished to continue the business, never came into play. Moreover, the whole purpose of appellants' wrongful acts in arranging the transfer of assets was to enable Newburger, Loeb to continue doing business which it did for at least two years after the events in question. A liquidation never occurred.*fn3 Appellants' arguments depend heavily on confusing the concept of "dissolution" with that of a "liquidation" or a "winding up". But New York's Partnership Law, section 60, explicitly prevents such an equivalence: "The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business."*fn4

The argument that the accounting should have been conducted on a "liquidating" basis is the only one raised by appellants that would materially affect the recovery of the limited partners, Bleich and Donoghue. Accordingly, we affirm the district court's award to them of their initial capital investment of $75,000, plus interest to February 11, 1971, as discussed on pp. 432-433 Infra. In addition, Bleich and Donoghue are entitled to prejudgment interest consistent with our discussion of this subject below.

The remainder of appellants' arguments involve the calculation of the capital interest of Charles Gross in the firm as of February 11, 1971 under Article VIII of the partnership agreement which provided that a withdrawing partner should receive the value of his capital account with the firm. To avoid the necessity of an audit each time a general partner withdrew paragraph 8.1(b) provided that the starting point for the calculation of this partnership interest would be the regularly prepared year-end financials. The departing partner's share of gains or losses realized in the year of his withdrawal was then to be pro-rated and applied to his account according to a formula derived from the relation of the firm's gross income for the year to the date of withdrawal compared to the firm's gross income for the year. The parties stipulated that Gross' share under this formula was 14.21892% Of the firm's 1970 gains and losses.

The essence of the dispute is that Gross claims that certain losses and write-offs taken by the firm in its 1970 financials were either taken in bad faith, or incurred after Gross' withdrawal from the firm and so forward-looking in nature that they are not properly attributable to Gross. The partnership articles clearly intended that a withdrawing partner should bear his fair share of any losses for the year of his withdrawal, but could not fairly be read to allow the remaining partners to reduce artificially a departing partner's capital account through the inflation of losses for the year of withdrawal.

Appellees presented an expert accountant at trial, Irving Lauterbach, who proposed fifteen alterations (hereafter called the "Lauterbach adjustments") designed to counter the effects of what Gross contends was unfair manipulation of the financials for 1970. Appellants argue that the district court erred in not hearing new evidence on the various Lauterbach adjustments. But in remanding this case two years ago, we explicitly left to the district court's discretion whether or not to reopen the case for new evidence. Moreover, the accounting adjustments as to which appellants desired to submit new expert testimony had been made known to appellants as early as 1975, in appellees' answers to interrogatories. At trial both sides had the opportunity to present expert witnesses on the accounting issues raised in the counterclaim and both sides did so.*fn5 We conclude that Judge Owen properly exercised his discretion by deciding these matters on the record already made.

Appellants also argue that the district court erred in placing the burden of proof upon them to show good faith as to those write-offs challenged by Gross' expert witness Lauterbach. Appellants argue that they met their burden of proof by showing that the 1970 financials were prepared according to "generally accepted accounting principles." We think the district court's handling of the burden of proof was correct. We base our decision on the compelling circumstances present in this case. The district court, and this court, found that appellants engaged in a civil conspiracy to breach their fiduciary duties to Gross, Bleich and Donoghue. Upon Gross' withdrawal, control of the firm and its financial record-keeping was in the hands of appellants. The firm's auditors, Peat Marwick, prepared the 1970 financials under explicit instructions for the principals of the new corporation, the appellants. On a number of accounting issues, Peat Marwick could come to no conclusion without an authoritative interpretation from appellants as to the meaning of the terms of the partnership agreement. Under these circumstances, after Gross had established through his expert Lauterbach that a particular accounting decision was questionable, it was entirely proper for Judge Owen to place the ultimate burden on the appellants.*fn6

We turn now to the individual Lauterbach adjustments. Most of these involve items charged off as losses by the firm in November and December 1970, the months immediately following Gross' withdrawal, but months in which losses taken by the firm would still be, in part, attributable to Gross because of the pro-rating provisions of Article VIII of the partnership agreement. Some of the adjustments can be dealt with in summary fashion. Item (3) (involving losses on accounts due from a bankrupt firm) and Item (12) (involving Newburger, Loeb's losses in extricating itself from the clearinghouse business) were upheld as appropriate losses by Judge Owen and appellees do not seriously press their cross-appeal on these matters. We affirm. Items 8, 10, 11 and 14 all involved losses as to which appellants presented no testimony at trial or as to which appellants' witness disclaimed any knowledge. Agreeing as we do with Judge Owen's allocation of the burden of proof, we affirm.

Item (1) concerns the treatment of a $411,655*fn7 payment agreed to in 1970 by Newburger, Loeb for release from a long-term lease. Judge Owen found that this release had been negotiated in good faith, but that it failed the second level of the scrutiny he applied to losses challenged by Gross; that is, its nature was so forward-looking that it was not properly attributable to a withdrawing partner. The purpose of the release was to cut ongoing losses the partnership was experiencing on a lease from Atlas Realty Co. Judge Owen pointed out that an alternative way of handling the problem would have been for the partnership to sublet the realty at a loss; such future losses would not have been chargeable to Gross. While the decision to absorb the full amount of the loss in 1970 may have had legitimate business purposes behind it, we agree with Judge Owen that this action was of such a character that the partnership agreement could not fairly be construed to place upon a withdrawing partner the full brunt of such a decision.

Lauterbach adjustment (2) involved a write-off the firm took in 1970 of $152,798 in uncollectible accounts receivable. This write-off was taken in November, 1970, after the firm had already taken $433,042 in write-offs for uncollectibles earlier in the year. Judge Owen apparently thought that $433,042 figure represented the firm's write-offs in previous years.

Normally, faced with such a situation, we would be inclined to remand to the district court for further findings on this point. But this case has now gone on for nearly nine years. Moreover, it must be emphasized that as part of the civil conspiracy for which we are calibrating liability in this appeal it has been found that appellants used the threat of protracted litigation to deprive Gross, Bleich and Donoghue of their legal right to large sums of money for a long period of time. It would be manifestly unjust to allow these proceedings to drag on much longer. Indeed, one of the appellants, Mabel Bleich, failed to survive our ...


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