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Chioffi v. Martin

Court of Appeals of Connecticut

April 17, 2018

MARK P. CHIOFFI
v.
CHRISTOPHER G. MARTIN ET AL.

          Argued October 12, 2017

         Procedural History

         Action to recover damages for, inter alia the named defendant's alleged breach of contract, and for other relief, brought to the Superior Court in the judicial district of Stamford-Norwalk, where the named defendant filed a counterclaim; thereafter, the matter was transferred to the Complex Litigation Docket and tried to the court, Genuario, J.; judgment for the plaintiff on the complaint in part and on the counterclaim; subsequently, the court granted the plaintiff's motions for reargument and attorney's fees, and amended its judgment; thereafter, the court denied the named defendant's motion for reargument, and the named defendant appealed and the plaintiff cross appealed to this court; subsequently, the court, Genuario, J., issued an articulation of its decision. Reversed in part; further proceedings.

          William H. Champlin III, with whom, on the brief, was Mark S. Gregory, for the appellant-appellee (named defendant).

          Timothy G. Ronan, with whom, on the brief, was Assaf Z. Ben-Atar, for the appellee-appellant (plaintiff).

          Lavine, Elgo and Beach, Js.

          OPINION

          BEACH, J.

         This action arises out of the dissolution of a registered limited liability partnership. The defendant Christopher G. Martin[1] appeals, following a trial to the court, from the judgment rendered in favor of the plaintiff, Mark P. Chioffi, on the count of the plaintiff's complaint which alleged breach of contract. The trial court awarded Chioffi $34, 120 in compensatory damages, $103, 000 in attorney's fees, and $6226.73 in costs. The defendant claims on appeal that the court erred in (1) finding a breach of § 3.02 of the parties' partnership agreement; (2) finding a breach of § 4.03 of the partnership agreement; (3) ordering the defendant to pay damages directly to the plaintiff rather than ordering a reduction in the defendant's capital account in the partnership; and (4) awarding attorney's fees to the plaintiff. The plaintiff cross appealed, claiming that the court (1) erred in not finding a breach of fiduciary duty, as alleged in count one of his complaint; (2) erred in its calculation of damages; and (3) abused its discretion in holding that the plaintiff waived his claim for an accounting. We agree with the defendant's second and fourth claims and the plaintiff's first claim. Accordingly, we reverse in part the judgment of the court and remand the case for a hearing on attorney's fees. We otherwise affirm the court's judgment.

         The parties, partners in Martin Chioffi LLP, a law firm, entered into a partnership agreement in 2012; the agreement by its terms was to be effective retroactively to January 1, 2010. The agreement comprehensively described and prescribed the operations of the partnership; a copy of the partnership agreement was an exhibit before the court.

         The agreement contemplated that revenue was to be allocated between three capital accounts: the corporate account, for which Martin was responsible; the trusts and estates account, for which Chioffi was responsible; and the ‘‘remaining'' account, into which all other revenues were allocated. See § 3.01 (c). The balance of each account was to be adjusted periodically by adding to it the appropriately allocated share of partnership revenue, and subtracting from it the allocable share of expenses and distributions to partners. See § 2.02.

         The process used to determine the ‘‘calculation and allocation of net profits and losses'' was set forth in article III of the agreement. As previously mentioned, there were three capital accounts corresponding to the three departments: corporate, trusts and estates, and everything else. Section 3.02 (b). Revenues were initially allocated to the appropriate account. Section 3.02 (c). Expenses were also allocated among the three departments. ‘‘Direct expenses'' of each department were to be allocated accordingly; ‘‘indirect expenses, '' such as rent, utilities, and costs of administrative personnel, were allocated among the departments ‘‘in proportion to the number of billing professionals'' in each department. Section 3.01 (d) (ii). The net profits or losses for each department were determined by subtracting the direct and indirect expenses attributed to each department from the revenue so attributed. The net profits for the corporate account were then allocated to Martin's capital account, those of the trusts and estates department to Chioffi's capital account, and net profits for the ‘‘remaining, '' or other, department were divided between Martin's capital account and Chioffi's capital account in proportion to the ownership percentage of each partner. Section 3.01 (e) and (f). Martin's ownership interest was 57 percent and Chioffi's 43 was percent. Schedule 1 of the partnership agreement.

         The allocation process did not in itself cause the actual, physical transfer of funds; rather, the process simply sorted revenues and expenses into separate capital accounts. Distribution of funds to partners was governed by § 3.02 of the agreement: ‘‘Distributions shall be made monthly and at such other times as the partners agree such that, following any such distribution, the capital account balances of the partners shall be directly proportionate to the ownership percentages of such partners. Monthly distributions for determining net income shall include cash paid to each partner, 401 (k) contributions, all related expense for business, automobile, and certain entertainment for certain clients not considered joint as it relates to the firm consistent with past practices of the partnership.''

         The management of the partnership was consistent with the allocation of revenues. Martin was the managing partner. Section 4.01. Article IV, entitled ‘‘Management; Restrictions, '' indicated that the partnership was to be ‘‘managed and the conduct of its business . . . controlled (except as otherwise specifically provided herein) by the partners'' such that ‘‘any decisions pertaining to the provision of corporate services [were to] be made by Martin in his sole discretion, '' and Chioffi enjoyed identical authority as to the trusts and estates department. Section 4.02. Other decisions were to be made by mutual consent.

         Article IV also listed, in § 4.03, seven specific actions which a partner was prohibited from performing except with the consent of the other partner. These ‘‘restrictions'' included, in part, compromising partnership claims, committing the partnership to financial obligations, and selling or assigning an interest in the partnership. Any losses or expenses, including attorney's fees, arising from such transgressions were to be ‘‘allocated exclusively to such partner's capital account.'' Section 4.03.

         Further sections governed a partner's withdrawal from the partnership and its dissolution. Section 7.01 provided that a partner could withdraw at any time, provided that the withdrawing partner was to give at least ninety days notice before the effective date of the withdrawal. Section 7.02 provided that upon the withdrawal of a partner, ‘‘the partners shall dissolve and liquidate the partnership pursuant to [article VIII].''

         Article VIII, in turn, set forth the procedures for dissolution and liquidation. The partners were to ‘‘work together in good faith'' to ‘‘immediately'' wind up the affairs and to ‘‘minimize to the greatest extent possible the costs incurred'' by the partnership or any partner. Section 8.01. The costs which were incurred were to be ‘‘allocated and apportioned to the partners in accordance with the departmental profit calculation.''[2] Id.

         Section 8.02 provided for liquidation. If the partnership were dissolved, the partners were to be the ‘‘liquidating trustees'' and were to take appropriate actions, including making ‘‘final distributions'' pursuant to § 8.03 and the Connecticut Uniform Partnership Act (act), General Statutes § 34-300 et seq. The costs of dissolution and liquidation were to be expenses of the partnership, and were ‘‘to be allocated and apportioned between Martin and Chioffi in accordance with their ownership percentages . . . .'' Section 8.02. The partners were to continue to operate the affairs of the partnership ‘‘until final distributions have been made . . . .'' Section 8.02.

         According to § 8.03, the assets of the partnership, ‘‘net of partnership liabilities, '' were to be distributed ‘‘upon liquidation . . . .'' The net assets to be distributed at that time included ‘‘all accounts receivable, works in progress and contingent fees with respect to any partner [which were to] be allocated in accordance with the departmental profit calculation, ''[3] and any ‘‘special allocations'' were to be determined in accordance with the respective ownership percentages of the partners, unless otherwise agreed by the parties. Any other assets were also to be distributed in accordance with the ownership percentages. Id.

         The following facts, as found by the trial court, and procedural history are relevant to our resolution of the claims on appeal. As the court stated in its memorandum of decision: ‘‘This action arises out of the dissolution of a limited liability partnership formed for the practice of law. The dissolution was occasioned by the voluntary withdrawal from the partnership of the defendant Martin, who owned a 57 percent interest in the partnership. The plaintiff was the only other [equity] partner. He owned a 43 percent interest. . . .

         ‘‘This dissolution did not occur under the best of circumstances. Besides . . . deficient communication between the partners and . . . different points of view, the dissolution was plagued by two particularly troublesome and substantial issues. The first dealt with the lease, to which the partnership was a party, and the second dealt with the disproportionate balances reflected in the partners' capital accounts.'' (Footnotes omitted.)

         In its memorandum of decision, the court described the partnership's lease and its ramifications for the dissolution as follows: ‘‘In June, 2012, the partnership entered into a lease that did not expire until December 31, 2017. The base monthly rent of the lease was $24, 916.67. Both parties described the lease as both a liability and an asset. The lease required substantial payments and was a substantial liability to the partnership. The rent payable was viewed by the parties to be below fair market value and therefore was considered a significant asset. Moreover, the partnership as a tenant had various subtenants whose rent covered $11, 961.67 of this partnership's monthly rental obligation. Because each party intended to form [his] own firm upon dissolution of the partnership, each partner initially had a desire to remain in the premises or, at least, in a portion of the premises. The plaintiff and the defendant, however, could not reach an agreement as to an allocation of the space contained in the premises. Notably, neither partner personally guaranteed or signed the lease in [his] individual capacity, and the only obligor under the lease was the limited liability partnership. Both the plaintiff's new firm . . . and the defendant's new firm . . . continued to occupy the space subsequent to the dissolution of the partnership on November 15, 2013, until such time as the defendant's new firm vacated the premises in June, 2014. From November 15, 2013, the parties practiced law and operated their new firms independently of one another, communicating only when necessary regarding their shared space and the winding up process. The defendant's new firm did not pay any rent for its occupancy of this space to the partnership or the lessor during the period between dissolution of the partnership and its vacating of the premises in June or, for that matter, thereafter. During the postdissolution period, the plaintiff contributed $12, 600 to assist the partnership in meeting its rental obligations. The rent that was due the lessor was fully paid by September 1, 2014, by virtue of certain assets of the partnership (cash remaining in the partnership accounts, accounts receivable of the remaining departments, rent from the subtenants, the plaintiff's contribution as indicated and finally by allocation of $35, 000 of the partnership's $74, 750 security deposit). Both [the] plaintiff and the defendant individually entered into discussions with the lessor concerning a new lease or leases, but no agreement was reached until after the defendant's firm had vacated the premises. In August, 2014, the plaintiff's new firm and the lessor entered into a new lease, effective September 1, for the same space previously occupied by the partnership and at the same rental price. The agreement between the plaintiff's new firm and the lessor also eliminated liability of the partnership for the balance of the partnership's leasehold obligations and allowed the plaintiff's new firm to continue to receive the benefit of the rents payable by the subtenants. The partnership's security deposit of $74, 750 was allocated as follows: $35, 000 for the payment of the partnership rental obligations up and through August 31, 2014, and $39, 750 as a portion of the plaintiff's new firm's security deposit.''

         The court found the following facts regarding the state of the capital accounts and the liquidation of the partnership: ‘‘[Although] all three departments of the partnership were financially healthy, the corporate department generated far more net income and, because it had more billing professionals, was responsible for a larger share of the indirect costs of the partnership. During the last two years of the partnership's existence, the defendant took distributions from his capital account [in] excess of the net income that was allocable to his capital account on a cash basis. In other words, he took more money than he made during that time period and, in fact, on the date he gave notice of his intent to withdraw, his capital account was negative in excess of $150, 000. This excessive distribution was, at least in part, financed by increases in the partnership credit line and increases in draws against that credit line. These excessive distributions were done with the knowledge and consent of the plaintiff, as was the activity regarding the partnership credit line. The defendant's rationale for taking these distributions, as expressed to the plaintiff, was based upon the fact that the corporate department had very substantial accounts receivable that eventually would more than offset the distributions he was taking. In fact, the corporate department did have substantial accounts receivable.

         ‘‘[Although] the plaintiff consented to these distributions, that consent was based upon the [defendant's] representations that draw[s] from the credit line which financed the distributions would be repaid through the collection of the corporate department accounts receivable in approximately six months. The credit line was eventually, though well past the represented time frame, paid in full through these corporate department assets shortly before the dissolution of the firm. However, the practice left the partners' capital accounts in a relationship that was directly in contradiction to the express provisions of the partnership agreement. The partnership agreement states that ‘distributions shall be made monthly and at such other times as the partners agree such that, following any such distribution, the capital account balances of the partners shall be directly proportionate to the ownership percentage of such partners.' In other words, at any given point in time, the defendant's capital account balance should be 57 percent of the total capital account balance of the two partners, and the plaintiff's capital account balance should be 43 percent of that total. [Although] the plaintiff may have consented to distributions that were temporarily in excess of the amount [that] the defendant was entitled to receive under the [partnership agreement], there was no evidence that such consent was intended to be a permanent amendment to the partnership agreement. Nor is there any evidence that such accommodation was intended to alter the financial relationship between the partners or between the partners and the firm. Nor is there any evidence to suggest that, upon dissolution and liquidation of the firm, the plaintiff would not be entitled to be paid 100 percent of his capital account or, at least, an amount equal to 43 percent of the firm's capital after payment of the firm's liabilities.

         ‘‘Both partners had firm credit cards and both partners were allowed to use those credit cards for personal expenses . . . . To the extent they did so, such personal expenses were treated as distributions to the respective partner with a corresponding reduction in the partner's capital account. The defendant engaged in this practice to a greater extent than the plaintiff, particularly subsequent to June, 2013, when, as a result of disagreements between the partners, the firm suspended monthly cash distributions. [Although] the personal expenses were properly accounted for, those expenditures further reduced the defendant's capital account in relation to that of the plaintiff.

         ‘‘The result of all of this was that, on November 15, 2013, the date of the dissolution of the partnership, the plaintiff's capital account was $178, 436 and the defendant's capital account was $46, 191. Moreover, the defendant, acting in his capacity as liquidating trustee of the partnership, assigned to himself all of the accounts receivable and work[s] in progress of the corporate department in a document dated November 16, 2013. The defendant, by document also dated November 16, 2013, offered to assign to the plaintiff all of the accounts receivable of the trust and estate departments. The assignment of the corporate department work[s] in progress and accounts receivable as of November 16, 2013 . . . had the effect of diverting from the partnership cash that would have brought the partners' capital accounts back to the proportional relationship required by the partnership agreement. Moreover, the balance sheet of the partnership indicates that, as of November 15, 2013, there were insufficient assets, and particularly liquid assets, remaining in the partnership from which the plaintiff could be paid the amount due him based upon his capital account and its relationship to the defendant's capital account.

         ‘‘The plaintiff did not accept distribution of the trust and [estate department's] accounts receivable on or about November 16, 2013. During the weeks following November 16, 2013, up until at least December 31, 2013, he continued to deposit the funds generated by those receivables into the partnership account. This caused his capital account balance to increase even further. Accordingly, on December 31, 2013, the capital account balance of the plaintiff was $279, 856 and the capital account balance of the defendant was $36, 734. The plaintiff did accept assignment of the accounts receivable of the trust and [estate department] on January 15, 2014, and, at that time, he withdrew $113, 363 from the partnership accounts with the consent of the defendant as a distribution of capital.

         ‘‘The difference in the approach[es] that the parties took to the accounts receivable between November 15, 2013, and December 31, 2013, is reflective of the difference in the parties' approach[es] toward the winding up of the partnership business. [The defendant] believed that, upon dissolution, the parties should distribute the assets as quickly as possible, leaving in the firm accounts only [those] which [were] necessary to pay the final expenses of the partnership and, to the extent there were assets available beyond what was necessary to pay the remaining obligations of the firm, they should be distributed immediately to accommodate the ongoing business of the successor firms. [The plaintiff] believed all assets of the firm, including accounts receivable, should continue to be collected until such time as all firm obligations had been paid or otherwise dealt with, until the lease liability was resolved and until an agreement on capital account adjustments had been reached. Distribution should occur subsequently. Whether because of a change in viewpoint or as a practical necessity, [the plaintiff] in January, 2014, took a cash distribution of $113, 363 with the defendant's consent. In the spring of 2014, [the plaintiff] also took a $64, 000 cash distribution without the defendant's consent.'' (Footnotes omitted.)

         After the date of the defendant's withdrawal letter, but prior to the partnership's date of dissolution, the plaintiff brought this action seeking, among other things, an injunction to prevent the defendant from winding up the affairs or liquidating and distributing the assets of the partnership. The injunction was denied. In the five count operative complaint, the plaintiff alleged that the defendant breached his fiduciary duty, breached the partnership agreement and converted partnership property. He also sought an order for judicial oversight and an accounting. The defendant filed a counterclaim alleging breach of contract and statutory theft, and seeking damages and attorney's fees. After a trial to the court, the court found that the defendant breached the partnership agreement and awarded damages of $30, 384 to the plaintiff, which the court later amended to $34, 120. The court also awarded $103, 000 in attorney's fees and $6226.73 in costs to the plaintiff. The defendant's claim for attorney's fees was denied. The defendant appealed and the plaintiff cross appealed. We will set forth additional facts as necessary.

         I

         DEFENDANT'S APPEAL

         The defendant claims on appeal that the court erred in (1) finding a breach of § 3.02 of the partnership agreement; (2) finding a breach of § 4.03 of the partnership agreement; (3) ordering the defendant to pay damages directly to the plaintiff rather than reducing the defendant's capital account; and (4) awarding attorney's fees and costs to the plaintiff.

         A

         The defendant first claims that the trial court erred in finding a breach of § 3.02 of the partnership agreement.[4] We disagree.

         ‘‘Except as otherwise provided [in this section], relations among the partners and between the partners and the partnership are governed by the partnership agreement. . . .'' General Statutes § 34-303 (a). ‘‘Although ordinarily the question of contract interpretation, being a question of the parties' intent, is a question of fact . . . [w]here there is definitive contract language, the determination of what the parties intended by their contractual communications is a question of law . . . subject to plenary review by this court. . . . In giving meaning to the terms of a contract, the court should construe the agreement as a whole, and its relevant provisions are to be considered together. . . . The contract must be construed to give effect to the intent of the contracting parties. . . . This intent must be determined from the language of the instrument and not from any intention either of the parties may have secretly entertained. . . . [I]ntent . . . is to be ascertained by a fair and reasonable construction of the written words and . . . the language used must be accorded its common, natural, and ordinary meaning and usage where it can be sensibly applied to the subject matter of the contract. . . . [Where] . . . there is clear and definitive contract language, the scope and meaning of that language is not a question of fact but a question of law. . . . In such a situation our scope of review is plenary, and is not limited by the clearly erroneous standard. . . . Whether a contract is ambiguous is a question of law subject to plenary review.'' (Citations omitted; internal quotation marks omitted.) Schwartz v. Family Dental Group, P.C., 106 Conn.App. 765, 771, 943 A.2d 1122, cert. denied, 288 Conn. 911, 954 A.2d 184 (2008).

         There is an animating difference between the parties' interpretations of the partnership agreement. The defendant's position is that once the date of dissolution arrived, in this case November 15, 2013, he was entitled to withdraw for his sole benefit all of the assets of the corporate department without regard to the provisions of article III of the agreement. The plaintiff, on the other hand, maintains that distributions throughout the liquidation process were subject to article III, and that, in general, partnership expenses were to be subtracted from revenues prior to distribution and that distributions were to be made such that the 57 to 43 ratio of partnership assets was to be maintained. We agree with the plaintiff.

         There is no merit to the defendant's contention that he was free, during the liquidation process, to assign all corporate revenue to himself without regard to expenses and the maintenance of the ratio of partnership assets in the partners' capital accounts. The agreement unambiguously required the prescribed distribution procedures to continue through the period of liquidation. First, § 8.01, entitled ‘‘Dissolution of Partnership, '' provided that the costs ‘‘in respect of such dissolution'' were to be allocated in accordance with the departmental profit calculation, which, as we have seen, allocated revenues to the several departments, then assigned expenses to each department, and finally provided that the required ratio between the capital accounts was to be realized immediately following any distribution (except perhaps the final distribution). Second, in § 8.02, the agreement provided that upon dissolution, the partners became liquidating trustees and that the expenses were to be apportioned; the business of the partnership could be continued until the final distributions were made. Third, as spelled out in § 8.03, upon liquidation, all assets of the partnership net of partnership liabilities were to be distributed according to the departmental profit calculation. The agreement, then, expressly contemplated that the allocation process was to continue from the date of dissolution-here, November 15, 2013-through the period of liquidation until and including, at least with respect to the ‘‘remaining'' capital account, the final distribution. There is nothing in the agreement indicating that the allocation process was to cease at the date of dissolution, such that either partner was free to appropriate partnership assets.[5]

         As previously cited, the specific provisions of article VIII, pertaining to dissolution and liquidation, refer to the distribution of net assets and adherence to the departmental profit calculation. The final distribution was to be made ‘‘in accordance with the departmental profit calculation.'' Section 8.01. Similarly, there is nothing in article III, which details the calculation and balancing of accounts, to suggest that the specifically designed balancing of accounts was to be abandoned when one partner gave notice of his intention to withdraw. In sum, the clear language of the agreement provided that the allocation of partnership revenues and expenses was to continue through the time of the final distributions, and § 3.02 provided that distributions were to be made such that, after each distribution, the capital account balances were to be in proportion to the partners' ownership interests. By distributing revenues from the corporate account to himself without regard to the required ratio of partnership assets in the partners' capital accounts, the defendant breached § 3.02 of the agreement, as the court correctly determined.

         The trial court noted that ‘‘[t]he defendant's assignment to himself of the accounts receivable and work[s] in progress of the corporate department upon dissolution, under some circumstances, would be harmless to the plaintiff'' because the defendant would have been entitled ultimately to the net profits under the partnership agreement's terms. (Emphasis in original.) This is entirely correct; however, with the capital accounts out of balance, the plaintiff was left bearing a disproportionate share of the remaining liabilities postdissolution. Thus, we agree with the trial court that the defendant's assignment of the corporate department's accounts receivable and works in progress without regard to the ratio of partnership assets in the partners' capital accounts, as reconciled pursuant to the departmental profit calculation, breached § 3.02 of the partnership agreement.

         B

         The defendant also challenges the court's conclusion that he breached § 4.03 of the partnership agreement. Section 4.03, as previously discussed, concerned restrictions on the partners' conduct. The defendant claims that because he had sole discretion regarding the provision of corporate services pursuant to § 4.02 (a), and that § 4.03 is subject to § 4.02, he did not breach § 4.03 by assigning the ...


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