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When a Business Partner Withdraws: Interpretation of Payout Provisions Under a Partnership Agreement

On Behalf of | Aug 9, 2016 | Business Management, Disagreement, Partnerships, Uncategorized

As you know, we write and speak frequently about various issues involving business partnership, including the four Ds (death, disability, divorce, and disagreement).  Although many business owners starting a new venture would like to think that they are somehow immune from the four Ds, the odds are that most, if not all, businesses are bound to experience at least one of them if they are around long enough (really, who can avoid death?).  Disagreement, in particular, can precipitate the withdrawal of one or more business partners at an unexpected time, and when that happens, figuring out the financial aspect of the breakup can be messier than you would want.

Ciklin Lubitz Martens & O’Connell v. Casey, a recent Florida case, involved interpretation of a law firm partnership agreement in connection with a partner’s withdrawal.[1]  In 2012, Casey, one of the founding partners and a 10% owner prior to his withdrawal, filed a lawsuit against the other partners for breach of contract, alleging that the firm failed to pay his retirement and capital contribution payments upon his withdrawal.[2]  Under the law firm’s partnership agreement, the law firm was required to pay the withdrawing partner the value of that partner’s interest in “Firm capital” to be computed as follows: (partner’s capital account balance as of December 31 of the year preceding the termination of interest) + (any “contributions or additions to capital” made by the partner since the previous December 21) – (any returns of capital made to the partner or other capital account reductions such as draws, advances, or loans, since the previous December 31) – (any “income allocations” for the year of termination) = partner’s payout of firm capital.  Simple enough, right?

Well, it appears that the trial court erroneously interpreted several provisions of the partnership agreement in determining the withdrawing partner’s payout.  First, the appeals court said that the trial court incorrectly treated the withdrawing partner’s “conveyance” of all of his “right, title and interest in and to the partnership business, assets and service marks” to the partnership, as required by the partnership agreement, as “contribution or addition of capital.”  Clearly, this was problematic in that it had the effect of artificially inflating the firm’s total capital amount when in fact it did not change at all by the partner’s withdrawal.  As the court pointed out, the only change that resulted from this fictional conveyance was that each of the remaining partners became 1/9 (as opposed to 1/10) owner after Casey’s withdrawal.  Second, the appeals court said that the trial court incorrectly determined that Casey was entitled to 10% of the income shown on the firm’s books as of the date of his withdrawal.  The court said that this “mechanical approach” ignored the language of the applicable portion of the partnership agreement, which provided that a partner’s share of firm profits was to be determined by the law firm’s compensation committee after the payment of certain significant expenses.

Based on the limited language in the opinion, the law firm partnership agreement seems straightforward enough that we suspect the remaining partners’ interpretation did not differ much.  As always, it is advisable to plan ahead and memorialize the parties’ understanding in a well-drafted agreement, ideally with separate legal counsel for each party.

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This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] Ciklin Lubitz Martens & O’Connell v. Casey, Nos. 4D14-3801 and 4D14-4353 (Fla. App. July 20, 2016).  Unless otherwise specified, all references to the case are to this citation.

[2] Palm Beach Post, Casey Ciklin Firm Mired in Lawsuit with Founding Lawyer (Dec. 30, 2012),