holding that the partnership agreement there provided for continuation of the partnership upon the parties' withdrawal, then looking to the partnership agreement for the "method of paying the withdrawing partner his agreed shared"Summary of this case from Hannan v. Godfrey
March 6, 1964 —
April 13, 1964.
APPEAL from a judgment of the county court of Lincoln county: DONALD E. SCHNABEL, Judge. Reversed.
For the appellants there was a brief by Theiler Seroogy of Tomahawk, and O'Melia Kaye of Rhinelander, and oral argument by Donald C. O'Melia.
For the respondent there was a brief by Schmitt, Wurster Tinglum of Merrill, and oral argument by Sverre Tinglum.
Action for declaratory judgment construing a medical-partnership agreement between three doctors. Plaintiff-respondent withdrew from the partnership seven years after it was formed. After the action was commenced one of the defendants, Dr. Edward C. Jarvis died. The executrix of his will was substituted as a party defendant by stipulation.
The dispute concerns the extent of the plaintiff's right to share in partnership assets, specifically accounts receivable. The relevant portions of the agreement provide:
"12. Books of Account. Proper books of account shall be kept by said partners and entries made therein of all matters, transactions, and things as are usually entered in books of account kept by persons engaged in the same or similar business. Such books and all partnership letters, papers and documents shall be kept at the firm's office and each partner shall at all times have access to examine, copy, and take extracts from the same.
"13. Fiscal Year — Share of Profits and Losses. The partnership fiscal year shall coincide with the calendar year. Net profits and losses of the partnership shall be divided among the individual[s] in the same proportion as their capital interest in the partnership, except as hereinafter provided for partners who become incapacitated or have withdrawn from the partnership, or the estates of the deceased partners.
". . .
"15. Conditions of Termination. Partnership shall not terminate under certain conditions. The incapacity, withdrawal or death of a partner shall not terminate this partnership. Such partner, or the estate or heirs of a deceased partner shall continue to participate in partnership profits and losses, as provided in this agreement, but shall not participate in management, the making of partnership decisions, or any professional matters. On the happening of any of the above events, the books of the partnership shall not be closed until the end of the partnership fiscal year.
"16. Withdrawal. No withdrawal from the firm shall be effective until at least thirty (30) days have elapsed from the date on which written notice of such intention is given the other partners by registered mail to their last known address.
"As used herein `withdrawal' shall refer to any situation in which a partner leaves the partnership, at a time when said partnership is not dissolving, pursuant to a written agreement of the parties to do so. The withdrawing partner shall be entitled to receive from the continuing partners the following:
"(1) Any balance standing to his credit on the books of the partnership;
"(2) That proportion of the partnership profits to which he was entitled by this agreement in the fiscal year of his withdrawal, which the period from the beginning of such year to the effective date of withdrawal shall bear to the whole of the then current fiscal year. Such figure shall be ascertained as soon as practicable after the close of the current fiscal year and shall be payable as soon as the amount thereof is ascertained. All drawings previously made during the then fiscal year shall be first charged against the share in net partnership profits as above computed. If there shall have been losses for such fiscal year, or overdrawings, or losses and the whole of any overdrawings or loans, shall be determined and charged against his capital account, and if in excess thereof, shall be paid by him or his estate promptly after the close of the fiscal year, plus
"(3) The amount of his capital account on the effective date of his withdrawal (after deduction of any losses required to be paid in subdivision (2) above).
"In the event such withdrawing partner dies prior to receiving any or all of the above payments, his personal representative, heirs or assigns shall receive the same payments at the same time as those to which he would have been entitled by the terms had he lived. Payment of the items set forth in subdivisions (1) and (3) above shall be made according to and evidenced by a promissory note, executed by the remaining partners, payable in twelve (12) equal quarterly installments, the first of which shall be payable at the end of the six (6) months following the effective date of such withdrawal. Acceleration of said note shall be permitted at the sole discretion of the remaining partners. Such note shall bear interest at Two (2) Per Cent, payable with each installment.
"It is further agreed that in the event of the withdrawal of any partner or partners, any and all accounts receivable for any current year and any and all years past shall remain the sole possession and property of the remaining member or members of THE TOMAHAWK CLINIC.
". . .
"18. Dissolution. Should this partnership be dissolved by agreement of the parties, all accounts and notes shall be liquidated and all firm assets sold or divided between the partners at agreed valuations. The books of the partnership shall then be closed and distribution made in proportion to the capital interests of the partners as shown by the partnership books. No drawings should be paid once the partnership has begun to wind up its affairs, although liquidating dividends based on estimates may be paid from time to time. No dissolution shall be effective until the end of the then fiscal year, and until ninety (90) days have elapsed from the date on which written agreement to such dissolution shall have been executed by the parties hereto.
"This agreement shall be binding not only upon the parties hereto, but also upon their heirs, executors, administrators, successors, and assigns, and the wives of said partners have signed this agreement as witnesses, after being advised of the terms of this agreement."
The trial court decided that the withdrawal of the plaintiff worked a dissolution of the partnership under sec. 123.25, Stats.; that the partnership assets should be liquidated and applied to the payment of partnership interests according to the scheme set forth in sec. 123.33, for the reason that paragraphs 15 and 16 of the partnership agreement did not apply in the case of a statutory dissolution; that plaintiff's interest was one third of the net worth, including therein accounts receivable of the partnership as of May 31, 1961; that plaintiff should recover from defendants the value of his partnership interest; and gave judgment accordingly, but retained jurisdiction for supplementary proceedings. Defendants appeal.
1. Does a withdrawal of a partner constitute a dissolution of the partnership under sec. 123.25, Stats., notwithstanding a partnership agreement to the contrary?
2. Is plaintiff, as withdrawing partner, entitled to a share of the accounts receivable?
Sec. 123.25, Stats., states:
"DISSOLUTION OF PARTNERSHIP DEFINED. (1) 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.
"(2) On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed."
The partnership agreement as set forth above (paragraph 15) specifically provides that the partnership shall not terminate by the withdrawal of a partner. We conclude the parties clearly intended that even though a partner withdrew, the partnership and the partnership business would continue for the purposes for which it was organized. Paragraph 18 of the agreement provides for a dissolution upon agreement of the parties in the sense that the partnership would cease to function as such subject to winding up of its affairs.
While the withdrawal of a partner works a dissolution of the partnership under the statute as to the withdrawing partner, it does not follow that the rights and duties of remaining partners are similarly affected. The agreement contemplates a partnership would continue to exist between the remaining partners even though the personnel constituting the partnership was changed.
Persons with professional qualifications commonly associate in business partnerships. The practice of continuing the operation of the partnership business, even though there are some changes in partnership personnel, is also common. The reasons for an agreement that a medical partnership should continue without disruption of the services rendered is self-evident. If the partnership agreement provides for continuation, sets forth a method of paying the withdrawing partner his agreed share, does not jeopardize the rights of creditors, the agreement is enforceable. The statute does not specifically regulate this type of withdrawal with a continuation of the business. The statute should not be construed to invalidate an otherwise enforceable contract entered into for a legitimate purpose.
The provision for withdrawal is in effect a type of winding up of the partnership without the necessity of discontinuing the day-to-day business. Sec. 123.33, Stats., contemplates a discontinuance of the day-to-day business but does not forbid other methods of winding up a partnership.
The agreement does provide that Dr. Adams shall no longer actively participate and further provides for winding up the affairs insofar as his interests are concerned. In this sense his withdrawal does constitute a dissolution. We conclude, however, that when the plaintiff, Dr. Adams, withdrew, the partnership was not wholly dissolved so as to require complete winding up of its affairs, but continued to exist under the terms of the agreement. The agreement does not offend the statute and is valid.
Sec. 123.33(1), Stats., provides:
"APPLICATION OF PARTNERSHIP PROPERTY ON DISSOLUTION. (1) When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his copartners and all persons claiming through them in respect of their interests in the partnerships, unless otherwise agreed, may have the partnership properly applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. But if dissolution is caused by expulsion of a partner, bona fide under the partnership agreement, and if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under the provisions of s. 123.31(2) he shall receive in cash only the net amount due him from the partnership."
The trial court concluded that the withdrawal constituted a statutory dissolution; that partnership assets shall be liquidated pursuant to the statute and that the plaintiff was entitled to a one-third interest in the accounts receivable.
Sec. 123.35, Stats., sets forth statutory rules for settling accounts between partners on dissolution.
Sec. 123.33, Stats., applies only "unless otherwise agreed." The distribution should therefore be made pursuant to the agreement.
Paragraphs 15 and 16 of the contract as set forth above provide for the withdrawal of a partner and the share to which he is entitled. Subject to limitations not material here, paragraph 16 provides that a withdrawing partner shall receive (1) any balance to his credit on partnership books, (2) his proportionate share of profits calculated on a fiscal-year basis, and (3) his capital account as of the date of his withdrawal. Paragraph 16 further provides that in event of withdrawal "any and all accounts receivable for any current year and any and all years past shall remain the sole possession and property of the remaining member or members of THE TOMAHAWK CLINIC."
The plaintiff contends that provision of the agreement denying him a share of the accounts receivable works a forfeiture and is void as being against public policy.
We conclude the parties to the agreement intended accounts receivable to be restricted to customer or patient accounts receivable.
The provision of the agreement is clear and unambiguous. There is nothing in the record to suggest the plaintiff's bar gaining position was so unequal in the negotiations leading up to the agreement that the provision should be declared unenforceable upon the grounds of public policy. Legitimate business and goodwill considerations are consistent with a provision retaining control and ownership of customer accounts receivable in an active functioning professional medical partnership. We hold the provision on accounts receivable enforceable.
The same conclusions were reached in Delvin v. Rockey (7th Cir. 1961), 295 F.2d 266. The United States court of appeals for the Seventh circuit construed the same provisions of the Uniform Partnership Act as enacted by Illinois as applied to a contract that was substantially similar to the contract under consideration here.
Because of our determination that the partnership agreement is valid and enforceable the judgment of the trial court insofar as it decrees a dissolution of the partnership and a one-third division of the accounts receivable to the plaintiff must be reversed and remanded to the trial court with directions to enter judgment in conformity with this opinion.
The trial court properly retained jurisdiction for the purpose of granting supplementary relief to plaintiff to enforce a distribution to the plaintiff. The trial court may conduct such proceedings as are necessary to effectuate a distribution pursuant to the agreement.
The parties have stipulated that the plaintiff ceased to be an active partner as of June 1, 1961. The agreement provides that the partnership fiscal year shall coincide with the calendar year. It further provides that his share of the partnership profits upon withdrawal shall be calculated upon the whole year and in proportion to his participation of the whole fiscal year. He is, therefore, entitled to 5/12ths of 1/3d, or 5/36ths of the profits for the fiscal year ending December 31, 1961.
Such of the accounts receivable as were collected during the year 1961 do constitute a part of the profits for 1961. The plaintiff had no part of the management of the partnership after June 1, 1961; however, his eventual distributive share of profits is dependent, in some degree, upon the management of the business affairs and performance of the continuing partners for the remainder of the fiscal year. Under these circumstances the continuing partners stand in a fiduciary relationship to the withdrawing partner and are obligated to conduct the business in a good-faith manner including a good-faith effort to liquidate the accounts receivable consistent with good business practices. By the Court. — Judgment reversed with directions to conduct supplementary proceedings to determine distributive share of plaintiff and then enter judgment in conformity with this opinion.
Sec. 123.18, Stats.; Smith v. Howard (1955), 76 Idaho 235, 280 P.2d 1060.