One of the great ironies of New York business divorce litigation is that so much of it involves the breakup of law firms. Perhaps it’s because New York is the center of the legal universe and the home state of thousands of law firms. Maybe it’s because lawyers are litigious by nature. Another, less obvious reason: law firms often imprecisely use the term “partner” to describe their lawyers.
Under Section 10 of the Partnership Law, the term “partnership” means an association of two or more people to carry on a business for profit “as co-owners.” By definition, “partner” means an owner who shares in profits and losses. But the archetypal law firm general partnership long ago gave way to other business forms, and even law firms that still adhere to the partnership form adopt agreements opting out of the default rules to provide for a wide variety of so-called “partners” – “equity partner,” “non-equity partner,” “income partner,” “profits partner,” “contract partner,” “general partner,” “limited partner.” The use of the term “partner” to describe folks who are not equity “partners” creates the potential for ambiguity, and ambiguity begets litigation.
If there is apparent ambiguity, to what extent must courts rely on the entity’s tax returns to decide the issue of ownership? In Mahoney-Buntzman v Buntzman, 12 NY3d 415 , New York State’s highest court wrote a seemingly hard-and-fast rule: “A party to litigation may not take a position contrary to a position taken in an income tax return.” Business divorce lawyers love to cite this rule when they believe it helps their position to prove or disprove ownership status in a business. A few months ago, we wrote about precisely such a case, Rosin v Schnitzler, 2018 NY Slip Op 32320(U) [Sup Ct, Kings County Sept. 4, 2018], in which Commercial Division Justice Lawrence S. Knipel, relying on Mahoney-Buntzman, held that an LLC’s filing of Schedule K-1s identifying the plaintiff as a member proved his membership status in the business. Continue Reading The Law Firm “Partner”- A Rose by Any Other Name . . .