You’d think lawyers, of all people, would appreciate the importance of having a written agreement when teaming up to form a law firm. If anything, the professional ethics rules guaranteeing the portability of clients make it even more imperative to plan for the comings and goings of law firm partners. Yet I continue to see decisions in messy cases involving law firm breakups made messier by the absence of a written agreement.
I previously wrote about a trial court decision in one of the more interesting such cases involving the Nassau County law firm, Horing Welikson & Rosen, P.C., in which a trial judge ruled that an expelled 16% partner could not require the law firm to purchase his interest for book value as statutorily required for deceased or disqualified shareholders of professional service corporations. That decision, by Nassau County Commercial Division Justice Ira B. Warshawsky, was affirmed last week on appeal to the Appellate Division, Second Department. Lubov v. Horing & Welikson, P.C., 2010 NY Slip Op 03076 (2d Dept Apr. 13, 2010).
I’ll only briefly recap the facts which are laid out more fully in my prior post. The law firm was formed as a general partnership in 1989 and later converted to a professional service corporation. The plaintiff started as a 30% shareholder of the professional corporation which was reduced to 16% by the time he was expelled by his partners in 1999. After a trial, Justice Warshawsky ruled that there was no evidence of oral or written agreement requiring the defendants to redeem his shares. The court also rejected the plaintiff’s alternative argument that he was entitled to be paid the book value of his shares under § 1510 of the Business Corporation Law. Specifically, Justice Warshawsky held that the statute by its plain terms only requires a buyout for deceased or disqualified (i.e., de-licensed) shareholders of a professional corporation. He also rejected the plaintiff’s public policy argument for extending the statute’s protection to involuntarily discharged shareholders.
The Second Department’s order of affirmance makes short work of the plaintiff’s reliance on § 1510. Here’s what the panel wrote:
Rejecting the plaintiff’s contention that his termination from the defendant professional corporation compelled redemption of his shares, the Supreme Court properly declined to extend the compulsory redemption requirement of Business Corporation Law § 1510 to the situation of a shareholder’s involuntary termination of employment from a professional corporation (accord Fearnow v. Ridenour, Swenson, Cleere & Evans, P.C., 213 Ariz 24, 31, 138 P3d 723, 730; Berrett v. Purser & Edwards, 876 P2d 367 [Utah]; McCormick v. Dunn & Black, PS, 140 Wash App 873, 890-892, 167 P3d 610, 618-619; Trittipo v. O’Brien, 204 Ill App 3d 662, 672, 561 NE2d 1201, 1208; Corlett, Killian, Hardeman, McIntosh & Levi, P.A. v. Merritt, 478 So2d 828 [Florida]). The language of the statute is clear and unambiguous, and the Legislature’s inclusion of specific categories raises the irrefutable inference that it intended to exclude other categories of shareholder withdrawal such as a shareholder’s termination of employment or voluntary withdrawal (see Matter of Crucible Materials Corp. v. New York Power Auth., 13 NY3d 223, 229; Matter of Town of Riverhead v. New York State Bd. of Real Prop. Servs., 5 NY3d 36, 42-43). The plaintiff’s reliance on notions of public policy is misplaced. Public policy ” is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interests'” (Kraut v. Morgan & Brother Manhattan Stor. Co., 38 NY2d 445, 451-452, quoting Muschany v. United States, 324 US 49, 66).
This appears to be the first appellate decision in New York pronouncing the limits of § 1510. In doing so, the court cited and aligned itself with several appellate decisions from other states similarly construing their analogous statutes granting limited, compulsory rights to the redemption of a professional corporation shareholder’s interest.
Lubov would have been a different case entirely had the plaintiff held 20% or more of the shares rather than 16%. Why? Because the plaintiff would have met the minimum standing requirement to bring a corporate dissolution proceeding as an oppressed shareholder under § 1104-a of the Business Corporation Law, which might or might not have prompted the other shareholders to avoid the risk of dissolution by electing to purchase his shares for fair value under BCL § 1118.
Finally, it’s my perception that limited liability partnerships, which New York adopted in 1994, are gradually supplanting use of the professional service corporation form, at least for law firms. The issues raised in Lubov would not exist within an LLP since that form is governed by the different provisions of the Partnership Law. Whichever form is used, again, the importance of having a written agreement cannot be overemphasized.