Earlier this year, we wrote about a partnership dispute involving a prominent insurance litigation firm, D’Amato & Lynch, LLP. In that case, a lawyer who enjoyed the title and certain trappings of “partner” tried, but failed, to persuade a court that he was an “equity partner” with the power to sue for dissolution of the firm.
D’Amato & Lynch involved a recurrent source of litigation among lawyers: the term “partner” is frequently overused or loosely used to describe many different roles – “general partner,” “equity partner,” “non-equity partner,” “income partner,” “profits partner,” “contract partner,” etc.
Two weeks ago, in Capizzi v Brown Chiari LLP, 2019 NY Slip Op 51471(U) [Sup Ct, Erie County Sept. 13, 2019], a dispute between a law firm partner and his former colleagues, raising the identical issue as D’Amato & Lynch, reached its climax in a highly-interesting, post-trial decision by Erie County Commercial Division Justice Timothy J. Walker. The sole question presented in a lengthy, framed-issue bench trial was whether Capizzi was an equity partner at the time he resigned from the firm and, therefore, caused dissolution of the partnership when he withdrew. Did the withdrawing partner in Brown Chiari fare any better than his counterpart in D’Amato & Lynch? Let’s take a look.
The Partnership and the First Trial
The Brown Chiari firm was the subject of not one, but two partnership dissolution trials over the years brought by different partners.
In 1997, James Brown, Donald Chiari, Samuel Capizzi, and Frank Frascogna formed the law firm of Brown, Chiari, Capizzi & Frascogna, LLP. In 2004, Frascogna resigned from the firm and commenced an action against the firm and his colleagues, including Capizzi, asserting that he was a “general partner” of the firm, that the partnership underwent a dissolution upon his withdrawal, and that he was entitled to both a dissolution of the firm pursuant to sections 62 and 63 of the Partnership Law, and an accounting.
In 2006, a single-issue trial was held before then-Supreme Court Justice Eugene M. Fahey on the following question: Was Frascogna a general partner of the firm?
Serendipitously, twelve years later, Justice Fahey authored New York’s most important partnership law ruling in years, the Court of Appeals’ decision shifting from from a statutory to contract-based approach to “wrongful” partner withdrawal in Congel v Malfitano, 31 NY3d 272 .
Holdings from the First Trial
In the first Brown Chiari trial before Justice Fahey, Capizzi opposed dissolution along with the two other, respondent partners. Capizzi testified that he and Frascogna were mere “income partners.” In a Memorandum Decision, Justice Fahey rejected Capizzi’s testimony and concluded that he and Frascogna were both general (i.e., equity) partners based upon the following evidence:
- All the partnership tax returns identified the firm as having four partners.
- The four partners signed off on broad authority for each of the partners to conduct transactions with its bank.
- The four partners personally obligated themselves on the firm’s line of credit.
- A “Business Certificate of the Partners” certified by all four partners that they agreed to conduct business under the d/b/a “Brown Chiari.”
After trial, Supreme Court Justice John M. Curran, newly assigned to the case following Justice Fahey’s elevation to an appeals court, issued an Order, in the words of Justice Walker, “declaring Frascogna to be an equity partner of Brown, Chiari, Capizzi & Frascogna, LLP; dissolving the partnership; declaring Frascogna’s entitlement to an accounting; and striking any denial of Frascogna’s status as a general partner of Brown Chiari from the Answers in the Frascogna Action.”
The Successor Partnership and the Withdrawal
In 2007, after Justice Curran dissolved the firm, the four former partners settled their litigation, and the three remaining partners, including Capizzi, filed a “Certificate of Registration” for a successor law firm, “Brown Chiari LLP.”
According to Justice Walker:
Following the settlement of the Frascogna Action, Brown, Chiari, and Capizzi largely continued to operate as they had while members of the dissolved firm. Indeed, in the wake of the Fahey Decision (finding Frascogna – and Capizzi – to be equity partners of the dissolved firm), neither Brown, nor Chiari, proposed a formal, written partnership agreement to clarify and define the attorneys’ status in the new law firm, nor was any other effort made to better define Capizzi’s role, much less his legal status.
The successor Brown Chiari firm operated continuously as a law practice from 2007 until 2016, when Capizzi sent Brown and Chiari a letter stating, “With this letter I hereby withdraw from Brown Chiari, LLP. . . Pursuant to New York partnership law, my withdrawal results in an immediate dissolution of the partnership. . . In addition, a full accounting of the partnership will be required. . .”
In response, Brown and Chiari denied that Capizzi was an equity partner or that his withdrawal dissolved the firm. Echoing Frascogna’s lawsuit 12 years earlier, Capizzi’s amended complaint sought a declaratory judgment “[d]eclaring that, by virtue of Plaintiff’s withdrawal from the Partnership on January 8, 2016, the Partnership is dissolved by operation of law, pursuant to NYPL § 62, effective January 8, 2016” and “[d]eclaring that Defendants must immediately wind up the affairs of the Partnership and permit/provide a full and complete accounting of the Partnership’s assets, liabilities, income and expenses and pay over to Plaintiff his share of Partnership assets and income.”
Holdings from the Second Trial
In 2018 and 2019, the parties tried the case over 20 days, with 9 witnesses, 160 exhibits, and 3,300 pages of testimony. Both sides submitted post-trial briefs (read here and here), and proposed findings of fact and conclusions of law (read here and here). In their post-trial brief, defendants pointed out that Capizzi testified in the first trial, more than two years after Frascogna resigned, that he had “the same relationship today” with Brown and Chiari as he had prior to Frascogna resigning.
To determine whether Capizzi was an equity partner, the most salient legal issue was the preclusive effect, if any, of the court’s holding in 2007 that Capizzi was an equity owner of the prior Brown Chiari firm. Brown and Chiari argued that Capizzi was precluded from arguing he was an equity owner because he took an opposite position in the first dissolution trial. Capizzi argued that Brown and Chiari were precluded from denying he was an equity partner because the court previously ruled against them.
As noted by Justice Walker, the doctrine of “collateral estoppel” precludes a party from changing legal positions where “(1) the issue sought to be precluded is identical to a material issue necessarily decided by the prior tribunal in a prior proceeding; and (2) there was a full and fair opportunity to contest the issue in that tribunal.”
Justice Walker ruled that Brown and Chiari were “collaterally estopped from denying” that the first Brown Chiari firm was a partnership with four equity partners, including Capizzi, and that the Brown Chiari firm dissolved with Frascogna’s withdrawal, resulting in his right to an accounting.
As to Capizzi’s denial of his status as equity partner in the first trial, the Court ruled, “Capizzi’s testimony in the Franscogna Action (with which Justice Fahey disagreed) is irrelevant. It is the Fahey Decision that is controlling, not the testimony upon which it is based (and, importantly, with which Judge Fahey largely disagreed).”
On top of collateral estoppel, the court imposed against Brown and Chiari, and in favor of Capizzi, the doctrine of “tax estoppel” (the same doctrine the court declined to apply in D’Amato & Lynch), which holds that a litigant “may not take a position contrary to a position taken in an income tax return.”
The following tax filings, Justice Walker held, precluded Brown and Chiari from denying Capizzi’s status as equity partner:
- Capizzi was identified as one of three partners in the firm, and he received a K-1 with a capital account each year.
- Brown Chiari‘s tax returns did not distinguish Capizzi’s interests from Brown’s and Chiari’s.
- No one owned at least fifty percent (50%) or more of the profit, loss or capital of the partnership, “thus establishing the partnership must have at least three owners.”
- Capizzi’s K-1s reflect recourse liability “certifying that he was personally responsible for Brown Chiari LLP’s debts.”
[H]aving presided over twenty (20) days of trial testimony and upon careful review and consideration of the parties’ respective post-trial submissions, and due deliberation having been had thereon, the Court finds that, based on the totality of the governing factors [including the findings and evidence in the prior dissolution litigation], Capizzi was an equity partner as of the date of his resignation from Brown Chiari LLP.
Accordingly, it is hereby
ORDERED AND DECLARED that, as of the date of his resignation from Brown Chiari LLP on January 8, 2016, Plaintiff, Samuel J. Capizzi, was an equity partner in the Brown Chiari LLP law firm.
As always, if one is going to argue (or oppose) partnership status, one needs to realistically assess any prior positions taken by the parties on the subject – whether in court filings, which may give rise to collateral estoppel, or in tax filings, which may give rise to tax estoppel.
Brown Chiari is a rare example of both doctrines applying to prove disputed partnership status. Hindsight is always 20/20, but after getting burned once in a full-blown partnership dissolution litigation, one might have expected the surviving partners of the Brown Chiari firm to document their partnership relationship a bit more carefully. Perhaps they will do so on the third go-round.