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Chance v. McCann

March 11, 2009

JOHN K. CHANCE AND IRENE P. CHANCE, AS CO-EXECUTORS OF THE ESTATE OF KERON D. CHANCE, DECEASED, PLAINTIFFS-RESPONDENTS,
v.
KEVIN P. MCCANN, DEFENDANT-APPELLANT.



On appeal from Superior Court of New Jersey, Law Division, Cumberland County, L-477-03.

The opinion of the court was delivered by: Waugh, J.S.C. (temporarily assigned).

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued October 8, 2008

Before Judges Stern, Rodríguez and Waugh.

Defendant Kevin P. McCann appeals a judgment in the principal amount of $852,123.18 in favor of the Estate of Keron D. Chance, McCann's deceased law partner. McCann and Chance practiced law together from 1978 to 1998. The judgment was based upon a partnership agreement and a promissory note arising out of the partnership agreement. The Estate was granted summary judgment on its claim, while the two counts of McCann's counterclaim for breach of the partnership agreement by Chance were decided against him by summary judgment as to count two and jury trial as to count one. We reverse and remand for a trial on the merits of the Estate's claims against McCann and a new trial on the first count of McCann's counterclaim. We affirm the order for summary judgment dismissing the second count of McCann's counterclaim.

I.

We discern the following facts from the record before us.*fn1

In September 1978, Chance and McCann formed a partnership under the name of Chance & McCann, with its office located in Bridgeton. Chance and McCann owned the building in which they practiced through an entity known as 201 Associates. After almost twenty years of practicing together, their partnership was dissolved as of October 31, 1998.

During most of its existence, the partnership operated without a written partnership agreement. According to McCann, their oral understanding was that all legal fees and other income received by the partnership would be deposited into the partnership bank account. Each partner was permitted to withdraw funds from the account in proportion to the fees he generated, and McCann withdrew significantly more than Chance. However, when the partnership's income was reported to the Internal Revenue Service and the State of New Jersey for income tax purposes, it was reported as if the partners had divided the income equally. The result was that Chance was paying taxes on a greater percentage of the income than he was actually receiving.

A.

Beginning in 1994, Chance approached McCann and initiated discussions regarding the preparation of a written partnership agreement. Chance prepared several drafts of the proposed agreement, but left blank the dollar amounts with respect to the key financial provisions. According to McCann, he and Chance discussed at various times the proper dollar amounts to be inserted into those blanks. That process appears to have taken place over several years, inasmuch as the agreement was not signed until July 20, 1998. Nevertheless, the agreement has an effective date of January 1, 1994.

There appear to have been four primary purposes for the creation of the partnership agreement. The first was to address the imbalance between the actual distribution of the firm's income and the reporting of that income for tax purposes. The second was to formalize the parties' relationship in anticipation of the dissolution of the partnership, after which the practice would continue under the same name, but with McCann as its sole practicing attorney. Chance was to have the right to use the facilities and to retain any legal fees he earned. The third was to arrange the sale to McCann of the building in which the firm's law office was located. And the fourth was to provide for the payout of Chance's capital account over time.

McCann maintains that he suggested to Chance that he pay Chance $160,000 to reflect the following: (1) the balancing of the capital accounts and (2) Chance's cooperation in the continuation of the practice after his retirement. Chance disagreed and wanted to use the figure of $630,000.*fn2 According to McCann, Chance made several representations with respect to that figure, including: (1) that the number was suggested by his accountant for tax purposes; (2) that he knew he was not entitled to that amount; (3) that he would never seek to enforce the agreement; (4) that he would consider the debt fully paid at $160,000; and (5) that he would inform his children that the agreement for $630,000 was not enforceable.

The agreement as signed by McCann and Chance used the $630,000 figure requested by Chance. McCann, however, contends that he executed the partnership agreement in reliance on Chance's assurances that he would only seek to collect $160,000, despite the provisions of the written partnership agreement stating the higher amount.

The Estate, of which Chance's two children are the executors, disputes that such representations were made, arguing that the figure of $630,000 was intended to be binding on the parties. The Estate also argues that McCann is, in any event, precluded by the parol evidence rule from seeking to vary the terms of the written partnership agreement by offering testimony about Chance's contrary statements. See Conway v. 287 Corporate Ctr. Assocs., 187 N.J. 259, 268 (2006) ("In general, the parol evidence rule prohibits the introduction of evidence that tends to alter an integrated written document.").

The partnership agreement also provided for the conveyance of the real estate owned by Chance and McCann through 201 Associates to McCann alone, for an additional sum of $30,000. McCann was to assume sole responsibility for the mortgage on the property. The partnership agreement as executed required payments by McCann to Chance, in addition to $30,000 for the office building, as follows: (1) an initial payment of $20,000 payable at the time of settlement on the real estate transaction; and (2) subsequent weekly installments of $1,000, beginning on August 1, 1998, and continuing until the full sum had been satisfied. The partnership agreement called for interest at six percent on any weekly payment more than ten days overdue.

In order to facilitate a full understanding of the factual and legal issues presented on this appeal, even at the risk of some repetition, we quote extensively from the relevant provisions of the agreement:

2. The parties acknowledge that personal Federal and State Income Tax Returns have heretofore been filed by each of them and Income Tax has been paid by each of them in some years based upon an equal allocation of income, notwithstanding incurring expenses and production of income in unequal amounts and unequal withdrawals of Partnership funds. Accordingly, adjustment of the Partnership account has now been determined and agreed upon and there is due to Chance as of August 1, 1998, an amount of $630,000.00.

3. The parties agree that no further adjustment shall be made between them for any expenses related to the operation of their practice of Law, including accounts receivable and work in progress; unless mutually agreed to in writing or mandated to by some Government Agency.

4. The parties mutually acknowledge and agree that they have practiced Law together for almost twenty years. During that period of time there has developed business and professional relationships which it is in the best interests of both parties to see that they continue. For the continued life of their professional, business and personal relationship both parties shall use their best efforts to make sure that these relationships remain and prosper so that the continuing business equity shall be viable and in a position to generate funds to pay the capital account as set forth above.

5. The parties acknowledge that the income generated to them and the withdrawals made by them have been unequal in amount and that the withdrawals do not accurately reflect their percentage of ownership in the Partnership as set forth in the Federal and State Tax Returns as of the time they were filed, excepting Returns for the tax year 1994 to date. The agreement set forth in this document shall serve to overcome these inequities and the parties intend that the payments made to Chance since January 1, 1994 and to be made under the terms hereof will be withdrawals of capital and therefore not subject to Federal and State Income Tax. If prior, present and future Tax Laws should apply to adversely affect this result then the parties will in good faith make a corresponding adjustment between them.

6. From time to time each of the parties have loaned money to the Partnership of Chance & McCann, and the principal amount of all such sums has been paid, excepting a balance still due to Chance in the amount of $7,239.36.

7. From and after the date of this effective date of this Agreement, January 1, 1994, Chance has not received any income and shall not share in the profits or losses, or be responsible for any obligations of the partnership of Chance & McCann. Nevertheless, he has received and may continue to receive for his own use remuneration for professional services performed by him on a case by case basis, provided expenses incurred therewith and paid by the Partnership shall be credited against the capital account of Chance.

9. The real estate located at 201 West Commerce Street, Bridgeton, New Jersey, is presently owned by them and operated through a separate Partnership known as 201 Associates. Upon the execution of this Agreement, and in consideration of the terms hereof, Chance shall convey to McCann all of the interest of Chance in the aforesaid real estate, subject to the existing Mortgage which McCann shall pay at settlement, and in addition McCann shall pay to Chance at settlement the amount of $30,000.00 whereupon the Partnership of 201 Associates shall be dissolved.

10. It is agreed that at settlement as aforesaid McCann shall pay to Chance the sum of $30,000.00 and shall also repay the amount of the loan referred to in Paragraph 6 above. It is further agreed that McCann will in good faith provide for additional payments to Chance to liquidate the obligation set forth in Paragraph 2 above $20,000.00 payable at said settlement and the balance payable in [blank] weekly installments of $1000.00. These payments shall continue until the full amount due has been paid to Chance and shall not bear interest if installments are made when due. If any installment becomes past due for more than ten (10) days suc[h] installment shall bear interest at the annual rate of six (6%) percent from the due date until paid. The first installment shall become due on August 1, 1998, and subsequent payments shall be due weekly, thereafter. As additional evidence of this obligation McCann shall execute and deliver to Chance upon the execution of this Agreement a Promissory Note and a purchase money Mortgage covering said real property, to secure payment thereof and performance of this Agreement, which Mortgage shall cover the one-half interest conveyed by Chance to McCann and the one-half interest owned by McCann, provided if McCann elects to borrow funds to be secured by a first Mortgage on said property and such funds are used to pay to Chance the obligation as aforesaid, then Chance shall subordinate his Mortgage to the first Mortgage given to secure the borrowed funds.

11. Notwithstanding conveyance by Chance to McCann of his interest in the office property and any of the other terms hereof, it is understood and agreed that each of the parties shall continue to have the unrestricted equal right, jointly and with the other party, to use the real property at 201 West Commerce Street and the personal property owned by either of the parties or by the Partnership of Chance & McCann as heretofore until all of the terms of this Agreement has been satisfied.

12. McCann does hereby assume all existing or future obligations of the Partnership of Chance & McCann and the Partnership of 201 Associates heretofore and hereafter incurred and hereby agrees to hold Chance harmless from any and all present and future liabilities.

14. The parties shall jointly continue to have the same uninterrupted use of the office building and appurtances and personal property as heretofore, which building is now occupied by them, and McCann shall pay or provide for payment of all expenses related to the building . . . .

15. In the event of default by McCann in fulfilling the provisions of this Agreement, Chance may, at his option, at any time, remove from the aforesaid office all or part of the items of personal property owned by him, exclusive of confidential legal files owned by him and now used by the Partnership. In the event of his death, this right may be exercised by his Executor(s) for a period of 90 days thereafter. If this option is not exercised by Chance or his Executor(s) such items shall [be] the sole property of McCann.

16. The parties understand that the continuing relationships, both business and professional, of Chance & McCann are in their joint best interests and both shall use their best efforts to promote those relationships now and in the future for the financial benefits of the parties.

17. Upon dissolution of the Partnership of Chance & McCann the firm name may be retained by McCann and he shall thereupon form a professional corporation or continue practice in any form of his choice, and in this event he shall provide adequate notice to clients and creditors and hold Chance harmless from such obligations in legally sufficient form satisfactory to Chance.

19. In the event that Kevin P. McCann should wish to refinance the property known as 201 West Commerce Street at a date subsequent to August 1, 1998, and all obligations pursuant to this Agreement have been met and are current, then Kevin P. McCann shall have the option to refinance providing that twenty-five percent of the new loan [proceeds] shall be paid to Keron D. Chance or his estate. If the agreement is in default the parties shall re-negotiate the percentage of payment to Keron D. Chance or his estate.

20. McCann does hereby personally guarantee performance of his part of this Agreement.

21. Chance does hereby personally guarantee performance of his part of this Agreement.

22. Mere passage of time or delay in seeking a remedy shall not be construed as a waiver of any default in ...


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