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Nadel v. Starkman

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


October 20, 2010

RAYMOND S. NADEL, PLAINTIFF-RESPONDENT,
v.
MORRIS STARKMAN, DEFENDANT-APPELLANT.

On appeal from Superior Court of New Jersey, Chancery Division, Camden County, Docket No. C-158-04.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued May 19, 2010

Before Judges Payne, Waugh, and Fasciale.

This appeal involves the dissolution of the relationship between two attorneys, plaintiff Raymond S. Nadel and defendant Morris Starkman, who practiced together in the law firm known as "Starkman & Nadel" from 1987 to 2004. More particularly, it involves the determination of Nadel's economic rights following Starkman's exercise of his right to dissolve the relationship.

On remand following our reversal of summary judgment in favor of Nadel, the General Equity judge held a trial and determined that Starkman and Nadel were partners. She awarded damages that she determined were warranted by that relationship. Although we defer to the judge's determination that Starkman and Nadel intended to create a partnership, we reverse the damages award because we have concluded that a partnership was nevertheless not created and, in any event, because the damages award is inconsistent with the actual agreement entered into by the parties.

I.

The following facts and procedural history are drawn from the record on this appeal.

A.

Starkman was admitted to the Bar in 1972, and opened his own office in 1973. Nadel was admitted to the Bar in 1981. He began working for Starkman as an associate in Starkman's practice in 1985. For the first two years of their relationship, Starkman paid Nadel a salary from which the applicable taxes were deducted. Starkman also gave Nadel a one-third referral fee for any case he brought into the office.

On June 30, 1987, the parties entered into a written agreement (1987 Agreement) with respect to the terms of Nadel's employment. Although the 1987 Agreement provided that the name of the firm would be changed to "Starkman and Nadel," it specified that the name change did "not represent a partnership but [was] only a change in firm name."

The 1987 Agreement established Nadel's salary at $750 per week ($39,000 per year) and entitled him to vacation (two weeks for 1987 and three weeks each year thereafter), health insurance, and a leased automobile. In addition to his salary, Nadel was entitled to participate in fees pursuant to specific provisions set forth in the body of the agreement. Bonuses were to be payable to Nadel at Starkman's "discretion."

On March 31, 1988, the parties signed a new agreement (1988 Agreement), which was made retroactive to January 1, 1988. The 1988 Agreement did not characterize the relationship between Starkman and Nadel as employer and employee or as a partnership, although prior drafts had variously named the document an "Associate Arrangement" and a "Partnership Arrangement." Instead, the final document signed by the parties was simply titled an "Agreement" and referred to an "arrangement" based on Starkman and Nadel's prior "excellent relationship" "in the law practice heretofore owned solely by [Starkman]." (Emphasis added).

The preamble to the 1988 Agreement stated that Starkman wanted Nadel to "share in the net income of the practice" and that Nadel did not "wish to invest any capital . . . in order to 'purchase' a share of said practice for cash," but that Starkman was "willing to allow [Nadel] to share in the 'bottom line' profit of the practice by means of [the 1988 Agreement] which bases the annual remuneration to be paid by [Starkman] to [Nadel] upon a percentage of the net income of the practice."

The 1988 Agreement provided for Nadel to share in the firm's net income on a percentage basis, and discontinued the salary and fee-sharing provisions found in the 1987 Agreement. From 1988 to 1992, Nadel was to receive a specified percentage of the net income. The percentage increased over time from twelve percent in 1988 to twenty-two percent in 1992. For each of those years, however, Nadel was "guaranteed" a specified minimum annual payment "regardless of the amount of net practice income." That minimum amount started at $52,000 in 1988 and increased annually to $60,000 in 1992.

From 1993 forward, however, Nadel's annual share of the net profits was fixed at twenty-five percent with no guaranteed minimum payment. The 1988 Agreement set forth methods for calculating expenses and for establishing periodic payments to Nadel. It also provided for Nadel's benefits and how their cost would be treated for purposes of calculating Nadel's compensation.

The 1988 Agreement further required each party to purchase term life insurance on the other's life, with the premiums to be paid out of the purchasing attorney's share of the profits. There was to be a $2 million policy on Starkman's life. The policy on Nadel's life was to start at $250,000, and increase $50,000 each year to a maximum of $750,000.

The apparent purpose of the life insurance policies was to fund a buyout of the deceased attorney's interest in the firm. Upon the insured-attorney's death, the proceeds were to be payable to his estate. The proceeds from Starkman's policy were characterized as "full and complete payment for the value of [Starkman's] law practice" and, following payment to his estate, "the practice [would] be deemed owned solely by [Nadel]." (Emphasis added). The proceeds from Nadel's policy would be paid to his estate "for his total and complete interest in the law practice which shall thereafter be owned solely by [Starkman]." (Emphasis added).

Although the preamble to the 1988 Agreement characterized the practice as having been "heretofore" owned solely by Starkman and the life-insurance-buyout provision states that, after payment of the proceeds to Nadel's estate, the practice would "thereafter be owned solely by [Starkman]," Paragraph 8 specifically provided that the practice would "continue to be owned solely by [Starkman] who alone shall make all decisions with respect to management of the practice." It also characterized Nadel as "an independent contractor" who would be "solely responsible for all taxes payable upon his remuneration."

Paragraph 11 of the 1988 Agreement provided that the agreement could "be terminated for any reason by either party with the giving of 60 days written notice by one party to the other." It established a procedure for the distribution of files upon termination, as well as the disposition of fees subsequently received by Nadel for files that he was permitted to take with him.

For purposes of this paragraph, files brought in by [Nadel] from his sources only, and not through any past or present clients of [Starkman], shall continue to be labeled upon their being opened with the letters "RN". In the event this agreement is terminated, [Nadel] shall have the right to take with him upon leaving all such files labeled "RN" and upon giving notice he shall give [Starkman] a list of all such files. When [Nadel] receives any fees paid on these files after he has left, he shall remit to [Starkman] one-third of any such fees paid together with any expenses and/or costs previously paid by [Starkman].

There was no provision for the disposition of fees received by Starkman for the files he retained after Nadel's departure. In fact, the final sentence of that paragraph states that Nadel would have no further right to those files.

Once the 1988 Agreement was signed, no taxes were withheld from Nadel's checks and, in contrast to 1986 and 1987, his income was reported to the taxing authorities on a Form 1099 rather than a W-2. As far as we can discern from the record, however, the firm never filed a partnership tax return and Nadel never received a Schedule K-1.

A year later, on April 28, 1989, the parties signed another agreement, titled "Cross-Purchase Buy-Sell Agreement" (Buy-Sell Agreement). The stated purpose of that agreement was the "mutual protection" of the parties "in the event of the death of either one of them and for the sale and purchase of his interest in the law firm known as Starkman and Nadel" pursuant to the 1988 Agreement. It required the estate of each party "to sell his interest in the firm, its files, profits, physical equipment and furniture, lease, etc." to the other, and the other "to purchase said interest." The price for Starkman's interest was set at $2 million. The price for Nadel's interest was set at $300,000. There was, however, no provision for an increase to $750,000 as was the case in the comparable provision of the 1988 Agreement. Each purchase was to be funded through a life insurance policy in the amount of the purchase price, with the premium to be paid by the purchasing party for the benefit of the other party's estate.

The Buy-Sell Agreement provided: "All monies and profits and obligations of the firm including salaries, normal and regular expenses of the firm and assets of the firm shall belong to the surviving party," including "all monies in the Attorneys checking account." It further provided:

In the event of the death of [Starkman], [Nadel] shall have the full power and authority to sign checks both on the Attorneys account and the Attorney escrow account and this agreement shall be valid as a power of attorney and any such authority as any bank shall need to give check signing authority to [Nadel]. In addition, all monies and fees in the Attorneys account shall be the sole property of [Nadel] and the current fees in the Escrow account shall belong to [Nadel] when they are ready to be disbursed. The only fees that do not belong to [Nadel] are those in the escrow account being held there by [Starkman] from the years 1987 and 1988, which shall be disbursed to the estate of [Starkman] or to his widow or heirs . . . .

The agreement contained no comparable paragraph regarding Starkman.

During the entire period of the parties' association, the firm's checking accounts remained solely in Starkman's name and were entitled "Morris Starkman, Attorney at Law," "Morris Starkman Attorney Business Account," and "Morris Starkman Attorney Trust Account." Nadel never had authority to sign checks, and none of the checks had his name on them.

The firm's signage, letterhead, and its advertisements all referred to the name of "Starkman & Nadel." In addition, the firm's malpractice insurance was issued in the name of Starkman & Nadel.

B.

In 1997, apparently on the advice of his accountant, Starkman sought to transform the firm into a limited liability corporation (LLC) to "insulate" himself and obtain "the corporate protection." Starkman asked his attorney to draft documents for the creation of an LLC that incorporated "the exact terms" of the existing agreement with Nadel "so nothing would change in [their] relationship."

The preamble to the LLC's proposed operating agreement stated that Nadel and Starkman had "been associated in the practice of law pursuant to an Agreement of Employment," which was not the correct title of the 1988 Agreement. Nadel and Starkman were to be the initial members, with Starkman to own a ninety-nine percent interest in the LLC and Nadel to own the other one percent. They were to "share all net income as described in Section VI."

Section VI provided that Nadel would "be employed by the Company as an attorney-at-law." He would "receive twenty-five percent (25%) of the 'net income' of the Company," which was defined as "the total of all fees collected in a calendar year, less all 'expenses'" as defined in the agreement and "expended during the same calendar year." Nadel was to receive a weekly $1,150 draw against his share of the profits.

Although Starkman would be permitted to "transfer his interest in the Company without restriction," Nadel would not be permitted to transfer his interest "without the advance written consent of Starkman." Starkman was to have an option to purchase Nadel's "interest" for $10.

In a November 7, 1997, memorandum to Starkman, Nadel rejected the terms of the proposed LLC agreement as "not acceptable." However, he added that there were two issues that he believed could "be easily resolved" and proposed that they discuss them "so that we can move forward and continue the relationship that we have developed over the past eleven years."

Starkman testified that Nadel told him the two issues were "a pension plan and a severance package." Starkman's position is reflected on his copy of the memorandum in handwritten notes that he made at the time. Starkman maintains that he told Nadel that "the deal was that if we form an LLC, it's going to be on the same terms and conditions as were in our '88 agreement, there's no pension plan and no severance package in the '88 agreement, so it's not going to be added to the LLC." According to Starkman, Nadel's response was "forget it."

Nadel maintained that he refused Starkman's request to form an LLC because he "wasn't going to give up [his] partnership agreement for an LLC which gave [him] less of the profits of the business."

C.

According to Starkman, he became unhappy with Nadel's performance and believed that he "slacked off" and "procrastinated a great deal." Beginning in 2002, Starkman began seeking a new attorney with whom to associate, placing advertisements and interviewing candidates. In the fall of 2003 or the beginning of 2004, Starkman approached David Rochman, an attorney who had his own practice, about practicing together.

On July 28, 2004, Starkman sent a letter of termination to Nadel, who was on vacation at the time.

As you are aware, our practice in terms of case volume and fees received over the last 36 months has dramatically declined in comparison to previous years. I see no prospect of any increase in case volumes or fees earned in the future.

Therefore I do not see the practice supporting two attorneys.

Pursuant to paragraph 11 of our agreement, I am hereby giving you 60 days notice from this date that I am terminating our agreement. While I intend to honor the agreement, I believe it best that you should leave the practice immediately.

Nadel persuaded Starkman to allow him continued access to his office so that he could complete certain pending cases.

Rochman and Starkman subsequently signed a partnership agreement, effective September 30, 2004. However, that partnership ended in March 2005, and Rochman left Starkman's office in July 2005. Their parting was not amicable.

D.

On September 17, 2004, Nadel filed a verified complaint against Starkman and the law firm of Starkman, Rochman & Aumiller.*fn1 He sought issuance of an order to show cause, seeking

(1) to enjoin the defendants from contacting Starkman & Nadel's clients to dissuade them from being represented by Nadel after his departure; (2) to compel the defendants to provide him with the full names and addresses of the clients of the firm as of September 3, 2004; and (3) to compel the law firm to notify its clients in writing of their right to be represented by the attorney of their choosing, including Nadel, and compelling the defendants to provide a financial accounting as of September 3, 2004. Nadel also sought "the reasonable value of his interest in the firm of Starkman & Nadel . . . and the case files maintained by said firm."

On September 23 and October 20, 2004, the then General Equity judge entered orders (1) establishing the terms of the parties' contact with the clients of their former firm; (2) requiring them to exchange the names and addresses of those clients; (3) compelling them to provide accountings to each other; (4) ordering Starkman to withdraw any lien letters sent by him regarding Nadel's files; and (5) ordering Nadel to pay Starkman one-third of any fees earned on those files.

On December 4, 2004, Starkman filed an answer and counterclaim, alleging that Nadel had failed to comply with the terms of the 1988 Agreement. The counterclaim sought a declaratory judgment establishing the parties' rights and responsibilities, an order compelling Nadel to comply with the terms of the 1988 Agreement, and attorney fees.

Nadel and Starkman each filed motions for summary judgment on August 2, 2005. The judge denied Starkman's cross-motion and granted summary judgment to Nadel. He concluded that the 1988 Agreement was susceptible of different conclusions in terms of whether there was a partnership. Because Starkman had drafted the agreement, the judge interpreted the agreement against him and determined that there had been a partnership. Consequently, he found that Nadel had a partner's interest in the firm and that he was entitled to twenty-five percent of the net income generated by all of the firm's files that were "open on September 28, 2004."

Starkman appealed. On November 9, 2006, we reversed the summary judgment and remanded the matter for trial. Although we agreed that the 1988 Agreement was open to two interpretations, we held that the rule of construction against the drafter was not dispositive and that a plenary hearing to determine the intent of the parties was required. Nadel v. Starkman, No. A-0074-05 (App. Div. November 9, 2006) (Nadel I) (slip op. at 9-10).

E.

The case was tried by a different judge over fourteen days in April, May, and June 2008.

Nadel testified that the 1988 Agreement was intended to make him a partner in Starkman & Nadel, and that he refused to enter into the proposed LLC because he would have been giving up his partnership interest. He also denied that his work habits had changed or that Starkman had warned him about any dissatisfaction. He explained that the "sole owner" provision in Paragraph 8 was merely an indication that Starkman was the managing partner.

David Rochman, the attorney who replaced Nadel, testified that Starkman told him on several occasions that he was unhappy with Nadel, whom he described as having "lost his edge." However, Rochman also testified that Starkman referred to his relationship with Nadel as a partnership and that he would owe a substantial buyout. Rochman also described his own falling out with Starkman, whom he characterized as a "liar" during his trial testimony.

Starkman testified that the 1988 Agreement was never intended to create a partnership, but rather to change Nadel's method of compensation to a fixed percentage of the firm's net income. He sought to structure the proposed LLC to preserve Nadel's method of compensation, while retaining his sole ownership. He asserted that Nadel refused to agree to the LLC because he wanted to change the terms of their arrangement to include a pension and a severance package. He also testified in support of his contention that Nadel's performance had deteriorated, that he had warned Nadel he needed to improve, and that he only terminated the 1988 Agreement because of Nadel's poor performance. He denied telling Rochman anything about his relationship with Nadel.

Several other witnesses testified that they either understood that Starkman and Nadel were partners based upon the way they conducted the firm, or that they were told there was a partnership by Starkman. Drafts and notes concerning the 1987 and 1988 Agreements, as well as the proposed LLC, were also introduced in evidence and discussed by the two parties during their testimony.

The trial judge issued a written opinion on September 23, 2008, in which she made findings of fact and conclusions of law. She determined that Starkman and Nadel had intended to enter into a partnership. She further determined that Nadel was entitled to twenty-five percent of the net fees recovered in cases that were open at the time the partnership was dissolved, as well as twenty-five percent of any referral fee from cases referred to other counsel pursuant to Rule 1:39-6(d), with certain adjustments for fees already received.*fn2

The judge outlined her assessment of the credibility of the two parties. She found Nadel to be a credible witness whose testimony was supported by the documents and witnesses offered by both sides. With respect to Starkman, she wrote that "[t]he pattern of evasiveness was so blatant that the court does not believe the critical testimony regarding [Starkman's] contention that [Nadel] was his employee when terminated."

It appears that a substantial influence on the judge's credibility findings was her dissatisfaction with Starkman's testimony concerning a list of pending cases he had been ordered to prepare in 2004. She concluded that the list omitted a significant number of cases. Although Starkman testified that it would have been impossible to create an accurate list, the trial judge concluded that his assertion was "absolutely not correct." She was also "troubled" by a letter sent by Starkman's attorney to his adversary in May 2008, representing that the list was "certified to be a true client list," which letter Starkman claimed never to have read.

In determining that Starkman and Nadel intended to create a partnership, the judge relied upon Nadel's testimony, the testimony of witnesses that Starkman referred to Nadel as his partner, the language in the 1988 Agreement that spoke in terms of Nadel's "interest" in the firm, the similar provisions of the subsequent Buy-Sell Agreement, and language in life insurance applications. She rejected Starkman's contrary testimony, and determined that the language in the 1988 Agreement about Starkman's sole ownership and Nadel's status as an independent contractor were not dispositive, especially in light of Nadel's explanation that they were only addressed to Starkman's role as managing partner and Nadel's income tax status.

Starkman moved for reconsideration and a recalculation of the damages, arguing that the judge had based her damages on estimated rather than actual expenses. That motion was denied. Starkman filed a second motion, denominated one to correct clerical errors, but actually addressed to the issue of actual as opposed to estimated expenses. That motion was also denied.

However, the judge eventually entered a second amended judgment, based on net fees rather than gross fees. It provided as follows:

1. [Nadel] is entitled to twenty-five percent (25%) of the net attorneys fees earned for all open cases as of September 26, 2004 which were retained by [Starkman], in the amount of $386,375.23, plus interest; and

2. [Nadel] is entitled to twenty-five percent (25%) of the referral fees for those cases referred to outside counsel in the amount of $266,120.30, plus interest; and

3. [Nadel] is entitled to retain twenty-five percent (25%) of the fees and expenses he has already collected from the seven (7) cases in which clients chose to have [Nadel] represent them in the amount of $62,645.70;

4. [Starkman] is entitled to retain seventy-five (75%) percent of the fees he has already collected, in all open cases as of September 26, 2004 in the total amount of $1,159,125.70 and the costs incurred in the amount of $76,277.71.

5. [Starkman] is entitled to seventy-five percent (75%) of the referral fees for those cases referred to outside counsel in the amount of $798,360.92; and

6. [Starkman] is entitled to one-third (1/3) of the total fees received by [Nadel] on those files [Nadel] brought to the firm of Starkman and Nadel and thereafter took with him and were resolved after September 26, 2004.

7. [Starkman] is entitled to seventy-five percent (75%) of the fees and expenses from the seven (7) cases in which those clients chose to have [Nadel] represent them in the amount of $187,937.09 plus interest.

This appeal followed.

II.

On appeal, Starkman argues (1) that the trial judge wrongly determined that he entered into a partnership with Nadel; (2) that, even if there were a partnership, the judge's calculation of damages was erroneous because she went beyond the terms of Paragraph 11 of the 1988 Agreement; and (3) that, in any event, the damages calculated by the trial judge were the result of mathematical errors even under her theory of recovery. Nadel responds that the trial judge's determination on the merits is fully supported by the facts as she found them and the governing law, and that there was no error in the computation of damages.

A.

In this appeal, we review a decision reached by the trial judge following a bench trial. "The general rule is that [factual] findings by the trial court are binding on appeal when supported by adequate, substantial, credible evidence." Cesare v. Cesare, 154 N.J. 394, 411-12 (1998) (citing Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974)). We do not disturb the factual findings of the trial court unless we are convinced that "'they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice.'" Id. at 412 (quoting Rova Farms, supra, 65 N.J. at 484); see also Beck v. Beck, 86 N.J. 480, 496 (1981).

However, "[w]hether the facts found by the trial court are sufficient to satisfy the applicable legal standard is a question of law subject to plenary review on appeal." State v. Cleveland, 371 N.J. Super. 286, 295 (App. Div.), certif. denied, 182 N.J. 148 (2004). Our review of the judge's legal conclusions are plenary. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).

B.

Starkman and Nadel entered into the 1988 Agreement to govern their working relationship with each other.

Consequently, the meaning of that agreement is central to their respective rights upon its termination.

The rules of contractual interpretation are well established. In our earlier opinion in the case, we outlined them as follows:

The role of the court is to give "juristic effect" to the intention of the parties as expressed in the contract. George M. Brewster & Son, Inc. v. Catalytic Constr. Co., 17 N.J. 20, 27-28 (1954) (citing Corn Exch. Nat'l Bank & Trust Co. v. Taubel, 113 N.J.L. 605 (E. & A. 1934)); Domanske v. Rapid-Am. Corp., 330 N.J. Super. 241, 246 (App. Div. 2000) (citations omitted). Ascertaining the intent of the parties requires, as the motion judge recognized, an analysis of the [1988] Agreement. See Kearny PBA Local # 21 v. Town of Kearny, 81 N.J. 208, 221 (1979) ("The polestar of construction of a contract is to discover the intention of the parties." (citing Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293, 301 (1953))); Caruso v. Ravenswood Developers, Inc., 337 N.J. Super. 499, 506 (App. Div. 2001) ("Courts are generally obligated to enforce contracts based on the intent of the parties, the express terms of the contract, surrounding circumstances and the underlying purpose of the contract." (citations omitted)).

If the contract is unambiguous, it must be enforced as written. Schenck v. HJI Assocs., 295 N.J. Super. 445, 450 (App. Div. 1996) ([citing] U.S. Pipe & Foundry Co. v. American Arbitration Ass'n., 67 N.J. Super. 384, 393 (App. Div. 1961)), certif. denied, 149 N.J. 35 (1997). A contract is ambiguous if it is reasonably susceptible of two interpretations. Nester v. O'Donnell, 301 N.J. Super. 198, 210 (App. Div. 1997) (quoting Kaufman v. Provident Life & Cas. Ins. Co., 828 F. Supp. 275, 283 (D.N.J. 1992)) (additional alteration omitted). The issue of ambiguity is one of law. Ibid.

If the contract is ambiguous, so that parole evidence is necessary to resolve the issue of intent, the meaning of the contract should be left for a fact finder after an appropriate evidentiary proceeding. See Bedrock Foundations, Inc. v. Geo. H. Brewster & Son, Inc., 31 N.J. 124, 133 (1959) (citations omitted); Michaels v. Brookchester, Inc., 26 N.J. 379, 387 (1958); Trucking Employees of N. Jersey Welfare Fund, Inc. v. Vrablick, 177 N.J. Super. 142, 148 (App. Div. 1980). [Nadel I, supra, slip op. at 6-7.]

Nevertheless, in interpreting the contract and seeking to ascertain the intent of the parties, the court will not make a better contract than the one created by the parties. See McMahon v. City of Newark, 195 N.J. 526, 545-46 (2008); Pacifico v. Pacifico, 190 N.J. 258, 266 (2007) ("The court's role is to consider what is written in the context of the circumstances at the time of drafting and to apply a rational meaning in keeping with the 'expressed general purpose.'") (quoting Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293, 302 (1953)).

C.

Before turning to the merits of the appeal, however, we must outline one further area of law, one that did not, in our view, receive sufficient attention both in the trial court and in Nadel I, our earlier consideration of the case. That is the law of partnerships.

A party seeking to prove the existence of a partnership bears the burden of proving its existence. Fenwick v. Unemployment Comp. Comm'n, 133 N.J.L. 295, 300 (E. & A. 1945); Lohmann v. Lohmann, 50 N.J. Super. 37, 45 (App. Div. 1958); In re Winter's Estate, 133 N.J. Eq. 245, 249 (Prerog. Ct. 1943), aff'd, 136 N.J. Eq. 112 (E. & A. 1945).

The Uniform Partnership Law (UPL), N.J.S.A. 42:1-1 to -49, which was in effect at the time the parties signed the March 1988 Agreement, defined a partnership as "an association of two or more persons to carry on as co-owners a business for profit." N.J.S.A. 42:1-6(1).*fn3 Pursuant to N.J.S.A. 42:1-7, "receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business," subject to certain exceptions, one of which is receipt of the share of the profits "[a]s wages of an employee."*fn4

Other indicia of a partnership "include agreement, sharing profits and losses, ownership and control of the partnership's property and business, community of power, rights upon dissolution and the conduct of the parties towards third persons, among others." Kozlowski v. Kozlowski, 164 N.J. Super. 162, 171 (Ch. Div. 1978), aff'd, 80 N.J. 378 (1979). See also Carney v. Hansell, 363 N.J. Super. 111, 121 (Ch. Div. 2003).

In Fenwick, supra, 133 N.J.L. at 297, the Court of Errors and Appeals noted that "[t]here are several elements that the courts have taken into consideration in determining the existence or non-existence of the partnership relation." In that case, for purposes of determining whether the beauty shop operated by John Fenwick was subject to the unemployment compensation law, it was necessary to determine whether Arline Chesire was his partner or his employee. Fenwick and Chesire had entered into a written agreement, which stated that they "associate[d] themselves into a partnership," but also provided that Chesire would make "no capital investment," that "control and management of the business [would] be vested in Fenwick," and that "as between the partners Fenwick alone [would] be liable for debts of the partnership." Id. at 296. The agreement, which also provided for each party to receive a percentage of the profits, was entered into in response to Chesire's request for a raise, rather than as an attempt to avoid application of the unemployment compensation law. Id. at 295-96.

The Court outlined the following elements for determining whether a partnership existed between Fenwick and Chesire:

The first element is that of the intention of the parties and here, of course, the agreement itself is evidential although not conclusive.

Another element of partnership is the right to share in profits and clearly that right existed in this case. However, not every agreement that gives the right to share in profits is, for all purposes, a partnership agreement. Therefore, this point is not conclusive.

Another factor is the obligation to share in losses, and this is entirely absent in this case because the agreement provides that [] Chesire is not to share in the losses.

Another is the ownership and control of the partnership property and business. Fenwick contributed all the capital and [] Chesire had no right to share in capital upon dissolution. He likewise reserved to himself control.

The next is community of power in administration and the reservation in the agreement of the exclusive control of the management of the business in Fenwick excludes this element so far as [] Chesire is concerned. In Wild v. Davenport, [48 N.J.L. 129, 132 (E. & A. 1886)], Mr. Justice Depue, speaking for this court, said:

"In Voorhees v. Jones,

[5 Dutcher 270, 272 (1865)] the decision that a servant or agent who had a share of profits simply as compensation for services was neither a partner nor liable for partnership debts, was placed by Chief Justice Whelpley on the ground that such a person had no control over the operations of the firm, and could not direct its investments nor prevent the contracting of debts --in other words, had none of the prerogatives of a principal in the management and control of the business."

The law as stated in these opinions has been followed by our courts.

Another element is the language in the agreement, and although the parties call themselves partners and the business a partnership, the language used excludes [] Chesire from most of the ordinary rights of a partner.

The conduct of the parties toward third persons is also an element to be considered and the conduct of the parties here does not support a finding that they were partners. They did file partnership income tax returns and held themselves out as partners to the Unemployment Compensation Commission, and Fenwick in his New York State income tax return reported that his income came from the partnership. But to no one else did they hold themselves out as partners. They did not inform the persons they purchased materials from, although Fenwick says this was not necessary since all purchases were for cash and they neither sought nor gave credit. The right to use the trade name had apparently come to Fenwick from one Florence Meola, by lease, and the partnership was given that name by Fenwick. There is no evidence that the trade name was ever registered as that of the partnership.

Another element is the rights of the parties on dissolution and apparently in this case the result of the dissolution, as far as [] Chesire is concerned, was exactly the same as if she had quit an employment. She ceased to work and ceased to receive compensation and everything reverted to the condition it was in prior to 1939, except that Fenwick carried on with a new receptionist.

Under all these circumstances, giving due effect to the written agreement and bearing in mind that the burden of establishing a partnership is upon the one who alleges it to exist, we think that the partnership has not been established, and that the agreement between these parties, in legal effect, was nothing more than one to provide a method of compensating [Chesire] for the work she had been performing as an employee. She had no authority or control in operating the business, she was not subject to losses, she was not held out as a partner. She got nothing by the agreement but a new scale of wages.

The question as presented to this court is one of law and not one of fact. The facts are really not in dispute. The contest concerns the inferences of law to be drawn from the facts as found by the Supreme Court.

The Uniform Partnership Act, [N.J.S.A. 42:1-6 (repealed 2000)], defines a partnership as an association of "two or more persons to carry on as co-owners a business for profit." Essentially the element of co-ownership is lacking in this case. The agreement was one to share the profits resulting from a business owned by Fenwick. He contributed all the capital, managed the business and took over all the assets on dissolution. Ownership was conclusively shown to be in him.

The act further provides that sharing of profits is prima facie evidence of partnership but "no such inference shall be drawn if such profits were received in payment as * * * wages of an employee." [N.J.S.A.] 42:1-7 [(repealed 2000)], and it seems that is the legal inference to be drawn from the factual situation here. [Id. at 297-300 (citation omitted).]

See also Farris v. Farris Eng'g Corp., 7 N.J. 487, 502-03 (1951) ("While the statute, [N.J.S.A.] 42:1-7 [(repealed 2000)], creates a prima facie presumption of a partnership where the profits are shared, not every agreement that gives the right to share profits is for all purposes a partnership agreement."); Bloom v. Clara Maass Med. Ctr., 295 N.J. Super. 594, 611 (App. Div. 1996) (same).

III.

Although we must defer to the trial judge's factfinding if supported by the record and the applicable law, the judge's conclusion that the parties intended to enter into a partnership is not itself conclusive of the existence of a partnership. The judge's conclusion that there was a partnership is not consistent with the facts when viewed in light of the applicable law. In addition, even if there had been a partnership, the damages awarded by the trial judge are not consistent with the language of the 1988 Agreement.

A.

As previously noted, the 1988 Agreement does not specifically state that it is a partnership agreement and the word "partnership" is nowhere to be found in the document. Its language about the relationship between Starkman and Nadel can be read as suggesting either a partnership or some other arrangement involving the sharing of net profits. Consequently, a trial was deemed necessary in Nadel I.

While we must defer to the judge's factual finding as to the parties' intention in entering into the agreement, our then highest court held in Fenwick, supra, 133 N.J.L. at 297, that intention is "evidential" but not "conclusive." Indeed, in Fenwick, the document itself purported to create a partnership, but the Court determined that it did not do so. In contrast, the UPA, N.J.S.A. 42:1A-10(a), provides that a partnership can be created even if the parties do not intend to create one.

Fenwick requires analysis of factors in addition to intent, such as (1) the sharing of profits; (2) the sharing of losses; (3) "ownership and control" of the property and business; (4) "community of power in administration and reservation in the agreement of exclusive control of the management of the business;" (5) whether the language of the agreement excludes one party from "most of the ordinary rights of a partner;" (6) the conduct of the parties toward third persons, including taxing authorities, clients, and others; and (7) "rights of the parties on dissolution." Id. at 298-300.

Taking the Fenwick factors, the 1988 Agreement, and the judge's findings of fact as a whole, the record reveals the following support for the existence of a partnership: (a) the trial judge found that the parties intended to create a partnership; (b) the agreement provides for the sharing of net profits; (c) the trial judge found that Starkman referred to Nadel as his partner; (d) the agreement and the Buy-Sell document refer to Nadel as having an "interest in the law practice"; and (e) the agreement has language stating the practice was "heretofore" owned solely by Starkman.

In contrast, the following support the conclusion that there was no partnership: (a) the agreement does not refer to itself as a partnership agreement but refers only to an "arrangement"; (b) the agreement provides that Nadel would be "deemed an independent contractor," rather than a partner; (c) there is no evidence that the firm filed a partnership tax return or reported the parties' income on a Schedule K-1; (d) the agreement has no provision for the sharing of losses; (e) the agreement specifically states that the practice would "continue to be owned solely by [Starkman] who alone shall make all decisions with respect to management of the practice"; (f) the agreement speaks in terms of Starkman, rather than the firm as a separate entity,*fn5 providing benefits to Nadel; (g) the agreement limited Nadel's right to take vacation, but not Starkman's, and set out Nadel's entitlement to benefits, but not Starkman's; (h) the agreement's only provision on termination limits Nadel's rights on termination to retention of his files and seventy-five percent of the resulting fees, subject to his obligation to repay Starkman for expenses paid by the firm before termination; and (i) the agreement recites that Nadel did not wish "to invest any capital in the existing practice [Starkman & Nadel] in order to 'purchase' a share of said practice for cash" but that Starkman was "willing to allow [Nadel] to share in the 'bottom line' profit of the practice by means of [the] agreement which bases the annual remuneration to be paid by [Starkman] to [Nadel] upon a percentage of the net income of the practice."

We hold that the 1988 Agreement did not create a true partnership between Starkman and Nadel because, by its terms, Nadel was precluded from exercising important rights of a partner and was not required to undertake one of the key obligations of a partner. While he was entitled to share in the net profits of the firm, Nadel undertook no obligation to share in its losses. He was precluded from any role in the management of the firm. His entitlement to vacation and benefits was fixed, whereas Starkman's was not. In addition, the agreement's only provision for its termination while both parties were still living did not provide for a buyout, such as the one that would occur if either Starkman or Nadel died, but provided only a right to take his files with him and retain more than his normal share of any fees received. Paragraph 11 provided that he would have no rights with respect to the files that remained with Starkman.

As outlined above, when there is ambiguity in a contract, extrinsic evidence can be used as an aid in interpreting the ambiguous terms. However, such evidence cannot be used to vary unambiguous terms of a contract. Chance v. McCann, 405 N.J. Super. 547, 564 (App. Div. 2009). The trial judge discounted the very specific language of Paragraph 8, that Starkman continued to own the firm, by adopting Nadel's interpretation that it was really addressed to Starkman's role as "managing partner." That is not what the language states and that provision is not ambiguous. That there may be some other language that appears to be inconsistent, such as the use of "heretofore" in the preamble and mention of Nadel's "interest" in the buyout provisions of Paragraph 12, does not render ambiguous the clear language of Paragraph 8, which is a specific and stand-alone provision of the document.

With respect to the buyout provisions of the 1988 Agreement and the subsequent Buy-Sell Agreement, they were limited to a dissolution of the parties' relationship upon the death of one of them, not termination pursuant to Paragraph 11. Nadel did have an interest in the firm, pursuant to the terms of the 1988 Agreement, and that interest was his right to receive most of the profit from the cases he had the right to take with him if the agreement was terminated. If Nadel died while still at the firm, his estate was to be compensated for the value of that interest.

B.

Even if the 1988 Agreement created a partnership between Starkman and Nadel, the trial judge's award of damages ignored the provisions of Paragraph 11, the only provision of the agreement to address a termination not related to the death of one of the parties. In our view, that provision governs without regard to whether the 1988 Agreement was a partnership, as the trial judge concluded, or only a compensation agreement, as we have concluded.

A fair reading of Paragraph 11 does not suggest any ambiguity. It provides that either party may terminate the agreement on sixty days notice for any reason, that in the event of termination Nadel has the right to take with him all of the files marked with his initials, that any fees paid to Nadel with respect to those files may be retained by him subject to his obligation to forward to Starkman one-third of the fee and the amount of any expenses paid by Starkman, and that the non-Nadel files will be retained by Starkman and Nadel will have no further rights with respect to them. That provision accords Nadel a larger portion of the fees resulting from his files, two-thirds of the gross fee minus expenses paid by Starkman, than he would ordinarily receive during the existence of the agreement, twenty-five percent of the net fee.*fn6

Despite the language in Paragraph 11 to the effect that Nadel was to have no further right to the files retained by Starkman after a termination of the agreement, the trial judge awarded substantial additional damages based upon the fees received from those files without any explanation of where she found that obligation reflected in the agreement or why she was varying the terms of the agreement. In fact, the formula applied by the judge is not found anywhere in the agreement. In effect, she created "a better contract" for Nadel than the one created by the parties, contrary to the legal principles found in cases such as McMahon v. City of Newark, supra, 195 N.J. at 545-46; Kampf v. Franklin Life Insurance Company, 33 N.J. 36, 43 (1960) ("When the terms of an insurance contract are clear, it is the function of a court to enforce it as written and not to make a better contract for either of the parties."); and Lucier v. Williams, 366 N.J. Super. 485, 491 (App. Div. 2004) ("[C]courts will not rewrite contracts to favor a party, for the purpose of giving that party a better bargain.") (citing Kampf, supra, 33 N.J. 36).

C.

Because we have concluded that the terms of Paragraph 11 of the 1988 Agreement govern Nadel's rights upon termination, whether there was a partnership or not, we reverse the judgment on appeal and remand to the trial court for a recalculation of damages based solely on the terms set forth in Paragraph 11.

Reversed and remanded.


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