On appeal from Superior Court of New Jersey, Chancery Division, Camden County, Docket No. C-158-04.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
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.
The following facts and procedural history are drawn from the record on this appeal.
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.
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 ...