1. Partnerships--modification of agreement--acceptance of other
employment
The trial court did not err in an action arising from the
dissolution of a partnership tried without a jury by concluding
that defendant was not entitled to damages for plaintiff's breach
of the partnership agreement in accepting other employment while
still a partner where the evidence showed both consent and
consideration, so that a new agreement was produced by the
parties.
2. Partnerships--dissolution--rent
The trial court erred in an action arising from the
dissolution of a partnership tried without a jury by awarding
plaintiff rent through the entire month of July where the record
shows that defendant obtained ownership of the building on 9
July.
3. Partnerships--dissolution--collection of debts
The trial court erred in an action arising from the
dissolution of an accounting partnership tried without a jury by
finding that defendant had collected $18,000 from JFJ where the
record shows that defendant only received about $13,317.65.
4. Partnerships--dissolution--interest
The trial court in an action arising from the dissolution of
an accounting partnership tried without a jury did not err by
awarding plaintiff interest on a judicial award from the date
the partnership dissolved. The business of the partnership was
continued by defendant without liquidation of partnership affairs
and plaintiff was thus entitled by N.C.G.S. § 59-72 to receive
interest on the value of his share of the partnership from the
date of dissolution. While N.C.G.S. § 24-5(b) generally provides
interest from the date of entry of judgment, the more specific
statute controls.
5. Partnerships--dissolution--payment of debts from individual
funds
The trial court erred in an action arising from the
dissolution of a partnership tried without a jury by not
considering the parties' adjustments to the final valuation for
the payment of partnership liabilities from individual funds.
6. Appeal and Error--cross-assignment of error--improper
A plaintiff's argument on appeal was waived where plaintiff
cross-assigned error to a trial court's order but the proper
method of raising the arguments would have been by a cross-
appeal. Plaintiff argued reasons the trial court erred in its
findings of fact and conclusions of law, but those reasons do not
provide an alternative basis in law for supporting the judgment.
Parker, Poe, Adams & Bernstein L.L.P., by R. Bruce Thompson,
II, for plaintiff-appellee.
McCoy, Weaver, Wiggins, Cleveland & Raper, PLLC, by Jim Wade
Goodman, for defendant-appellant.
GREENE, Judge.
Charles K. Edwards (Defendant) appeals an order filed 11 May
1999 determining the value of a partnership and an order filed 17
March 2000 directing Defendant to pay Henry G. Lewis (Plaintiff) a
total of $157,414.99 for Plaintiff's one-half interest in a
partnership between Plaintiff and Defendant.
Defendant and Plaintiff were the sole partners of Edwards &
Lewis, CPAs (the Partnership), a professional certified public
accounting practice in Lumberton, North Carolina. Plaintiff and
Defendant entered into a partnership agreement (the agreement) on
1 June 1978 that included a provision for the duties of the
partners (the Partnership duties):
Each partner shall devote full working time to
[the P]artnership affairs and shall not accept
full, or regular parttime, employment from any
other source nor engage in any other business
other than investment and management of his
own funds without first obtaining theagreement of the other party, and
notwithstanding such agreement, if the other
partner so demands, any and all salaries
received thereafter from such employment shall
be charged against the pro-rata share of net
income to which such employed partner is
entitled to receive.
The Partnership was primarily located at 304 East 5th Street in
Lumberton (the 5th Street building). The 5th Street building was
owned by E&L Rentals, a separate general partnership between
Defendant and Plaintiff, from 1985 until 9 July 1999. Tax returns
filed by the Partnership indicate the Partnership paid E&L Rentals
$2,500.00 per month for rent.
In December 1995, Plaintiff decided he no longer wanted to be
actively involved in the Partnership and obtained employment at Ted
Parker Home Sales, Inc. (Ted Parker) as its Chief Executive
Officer. The parties agreed Defendant would be the managing
partner of the Partnership and would be compensated an additional
$2,000.00 per week for to his increased responsibilities of
managing the Partnership. Plaintiff began his employment with Ted
Parker on 1 January 1996.
In a letter dated 8 April 1996, Plaintiff informed Defendant
of Plaintiff's “intent to dissolve the [P]artnership effective May
1, 1996.” Plaintiff also requested Defendant inform him as to
whether Defendant intended to continue operating as a sole
practitioner and whether Defendant intended to continue utilizing
the 5th Street building and the equipment and other assets of the
Partnership. In his response letter dated 26 April 1996, Defendant
indicated he would “continue in public accountancy as a sole
practitioner” at the 5th Street building. A year after the date of dissolution of the Partnership
Defendant had not formally accounted to Plaintiff for Plaintiff's
share in the assets of the Partnership. On 9 May 1997, Plaintiff
filed a complaint against Defendant requesting: Defendant be
required to account for the Partnership's property and earnings
retained by Defendant, as required by the agreement or N.C. Gen.
Stat. §§ 59-52 and 59-68(a);
(See footnote 1)
Plaintiff recover from Defendant
Plaintiff's share of the Partnership's property and earnings; and
Plaintiff recover interest, including pre-judgment interest. In
Defendant's answer and counterclaim, he denied the allegations of
Plaintiff's complaint and counterclaimed for Plaintiff's alleged
breach of the Partnership duties, alleged breach of fiduciary duty,
violation of the Trade Secrets Protection Act, and unfair and
deceptive trade practices. In an amended complaint filed 1 June
1998, Plaintiff sought damages for Defendant's alleged: negligence
and breach of the Partnership duties; breach of fiduciary duty; and
unfair and deceptive trade practices. Defendant filed an amended
counterclaim and answer specifically pleading unclean hands as a
defense to Plaintiff's allegations concerning Defendant's breach of
fiduciary duty. Defendant also counterclaimed for: a declaratory
judgment on Plaintiff's claim for a judicial accounting; unjust
enrichment; and interference with prospective economic advantage.
On 21 May 1998, Plaintiff moved for partial summary judgmenton Plaintiff's entitlement to an accounting of the Part
nership and
Defendant's causes of action for an alleged violation of the Trade
Secrets Protection Act and alleged unfair and deceptive trade
practices. Plaintiff also requested that all other issues be
stayed until completion of the accounting. On 7 July 1998, Judge
Dexter Brooks (Judge Brooks) granted Plaintiff's motion for summary
judgment on Defendant's claim under the Trade Secrets Protection
Act and on Defendant's claim for unfair and deceptive trade
practices. Judge Brooks further held Plaintiff was entitled to
summary judgement on his claim seeking an accounting for the
Partnership assets, and all other issues should be stayed pending
the completion of the accounting of the Partnership.
(See footnote 2)
On 20 July 1998, a hearing began on Plaintiff's claim for an
accounting of the Partnership. During the presentation of
Defendant's evidence, Judge Stafford G. Bullock (Judge Bullock)
found the accounting of the Partnership required “the examination
of a long, complicated account” and concluded “that a reference is
necessary” to complete the accounting. In an order filed 21
September 1998, Judge Bullock ordered a reference for an accounting
of the value of the Partnership as of 1 May 1996.
On 9 and 10 November 1998, the reference hearing was conducted
by Robert N. Pulliam (Pulliam), a Certified Public Accountant and
Accredited in Business Valuations. Pulliam found as fact:
1. The accounting records maintained by thePartnership subsequent to
May 1, 1996 are
not credible as to accuracy. Billings
and collections were commingled by . . .
Defendant with his subsequent
proprietorship thereby making it
impossible to identify separate
distinguishable values for accounts
receivable and work in process.
. . . .
4. Intangible assets (goodwill) is agreed to
by the parties to have a value of zero.
. . . .
6. . . . The value of the assets, less
liabilities of [the Partnership] as of
May 1, 1996 is $176,070.52.
Pulliam also found that the methodology for dissolution of the
Partnership contained in the agreement was based on a “rule of
thumb,” more appropriate to “measure the CPA practice operating as
a going concern with measurable goodwill,” which was not applicable
in this case. Both parties objected to Pulliam's report and his
valuation of the Partnership.
(See footnote 3)
In an order filed 11 May 1999,
Judge Robert F. Floyd, Jr. (Judge Floyd) concluded the value of the
Partnership was $176,070.52 as of 1 May 1996 and adopted Pulliam's
report, including the methodology used for the valuation of the
Partnership.
(See footnote 4)
Judge Floyd further concluded:
Nothing else appearing, Plaintiff would be
entitled to receive $88,035.26, plus
appropriate interest, on his first claim for
relief. However, each party reserves its
rights in further proceedings in this matterto prove that he has paid from his individual
funds partnership liabilities existing at May
1, 1996, or that the [P]artnership has, since
May 1, 1996, paid for the benefit of either
party any amount that was not a liability of
the Partnership at May 1, 1996, or that any
other adjustments are appropriate.
A bench trial was held on the remaining claims of Plaintiff
and Defendant on 1-3 November 1999 before Judge William C. Gore,
Jr. (Judge Gore). At the trial, Plaintiff presented exhibit 66
which showed Defendant had collected approximately $13,317.65 in
payments from JFJ, a client of the Partnership. Plaintiff also
presented exhibit 71-A (exhibit 71-A), a computation of the
adjusted value of the Partnership and the amounts owed to
Plaintiff. Exhibit 71-A adjusted the value of the Partnership, as
determined by Pulliam, to include debts paid by the parties after
1 May 1996. Exhibit 71-A included amounts Plaintiff paid for
storage of the Partnership's files, amounts paid to Kinlaw
Chiropractor, and amounts due to Plaintiff for rental of the 5th
Street building. Exhibit 71-A also made adjustments to Plaintiff's
interest in the Partnership for disbursements made for the benefit
of Plaintiff including amounts paid to: Jean Lamb; E&L Rentals
from the Partnership's BB&T account (BB&T); Robesonian from BB&T;
E&L Rentals from the Partnership's UCB account; Plaintiff's country
club dues; taxes paid for Plaintiff; and insurance paid for
Plaintiff. In Plaintiff's exhibit 71-B (exhibit 71-B), Plaintiff
made adjustments to exhibit 71-A showing the subtraction of monies
paid for rent from E&L Rentals as well as payment on BB&T's line of
credit. Exhibit 71-A also adds payments from E&L Rentals.
Defendant's exhibit 109 (exhibit 109) adjusted the value ofthe Partnership as determined by Pulliam to include dist
ributions
for the parties' joint benefit. Defendant added to Plaintiff's
one-half interest sums including: E&L Rentals' contribution to
“FUNB Bank Principal”; E&L Rentals' contribution to BB&T Note;
personal contributions to BB&T Note; and half the value of the
Partnership's furniture, equipment, and supplies. Defendant,
however, subtracted from Plaintiff's interest sums including:
payments for country club dues; payments for tax filings; payments
for insurance; interest on BB&T note; and bank charges.
At the conclusion of trial, Judge Gore entered an order and
found as fact, in pertinent part:
10. The Court finds that [the
Partnership duties] w[ere] modified by the
conduct of the parties and that, through that
conduct, [Defendant] waived his right to
enforce the provisions of the [agreement]
relating to outside employment by [Plaintiff].
Specifically, [Plaintiff] and [Defendant]
agreed that, beginning January 1, 1996, when
[Plaintiff] began his work with Ted Parker,
[Defendant] would receive an additional
$2,000.00 per week in guaranteed compensation
from the . . . Partnership.
11. [Defendant] was in fact paid $2,000
per week for the time period January 1, 1996
through April 30, 1996 from [the] Partnership
assets. [Plaintiff's] acceptance of a salary
from Ted Parker and his failure to disclose
the same to [Defendant] was not a breach of
fiduciary duty because of this modification of
the . . . [a]greement and the extra
compensation paid from the [P]artnership
assets to [Defendant].
. . . .
14. [Plaintiff's] leaving to work for
Ted Parker, the . . . Partnership's largest
client, did adversely affect the . . .
Partnership. However, in agreeing to accept
$2,000 per week, [Defendant] agreed to this,
there is no cause of action based on thatconduct and [Defendant] is not entitled to any
damages as a result of [Plaintiff's] conduct
in leaving to take another job.
. . . .
20. The Court likewise finds that
[Defendant's] mailing statements to the . . .
Partnership's clients on his personal
letterhead after the date of dissolution was
not in good faith, was not in keeping with
accepted business practices, and that such
conduct also adversely affected the
collectability of the . . . Partnership's
accounts receivable.
21. The Court further finds that
[Defendant], after the date of dissolution did
in fact commingle his private proprietorship
accounting business funds with the funds of
the . . . Partnership, which, according to
[Pulliam], made a valuation of the . . .
Partnership very difficult. The Court further
finds that [Defendant's] actions in
commingling funds and sending confusing bills
to the . . . Partnership's clients did
adversely affect the collectability of
accounts receivable. The Court cannot assign
a number figure to that.
. . . .
24. The Court further finds that
[Defendant's] representations to [Pulliam]
that the . . . Partnership, as of the date of
dissolution, had a negative value of $118,000
to be false, disingenuous, and a violation of
his fiduciary duty to the . . . Partnership.
. . . .
26. From 1985 until July 9, 1999, the
5th Street [b]uilding continued to be owned by
E&L Rentals. On July 9, 1999, [Defendant] and
his wife and Jeff Collins and his wife
purchased the 5th Street [b]uilding. During
the period from May 1, 1996, through July 9,
1999, [Defendant] . . . continued to use the
5th Street [b]uilding for his own accounting
practice. Although the . . . Partnership,
according to filed tax returns, paid rent of
$2,500 per month on the 5th Street [b]uilding,
[Defendant] paid rent of only $1,275 per
month. The Court finds that [Defendant's]contention that he should not be required to
pay rent based on the same rental value as had
been claimed by the . . . Partnership for tax
purposes is not equitable, and that
[Defendant] is estopped from denying that the
amount of rent shown by the . . . Partnership
in its tax returns ($2,500[] per month) is not
the fair rental value of the 5th Street
[b]uilding.
27. The difference between the $2,500
per month rental value paid by the . . .
Partnership for the 5th Street [b]uilding and
the $1,275.00 per month paid by [Defendant]
after May 1, 199[6], is $1,225. [Defendant]
paid the lesser amount for 33 months, from May
1, 1996 through January 1999. Thus, the total
deficiency for this 3[3] month period is
$40,425. [Defendant] did not pay any rent on
the 5th Street [b]uilding from February 1999
until July 1999. The total deficiency for
this period is $15,000.
. . . .
29. [Defendant] collected $18,000.00
from [the] Partnership client JFJ when
approximately that same amount was still owing
to the Partnership. [Defendant's] actions
were in bad faith and the $18,000.00 should be
added to the post-dissolution value of the
Partnership, with [Plaintiff] being entitled
to one-half (1/2) of that amount.
. . . .
31. The Court finds that [Defendant]
continued to use all of the . . .
Partnership's assets in the 5th Street
[b]uilding. However, [Defendant] did not
convert all the assets because [Defendant] did
offer [Plaintiff] and indeed requested
[Plaintiff] to come to the [P]artnership and
help with the winding down of the
[P]artnership's affairs.
. . . .
34. [Plaintiff's] contention that he
should be reimbursed by the . . . Partnership
for storage charges for files and records
. . . is a transparent attempt by [Plaintiff]
to require [Defendant] to reimburse
[Plaintiff] when the money [Plaintiff]actually paid was paid to a corporation of
which [Plaintiff] was an officer. . . .
35. The Court finds that the only May 1,
1996 adjustments to be made to [Pulliam's]
valuation are the rental amount and the amount
collected from JFJ.
Judge Gore concluded: Defendant breached his fiduciary duty and
the Partnership duties, but Plaintiff was not entitled to the
recovery of damages on these claims; Plaintiff breached the
Partnership duties, but Defendant was not entitled to any damages
on this claim; Plaintiff breached his fiduciary duty, but Defendant
failed to show any compensable damages; and Defendant failed to
present any evidence establishing Defendant's entitlement of relief
for interference with prospective economic advantage or unjust
enrichment.
(See footnote 5)
Judge Gore further concluded with respect to
Plaintiff's first claim for relief for a judicial accounting
pursuant to statute:
A. The value of the . . . Partnership at May
1, 1996 . . . was $176,070.52.
B. The value of the . . . Partnership as of
the dissolution date should be adjusted
upward by $18,000.00, representing the
amount of money that [Defendant]
collected from JFJ and deposited into his
sole proprietorship after May 1, 1996.
Thus, the value of the Partnership is
$194,070.52 and [Plaintiff] is entitled
to one-half (1/2) of that amount from
[Defendant], which is $97,035.26.
Interest at the rate of eight percent
(8%) per annum should be added to that
amount from May 1, 1996, the date that
[Defendant] took control of the
Partnership assets and liabilities, untilthe date of entry of judgment.
C. [Defendant] is also liable to E&L Rentals
in the principal sum of $55,425.00 in
rent on the 5th Street [b]uilding, in
accordance with the rent of $2,500.00 per
month previously paid by the . . .
Partnership for rent of the 5th Street
[b]uilding according to the . . .
Partnership's tax returns.
D. [Defendant] is required to pay
[Plaintiff] $27,712.50 for the principal
amount of his one-half interest in the
principal sum that [Defendant] owes in
rent for the 5th Street [b]uilding, plus
appropriate interest.
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