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First District Strikes Verdict Against Partners But Leaves Firm Liable in Partnership Dispute

 

In a partnership dispute and breach of fiduciary duty claim, the First District Court of Appeal has ruled that an attorney may sue his former firm, but not his former partners. In Kehoe v. Harrold, Wildman, Allen & Dixon, No. 1-07-0435 (Ill. 1st Dec. 23, 2008), Robert Kehoe, a former partner in the firm, sued after partners voted to change him from equity partner to nonequity partner. That is, they voted to end his part ownership of the firm and make him a salaried employee.

In 1995, after Kehoe had been a partner in Harrold Wildman for sixteen years, the firm renegotiated its financing with its bank, a deal that required every equity partner to execute a personal guaranty acceptable to the bank. Kehoe objected to the proposed guaranty and was unable to find a compromise, despite offers to draft his own version. The bank allowed the firm to take out its loan anyway. Later, the firm amended its loan agreement with the bank to eliminate the guaranty requirement but specify that partners without a guaranty are personally liable for the full amount of the debt. A few months later, partner Eisel approached Kehoe about his lack of a guaranty, and Kehoe replied that the amendment made it unnecessary.

The firm’s management committee then met and adopted a resolution allowing a two-thirds vote of partners to change the status of any partner who failed to execute a guaranty. Kehoe was present and objected, and rebuffed later advice to sign the guaranty. The partners later voted to remove his equity status per the resolution. Over the next two days, Kehoe moved his clients to a law firm of his own; he also requested his equity be paid out and was denied. He sued individual partners, claiming they breached their fiduciary duty by advocating the resolution, and the firm as a whole for breaching their obligation to pay his equity share.

At trial, the case turned on the definition of “involuntary withdrawal” in the firm’s partnership agreement; Kehoe was only entitled to equity payment if he was involuntarily withdrawn. The jury decided that he was, finding both the firm and certain partners in breach. All of the defendants appealed, claiming they were entitled to judgment notwithstanding the verdict based on the fiduciary duty claim. The partners also appealed, arguing that they were entitled to a new trial because the manifest weight of the evidence favored them and because of errors by the court.

The appeals court started by examining the dispute over whether the partnership agreement was ambiguous in its definition of “involuntary withdrawal,” a basis for both of Kehoe’s successful claims. The appeals court agreed with the trial judge that it was, and allowed the jury’s decision based on that finding, to hold the firm liable for failing to pay Kehoe’s separation benefits, to stand. It next turned to the decision against individual partners, which held them personally liable for failing to pay Kehoe. The language of the partnership agreement mentioned only the firm’s obligation to pay, but Kehoe argued that partners should be individually liable based on obligations of partners under Illinois partnership law.

The judges disagreed, pointing out that Kehoe did not use a partnership cause of action. A plain reading of the partnership agreement did not support him, they said, and he could not pick and choose which language in the contract applied. Thus, the partner defendants were entitled to judgment notwithstanding the verdict on breach of contract. Kehoe also alleged that partner defendants had breached their fiduciary duty to him by misinforming the partnership before the vote. Again, the appeals judges disagreed: “The allegations set forth by the plaintiff do not remotely come close to the [defendants’] fundamental duty.” The partners did not deprive the partnership of profits, the court said, as required to find a breach of fiduciary duty. Thus, the First reversed the lower court’s decision as to the partner defendants and upheld it as to the firm itself.

The business litigation law firm of DiTommaso Lubin Austermuehle focuses on this type of partnership dispute, as well as disputes involving closely held businesses, franchise businesses and corporate shareholders. Based in Oak Brook and Chicago, we represent businesses and individuals throughout Illinois as well as in Wisconsin and Indiana. If you have a business-related dispute, we can help. Please contact us online for a confidential consultation.