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Jerry Rappaport v. Marvin Gelfand et al

July 28, 2011

JERRY RAPPAPORT, PLAINTIFF AND RESPONDENT,
v.
MARVIN GELFAND ET AL., DEFENDANTS AND APPELLANTS.



(Los Angeles County Super. Ct. No. SC092179) APPEAL from a judgment of the Superior Court of Los Angeles County, Linda K. Lefkowitz, Judge. Modified and, as so modified, affirmed in part and reversed in part.

The opinion of the court was delivered by: Croskey, J.

CERTIFIED FOR PUBLICATION

Defendants and appellants Marvin Gelfand (Gelfand), Steven Glaser (Glaser), Gelfand Rappaport & Glaser LLP (GRG) and Gelfand & Glaser LLP (GG), the successor to GRG, appeal a judgment in favor of plaintiff and respondent Jerry Rappaport (Rappaport) following a bench trial to determine the "buyout price" of a dissociating partner's interest in a law firm pursuant to Corporations Code section 16701, subd. (b).*fn1 That section is part of the Uniform Partnership Act of 1994 (UPA) (§ 16100 et seq.), which applies to law partnerships.

In this apparent case of first impression in California, we are called upon to construe section 16701, subdivision (b), which provides, "The buyout price of a dissociated partner's interest is the amount that would have been distributable to the dissociating partner under subdivision (b) of Section 16807 if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership was wound up as of that date. Interest shall be paid from the date of dissociation to the date of payment."

Here, the trial court ruled that "[b]ecause of the peculiar relationship between dissociation and the wind-up process when applied in the law firm context, a construct is created to calculate a value as of October 31, 2005, based upon individual assets being liquidated over time, and then bringing the value 'back' to the date of dissociation." The trial court's interpretation of section 16701 is correct and its creating a "construct" based on individual assets being liquidated over time is a reasonable application of the statute. It awarded judgment in favor of Rappaport and against all of the appellants, based on 31 percent of the liquidation value of the partnership as determined by expert testimony. (See fn. 5, post.)

The trial court further found that appellants Gelfand and Glaser were individually liable, in addition to the limited liability partnerships of GRG and GG,*fn2 for the amount of the buyout payment to Rappaport. Although we affirm the trial court's interpretation and application of section 16701, subdivision (b), we reverse the trial court's finding of individual liability on the part of Gelfand and Glaser.

In addition, our review of the record indicates that the trial court made a relatively minor mathematical error which we will correct by modifying the judgment.

FACTUAL AND PROCEDURAL BACKGROUND*fn3

1. The Partnership and Rappaport's Dissociation Therefrom

The instant action arises from the dissociation of Rappaport from the law firm of GRG. Gelfand and Glaser were the original partners of the firm and had been so since 1986. In 2000, Rappaport joined Gelfand and Glaser to form GRG. Gelfand held a 46 percent share in the practice; Rappaport's share was 31 percent; and Glaser had the remaining 23 percent share. There was no oral or written partnership agreement governing the terms of any partner's dissociation.

In 2005, Rappaport indicated he wished to dissociate from the GRG limited liability partnership. Gelfand and Glaser wished to continue their partnership and did so for approximately 14 months thereafter. The three partners agreed the effective date of dissociation would be October 31, 2005. From October of 2005 through February of 2006, the parties attempted to negotiate the terms of Rappaport's dissociation. On February 22, 2006, after negotiations broke down, Rappaport made a written demand for compensation for his partnership interest in accordance with section 16701, which "controls and provides that I am to receive the greater of the liquidation or going concern value."

2. Proceedings

On December 21, 2006, Rappaport filed suit against Gelfand, Glaser, GRG and GG (collectively, appellants), seeking, inter alia, damages for breach of section 16701, subdivision (b). GG, the successor to GRG, filed a cross-complaint against Rappaport for money had and received and for conversion. On February 20, 2008, the matter came on for trial.

The three major assets of GRG in issue during the trial were: (1) general accounts receivable; (2) possible recovery of a contingency fee in a case identified as Hughes v. U.S. Foodservice (Hughes litigation); and (3) receivables due from work in four separate litigation matters on behalf of a client, Dr. Morry Waksberg (Waksberg litigation). Also in dispute was the amount of liability that should be attributed to Rappaport under the office space lease.

At trial, Rappaport presented expert testimony by Jan Goren (Goren), a certified public accountant, and Paul Kelley (Kelley), a civil litigator who was specifically retained to value the Hughes litigation and Waksberg litigation receivables. GRG presented expert testimony by David Nolte (Nolte) of Fulcrum Financial Inquiry.

3. Trial Court's Ruling

The trial court issued an extensive statement of decision which set forth the valuation methodology that it adopted and applied to the various assets and liabilities in issue. It began its analysis as follows: "[Section 16701] permits an individual to 'dissociate' from the partnership while permitting the remaining partners the option of buying out the departing partner as of a given date, while continuing the partnership. . . . Essentially, neither the departing partner nor the remaining partners should obtain an advantage by the dissociation. The basic policy judgment is that the departing partner should get the same amount through the buyout that he or she would get if the business were wound up." (Italics added.)

"While the statute sets forth two alternatives for valuing the dissociating partner's interest, there remains some question whether the concept of sale as of the entire business is theoretically possible when applied to a law practice. . . . [¶] As applied to the instant case, the parties agree upon which assets must be valued to determine Rappaport's share as of October 31, 2005. The disagreement lies in the method of valuation."

The trial court reasoned, "Because of the peculiar relationship between dissociation and the wind-up process when applied in the law firm context, a construct is created to calculate a value as of October 31, 2005, based upon individual assets being liquidated over time, and then bringing the value 'back' to the date of dissociation." The trial court was persuaded by the testimony of Rappaport's expert, Goren, who opined "that in assessing value, one would calculate an amount on October 31[, 2005] based upon individual assets being liquidated over time, calculating risk, and then bringing the value 'back' to the date of dissociation. Whether looking at sale of the business as [a] whole, or by liquidation of assets, Goren assumed all partners were attempting to maximize the value of the assets. He did not view 'liquidation' as assuming the sale of all assets on one date."

With respect to the three major assets of GRG and the lease liability, the trial court ruled as follows:

a. General Accounts Receivable

On the date of Rappaport's dissociation, GRG, like most law firms, had a number of accounts receivable. Nolte, for the defense, valued the general accounts receivable at 25 percent of face value for accounts under 90 days, and of no value thereafter, for a total valuation of $60,800. Nolte reasoned as follows: "Due to the nature of most 'service' businesses, a strict liquidation assumption provides a serious discount when compared to the face amount of a receivable. Service receivables are not the result of a transfer of acceptable physical goods, but are instead subject to after-the-fact claims that the billed services were not desired, of poor quality, etc. In this situation there is almost no market for the non-recourse sale of 'service' receivables, especially where the service provide[r] is not providing ongoing work that the debtor needs. As a result, the receivables of a 'service' business have almost no value under the treatment prescribed by law in the case of a withdrawing partner."

Goren, in turn, valued 0-90 day receivables at 90 percent of face value, 90-180 day receivables at 55 percent of face value, and agreed that receivables had no value if they exceeded 180 days, for a total valuation of $256,842. Goren noted the assessment of accounts receivable was particularly difficult in the context of a statutory dissociation "because in a partnership windup, there is an orderly process over time, where under [section] 16701, one must make an assumption as to an orderly process, yet value the asset at a ...


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