Last month an interesting decision from Missouri addressed and resolved a myriad of issues concerning a law firm dissolution including issues of first impression. As we hope you see, the case addresses issues often faced in New York practice when dissolution occurs, and, as a result, is insightful particularly in its analyses of fiduciary duty and jury instructions regarding law firm disputes. With no further adieu, from the “Show-Me” State we present Finch v. Campbell, 2017 WL 6329924.

On Dec. 12, 2017, the case of Floyd Finch and Bruce Campbell regarding a dispute over the dissolution of their law partnership was decided by the Missouri Court of Appeals, Western District.

Finch and Campbell became partners in 2009 and dissolved their partnership as of Aug. 1, 2012. (*1). Although the law firm of Finch & Campbell had no written partnership agreement, the partners each had a 50 percent stake, and the firm operated on a cash basis. (*1).

In 2012, Campbell attempted to dissolve the firm; yet, when dissolution talks stalled, Campbell locked Finch out of the firm offices, and established The Bruce Campbell Law Firm LLP. (*1). Campbell continued to maintain all of Finch & Campbell's profits, losses, and expenses during the windup period. (*1).

In February 2013, Finch filed a petition against Campbell and The Bruce Campbell Law Firm LLP, claiming that he had been wrongfully barred from Finch & Campbell and its profits. (*1). He sought an accounting, the ability to access information from his former firm, the establishment of a constructive trust, injunctive relief, and relief for breach of fiduciary duty. (*1). In March, Campbell answered and counterclaimed against Finch for: his failure to consistently and accurately bill clients, breach of fiduciary duty, breach of contract, breach of the duty of good faith and fair dealing, and unjust enrichment. (*1).

In January 2014, the trial court ordered an accounting of Finch & Campbell, and appointed a Special Master for this purpose. (*1). The cash basis on which the firm operated led the Special Master to focus on identifying unrecorded assets, specifically accounts receivable and work in progress. (*1-2).

The accounting of Finch & Campbell was complicated by two factors. (*2). First, Finch inconsistently billed his clients, with some bills being sent for work performed months or even years prior. (*2). Second, in 2012 Finch underwent a divorce, during which a CPA valued the partnership of Finch and Campbell as being worth only $1,038.75. (*2). However, in December 2014 and January 2015, the same CPA, acting as expert witness for Finch, valued the 2012 partnership at $412,435.56. (*2). Given this, Finch's CPA was found to be not reliable and the court valued the partnership at $350,376.29. (*2).

In February 2016, a jury trial took place to decide, inter alia, the breach of fiduciary duty claims by both parties. (*2).

In March 2016, the jury reached a verdict, awarding Finch $150,000 in damages for Campbell's breach of fiduciary duty, and awarding Campbell $100,000 for Finch's breach. (*2-3). No other claims were sustained. (*2-3).

Both Finch and Campbell appealed to the Missouri Court of Appeals. (*3).

Finch's argument on appeal contained four points. In Point I, Finch argued that the trial court's refusal to accept his motions for directed verdict and judgment notwithstanding the verdict, as well as their judgment against Finch for breach of fiduciary duty, was in error, for the court's decision was based on his poor billing practices, conduct which, Finch claimed did not violate his fiduciary obligations. (*3). Citing Missouri's Uniform Partnership Law, which holds that fiduciary duty is governed by each partnership's unique agreement, Finch argued that, as there was no written agreement between himself and Campbell, he was not obligated to bill time in any particular way. (*4). What is more, Finch stated, as he in no way profited from the manner in which he billed clients, he could not have breached his fiduciary duty. (*4).

The Court of Appeals found this argument unconvincing. (*4-5). The court had not previously been asked to decide whether a breach of fiduciary duty existed concerning a refusal to record time despite demand from a partner or client and noted that this was an issue of first impression. (*4). The court opined that “Finch had a fiduciary duty to Campbell,” for “[a] partner's fiduciary duty includes the duty to be candid concerning business opportunities, the duty to be fair, the duty not to put self-interests before the interests of the partnership, and the duty not to compete with the partnership.” (*5, citing Matter of Cupples, 952 S.W.2d at 235-36). According to the evidence, the court determined that Finch had hurt his firm, for Campbell and the firm's clients were unhappy with Finch's billing methods. (*5). However, there was more, for, according to Campbell, Finch purposely did not bill his clients so as to claim to have a lower income in his 2012 proceedings for divorce. (*5). Accordingly, the point was denied. (*4).

Finch's Point II concerns the trial court's Jury Instruction Number 11 which dealt with Campbell's counterclaim that Finch breached his fiduciary obligations. (*5). According to Instruction 11, the jury should conclude that Finch breached his fiduciary duty if he did not record or bill his time in a reasonably timely manner, cooperate sufficiently with the billing process, act in his partner's best interest, or if he directly damaged his partner through his actions. (*6). Finch made four arguments. (*6).

First, Finch claimed that Instruction 11 assumes it is part of his fiduciary obligations to bill his clients in a specific manner when such is not the case. (*6).

The court held that Finch's billing practices not only hurt the partnership in and of itself, but also were motivated by self-interest, and thus constitute a breach of fiduciary duty. (*5).

Second, Finch claimed that Instruction 11 misrepresented Missouri law insofar as it encouraged jurors to determine if there was a breach based on whether or not they believed Finch owed a duty to Campbell. (*6). According to Finch, it is to the clients and the partnership that he owed fiduciary obligations, not to Campbell, and thus his objection should be sustained. (*6). However, the Court of Appeals opined that, as Finch's objection is not based on the actual language of the Instruction, it has no merit. (*6).

Finch's third argument dealt with his claim that Instruction 11 gave the jury a “roving commission,” meaning that, rather than presenting a definitive issue of law or fact to the jurors, the trial court had been vague and thus made room for the jury “to roam freely through the evidence and choose any facts which suit its fancy or its perception of logic to impose liability.” (*6, McNeill v. City of Kansas City, 372 S.W.3d 906 (Mo. App. W.D. 2012) at 910, quoting Klotz v. St. Anthony's Med. Ctr., 311 S.W.3d 752 (Mo. Banc 2010)).

The Court of Appeals disagreed with Finch's assessment. (*7). The court ruled that Instruction 11 was not vague as it gave three precise instances which would constitute breach of fiduciary duty. (*7). Thus, the court concluded, there is no issue of a “roving commission.” (*7).

Finch's fourth and final claim under Point II argued that, as the term “fiduciary duty” was never defined in the jury instructions, the jury was misled. (*7). In response, the court ruled that Instruction 11 was clear, and gave the jury a sufficient factual basis to understand a partner's fiduciary duty, and determine if there was a breach. (*7).

Thus, Finch's Point II was denied. (*7).

Regarding Point III, Finch argued that the trial court ought to have awarded him either 50 percent of the profits Campbell received from the windup of their former firm in accord with Missouri law or 50 percent of the net profits from Campbell's new firm. (*7).

The court opined that Finch's claim that he was entitled to choose between 50 percent of the former firm's profits or 50 percent of net profits from The Bruce Campbell Law Firm was erroneous, for the applicable statute did not apply when “the profits of the post dissolution partnership were derived from the personal services of the remaining partners.” (*7). Thus, as the only profits from the windup of Finch & Campbell came from the work of Campbell and his new firm, Campbell (and not Finch) was entitled to those revenues. (*7).

Furthermore, in his reply brief, Finch argued that Campbell's breach of fiduciary duty by locking Finch out of the firm and using money from the windup of Finch & Campbell to run his new firm entitled him to an accounting. (*8). The court disagreed and held that, while Campbell breached his fiduciary duty insofar as he barred Finch from the firm, neither this, nor any of Campbell's actions damaged or reduced the partnership's assets. (*8-9).

Finch's second argument in Point IV consists of eight parts: “(1) the trial court made erroneous factual findings not supported by substantial evidence regarding Finch's marital dissolution trial, (2) the unclean hands doctrine was erroneously applied to a lease, (3) the unclean hands doctrine was erroneously applied to expenses from the Bruce Campbell Law Firm, (4) the unclean hands doctrine was erroneously applied to aid Campbell who had himself acted inequitably, (5) the unclean hands doctrine should not be based on wrongs done to outside parties, (6) the unclean hands doctrine should not be based on wrongs not used to acquire the rights involved in this case, (7) the unclean hands doctrine violates Missouri's Partnership Law, and (8) the interlocutory judgment failed to address collections Campbell did not disclose to [the Special Master].” (*9). All of these points were denied. (*13).

With regard to (1), the court ruled that, given that Finch's expert witness CPA valued the partnership at $412,435.56 during the trial court accounting and at only $1,038.75 during Finch's divorce proceeding, his opinion was not as credible as the Special Master's conclusions. (*10).

The court rejected (2) on the basis that, while technically the full value of the lease should be regarded as a liability to the partnership, as the court already granted Finch this deduction in his divorce proceeding, it would be wrong to do so a second time, especially in light of how significantly Finch and his CPA reduced the partnership value in the divorce proceeding. (*10-11).

Similarly, the court dismissed (3) on the basis that it would be unfair to increase the partnership's value by including accounts receivable when Finch did not do so in his divorce. (*11). At the same time, the court ruled that this should not prevent Campbell from collecting his due portion of the receivables. (*11).

Regarding (4), the court found that Finch's argument that Campbell had withheld financial information from him during his dissolution trial was unpersuasive. (*11-12). For, not only would Finch have known what monies were owed to the partnership, but also the Special Master found that, at his divorce proceeding, Finch did not disclose all his billable hours. (*12).

Concerning (5), (6), (7) the court relied upon In re Contest of Primary Election Candidacy of Fletcher, 337 145 S.W.3d 137 (Mo. App. W.D. 2011) which states: “there is ample case law to support the contention that parties are not allowed to take clearly inconsistent positions in differing lawsuits.” (*11). The partnership finances, which Finch used to his benefit in his divorce trial, could not, the court opined, now be used in the opposite way to once again reap a reward. (*11-12).

Finally, the court dismissed (8), ruling that, as Finch had knowledge of the undisclosed revenues, but did not bring them up in discovery, it was not to be expected that the court should allow Finch to essentially re-argue the case on a different basis. (*12).

Arthur J. Ciampi is the coauthor of the treatise 'Law Firm Partnership Agreements' and is the managing member of Ciampi LLC. Maria Ciampi, of counsel to Ciampi LLC, assisted in the preparation of this article.