It’s a decision involving a law firm partnership that, if widely followed, will likely have a sweeping effect on the interpretation of the statutory requirement for unanimity in adopting critical agreements that govern partnerships and liited liability companies.
Attorney Andrew Zidel, an attorney who left prominent intellectual property boutique firm Lerner David in Westfield, failed in his attempt to use a minority veto to block the adoption of a law firm partnership agreement that treated retiring partners differently than withdrawing partners.
The trial court finessed the unanimity requirement found in the partnership statute, and was affirmed in an unreported decision of the appellate division.
Court Discounts Literal Language of Partnership Statute; Implies Consent to Adopt Partnership Agreement
The reason for Zidel’s failure to rely on the language of the statute was that the law firm had, for many years, operated without a formal partnership agreement. Therefore, the trial court found that the written formal agreement would be considered an amendment to the existing partnership agreement, and, under the partnership’s prior practices, it did not require a unanimous agreement.
Whether the trial court and later the appellate division engaged in legal gymnastics to reach this conclusion is an open question. It seems relatively clear that the alleged conduct of the departing partner factored in the decision, as the trial court also found he had breached his fiduciary duties to the firm and awarded attorneys’ fees.
Why this case matters, and why the owners of any unincorporated business association should take note — and that includes partnerships, limited partnerships, and limited liability companies — is because the statutes governing each of those entities are substantially identical.
Partnerships
“Partnership agreement” means the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement.
A difference arising as to a matter in the ordinary course of business of a partnership shall be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement shall be undertaken only with the consent of all of the partners. N.J.S.A. 42:1A-21(j)
Limited Liability Company
“Operating agreement” means the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company, including a sole member, concerning the matters described in subsection a. of section 11 of this act.8 The term includes the agreement as amended or restated.
(4) An act outside the ordinary course of the activities of the company may be undertaken only with the consent of all members.
(5) The operating agreement may be amended only with the consent of all members. N.J.S.A. 42:2C-37Z(i)
The Underlying Partnership Dispute
Zidel started at the firm as a patent agent in 2001. He progressed to associate in 2003 and became an equity partner in 2012. When he left the firm in 2019, Zidel had received a total of 4.5 partnership points, the amount of the firm’s cash to which he was entitled.
The firm had operated for fifty years without a detailed written partnership agreement but did have written agreements covering specific partnership issues like point allocations, the appointment of tax representatives, and buyouts for death or disability.
There was no formula in writing for determining the compensation retiring partners received. Recognizing the need to address issues related to retiring and withdrawing partners, the firm decided to create a formal written partnership agreement.
In the spring or summer of 2018, a managing partner started drafting the Lerner David Partnership Agreement (LDPA). Zidel consistently provided feedback and raised objections regarding language that restricted compensation, for partners leaving the firm to pursue law practice compared to those who retired.
In 2017, Zidel established a “Next Gen” or Business Development committee at Lerner David to explore strategies for generating business opportunities. By the summer of 2018, this group had been dubbed the “Mutiny Committee” and had deliberated on proposed changes to the executive committee. However, no concrete actions resulted from those discussions. The Next Gen committee disbanded by August or September of 2018.
In November 2018, Zidel actively sought other positions. During that month, he entered into a partnership with two other partners from Lerner David, taking steps such as signing a partnership agreement incorporating paperwork and opening a firm bank account, all while maintaining his partnership status at Lerner David. That partnership,however, never began operations.
Another firm, Botos Churchill, proposed a partnership to Zidel on December31,1 2018. Zidel accepted the offer by sending a reply letter on Januar1, 1 2019. On January 3, 2019, Zidel officially resigned from his position at Lerner David.
Meanwhile, while Zidel was looking for a new position, Lerner David took up the issue of a written partnership agreement that would address the firm’s obligations upon the retirement of a partner. Zidel objected to the agreement because it permited withdrawing partners to receive compensation only when retiring, not if they withdrew.
Following his departure from the company, Zidel asked Lerner David to buy out his equity share at a value that compensated him with a percentage of the firm’s accounts receivable.
Lerner David refused. His lawsuit sought to compel the purchase of his ownership interest at fair value. He also alleged minority oppressed by the majority, breach of fiduciary duty and sought an accounting.
A bench trial took place over six days in March and April of 2022. The trial judge issued an order and opinion on dismissing Zidels complaint and allowing Lerner David to apply for attorneys fees.
Zidel made several arguments, seeking to avoid the effects of the new partnership agreement. He claimed in the first instance that he was not bound by the agreement since he had not consented to its adoption. He also argued that the Uniform Partnership Act, as adopted in New Jersey governed his rights as a partner. He also argued that after the LDPA took effect on January 1, 2019, he was considered a “dissociated equity partner” and therefore not bound by the LDPA terms.
The trial court rejected those arguments, and the appellate division agreed.
In determining Zidel was bound by the LDPA—despite having refused to execute it—the trial judge found overwhelming evidence Zidel understood he would be bound by the terms of the LDPA (Lerner David Partnership Agreement) and cannot avoid the terms of that agreement. The trial judge found Zidel’s having made innumerable pleas to have the LDPA changed so he would be rewarded for his already planned departure and his race to make his exit from the Firm prior to the commencement date of the LDPA demonstrated his understanding he would be bound by the terms of the final document. …
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The LDPA is an amendment to the Firm’s implied partnership agreement—at least an amendment of a portion of that agreement. Zidel was already bound as a partner, whose relations with the partnership “are governed by the partnership agreement.” See N.J.S.A. 42:1A-4(a). Again, there was no written partnership agreement that describes the process required to amend either the Firm’s implicit partnership agreement or the narrowly focused agreements that were written. Thus, the Firm’s amendment process must be inferred by examining its historical course of conduct in undertaking such changes.
Only one equity partner had ever left the firm (without retiring), and their compensation was determined through a settlement to avoid legal disputes. The court held that based on the conduct and implied agreements among the partners, the new operating agreement would not require Zidel’s consent and that he was bound by it.
Zidel’s refusal to sign the LDPA was insufficient to negate the wishes of all the rest of the equity partners. The LDPA adoption process substantially complied with the historical course of conduct of the Firm’s prior agreement ratification procedures, and Zidel’s own actions demonstrated his intention to relinquish the rights and responsibilities of a Lerner David partner….
We conclude as the trial judge did, the LDPA was adopted by the equity partners of Lerner David as an amendment to their implicit partnership agreement and took effect on January 1, 2019, as to all equity partners of the Firm, regardless of whether they had executed the document. Zidel’s
The judge determined that Zidel had violated his duty to the firm before his resignation, in part by opposing the proposed operating agreement without telling his partners of his intent to resign.
He also held that Zidel had approached clients to solicit their work before leaving.
Although the trial court had awarded fees to Lerner David as a sanction for what it found was a claim brough by Zidel without any reasonable basis in law or equity, the appellate court remanded the case to the trial judge to develop a factual record for any fee award.