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Jewel v. Boxer 317

Howard H. JEWEL et al., Plaintiffs and Appellants, 317

v. 317

Stewart N. BOXER et al., Defendants and Respondents. 317

A017873. 317

Court of Appeal, First District, Division 5, California. 317

May 22, 1984. 317

Hearing Denied Aug. 22, 1984. 317

KING, Associate Justice. 317

In this case we hold that in the absence of a partnership agreement, the Uniform Partnership Act requires that attorneys' fees received on cases in progress upon dissolution of a law partnership are to be shared by the former partners according to their right to fees in the former partnership, regardless of which former partner provides legal services in the case after the dissolution. The fact that the client substitutes one of the former partners as attorney of record in place of the former partnership does not affect this result. 317

Howard H. Jewel and Brian O. Leary appeal from a judgment, after dissolution of the former law partnership of Jewel, Boxer and Elkind, allocating post- dissolution fees on a quantum meruit basis. We reverse the judgment and remand the cause for allocation based upon the respective interests in the former partnership. 318

On December 2, 1977, the law firm of Jewel, Boxer and Elkind was dissolved by mutual agreement of its four partners--Howard H. Jewel, *175 Stewart N. Boxer, Peter F. Elkind, and Brian O. Leary. The partners formed two new firms: Jewel and Leary, and Boxer and Elkind. Three associates employed by the old firm were employed by Boxer and Elkind. The partners in the old firm not only lacked an agreement about the allocation of fees from active cases upon a dissolution of the partnership but, contrary to the sound legal advice they undoubtedly always gave their partnership clients, they had no written partnership agreement. The absence of a written partnership agreement was an invitation to litigation upon a dissolution of the partnership. 318

On the date of dissolution the former partnership had numerous active cases. Boxer, Elkind, and the three associates had handled most of the active personal injury and workers' compensation cases; the rest, as well as other kinds of cases, had been handled by Jewel and Leary. Shortly after dissolution, each former partner sent a letter to each client whose case he had handled for the old firm, announcing the dissolution. **16 Enclosed in the letter was a substitution of attorney form, which was executed and returned by each client retaining the attorney who had handled the case for the old firm. [FN1] The new firms represented the clients under fee agreements entered into between the client and the old firm. 318

FN1. Neither party challenged at trial or on appeal the authority of a former partner to execute a substitution of attorney on behalf of the dissolved partnership. 318

At issue here is the proper allocation of attorneys' fees received from these cases, some of which were still active at trial. Jewel and Leary filed a complaint for an accounting of these fees, contending they were assets of the dissolved partnership. 318

In a nonjury trial the court first determined that the partnership interests in income of the old firm were 30% for Jewel, 27% each for Boxer and Elkind, and 16% for Leary. The court then allocated the disputed fees among the old and new firms by considering three factors: the time spent by each firm in the handling of each case, the source of each case (always the old firm), and, in the personal injury contingency fee cases, the result achieved by the new firm. The court assigned a value of 25% to the source factor, and thus allocated 25% of the total fees to the old firm for this factor. In the personal injury cases the court assigned values of 20%, 30%, and 40% for the result factor, depending on when the cases were settled or if they were tried. Remaining percentages (35% to 55% in the personal injury cases and 75% in the other cases) were allocated in accordance with the amount of attorney time expended upon the case before and after dissolution. Under this formula, Jewel and Leary was determined to owe $115,041.16 to the old firm, and *176 Boxer and Elkind was determined to owe $291,718.60 to the old firm. The court rendered judgment in these amounts, plus interest at the legal rate from the date of receipt of each fee on the amount due the old firm. Although we reverse the judgment, we cannot do so without expressing admiration for the laudable efforts of the learned trial judge who masterfully developed a formula geared to achieving a just and equitable result for each party. 318

Under the Uniform Partnership Act (Corp.Code, § 15000 et seq.), a dissolved partnership continues until the winding up of unfinished partnership business. (Corp.Code, § 15030.) No partner (except a surviving partner) is entitled to extra compensation for services rendered in completing unfinished business. [FN2] (Corp.Code, § 15018, subd. (f).) Thus, absent a contrary agreement, any income generated through the winding up of unfinished business is allocated to the former partners according to their respective interests in the partnership. 319

FN2. As used in this opinion extra compensation means receipt by a former partner of the dissolved partnership of an amount of compensation which is greater than would have been received as the former partner's share of the dissolved partnership. 319

The trial court in the present case recognized these principles, but followed a Texas decision which cited no supporting authority but held that the rule precluding extra compensation for post-dissolution services should not apply to a law partnership, because fees are generated by a former partner's post- dissolution time, skill, and labor. (Cofer v. Hearne (Tex.Civ.App.1970) 459 S.W.2d 877, 879.) The trial court also cited Fracasse v. Brent (1972) 6 Cal.3d 784, 100 Cal.Rptr. 385, 494 P.2d 9, which held that a client has an absolute right to discharge an attorney employed under a contingent fee contract and the attorney is entitled only to the reasonable value of the services rendered before discharge. 319

Jewel and Leary contend that the court erred in failing to adhere to the rule precluding extra compensation, and should have allocated all post-dissolution fees from the old firm's unfinished cases to the four former partners according to their respective percentage interests in the old firm. Boxer and Elkind argue that the substitutions of attorneys transformed the old firm's unfinished business into new **17 firm business and removed that business from the purview of the Uniform Partnership Act, with the old firm thereafter, under Fracasse v. Brent, supra, limited to a quantum meruit recovery for services rendered before discharge. 319

The decision in Cofer v. Hearne, supra, was plainly wrong. [FN3] The Uniform Partnership Act unequivocally prohibits extra *177 compensation for post-dissolution services, with a single exception for surviving partners. (Corp.Code, § 15018, subd. (f).) The definition of "business" in the Uniform Partnership Act as including "every trade, occupation, or profession" (Corp.Code, § 15002) precludes an exception for law partnerships. (Resnick v. Kaplan (1981) 49 Md.App. 499, 434 A.2d 582, 588.) 319

FN3. The source of the court's error in Cofer v. Hearne might have been the court's reliance on decisions that predated the Uniform Partnership Act. (459 S.W.2d at pp. 879-880.) 319

Accordingly, several courts in other states have held that after dissolution of a law partnership, income received by the former partners from cases unfinished at the time of dissolution is to be allocated on the basis of the partners' respective interests in the dissolved partnership, not on a quantum meruit basis. (Resnick v. Kaplan, supra, 434 A.2d at p. 587; Frates v. Nichols (Fla.App.1964) 167 So.2d 77, 81; see also Kreutzer v. Wallace (Fla.App.1977) 342 So.2d 981, 982-983.) 319

The decision in Resnick v. Kaplan, supra, is closely analogous to the present case. Resnick, a former partner in a dissolved law partnership, opened his own office and continued to represent clients of the former firm in cases for which he had been responsible before dissolution. The other partners continued to represent other clients of the old firm. (Id., 434 A.2d at pp. 584-585.) In an ensuing action for an accounting, the trial court allocated all fees collected in these cases among the former partners according to their percentage interests in the former partnership. The appellate court affirmed, stating that the Uniform Partnership Act "conferred no right upon either side to compensation for services rendered in this winding up process, [citation] and, in the absence of any provision in the partnership document, it was correctly held that the aggregate of the fees collected should be allocated according to the percentages specified in the agreement for the distribution of profits and losses." (Id., at p. 587.) The court rejected the argument that different rules should apply to professional partnerships, citing the Uniform Partnership Act's express applicability to the professions. (Id., at p. 588; see Corp.Code, § 15002.) 319

The court in Resnick also rejected an argument made by Boxer and Elkind in the present case (and asserted by the court below in citing Fracasse v. Brent ), that clients have an absolute right to the attorney of their choice. The Resnick court recognized this right of clients, but said "it does not mean, as appellant contends, that the fees thereafter earned by the partner chosen by the client are not subject to division in accordance with the partnership agreement." (Id., at p. 588.) A similar conclusion was reached recently in Rosenfeld, Meyer & Susman v. Cohen (1983) 146 Cal.App.3d 200, 219, 194 Cal.Rptr. 180, in which two partners handling a large antitrust suit for a law partnership left the firm and contracted with the client to take the case with them. The court held that even though the client had *178 the right to the attorneys of its choice, that right was irrelevant to the rights and duties between the former partners with regard to income from unfinished partnership business. The reasoning in Resnick and Rosenfeld on this point is sound: the right of a client to the attorney of one's choice and the rights and duties as between partners with respect to income from unfinished business are distinct and do not offend one another. Once the client's fee is paid to an attorney, it is of no concern to the client how that fee is allocated among the attorney and his or her former partners. Boxer and Elkind seek to distinguish the Rosenfeld holding, contending it is limited to circumstances where the departing former partners act in bad faith. It is true that Rosenfeld involved causes of **18 action for breach of a fiduciary duty, interference with contractual relations, and conspiracy to interfere with contractual relations; however, its holding should not be limited to bad faith claims. 320

Boxer and Elkind also argue that cases involving allocation of post- dissolution income of a law partnership are distinguishable because here each client of the old firm signed a substitution of attorneys discharging the old firm and substituting one of the new firms as the attorney of record, thus under Fracasse v. Brent, the old firm had no more than a quantum meruit interest in unfinished cases. But we must look to the circumstances existing on the date of dissolution of a partnership, not events occurring thereafter, to determine whether business is unfinished business of the dissolved partnership. (Smith v. Bull (1958) 50 Cal.2d 294, 303-304, 325 P.2d 463; Rosenfeld, Meyer & Susman v. Cohen, supra, 146 Cal.App.3d at p. 217, 194 Cal.Rptr. 180; Heywood v. Sooy (1941) 45 Cal.App.2d 423, 426, 114 P.2d 361.) Thus in Rosenfeld a client's retention of a new firm consisting of two former partners of the dissolved firm that previously handled the client's case did not transform the case into new partnership business: "It is clear that a partner completing unfinished business cannot cut off the rights of the other partners in the dissolved partnership by the tactic of entering into a 'new' contract to complete such business." (Rosenfeld, Meyer & Susman v. Cohen, supra, 146 Cal.App.3d at p. 219, 194 Cal.Rptr. 180.) [FN4] Accordingly, the substitutions of attorneys here did not alter the character of the cases as unfinished business of the old firm. To hold otherwise would permit a former partner of a dissolved partnership to breach the fiduciary *179 duty not to take any action with respect to unfinished partnership business for personal gain. (Id., at pp. 217-220, 194 Cal.Rptr. 180.) 320

FN4. The Rosenfeld court subsequently stated that a partner "is entitled to the reasonable value of the services in completing the partnership business, but he may not seize for his own account the business which was in existence during the terms of the partnership." (Rosenfeld, Meyer & Susman v. Cohen, supra, 146 Cal.App.3d at p. 220, 194 Cal.Rptr. 180; emphasis added.) To the extent that the italicized excerpt might be construed as stating that the partner is entitled to compensation beyond his or her percentage interest in the former partnership, it is squarely in conflict with the rule against extra compensation. The statement makes sense only if it is construed as referring to receipt of the partner's percentage interest as compensation for the "reasonable value" of services rendered. The court's ambiguous and potentially misleading choice of words is unfortunate. 321

There are sound policy reasons for applying the rule against extra compensation to law partnerships. The rule prevents partners from competing for the most remunerative cases during the life of the partnership in anticipation that they might retain those cases should the partnership dissolve. It also discourages former partners from scrambling to take physical possession of files and seeking personal gain by soliciting a firm's existing clients upon dissolution. Boxer and Elkind argue that application of the rule in the present context will discourage continued representation of clients by the attorney of their choice, as former partners will not want to perform all of the post-dissolution work on a particular case while receiving only a portion of the income generated by such work. Of course, this is all the former partners would have received had the partnership not dissolved. Additionally, the former partners will receive, in addition to their partnership portion of such income, their partnership share of income generated by the work of the other former partners, without performing any post- dissolution work in those cases. On balance, the allocation of fees according to each partner's interest in the former partnership should not work an undue hardship as to any partner where each partner completes work on the partnership's cases which are active upon its dissolution. 321

As previously indicated, the trial court's attempt to achieve an equitable result was laudable. At first glance, strict application of the rule against extra compensation might appear to have unjust results (**19 e.g., where a former partner obtains a highly remunerative case just before dissolution, and nearly all work is performed after dissolution). But undue hardship should be prevented by two basic fiduciary duties owed between the former partners. First, each former partner has a duty to wind up and complete the unfinished business of the dissolved partnership. This would prevent a partner from refusing to furnish any work and imposing this obligation totally on the other partners, thus unfairly benefiting from their efforts while putting forth none of his or her own. Second, no former partner may take any action with respect to unfinished business which leads to purely personal gain. (Rosenfeld, Meyer & Susman v. Cohen, supra, 146 Cal.App.3d at pp. 216-217, 194 Cal.Rptr. 180; see Smith v. Bull, supra, 50 Cal.2d at p. 304, 325 P.2d 463; Resnick v. Kaplan, supra, 434 A.2d at p. 587.) Thus the former partners are obligated to ensure that a disproportionate burden of completing unfinished business does not fall on one former partner or one group of former partners, unless the former partners agree otherwise. It is unlikely that the partners, in discharging their mutual fiduciary duties, will be able to achieve a distribution of the burdens of completing unfinished business that corresponds precisely to their respective interests in the partnership. But partners are free to include *180 in a written partnership agreement provisions for completion of unfinished business that ensure a degree of exactness and certainty unattainable by rules of general application. If there is any disproportionate burden of completing unfinished business here, it results from the parties' failure to have entered into a partnership agreement which could have assured such a result would not occur. The former partners must bear the consequences of their failure to provide for dissolution in a partnership agreement. 321

In short, the trial court's allocation of post-dissolution income to the old and new firms on a quantum meruit basis constituted error. The appropriate remedy is to remand the cause for post-trial proceedings to allocate such income to the former partners of the old firm in accordance with their respective percentage interests in the former partnership. [FN5] This will also allow the trial court to allocate fees received since the trial. 322

FN5. None of the litigants asserted a cause of action for breach of the former partners' fiduciary duties to each other. 322

Under the provisions of the Uniform Partnership Act, the former partners will be entitled to reimbursement for reasonable overhead expenses (excluding partners' salaries) attributable to the production of post-dissolution partnership income; in other words, it is net post-dissolution income, not gross income, that is to be allocated to the former partners. (Corp.Code, § 15015, subd. (b) [joint and several liability for debts and obligations of partnership]; Corp.Code, § 15038, subd. (1) [right of partners upon dissolution to have partnership property applied to discharge its liabilities "and the surplus applied to pay in cash the net amount owing to the respective partners"]; Corp.Code, § 15040, subds. (d) and (f) [right and obligation of partners after dissolution to contribute amounts necessary to satisfy partnership liabilities]; see Chazan v. Most (1962) 209 Cal.App.2d 519, 522-523, 25 Cal.Rptr. 864 [trial court gave credit to partners for proven post- dissolution expenses]; Yeomans v. Lysfjord (1958) 162 Cal.App.2d 357, 364, 327 P.2d 957 [trial court erred in failing to award share in net profits after dissolution].) [FN6] A reimbursement of reasonable **20 and necessary overhead expenses attributable to the winding up of partnership business is certainly an equitable result. When partners fail to have a partnership agreement which determines how and to what extent such reimbursement*181 should take place, they have no cause to complain about the law supplying an equitable resolution of the issue. 322

FN6. In Hawkesworth v. Ponzoli (Fla.App.1980) 388 So.2d 299, 301, the court held that former partners could not obtain reimbursement for overhead expenses indirectly attributable to the winding up of partnership business (such as office salaries, rent, and library costs), because such reimbursement would violate the rule against extra compensation for former partners. We reject this holding as being inconsistent with the provisions of the Uniform Partnership Act, and as bearing the potential for inequity where one partner or group of partners incurs a disproportionate amount of overhead expenses in winding up partnership business. 322

Jewel and Leary contend that Boxer and Elkind have waived any right to reimbursement for overhead expenses by failing below to seek reimbursement and introduce evidence of their overhead expenses. No waiver occurred, however, as the trial court's adoption of the quantum meruit approach, which occurred during the trial, made it pointless for Boxer and Elkind to present such evidence. The evidence may be presented in the post-trial proceedings on remand. 322

Jewel and Leary also contend that to the extent the judgment was in their favor it should have been "enhanced" by awarding interest from the date of receipt of fees at the prime interest rate (stipulated at trial to have averaged 14% during the period 1977-1981), rather than at the legal rate as awarded by the trial court. Boxer and Elkind respond that this is a request for a penalty not authorized in an accounting proceeding. We examine this issue for the guidance of assert entitlement to "damages" for Boxer and Elkind's purported breach of fiduciary duties by retaining fees in excess of their partnership share. But Jewel and Leary's complaint did not assert a cause of action for damages for breach of fiduciary duty; it simply sought an accounting. Absent some basis for awarding compensatory or punitive damages and using the prime interest rate as the measure, the applicable rate of interest is the legal rate as prescribed by article XV, section 1, of the California Constitution. 323

The judgment is reversed and the cause is remanded for further proceedings consistent with this opinion. 323

LOW, P.J., and HANING, J., concur. 323

Hearing denied; MOSK, and BROUSSARD, JJ., did not participate. 323

Bassan v. Investment Exchange Corp. 323

Morton E. BASSAN et al., Appellants, M. L. Grout, Plaintiff, 323

v. 323

INVESTMENT EXCHANGE CORPORATION, a Washington corporation, and Auburn West 323

Associates, a Washington limited partnership, Respondents, 323

James L. Charlton et al., Defendants. 323

No. 42921. 323

Supreme Court of Washington, En Banc. 323

June 20, 1974. 323

UTTER, Associate Justice. 323

The appellants are limited partners in Auburn West Associates, and the respondent Investment Exchange *923 Corporation is the sole general partner. This action was brought for an accounting and dissolution upon the theory that the general partner had, in purchasing land and selling it to Auburn West Associates, derived profits without the consent of the limited partners in breach of its fiduciary relationship. The cause was tried to the court which dismissed the action after hearing the evidence. 323

The controlling issue in this case is whether the partners consented to the profit made by the general partner in the sale of the Murakami property to the partnership. We find an absence of such consent in the record and reverse the trial court. 324

In 1964 Investment Exchange Corporation, a Washington corporation, formed Auburn West Associates as a limited partnership. The purpose of the partnership as stated in the articles of partnership was 324

(to) initially acquire, for investment, improve and hold for lease or resale, a tract of real property. The General Partner presently is the owner of interests in said real property. To additionally acquire from the General Partner such other adjacent and contiguous tracts as, in the sole determination of the General Partner, will enhance the Partnership properties and objectives. 324

The general partner was given broad discretion in the articles to manage the affairs of the partnership and they acknowledged the right of all partners, including the general partner, to engage in 324

and/or possess an interest in other business ventures of every nature, and description, independently or with others, including but not limited to the ownership, financing, leasing, operation, management, syndication, brokerage and/or development of real property; . . . 324

They also gave the general partner the right to have an interest in or be employed by another business which might deal with the partnership. 324

The articles provided that the general partner might devote such of its time as in its discretion it deemed necessary *924 to the partnership affairs and business, and that it should be reimbursed by the partnership for all the costs and expenses which it incurred in connection therewith, in addition to its respective share of the profits of the partnership. 324

**236 The partnership articles provided that 100 units of the partnership, consisting of 40 units as general partner and 60 units as limited partner totaling $100,000, should be given to the general partner as partial payment of the purchase price of the original piece of real property, the purchase price being $593,000. That price was greater than the acquistion cost to the general partner. 324

Each of the appellants owned one or more limited partnership units. The remaining 29 limited partners did not elect to join in the action. 324

The general partner annually mailed out a financial statement to the limited partners. These financial statements advised the limited partners of the price the partnership paid for the real estate purchased from the general partner. The limited partners were represented at the partnership council meetings by plaintiff Milton Grout and others. 324

The last transaction upon which the appellants claimed a right to receive the benefit of the profit made by the general partner was the Murakami property. All claims by the limited partners except that one were held barred by the statute of limitations. 324

The general partner had formed a real estate subsidiary and informed the limited partnership it intended to utilize this corporation as sales and purchase agent for partnership property. The court found the articles of limited partnership and prospectus had authorized the real estate subsidiary to retain commissions on sales and purchases. This subsidiary received a $24,500 commission from Murakami in the sale of the property in addition to the markup of $167,500 by the general partner. 324

The court found that in the issuance of the prospectus, the publication of financial statements and in its dealings with the appellant and its conduct of partnership affairs, the *925 general partner made no false or fraudulent representations and did not engage in any improper conduct. It found no breach in its fiduciary obligations to the limited partners inasmuch as the price charged for the Murakami parcel was fair and the amount of profit made by the general partner was reasonable. There is no substantial dispute regarding the facts in this case and all of the claims prior to the Murakami transaction are barred by the statute of limitations. The validity of this transaction is our only concern in this appeal. 325

Under the Washington Uniform Limited Partnership Act, the general partner has all the rights and powers, and is subject to all the restrictions and liabilities, of a partner in a partnership without limited partners. RCW 25.08.090. He is therefore accountable to the limited partners as a fiduciary. Homestake Mining Co. v. Mid-Continent Exploration Co., 282 F.2d 787 (10th Cir. 1960). The Washington Uniform Partnership Act requires every partner to 'account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the . . . conduct . . . of the partnership . . .' RCW 25.04.210(1). 325

The partnership agreement does not provide consent by the limited partners to the general partner for a profit on the sale of the Murakami property to the partnership. The articles contain no provision setting forth the price to be paid for this property nor any method for determining such a price. Partners may include in the partnership articles practically any agreement they wish and if the asserted self-dealing was actually contemplated and specifically authorized with a method for determining, in advance, the amount of the profit it would not, ipso facto, be impermissible and deemed wrongful. Riviera Congress Assoc. v. Yassky, 48 Misc.2d 282, 264 N.Y.S.2d 624 (1966). Here, however, the partnership agreement is silent as to any formula to determine the general partner's profit. 325

*926 The prospectus, from which it could be argued most earlier purchases by the partnership **237 from the general partner were contemplated, does not mention the Murakami piece. It also fails to set forth a formula to determine the general partner's profit in either the anticipated purchases or in any future transactions by the general partner on behalf of the partnership. The articles of limited partnership merely state that five parcels, the Henack, Nelson, Coast No. 2, Belus and Coast No. 1 were to be acquired at a cost of $593,000 from the general partner. The prospectus disclosed that the general partner intended, as well, to acquire the Davis parcel for $50,000 but the articles and prospectus do not specifically describe any other anticipated acquisitions. 325

Neither the articles nor prospectus disclose the actual amount of the profit to be made by Investment Exchange Corporation in their resale of properties to the Auburn West Associates partnership. The only source of information to the limited partners on the profits by the general partner was an accounting footnote in the 1964 partnership financial statement issued after the limited partners had invested funds in the partnership, indicating that property acquired by Auburn West Associates for $642,342 had previously cost the general partner $459,000. 325

The only other report indicating the amount of profit to the general partner was found in a prospectus required by the Securities and Exchange Commission. This indicated that from May 1964 through December 1965, prior to the Murakami purchase, Auburn West Associates had acquired eight parcels of property from Investment Exchange Corporation for $749,250 which property had cost Investment Exchange Corporation $488,221. 326

An investigation of the separate transactions prior to the Murakami purchase showed no consistent percentage of profit taken by the general partner on these transactions. Of those parcels described in the prospectus to be acquired by the general partner, the highest profit received was $67,000 on a piece sold for $182,000 (the Henack parcel). The smallest was a $20,000 profit on a price sold for $180,000 *927 to the partnership (the Belus parcel). Of those properties not described in the prospectus, and purchased subsequent to those described in the prospectus, the highest profit was $80,000 on a piece sold for.$108,750 to the partnership (the Layos parcel) and the lowest was $24,000 on a piece sold to the partnership for $50,000 (the Davis parcel). 326

The trial court found an understanding did exist that the general partner would acquire property and sell it to the partnership at a fair price and would realize a profit on the transaction. It did not and could not find that a formula existed or was agreed upon explicitly or inferentially that established a basis upon which the exact amount of this profit was to be determined. The limited partners, therefore, could only consent after the fact to whatever profit the general partner determined it should have as to a particular transaction. Because of this, although the limited partners may have consented after the fact to specific profits taken on previous transactions, this could not imply consent to the Murakami transaction because the limited partners could not know what the profit to Investment Exchange Corporation was until after the sale closed. 326

No consent may be implied from the conduct of the limited partners regarding Murakami after they were informed of the profits. The formal action of Investment Exchange Corporation adopting the $167,500 profit was on November 15, 1969, and suit was brought on November 26, 1969 by appellants. 326

Where consent is lacking, the general partner is held under RCW 25.04.210, as a trustee, to account to the partnership for any profits derived by it. That standard, by the terms of the statute, is not whether the general partner acted fairly and reasonably, but whether it acted as a fiduciary. 326

The benefit of this standard is nowhere more apparent than in a limited **238 partnership of this nature. The articles give the general partner the authority to conduct 'any and all of the business of the Partnership . . .' Once the *928 limited partner has joined the partnership he has no effective voice in the decision-making process. He must, then, be able to rely on the highest standard of conduct from the general partner. Any deviation from this must be clearly stated in terms that would give the limited partner the option of deciding whether or not, in the first instance, to join the partnership. 326

The duty of loyalty resulting from a partner's fiduciary position is such that the severity of a partner's breach will not be questioned. The question is only whether there has been any breach at all. Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928). 326

This is to be distinguished from questions related to the use of business judgment of a partner in partnership affairs. Here the degree of care required is one of reasonableness, or in some jurisdictions, of good faith. Bohrer v. Drake, 3o Minn. 408, 23 N.W. 840 (1885); Cf. J. E. Crosbie, Inc. v. King, 192 Okl. 53, 133 P.2d 543 (1943); Note, Fiduciary Duties of Partners, 48 Iowa L.Rev. 902 (1963). This is the standard the trial court apparently applied. 326

This case does not involve the issue of whether the general partner is entitled to make a profit for use of its expertise. Compensation may be provided for the general partner by specific consent of the parties. There is also no issue about the general partner's right to be reimbursed for its expenses. Article 8, section 2 of the partnership articles provides that the general partner shall be reimbursed for all the costs and expenses it incurs in the devotion of its time to the partnership business. 327

Investment Exchange Corporation did not act in a fiduciary capacity regarding the profits it obtained in the Murakami transaction. Consent was not given by the appellants as to the profit taken in that transaction and Investment Exchange Corporation should be held accountable to the partnership for the profits it there realized. 327

This will result in the establishment of a common fund for the benefit of the partnership. The expense of *929 legal services, including counsel fees, is a proper charge against the common fund so preserved or protected. Weiss v. Bruno, Wash., 523 P.2d 915 (1974); In re Estate of Wheeler, 71 Wash.2d 789, 797, 431 P.2d 608 (1967). 327

The judgment is reversed and remanded to the trial court to determine counsel fees. 327


ROSELLINI, Associate Justice (dissenting.) 327

The majority in this case has overturned the finding of the trial court that it was the understanding and agreement of the parties to the limited partnership agreement that the general partner would buy land and would resell it to the partnership at a reasonable profit to itself. In doing so, it has not made so bold as to assert that there was no substantial evidence to support this finding. The trial court found that this agreement, while not expressed in the articles of limited partnership, was established by the evidence showing the course of dealing between the general partner and the limited partners over a period of years. 327

The court specifically found that, prior to purchasing their units of limited partnership, each of the appellants was advised and understood that the general partner had sold and would sell property to the partnership and in connection with such sales had made and would make a profit. It found that, prior to purchasing his units, each partner was informed and understood that contiguous properties could and would be purchased and that, in connection with said sales of property by the general partner **239 to the partnership, the general partner would make a profit. 327

The court also found that in each transaction the markup in price was fair and reasonable and that the transactions were in all respects fair and reasonable to the limited partnership. According to the findings, the general partner exercised its particular skill and knowledge in the purchase of properties and was able to acquire properties at a price *930 lower than the fair market value of the property. Although the properties were transferred to Auburn West Associates for a price in excess of that paid by the general partner, the fair market value of the properties at the time of transfer with respect to each parcel was in excess of the price charged Auburn West Associates. 327

The most recent transaction upon which the appellants claimed a right to receive the benefit of the profit made by the general partner involved the acquisition of a tract of land known as the Murakami property. The trial court found that a number of events which occurred subsequent to the acquisition of this land by the general partner, and prior to its sale to the partnership, substantially increased its value. The court found that it was sold to the partnership for a sum which was $138,000 below its fair market value. 328

The court further found that Auburn West Associates has made and will make a substantial profit on the Murakami property and upon all of the property transferred to the partnership by the general partner. It found that the limited partners have received back nearly all of their initial $10,000 in capital from proceeds of sales and condemnation, all of the debts of the partnership have been paid and there remain approximately 50 acres of property worth approximately $25,000 per acre. 328

The majority does not pretend that any of these findings is unsupported by the evidence. Rather, it rests its reversal of the trial court upon an implied holding either (1) that partners are not bound under an agreement that the general or managing partner may make a fair and reasonable profit on a transaction with the partnership, unless the agreement spells out the method of determining the amount of such profit, or (2) that the terms of an agreement may not be established by the course of dealing between the parties. 328

No authority is cited for either proposition and I am convinced that if any such authority exists, it is contrary to the general principles of contract law, and to those which *931 this court has applied in determining the rights and obligations of parties who have entered into contracts of partnership. 328

This court is not without its precedents upon the law of partnership, and I find them to be in harmony with the general law. I also find that they support the judgment of the trial judge, who studied the exhibits and listened to the testimony of the witnesses, observed their demeanor, found the facts upon substantial evidence, and also observed where the equities lay. That court evidently came to the conclusion that this action was an attempt by a few of the limited partners to overreach and take unfair advantage of the general partner, without whose services the profitable investments made for the plaintiffs could never have been effected. 328

A partnership is an association of two or more persons to carry on as coowners a business for profit. RCW 25.04.060. RCW 25.04.180 sets forth rules governing the rights and duties of partners but makes such rules subject to any agreement between the parties. This is in harmony with the general rule that a partnership is a consentual relationship governed by the agreement between the parties, as far as that contract extends; that the courts cannot rewrite their agreement, but that those duties and obligations which are not reached by the express contract are implied and enforced by law. The rule is thus stated in 68 C.J.S. Partnership s 76, p. 516 (1950). In Eder v. Reddick, 46 Wash.2d 41, 278 P.2d 361 (1955), we held that a contract of partnership, either express or **240 implied, is essential to the partnership relationship. 328

A limited partner is not bound by the obligations of the partnership (RCW 25.08.010) and is not subject to the liability of a general partner, unless he takes part in the control of the business (RCW 25.08.070). 328

RCW 25.04.210 provides: 329

(1) Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from *932 any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. 329

The statute embodies the general rule applicable to partners that a partner may nor derive a Secret personal profit out of the business or transactions of the firm. This rule is stated in 68 C.J.S. Partnership s 99, p. 538 (1950). See Annot., Duty of one who joins with others as partners or members of a joint adventure in the purchase of property from a third person to share with them the benefit of an existing option or executory contract for the property, 152 A.L.R. 1001 (1944). Where a partner sells property to his partnership, he must make full disclosure of all the facts relating to the sale. Victor Oil Co. v. Drum, 184 Cal. 226, 193 P. 243 (1920); Ligget v. Lester, 237 Or. 52, 390 P.2d 351 (1964). Full disclosure is necessary, otherwise it cannot be successfully maintained that the remaining partners have given their informed consent. 329

In the present case, the trial court found upon substantial evidence that it was the understanding and agreement of the partners that the general partner would acquire property and sell it to the partnership at a fair price and would itself realize a profit on the transaction. Such an agreement was within the power of the partners. There is no statute or rule of law of which I am aware which forbids it. 329

While the articles of limited partnership state that they contain the entire understanding of the parties, it is obvious that one of the terms which was essential to the partnership arrangement was not provided in the agreement. The articles contain no provisions setting forth the price to be paid for any property other than that involved in the initial purchase, nor do they set forth any method of determining such price. 329

It is the rule that where a written agreement is silent as to one of the terms which is essential to the contract, that term may be supplied by parol evidence. In ascertaining the intention of parties to a written agreement, the court looks to the wording of the instrument itself as made by *933 the parties, views it as a whole, and considers all the circumstances surrounding the transaction, including the subject matter, together with the subsequent acts of the parties to the instrument. In re Estate of Garrity, 22 Wash.2d 391, 156 P.2d 217 (1945). In interpreting a partnership agreement, the agreement must be read as a whole and construed in the light of the history of the partnership and its purpose. Ashley v. Lance, 75 Wash.2d 471, 451 P.2d 916 (1969). See also Yatsuyanagi v. Shimamura, 59 Wash. 24, 109 P. 282 (1910). 329

A written contract may be modified by the subsequent conduct of the parties. Davis v. Altose, 35 Wash.2d 807, 215 P.2d 705 (1950). And see Lundberg v. Corporation of Catholic Archbishop, 55 Wash.2d 77, 346 P.2d 164 (1959) (an ambiguity may be resolved by subsequent conduct). 329

These were the rules of law followed by the trial court when it considered the nature of the partnership undertaking and the subsequent conduct of the parties to find their understanding as to the price or method of determining the price to be paid for properties purchased from the general partner. 329

The agreement which the trial court found to exist in this case is not an extraordinary one. It is generally the rule that, where there is an otherwise enforceable contract to purchase property and the price is not agreed upon, the court will determine the price upon the basis of the fair **241 value of the property. O'Keefe v. Aptos Land & Water Co., 134 Cal.App.2d 772, 286 P.2d 417 (1955); Allred v. Lininger, 156 Colo. 341, 398 P.2d 967 (1965); J. Pomeroy, Specific Performance of Contracts s 149 (3d ed. 1926); And see 5A A. Corbin, Contracts s 1174 (1964). The legislature has recognized this general principle and embodied it in the Uniform Commercial Code, RCW 62A.2--305, providing that if the parties to a sale have not agreed upon a price, the price shall be a reasonable price at the time for delivery. 329

In its implicit holding that an agreement to pay the fair *934 market value for the purchase of land is unenforceable, the majority has ignored and repudiated all of these authorities. The trial court found that there was such an agreement in the case before us, and the evidence supports that finding. 330

The majority acknowledges that the appellants assented to and acquiesced in the terms upon which all sales previous to the Murakami sale were made to the partnership, including the withholding of a reasonable profit on each transaction. What it apparently fails to perceive is that this course of conduct established the contract of the parties--whether it is viewed as having supplied a missing term or constituted a modification of the written contract. As I understand the law, the general partner was entitled to rely upon that contract when it made the Murakami sale; but the majority has said that it had no such right. 330

The opinion of the majority reflects a view, although it is not expressly stated therein, that an agreement established through a course of conduct of the parties may be repudiated at anytime by a party who does not find it to his liking. Not surprisingly, no authority is cited which would support such a proposition. 330

As the trial court found, the fact that the appellants acquiesced in all transactions prior to the Murakami sale, after receiving full disclosure of the facts, indicates that they considered the price fair in each instance and that the transaction was conducted in accordance with the understanding of the parties. By this course of conduct, the parties manifested their agreement. That agreement governed the Murakami transaction as well as the previous transactions, according to established principles of contract law. In Shell Oil Co. v. Wright, 167 Wash. 197, 202, 9 P.2d 106 (1932), we said: 330

There can be no question that an unexecuted contract, even though in writing, may be modified by agreement of both parties, and that, when so modified and acted upon by the parties, it will be given the same effect as if the modification was part of the original contract. Tingley v. *935 Fairhaven Land Co., 9 Wash. 34, 36 P. 1098 (1894); La Plante v. Hubbard, 125 Wash. 621, 217 P. 20 (1923); Hunters Cattle Co. v. Carstens Packing Co., 129 Wash. 377, 225 P. 68 (1924); Inman v. Roche Fruit Co., 162 Wash. 235, 298 P. 342 (1931). 330

It is not denied by the majority that the articles of partnership provided no method of compensating the general partner for its expertise and efforts in acquiring the properties for the partnership, and that unless the general partner could make a profit on the sale of properties to the partnership, its services would be bestowed gratuitously. It suggests no reason why the general partner would have been willing to give the partnership the benefit of these services without compensation. 330

It is true that the general partner was entitled to a share of the profits of the partnership as owner of 100 units of the partnership. However, those profits were attributable to its investment and not to its services, which the trial court found to have been of considerable value. It appears that the services of the general partner were necessary to achieve the partnership purposes. 330

In an analogous situation we have said that where one partner has the entire management and control and is devoting his whole time to the partnership business, and **242 the other renders no service in the business and is entirely and constantly away from the business tending to other business of his own, such conditions may give rise to an implied contract that the one giving his whole time and attention to the business shall be compensated therefor. In re Estate of Levy, 125 Wash. 240, 215 P. 811 (1923). In Waagen v. Gerde, 36 Wash.2d 563, 576, 219 P.2d 595 (1950), we said that the exception to the general rule that one partner is not entitled to extra compensation from the partnership is well stated in 1 S. Rowley, Modern Law of Partnership 412, s 354 (1916), as follows: 331

"Where it can be fairly and justly implied from the course of dealing between the partners, or from circumstances of equivalent force, that one partner is to be *936 compensated for his services, his claim will be sustained.' (Emerson v. Durand, 64 Wis. 111, 24 N.W. 129, 54 Am.Rep. 593.) 'The partnership may be of such a peculiar kind, and the arrangements and the course of dealing of the partners in regard to it may be such as pretty plainly to show an expectation and understanding, without an express agreement upon the subject, that certain services of a copartner should be paid for. Such cases, presenting unusual conditions, are exceptions to the general rule (Hoag v. Alderman, 184 Mass. 217, 68 N.E. 199),' however.' 331

It would have been unreasonable for the limited partners to expect that the general partner would render its valuable services in acquiring the properties for the partnership without some form of remuneration, and the evidence showed that they had no such expectation. Under the system adopted, the amount of such remuneration depended entirely on the exercise of skill and judgment in the acquisition of properties. Had the market value of any parcel dropped before its resale to the partnership and had the general partner attempted to recoup its loss by selling to the partnership at the price which it had paid for the land, the limited partners would have had just cause for complaint. It appears that property values were rising rather rapidly in the area where the land was situated, and this was the reason why both the general partner and the partnership could realize substantial profits. 331

The trial court correctly applied the law to the undisputed facts of this case. They show that it was the understanding of the partners that the general partner would use its expertise and its facilities to acquire properties which the limited partners acting individually would have been unable to acquire and upon which they could realize a profit either from development, lease or resale; that it would sell those properties to the partnership at a fair price which would allow them to make such a profit and that this was the course of dealing throughout the life of the partnership. The conclusion that the partnership was bound to *937 pay the price charged by the general partner, which was below the fair market value, was compelled by the applicable law. 331

The judgment should be affirmed. 331

HUNTER and HAMILTON, JJ., concur. 331

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