2. Whether upon dissolution accounting an unfunded pension plan, which the partnership did not treat as a liability, is a liability of the partnership.
2. No. If the partnership does not treat the unfunded pension plan as a liability in its financial statements, the partners cannot later claim it as such.
Order of the Appellate Division modified, without costs, and, as so modified, affirmed.
Theoretically, "[a] professional partnership, whose reputation depends upon the individual skill of the members, has no good-will to be distributed as a firm asset on its dissolution." Mendelsohn v. Equitable Life Assurance Soc'y, 33 N.Y.S.2d 733, 734 (N.Y. Sup. Ct.), appeal denied, 35 N.Y.S.2d 162 (N.Y. App. Div. 1942). Under this analysis, a partner's reputation leaves a firm with him. The partnership does not have goodwill to distribute to the partner because the law firm will not benefit in the future from that partner's association with the firm.
Ethically, it was argued, the distribution of goodwill involves the unethical practice of fee splitting (DR 2-107) and the violation of client confidences (DR 2-111). See N.Y. Comp. Codes R. & Regs. tit. 22, § 1200.12, 1200.15-a (1996).
Dawson represents yet another step in the court's acceptance of professional partnership goodwill. The court notes, "the holding in this case is based on the specific facts presented, and should not be construed as a prohibition against the valuation, in the appropriate case, of law firm good will."Dawson, at para. 15.
The recent revision of the ethical regulations for the legal profession alleviate the ethical concerns regarding the sale or distribution of goodwill. See 22 N.Y. Com. Codes R. &Regs. Title 22 § 1200.12 (1966) (Disciplinary Rule 2-107) (allowing payment of former partner pursuant to separation agreement); 22 N.Y. Comp. Codes R. & Regs. Title 22, § 1200.15-a (1996) (Disciplinary Rule 2-111) (allowing sale of law partnership and accompanying goodwill).
The partnership's course of dealing also determined treatment of an unfunded pension plan upon a dissolution accounting. White & Case never included the unfunded pension plan as a liability in the firm's financial statements. The court concluded that pension payments were not a liability of the firm. Instead, the court reasoned, the partnership's treatment of the pension plan coupled with the fact that the partnership agreement limited pension payments to no more than fifteen percent of partnership profits caused the pension payments to be operating expenses of the successor firm contingent on its future profits.
The Court of Appeals adopted a broader definition of goodwill such that a professional partnership's goodwill extends beyond the mere skill and reputation of the partners. Dawson, at para. 10. Under this more expansive definition, goodwill becomes a saleable asset in certain circumstances. Spaulding v. Benenati, 57 N.Y.2d 418 (N.Y. 1982) (goodwill included location and was therefore saleable). Dawson suggests that this definition will also allow the inclusion of goodwill as an asset in dissolution.
Another question pertains to the scope of Dawson when less than the entirety of the former law partnership continues. In Dawson, the entire firm reformed absent one partner. On the opposite extreme, may a law partnership sell its goodwill alone? It remains to be seen whether the court's definition of goodwill is sufficiently broad to encompass every permutation. See In re Kitay, 647 N.Y.S.2d 49 (N.Y. App. Div. 1996) (goodwill of firm transferred even though new staff, new location, and only 20% of the clients are serviced by the new partnership).
States employing the common law approach include New York, Ohio, Florida, and Washington. In Spayd v. Turner, Granzow & Hollenkamp, the Supreme Court of Ohio held that "the provision for goodwill as an asset of a partnership which is to be distributed upon dissolution of the business is a matter of contract between the partners and must be specifically set forth in the partnership agreement." 482 N.E.2d 1232, 1240 (Ohio 1985). See also Swann v.Mitchell, 435 So. 2d 797 (Fla. 1983) (goodwill of a partnership should be recognized as an asset in determining a partner's share upon dissolution); Harstad v. Metcalf, 351 P.2d 1037 (Wash. 1960) (finding there was no goodwill to distribute where each partner was continuing his own business after division of assets,).
Other jurisdictions use a statutory approach when considering the inclusion of goodwill as an asset. These states include Nebraska, Illinois, and Massachusetts. The Nebraska Supreme Court cited a state statute for the proposition that "a partner who does not wrongfully dissolve a partnership is entitled to his share of the partnership's goodwill." Thomas v. Marvin E. Jewell & Co., 440 N.W.2d 437, 442-43 (Neb. 1989) (citing Neb. Rev. Stat. §67-338 (1986)). See also Cook v. Lauten, 117 N.E.2d 860 (Ill. 1954) (a professional partnership, whose reputation depends upon the individual skill of the members, has no good will to be distributed as a firm asset on its dissolution); Whitman v. Jones, 77 N.E.2d 315 (Mass. 1948) (in the absence of agreement to the contrary, goodwill of a partnership is an asset and a partner appropriating it to his own use must account for its value).