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Fredericks Peebles & Morgan LLP v. Assam

Supreme Court of Nebraska

August 3, 2018

Fredericks Peebles & Morgan LLP, appellee.
Fred Assam, appellant.

         1. Declaratory Judgments. An action for declaratory judgment is sui generis; whether such action is to be treated as one at law or one in equity is to be determined by the nature of the dispute.

         2. Partnerships: Accounting: Appeal and Error. An action for a partnership dissolution and accounting between partners is one in equity and is reviewed de novo on the record.

         3. Declaratory Judgments: Equity: Appeal and Error. In reviewing an equity action for a declaratory judgment, an appellate court tries factual issues de novo on the record and reaches a conclusion independent of the findings of the trial court, subject to the rule that where credible evidence is in conflict on material issues of fact, the reviewing court may consider and give weight to the fact that the trial court observed the witnesses and accepted one version of the facts over another.

         4. Partnerships. The interpretation of a partnership agreement presents a question of law.

         5. Appeal and Error. An appellate court independently reviews a lower court's rulings on questions of law.

         6. Courts: Jurisdiction: States. In answering any choice-of-law question, a court first asks whether there is any real conflict between the laws of the states.

         7. Jurisdiction: States. An actual conflict exists when a legal issue is resolved differently under the law of two states.

         8. Contracts. A contract written in clear and unambiguous language is not subject to interpretation or construction and must be enforced according to its terms.

         9. Actions: Appeal and Error. An appellate court determines the nature of an action from the relief sought.

          [300 Neb. 671] 10. Breach of Contract: Damages. A suit for damages arising from breach of a contract presents an action at law.

         11. Trial: Expert Witnesses. The trier of fact is not bound to accept expert opinion testimony.

         12. Trial: Evidence. Evidence not directly contradicted is not necessarily binding on the triers of fact, and may be given no weight where it is inherently improbable, unreasonable, self-contradictory, or inconsistent with facts or circumstances in evidence.

         13. Witnesses: Testimony. The credibility of a witness is a question for the trier of fact, and it is within its province to credit the whole of the witness' testimony, or any part of it, which seemed to it to be convincing, and reject so much of it as in its judgment is not entitled to credit.

         14. Options to Buy or Sell: Valuation: Words and Phrases. "Fair market value" is the price that a willing buyer would pay a willing seller, both persons having reasonable knowledge of all relevant facts and neither person being under compulsion to buy or to sell.

         15. Options to Buy or Sell: Presumptions. The willing buyer-willing seller rule presumes that a potential transaction is to be analyzed from the viewpoint of a hypothetical buyer whose only goal is to maximize his or her advantage.

         16. Options to Buy or Sell. The willing buyer-willing seller rule is applied using the viewpoint of an objective hypothetical buyer, rather than a subjective buyer.

          Appeal from the District Court for Douglas County: Shelly R. Stratman, Judge. Affirmed.

          David A. Domina, of Domina Law Group, PC, L.L.O., for appellant.

          Daniel P. Chesire, Brian J. Brislen, and Cathy S. Trent-Vilim, of Lamson, Dugan & Murray, L.L.P., and James J. Banks, of Banks & Watson, for appellee.

          Heavican, C.J., Miller-Lerman, Cassel, Stacy, Kelch, and Funke, JJ.

          FUNKE, J.

         This appeal concerns a determination of Fred Assam's ownership interest in the law firm of Fredericks Peebles & Morgan LLP (FPM). After Assam voluntarily withdrew from [300 Neb. 672] the firm, FPM filed suit seeking a declaration of the rights of FPM and Assam under the governing partnership agreement (Partnership Agreement). Following a bench trial, the district court for Douglas County declared the fair market value of Assam's interest in FPM to be $590, 000. For the reasons stated herein, we affirm.

         I. BACKGROUND

         1. Partnership

         FPM is a limited liability partnership composed of legal professionals. FPM has a nationwide practice which specializes in handling legal issues impacting Native American tribes, including, but not limited to, facilitating interrelationships between Native American tribes and the federal government, state governments, and other tribes, as well as foreign governments and foreign companies. FPM represents Native American tribes, entities, and individuals, as well as banks and financial institutions which deal with Native American tribes.

         FPM was organized under the laws of the District of Columbia, and its principal place of business is located in Omaha, Nebraska. At the relevant time, FPM had dozens of attorneys throughout offices in Sacramento, California; Louisville, Colorado; Sioux Falls, South Dakota; Omaha, Nebraska; Winnebago, Nebraska; Peshawbestown, Michigan; and Washington, D.C.

         As of October 1, 2014, FPM had five equity partners: Thomas W. Fredericks, John M. Peebles, Lance G. Morgan, Conly J. Schulte, and Assam. Fredericks, Peebles, Schulte, and Assam each held a 23.25 percent interest in FPM, and Morgan held the remaining 7 percent. FPM traditionally implemented a team approach in servicing its clients' accounts, but nearly 90 percent of FPM's clients were brought in by Fredericks, Peebles, Morgan, and Schulte. Assam, a financial attorney, worked on accounts brought in by the other equity partners. Only three clients followed Assam when he left FPM, two of which maintained a relationship with FPM.

          [300 Neb. 673] In early 2014, FPM undertook a thorough financial review in order to implement long-term planning. The partners began to discuss changes to their compensation structure in order to reward younger partners for bringing in new clients. Fredericks proposed that compensation should be based on client generation, while others proposed that compensation should be based upon equity ownership. The partners exchanged and refined proposals over a period of months, and FPM ultimately arrived at a hybrid of the two compensation structures.

         According to the testimony of Peebles, Assam had not kept up to date on the various proposals and voiced concern about only Fredericks' initial proposal, which Assam felt negatively impacted his compensation. As a result of his concerns, Assam hired the accounting firm Eide Bailly LLP to perform a valuation of his equity interest in FPM.

         On the evening of October 2, 2014, Assam sent an email to his partners in which he voluntarily resigned from FPM. In the email, Assam advised, "As you are all aware, over the course of the last few months, I have been under a personal attack by . . . Fredericks." Assam stated the compensation structure Fredericks had proposed would "transfer complete control of [FPM] over to [Fredericks]. This means the life of my family and me will [sic] in complete control of a man who does not care for me and, in fact, will apparently act with intent to only to [sic] harm me."

         The following morning, Assam, whose office is located in Sioux Falls, flew to Denver, Colorado, to attend a partner meeting at the Louisville office, which had been scheduled prior to Assam's resignation email. During his flight, Assam reviewed some of the more recent compensation structure proposals and realized the documents he had relied on when deciding to resign had significantly changed. At the meeting, Assam told the partners he had made a mistake and wanted to rescind his resignation and rejoin FPM. The partners declined and formally voted to accept Assam's resignation.

          [300 Neb. 674] The FPM partners then continued their meeting and, as part of their ongoing financial review, addressed the agenda item of how to treat approximately $10 million in old accounts receivable. Many of FPM's clients are sovereign under federal law and therefore may not be sued to collect on past-due billing absent a waiver of sovereign immunity. FPM has a practice of not requesting such a waiver from its clients so as to not jeopardize client relationships. As a result, according to the testimony of Morgan, FPM has a lower-than-average collection rate.

         FPM carried a significant amount of outstanding accounts receivable for an extended period of time. At the partnership meeting, FPM decided to write off as uncollectable approximately $10 million in old accounts receivable.

         After Assam's resignation, the partners made him an offer of payment intended to represent the fair market value of his equity interest as set out in the Partnership Agreement. However, the two sides could not agree as to the value of Assam's interest.

         In late 2014, FPM filed a declaratory judgment action to determine the value of Assam's interest. Assam filed an answer and counterclaim for an accounting and fair valuation of his interest in FPM, based on the Partnership Agreement. Assam sought a money judgment and attorney fees. FPM filed an amended complaint which asserted claims for breach of contract, breach of fiduciary duty, fraud, constructive fraud, rescission, disgorgement, and an accounting. Assam filed an answer which denied such claims and stated affirmative defenses.

         At trial, FPM moved without objection to conform its pleadings to the adduced evidence in order to clarify that its sole claim was for declaratory judgment as to the amount it owed Assam for the fair market value of his ownership interest, as provided under the Partnership Agreement. Assam clarified that he maintained his counterclaim for an accounting, fair valuation, and a money judgment, plus attorney fees.

          [300 Neb. 675] The Partnership Agreement is dated May 1, 2007, and was signed by Fredericks, Peebles, Morgan, Schulte, and Assam on August 9, 2008. The parties agree that the provision which governs the determination of Assam's equitable interest in FPM is:

In the event any Equity Partner gives a notice of voluntary withdrawal more than sixty months of July 1, 2003, such withdrawing Equity Partner will receive an amount equal to 100% of the fair market value of the Equity Partner's interest in the Partnership as of the date of such notice of voluntary withdrawal, which amount will be paid out in six equal monthly installments without interest.

         2. Expert Testimony

         The court heard valuation testimony from several expert witnesses. FPM called William Brennan, a management consultant for the legal profession. Assam called Chad Flanagan and Jay Fullerton, of Eide Bailly. In addition, Assam called Matthew Stadler as an expert witness. Assam himself also opined as to valuation.

         (a) Brennan

         Brennan has worked for over a decade as a principal with a law firm management consulting group. He testified that in the past 25 years, he has consulted with over 500 firms of all types and sizes. Prior to becoming a management consultant, Brennan worked as an accountant and auditor. Brennan's work experience includes serving as chief financial officer and executive director for two law firms, one of which had 250 attorneys.

         As a consultant, Brennan developed a specialty in law firm mergers and acquisitions, which included performing firm valuations. Over his career, he had performed about 25 firm valuations. He previously testified in court seven times as an expert in law firm valuation. He is published in the area of valuation and is a frequent speaker on the issue of law firm financial management.

          [300 Neb. 676] Brennan spent over 100 hours on his valuation of FPM and drafted a 48-page report. Brennan's report demonstrated several different business valuation approaches for comparison. Brennan testified that although market-based, asset-based, and income-based approaches are each generally accepted, the income approach is best for valuing law firms. Brennan stated the market-based approach is not useful for valuing law firms, because such businesses are privately owned and therefore a firm's private transaction data is not publicly available to be used to compare value with other businesses in the market. As for an asset-based approach, Brennan testified firm assets must be adjusted down to their cash ...

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