ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 07-CV-339360PD1
DATE: 20130318
B E T W E E N:
SIEVERT & SAWRANTSCHUK LLP
Plaintiff
- and -
BOSTON HOMMEL
Defendant
J.C. Rioux and John Philpott, for the Plaintiff
Evan L. Tingley, for the Defendant
HEARD: February 11 to 14, 2013
SPENCE J.
REASONS FOR DECISION
[1] On June 30, 2004, the Defendant, Boston Hommel (“Hommel”) terminated his partnership in the Plaintiff firm, Sievert & Sawrantschuk LLP (the “Firm”). The Plaintiff and the Defendant each claim against the other for amount owing by reason of the termination.
[2] The claims of the parties relate principally to:
• the amount owing by the Plaintiff to the Defendant in respect of the Defendant’s capital accounts in the Plaintiff firm; and
• the amount owing by the Defendant to the Plaintiff in respect of the assignment made by the Plaintiff to the Defendant of work in progress (“WIP”) and Accounts Receivable (“A/R”) relating to client accounts which the Plaintiff and the Defendant agreed the Defendant could take with him.
Applying the Partnership Agreement
[3] It is not disputed that Hommel is entitled to be paid by the Firm an amount equal to his capital accounts in the Firm. Paragraph 30 of the Agreement provides for the making of payments on account of his estimated capital accounts in four equal instalments.
[4] Paragraph 4 provides for the way a partner’s capital accounts are to be determined.
[5] Paragraph 4(a) provides that the capital accounts include cash contributions less cash withdrawals in excess of permitted expense amounts plus profits.
[6] The amount which the Firm records in its financial statements as the “Partners Capital” includes the amounts of this kind, plus goodwill amounts allocated to the Partners.
[7] Hommel’s Capital is stated on the 2003 balance sheet as $410,371. The portion of that amount that represents goodwill allocations made in prior years is $159,560. Accordingly, the net amount is $250,811.
[8] The Firm says that Hommel had draws in the first half of 2004 in the amount of $54,472. Hommel says he believes he did not receive more than about $36,000. Neither amount is well supported. It is probable that Hommel withdrew about $46,000. The Firm accepts that $7,789 would be deductible from the higher amount so the amount to be deducted on a fair basis is probably $5,000, for a net deduction from the capital account of $41,000.
[9] Hommel contends that his initial $50,000 capital contribution has been overlooked in the accounts. The contribution was made in 1990 and 1991 and he has access to the financial statements throughout his time as partner to June 30, 2004. If there was a discrepancy of this magnitude, which would have been especially evident in his early years as a partner, he ought reasonably to have noticed it.
[10] For the above reasons, the amount to be included under paragraph 4(a) is $250,811 less $41,000; i.e. $209,811.
[11] Paragraphs 4(b) and (c) include in the Capital Accounts of Hommel his shareholder’s equity in the two subsidiary companies as reported on their most recent financial statements. That amount is one-third of the total shareholding equity of $281,816 shown on those statements.
[12] Mr. Sievert said that the amount should be a lesser amount, as set out in his calculation at Exhibit 1, Tab 11. He referred to the tax costs of paying out the undistributed income in the subsidiaries. No such distribution is occasioned by the departure of Hommel. No provision is made in paragraphs 4(b) and(c) for a deduction on that account.
[13] Accordingly, the amount to be included under paragraphs 4(b) and (c) is one-third of $281,816 or $93,938.
[14] Paragraph 4(d) provides for an inclusion in respect of goodwill. Paragraph 33 provides that, for purposes of the estimation of Hommel’s capital accounts for payments under paragraph 30, “the payments shall not include the Goodwill Capital Account which shall be dealt with in accordance with paragraph 34”. Paragraph 34 provides that the “value of goodwill shall be reduced [and] shall be paid to the Departing or Withdrawing Partners…, subject to Paragraph 35 as hereinafter set out”.
[15] Paragraph 35 appears to deduct from the “Reduced Value of Goodwill” (i.e. the paragraph 34 amount), the “value to be ascribed to the Goodwill Capital Account” of Hommel of all clients included in his capital accounts except those of clients who remain clients of the Firm for three years after his departure or in the case of such clients who remain with the Firm for less than three years, “5% of the fees collected during such shorter period of time”. The parties apparently accept that the purport of paragraph 35 is as set out above.
[16] In view of paragraphs 34 and 35, the only amounts to be included in Hommel’s capital accounts under paragraph 4(d) of the Agreement, in respect of the Value of Goodwill are the amounts determined under paragraphs 34 and 35.
[17] The Firm accepts and Hommel appears not to dispute a total amount for Plasma, NCC and Heathbridge of $16,315 for inclusion as goodwill on the above basis.
[18] Hommel claims additional goodwill amounts with respect to clients who stayed with the Plaintiff for more than three years, as follows:
1091439 Ontario Ltd.
$ 7,100.00
1091440 Ontario Inc.
2,600.00
Henry and Corina Brasil
1,050.00
Sea Green Capital Corp.
29,260.00
Total:
$40,010.00
[19] Delta One Energy Fund Limited Partnership stayed with the Plaintiff for less than three years. Consequently, Hommel is entitled to be credited with 5% of the total fees billed and collected. Those fees were $64,041.50, 5% of which is $3,202.08.
[20] These claims are adequately established except that the 20% reduction in paragraph 34 needs to be applied. On this basis the amount to be included in goodwill for these additional items is 80% of $43,212, i.e. $34,570.
[21] Accordingly, the total inclusion for goodwill is $16,315 plus $34,570, i.e. $50,885.
[22] Based on the above determinations, the amount of the Capital Accounts of Hommel for purposes of determining the amount that the Firm owes him is:
$209,811
93,938
50,885
$354,634
The Assignment of WIP and Accounts Receivable
[23] Next, it is necessary to determine the amount that Hommel owes to the Firm in respect of the WIP and A/R that he acquired from the Firm when he departed.
[24] The WIP and A/R were carried on the books of the Firm as follows:
WIP: $159,735
A/R: 99,254
$258,989
[25] Hommel submits that there should be deductions on account of WIP and A/R that turned out not to be collectable. The Firm concedes a deduction in respect of Greentree in the amount of $19,011, but the evidence is that they recognized it to be uncollectable before it was assigned, which is said not to be the case with the other WIP and A/R accounts. There is no basis to make the deductions Hommel seeks.
[26] The amount payable on account of WIP and A/R must also be reduced as follows:
• payments made by Hommel on the purchase price of the WIP and A/R: $13,400
• A/R payment received by the Firm otherwise: $15,521
• A/R payment received from Plasma: $6,240
• GST on A/R assigned: $5,972
[27] On this basis, the amount payable by Hommel for WIP and A/R must be reduced by the total of the following amounts:
$19,011
13,440
25,521
6,240
5,972
$70,184
[28] On this basis, the amount that is payable by Hommel to the Firm for WIP and A/R is:
$258,989
Less: 70,184
i.e. $188,805
Miscellaneous
[29] The Firm claims $4,966 on account of a payment made to Hommel to assist him with start-up.
[30] The Firm claims $4,427 on uncollectable WIP of former clients of Hommel. The Agreement does not make provision for a claim of this kind.
Conclusion
[31] Based on the above determinations, the net amount owing is as follows:
Owing by the Firm:
$354,634
Owing by Hommel:
$188,805
4,996
($193,801)
Net Amount Owing by the Firm to Hommel:
$160,833
[32] Hommel concedes that by reason of the two-year limitation period for claims, only the portions of the amount payable to him that came due after December 13, 2005 can be claimed. Since he left the Firm on June 23, 2004, two equal payments were due before December 13, 2005 and two equal payments have become payable since then. Accordingly, Hommel has a proper claim for 50% of the net amount owing.
[33] For the above reasons, judgment is to go in favour of Hommel in the amount of $80,416.50.
[34] If necessary, written submissions may be made to me about costs. One party should make the first submissions within 30 days of the release of these reasons, with any responding submissions from the other party to be made within 15 days afterwards, and any reply submissions within 15 days after that. It would be helpful if a copy of any submission could be sent by e-mail to my assistant.
Spence J.
Released: March 18, 2013
COURT FILE NO.: 07-CV-339360PD1
DATE: 20130318
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
SIEVERT & SAWRANTSCHUK LLP
Plaintiff
- and -
BOSTON HOMMEL
Defendant
REASONS FOR DECISION
Spence J.
Released: March 18, 2013