COURT FILE AND PARTIES

COURT FILE NO.: CV-13-484489-000

DATE: 20131114

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Marko Djurdjevac, Applicant

AND:

Deacon, Spears, Fedson & Montizambert LLP, Respondent

BEFORE: D.L. Corbett J.

COUNSEL: Joyce Harris, for the Applicant

Nicole Henderson, for the Respondent

HEARD: November 7, 2013

ENDORSEMENT

[1] Marko Djurdjevac withdrew from the partnership of Deacon, Spears, Fedson & Montizambert LLP (“Deacon Spears”) effective December 30, 2010. Two disputes arise from this departure:

(a) is Mr Djurdjevac liable to make three annual payments in 2011, 2012 and 2013 of $25,000 to the partners of Deacon Spears on account of goodwill? and

(b) is Mr Djurdjevac liable to pay $2,850 for accounting services rendered in connection with Mr Djurdjevac’s departure?

[2] For the reasons that follow, Mr Djurdjevac’s application is granted in respect to both issues. The annual goodwill payments were contingent on Mr Djurdjevac remaining in the partnership. The accounting services were incurred to investigate and correct errors in the firm’s records concerning Mr Djurdjevac’s entitlements and obligations on leaving the partnership. Mr Djurdjevac paid his own accountant to look into these issues; he is not liable to pay his former firm’s accounting bills as well.

[3] In the result there shall be judgment for Mr Djurdjevac for $75,000, with interest from January 1, 2011, plus judgment for $2,850, with interest from the date the application was commenced (July 10, 2013). If costs are not agreed then they shall be addressed in writing.

Background

[4] Mr Djurdjevac joined Deacon Spears as an articling student in 2001-2002. He was invited back upon his call to the bar and practiced as an associate lawyer until December 31, 2008. Effective January 1, 2009, he became a partner in the firm. He withdrew two years later, effective December 30, 2010.

[5] In the fall of 2008, Mr Djurdjevac and the firm discussed his joining the partnership. Mr Djurdjevac was given copies of the partnership agreement, financial statements for the year ending December 31, 2007, financial information for the 2008 year-to-date, and projections for the five year period beginning January 1, 2009 (the “Projections”). Discussions centered on three issues:

(a) the $125,000 capital contribution Mr Djurdjevac would make upon becoming a partner.

(b) the “buy-in” Mr Djurdjevac would pay to the other partners of the firm, characterized as goodwill. This buy-in is reflected on the Projections as annual payments of $25,000 by Mr Djurdjevac, and annual credits for each of the other five partners of $5,000 per partner. These payments are recorded as income events in the years in which they were made.

(c) Mr Djurdjevac’s projected gross and net income over five years as it would rise to achieve parity with the other partners in the firm.

[6] There are no issues in respect to (a) and (c). The parties dispute the substance of their agreement in respect to (b).

The Goodwill Payments

[7] Both sides understood that Mr Djurdjevac would make goodwill payments to the other partners as part of the price of admission to the partnership. But what were the precise terms of this obligation? The evidence is as follows:

(1) the Projections;

(2) Mr Djurdjevac’s goodwill payments in 2009 and 2010 and the accounting for those payments;

(3) Mr Djurdjevac’s evidence of the discussions about this issue;

(4) evidence of partners of Deacon Spears of the discussions about this issue;

(5) evidence of goodwill payments made when Gregory Marley was admitted to the partnership; and

(6) the silence of the partnership agreement on this issue.

Preliminary Issue: Application or Action

[8] As a preliminary issue, Deacon Spears argued that the issue respecting goodwill payments turns on credibility and ought not to be decided on an application. For brief handwritten reasons I dismissed Deacon Spears’ motion to convert this proceeding into an action or to order the trial of an issue within this application.[^1]

The Goodwill Payment Obligation

[9] The Projections, the payments made by Mr Djurdjevac in 2009 and 2010, and the payments made by Mr Marley when he became a partner, are not in dispute. The evidence of Mr Djurdjevac and his former partners about the discussions they had respecting this issue differ in respect to only one point: whether Deacon Spears expressed the goodwill obligation as a crystallized obligation of $125,000 upon entering the partnership, payable over five years, or whether it was a cumulative obligation that arose annually contingent on Mr Djurdjevac remaining in the partnership. It is clear that no one expressly raised the question of what obligations Mr Djurdjevac would have if, for any reason, he left the partnership in less than five years.

[10] The inference I draw from the evidence is that the parties did not put their minds to Mr Djurdjevac leaving the partnership in less than five years. The evidence of both sides casting shades of meaning on their discussions six years ago that would bear on this question is patently self-serving and not entitled to any weight. If either side had put its mind to the issue, the issue would have been discussed expressly. All involved are reputable and competent legal professionals, who acted in good faith around Mr Djurdjevac joining the partnership. They would have been clear and direct about this issue if they had put their minds to it.

[11] The Projections show the goodwill payments being made from annual partnership draws over five years. They state:

Marko Djurdjevac is expected to pay for his partnership share directly out of his earnings over the next 5 years.[^2]

In the result, assuming gross income and expense projections are reasonable, Mr Djurdjevac would have seen little increase in earnings in his first year of partnership (once he deducted his carrying costs for his capital contribution), and then his annual income would have increased to match that of the other partners. He would have paid for the goodwill as he enjoyed it, rather than all at once. I agree with Ms Henderson that the Projections do not decide the issue definitively, and perhaps are not as determinative as Ms Harris argued. But nonetheless, they weigh in favour of Mr Djurdjevac’s account of his expectations.

[12] Second, the firm could determine the form of the partnership documents to be required on admission of a new partner. Of course, a new partner could reject partnership terms. But when admitting a junior partner, who has come up through the ranks, I would expect that the necessary documents would be provided by the firm. And indeed they were; the partnership agreement, financial statements and Projections all came from the firm. No documents were drafted by Mr Djurdjevac. I cannot apply the contra proferentum principle to an absence of documentation. However, I can place greater weight on the one document that bears on this issue: the Projections. And I can conclude that any ambiguity arising from the failure to document the terms of the goodwill payments ought to be resolved against the firm. The goodwill payments are non-refundable (unlike the capital contribution). They are highly material for a young lawyer, as Mr Djurdjevac was at the time. Indeed, taking the firm’s position as expressed, the goodwill was a fixed long-term obligation, akin to a bank loan, and the sort of obligation that could well lead someone in Mr Djurdjevac’s position to purchase insurance for it if he had financial responsibilities to others. I put this issue to Ms Henderson: under the firm’s view of it, what would have happened if Mr Djurdjevac had been killed in an accident a week after entering the partnership? His capital would be returned to his estate in accordance with the partnership agreement, but would his estate be liable to make the goodwill payments for the five year period, even though it would earn no income from the firm? Her response was instructive: we should not assume that the firm would have taken such a hard line in such tragic circumstances.

[13] That is both a good answer and no answer at all. It is a good answer because it is the only reasonable response in the circumstances. It is no response at all because it side-steps the legal question. If the legal response is yes, the balance would be owed to the firm, then this would have to have been made clear to Mr Djurdjevac at the time he entered the partnership.

[14] Payment of and accounting treatment for goodwill payments made by Mr Djurdjevac does not assist on this issue. Mr Djurdjevac paid the $25,000 in 2009 and 2010. In 2009 he paid the money to the firm, and each of the other five partners was apparently credited with $5,000 in the manner shown on the Projections. In 2010 he paid the money directly to the other partners with cheques of $5,000 each, rather than paying the firm. This led the firm to miscalculate the balance owed to Mr Djurdjevac, since the firm’s accountant proceeded on the basis that the 2010 payment had not been made. When this was brought to the firm’s attention, the firm credited Mr Djurdjevac’s capital account with $25,000, as an adjusting entry. I accept that the goodwill payments were income events for Mr Djurdjevac and the other partners, and were not payments to the firm on account of capital. That is how they are shown on the Projections, and the one credit to the capital account is to correct a double-payment.

[15] Similarly, the payment history of Mr Marley is of no help in deciding whether Mr Djurdjevac is liable for goodwill payments in 2011, 2012 and 2013. Like Mr Djurdjevac, Mr Marley agreed to make $25,000 payments for five years. Unlike Mr Djurdjevac, Mr Marley stayed with the firm throughout the five year period. He made the five payments, but in circumstances where he would have been obliged to do so on both the firm’s and Mr Djurdjevac’s theories of the case. There is no evidence that Mr Marley or the firm put their minds to what would have happened if Mr Marley had left the firm in less than five years. Mr Marley’s purported recollections of his own understanding, nine years ago, in respect to an issue that apparently was never raised explicitly, are self-serving and of no help in resolving the issue.

[16] I conclude that the obligations to pay goodwill were contingent on Mr Djurdjevac having “partnership earnings” is a given year from which to make the goodwill payments. Since Mr Djurdjevac withdrew from the partnership at the end of a partnership year, I do not have to consider whether the annual goodwill payments should be pro-rated for a partial year, or whether they are payable to $25,000 from any partnership income earned in a particular year.

[17] In the result, I find that Deacon Spears was not entitled to deduct $75,000 from the amounts it owed Mr Djurdjevac on account of goodwill payments for 2011, 2012 and 2013.

The Accounting Services

[18] The invoice from Deacon Spears’ accountants indicates that the services involved assisting Mr Djurdjevac in respect to his personal tax issues. Of course, finalizing the amounts to be paid to Mr Djurdjevac would be relevant to his taxes. But that does not make the services personal tax advice to Mr Djurdjevac. On the record, the only services rendered by the firm’s accountant related to sorting out disagreements about what was owed to Mr Djurdjevac, and specifically, in respect to an error accounting for Mr Djurdjevac’s goodwill payment in 2010. This is a firm expense, not one for Mr Djurdjevac’s account. In the result, Mr Djurdjevac is entitled to $2,850 from Deacon Spears in respect to this issue.

Interest and Costs

[19] The $75,000 ought to have been shown as a credit to Mr Djurdjevac as of the date of his departure, December 30, 2010. Interest shall run on this amount from January 1, 2011. Although the accounting invoice ought not to have been claimed from Mr Djurdjevac, he did not complain about it until he commenced this claim. Interest shall run on this portion of the claim from the date the notice of application was issued (July 10, 2013).

[20] Mr Djurdjevac is entitled to his costs throughout. If the parties cannot agree on the scale and quantum within 14 days, then they shall make brief written submissions, Mr Djurdjevac by November 29, 2013, and Deacon Spears by December 6, 2013. There shall be no reply or oral costs submissions unless I subsequently direct otherwise.

D.L. Corbett J.

Date: November 14, 2013

[^1]: This alternative relief was not sought by Deacon Spears, but was an option that I considered.

[^2]: Application Record, tab 3, page 43.