Holman, PLLC v. Gentner ( 2021 )

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DISTRICT OF COLUMBIA COURT OF APPEALS
19-CV-830
JACOBSON HOLMAN, PLLC, APPELLANT
V.
MARSHA GENTNER, APPELLEE.
Appeal from the Superior Court
of the District of Columbia
(CAB-1834-15)
(Hon. Brian F. Holeman, Trial Judge)
(Argued December 8, 2020 Decided February 4, 2021)
John J. Brennan III for appellant.
Philip J. Harvey for appellee.
Before EASTERLY and MCLEESE, Associate Judges, and WASHINGTON, Senior
Judge.
EASTERLY, Associate Judge: This appeal arises out of a dispute over
contractual terms in a law firm’s operating agreement governing the payout to an
equity partner leaving the firm. Marsha Gentner sued Jacobson Holman, PLLC (“the
firm”), for breach of contract because it refused to pay the equity interest she
2
believed was due to her under the firm’s operating agreement (actually a collection
of agreements). Specifically, she claimed that the firm, where she had worked for
three decades, had improperly calculated her equity share by failing to rely on the
last annual financial statement issued prior to her notice of withdrawal as required
by the operating agreement. She also asserted that a provision in the operating
agreement which forced her to forfeit half of her equity interest if she took any clients
from the firm violated D.C. Rule of Professional Conduct 5.6(a) and was thus
unenforceable. The Superior Court concluded that Ms. Gentner was entitled to
judgment as a matter of law, both as to the payout of her equity share under the
operating agreement and as to the enforceability of the forfeiture provision. The
firm appealed both components of the trial court’s ruling. We affirm and publish
this opinion to ensure that the members of the District of Columbia Bar understand
the strictures of Rule 5.6(a).
3
I. Facts and Procedural History 1
A. Ms. Gentner’s Tenure at the Firm and the Firm’s Operating
Agreement as amended.
Ms. Gentner joined a predecessor entity to the firm as an associate in 1983,
later becoming an equity partner. In 1989, the firm’s equity partners signed a new
Partnership Agreement. Paragraph 24A of the 1989 agreement addressed “Payment
Upon Withdrawal of a Partner.” It provided that payment would be based on a
partner’s “adjusted Accrual Basis Account,” which would “be equal to the Accrual
Basis Account of such Partner as of the end of the fiscal year immediately preceding
the effective date of withdrawal,” and then “adjusted for Net Profits (and Losses)
and Accrual Basis Profits (or Losses) allocable to such Partner up to [the] date of
withdrawal.” Paragraph 24A identified two methods for calculating “[s]uch
adjustment”: the withdrawing partner and the remaining partners would agree on
the adjustment, or it would be calculated “by applying the allocation percentage for
1
The trial court did not issue a written summary judgment ruling and did not
clearly identify a set of undisputed facts when it ruled orally. Further, the parties
have not submitted to this court the statements of facts, undisputed or disputed, that
they were required to file with the trial court under Super. Ct. Civ. R. 56(b)(2) along
with their respective summary judgment motions and oppositions. Nevertheless,
relying on the parties’ briefs as well as the exhibits to the parties’ summary judgment
filings that were included in the joint appendix submitted to this court, we understand
the facts set forth below to be undisputed.
4
the withdrawing Partner of Net Profits determined based on the average allocation
percentage to such Partner of Net Profits for the last two fiscal year-ends
immediately preceding such withdrawal.” Lastly, Paragraph 24A provided that
“[t]he adjusted Accrual Basis Account of a Partner at [the] date of withdrawal
[would] be established by the accountants regularly employed by the Partnership as
soon as practicable after the effective date of such withdrawal[,] . . . [would] be
conclusive and binding upon all Partners hereto,” and would “include a reduction
for doubtful accounts, based upon prior experience of the Partnership.”
The firm converted to a professional limited liability company in 1996. The
Operating Agreement effecting this conversion expressly incorporated provisions of
the 1989 Partnership Agreement that addressed “the withdrawal or retirement of
Equity Members, except to the extent that any such provision of the Partnership
Agreement [was] inconsistent with the [District of Columbia Limited Liability Act
of 1994], the Articles [of Organization] or this Agreement.”
The following year, the firm amended the 1996 Operating Agreement. The
1997 Amendment to the 1996 agreement included three new provisions addressing
the payout to an equity member when they left the firm. Paragraph 1 contained a
forfeiture provision:
5
In the event an Equity Member withdraws from the
Company at any time after the date of this Amendment and
takes client(s) of the Company, and the Company does not
dissolve within three months of the Equity Member
withdrawal date, then the withdrawing Equity Member
will forfeit and give up to the Company fifty percent
(50%) of his/her Accrual Basis Account . . . .
Paragraph 3 more precisely detailed a two-step process for calculating a departing
member’s adjusted Accrual Basis Account:
[T]he adjusted Accrual Basis Account (including the
respective amounts attributed to accrual capital and cash
capital) of an Equity Member who shall have withdrawn
from the Company shall be that amount set forth in the
last annual financial statement for the Company prepared
by the Company’s accountant, or the last monthly
financial statement for the Company prepared by the
Company’s regularly employed bookkeeper, whichever is
later, prior to the date of the withdrawing Equity
Member’s notice of withdrawal, with adjustments to the
withdrawal date[2] solely for events occurring in the
period between the closing date of such last financial
statement and the withdrawal date . . . .
(emphasis added). No guidance was provided as to what constitutes a qualifying
“event.”
2
Both parties appear to agree that “adjustments to the withdrawal date”
should be understood to mean “adjustments to the Accrual Basis Account up to the
withdrawal date.”
6
B. Ms. Gentner’s departure and the firm’s financial statements.
In March 2013, Ms. Gentner and the other equity members of the firm
received a memo from the two named members, Harvey Jacobson and John C.
Holman, announcing their intent to dissolve the firm as it was currently comprised
and create a new entity. The equity members were given a choice to leave the firm
or join the new entity under new terms that Ms. Gentner deemed unfavorable to her.
By letter dated June 17, 2013, Ms. Gentner announced her decision to leave
the firm and requested an accelerated withdrawal date of June 30, 2013. In her letter,
Ms. Gentner informed the firm that “in accordance with [their] partnership
Agreement, as amended, [she] expect[ed] to be paid the total amount of the accrual
capital and cash capital as ‘set forth in the last annual financial statement for
[Jacobson Holman] prepared by [Jacobson Holman’s] accountant’” for 2012, which
the firm’s accountants had issued on April 30, 2013. That financial statement
calculated her Accrual Basis Account as $141,569. Ms. Gentner also noted that
“[a]lthough [their] Agreement provide[d] for adjustments ‘solely for events
occurring in the period between the closing date of such last financial statement and
the withdrawal date,’” she was “not aware of any such events which ha[d] occurred
7
on or after January 1, 2013.” Based on these premises, Ms. Gentner requested a
payout of $141,569.
The firm acknowledged receipt of Ms. Gentner’s resignation letter and agreed
to her June 30, 2013, withdrawal date. Shortly before her departure, on June 28 and
June 29, two other equity members notified the firm that they would be withdrawing
the following month, effective July 31, 2013. The remaining members, at least for
the time period leading up to June 30, 2013, stated their intent to remain and
transition to “of counsel” positions.
In September 2013, three months after Ms. Gentner left the firm, the firm’s
accountants, at Mr. Holman and Mr. Jacobson’s request, issued a revised annual
financial statement for 2012. The revised statement included two liabilities that had
not appeared in the original statement—member bonuses and allowances—which
reduced Ms. Gentner’s Accrual Basis Account by approximately 55%, from
$141,569 to $63,938. The parties agree that these liabilities were known to the firm
at the time that the original financial statement for 2012 was prepared.
Subsequently, in March 2014, nine months after Ms. Gentner’s departure, the
firm issued a financial statement ostensibly reporting the firm’s finances from
8
January to July 2013. This third statement included a significant restatement of the
firm’s Accounts Receivable. The initial financial statement for 2012 had included
in its statement of Accounts Receivable a line item for “[a]llowance for doubtful
accounts” in the amount of $459,716. The new financial statement for the first half
of 2013 acknowledged that figure as a “Beginning balance,” then added in a line
item for “Bad debt expense” and wrote off $550,514, thereby reducing the firm’s
doubtful accounts going forward by more than half ($207,098). It is undisputed that
the doubtful accounts reflected in the “Beginning balance” were known to the firm
in 2012. With these new calculations, Ms. Gentner’s Accrual Basis Account fell to
a negative value of $21,762.
Upon learning that the firm not only refused to pay her any amount of her
equity interest, but also alleged she owed the firm money, Ms. Gentner sued for
breach of contract in Superior Court. 3 The firm filed an answer in which it asserted
it was permitted under its operating agreement, as amended, to adjust Ms. Gentner’s
Accrual Basis Account, and acknowledged it had relied upon the revised annual
financial statement for 2012 and the financial statement for the first half of 2013 to
3
Contemporaneously, a different equity member of the firm, Simor
Moskowitz, sued the firm in federal court, in the Eastern District of Virginia.
See infra note 10.
9
calculate Ms. Gentner’s equity interest. 4 The firm also counterclaimed and sought
a declaratory judgment that Ms. Gentner had a negative Accrual Basis Account
which could be treated as an account receivable by the firm and be subject to
collection. The firm further alleged that twenty of the firm’s clients had followed
Ms. Gentner to her new firm, and on that basis asserted that, if the court determined
Ms. Gentner’s equity interest was a positive value, then her Accrual Basis Account
should be cut in half under the forfeiture provision in Paragraph 1 of the 1997
Amendment to the 1996 Operating Agreement.
Both parties moved for summary judgment. At a hearing in July 2017, the
trial court made an oral ruling in which it determined that: (1) Paragraph 3 of the
1997 Amendment controlled how Ms. Gentner’s Accrual Basis Account should be
calculated, and required that only the firm’s original financial statement for 2012 be
considered for that calculation; (2) there remained a triable issue of fact regarding
whether there was a qualifying “event” permitting adjustment of Ms. Gentner’s
Accrual Basis Account; and (3) the forfeiture provision of Paragraph 1 of the 1997
Amendment violated D.C. Rule of Professional Conduct 5.6(a) and was
4
As the justification for the downward adjustment of Ms. Gentner’s Accrual
Basis Account, the firm specifically asserted that it needed to account for the
departure of six equity members from the firm and uncollected fees from clients.
10
unenforceable as a matter of law. At a hearing in August 2018, however, the court
clarified that it read Paragraph 3 of the 1997 Amendment to plainly allow
adjustments only for events occurring prior to Ms. Gentner’s June 30, 2013,
withdrawal date, and thus a fact-finder could not consider the equity members’ July
2013 departures to be a qualifying event. The parties subsequently filed a joint
motion for entry of judgment in Ms. Gentner’s favor, which the trial court5 granted.
This timely appeal followed.
II. Standard of Review
We review de novo a trial court’s order granting summary judgment. Aziken
v. District of Columbia, 70 A.3d 213, 218 (D.C. 2013). “Summary judgment is
appropriate only when there are no material facts in issue and when it is clear that
the moving party is entitled to judgment as a matter of law.” Deutsch v. Barsky, 795
A.2d 669, 673 (D.C. 2002) (internal quotation marks omitted). In contract dispute
cases such as this one, summary judgment is generally appropriate where an
“agreement is unambiguous and where there is no question as to the parties’ intent.”
Id. (internal quotation marks omitted). In our jurisdiction—barring “fraud, duress,
5
The final order was signed by a different trial judge (the Honorable Heidi
M. Pasichow) because the original trial judge had retired.
11
or mutual mistake”—generally “the written language embodying the terms of an
agreement will govern the rights and liabilities of the parties . . . unless [it] is not
susceptible of a clear and definite undertaking.” DSP Venture Grp., Inc. v. Allen,
830 A.2d 850, 852 (D.C. 2003). Whether the meaning of a contractual provision is
plain is likewise a legal question that we review de novo. Id.; see also Aziken, 70
A.3d at 219 (“Contracts are not rendered ambiguous by the mere fact that the parties
do not agree upon their proper construction. An ambiguity exists when, to a
reasonably prudent person, the language used in the contract is susceptible of more
than one meaning[.]”) (internal quotation marks, brackets, and citations omitted).
Lastly, whether a contract provision violates public policy and is thus unenforceable
is a legal question that we review de novo. See Deutsch, 795 A.2d at 673 (reviewing
enforceability of noncompete covenant); Capital Constr. Co. v. Plaza W. Coop.
Ass’n, 604 A.2d 428, 429–30 (D.C. 1992) (reviewing enforceability of a construction
contract for violation of a regulation “enacted to protect the public”).
III. Analysis
On appeal, the firm challenges the trial court’s construction of the firm’s
operating agreement—really a collection of three contracts, (1) the 1996 Operating
Agreement, which incorporated in part (2) the 1989 Partnership Agreement, and was
later revised by (3) the 1997 Amendment—and the court’s ultimate conclusion that
12
Ms. Gentner is entitled to judgment as a matter of law in her suit to recover her equity
interest in the firm. First, the firm effectively argues that the trial court was wrong
to conclude that the starting point for the calculation of Ms. Gentner’s adjusted
Accrual Basis Account under the operating agreement was the firm’s original annual
financial statement for 2012, issued in April 2013. Second, the firm argues that the
trial court was wrong to conclude there were no qualifying “events” under the
operating agreement necessitating adjustment of Ms. Gentner’s Accrual Basis
Account. And third, it argues that the court was wrong to conclude that the forfeiture
provision of the amended operating agreement violated Rule of Professional
Conduct 5.6(a) and is unenforceable in a court of law. We address each argument
in turn below.
IV. The starting point for the calculation of Ms. Gentner’s adjusted Accrual
Basis Account under the firm’s operating agreement.
The firm acknowledges that our analysis must begin with Paragraph 3 of the
1997 Amendment to the firm’s 1996 Operating Agreement. Paragraph 3 identifies
the starting point that “shall” be relied on to calculate a departing member’s adjusted
Accrual Basis Account: the “amount set forth in the last annual financial statement
for the Company prepared by [its] accountant, or the last monthly financial
statement for the Company prepared by [its] regularly employed bookkeeper,
13
whichever is later, prior to the date of the withdrawing Equity Member’s notice of
withdrawal . . . .” (emphasis added). This language unambiguously provides that
only one financial statement may be used to calculate the baseline Accrual Basis
Account—either an annual financial statement or a monthly financial statement,
whichever is later. It also unambiguously imposes a bright line temporal restriction
on the creation of this financial statement: it must be “prepared . . . prior to the date”
a firm member gives notice of withdrawal. Applying this provision in this case, the
latest in time financial statement prepared prior to Ms. Gentner’s June 17, 2013,
notice of withdrawal was, as the trial court correctly determined, the original annual
financial statement for 2012, dated April 30, 2013.
The firm provides an “alternate interpretation” for this contractual language
and argues that this court “should [] prefer[]” its interpretation over a “literal”
understanding of Paragraph 3. The firm explains that the terms “prepared” and
“prior to” should be read separately to require that the financial statement (1) be
prepared by the firm’s accountant and (2) relate to a time period prior to the notice
of withdrawal. In this manner, the firm argues that Paragraph 3 does not impose a
temporal condition on when a financial statement must come into existence. The
firm asserts that Paragraph 3 is more reasonably read in this way, both because this
interpretation allows for later correction of errors in a financial statement and
14
because this interpretation aligns Paragraph 3 with Paragraph 24A of the 1989
Partnership Agreement.
We disagree that Paragraph 3 is reasonably susceptible to the interpretation
attributed to it by the firm, much less that it must be read in this manner. Instead we
conclude that common sense supports the literal meaning of its plain language. By
establishing that a baseline figure must be derived from a financial statement
prepared prior to a member’s announced departure, Paragraph 3 promotes both
certainty and fairness because a financial snapshot is taken at a clear moment in time,
when equity members of the firm have a shared interest in accurately reporting the
firm’s financial health. The alternative is to allow a departing member’s Accrual
Basis Account to be determined by their former colleagues based on financial
statements prepared or revised after they left the firm. But such a process would
simply invite the remaining equity members to make unpredictable, self-interested,
post hoc changes to the firm’s financial statements.
We are unpersuaded by the firm’s argument that such post hoc revisions must
be permitted under its operating agreement in order to allow for correction of errors
in financial statements that go unnoticed until after a member has withdrawn.
Presumably, the firm has mechanisms in place and strong incentives to detect and
15
correct errors before the financial statements are issued; but if it does not, the firm,
pursuant to the bright line rule in Paragraph 3, rightly absorbs any loss from errors
to its detriment that are later discovered. 6 Moreover, allowing for after-the-fact
corrections would give rise to all sorts of questions and inject uncertainty into the
calculation of the adjusted Accrual Basis Account that Paragraph 3, read as a whole,
plainly seeks to avoid, for example: What kind of errors in earlier generated and
approved financial statements could be corrected? How long after the member’s
departure could they be corrected? How many times could a firm attempt to correct
errors? The firm suggests that a court should answer these questions and fill these
gaps. But courts generally do not imply terms into an agreement when the
contractual language at issue is otherwise clear. See Bragdon v. Twenty–Five Twelve
Assocs. L.P., 856 A.2d 1165, 1170 (D.C. 2004). And gap-filling by courts is
especially ill-advised when “there is reason to believe that the parties might not have
easily reached accord on the critical point.” Aziken, 70 A.3d at 220 (internal
quotation marks omitted).
6
In a declaration submitted to the trial court in support of the firm’s motion
for summary judgment, named member Harvey Jacobson acknowledged that his
“role is . . . to review a draft of the statements prepared by the Firm’s Accountants”
and that he reviewed the original financial statement for 2012 but failed to “perceive
any errors at that time.”
16
Further, we are unpersuaded that we should strain to read Paragraph 3 of the
1997 Amendment to the 1996 Operating Agreement as “paraphras[ing]” Paragraph
24A of the 1989 Partnership Agreement. Although both provisions envision a two-
step process for calculating an adjusted Accrual Basis Account, Paragraph 3 takes a
different approach from Paragraph 24A. First, Paragraph 24A stated that the starting
point would be the last annual financial statement, but it did not specify when the
statement had to be prepared. As discussed, Paragraph 3 expressly requires that the
financial statement be prepared prior to the notice of withdrawal. Second, Paragraph
24A allowed for adjustments, but it envisioned that the outgoing partner would be
able to reach an agreement with their former colleagues if adjustment were
necessary. Only in the absence of agreement were the accountants brought in to
apply a backward-looking formula relying on the outgoing partner’s allocation
percentage of profits in prior years. In contrast, Paragraph 3 sets a clear goal of
bridging the gap between the last financial statement and the date of withdrawal
based on events that affect the firm’s financial health in that time period, see infra
Part III.B. 7
7
For this reason, we disagree that the two-step process set forth in Paragraph
3 reflects an intent to allow for after-the-fact correction of errors in the initial
calculation of the Accrual Basis Account.
Relatedly, we disagree that Paragraph 20 of the 1989 Partnership Agreement
supports the firm’s argument. Paragraph 20 states that a partner’s “withdrawal does
17
V. Qualifying Events for which Ms. Gentner’s Accrual Basis Account
could be Adjusted.
Alternatively, the firm argues that even if the starting point for calculating Ms.
Gentner’s equity interest is the original annual financial statement for 2012 dated
April 30, 2013, the Accrual Basis Account in that document must be adjusted
downward, as is authorized by Paragraph 3. We return to the plain language in this
provision which allows for “adjustments” to the Accrual Basis Account “solely for
events occurring in the period between the closing date of such last financial
statement and the withdrawal date . . . .” Like the trial court, we conclude that the
firm has identified no event that, pursuant to Paragraph 3, could serve as a basis to
adjust Ms. Gentner’s Accrual Basis Account.
We acknowledge at the outset that Paragraph 3 does not define “event.”
Looking at the requirement in this clause that “adjustments” be made “solely for”
certain “events,” however, we think it plain that an event must bear at least some
not relieve [them] from obligations of the Partnership incurred prior to, and still
unpaid at, the time of withdrawal.” But Paragraph 3 of the 1997 Amendment to the
1996 Operating Agreement plainly addresses these obligations, to the extent they are
incurred and unpaid at year’s end, in “the last annual financial statement for the
Company prepared . . . prior to the date of . . . notice of withdrawal,” and to the
extent that they are incurred after year’s end but before withdrawal, in the
adjustments that may be made for qualifying “events.” See infra Part III.B.
18
relationship to the firm’s finances, such that it could impact the calculation of the
member’s Accrual Basis Account. See 1010 Potomac Assocs. v. Grocery Mfrs. of
Am., Inc., 485 A.2d 199, 205 (D.C. 1984) (“The writing must be interpreted as a
whole, giving a reasonable, lawful, and effective meaning to all its terms.”). Thus,
a birthday or a blue moon would not constitute an “event” under Paragraph 3, and
we reject the firm’s argument that the term “event” should be broadly understood as
“something that happens” or “an occurrence.” Additionally, Paragraph 3 requires
the “event” to occur within a specified time period: between the closing date of the
last annual (or monthly) financial statement and the member’s actual departure date.
Because some amount of time may pass between those two points, this provision
allows the firm to pay out the member’s equity interest at a level that reflects any
changes to the firm’s finances leading up to the member’s withdrawal.
The firm identifies two “events” that it argues should be considered as bases
for “adjustments” under Paragraph 3. The firm first looks to Harvey Jacobson’s
“discovery” that the April 30, 2013, annual financial statement for 2012 (just like
the annual financial statements for prior years) did not account for member bonuses
and allowances, prompting the firm to ask its accountants to issue a revised annual
19
financial statement for 2012 in September 2013. 8 We cannot agree that this
discovery is an “event” contemplated by Paragraph 3. The firm has never specified
exactly when this discovery allegedly took place. In his declaration submitted to the
trial court, Mr. Jacobson stated that he made the realization sometime in “June - July
2013,” thus including a timeframe after Ms. Gentner left the firm, whereas the firm’s
accountant’s declaration stated that he was told of the omission in late August 2013,
well after her departure. But the answer to this factual question is immaterial. To
avoid allowing “adjustments” for “events” to serve as a backdoor mechanism for
after-the-fact correction of financial reports (which Paragraph 3 does not authorize,
see supra Part III.A.), the proper focus must be on when the firm incurred and had
knowledge of a liability, not when it “discovered” that this liability was omitted from
a financial statement. The firm necessarily knew of these member bonuses and
allowances—which totaled $611,654—when it recorded them on a cash basis in
2012, and Mr. Jacobson admitted he knew of them when he approved the original
annual financial statement for 2012. Accordingly, we conclude that the alleged
discovery that 2012 bonuses and allowances were omitted from the original annual
8
It is unclear if the firm raised this issue in the summary judgment
proceedings in the trial court. Again, the firm has not provided us with its filings,
but the firm did not seek an express ruling on this theory at that hearing and the trial
court did not rule on it. Because Ms. Gentner has not argued on appeal that we
should not consider this “discovery of errors” theory, however, we address it here.
20
financial report for that year does not constitute an “event” occurring after 2012 and
before Ms. Gentner’s withdrawal date, within the meaning of Paragraph 3. 9
The firm also argues that the “mass resignation” of six equity members,
including Ms. Gentner, and the related need to write off uncollectible accounts which
had inflated the equity interest of all the members of the firm constituted a qualifying
event necessitating a downward adjustment of Ms. Gentner’s Accrual Basis
Account. Again, we cannot agree.
Although some of the equity members announced their intent to withdraw
from the firm after Ms. Gentner gave notice and before her actual departure date of
June 30, 2013, it is undisputed that none of these equity members actually left the
firm before her. One could reasonably expect the eventual departure of these
members to have a financial impact on the firm thereafter; but the mechanism set
forth in Paragraph 3 for calculating a departing member’s adjusted Accrual Basis
Account does not permit consideration of such future events. As discussed above,
it requires the event to have had an impact on the capital lost or gained by the firm
9
The fact that the firm sought to include these bonuses and allowances in a
revised annual financial report for 2012, not in a financial statement for 2013,
reinforces this conclusion.
21
during a particular span of time in the past: after the last annual (or monthly)
financial statement and before the date of withdrawal, which in this case was after
December 31, 2012, and before June 30, 2013.
The firm argues, however, that the knowledge that some number of equity
members in addition to Ms. Gentner were going to leave altered the firm’s financial
picture because the firm was carrying sizeable uncollectable accounts. The flaw in
this argument is that the firm knew about these uncollectible accounts in 2012. In
fact, it is undisputed that the firm had disagreed over whether and in what amount to
write them off, and it did not collectively resolve this disagreement prior to Ms.
Gentner’s resignation. Again, we decline to expansively construe the language
allowing “adjustments . . . solely for events” to allow post hoc decisions about
financial information already known to the firm prior to the relevant time period. 10
10
In its reply brief, the firm highlights that Paragraph 24A of the 1989
Partnership Agreement expressly requires the firm to deduct doubtful accounts from
its financial statements, and argues that this supports a determination that the
departure of a number of members of the firm and the related need to write off more
than half a million dollars in the subsequent financial statement for the first half of
2013 were properly considered as a basis for a downward adjustment of Ms.
Gentner’s Accrual Basis Account. This argument, although perhaps alluded to in its
summary of argument in its initial brief, is not addressed in any depth in that filing.
Comford v. United States, 947 A.2d 1181, 1188 (D.C. 2008) (“[I]ssues adverted to
in a perfunctory manner, unaccompanied by some effort at developed
22
Accordingly, we are unconvinced that Paragraph 3 authorized the firm to wait until
a significant number of the equity members left to finally settle—to the remaining
members’ benefit—the contentious issue of how to account for unpaid work, and
then to characterize that self-interested resolution as an “event.”
Because the firm has failed to identify a qualifying event for which it could
adjust Ms. Gentner’s Accrual Basis Account, we affirm the trial court’s ruling that
there were no triable issues related to the interpretation of “event” and thus no triable
issue of fact regarding the need to adjust the Accrual Basis Account value ($141,569)
contained in the firm’s original annual financial statement for 2012.
argumentation” in an initial brief are generally “deemed waived,” and “elaboration
in the reply brief comes too late”) (alteration in original).
In any event, as discussed above, Paragraph 24A set forth a distinct
mechanism for calculating a withdrawing partner’s adjusted Accrual Basis Account,
and we conclude that it was entirely superseded by Paragraph 3 in the 1997
Amendments to the firm’s operating agreement. We acknowledge that a federal trial
court reached a different conclusion in Moskowitz v. Jacobson Holman, PLLC, No.
1:15-cv-336, 2016 WL 356035, at *10 (E.D. Va. Jan. 28, 2016) (reasoning that
“Paragraph 24(A) provided the Firm an independent basis for the adjustment to its
accounts receivable” (emphasis added) and concluding that “there is no need for the
Firm to tie the doubtful accounts receivable to an event occurring during the relevant
time period”), but we are not bound by that trial court decision and we are
unpersuaded by its cursory determination that, because the court could “identify no
inconsistency” between the last sentence of Paragraph 24A and Paragraph 3, the last
sentence of Paragraph 24A “remains in force.” Id.23
VI. Rule 5.6(a) and the Law Firm’s Forfeiture Provision.
Lastly, the firm argues that the trial court erred in ruling that the forfeiture
provision in Paragraph 1 of the 1997 Amendment to the 1996 Operating Agreement
violated D.C. Rule of Professional Conduct 5.6(a) and was thus unenforceable. Rule
5.6(a) states, “A lawyer shall not participate in offering or making . . . [a]
partnership, shareholders, operating, employment, or other similar type of agreement
that restricts the rights of a lawyer to practice after termination of the relationship,
except an agreement concerning benefits upon retirement . . . .” D.C. Rules of Prof’l
Conduct R. 5.6(a) (1991). Our court analyzed the scope of this rule’s exception for
retirement benefits in Neuman v. Akman, 715 A.2d 127 (D.C. 1998), but we have
never examined the affirmative reach of the rule’s prohibition on “restrict[ions]” on
“the rights of a lawyer to practice” after terminating an employment relationship.
We do so now.
Preliminarily, we consider whether Rule 5.6(a) bars both agreements that
place express restrictions on the practice of law and agreements that have that effect,
and whether any such restrictions need be absolute or something less. As Comment
1 to the rule explains, the underlying concern of the rule is that an agreement
restricting the practice of law “not only limits [a lawyer’s] professional autonomy
but also limits the freedom of clients to choose a lawyer.” See also Neuman, 715
24
A.2d at 130–31; Erika Stillabower, Speaking of Ethics: A Look at Employment
Contracts for Lawyers, Washington Lawyer, May 2015, at 14 (“At the heart of Rule
5.6 is the fundamental premise that limitations on a lawyer’s practice (outside of
those inherent in the Rules of Professional Conduct) are bad for lawyers and clients
alike, since a smaller pool of available attorneys necessarily limits clients’ choice of
counsel.”) (analyzing D.C. Legal Ethics Comm., Formal Op. 368 (2015)). This
concern would be inadequately addressed if only express or absolute restrictions
were prohibited.
Comment 2 supports this assessment and a broader reading of the rule. It
provides that “[r]estrictions . . . that impose a substantial financial penalty on a
lawyer who competes after leaving the firm may violate paragraph (a).” D.C. Rules
of Prof’l Conduct R. 5.6(a) cmt. [2] (1991). Additionally, the Legal Ethics
Committee of the District of Columbia Bar Association has consistently interpreted
Rule 5.6 to preclude not just agreements that explicitly and totally prohibit a lawyer
from practicing law when they leave a firm, but also agreements that “create
financial disincentives” to competition. 11 And a majority of other jurisdictions that
11
D.C. Legal Ethics Comm., Formal Op. 325 (2004) (reviewing forfeiture of
payments in law firm merger agreement and discussing prior ethics opinions); see
also ABA Comm’n on Ethics & Prof’l Responsibility, Formal Op. 489 at 5 (2019)
(noting that “financial disincentives to a competitive departure have routinely been
25
have considered this question have likewise concluded that such restrictions violate
their Rule 5.6 equivalent, 12 based on reasoning perhaps best articulated by the New
York Court of Appeals in Cohen v. Lord, Day & Lord:
While a law firm has a legitimate interest in its own
survival and economic well-being and in maintaining its
clients, it cannot protect those interests by contracting for
the forfeiture of earned revenues during the withdrawing
partner’s active tenure and participation and by, in effect,
restricting the choices of the clients to retain and continue
the withdrawing member as counsel.
550 N.E.2d at 413 (emphasis and citation omitted).
struck down by the courts and criticized in ethics opinions”); Shainis v. Baraff,
Koerner, Olender & Hochberg, P.C., 1994 U.S. Dist. LEXIS 21971, at *7–8 (D.D.C.
July 18, 1994) (citing District of Columbia Legal Ethics Committee opinions
“prohibit[ing] employment agreements that exact a monetary penalty from a lawyer
who enters into competition with a former employer”).
12
See, e.g., Pettingell v. Morrison, Mahoney & Miller, 687 N.E.2d 1237,
1238 (Mass. 1997) (invalidating provision requiring forfeiture of “all . . . benefits,”
including cash profits and annual partnership interest credits); Whiteside v. Griffis &
Griffis, P.C., 902 S.W.2d 739, 741–43 (Tex. App. 1995) (invalidating stock
agreement provision conditioning payment of good will factor on geographic and
time limitations); Jacob v. Norris, McLaughlin & Marcus, 607 A.2d 142, 145, 154
(N.J. 1992) (invalidating provision requiring loss of all “termination compensation”
except for life insurance benefit); Cohen v. Lord, Day & Lord, 550 N.E.2d 410, 410–
11 (N.Y. 1989) (invalidating provision requiring forfeiture of all net profits earned
during tenure at firm); Hagen v. O’Connell, Goyak & Ball, P.C., 683 P.2d 563, 564–
65 (Or. Ct. App. 1984) (invalidating stock valuation provision requiring reduction
of share value by 40 percent).
26
We note that, at least in their initial briefs to this court, the parties assume that
a substantial financial penalty will qualify as a restriction that runs afoul of Rule
5.6(a) and largely devote their briefing on this issue to explaining why the forfeiture
provision in Paragraph 1 of the 1997 Amendment to the 1996 Operating Agreement
should or should not be so characterized. 13 Accordingly, we hold that an implied,
partial restriction on the practice of law, in the form of imposing a substantial
financial penalty for representing clients previously represented by the firm, is
invalid under Rule 5.6(a), and we turn our attention to considering whether the
forfeiture provision in Paragraph 1 functions as a substantial penalty. We conclude
that it does.
To begin, we reject the firm’s argument that in assessing substantiality, we
should look to the actual impact of this forfeiture provision on a departing lawyer’s
practice going forward (which in this case would require further factual development
precluding summary judgment). We disagree that Rule 5.6(a) contemplates such an
analysis given its prophylactic language prohibiting attorneys from “offering or
making . . . agreement[s]” that restrict the free movement of lawyers and their
13
In its reply brief, the firm changes course and argues that “there is good
reason to doubt that Rule 5.6(a) even applies to this case,” pointing to the fact that
Ms. Gentner was able to practice law after her departure. We decline to address this
argument. See Comford, 947 A.2d at 1188.
27
clients. Looking to the text of Paragraph 1, it requires a partner to forfeit “fifty
percent (50%) of his/her [adjusted] Accrual Basis Account” if the partner withdraws
from the firm and “takes client(s)” with them. Whatever the outer limit is for a
“substantial penalty,” we conclude a 50 percent forfeiture of a departing partner’s
earned equity interest for taking even one client with them falls well within its
bounds.
Our conclusion that Paragraph 1 violates Rule 5.6(a) necessarily compels a
conclusion that this provision is unenforceable as against public policy, 14 and we
reject the firm’s argument that we must separately analyze enforceability of this
provision. The firm relies on cases where, in other contexts not concerning lawyers,
we have addressed the validity of restrictive covenants based on their reasonableness
according to certain factors. 15 But we see no need to assess the reasonableness of
14
Cf. Capital Constr. Co., 604 A.2d at 429–30 (“In the District of Columbia,
it is a principle of long standing that an illegal contract, made in violation of a
statutory prohibition designed for police or regulatory purposes, is void and confers
no right upon the wrongdoer.” (internal quotation marks omitted)); see also Moore
v. Jones, 542 A.2d 1253, 1255 (D.C. 1988) (acknowledging a “contract[] may be
held invalid if it violates a criminal or regulatory statute”).
15
See, e.g., Ellis v. James V. Hurson Assocs., 565 A.2d 615, 618 (D.C. 1989)
(restraints on trade are unreasonable if “(a) the restraint is greater than is needed to
protect the promisee’s legitimate interest, or (b) the promisee’s need is outweighed
by the hardship to the promisor and the likely injury to the public” (citing
Restatement (Second) of Contracts § 188 (Am. Law Inst. 1981))).
28
Paragraph 1 under these factors because Rule 5.6(a) itself is a statement of policy
approved by this court and it prohibits agreements such as the one at issue here. See
Moskowitz, 2015 WL 6830266, at *7 (“The clear majority of courts find that a
provision that violates Rule 5.6 is unenforceable without requiring any additional
showing.”). In addition, given that this court interprets and enforces the Rules of
Professional Conduct, it would be incongruous for us to recognize on the one hand
that Paragraph 1 violates Rule 5.6(a), but simultaneously conclude that it is still
enforceable in a civil action.
* * *
For the foregoing reasons, we affirm the Superior Court’s decision to grant
Ms. Gentner summary judgment on her breach of contract claim.
So ordered.