Yann Geron v. Fontana (In re Thelen LLP)

520 B.R. 388, 72 Collier Bankr. Cas. 2d 1491, 2014 Bankr. LEXIS 4809
CourtUnited States Bankruptcy Court, S.D. New York
DecidedNovember 20, 2014
DocketCase No. 09-15631 (ALG); Adv. Pro. No. 11-02648 (ALG)
StatusPublished

This text of 520 B.R. 388 (Yann Geron v. Fontana (In re Thelen LLP)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, S.D. New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Yann Geron v. Fontana (In re Thelen LLP), 520 B.R. 388, 72 Collier Bankr. Cas. 2d 1491, 2014 Bankr. LEXIS 4809 (N.Y. 2014).

Opinion

Chapter 7

MEMORANDUM'DECISION DENYING TRUSTEE’S MOTION TO COMPEL ARBITRATION, DENYING DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT, AND GRANTING SUMMARY JUDGMENT TO THE TRUSTEE ON HIS CONTRACT CLAIM

ALLAN L. GROPPER, UNITED STATES BANKRUPTCY JUDGE

On September 18, 2009, the law firm Thelen LLP (“Thelen”) filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code, and Yann Geron (the “Trustee”) was appointed the chapter 7 trustee. The bankruptcy filing occurred [390]*390almost one year after the partners of The-len, a registered limited liability partnership governed by California law, voted to dissolve the partnership. During the intervening year, the firm apparently collected the firm’s receivables and monetized available assets and paid them over to its secured lender, Citibank, N.A. (“Citibank”).

From December 1, 2006, through October 27, 2008, the firm’s business was governed by The Third Amended and Restated Limited Liability Partnership Agreement of Thelen Reid Brown Rays-man & Steiner LLP, the firm’s previous name (the “Third Partnership Agreement”). In August, 2008, the withdrawal of several partners triggered a non-monetary breach of the firm’s loan agreement with Citibank. Although the firm continued to operate for a few months, on October 28, 2008, the partners voted to dissolve the firm and to adopt a Fourth Amended and Restated Limited Liability Partnership Agreement (the “Fourth Partnership Agreement”), which governed its affairs up to the dissolution. An October 28, 2008, dissolution agreement contemplated that the firm would effectuate its dissolution on a date between November 26, 2008 and December 15, 2008; the actual date of dissolution was November 30, 2008.

Each of the Defendants either was a Partner of Thelen as of December 1, 2006 or became a Partner thereafter and prior to October 28, 2008, and each signed one or more of the Partnership Agreements or through conduct manifested an intention and agreement to be bound thereby.1 Thelen had three tiers of partners: (i) equity partners without guaranteed compensation (“Equity Partners”), (ii) Equity Partners with guaranteed compensation, and (iii) income partners (those who received salaries). All of the defendants in the instant adversary proceeding are or were Equity Partners. The Partnership Agreements both provide in § 8.3 that the laws of the State of California (other than its conflict of laws principles) apply to the construction, interpretation and effect of the agreements.

The Partnership Agreements

The Partnership Agreements provide that “ ‘Partner’ means, as of any date, each individual who on such date is a Partner with the right to share in the Net Income of the Partnership pursuant to Section 2.1.” (Third, § 1.10.11; Fourth § 1.9.11). Section 2.1 provided that

The Partners in the Partnership shall be those individuals who have been admitted as Partners to the Partnership pursuant to the terms of this Agreement and who have not ceased to be Partners pursuant to Article 6. Each of the Partners who have the right to share in the Net Income of the Partnership (irrespective of whether such Partner’s compensation is determined solely based upon the right to share in the Net Income of the Partnership) and who have an interest in the capital of the Partnership are parties to this Agreement....

The Partnership Agreements then provided in Article 4 for the allocation of Net Income to Partners, with each partner entitled to receive an allocation of the partnership’s “Net Income” for the calendar year (or relevant portion thereof) in proportion to certain sharing ratios. Section 4.1.1 of the Third Partnership Agreement and section 4.1.1.1 of the Fourth Partnership Agreement both provided that the “Net Income of the Partnership for each [391]*391calendar year or relevant portion thereof ... shall, after taking into account any allocations of income ... and any deductions[,] ... be allocated to the Partners in proportion to their Sharing Ratios.” Each Partner entering into the Partnership Agreement was assigned a certain number of points that were used to calculate the Partner’s “Sharing Ratio.” Section 4.2 of both Partnership Agreements governed distributions; section 4.2.1, relating specifically to periodic draws, provided that:

Each Partner shall be entitled to receive a draw as an advance against such Partner’s share of Net Income of the Partnership on a periodic basis under a policy determined from time to time by the Office of the Chair, (emphasis added).2
Section 4.2.2 provided that:
The Partnership shall distribute to the Partners from time to time, in proportion to their Sharing Ratios, all or a portion of the Net Income of the Partnership, reduced by prior draws or other advances against Net Income paid to such Partners pursuant to Section 4.2.1, under a policy determined from time to time by the Office of the Chair.

In brief, the Partnership Agreements thus provided that the Partners would share in the Net Income of the Partnership; that the Partners could receive periodic advances as draws against Net Income; and that an allocation of Net Income to a partner would be reduced by “prior draws or other advances.”

On September 15, 2011, the Trustee commenced similar adversary proceedings against many of the Thelen partners (including the Defendants) seeking, among other things, damages for breach of contract, avoidance of fraudulent conveyances and turnover of property of the estate. The Trustee’s claims against nine of the Former Partners were consolidated in the instant consolidated Amended Complaint, which as amended on January 22, 2014, alleged that the defendant partners had been overcompensated in the year 2008 under the terms of the Partnership Agreements. Accordingly, among other things, the Trustee sought damages against each defendant for breach of contract to recover the overpayments, plus costs, interest and attorneys’ fees. In addition, the Trustee alleged that the overpayments were avoidable as fraudulent conveyances under 11 U.S.C. § 548(a)(1)(B) (constructive fraudulent conveyance). In May 2014, the Court denied a partial summary judgment motion filed by the Trustee concerning two aspects of the fraudulent conveyance claims in dispute. Geron v. Fontana (In re Thelen), Ch. 7 Case No. 09-15631(ALG), Adv. No. 11-2648, 2014 WL 2178156 (Bankr.S.D.N.Y. May 28, 2014).

In the instant motion, each side contends that the terms of the ■ Third and Fourth Partnership Agreements support their respective positions, with the Defendants arguing that they do not have to return any overadvances received, and the Trustee arguing that advances in excess of net income are a liability that the Defendants owe to the estate.

Arbitration

Before dealing with the substantive, motions before the Court, the Trustee’s belated attempt to send this dispute to arbitration must be considered.

The Thelen Partnership Agreements each had an arbitration clause providing that

[392]

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Bluebook (online)
520 B.R. 388, 72 Collier Bankr. Cas. 2d 1491, 2014 Bankr. LEXIS 4809, Counsel Stack Legal Research, https://law.counselstack.com/opinion/yann-geron-v-fontana-in-re-thelen-llp-nysb-2014.