Fagenblat v Feingold Partners Pty Ltd [2001] VSC 479 - VSC 2001 case summary — Zoe

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Fagenblat v Feingold Partners Pty Ltd [2001] VSC 479

[2001] VSC 479

Supreme Court of Victoria|2001-12-17|Before: PAGONE, J

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At a glance

Source facts

Court

Supreme Court of Victoria

Decision date

2001-12-17

Before

PAGONE, J

Catchwords

Valuation of goodwill in legal practice - Subsequent events - Expert evidence - Factors relevant to valuation - Departure of partner - Partners' duties as fiduciaries.

Source

Original judgment source is linked above.

Catchwords

Valuation of goodwill in legal practice - Subsequent events - Expert evidence - Factors relevant to valuation - Departure of partner - Partners' duties as fiduciaries.

Judgment (38 paragraphs)

[1]

This proceeding is in substance a partnership dispute between the four principal lawyers who effectively conducted a practice up to 30 June 2000 under the name of "Feingold Partners". The plaintiff, Mark Fagenblat (who sues in this capacity as trustee of the Mark Fagenblat Practice Family Trust), is now 55 years of age. In 1990 he joined the firm, then known as Feingold Gurgiel, which was the successor of the practice established by Simon Feingold in 1981. Mr. Fagenblat did not join the firm in 1990 as a partner but brought with him clients and contacts which he had established from his time as a practising lawyer since 1971 (with a gap between 1976 and 1980 when he was absent from Australia living in Israel). He acquired a 10% interest in the practice as from 1 January 1992 based upon the proportion of fees which he was able to generate: his "payment" for that interest was the contribution of his clients to the practice. Mr. Fagenblat subsequently acquired an additional 23.33% interest in the practice as at 1 July 1993. The mechanism used to fund that additional acquisition by Mr. Fagenblat was by an increase in partners' loan accounts of the firm in the names of Mr. Feingold and Mr. Gurgiel to such an amount that "the practice owed [them] substantially more capital than it owed to Mr. Fagenblat". The goodwill of the practice at the time was struck at approximately $1,000,000, with the consequence that the acquisition by Mr. Fagenblat of the additional 23.33% of the practice as from 1 July 1993 cost him $233,000. Differential drawings were thereafter taken to equalise the capital entitlement of each of the partners. There have been a number of changes in the composition of the practice (including to its legal structure) between 1993 and its eventual dissolution. In June 2000, however, Mr. Fagenblat resigned from the practice and seeks by these proceedings his share of the value of the partnership as at 30 June 2000. By that time Mr. Fagenblat's interest was held through a family trust and was 25% of the practice.

[22]

Mr. Borsky's valuation proceeds upon the basis that Mr. Fagenblat would be remaining in the legal practice as an employee. I am not satisfied that Mr. Borsky was wrong in assuming that Mr. Fagenblat would, as at 30 June 2000, be remaining in the legal practice. It was the defendant who advanced the contention that Mr. Borsky was in error in doing so, and in my view it has not satisfied me that as at 30 June 2000, the probability was that Mr. Fagenblat would leave. On the contrary, the evidence which I have seen leads me to conclude that as at 30 June 2000, the probability was that Mr. Fagenblat would remain in the legal practice as a consultant, although that was not certain. It is beyond doubt that by 30 June 2000, the personal relations between Mr. Fagenblat and Mr. Feingold had deteriorated badly, and possibly beyond repair, but that relationship had not deteriorated to such a point that Mr. Fagenblat could not continue working within the firm or that he did not feel that he could discharge the obligations which he had and felt to the other partners, to the practice as a whole, to the clients who came to him at the practice, to the staff, and to his own self-esteem. There is, in my view much evidence to support the conclusion that as at 30 June 2000 the probability was that Mark Fagenblat would continue in the firm for a least a sufficient period of time as would allow an orderly departure by him in the future in such a way as would preserve to the firm the entirety of its goodwill. Mr. Fagenblat had such strong personal feelings against Mr. Feingold that Mr. Fagenblat felt that he should procure the Fagenblat trust to resign from the partnership. He did so, however, in circumstances which sought to minimise disruption to the firm, clients and staff, and which were objectively calculated to ensure the firm's continued viability and reputation. Such an attitude might be thought to be little more than common sense and professional self-preservation; after all, Mr. Fagenblat would stand to gain nothing from, and had much to lose by, an immediate and disruptive departure from a firm which he had helped to build up during a critical time of his professional career.

[23]

Mr. Fagenblat's letter of resignation expressed what I accept to have been an honest intention, and an achievable goal, of continuing with the firm as a consultant employee. On 14 June 2000 he wrote a memorandum to everyone in the firm to assure everyone that he would remain "with the firm on a full time basis in the position of Senior Consultant" retaining the position as head of the litigation department and continuing his legal education activities. This memorandum was sent two weeks after the letter of resignation. It was sent one day after a meeting of the partners which was held to discuss the basis of the resignation and to discuss the suggestion of continuing employment to Mr. Fagenblat. The memorandum was written on the same day as a further meeting of the directors of Feingold Partners Pty. Ltd. at which Messrs. Feingold, Gurgiel and Tuszynski had put a proposal for the continuing employment of Mr. Fagenblat for at least six months on a trial basis. This was confirmed in a memorandum on 20 June 2000, and negotiations between the individuals continued until August. Concern had been expressed about the need for Mr. Fagenblat to give a restraint of trade in the event that he left the practice after payment of goodwill if clients followed him, and, on 22 June 2000, Mr. Fagenblat wrote to the others expressing his willingness to give a restraint albeit limited, in my view quite properly, to the extent necessary to compensate the remaining partners for any loss occasioned by clients ceasing to use the legal practice and following Mr. Fagenblat. That is to say, that Mr. Fagenblat was willing to compensate the remaining partners "in respect of any client of the practice that might follow" him if he were to leave. The partners were ultimately unable to reach agreement and it was the remaining partners who, by memorandum dated 14 August 2000, reached the conclusion that Mr. Fagenblat's engagement by the firm "be terminated at the earliest opportunity" and thereupon "invite[d]" Mr. Fagenblat to nominate an "early date" to cease employment and vacate the office. In short, Mr. Fagenblat was dismissed from his employment by his employers rather than having left of his own accord. Mr. Feingold's refusal in cross examination to accept that Mr. Fagenblat had been sacked was surprising. In my view it would be wrong for the purposes of a valuation of the practice as at 30 June 2000 to assume that Mr. Fagenblat would, or even probably would, be dismissed from an employment which he was eager to keep.

[24]

The mere fact of leaving a practice need not have a negative impact upon its goodwill. So much was clear from the direct oral evidence of Mr. Lipson who was called by the defendant to give expert evidence on its behalf. He gave as but one example an actual case he had had of a partner leaving a legal practice to go to Israel after having given either 6 or 12 months notice. Mr. Lipson described the effect of such a smooth transition as being the transferring of the departing partner's files, clients, contacts and marketing from himself to the existing partners or to the incoming potential partners. The defendant has not satisfied me that such a process was so unachievable as at 30 June 2000 that the valuation of the legal practice as at that date should be made upon the assumption that Mr. Fagenblat would leave in such circumstances as would bring with it a wake of disruption, loss of income and destruction to the goodwill of the firm. I would have thought that the reasonable self-interest of professional men and women in the law would itself tend against the self-infliction of harm that the defendant maintains must necessarily have been taken into account by a valuer. In any event, the basis upon which Mr. Borsky made his calculation was that Mr. Fagenblat would continue in the firm. The appropriateness of that assumption was a matter within the special factual knowledge of Mr. Borsky because, amongst other things, he had been involved in the negotiations between the individuals towards their achieving an agreement. The parties had acted, to his knowledge, upon the basis that Mr. Fagenblat would continue in the practice, or, at least, that the parties had entered into bona fide negotiations in which Mr. Borsky participated to achieve that result. Subsequent events may, of course, be taken into account when they truly reflect upon the earlier position, but hindsight is not always beneficial and does not always bring enlightenment. An automatic substitution of what did happen with what might have happened could seriously distort the proper assessment of a situation. In this case I do not think the substitution of Mr. Fagenblat's actual departure with a hypothetical possibility of departure is either necessary or appropriate. More specifically, I do not consider that the basis upon which Mr. Borsky proceeded with his valuation to have been in error. Nor do I accept that his relationship with the plaintiff has infected the objective reasonableness of the assumptions made by Mr. Borsky in relation to Mr. Fagenblat's future involvement in the legal practice. Mr. Borsky struck me as a diligent professional man conscious of his responsibilities to the Court. In any event, the matters he has taken into account seem to me to be objectively supported.

Fagenblat v Feingold Partners Pty Ltd [2001] VSC 479

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (38 paragraphs)

Parties

Cases Cited (2)