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Mitchell, Brewer, Richardson, Adams, Burge & Boughman v. Brewer

Court of Appeals of North Carolina

August 1, 2017

MITCHELL, BREWER, RICHARDSON, ADAMS, BURGE & BOUGHMAN; GLENN B. ADAMS; HAROLD L. BOUGHMAN, JR. and VICKIE L. BURGE, Plaintiffs,
v.
COY E. BREWER, JR., RONNIE A. MITCHELL, WILLIAM O. RICHARDSON, and CHARLES BRITTAIN, Defendants.

          Heard in the Court of Appeals 2 May 2017.

         Appeal by defendants from orders entered 26 February 2013, 18 September 2015, and 19 February 2016 by Judge John R. Jolly, Jr. in Cumberland County Superior Court No. 06 CVS 6091 [1]

          Everett Gaskins Hancock LLP, by E.D. Gaskins, Jr., James M. Hash and Fiona K. Steer, for plaintiffs-appellees.

          Ronnie M. Mitchell and Coy E. Brewer, Jr., pro se, for defendants-appellants.

          DAVIS, Judge.

         This appeal involves a number of issues surrounding the break-up of the Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC law firm. Upon remand of the case following our resolution of the parties' initial appeal, the trial court dissolved the law firm and appointed a referee to conduct an accounting and distribution. Ronnie M. Mitchell[2] and Coy E. Brewer, Jr. (collectively "Defendants") now appeal from the trial court's orders appointing a referee, adopting the report of the referee, and granting the motion for summary judgment of Glenn B. Adams, Harold L. Boughman, Jr., and Vickie L. Burge (collectively "Plaintiffs") as to Defendants' remaining counterclaims. We affirm each of the trial court's orders.

         Factual and Procedural Background

         The full factual background relating to the break-up of the firm is set out in our prior opinion. See Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC v. Brewer, 209 N.C.App. 369, 705 S.E.2d 757 (hereinafter "Mitchell I"), disc. review denied, 365 N.C. 188, 707 S.E.2d 243 (2011). Accordingly, we only discuss below those facts relevant to the present appeal.

         This lawsuit arose out of a dispute between the members of the Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC law firm, which resulted in the firm breaking up in the summer of 2005.[3] Plaintiffs subsequently formed a new firm called Adams, Burge & Boughman, PLLC ("AB&B"), while Brewer, Mitchell, William O. Richardson, and Charles Brittain continued to practice law together as Mitchell, Brewer, Richardson. In the aftermath of the break-up, numerous disagreements arose between the parties regarding the ownership of certain PLLC assets - including future profits from unresolved contingent fee cases brought into the PLLC before the break-up.

         On 5 July 2006, Plaintiffs filed the present lawsuit in Cumberland County Superior Court against Brewer, Mitchell, Richardson, and Brittain in which they asserted claims for (1) an accounting to the PLLC; (2) an accounting to Plaintiffs; (3) a "liquidating distribution"; (4) constructive fraud and breach of fiduciary duty; and (5) unfair and deceptive trade practices. In connection with these claims, Plaintiffs sought a judicial dissolution and winding up of the PLLC. Plaintiffs asserted these claims both individually and derivatively on behalf of the PLLC. Plaintiffs subsequently amended their complaint on 1 August 2006, 23 May 2007, and 17 February 2009.

         The lawsuit was designated a complex business case pursuant to N.C. Gen. Stat. § 7A-45.4 and assigned to the Honorable John R. Jolly, Jr. of the North Carolina Business Court. On 1 November 2006, Defendants moved to dismiss Plaintiffs' complaint, and the trial court denied the motion by order entered on 8 May 2007. Defendants subsequently filed an answer on 13 June 2007, raising multiple defenses and asserting the following counterclaims: (1) a request for a declaratory judgment that Plaintiffs "voluntarily and unilaterally withdrew" from the PLLC; (2) a declaratory judgment that Plaintiffs were equitably estopped from denying that they had agreed to a dissolution of the PLLC pursuant to the terms of a memorandum drafted by Brewer; (3) breach of fiduciary duty in connection with Plaintiffs' misuse of PLLC assets, failure to meet financial obligations of the PLLC, and failure to account for fees generated through PLLC business; (4) conversion and misappropriation of PLLC assets; (5) unjust enrichment for failure to account to the PLLC; (6) a request for imposition of a constructive trust, equitable lien, or resulting trust; (7) breach of fiduciary duty in connection with "the defense of [a] malpractice action[;]" (8) unjust enrichment in connection with "the defense of [a] malpractice action[;]" (9) breach of fiduciary duty based on ultra vires acts; and (10) a request for a statutory distribution of assets.

         On 9 January 2008, the parties each filed motions for partial summary judgment. Plaintiffs' motion requested judicial dissolution of the PLLC and dismissal of Defendants' counterclaims that were "predicated on the proposition that no such dissolution occurred." Defendants' motion requested an order declaring that Plaintiffs had "withdrawn" from the PLLC as opposed to there having been a dissolution of the firm. On 15 August 2008, Defendants filed a second motion for summary judgment as to all of Plaintiffs' claims on the grounds that the PLLC lacked standing to bring this action on its own behalf and the individual plaintiffs lacked standing to bring this action derivatively on behalf of the PLLC.

          The trial court issued an order on 31 March 2009 ruling, in part, that Plaintiffs were equitably estopped from denying that they had withdrawn from the PLLC. Therefore, the court held, all of the parties' claims would be evaluated in the context of a withdrawal by Plaintiffs from the PLLC rather than a dissolution of the PLLC. Mitchell I, 209 N.C.App. at 375-76, 705 S.E.2d at 762-63. All of the parties appealed to this Court from the trial court's order.

         In Mitchell I, we affirmed in part the trial court's order, reversed in part, and remanded for further proceedings. With respect to the issue of standing, we held that Plaintiffs possessed standing under N.C. Gen. Stat. § 57C-8-01(a) to assert derivative claims on behalf of the PLLC. Id. at 382-87, 705 S.E.2d at 767-70. We further ruled that because "withdrawal pursuant to N.C. Gen. Stat. § 57C-5-06 was not available as a remedy at law for the parties[, ]" the dismissal of Defendants' counterclaims premised upon an alleged withdrawal by Plaintiffs was proper. Id. at 390, 705 S.E.2d at 772. We also held that pursuant to N.C. Gen. Stat. § 57C-6-02 dissolution of the PLLC was necessary because there was a deadlock in its management. Id. at 390-91, 705 S.E.2d at 772.[4]

          With respect to dissolution and the need for a liquidation and distribution, we explained as follows:

Here, since 14 June 2005, there has been a deadlock between the PLLC members as a result of their disagreement regarding division of profits derived from pending contingent fee cases when three members of the PLLC left the PLLC, and plaintiffs and defendants began practicing separate and apart beginning on 1 July 2005. Although there were communications between plaintiffs and defendants addressing the assets of the PLLC, none resolved this deadlock. Because the three plaintiffs were no longer willing to practice with defendants, the PLLC could "no longer be conducted to the advantage of the members generally[.]" See [ N.C. Gen. Stat. § 57C-6-02]. Liquidation of the PLLC's assets "is reasonably necessary for the protection of the rights or interests of the complaining member[s]" as the PLLC's members have been unable to reach any agreement regarding profits from the disputed pending contingent fee cases. See id. Also, there is evidence that profits made by defendants since the deadlock from one of the disputed contingent fee cases were not distributed to the members or accounted for by defendants. Therefore, there is a potential that the PLLC's assets are being misapplied. Accordingly, plaintiffs have forecast facts which would permit judicial dissolution pursuant to N.C. Gen. Stat. § 57C-6-02. As defendants had "a full and complete remedy at law[, ]" the business court erred in not applying this legal remedy and instead applying the principles of equity to resolve the issues arising from this breakup.

Id.

         Thus, we determined that "because the business court improperly applied equitable estoppel in this situation, it abused its discretion by not ordering judicial dissolution of the PLLC." Id. at 392, 705 S.E.2d at 773. We then concluded as follows:

Accordingly, we reverse the business court's judgment granting partial summary judgment in favor of defendants on the basis of equitable estoppel and remand to the business court for [the] granting of summary judgment in favor of plaintiffs on the issue of judicial dissolution pursuant [to] N.C. Gen. Stat. § 57C-6-02, for a decree of dissolution, and directing the winding up of the PLLC pursuant to N.C. Gen. Stat. § 57C-6-02.3 (2007). Given this ruling, plaintiffs' derivative claims for an accounting to the PLLC (claim one), an accounting to plaintiffs (claim two), and a demand of liquidating distribution (claim three), as well as defendants' counterclaim for a demand for statutory distribution of assets (counterclaim ten), will be addressed by the business court in its directing the winding up of the PLLC.

Id. at 393, 705 S.E.2d at 773. Finally, we reversed the trial court's dismissal of Plaintiffs' Claims Four and Five and Defendants' Counterclaims Three through Six and Nine on the ground that the trial court had dismissed those claims based upon its incorrect determination that a withdrawal had occurred. Id. at 393, 705 S.E.2d at 773-74.

         Upon remand, the trial court held a hearing on 17 August 2012 in order to consider the parties' arguments regarding the potential appointment of a referee to oversee accounting and distribution issues in connection with the dissolution of the PLLC. Prior to the hearing, the parties submitted briefs setting forth their respective positions regarding the appointment of a referee and the methodology that should be employed in valuing disputed contingent fee engagements.

          On 26 February 2013, the trial court issued an "Opinion and Order Dissolving Company and Appointing Special Master" (the "Reference Order").[5] In this order, the court entered a decree of dissolution retroactively dissolving the PLLC as of 1 July 2005 (the "Dissolution Date"). The trial court noted that "[t]he parties agree that a dissolution of the [PLLC] is required, as well as an accounting and distribution of its assets" but that "[t]he parties dispute various aspects of the financial and accounting records of the [PLLC] and the amounts owed by and to the respective parties." The court observed that "[a] primary point of contention between the parties is the appropriate accounting method for profits derived from the contingent-fee engagements that the [PLLC] entered into prior to dissolution but were resolved post-dissolution by Defendants ('Contingent Fee Engagements')." The court stated that

[t]he difficulty in liquidating contingent-fee engagements by conventional means leads inevitably to the conclusion that the only way in which they may be converted to value following dissolution is by pursuing them to resolution. Further, it is unrealistic to suppose that all former members will collaborate in order to resolve contingent-fee engagements following dissolution. As is often the case in a law-firm setting, only a few of the members, perhaps only one, will have been involved personally in the engagement prior to dissolution and possess an adequate familiarity with the client and the subject matter of the litigation to proceed with representation following dissolution.
Therefore, the task of pursuing such engagements following dissolution is likely to fall to those members who pursued the engagements prior to dissolution, usually at the affirmative direction of the client. Practically, this means that following dissolution an individual member or members will pursue the engagements using individual effort and skill without collaboration with former members.

         The trial court then concluded that

the appropriate measure of the value of the Contingent Fee Engagements to the [PLLC] is the reasonable value of the services provided by or in behalf of the [PLLC] up to the date of dissolution. Under the present circumstances, the best means by which to measure the reasonable value of pre-dissolution services is to determine (a) the total attorney hours ("Time") expended on a particular Contingent Fee Engagement, both prior to and after dissolution, (b) the percentage of Time that was expended prior to dissolution and (c) the net profit ultimately realized from the Contingent Fee Engagement. The reasonable asset value to the [PLLC] of each such matter would be determined by the percentage of pre-dissolution Time expended relative to the net profit ultimately realized on that matter. As an example, if a total of 100 attorney hours were expended on a particular Contingent Fee Engagement and 50 of those hours were performed prior to dissolution, the net fee ultimately received by Defendants should be shared 50/50 with Plaintiffs. This method, as opposed to others, best accounts for the risk borne by the [PLLC] in initially taking on the Contingent Fee Engagements and also reflects the parties' expectations at the time they entered into the Contingent Fee Engagements.
The court therefore will direct the winding up of the [PLLC] in accordance with the findings and conclusions above. In doing so, the court observes that the reasoning relative to liquidation and sharing between the [PLLC] and Defendants of ultimate profits from Contingent Fee Engagements ordinarily also would hold true for any professional engagements ("Other Engagements") initially undertaken by the [PLLC] but completed and billed for post-dissolution by Defendants. This Opinion and Order is intended to encompass such Other Engagements.

(Footnote omitted.)

         The trial court proceeded to determine that the appointment of a referee "to conduct an accounting of the [PLLC] as to the Contingent Fee Engagements and any Other Engagements . . . will be in the best interest of the parties." Accordingly, the trial court ordered as follows:

[31] The [PLLC] is DISSOLVED, pursuant to G.S. 57C-6-02. The dissolution of the [PLLC] shall be effective as of July 1, 2005 ("Dissolution Date").
[32] The court appoints Craig A. Adams, CPA, as Special Master, pursuant to Rule 53. . . .
[33] In undertaking and performing this engagement, the Special Master is authorized to engage the professional services of other members of his accounting firm, at their customary and usual hourly rates, as he reasonably determines are needed.
[34] The Special Master shall take an account of the [PLLC] and the Defendants, consistent with the provisions of this Opinion and Order, and shall:
(a) Take control of and secure the financial records, or appropriate copies thereof, of the [PLLC];
(b) Secure the financial records, or appropriate copies thereof, of the Defendants, as they relate to the Contingent Fee Engagements or any Other Engagements;
(c) Assess the state of the financial records of the [PLLC];
(d) Assess the state of the financial records of the Defendants as they relate to the Contingent Fee Engagements or any Other Engagements;
(e) Direct and assist in the preparation of financial statements that state the financial condition of the [PLLC] with reasonable accuracy;
(f) Investigate and report to the court the nature and extent of the outstanding assets and ...

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