Medalie v. Ferry
30 F.Supp.2d 48, 1998 U.S. Dist. LEXIS 21683, 1998 WL 854662 (1998)
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Rule of Law:
In the absence of a specific agreement to the contrary, the Uniform Partnership Act mandates that partners share profits equally. Courts will look to the parties' course of conduct and business records, such as tax filings, to determine the true terms of an unwritten partnership agreement.
Facts:
- Richard J. Medalie and Daniel R. Ferry, both lawyers, formed a law partnership on July 1, 1988.
- The partners never created or signed a written partnership agreement.
- In 1988, Medalie generated more client fees ($38,968) than Ferry ($27,765), but their profit draws were nearly equal.
- In 1989, Ferry generated significantly more client fees ($175,642) than Medalie ($103,967).
- For both 1988 and 1989, the partnership's tax returns stated that each partner's share of profits was 50%.
- The partners shared common business expenses, including those for prospective business development trips taken by each individual.
- At the conclusion of 1989, Ferry decided to terminate the partnership relationship.
Procedural Posture:
- Plaintiff Richard Medalie filed a lawsuit against Defendant Daniel Ferry in the U.S. District Court for the District of Columbia.
- Medalie sought a final accounting of the dissolved partnership assets.
- The case was tried before a United States Magistrate Judge.
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Issue:
In a partnership without a written agreement, does the statutory default rule of equal profit sharing apply when one partner claims there was an oral understanding to divide profits based on individual revenue generation?
Opinions:
Majority - Facciola, United States Magistrate Judge
Yes. In a partnership lacking a written agreement, the statutory default rule of equal profit sharing applies. The very essence of a partnership is the sharing of profits and losses, a principle codified in the Uniform Partnership Act. Ferry's proposed arrangement—sharing expenses but keeping individual revenues—is inconsistent with the legal nature of a partnership, which the court described as a 'unicorn.' The most compelling evidence of the partners' actual agreement was their tax returns, the only documents signed by both parties, which unequivocally showed a 50/50 profit split. Furthermore, the partners' conduct, including the nearly equal profit distribution in 1988 when Medalie generated more revenue, contradicted Ferry's claim and supported a finding of a traditional partnership with equal profit sharing. The court found Ferry’s testimony to be a 'post hoc rationalization' motivated by regret.
Analysis:
This decision underscores the critical importance of having a clear, written partnership agreement to avoid defaulting to statutory rules. It highlights that courts will heavily weigh the parties' course of conduct and formal business records, such as tax returns, as objective evidence of intent, often giving it more credence than subsequent, self-serving testimony. The case establishes that an arrangement cannot be selectively defined as a partnership for some purposes (like sharing expenses) while rejecting its core tenets (like sharing profits). This precedent reinforces the stability of default partnership rules and serves as a strong cautionary tale for professionals entering into business relationships without formalizing their terms.
