Faw, Casson & Co. v. Everngam

BISHOP, Judge. Appellee/Cross-Appellant, K. Thomas Everngam (“Evemgam”) filed declarations (now referred to as complaints) in the Circuit Court for Talbot County against Appel ¹³¹ lants/Cross-Appellees, Faw, Casson & Co. and its past and present partners (hereinafter collectively referred to as “FC”), alleging, inter alia, restraint of trade — statutory (Count One), restraint of trade — common law (Count Two), and breach of partnership agreement (Count Six). The trial court granted FC summary judgment as to Counts One and Two. The trial court then issued an order providing for the method by which damages under Count Six would be determined.

Count Six was tried before a jury, after which judgment was entered in favor of Everngam. Counts Three, Four, Five, Seven and Eight are not relevant to this appeal. Issues FC’s Appeal I. Did the trial court err by ruling, as a matter of law, that the aggregate amount of Everngam’s continued income participation payments would not be reduced to present value before being offset by Everngam’s debt to FC?

II

Did the trial court err by allowing the jury to award prejudgment interest based upon FC’s liability to Everngam, without instructing the jury to consider Everngam’s liability to FC?

III

Did the trial court exclude evidence which should have been considered by the jury when considering whether pre-judgment interest should be awarded? Everngam’s Cross-Appeal IV. Did FC’s withholding of continued income participation payments after Everngam violated the noncompetition covenant of the partnership agreement constitute an unreasonable restraint of trade under Maryland common law and statutory law? Facts FC is a partnership engaged in the practice of public accounting.

Everngam, a certified public accountant, be ¹³² came a FC partner in 1965 and continued as such until he resigned effective June 2, 1983. During Evemgam’s tenure, the partnership was governed by a series of written partnership agreements, including the 1980 Faw, Casson & Company Partnership Agreement (“the Agreement”). This controversy arose when Everngam withdrew from the partnership and, almost immediately thereafter, became a partner in a competitive public accounting firm. The issues concern the interpretation and application of Sections XVII and XXI of the Agreement.

Section XXI of the Agreement included the following noncompetition covenant: Any partner withdrawing from the partnership voluntarily or involuntarily hereby covenants and agrees that he or she will not engage in the general practice of public accountancy or any of its allied branches, either individually or with any other person, firm or corporation, either directly or indirectly, at any place within a forty mile radius of any of our offices for a period of five years from the date of such withdrawal. If within these limits the partner engages in the general practice of public accountancy or any of its allied branches, ... he or she agrees to pay Faw, Casson & Co. or its successor, 100% of the prior year’s fee for any clients that were Faw, Casson & Co.’s who engage the services of the withdrawing partner during the five year period. Any amounts due such partner under item XVII shall be forfeited by such partner. However, such forfeited vested amounts will be used to offset payments above.

If there is a balance due Faw, Casson & Co. after offsetting of vested amounts, the partner’s individual capital account will be used to offset the balance. Any remaining balance will be secured by a note to Faw, Casson & Co. from the partner payable over a three year period. The Agreement’s five year noncompetition period was judicially limited to three years in litigation that dealt with the ¹³³ same agreement in Holloway v. Faw, Casson & Co., 319 Md. 324, 351 , 572 A.2d 510 (1990). In the case sub judice, the parties limited the duration of the noncompetition covenant to three years.

It was four days after his withdrawal from FC that Evemgam became a partner of another accounting firm located in Easton, Maryland, the same city where Everngam had practiced as a FC partner. During the next three years, over 300 clients and accounts of FC became clients of Evemgam. Consequently, Everngam became indebted to FC for 100% of the prior year’s fees of those clients under Section XXI’s “fee-equivalent” formula (the “fee-equivalent damages”). At trial, the jury determined that the clients had generated a gross income of $253,975.00 to FC during the twelve months preceding Everngam’s withdrawal.

Section XVII of the Agreement provided for Continued Income Participation (“CIP”) payments: Equal monthly [CIP] payments shall be made, without interest thereon, to a terminated partner for a period of ten years following the effective date of any termination. The aggregate amount, subject to adjustments as provided elsewhere in this agreement, of such [CIP] payments shall be an amount equal to the terminated partner’s allocable share of the “fees” of the firm. It was stipulated by counsel that Everngam was entitled to $419,117 in CIP payments. Nevertheless, no CIP payments were made following Everngam’s departure.

It was FC’s original position that Evemgam’s CIP payments had been forfeited pursuant to Section XXI. At some point during the ensuing litigation, apparently as late as July of 1985, FC changed its position. FC stated that Everngam would be entitled to receive CIP payments to the extent they exceed the amount he owes FC under Section XXI. Everngam and FC did not resolve their differences regarding the offset between Everngam’s CIP entitlement and FC’s fee-equivalent damages.

On December 6, 1983, Everngam filed a declaration against FC in the Circuit Court for Talbot County; he ¹³⁴ subsequently amended it on January 29,1986. Referring to Section XXI’s noncompetition covenant as applied to Evemgam, Count One of the declaration alleged an unreasonable restraint of trade under the Maryland Antitrust Act, Md. Com.Law II Code Ann. § 11-204 (1990) and Count Two alleged an unreasonable restraint of trade under Maryland common law. Count Six of the Amended Declaration alleged FC failed to make payments due to Evemgam under Section XVII of the Agreement. On December 3, 1985, the trial court granted FC’s motion for summary judgment as to Counts One and Two, the counts alleging restraint of trade.

On July 16, 1990, the trial court, in a letter to counsel, explained that damages under Count Six would be calculated: by offsetting the total aggregate amount that [FC] owed [Evemgam] in C.I.P. payments pursuant to Section XVII ... against the total aggregate amount that [Everngam] owed [FC] pursuant to Section XXI’s “fee-equivalent” liquidated damages clause and then calculating pre-judgment interest on the resulting difference____ (Emphasis in original). On June 5, 1991, the trial court issued an order directing the use of this formula in computing damages. It determined, however, that the award of pre-judgment interest would be an issue left to the jury’s discretion. At the conclusion of the two-day jury trial, Everngam was awarded $255,970 in damages under Count Six, which amount included $90,828 in pre-judgment interest.

Accordingly, the jury found that the CIP payments due Everngam exceeded Everngam’s liability to FC under the fee-equivalent formula of Section XXI by $165,142 ($255,970 minus $90,828). This appeal followed. I Computation of Damages — Count Six Maryland follows the objective law of contracts. See State, Dep’t of Economic and Community Dev. v. ¹³⁵ Attman/Glazer P.B. Co., 323 Md. 592, 604 , 594 A.2d 138 (1991); Aetna Casualty & Surety Co. v. Insurance Comm’r, 293 Md. 409, 420 , 445 A.2d 14 (1982).

A court construing an agreement under this test must first determine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated. In addition, when the language of the contract is plain and unambiguous there is no room for construction, and a court must presume that the parties meant what they expressed. In these circumstances, the true test of what is meant is not what the parties to the contact intended it to mean, but what a reasonable person in the position of the parties would have thought it meant. Consequently, the clear and unambiguous language of an agreement will not give way to what the parties thought that the agreement meant or intended it to mean.

General Motors Acceptance Corp. v. Daniels, 303 Md. 254, 261 , 492 A.2d 1306 (1985). “It is well settled that the construction of a written contract is ordinarily considered to be an issue of law for resolution by the trial judge.” Board of Educ. v. Plymouth Rubber Co., 82 Md.App. 9, 26 , 569 A.2d 1288 , cert. denied, 320 Md. 505 , 578 A.2d 778 (1990). However, when there is a bona fide ambiguity in the contract’s language or legitimate doubt as to its application under the circumstances[,] ... the contract [is] submitted to the trier of the fact for interpretation. Ambiguity arises if, to a reasonably prudent person, the language used is susceptible of more than one meaning and not when one of the parties disagrees as to the meaning of the subject language. Id.

(emphasis in original) (citations omitted). With these principles in mind, we now turn to the case sub judice. In its July 16, 1990 letter to counsel, the trial court explained its reasons for adopting Everngam’s suggested approach to calculating damages. ¹³⁶ [B]oth the plain language of Sections XVII and XXI of the Agreement, and the established practice of Faw, Casson as explained in Holloway necessitate such a conclusion. The compromise aggregate fee amount due [Everngam] under Section XVII ... was $420,000.

According to the most reasonable construction of [Section XVII], the aggregate amount of $420,000, subject to the adjustments set forth in Paragraph XXI of the Agreement should have been paid by [FC] to [Everngam] over a period of time. Paragraph XXI clearly provides that aggregate vested C.I.P. ‘will be used to offset payments due [FC].’ (Emphasis in original) (footnote omitted). FC, however, maintains that several methods of performing the offset would be faithful to and consistent with the terms of the Agreement. First, FC suggests that payments due from FC to Everngam for CIP could be offset against payments due from Everngam to FC for client fee-equivalent damages, as each becomes due.

In pretrial proceedings, FC submitted a chart on which was set out the required monthly payments by each party as they become due, on the first of each month after the date of Everngam’s resignation. The chart demonstrated an ongoing reconciliation of payments and cumulative debt, including interest on the unpaid net balance outstanding each month. Under this “monthly offset” approach, FC calculated that as of the date of trial, Everngam owed FC $14,134 for past payments and FC owed Everngam $95,271 for future payments (a net balance of $81,137 due Everngam). FC used $275,000 as the amount owed by Everngam for fee-equivalent damages.

Although this figure was reduced to $253,-975 by the jury, we shall adopt FC’s estimate for the purposes of this discussion. Alternatively, FC proposes a reduction to present value, as of Evemgam’s resignation date, of both the aggregate CIP payments otherwise due and payable to Everngam by ¹³⁷ FC over ten years and the liability for fee-equivalent damages otherwise due and payable to FC by Everngam over three years. Under this “present value” approach, FC calculated its liability, as of the date of trial, to be $38,766, the difference between the CIP payments due Everngam reduced to present value ($420,000 reduced to $264,849) and the fee-equivalent damages due FC reduced to present value ($275,000 reduced to $226,083). Section XVII of the Agreement provides that [e]qual monthly [CIP] payments shall be made, without interest thereon, to a terminated partner for a period of ten years following the effective date of any termination.

The aggregate amount, subject to adjustments as provided elsewhere in this agreement, of such [CIP] payments shall be an amount equal to the terminated partner’s allocable share of the “fees” of the firm. The term “fees” for this purpose shall mean net professional fees, on the accrual basis of accounting, earned by the firm____ The increase (decrease) in each partners allocable share of the “fees” is based upon each partner’s percentage of his income ... to the total partnership income in relation to the firms’s total increase (decrease) in “fees” from one year to the next. The terminated partner’s allocable net “fees” shall be limited by the application of the following vesting percentage rules. (Emphasis added).

Following this language are vesting percentage charts which list the number of years of service as a partner and the corresponding percentage of vesting. In the event a former partner violates the Agreement’s noncompetition covenant, Section XXI makes clear that “[a]ny amounts due ... under [Section] XVII shall be forfeited____ [h]owever, such forfeited vested amounts will be used to offset payments [of fee-equivalent damages].” FC contends that there is no support that “subject to adjustments as provided elsewhere in this agreement” (the “quoted language” in Section XVII, supra) is intended to refer in isolation to an offset under Section XXI, as opposed ¹³⁸ to any other adjustments necessary to reconcile the respective obligations of the firm and a terminated partner. FC does not, however, supply us with any other provision of the Agreement to which it may refer. FC argues the quoted language of Section XVII relates to an adjustment required in the multi-step formula for determining a partner’s CIP entitlement.

FC contends that under the trial court’s construction of Section XVII, if “adjustment” does not refer to an adjustment to reflect the partner’s vested percentage of the aggregate CIP, then a partner would, for purposes of an offset of fee-equivalent damages, always receive credit for 100% of the aggregate CIP, irrespective of his actual vested percentage. FC notes that Section XXI states: “such forfeited vested amounts will be used to offset payments above.” Accordingly, FC claims that if “adjustments” in Section XVII does not mean application to the aggregate CIP of the appropriate percentage to determine the partner’s vested CIP, then there is no way to get from aggregate amount to vested amount under the language of the Agreement. FC maintains that language in Section XXI evidences an intent that an accounting or reconciliation between FC and a withdrawing partner who competes will occur on the basis of periodic payments or credits respecting reciprocal obligations as they become due. FC directs the Court’s attention to the following language contained in Section XXI: “Any amounts due ... under [Section] XVII shall be forfeited____ However, such forfeited vested amounts will be used to offset payments [of fee-equivalent damages]” (emphasis added).

It is urged that the use of the plural of “amount” and “payment” supports FC’s alternative damage formula theories. The Court of Appeals addressed the Agreement at issue sub judice in Holloway v. Faw, Casson & Co., 319 Md. 324 , 572 A.2d 510 (1990). Holloway, a withdrawing FC partner, was entitled to $35,525 in CIP payments. Id. at 328 , 572 A.2d 510 .

FC did not reduce Holloway’s aggregate CIP entitlement to present value before subtracting FC’s fee- ¹³⁹ equivalent damages. Id. at 330 , 572 A.2d 510 . According to FC, this was not done because the fee-equivalent damages exceeded Holloway’s aggregate CIP entitlement. Appellant/Cross-Appellee’s Br. at 19-20.

In passing, the Court mentioned in a footnote: “Holloway received, as credit for CIP, a lump sum in the total amount payable in monthly installments over a ten year period. Arguably, the credit to Holloway could have been only the present value of that stream of payments.” Id. at 332-33 n. 3, 572 A.2d 510 . Although the issue of present value reduction of vested CIP had not been raised in Holloway , the Court of Appeals commented on the matter. FC believes the Court’s observation reflects logic, the clear language of the Agreement, the intent of the parties to it, and simple common sense.

We, however, find footnote three unpersuasive for several reasons. First, the Court of Appeals was probably referring to a situation where a withdrawing partner did not compete in violation of Section XXI, and received, by mutual agreement, a lump sum settlement of all CIP payments reduced to present value. This did not happen either in the case sub judice or in Holloway . Second, the present value issue of this case was not an issue in Holloway .

The Court of Appeals was under no obligation to, and presumably did not, fully consider the relative merits; therefore, the Court’s comment is of little significance. Third, the language used by the Court of Appeals was hypothetical in nature. The Court merely said “[ajrguably, the credit to Holloway could have been only the present value of that stream of payments.” This language does not suggest that the Court, if presented with the issue, would rule that the Agreement called for reduction of CIP payments to present value. The Court simply suggested that the argument could be advanced.

Indeed, it was. FC cites Sherley v. Sherley, 118 Md. 1 , 84 A. 160 (1912), Dennis v. Blanchfield, 48 Md.App. 325 , 428 A.2d 80 (1981), modified, 292 Md. 319 , 438 A.2d 1330 (1982), and Chesapeake & Ohio Ry. v. Kelly, 241 U.S. 485 , 36 S.Ct. 630 , 60 ¹⁴⁰ L.Ed. 1117 (1916), to support the proposition that Maryland law clearly recognizes that money payable in future installments, without interest, must be reduced to present value. These cases do not support FC’s position; rather, they stand for the proposition that when damages are awarded at the time of trial for a loss in the future, they must first be reduced to present value. For example, in Dennis, a medical malpractice action, we held that a jury must be instructed to reduce to present value any damages awarded for the loss of future earning capacity. 48 Md.App. at 333 , 428 A.2d 80 .

In the case sub judice, the damages awarded under Count Six were for a breach of the Agreement, an event resulting in primarily past, not future, damages. To the extent the jury’s award included the twenty-two monthly payments not yet due at the time of trial, a reduction to present value was in order. Indeed, the jury took this into account by modifying the net pre-judgment interest rate to reflect a reduction to present value of the twenty-two future monthly CIP payments. Section XVII provides that a terminated partner shall be paid CIP “for a period of ten years following the effective date of any termination.” At the time of termination, Everngam was entitled to $419,117.00 in CIP payments.

In refining the definition of the amount of these payments, the Agreement continues to provide that the aggregate amount of CIP payments is “subject to adjustment as provided elsewhere in the agreement” and that this aggregate amount less adjustments shall be the terminating partner’s share of the fees or his net CIP. The problem in this case is that, almost immediately upon termination, Everngam began competing with FC in direct violation of the agreement. This triggered: 1) a forfeiture clause, and 2) the implementation of a repayment schedule due to FC. Under the repayment schedule, Everngam was required to pay FC certain fees for all clients formerly represented by FC but who moved to Everngam during the first three years after his termination. ¹⁴¹ Since it had to be obvious to everyone concerned that there would be some offset of the aggregate CIP amount due to Everngam’s representation of former FC clients, how, at the time of the termination, was it possible to subject the aggregate CIP amount to the “adjustment as provided elsewhere in the agreement” assuming that these adjustments refer to the client fee equivalent damages?

What were the legal responsibilities of FC vis-a-vis Everngam under the above set of facts? There seems to be little question that FC initially activated the