Abbott v. Schnader, Harrison, Segal & Lewis

805 A.2d 547

2002 Pa. Super. 247

Frank H. ABBOTT and Vincent P. Haley, Appellees v. SCHNADER, HARRISON, SEGAL & LEWIS, LLP, Appellant

Superior Court of Pennsylvania.

Argued October 23, 2001.

Filed July 30, 2002.

Paul H. Titus, Philadelphia, for appellant.

Alfred W. Putnam, Philadelphia, for appellees.

Before: JOHNSON, TODD, and KELLY, JJ.

TODD, J.

¶ 1 In this breach of contract action, Schnader, Harrison, Segal, & Lewis, LLP ("Schnader") appeals the trial court's order denying its motion for summary judgment and granting the motion for summary judgment filed by Appellees Frank H. Abbott ("Abbott") and Vincent P. Haley ("Haley").¹ The essential question presented in this appeal is whether active partners may amend a provision of a partnership agreement providing for income to retired partners, substantially reducing that income, without the consent of the retired partners. This is a question of first impression in the appellate courts of this Commonwealth. Upon review, we affirm, finding the amendment ineffective to reduce Appellees' retirement benefits once they had retired.

¶ 2 The trial court, by the Honorable John W. Herron, accurately and succinctly summarized the facts underlying this action as follows:

Schnader is a law firm founded in 1935 and headquartered in Philadelphia, Pennsylvania. Abbott's career at Schnader spanned forty-four years, first as an associate for eleven years and then as a partner from 1960 through January 1, 1993 [when his retirement was mandated under the partnership agreement at the age of 65]. Haley likewise worked at Schnader for forty years, as an associate from 1959 and then as a partner from 1968 until January 1, 1999 [when his retirement was likewise mandated, although he agreed with Schnader to continue to work for an additional year].

On May 31, 1984, the Parties entered into a partnership agreement ("Agreement") that is at the center of the controversy in this case. The agreement addressed a variety of issues of partnership management such as the partners' capital and drawing accounts, division of profits and election of the Firm's executive committee. The Parties' dispute, however, focuses on the relationship between an amendment provision in Article II, Section 2.06(d)² and Article VII, which grants retirement benefits for Firm partners ("Partners") who have served for twenty-five years.

Article VII was titled "Retirement of Partners" and provided for income benefits for retired Partners who satisfied certain conditions. According to Section 7.04, those Partners who had given twenty-five calendar years of service to the Firm were "entitled" to "retired partner payment benefits":

Section 7.04. Minimum Years of Service. A partner must have at least twenty-five (25) full calendar years of service with the firm as a partner or as an associate (which need not be consecutive) to be entitled to the full retired partner payment benefits provided under this Article.

These "Benefits" are more fully described in Agreement Section 7.02, which, prior to December 1999, read as follows:

Section 7.02. Income of a Retired Partner. For each year a retired partner shall receive from the Firm, payable monthly, an amount equal to thirty percent (30%) of the average of the partner's five (5) highest annual shares of partnership income during the seven (7) years prior to the effective date of his retirement (subject to section 7.03) as shown on Line 1, ordinary income (loss) (or any successor line or provision) on such partner's federal Schedule K-1 (or any successor schedule), as adjusted for any amounts included on such line paid by the Firm that are not charged or credited to all partners on a per partner or proportionate basis, for such years, subject to minimum and maximum annual amounts of fifty thousand dollars ($50,000) and one hundred thousand dollars ($100,000).

In [Section 2.06], the Agreement outlined "votes required for Certain Actions." The vote required to amend the Agreement was [75%]. Both parties concede that under this provision only active Partners may vote on amending the Agreement.

Under the Benefits provisions of Article VII, effective January 1, 2000, Abbott would have been entitled to receive Benefits at an annual rate of $91,745.76 under the pre-December 1999 agreement. This amount would have increased to $94,257.76 on March 31, 2000. For Haley, the corresponding amounts would have been $91,990.96 and $94,509.67.

On December 23, 1999, the Partners enacted a series of amendments ("Amendments") including one that revised Section 7.02 to read as follows:

(a)(i) A retired partner whose effective date of retirement was prior to January 1, 2000 shall receive from the Firm the lesser of (x) the amount which he or she was receiving on an annual basis during calendar year 1999 and (y) $50,000, on an annual basis, payable monthly, during such retired partner's lifetime but not to exceed a period of ten years from the effective date of his or her retirement....

(b) Subject to the provisions of Section 7.02(a), the amount of annual payments to a retired partner shall be initially calculated as thirty percent (30%) of the average of the partner's five (5) highest annual shares of partnership income during the seven (7) years prior to the effective date of his or her retirement (subject to Section 7.03) as shown on Line 1, ordinary income (loss) (or any successor line or provision) on such partner's federal Schedule K-1 (or any successor form or schedule), as adjusted for any amounts included on such line paid by the Firm that are not charged or credited to all partners on a per partner or proportionate basis, for such years.

The amendments have the practical effect of capping Abbott's and Haley's Benefits at $50,000 per year and limiting the period of compensation to ten years from the date of retirement of each. Although the Amendments were adopted in accordance with section 2.06(d) of the Agreement, which allows the Agreement to be amended with the consent of seventy-five percent (75%) of all Partners, neither Abbott nor Haley consented to the adoption of the Amendments.

(Trial Court Opinion, 2/28/01, at 2-4 (citations omitted) (footnotes omitted).)

¶ 3 As a result of this reduction in retirement benefits, Appellees brought suit in June 2000, asserting causes of action for breach of contract, promissory estoppel, and breach of the duty of good faith. The parties filed cross-motions for summary judgment on stipulated facts. The trial court granted Appellees' motion for summary judgment on their contract claim, concluding that they were entitled to the pre-1999 payment benefits, dismissed as moot Appellees' remaining claims,³ and denied Schnader's motion in its entirety.

¶ 4 In concluding that Appellees were entitled to relief, the trial court treated the retirement provision of the partnership agreement, which it concluded was severable from the remainder of the agreement, as an offer by Schnader to enter into a unilateral contract, to be accepted by satisfying the retirement benefit conditions. (Trial Court Opinion, 2/28/01, at 7-10.) Accordingly, Appellees' rights to the retirement benefits vested when they completed 25 years of service and retired after age 65. (Id. at 11-15.) Finding no Pennsylvania cases on point and relying on Kemmerer v. ICI Americas Inc., 70 F.3d 281 (3d Cir.1995), the trial court concluded that the amendment provision in the agreement was ineffective to preclude vesting, as the provision did not explicitly reserve the right to amend the agreement and apply such amendment to partners who had retired.⁴ ¶ 5 On appeal, Schnader presents the following questions for our review:

1. Where a comprehensive written partnership agreement provides that it can be amended and places no restrictions on the right to amend, are retirement benefits under the Agreement nevertheless "vested" and unamendable?

(a) May the retirement benefit provisions in that agreement be severed from the rest of the partnership agreement to create a separate unilateral contract governed by principles derived from employment contracts?

(b) Where one sentence in a paragraph of the agreement defines what percentage of benefits may be paid to retired partners with 25 years of service to the Firm (i) may that sentence be treated as an "offer" to enter into a unilateral contract that creates "vested" benefits; (ii) may future service as a partner under that provision be deemed "consideration" for the benefits although the Uniform Partnership Act prohibits compensation for such service, and (iii) may benefits be considered "vested" under the provision even though the service to the partnership was rendered before the "offer" was made?

(c) Is a general unqualified power of amendment in the partnership agreement ineffective when it is applied to the benefit provisions in it?

2. Should a plaintiff be precluded from recovery on claims of estoppel and breach of a duty of good faith where those claims are based on a reliance on benefits under an agreement that could be amended at any time?

(Appellant's Brief, at 2.)

¶ 6 Summary judgment properly is granted after the close of the relevant pleadings "whenever there is no genuine issue of any material fact as to a necessary element of the cause of action or defense which could be established by additional discovery or expert report" and the moving party is entitled to judgment as a matter of law. Pa.R.C.P. 1035.2(1). The scope of our review of an order granting or denying a motion for summary judgment is well established. In reviewing an order granting summary judgment, an appellate court must examine the record in the light most favorable to the non-moving party. Curbee, Ltd. v. Rhubart, 406 Pa.Super. 505, 509, 594 A.2d 733, 735 (1991); Laventhol & Horwath v. Dependable Ins. Assoc., Inc., 396 Pa.Super. 553, 558, 579 A.2d 388, 390 (1990). We will reverse only if there has been an error of law or a clear abuse of discretion....