Comtois v. Rogers

PRESENT: Kinser, C.J., Lemons, Goodwyn, Millette, and Mims, JJ.

MARK C. COMTOIS, ET AL.
OPINION BY
v. Record No. 101128 JUSTICE WILLIAM C. MIMS
September 16, 2011
L. LAWTON ROGERS, III

FROM THE CIRCUIT COURT OF THE CITY OF ALEXANDRIA
Nolan B. Dawkins, Judge

In this appeal, we consider whether the circuit court

erroneously failed to perform an accounting of a partnership

prior to ordering its judicial dissolution.

I. BACKGROUND AND MATERIAL PROCEEDINGS BELOW

L. Lawton Rogers, III and Joseph Killeen shared a

successful law practice in the partnership of Rogers & Killeen

until Killeen’s death in 1998. Rogers thereafter continued the

practice as a sole proprietorship with Mark C. Comtois, D.

Joseph English, and Patrick D. McPherson, who had been hired as

associates between 1996 and 1998. In December 1999, Rogers

approached the three associates (collectively, “the Plaintiffs”)

to form a new partnership that retained the name Rogers &

Killeen (“the Firm”). The Plaintiffs agreed and the four

attorneys signed a partnership agreement backdated to April 1,

1999.

Paragraph 3.2 of the partnership agreement required “[e]ach

Partner [to] deposit to the account of the Firm an equal share

of the capitalization of the Firm and the financial records of
the Firm shall reflect the Capital Account of each Partner

individually.” Paragraph 3.1 provided that “[t]he

capitalization of the Firm may be referred to in accounting

records and balance sheets as ‘Net Worth’, ‘Capital Accounts’ or
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‘Partner’s Equity’.” (Id.) Paragraph 3.3 required each partner

to make his capital contribution within five days of a call for

capital and Paragraph 3.4 provided that any partner who failed

to do so would be in default, thereby losing his right to

participate in the management of the Firm and subjecting himself

to possible expulsion. Paragraph 3.5, captioned “Interest On

Capital Contributions,” provided that interest would be paid on

each partner’s equity in the firm. Specifically, it stated:

To encourage the adequate capitalization of the
Firm and the interest of the Partners in the
financial success of the Firm which will
accompany the investment by each Partner of
capital in the Firm, the Firm shall pay to each
Partner on the last day of each calendar month as
interest a sum equal to one percent (1%) of such
Partners’s [sic] Capitol [sic] Account during
that month. Interest shall be paid
notwithstanding the fact that the payment thereof
shall reduce the cash available to the Firm and
trigger a new call for capital.

1
In addition to the account into which each partner
deposited his capital contribution, representing his equity in
the Firm, Paragraph 7.4 of the partnership agreement provided
that each partner would have an income account. That paragraph
also provided that overdrawn capital and income accounts “shall
be considered by the Firm as accounts receivable”; conversely,
underdrawn accounts “shall be considered by the Firm as accounts
payable.”

2
 The partners also agreed to capitalize the Firm by each

contributing $150,000. The Plaintiffs borrowed some of their

contributions from Rogers and Rogers’ wife: English and

McPherson each borrowed the full $150,000; Comtois borrowed

$100,000. Each Plaintiff signed a note securing his

indebtedness with his interest in the Firm. The respective

notes provided that interest on the outstanding balance would

accrue at the rate of 12% per year. The notes also provided

that the interest payable by the Firm on the respective

partner’s equity under Paragraph 3.5 of the partnership

agreement would be deposited in Rogers’ capital account as

payment toward the debt.

In late 2000, all four partners joined Carter Ledyard &

Milburn LLP. The partners did not dissolve the Firm because

they were awaiting a large payment from an unresolved contingent

fee case. In 2002, the partners moved from Carter Ledyard &

Milburn LLP to Duane Morris LLP. The Firm remained extant but

inactive. After 2002, the Firm paid no interest on the

partners’ equity.

In December 2008, Rogers and his wife filed an amended

complaint against the Plaintiffs demanding repayment of the

notes. 2 In February 2009, the Plaintiffs filed a separate

2
Rogers subsequently non-suited additional claims in his
amended complaint.

3
complaint asserting that Rogers had overdrawn his capital

account by $611,147.00 and that this amount was an account

receivable owed to the Firm under Paragraph 7.4 of the

partnership agreement. In their complaint, the Plaintiffs

sought a final accounting, judgment against Rogers in favor of

the Firm in the amount of $611,147.00, the distribution of the

Firm’s assets equally among the partners, and the judicial

dissolution of the Firm. By agreement of the parties, the

circuit court consolidated the two cases and heard evidence in a

three-day bench trial.

The circuit court thereafter issued a letter opinion in

which it found that the Firm owed all the partners 1% monthly

interest on their equity from the date the Firm ceased paying

such interest. It then further found that the Plaintiffs had

not paid Rogers and his wife any interest due under their

respective notes since the Firm had ceased paying interest on

their equity, but determined that the Plaintiffs’ failure to pay

Rogers and his wife was offset by the Firm’s failure to pay the

Plaintiffs.

Accordingly, the circuit court ruled that because English

and McPherson’s equity was equal to their debts under their

notes, their obligations to pay interest under their notes was

canceled out by the Firm’s obligation to pay them interest on

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their equity. 3 To the extent English and McPherson had repaid

Rogers and his wife any amounts beyond the interest accrued or

due to them from the Firm on their equity, such repayments would

be applied to reduce their outstanding principal balances due

under the notes.

Similarly, the circuit court found that Comtois’ obligation

to pay annual interest on the outstanding balance of his debt

under his note was canceled out by the Firm’s obligation to pay

him interest on his equity. Moreover, because Comtois had only

borrowed $100,000 of his $150,000 equity, he was entitled to be

paid the monthly interest on the $50,000 he personally

contributed to the account. The court found each partner liable

for 25% of the unpaid interest due to Comtois if the Firm’s

assets were insufficient to pay it. The court also found that

Rogers was entitled to be paid monthly interest on his entire

$150,000 contribution and found each partner liable for 25% of

this obligation.

The circuit court directed all the parties to audit the

payments the Plaintiffs had made to Rogers and his wife and to

3
The Firm was obligated by the partnership agreement to pay
English and McPherson interest on their capital contributions.
In their respective notes, English and McPherson had assigned
their right to receive these interest payments to Rogers and his
wife as payment of the interest due under the notes. The
circuit court reasoned that English’s and McPherson’s failures
to pay Rogers and his wife interest as required by the notes was
subsumed by the Firm’s failure to pay English and McPherson
interest as required by the partnership agreement.

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propose a final order providing for the payment of any

outstanding balance under the notes, plus 12% annual interest

until paid in full. The court made no finding with respect to

the Plaintiffs’ allegations that Rogers’ capital account was

overdrawn or that he owed the Firm any money as a result.

Finally, the court found that the Plaintiffs had met their

burden of proof that the Firm should be judicially dissolved.

Rogers and his wife and the Plaintiffs were unable to agree

to the amounts of their respective obligations and therefore

proposed competing final orders to the circuit court. The court

held a hearing on the parties’ proposals, after which it entered

a final order. The final order found that Comtois had paid

$77,951 in principal under his note and owed an outstanding

balance of $22,049; that McPherson had paid $93,951 in principal

under his note and owed an outstanding balance of $56,049; and

that English had paid $75,951 in principal and owed an

outstanding balance of $74,049. The court entered judgment

against each Plaintiff in favor of Rogers and his wife for the

outstanding balances he owed, plus 12% interest per year on

those balances until paid in full. 4

4
No party assigns error to the court’s factual findings as
to the amount of principal each Plaintiff had paid or to the
outstanding balance each Plaintiff owed Rogers and his wife
under their respective notes.

6
 In its final order, the circuit court also awarded Rogers

$129,500.00 in unpaid 1% monthly interest on his equity in the

Firm, the liability for which was to be divided equally among

the four partners. The court awarded Comtois $43,000 in unpaid

1% monthly interest only on $50,000 in equity he had not

borrowed, the liability for which was also to be divided equally

among the four partners. It awarded English and McPherson no

unpaid interest on their equity because their entire

contributions had been borrowed. The court therefore

specifically ordered English and McPherson each to pay Rogers

$32,500.00 and Comtois $10,750.00 in unpaid interest on equity;

finding that Rogers’ liability to Comtois partially offset

Comtois’ liability to Rogers, it ordered Comtois to pay Rogers

$21,500.00 in unpaid interest on equity. 5

Finally, the court ordered the partnership judicially

dissolved.

The Plaintiffs objected to the final order and we awarded

them this appeal. 6

5
No party assigns error to the portion of the court’s order
calculating each partner’s share of Rogers’ unpaid interest on
equity as $32,250, even though four equal shares of $129,500
amount to $32,375 each.
6
Rogers and his wife also objected to the final order and
we awarded them an appeal, Record No. 101132, which we dismiss
by separate, unpublished order for the reasons set forth
therein.

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 II. ANALYSIS

The Plaintiffs assign error to the circuit court’s judgment

on three grounds. First, they assert that the circuit court

ordered the judicial dissolution of the Firm without performing

an accounting and settlement of the partners’ accounts. Second,

they assert that by failing to perform the required accounting,

the circuit court failed to require Rogers to repay his

allegedly overdrawn, negative capital account or award the

Plaintiffs the balances of their underdrawn, positive capital

accounts. Third, they assert that the circuit court erred in

awarding Rogers $129,500 in unpaid interest on his capital

account balance when his account allegedly was overdrawn with a

negative balance. We address this third assignment first.

A. INTEREST ON ROGERS’ EQUITY

The Plaintiffs assert that the circuit court erred by

awarding Rogers interest on his capital account balance when the

account allegedly was overdrawn. Their assignment of error thus

challenges the circuit court’s interpretation of the interest

obligation set forth in the partnership agreement. “We review

the interpretation of a contract de novo.” Uniwest Constr.,

Inc. v. Amtech Elevator Servs., 280 Va. 428, 440, 699 S.E.2d

223, 229 (2010).

When the terms in a contract are clear and
unambiguous, the contract is construed according
to its plain meaning. Words that the parties

8
 used are normally given their usual, ordinary,
and popular meaning. No word or clause in the
contract will be treated as meaningless if a
reasonable meaning can be given to it, and there
is a presumption that the parties have not used
words needlessly.

Id. (quoting PMA Capital Ins. Co. v. US Airways, Inc., 271 Va.

352, 358, 626 S.E.2d 369, 372-73 (2006)).

The Plaintiffs’ argument on this assignment is founded on

an interpretation that the interest payable by the Firm under

Paragraph 3.5 of the partnership agreement accrues on the

balance of each partner’s respective total contributions to the

Firm. The Plaintiffs contend that such contributions include

deferred or uncollected salary, fees, and other earnings, which

their forensic expert described at trial as capital

contributions. 7 He testified that, “[A] capital account balance

is increased by capital contributed to the firm and increased by

a share of income allocated to a partner, and it’s decreased by

distributions to a partner from the firm and losses allocated to

a partner.” While his statement may be correct as an accounting

principle, it exposes a critical semantic divergence between a

“capital account” as contemplated by the partnership agreement

and each partner’s capital in the Firm under standard accounting

practices.

7
Each of the Plaintiffs had such deferred or uncollected
salary, fees, and other earnings between 2000 and 2002, which
according to their forensic expert should be applied to their
capital accounts.

9
 Under Paragraph 3.1, each partner’s “capital account” is

defined as that amount he contributes to the capitalization of

the firm. Under that paragraph, “[t]he total capitalization of

the Firm shall be determined by the Partners.” Under Paragraph

3.2, the partners must contribute to the Firm’s capitalization

equally: “Each Partner shall deposit to the account of the Firm

an equal share of the capitalization of the Firm and the

financial records of the Firm shall reflect the Capital Account

of each Partner individually.” (Emphasis added.) Under

Paragraph 3.3, capital contributions are made only after a call

for capital. Under Paragraph 3.4, a partner’s failure to make

his equal contribution within five days of such a call for

capital suspends his participation in the management of the Firm

and places his continued role as a partner in jeopardy.

Based on these provisions it is clear that the phrase

“capital account” as contemplated by Paragraph 3.5 includes only

the partners’ equal contributions to the capitalization of the

Firm: their equity in the Firm as opposed to any undrawn

surplus in the income accounts provided for in Paragraph 7.4.

While it may be standard accounting practice to apply such

undrawn surpluses – in the form of salary, fees, and other

earnings a partner may be entitled to receive but has not

actually withdrawn – to the partner’s capital account, there is

no provision in the partnership agreement directing that those

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undrawn surpluses be included in the equity on which the Firm is

required to pay interest under Paragraph 3.5. The partnership

agreement does not provide for voluntary, unilateral increases

in a partner’s equity. To the contrary, under Paragraphs 3.1

and 3.2 of the partnership agreement the total capitalization of

the Firm must be determined by the partners collectively, and

must remain equal among all of them; the agreement thus provides

only for mandatory increases through calls for additional

capitalization shared equally among the partners. There were no

such calls for capital.

Accordingly, though Rogers’ capital or income accounts may

or may not have been overdrawn according to standard accounting

practices as the Plaintiffs allege, there was no reduction in

his partner’s equity as contemplated by the partnership

agreement, just as there was no increase in the Plaintiffs’

respective equity regardless of any undrawn surpluses in their

capital or income accounts. The partners’ equity remained an

equal $150,000 at all times after the execution of the

partnership agreement and concomitant agreement that each

partner contribute $150,000 in capital. The interest to which

each partner was entitled under Paragraph 3.5 thus accrued only

on his initial $150,000 contribution notwithstanding any

deposits or withdrawals from the income accounts provided for in

Paragraph 7.4.

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 We therefore will affirm the portion of the circuit court’s

judgment awarding Rogers interest on his $150,000 capital

contribution.

B. ACCOUNTING AND SETTLEMENT

The Plaintiffs argue that the circuit court correctly found

that they had met their burden for an order of judicial

dissolution of the partnership under Code § 50-73.117 but then

erroneously failed to perform an accounting and winding up of

the Firm’s business, including the settlement of the partners’

accounts that is required by Code § 50-73.123. The Plaintiffs

thereby raise the question of whether the circuit court failed

to do that which Code § 50-73.123 required it to do after it

determined a judicial dissolution was warranted under Code § 50-

73.117. This question presents an issue of statutory

interpretation, which we review de novo. Jones v. Williams, 280

Va. 635, 638, 701 S.E.2d 405, 406 (2010).

Code § 50-73.123(A) directs the circuit court to ascertain

the value of a partnership’s assets and liabilities and apply

the assets “to discharge its obligations to creditors,

including, to the extent permitted by law, partners who are

creditors.” Thereafter, “[a]ny surplus shall be applied to pay

in cash the net amount distributable to partners in accordance

with their right to distributions under subsection B.” Id.

Code § 50.73-123(B) states that

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 [e]ach partner is entitled to a settlement of all
partnership accounts upon winding up the
partnership business. In settling accounts among
the partners, the profits and losses that result
from the liquidation of the partnership assets
shall be credited and charged to the partners’
accounts. The partnership shall make a
distribution to a partner in an amount equal to
any excess of the credits over the charges in the
partner's account. A partner shall contribute to
the partnership an amount equal to any excess of
the charges over the credits in the partner's
account that is attributable to an obligation for
which the partner is liable under § 50-73.96.

Historically, an accounting was a term of art describing a

particular remedy in equity available “against any agent,

trustee, committee[, or] partner.” 8 John L. Costello, Virginia

Remedies § 16.01[1] (3d ed. 2005). Such an equitable accounting

included two steps. “First, the account is to be stated; this

is a determination of who owes what. Second, the account is to

be settled; this is the payment by the debtor of the money found

to be owing.” W. Hamilton Bryson, Bryson on Civil Procedure

§ 12.03[2][c] (4th ed. 2005).

Although Code § 50-73.123 does not explicitly direct the

circuit court to perform the historical equitable accounting as

an incident to a judicial dissolution, the steps required by

Code § 50-73.123(A) and (B) are identical to those comprised by

8
Code § 8.01-31 also affords a statutory right to an
accounting “against any fiduciary or by one joint tenant, tenant
in common, or coparcener for receiving more than comes to his
just share or proportion, or against the personal representative
of any such party.”

13
the historical accounting in equity. Moreover, it simply is

common sense that the liabilities of the partnership must be

satisfied and that any residual surplus be distributed among the

partners, in that order. The winding up of a partnership’s

business incident to a judicial dissolution thus necessarily

includes the completion of an accounting. See Spencer W.

Symons, 4 Pomeroy’s Equity Jurisprudence § 1421 (5th ed. 1941)

(An accounting is “necessary to a final and complete relief” in

a judicial dissolution.)

The Plaintiffs alleged in their complaint that Rogers had

overdrawn his accounts while their own respective accounts were

underdrawn. 9 Paragraph 7.4 of the partnership agreement provided

that “[o]verdrawn accounts shall be considered by the Firm as

accounts receivable and underdrawn accounts shall be considered

by the Firm as accounts payable.” Accordingly, the complaint

sought an accounting that would result in Rogers repaying the

allegedly overdrawn balance of his accounts and the

corresponding distribution of their underdrawn accounts.

9
The difference between partners’ equity on which interest
accrued under Paragraph 3.5 of the partnership agreement and
capital and income accounts as contemplated by Paragraph 7.4 is
immaterial here. The Plaintiffs’ allegation that Rogers
overdrew his capital account is sufficient to embrace both his
capital and income accounts. The Plaintiffs’ allegation is
clear: Rogers’ withdrawals from the Firm created a deficit in
his accounts and this deficit is an account receivable due to
the Firm under Paragraph 7.4, regardless of whether it is
charged to his capital or income account.

14
 Although the Plaintiffs adduced evidence to support the

allegations of their complaint, the circuit court neither made

factual findings as to the value of the partners’ respective

account balances nor directed the repayment of any excessive

withdrawals or distribution of any surplus. Both the letter

opinion and the final order focus on the Plaintiffs’ obligation

to repay Rogers and his wife under the terms of their respective

notes and the Firm’s obligation to pay unpaid interest on the

partners’ equity. Both are silent as to the value of the

principal balances of the partners’ accounts in the Firm,

whether the Firm had any surplus after the satisfaction of its

outstanding liabilities, if any, and whether any partner either

owed any amount to the Firm or was entitled to any distribution

from it. 10

10
Rogers argued below that some portion of the amount by
which his accounts allegedly were overdrawn was attributable to
the partners’ agreement that the Firm’s entire operating loss
for 1999 should be charged to his accounts but that the
Plaintiffs had agreed that this one-time charge would not need
to be repaid. The circuit court found there was no evidence of
an agreement by the partners that such a charge need not be
repaid and no party has assigned error to that finding.
However, the circuit court never determined whether Rogers’
accounts were in fact overdrawn or by what amount, whether he
had an obligation to repay any overdrawn balance to the Firm, or
how such a repayment would ultimately be distributed among the
partners during the settlement of their accounts required by
Code § 50-73.123(B). Similarly, the court never determined
whether the Plaintiffs’ respective accounts were in fact
underdrawn or by what amount, and whether they were entitled to
distributions of their respective balances.

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 Accordingly, it is clear that the circuit court failed to

perform the accounting necessarily inherent in a winding up of

the Firm’s business and prerequisite to a settlement of its

accounts among the partners and its final judicial dissolution.

We therefore will vacate the court’s judgment insofar as it

fails to account for all the assets and liabilities of the Firm,

including the principal balances of each partner’s accounts, and

fails to provide for the distribution of any residual surplus.

We will remand the case for further proceedings consistent with

this opinion, including factual findings as to the satisfaction

of any outstanding liabilities of the Firm, the extent of any

residual surplus, the value of each partner’s accounts based on

his respective contributions and withdrawals, and the proportion

to which any partner either is liable to the Firm or is entitled

to a distribution from the Firm based on the provisions of the

partnership agreement.

III. CONCLUSION

For the foregoing reasons, we will vacate the judgment of

the circuit court and remand for an accounting and settlement of

the Firm’s assets and liabilities. We will affirm the portion

of the judgment awarding Rogers unpaid interest on his $150,000

capital contribution to the Firm.

Affirmed in part,
vacated in part,
and remanded.

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