## Facts

- A Boston law firm was formed in 1985 as a partnership composed of two founding professional corporations and other partners, including Ian M. Starr.
- The partnership agreement gave the founding partners sole discretion to set each partner’s annual profit share, subject to fiduciary obligations.
- Starr withdrew effective December 31, 1986.
- In 1986, Starr generated about 15% of firm billable hours but received only 6.3% of profits; the founding partners received substantially larger shares.
- Starr claimed the founding partners selected allocation criteria to reduce his share and that he was misled about how profits would be allocated.
- Starr sought additional amounts under the agreement, damages for fiduciary and good-faith breaches, and fraud damages; he also claimed entitlement to accounts receivable and work in process upon withdrawal.
- After a bench trial, the court found breaches of fiduciary duty and the implied covenant of good faith and fair dealing, found fraudulent misrepresentation by a founding partner, awarded Starr damages for lost profits plus prejudgment interest, and rejected Starr’s receivables/WIP claim.
- Defendants appealed; the Supreme Judicial Court took direct appellate review.

## Issues

1. Whether, given self-dealing, the founding partners bore the burden to prove the fairness of the profit allocation and whether the business judgment rule applied.
2. Whether the findings of breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing were clearly erroneous.
3. Whether the trial court erred by treating the firm’s cash-basis method of determining profits as unfair in itself.
4. Whether the evidence supported findings of fraudulent misrepresentation, reasonable reliance, and resulting harm.
5. Whether the partnership agreement entitled the withdrawing partner to accounts receivable or work in process when firm liabilities exceeded assets at withdrawal.
6. Whether prejudgment interest properly ran from the date the complaint was filed.

## Decision

- Affirmed in substantial part.
- Held that where partners engaged in self-dealing, the trial judge properly required them to prove the fairness of the challenged profit distribution; the business judgment rule did not shield the conduct.
- Held that the findings of fiduciary-duty breach and implied-covenant breach in the 1986 allocation were not clearly erroneous.
- Held that the evidence supported findings that a founding partner fraudulently misrepresented the basis for profit allocation, that Starr reasonably relied, and that he suffered damages.
- Held that Starr was not entitled under the agreement to an allocation of accounts receivable or work in process upon withdrawal where partnership liabilities exceeded assets.
- Held that prejudgment interest was properly awarded from the complaint date because the date of breach was not adequately established.
- Clarified that the trial judge erred in concluding that cash-basis accounting was unfair per se, while leaving the liability and damages determinations otherwise intact.

## Legal Principles

- Law partners owe fiduciary duties to one another; when controlling partners engage in self-interested conduct affecting distributions, they must justify the transaction’s fairness.
- The business judgment rule does not insulate partner decisions that involve self-dealing in allocating partnership profits.
- Contractual discretion over profit allocations remains constrained by fiduciary duties and the implied covenant of good faith and fair dealing; discretion cannot be exercised in bad faith to disadvantage a partner.
- Fraudulent misrepresentation may be established where a partner makes material false statements about profit allocation, intending reliance, and the other partner reasonably relies to detriment.
- A withdrawing partner’s entitlement to accounts receivable or work in process depends on the partnership agreement and the firm’s net financial condition; no distribution is required where liabilities exceed assets under the governing terms.
- Prejudgment interest may run from the complaint date when an earlier breach date is not sufficiently proven.

## Conclusion

The court upheld liability and damages for unfair, self-interested profit allocation and related fraud, required self-dealing partners to prove fairness, rejected a withdrawal claim to receivables and work in process due to negative net value under the agreement, and approved prejudgment interest from the complaint date, while rejecting the view that cash-basis accounting is inherently unfair.


Starr v. Fordham, 420 Mass. 178, 648 N.E.2d 1261 (Mass. 1995)