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PARTNERSHIPS - Relations of partners to one another

Tuesday, July 02, 2019 @ 11:44 AM  

Lexis Advance® Quicklaw®
Appeal by the estate representatives from a decision dismissing their application for a declaration that the respondent breached a settlement agreement by allocating partnership income to the estate in the year following the death of the deceased. The deceased was a practising lawyer and partner in the respondent law firm. After his death in 2014, the estate reached a settlement with the respondent on the various financial issues pursuant to which the respondent paid a one-time and all-inclusive payment to the estate of $20,000 in full and final satisfaction of any and all further financial entitlement claims, known or unknown. One year after the settlement, the respondent allocated an additional $54,332 partnership income to the deceased for the 2015 taxation year resulting in an effective tax liability to the estate of $26,000. The appellants disputed the allocation, claiming that the deceased did not generate any income in 2015 and, upon his death, ceased being a partner. The respondent maintained that the allocation was simply part of an approved accounting and financial statement practice that resulted in deferral of income tax for each of the partners. The appellants argued that it was always the intent of the parties that the settlement agreement would conclude all matters between them, and it was on that understanding that they executed the final release. The application judge found that the evidence proffered by the appellants reflecting the parties’ intent in entering the settlement agreement constituted inadmissible evidence of subjective intent and that the final release applied only to the appellants and not to the respondent.

HELD: Appeal allowed. The application judge took too narrow a view of what was admissible evidence of surrounding circumstances in the interpretation of the settlement agreement. The application judge conflated the issues of subjective intent and surrounding circumstances resulting in his failing to consider the surrounding circumstances regarding the formation of the settlement agreement. During the process of negotiation, the respondent specifically contemplated the fact that there could be tax implications to the estate. While the intent of the settlement agreement was not to preclude the respondent from allocating partnership income to the deceased in the taxation year after his death, at the time the respondent entered into settlement discussions, it owed an ad hoc fiduciary duty to advise the appellants of its intended allocation of income to the estate in the year following the death of the deceased. Given the inherent duties of honesty, loyalty and good faith present in a partnership, it could be implied that the respondent undertook to act in the best interests of the estate of its deceased partner. The estate was vulnerable when negotiating the settlement agreement. The respondent was privy to its accounting process, its intent to allocate partnership income to the estate in the year following the death of the partner, and had the discretion to disclose this, but failed to do so. This information was not known to the appellants. Had the appellants known of the intended allocation of additional partnership income to the estate it would have undoubtedly affected the negotiation of the settlement agreement. By failing to disclose the intended allocation during its negotiations with the appellants regarding the settlement agreement, the respondent breached its duty to provide the appellants with complete financial disclosure regarding the deceased’s financial affairs.

Filkow Estate v. D'Arcy & Deacon LLP, [2019] M.J. No. 147, Manitoba Court of Appeal, R.J.F. Chartier C.J.M., D.M. Cameron and C.J. Mainella JJ.A., May 28, 2019. Digest No. TLD-July12019001