Facts

On March 1, 2006, Michael R. Snyder, Jeffrey A. Walker and Douglas K. Mann began operating as the law firm, Snyder, Walker & Mann, LLP (SWM). Snyder, Walker, and Mann collectively agreed that Snyder would be 50 percent owner in the partnership and Walker and Mann would each have 25 percent interest in the partnership. Snyder was the self-elected managing partner. Based upon this partnership arrangement, Snyder, Walker, and Mann purchased an office building through their company, SWM Management Corporation, and the firm entered into a long-term lease with SWM Management. Walker and Mann also executed an equipment lease as general partners of the firm along with Snyder, and signed on to three separate loans amounting to $650,000.

Snyder initiated litigation against claimants by filing a complaint in San Bernardino Superior Court alleging numerous causes of action including dissolution of partnership, dissolution of corporation, breach of fiduciary duty, fraud and deceit (false promise), libel, trade libel, slander, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, negligence, conversion, negligent infliction of emotional distress, intentional infliction of emotional distress, breach of written contract, breach of oral contract, derivative action for damages, and declaratory relief.

Walker and Mann filed a cross-complaint for breach of partnership agreement, breach of fiduciary duty, conversion, intentional misrepresentation, false promise, concealment, constructive fraud, accounting, constructive trust and unjust enrichment.

The parties executed a stipulation that AAA would adjudicate all of the claims in the complaint and the cross-complaint through binding arbitration. Snyder failed to file the requisite demand with AAA to initiate the arbitration proceedings. Walker and Mann thus filed the claim themselves in order to move the case forward, and became the claimants in the arbitration.

CLAIMANTS' CONTENTIONS:
The claimants argued that Snyder's excessive draws and personal charges to the firm's credit cards forced the firm into insolvency. They further alleged that Snyder's conduct was not only a breach of the partnership agreement, but also a breach of his fiduciary duties as well as a violation of the rules of professional conduct.

The claimants' allegations were as follows: Immediately after beginning to operate as SWM, Snyder began to take excessive draws from the firm and also allocated a managing partnership credit to himself, which quickly extinguished the firm's loan money. Snyder continued this practice, unbeknownst to Walker and Mann, even when SWM could not satisfy its mounting debts. When Walker and Mann were first apprised of Snyder's conduct, they immediately requested he cease his conduct and that all three partners forgo their draws in order to meet the firm's financial obligations. Despite an agreement to do so, Snyder continued to take his draws and use the firm's credit cards for his own personal expenses. As a result, SWM was near insolvency and Walker and Mann voted to expel Snyder, under the terms of the partnership agreement, in an effort to save the firm.

Settlement Discussions

Snyder's cash demand at mediation the week prior to the arbitration was in the amount of $1 million, together with various non-monetary demands. The claimants' insurance carrier offered $200,000 at mediation.

Result

Arbitration award to claimants in the amount of $450,000, plus attorney fees and costs. The claimants were determined to be the prevailing party in the arbitration. The claimants have submitted an application for fees and costs in excess of $370,000. Except for minor relief related to rent owed by Walker and Mann to the parties' corporation, all of Snyder's claims were denied as not being supported by sufficient credible evidence, either as to liability or as to damages, or as to both.

Other Information

The arbitrator made the following findings: From March 1, 2006 through Nov. 14, 2007, the equity partners of the firm were Snyder with a 50 percent interest, Walker with a 25 percent interest and Mann with a 25 percent interest. The firm lost money in virtually every month of its operation and had become dangerously insolvent and in dire financial condition from which it likely could not recover. Various of Snyder's actions exacerbated the firm's financial difficulties and constituted a breach of contractual obligations and fiduciary duties owed to Walker and Mann for which they are entitled to monetary damages including:(a) taking and receiving compensation on a regular basis which substantially exceeded (i.e., by approximately $410,000) Snyder's agreed upon 50 percent interest noted above; (b) taking and receiving and/or booking additional compensation for serving as the self-appointed managing partner, contrary to provisions of the partnership agreement; (c) taking and receiving compensation in February 2007 when the partners unanimously had agreed to defer compensation in order to conserve cash; (d) taking and receiving compensation regardless of whether funds existed to pay such compensation; (e) prioritizing the payment of his draw over the draws payable to the other partners; (f) taking and receiving his draws attributable to September, October, and November 2007, when Walker and Mann did not receive any draws for such months; (g) engaging in self-centered, irresponsible, reckless and unrealistic fiscal management as the managing partner; (h) failing to appropriately communicate as the managing partner with his partners regarding the operations and financial affairs of the firm; (i) failing to reimburse the firm for approximately $44,000 in personal expenses charged on firm credit card accounts. EXPERT TESTIMONY: James Skorheim, J.D., CPA/ABV/CFF, CVA, Cr.FA, testified that SWM lost money during every month of its operation, which led to its inability to satisfy its debts. Skorheim opined that the cause of the untenable and irreversible financial demise of the firm was due to Snyder's large discretionary payments to himself, as well as his personal use of the firm's credit cards. John Olson, J.D., testified that Snyder misled the public regarding the partnership status in violation of the Rules of Professional Conduct. Olson opined that Snyder breached his fiduciary duties to claimants by taking excessive draws and not making distributions to Walker and Mann, by taking a managing partner credit in violation of the partnership agreement, by using the firms loan funds to pay himself, and by failing to keep his partners informed about the financial condition of the firm. Ellen Peck, J.D., opined that Snyder committed professional misconduct and that his conduct constituted violations of the Business & Professions Code and the Rules of Professional Conduct.