Should a partner of a professional services firm in financial distress who takes over the active matters by agreement with its receivers, be obliged to account to other partners for the value of “goodwill” represented by the fees that can be derived in the future from those matters?
Consider the case of Dennis Paltos – a 70% owner of Sydney CBD law firm Paltos Milevski Family Lawyers – and his junior partner Peter Milevski who held a 30% share.
A partnership dissolution was triggered by health issues concerning the senior partner and resulted in multiple disputes including one that required determination of the value of active client matters transferred by the receivers to the junior partner.
The receivers transferred the conduct of client matters to Milevski – against objections from Paltos – to render invoices to clients for unbilled work and to repatriate fees for work up to the date of their appointment, to them.
That transfer effectively allowed Milevski to carry on the same practice as had been conducted by the previous firm.
Paltos contended therefore that in the reconciliation of assets and liabilities, Milevski should be debited with the value of the goodwill of the former firm.
He recruited forensic accountant Rebecca Conoulty to value the goodwill and other intangible assets he contended his former partner had by those means acquired.
In her view, the active files constituted by far the largest asset of the business. She valued them by reference to the income derived which – over a period of 18 months – was $1.3 million in professional fees.
The transfer of the conduct of those matters had provided Mr Milevski an opportunity – she reported – to continue to act and earn fees on them subject to the clients’ decision to transfer their matters elsewhere.
Other intangible assets included the value of the “established workforce” – a working team experienced in their employment roles – which Ms Conoulty valued at $147k to reflect recruitment costs, training costs and efficiency benefits.
Milevski’s contention was that upon dissolution, the partnership practice had “effectively ceased to exist” and “any goodwill in it had been lost”. It was simply a matter for clients to decide – so his argument ran – whether they wanted one or other of the former partners to continue to represent them.
When the dispute came before him in the NSW Supreme Court, Justice Guy Parker observed that a dissolution of a partnership may not of itself end the business it previously carried on and that as a result the clientele may have value as goodwill.
He ruled that the value of transferred clientele should be determined by reference to “what a third party purchaser, facing potential competition from Mr Milevski and Mr Paltos would have expected to earn”.
Ultimately His Honour concluded that Ms Conoulty’s valuation opinions were either beyond her expertise or derived from valuation methods which were inappropriate to the circumstances of the case.
“In the end Ms Conoulty’s valuation is a desktop analysis,” he ruled. “It does not satisfy me that third-party purchasers would actually have been prepared to buy the practice for prices in the range calculated by her”.
He was thus unable to make “any reliable determination” of the market value of the practice.
He went on to conclude that the intangible assets of the partnership (including goodwill) had no value and that more likely than not, no goodwill had been transferred.
Paltos had already succeeded in a negligence claim against his own solicitors for their erroneous advice in relation to the dispute. Justice Stephen Rothman in those proceedings assessed the value of the intangible assets ie goodwill etc at $1.41 million but on appeal this was reduced by the prospect of a successful recovery in the action concerning his former partner, to $943k.
“The result is unfortunate for Mr Paltos,” Justice Parker observed, “given that his damages were docked (in the professional negligence claim) by almost $500,000 for the value of intangible assets which I have now found to have had no value”.
Milevski v Paltos [2022] NSWSC 261 Parker J, 14 March 2022 Read case
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