Starr v. Fordham

Supreme Judicial Court of Massachusetts · 1995 · Corporations

420 Mass. 178 (1995)

Updated August 22, 2026

CorporationsPartnershipsFiduciary DutyFraudulent MisrepresentationContract InterpretationPrejudgment Interestpartnership profitsself-dealing

Facts

Starr joined a new law firm after Fordham told him that business origination would not be a significant factor in allocating partner profits. The partnership agreement gave the founding partners authority to determine each partner's profit share and, upon withdrawal, a departing partner's fair share of unrealized accounts receivable and work in process less liabilities. When Starr withdrew on December 31, 1986, the founding partners gave him 6.3% of 1986 profits, did not consider billable hour and billable dollar totals fairly, and refused him any share of accounts receivable and work in process because they treated the firm's long-term office lease as a liability exceeding those assets. The trial judge found fiduciary breach, bad faith, and misrepresentation, but denied recovery on accounts receivable and work in process.

Issue

Whether the founding partners breached fiduciary duties and the implied covenant of good faith and fair dealing by allocating Starr only 6.3% of 1986 profits; whether Fordham fraudulently misrepresented the basis for profit allocation; whether the partnership agreement entitled Starr to a share of accounts receivable and work in process despite the firm's lease obligations; and whether prejudgment interest should run from a date earlier than the filing of the complaint.

Rule

Partners owe each other the highest degree of good faith and fair dealing. When a partner engages in self-dealing, that partner bears the burden of proving the fairness of the action, and the business judgment rule does not apply. A statement of present intention as to future conduct is actionable as fraud if it misrepresents the speaker's actual intent and is reasonably and detrimentally relied upon. Contract terms such as 'liabilities' must be interpreted in context and may include contractual lease obligations. Under G. L. c. 231, § 6C, prejudgment interest runs from the date of breach or demand if established; otherwise it runs from commencement of the action.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

A five-lawyer partnership in Chicago allows its two managing partners, Nora Blake and Steven Kerr, to set each partner’s annual profit percentage, including their own. When Priya Desai announces she is leaving at year end, Blake and Kerr assign her 5% of profits; every additional percentage point given to Priya would reduce Blake’s and Kerr’s own shares.

If Priya sues claiming the allocation breached fiduciary duty, who bears the burden regarding fairness of the allocation?

Explanation. When partners allocate another partner’s share in a way that directly affects their own shares, they are engaged in self-dealing. Under the majority opinion, self-dealing places the deciding partners on both sides of the transaction, so they bear the burden of proving the fairness of the allocation and the absence of harm. That rule applies here because Blake and Kerr personally benefited from assigning Priya a smaller share.