APPEAL from an order of the Supreme Court at Special Term (EDER, J.), entered November 12, 1954, in New York County, which denied a motion by defendants for summary judgment dismissing the complaint.
Cuthbert B. Caton of counsel (Wolfson, Caton & Moguel, attorneys), for appellants.
Herbert Edelhertz of counsel (Hilton Soba, attorney), for respondent.
Defendants appeal from an order denying their motion for summary judgment dismissing the complaint in an action to recover damages for the alleged breach of a contract executed when plaintiff withdrew from a partnership.
It appears from the uncontradicted statements in the affidavits that plaintiff and defendants were partners in a firm which bought and sold engineering specialties. Differences arose between plaintiff and his fellow partners leading to a decision to dissolve the partnership. The partnership agreement provided that upon the voluntary withdrawal of a partner, he was to be paid the book value of his interest in the firm, without any allowance for good will. Valuation of plaintiff's interest was complicated by the presence among the partnership assets of shares of stock in a closely held corporation. These shares had no readily ascertainable market value and were held individually in equal amounts in the names of each of the four partners. Defendants wished to acquire this stock as well as the plaintiff's interest in the other partnership assets.
In order to avoid an accounting proceeding, plaintiff and defendants entered into an agreement providing for the withdrawal of plaintiff and the formation of a new partnership with defendants as copartners. By the terms of this agreement, the final book value of plaintiff's interest was left undetermined until the partnership accountants had made their audit at the end of the firm's fiscal year. In the meantime, plaintiff was to receive certain specified payments of his partnership interest, with the value of the final payment dependent upon the results of the audit. The present controversy between the parties hinges upon the construction of this paragraph of the agreement: 'The book value of Soechtig's [plaintiff's] interest in the capital of said co-partnership, as of the close of business on March 31, 1952, shall be determined by financial statements to be prepared and certified by Emanuel Colodny & Company, certified public accountants, of Mt. Vernon, N. Y., in accordance with the accounting principles heretofore followed by them in their audit of the books of said co-partnership, and their written certificate as to such book value shall be conclusive on Soechtig and on the Continuing Partners.' (Emphasis supplied.)
A financial statement was prepared and certified by Emanuel Colodny & Company, the partnership accountants, and sent to the plaintiff. Plaintiff was paid the book value of his interest as shown by the statement with checks marked 'Final payment on account of Partnership interest.' Plaintiff then brought this action for breach of contract alleging that the financial
statement prepared by the partnership accountants did not correctly reflect the full book value of his interest in the partnership; that he requested the defendants to furnish a full accounting of the book value of his interest as provided by the agreement; and that he was refused such an accounting. The complaint demands damages for $10,000 representing the balance due under the terms of the withdrawal agreement.
Defendants' motion for summary judgment was denied by the court below on the ground that an issue of fact was raised as to whether the partnership accountants abided by the agreement in preparing the financial statements. In his opposing affidavit, plaintiff sets forth two objections to the financial statement: (1) the inclusion of a reserve for bad debts and contingencies; and (2) the exclusion of earned but uncollected commissions. Although plaintiff admits that in preparing the statement the accountants used 'practices' and 'procedures' that were 'heretofore followed,' he argues that in so doing the partnership accountants did not follow accredited or correct accounting principles. To support his statement, plaintiff submits the affidavit of an accountant which, if we read it correctly, stands for the proposition that the accounting principles involved in an audit are different from those used in determining net worth. Since the partnership accountants had only audited the books, they did not use the correct accounting principles for determining the book value of plaintiff's interest. The accountant points to the failure to adjust the reserve for bad debts and contingencies each year so that it bears a direct relationship to possible losses. He is also critical of the failure to use the accrual basis in accounting for commissions.
It may very well be that the principles used by the partnership accountants in their audit were not the correct or the proper principles for determining net worth. But these considerations are irrelevant if the accounting principles that were employed by the partnership accountant were those that were 'heretofore followed'. It is uncontradicted that Emanuel Colodny & Company used the same accounting principles in preparing the financial statements as they had used in making prior audits. In any event, the courts are not a forum for determining what are and what are not 'correct' accounting principles except insofar as certain principles are mandated by statute or by administrative regulation. (Cf. Internal Revenue Code of ...