Appellants Paul R. Frank, Stanley Futterman, Peyton A. Moss, Eric Rosenfeld, and Eric D. Witkin, former law partners, appeal from a final judgment of the United States District Court for the Southern District of New York (Haight, J.) entered on October 18, 1988 dismissing their claims and awarding the proceeds of certain life insurance policies to appellees Susan Herman, Martha Prashker, and Lucy Prashker, the daughters of the deceased. Appellants also appeal the dismissal of their claims against their former partner, Murray Gartner, for breach of fiduciary duty, conversion, and fraud. Reversed and remanded.
Van Graafeiland, Cardamone and Pierce, Circuit Judges.
CARDAMONE, Circuit Judge:
This appeal involves a dispute over 1.35 million dollars in insurance proceeds derived from certain life insurance contracts taken out on the life of a law firm's leading partner -- a partner who died shortly after his firm dissolved. When sorrow strikes a thriving law firm, its happiness goes down and, at least in this case, its demise has tragic overtones because the present litigation over the insurance proceeds sets the insured's former law partners against his surviving daughters.
Appellants are Paul Frank, Stanley Futterman, Peyton Moss, Eric Rosenfeld, and Eric Witkin, five of the nine surviving former partners of the erstwhile law firm of Poletti Freidin Prashker & Gartner (Poletti Freidin). They appeal from a judgment of the United States District Court for the Southern District of New York (Haight, J.) entered on October 18, 1988 denying their claims to the proceeds of life insurance policies issued by Provident Mutual Life Insurance Company of Philadelphia (Provident) on the life of their deceased former partner, Herbert Prashker.
The district court dismissed appellants' claims to the insurance proceeds and also dismissed their claims against Murray Gartner, one of their former partners, for breach of fiduciary duty, conversion, and fraud. It granted summary judgment in favor of appellees Susan Herman, Lucy Prashker, and Martha Prashker, the daughters of Herbert Prashker who, the district court ruled, were the beneficiaries of the Provident policies.
This litigation began as a result of the dissolution of the Poletti Freidin firm and the subsequent death of its name partner Herbert Prashker. In late 1984 and early 1985 the firm experienced financial difficulties compounded by Prashker's serious illness that resulted in his extended absence from work. According to an affidavit submitted by appellant Futterman in support of a motion for partial summary judgment, when Prashker "was struck with cancer, became gravely ill and made known his desire to wrap up the firm's practice, it was clear that the firm would terminate." On March 29, 1985, its Partnership Agreement (Agreement) was amended to permit appellants Moss, Rosenfeld, and Witkin to withdraw as partners effective March 31, 1985, without creating an immediate obligation to make payments to them, which would otherwise have been required under Article X of the Agreement, By resolution dated May 9, 1985 the remaining partners voted to terminate the firm's practice at the close of business on May 31, 1985, and unanimously named Herbert Prashker and Murray Gartner as the liquidation committee.
Among the firm's assets were two life insurance policies purchased by the partners in 1970 and 1976 on the life of Prashker who, it is agreed, was the most significant member of the firm in terms of his capital account and generation of business. These policies were taken out pursuant to Article XIII(B) of the Agreement that provides, in part, as follows
Each partner consents to having his life insured by and for the benefit of the firm. . . . The cost of any such insurance shall not be deemed an expense and the proceeds of any such insurance shall not be deemed income of the firm. The cost of any such insurance shall be charged to the partners other than the partner whose life is insured in proportion to their interests in firm income for the fiscal year preceding the year in which such premium is due. The proceeds from any such insurance shall be credited to the capital accounts of the partners who contributed to the cost thereof in the same proportion as the most recently paid premium was charged to them.
If after having procured life insurance upon the life of any partner the firm shall thereafter decide to drop such insurance, the firm shall first offer to assign such policy to the insured person (whether or not he is then a partner), it being understood, however, that the firm shall have the right to continue any insurance in force despite the fact that the insured partner ceased to be a partner.
The first policy -- Policy No. 3,005,150 -- was issued in May 1976 in the face amount of $1,000,000. It was issued initially as a five-year renewable term policy, and later, in November 1977, was converted to a whole life policy. The second policy -- Policy No. 3,074,242 -- was issued in January 1980 in the face amount of $350,000, and it represents the conversion of a term policy originally purchased in 1970. In mid-1985 the two policies had an aggregate face value of $1,350,000, but borrowings had reduced their cash surrender value to $17,500. The policies identify as owners and beneficiaries the "partners" of Poletti Freidin "other than the Insured."
Subsequent to the resolution to dissolve the firm, William Malarkey, the firm's acting managing partner, received a premium notice for Policy No. 3,005,150 that required that a semi-annual premium of $24,500.05 be paid prior to May 4, 1985, in order to keep the insurance in effect. He arranged to have this payment converted to a quarterly premium payment, thereby deferring the payment of $12,000 until the liquidation committee had an opportunity to consider distribution of the firm's assets. According to Malarkey's deposition, the smaller quarterly premium payment prevented the policy from lapsing and preserved insurance coverage in the event it was decided, as part of the winding-up process, to offer to assign the policy to the insured in accordance with Article XIII(B) of the Agreement.
On May 31, 1985 Poletti Freidin ceased the practice of law. Following the dissolution, Prashker and Gartner, as members of the liquidation committee, were entrusted with winding up the firm's affairs and with distributing its remaining assets to the former partners. The firm's assets -- excluding the Provident policies -- exceeded its liabilities. Its only long term liability, the 23-year lease of its premises, had been discharged by agreement with the landlord. On the date that Poletti Freidin closed its doors, the firm had cash on hand of $260,838 and accounts receivable of $815,741. The order of priority for distributions of its assets set forth in Article XVI(D) of the Agreement provides, in part, as follows:
After payment of all expenses of liquidation the net assets and proceeds of liquidation shall be ...