Heller Ehrman LLP v. K. Neuman
686 F. App'x 480
9th Cir.2017Background
- William (K. William) Neuman had an Employment Agreement with Heller Ehrman California PC that made him a shareholder and specified compensation mechanics tied to the firm’s compensation system.
- In 2007 Neuman and Heller Ehrman LLP executed a 2007 Letter Agreement fixing Neuman’s annual compensation at $775,000 for four years and describing him as a “fixed income shareholder.”
- Bankruptcy Court held a bench trial and found the 2007 Letter Agreement terminated Neuman’s shareholder status (making him an employee), denied him an Attributed Percentage and units of compensation, and allowed Neuman’s claim for $1,161,066.43 under the employment arrangement.
- The district court affirmed the bankruptcy court; Heller Ehrman LLP petitioned the Ninth Circuit for review.
- The Ninth Circuit majority reversed, concluding the 2007 Letter Agreement modified payment terms but did not extinguish Neuman’s shareholder status; upon Heller’s dissolution Neuman was not entitled to further compensation under the continuing Employment Agreement.
- A dissent argued the bankruptcy court’s factual findings (that Neuman became a salaried employee with no economic stake and that the LLP—not the PC—entered the 2007 agreement) were not clearly erroneous and would have affirmed.
Issues
| Issue | Neuman's Argument | Heller Ehrman LLP's Argument | Held |
|---|---|---|---|
| Whether the 2007 Letter Agreement terminated Neuman’s shareholder status (novation) | The 2007 agreement replaced prior terms and converted Neuman to an employee | The 2007 Letter only modified pay; it expressly called him a “fixed income shareholder” and did not extinguish shareholder rights | Reversed: the 2007 Letter modified compensation but did not effect a novation; Neuman remained a shareholder |
| Whether contract language was ambiguous and whether extrinsic evidence could be used | Ambiguity supports treating the Letter as changing status | Letter’s text plus Employment Agreement and course of conduct show no termination of shareholder status | Court reviewed de novo and used extrinsic evidence; held Letter reasonably read as payment modification, not status change |
| Whether Neuman had an Attributed Percentage/units of compensation (and thus voting rights) | Neuman lacked attributed percentage, supporting non-shareholder status | Attributed Percentage equals fixed income divided by LLC net profits; Neuman had such a percentage and exercised shareholder votes | Reversed: factual finding that Neuman had no Attributed Percentage was clearly erroneous; he retained voting rights tied to his fixed-income derived percentage |
| Effect of firm dissolution on Neuman’s entitlement to compensation | Neuman asserted claim for unpaid amounts under employment arrangement | Heller argued dissolution terminated entitlement to compensation under Employment Agreement | Court held dissolution terminated entitlement to further compensation under the continuing Employment Agreement |
Key Cases Cited
- In re Int’l Fibercom, Inc., 503 F.3d 933 (9th Cir. 2007) (standards for reviewing bankruptcy court factual and legal determinations)
- Hamada v. Far E. Nat’l Bank, 291 F.3d 645 (9th Cir. 2002) (standard for mixed questions of law and fact)
- DP Aviation v. Smiths Indus. Aerospace & Def. Sys. Ltd., 268 F.3d 829 (9th Cir. 2001) (contract interpretation and review when extrinsic evidence used)
- U.S. Cellular Inv. Co. v. GTE Mobilnet, Inc., 281 F.3d 929 (9th Cir. 2002) (ambiguity and contract meaning review)
- Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33 (Cal. 1968) (extrinsic evidence admissible when language is reasonably susceptible to a proffered meaning)
- Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1 (Cal. 1995) (mutual intent of parties inferred from written provisions under California law)
- San Gabriel Valley Ready-Mixt v. Casillas, 142 Cal.App.2d 137 (Cal. Ct. App. 1956) (novation requires clear proof of intent to abandon prior agreement)
- Howard v. County of Amador, 220 Cal.App.3d 962 (Cal. Ct. App. 1990) (burden and clarity required to show novation)
- Davies Machinery Co. v. Pine Mountain Club, Inc., 39 Cal.App.3d 18 (Cal. Ct. App. 1974) (mere change in payment arrangements does not effect novation)