A major Indianapolis law firm must pay three departed partners who sued, a judge has ruled, but it will be up to a judge or jury to determine whether paying the former employees would create a “substantial and material adverse effect” for the law firm partnership, as it has claimed in the case.
Krieg DeVault LLP also cannot retroactively reduce the capital accounts of three partners who left the firm at the end of June 2015 and who later sued, Marion Superior Judge Heather Welch wrote in an order issued Wednesday.
“Plaintiffs are entitled to receive their June 2015 distributions of net income in the same manner and at the same time as all other Krieg DeVault partners … .”
Former partners David Jose, Melinda Shapiro and Mark Wenzel sued their former firm last year. They claimed they were shortchanged when they departed, and the balance in their capital accounts was reduced to offset other former partners whose accounts had negative balances and were written off. The suit in Commercial Court in Marion County claims breach of contract, conversion, breach of fiduciary duty and breach of trust.
Krieg DeVault attorneys who are defending the firm in this case, Kay Dee Baird and Mark J.R. Merkle, did not reply to messages seeking comment. Attorney James R. Fisher, who represents the plaintiffs, declined to comment.
Welch’s order found the plaintiffs were owed the amount of compensation that was in their accounts at the end of June 2015 and that the firm could not retroactively reduce those accounts. She ruled the partnership contract does not allow the firm to reallocate the plaintiffs’ capital accounts.
However, Welch ruled that the allegations against the firm do not warrant treble damages for the plaintiffs or an award of the plaintiffs’ attorney fees.
“As a matter of law, the Court finds that any diminutions of Plaintiffs’ capital accounts that took place subsequent Plaintiffs’ terminations are against the terms of the Partnership Agreement, and the Plaintiffs are entitled to receive the full amounts of their capital accounts as of June 30, 2015.” The record does not indicate how much they would have been entitled to at the time.
However, Welch also ruled that the plaintiffs could not sustain their arguments of conversion or that the law firm acted as a trustee to any of the plaintiffs.
All three of the former Krieg DeVault partners now are at SmithAmundsen — Jose and Shapiro as partners in the health care practice, and Wenzel as a partner practicing in the areas of creditors’ rights, bankruptcy, real estate and commercial law.
The Krieg DeVault Executive Committee decided in 2016 that it would pay partners who withdrew in 2015 a lump sum, followed by the remainder of their balances in payments over a 60-month period. Welch ruled this is not allowed under the contract without a prior showing that doing so would result in a substantial and material adverse effect, as the firm argued.
“While the balance books may show available funds, the remaining (partners) can still have good-faith concerns with the financial situation of the Firm that are not reflected in a plain reading of a balance sheet,” the judge ruled.
“The Court finds that whether the payment of the capital accounts does or does not create a (substantial) and material adverse effect upon the financial resources of the Partnership and whether the capital account payments can be deferred is a question of fact for the trier of fact.”
According to the Indianapolis Business Journal’s Largest Indianapolis-Area Law Firms lists, Krieg DeVault is the eighth-largest firm with 86 attorneys in its various offices. It was the area’s fourth-largest firm in 2012 with 138 attorneys. The firm was also in the eighth spot on the 2016 list, reporting 79 lawyers.