An old French saying posits: “Any fool can start a love affair, but it takes a real talent to know how to end it.” The same is true for a law firm. And just like ending a love affair can cause anger and hostility you never expected, ending a law practice with lawyers you have trusted for decades can reveal hostility, greed, and selfishness you never expected as well.
I have had an incredibly stable professional career over the past 40 years. Yet I have worked at three law firms that no longer exist. Two of the three went out of business while I was a principal of the firm. And I was never the one that wanted to file the law firm divorce papers. You may think it can’t happen to you, but it can happen to any law firm, big or small. Indeed, it has happened to a lot of firms, both big and small. Remember these law firms?
- Johnson Swanson Barbee
- Coke &Coke
- Rain Harrell
- Baker Glast
- Davenport & Brown
- Johnston Budner
- Jenkens & Gilchrist
- Shank Irwin
So what are the rules when your law firm starts to break up, when key lawyers are leaving the firm, or when you want to leave? The answer can be found in three different locations: (a) the partnership agreement; (b) the ethical rules governing the conduct of lawyers: and (c) statutes and case law defining duties to clients, partners, and law firms.
The issues that need to be defined are relatively simple, even though their resolution can be complex. Among the issues that should be looked at are the following:
- How do you divide up money on hand that was generated by each lawyer?
- How do you divide up money on hand that is the product of hours worked by each lawyer?
- How do you divide up money already billed or to be billed but not yet collected?
- How do you divide up the value of hard assets and goodwill?
- Who is going to pay the outstanding bills of the law firm?
- How do you divide up work performed on contingent fees on cases not yet concluded?
- What happens to the money that the law firm advanced as expenses on contingent fee cases?
- How do you deal with guarantees of lease obligations and law firm debts?
- What can you say to clients and when can you say it?
- Who has responsibility for maintaining closed files?
- Who is responsible for maintaining trust account documents and tax documents?
- Who is responsible for responding to IRS audits and paying taxes?
- Who is responsible for maintaining malpractice insurance to cover possible claims against the lawyers arising during the time they were with the old law firm?
- Who is responsible for the continued administration of profit-sharing or 401(k) plans containing the money of both lawyers and staff of the dissolving law firm?
The first place to look for answers always is the partnership agreement. Most law firm partnership/operating agreements are silent on what to do if the law firm dissolves, but they almost always have a provision for the rights of a departing partner vis-à-vis the law firm. That is your starting point. After that, look at the statutory provisions related to dissolution of your particular form of business entity: corporation, partnership, LLC, etc. Just because you stop practicing law together and everyone goes their own separate ways, that does not mean law firm is over. There is always some form of wind up or dissolution process, usually taking months. And someone has to be responsible for that wind up process – it doesn’t happen automatically.
Once you have answered the questions about everyone’s obligations to each other and the law firm, you must address the obligations to clients. It is not uncommon for the death of a law firm to result in a scramble and competition for the firm’s clients. Ideally, this would be addressed with a letter to all clients that describes the dissolution and then gives clients the options on what to do from that point forward. No matter how this process is handled, the one absolute “no/no” is for the lawyer to contact existing clients and solicit their business for a new law firm at a time when the lawyer still owes a fiduciary relationship to the old law firm’s partners. When a law firm is going out of business, this must be balanced against a lawyer’s obligations to inform the clients of everything relevant to their continued representation, particularly if there are deadlines that could be jeopardized by delays in the transfer of the file.
Yes, breaking up really is hard to do. Just like any other divorce, it can be as simple as a no asset-no children family law divorce or as complex as a high-stakes family law divorce involving prenup agreements, separate and community property fights, children, affairs, abuse, etc. If your law firm is breaking up, you can handle it yourself—just like you can extract your own impacted wisdom tooth—but that is usually a bad idea. You wouldn’t advise your client to go through a complicated business divorce without counsel and you shouldn’t do-it-yourself either. We have helped many lawyers get on with their careers after a law firm breakup. We would be happy to help you to if that occasion arises.