Archive for the ‘Law Firms’ Category

The Death of Big Law

Tuesday, September 22nd, 2009

Larry E. Ribstein (Illinois) has posted a working paper on SSRN, The Death of Big Law, in he argues that “the basic business model of the large U.S. law firm is failing and needs fundamental restructuring.”  Ribstein suggests possible changes to law-firm structure and ethics rules governing lawyers. 

The first change that he suggests is that law firms “must own a core of durable, firm-specific property”.  By that, Ribstein means firm ownership of professional goodwill (client relationships), and non-competition agreements to protect it.  No more portable practices.  To quote from “Sixteen Tons,” popularized by Tennesee Ernie Ford, but written by Merle Travis:

Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store

Gary Rosin

Attorneys of Aboite, LLC. In re Loomis (Ind. 2009)

Monday, August 24th, 2009

 In re Loomis, No. 02S00-0808-DI-422 (Ind. May 7, 2009), is a recent disciplinary case.  Three lawyers in Aboite, Indiana formed “Attorneys of Aboite, LLC.”  Although the three lawyers did not combine their practices, they

…used the names “Attorneys of Aboite, LLC” and “Attorneys of Aboite” in professional documents, communications, signage, telephone directory listings, numerous advertisements, and an internet website without revealing that they did not practice law as a firm.

Slip Op.at 1.  Unsurprisingly, they were disciplined for misleading clients as to whether they practiced as a firm.  Still …

What were they thinking?  I suppose that they wanted to share offices, and formed the LLC to lease or buy office space, and to share expenses. 

There may be some estoppel issues here, so that the LLC may be liable for malpractice, errors and omissions committed in the course of representing clients who thought they were dealing with a firm.

Hat tip, Mike Frisch (Legal Profession Blog).

Gary Rosin

Comparative Limited Liability for Law Firms

Wednesday, August 19th, 2009

Susan Saab Fortney (Texas Tech) has a new article, Tales of Two Regimes for Regulating Limited Liability Law Firms in the U.S. and Australia: Client Protection and Risk Management Lessons, 11 Legal Ethics 230 (2009) (SSRN), that compares US and Australian regimes for law firm limited liability.  She criticizes US for not adequately addressing firm management systems to ensure ethical conduct.

Gary Rosin

Unfinished Business & Law Firms

Wednesday, August 12th, 2009

As noted earlier, In re Brobeck, Phleger & Harrison, LLP (Greenspan v. Orrick, Herrington & Sutcliffe LLP), __ B.R. __, 2009 WL 2045344 (Bankr. N.D. Cal. July 2, 2009), involves the concept of unfinished business.  That concept grows out of UPA Section 34(1)(a), which provides that, after dissolution,  partners have the power to bind the partnership “[b]y any act appropriate for . . . completing transactions unfinished at dissolution.”  

In a law firm, the primary unfinished business would include the representation of clients in matters already begun, but not yet completed.  We often associate law-firm unfinished business with contingent-fee litigation, but even matters billed on an hourly basis could have substantial remaining work–consider a major acquisition or commercial litigation, for example.  Unfinished business in no different from unbilled hourly matters or unpaid receivable; all must be finished, billed and collected for the benefit of the old firm. 

The Brobeck waiver of the firm’s interest in unfinished business amounted to a distribution in kind of that business.  It is well-settled that partners may agree to distributions in kind, rather than liquidations by sale and distributions of cash.  As noted by the Brobeck court, completing unfinished business of a law firm “can be protracted”.  Slip Op. at *8.  Given that, the court concluded that

an agreement that immediately disposes of unfinished business and minimizes the disruptive impact of a dissolution is appropriate, and the court will not fault them for complying with this aspect of California law.

Id.

The problem was that the Brobeck firm was not only insolvent, but also an LLP; its partners were not liable for the obligations that the firm could not cover.  There is a very real difference between the interests of the firm and those of its partners.  In that context, partner consent should not be sufficient to avoid a breach of the duty of loyalty to the partnership.  Yet the court treated the duty to account as operating only as among the partners. 

The court gestured towards the principle that agreements solely among partners cannot override the rights of creditors.  Slip. Op.at *10.  That said, the court incorrectly viewed the insolvency of the partnership as relating only to the general creditors’ remedy of the fraudulent transfer laws.  The duty to act for the benefit of the partnership cannot allow partners to strip assets from an insolvent firm.  any assertion otherwise is “manifestly unreasonable.”

Gary Rosin

Law-Firm Dissolutions & Fiduciary Duties. In re Brobeck, Pheleger & Harrison, LLP (Bankr. N. D. Cal 2009)

Wednesday, August 12th, 2009

Prior to filing bankruptcy, in order to facilitate an orderly liquidation and movement of attorneys to other firms, the law firm of Brobeck, Phleger & Harrison, LLP (“Brobeck”) amended its partnership agreement to include a waiver of the rights of the firm and its partners to any “unfinished business” of the firm, as that term is defined in Jewel v. Boxer. 

In In re Brobeck, Phleger & Harrison, LLP (Greenspan v. Orrick, Herrington & Sutcliffe LLP), __ B.R. __, 2009 WL 2045344 (Bankr. N.D. Cal. July 2, 2009), the bankruptcy court held that the provision was valid as a matter of California partnership law but was a fraudulent transfer because it was a transfer of interests in Brobeck’s property that was made while Brobeck was insolvent and without the receipt by Brobeck of any value in return.

In Jewel v. Boxer, 156 Cal.App.3d 171, 203 Cal.Rptr. 13 (1984), a California court of appeals held that, in the absence of an agreement otherwise, when a partnership dissolves, the partners have a duty to account to the dissolved firm and their former partners for profits earned on the dissolved firm’s unfinished business after deducting for overhead and reasonable compensation.  The Jewel case involved contingency fee matters, but later cases made clear that the rule also applies to hourly rate matters.  Many Brobeck partners were familiar with the Jewel duty to account because a law firm had recently sued Brobeck for an accounting of profits earned on unfinished business completed by former partners of that firm who went to Brobeck.  As the dissolution of Brobeck loomed, the Brobeck policy committee thus recommended that the  partnership agreement be amended to include a provision waiving Jewel claims that Brobeck would have against its former partners or their new firms except for two specified matters.  The amendment received the requisite approval of the partners, and Brobeck proceeded to dissolve.  After Brobeck entered involuntary bankruptcy, the trustee asserted various claims against the Brobeck partners and several firms who had hired Brobeck partners.  The trustee settled with most of the partners and the two firms to which most Brobeck partners moved, but certain Jewel claims were not settled, and the trustee asserted these claims against two firms and ten former Brobeck partners who moved to those firms.

The court first analyzed whether the Jewel waiver was valid under California partnership law.  The court concluded that the partners were not only free to adopt such a provision, but were, in fact, encouraged by the case law in this area to adopt an agreement as to how to handle unfinished business in a way that immediately disposes of unfinished business and minimizes the disruptive impact of the dissolution.  The court rejected the trustee’s arguments that the waiver ran afoul of the RUPA provision permitting modification of the duty of loyalty by identifying “specific types or categories of activities that do not violate the duty of loyalty” so long as the modification is not  “manifestly unreasonable.”  The trustee argued that the provision was not specific enough because it did not refer to the partners’ duty of loyalty, but the court stated that specific reference to the duty of loyalty, while “it may be a prudent exercise,” is not required for a valid modification of the duty under RUPA.  The court also rejected the trustee’s argument that the provision was “manifestly unreasonable.”  The court stated that it was left to rely on its common sense in the absence of case law defining the term, and the court concluded that the Jewel waiver was not “manifestly unreasonable.”  The court reasoned that the waiver did not eliminate the duty of loyalty, but merely modified the duty to account, which is just one of the three duties of loyalty set forth in RUPA.  The court stated that Brobeck’s insolvency at the time of adoption of the waiver did not affect its validity under RUPA because RUPA does not govern the relationship of the partnership or its partners to third parties, such as creditors.

While the court determined that the Jewel waiver was lawful and valid under RUPA, the court ultimately determined that the waiver was avoidable as a fraudulent transfer.  The court held that profits from unfinished business amounted to property of Brobeck and that the waiver effected a transfer of that property to the partners.  Although the court concluded that the trustee failed to meet his summary judgment burden with respect to actual intent to hinder, delay, or defraud a creditor, the court concluded that the trustee was entitled to summary judgment that the Jewel waiver was a constructively fraudulent transfer.  The parties did not dispute that Brobeck was insolvent when the waiver was approved, and the court concluded that there was no evidence that Brobeck received anything of value in exchange for the waiver.  Thus, the waiver was avoidable as a fraudulent transfer, and the partners, as initial transferees, and their new firms, as immediate transferees, were liable to the extent of profits received on Brobeck’s unfinished business.

Elizabeth Miller