DISSOLVING A LAW FIRM: A SURVEY OF THE LEGAL AND ETHICAL ISSUES

Dissolving a law firm is not simply a financial exercise. There are a host of legal and ethical issues that are implicated: everything from the transfer of files to the new law practice to retention or destruction of closed matter files; from preservation of the attorney/client-privileged paper file documents to digital files that thenew firm’s IT infrastructure may no longer be able to read without glitches; from ongoing contractual obligations relating to attorney compensation to ERISA issues concerning the firm’s pension plan. The list is endless, and the following are just a few of the highlights:

Transfer of Client Files without Breaching Legal or Ethical Duties

We start with the basic premise that the file belongs to the client primarily, and the law firm secondarily. What that means is, generally speaking, the client has the right to obtain a copy of their file at any time, but the law firm likewise has the right to maintain such a copy, as well. In a dissolution, there has to be a sufficient period of time for the client to receive advance written notice with the option to either take back their file or have it forwarded to new counsel (or both in succession).

Indeed, a more immediate issue that often arises is that the underlying matters may involve ongoing litigation. To the extent that there are pending motions, trial dates or even simply imminent discovery end dates, the time it may take to give notice to a client and have them respond and provide instructions as to transferring the matter to their new counsel can create unintended potential prejudice to their litigation position. Consequently, it is important to have all the initial notices of the impending dissolution sent out at the reasonably earliest point, with prewritten follow-up notices for clients who do not respond. Everything should be captured on a spreadsheet with a “tickler system,” so that any clients who have not responded can be located some other way.

Ongoing Financial Commitments to the Law Firm’s Partners and Employees

Law firms generally have a lag time between the legal work that is done for a client and the point at which they receive compensation for that work. That can present all sorts of compensation issues relating to fee participation when the aquired practice has a numbner of pending contingency cases; indeed, it also can be an issue in regard to billable charges, as well. Accordingly, the anticipated contingency settlements or actual judgments, as well as the hourly billable “work-in-progress” that is the subject of monthly invoices should be tracked on a spreadsheet. That tracking should include a calendaring system for follow-up evaluation of the corresponding fee  participation. This includes

• as to contingency matters, the date for any settlement payouts or judgment satisfaction and
• as to billable matters (a) the amount of the invoices outstanding (b) the status of the collection efforts for accounts receivable; and (c) the potential implementation or pendency of collection litigation (though of course consideration should be given to potential counterclaims should must be taken into account before a collection lawsuit is filed).

Another set of issues relating to ongoing financial commitments involves ERISA; the law and regulation concerning closing a law firm’s pension plan. It is important that the firm obtain the advice of their financial advisor and accountant in that regard.

Finally, there is the unfortunate topic of potential liability for which the attorneys in the dissolving firm may bear responsibility. For that reason, it is typical that the firm obtain a tail professional negligence policy. Further, it is critical that a risk assessment be made with respect to potential claims against the law firm so that the partners can decide whether to set aside a financial pool from which to pay future judgments, tax assessments and such.

The Intellectual Property of the Law Firm’s Name, Logo and Other Items

There are scenarios in which a segment of the departing partners may wish to re-form as a new law firm with a variation of the old name. Obviously, if this merely involves the last names of the departing partners, they typically have the absolute right to utilize them. However, there are other scenarios in which the firm might be denominated after a deceased partner or someone else who is not actually practicing in the dissolving law firm. Likewise, a well-known logo or even tag-line might be associated with the dissolving practice, one that may be trademarked.

It is critical that the owners of the dissolving firm contemplate the need for an intellectual property assignment and/or license. Further, it is important that there be language in the retainer agreement for the new law firm that clarifies the demarcation between the legal liabilities and responsibilities of the dissolving law firm, versus those being adopted (or not) by the new law firm that will bear a similar name.

Bankruptcy Protection

While it is counterintuitive to assume that a bankruptcy filing for the dissolving law firm might actually be a benefit to the partners’ ongoing practice, there are scenarios in which the liabilities that have accrued are both enormous and aberrational (hence, the need to be bought out). To the extent that a bankruptcy plan confirmation can erase or limit such liabilities, the fact that the law firm will suffer negative publicity from having filed a bankruptcy petition may be outweighed by the benefit of remaining in practice without a spate of never-ending lawsuits.

Obviously, this is an example of choosing the “least worst” option. However, especially with regard to a Chapter 11 (reorganization), as opposed to a Chapter 7 (straight bankruptcy), this can be a viable way of emerging with a more financially healthy, and therefore viable, legal practice.