General Practice, Solo & Small Firm Division
American Bar Association
General Practice, Solo, and Small Firm Division The Compleat Lawyer
Fall 1997 copyright American Bar Association. All rights reserved.
Breaking Up Is Hard to Do
BY JILL SCHACHNER CHANEN
Jill Schachner Chanen is a freelance writer in Chicago. She writes regularly for the ABA Journal.
The last thing Stephanie Hassler had on her mind when she left a small midwestern law firm to start her own solo practice was defending an allegation of theft. But that is exactly what the Manchester, Iowa, lawyer found herself confronting when her former employer threatened to bring criminal charges against her unless she returned her client files to him.
"I really liked him. I thought we had a good working relationship. But he just turned on me when I wanted to leave," she says. Hassler found herself in this rather awkward situation after telling the lawyer for whom she worked for one-and-a-half years that she was planning to open her own practice. The lawyer then left for a vacation the week before she planned to hang her shingle, telling her that he would notify all of her clients of her departure when he returned.
At the time, Hassler was representing several clients in court-appointed matters and local rules there prohibited her from withdrawing without court approval. Because she had nowhere to turn - and wanted to maintain the clients - Hassler sought the counsel of a local judge. The judge advised her that she, not the law firm, had been appointed and that she should take the files with her. Hassler followed the judge's advice and soon found herself threatened with the criminal charges.
"I reminded [my former employer] of the local rules and indicated that I would need to file motions to be allowed to withdraw on all the other files that remained in his office," Hassler recalls. "He said I was no longer employed there and did not have the authority to file any pleadings in any of his cases."
Hassler filed the motions anyway, and made sure to spell out in her pleadings the reasons why they were missing some vital information. To this day, she believes some of the local judges look askance at her one-time employer for his behavior. "What is the moral of this story?" she asks. "Cooperate with the departing attorney rather than make his or her life a living hell." Unfortunately, when it comes to law firm dissolution, few lawyers pay heed to Hassler's advice. Tangled with emotion, egos, and money, law firm breakups can become more difficult than even the nastiest of divorces.
Partnership Agreements Are a Must
"The practice of law is a personal thing," remarks Edward Poll, a Los Angeles law firm management consultant who has helped many firms through the process of breaking up. "You develop close relationships with your colleagues and clients. Sometimes you end up spending more time with them than with your families."
As the practice of law becomes increasingly more competitive, Poll sees many more law firms splintering as a result of the internal and external pressures now facing the legal profession. Lawyers, he says, would be well advised to review partnership agreements and related documents to make sure that they reflect the current state of the firm so that if a dissolution occurs, it can be handled quickly and amicably.
Law partners should talk about dissolution issues at the beginning of the partnership while all are still on good terms. "One of the things you need to talk about at the beginning, while everyone is still friends, is what happens if the firm separates," Poll says. "The discussion does not have to be based on a hostile breakup. Talk about it in terms of death or one of the lawyers getting elevated to the bench. If you think about it in terms of decent reasons for dissolution, you can address the ‘what ifs' and ‘what happens when' issues."
However, when pressed, many lawyers in smaller practices learn that their partnership agreements are more similar to office-sharing agreements and do not help facilitate a breakup when a partner leaves a firm. Vadnais Heights, Minnesota, lawyer Frederick Knaak found out just how little his former firm's agreement addressed when the firm broke up after experiencing undesired growth. "We had a combination office share and partnership agreement and that was part of the problem. It did not define who we were and what we wanted to be. No one came out of it very well."
Knaak believes the resulting pain and financial losses that all of his former partners experienced might have been lessened if their partnership agreement had provided for a cooling off period and called for mediation or arbitration for unresolved issues. Though he did not engage in litigation, several of his former partners did over compensation and receivables.
"Whether the firm is big or small, breakups are painful, ugly, and bitter" says Knaak, now of counsel to Holstadt & Larsen. "Much like I find in the occasional divorce case that I handle, you end up finding out things about people that you would rather not know."
It's the Little Things
Chicago solo practitioner Mary Bryant advises lawyers not to overlook even the smallest of details. Seemingly unimportant issues like the forwarding of mail or telephone calls can get prickly when a dissolution is underway.
"Mail is a land mine," says Bryant, whose partnership with a long-time mentor dissolved nearly two years ago after the pair realized that they had irreconcilable personality differences.
After her partnership dissolved, Bryant learned that the postal service will not forward mail addressed to an individual in care of a company unless all of the company's mail is going to be forwarded to the same place. Because her former partner kept their office, Bryant agreed to let the other partner forward her mail.
Much of it, she says, arrived opened. She also learned from the opened mail that the firm had not removed her name as the administrative partner for vendors' bills. "Everything was in my name. That was acceptable for a little while, but it has now been more than a year and a half, and my mail is still being opened."
Bryant says she has registered several complaints with her former partner's office manager, who insists that their opening of the mail has been innocent.
Another lawyer - who wishes to remain anonymous - says that when his law firm dissolved, one of the partners was allowed to keep the name of the partnership. That lawyer then moved to a different office in a different city and had all of the firm's mail forwarded to him.
Bryant stresses that dissolution agreements should address the handling of mail and telephone calls. Mail should not be opened before being forwarded, she says, and an agreement should be made about forwarding telephone calls if one of the partners retains the firm's telephone number.
"She's Gone to a Better Place"
Edinburgh, Scotland, lawyer Val MacAdams wishes she had held a former law firm to such an agreement after she discovered that one of her former partners had implied that she was dead to a client inquiring about her whereabouts.
"My letter to that client had gone to the wrong address and the client did not get it," she says. "The breakup happened in the midst of one of this client's business transactions. When he called to get the name and telephone number of my new firm - which was just down the street - one of my former partners said ‘Oh, Val. It is very sad. She's gone to a better place.' Now I agreed with him, but the client thought I had died and gone to heaven."
MacAdams says the client eventually learned the truth - that she had moved less than a mile down the street - when he asked a former paralegal about the circumstances of her death.
"I see that incident as the ultimate accolade that my old firm wanted to keep my business that badly," she quips.
Notification of Clients
MacAdams says that notifying clients of where she had moved was not a problem for her because she maintains a personal client list. "That was the one thing I was smart about, but a lot of people do not think about it," she says. "If you do not keep your own private client list, you have a huge problem."
Though ethical rules prohibit lawyers from soliciting clients, they can advise their clients on where they have moved, and the clients may choose to follow. "But if you do not know how to reach the clients to tell them where you are, they cannot follow you," MacAdams says. "Then you have no business."
Consultant Poll advises lawyers to work together, even in the midst of a breakup, to determine how notification of clients should be handled. Many law firms have institutionalized their clients so that they have no loyalty to a particular lawyer. As a result, clients often throw up their hands in frustration and bring their business to a new lawyer.
"What oftentimes happens is that where former partners are competing to keep the business of a client and the client does not have a clear allegiance to a lawyer, the client may say, ‘A pox on both of your houses,' and go to a third lawyer. If possible, try to divide the client list in a friendly and amicable way," Poll says. "But it is ultimately the client's decision."
Another reason for working together to divide client lists is for future referral work, says Martin Tasch, a solo practitioner in Chicago, who describes the breakup of his seven-lawyer firm last year as amicable.
"Every lawyer that you meet or talk to on the phone is a potential source of business. You want to do everything in your power to keep possible referral sources," he says. "What better people are there who know you and the work you do than your former partners?"
Tasch says having good referral sources can be the key to starting anew when a firm breaks up on short notice. He learned that his firm was dissolving while on vacation and found himself scrambling to start a solo practice with little notice. "I had no reason to suspect that the floor would just drop out from under me," he says.
Finances: Another Sticky Issue
Knaak also reminds lawyers to smooth out billing issues. He says that many firms fall prey to the classic double billing situation when a client follows one lawyer out the door. "You have a client that you represent and who considers you to be their lawyer. Yet the contract for services is with your old law firm. You leave and continue the services and bill for them. Yet the law firm also continues to bill the client. The client says, ‘Who am I supposed to pay?' and you both say, ‘Me.' That is bad and fairly typical."
Poll says contractual issues sometimes force lawyers to stay together when they are considering dissolution. Leases and bank loans often require the signature of each partner and frequently do not allow individuals to be released in the event that one or more members of the firm plan to leave. "A number of law firms have stayed together because their lease obligations were so horrific that they decided it was better to stay together than to risk damages related to their leases." Poll tells his clients to negotiate individual release provisions up front before signing leases or bank loans. He also advises lawyers to study their pension and profit-sharing plans before leaving. "Sometimes you get mad and leave before you are vested. You could lose a lot that way."
Cars also can be an issue. Many law firms lease cars for their partners and do not make any provision for assigning the lease obligations in the event of a departure or dissolution. One lawyer now living in Virginia was so mad at her former partners, believing that she was shorted on the return of her capital contribution, that she decided to stick them with her car lease. She had first heard about the opportunity to do so at a partnership meeting when her other partners were complaining about another departing partner who was sticking them with his car lease.
Though lawyers often are very focused on themselves when their partnerships dissolve, they cannot overlook clients. If they are not careful, they could find themselves facing malpractice actions and disciplinary proceedings.
Robert Weiss, a solo practitioner in Brooklyn, New York, is in the midst of suing the members of a law firm who allowed the statute of limitations to run out on one of their client's cases because they were caught up in their own dissolution-related woes. One of the named defendants is a lawyer who had left the firm approximately six months prior to the alleged malpractice. However, since he failed to notify the client that he was leaving the firm and ending his obligations to the firm's clients, he was named a defendant.
"If you are going to withdraw from a law practice, make sure you know all of the firm's clients and notify them that you will no longer be involved in the firm's matters," Weiss says. "If you don't, the argument can be made that you still have a fiduciary duty to those clients."
Anne Thar, vice president and corporate counsel of the Illinois State Bar Association Mutual Insurance Co., a professional liability insurer, advises lawyers to conduct a thorough audit when a lawyer leaves a firm, especially if the lawyer is seen as a bad apple. "What typically happens is that the firm does not do enough due diligence in terms of contacting clients, looking at files, and formally withdrawing from matters," she says. "The firm usually leaves it to the bad apple to do that."
"But then that bad apple screws up the file, and the firm's name is still on the file. They have not withdrawn so they get hit with a claim."
Thar tells lawyers to make a list of all of the files the departing partner has taken and formally withdraw from those matters. She also suggests reviewing the files that have remained from that lawyer to make sure that there are no looming claims.
Cover Your Tail
Because many dissolutions are acrimonious, lawyers often overlook the need to buy tail insurance - policies that cover claims in the gap between canceled policies and new ones. If a lawyer's new malpractice policy covers full prior acts, they do not need tail coverage, Thar says.
At a minimum, she suggests getting all the remaining partners to sign a written agreement promising to carry malpractice insurance for a agreed upon time period.
In addition to malpractice claims, lawyers also can find themselves in front of their state disciplinary agencies as a result of botched breakups. James Grogan, the chief counsel for the Illinois Attorney Registration and Disciplinary Commission, says his agency receives numerous complaints from lawyers about former partners as a result of firm breakups because of the bitterness involved.
Though Grogan has found most of the claims to be meritless, few lawyers would relish the opportunity to be investigated for fraud, conversion, or solicitation.
Though some lawyers compare the dissolution of their law firms to their own divorces, they say that much like a crumpled marriage, that life will go on, albeit with a decidedly different outlook.
"I am a believer that things happen for a purpose," says Knaak. "Now I am happy. Things have worked out, but I acquired a few scars along the way. " Adds Tasch: "Although my situation was difficult, I am determined to look at it as the best thing that ever happened to my career. I look at the breakup not as a problem, but as an opportunity."