General Practice, Solo & Small Firm DivisionMagazine
Volume 17, Number 1
SEMI-RETIREMENT FROM PRIVATE PRATICE
One Lawyer's Story
BY DANIEL R. HEIDEN
In 1998, after more than 18 years as the sole owner of a small law firm in Wisconsin, I decided to make a career change and become a part owner and full-time employee of a title insurance agency. This decision presented me with the task of facing the legal, ethical, and practical problems of closing down my law practice, which consisted of myself, two full-time associates, and four nonlawyer support staff.
In discontinuing my existing law practice, my goals were to ensure care for my clients and employees; continue the private practice of law on a limited, part-time basis; and gain some compensation for the value of the client base and goodwill that I had built up during those 18 years.
I considered a number of alternatives, including turning the practice over to my associates (the most obvious solution); selling the law practice to one or more other lawyers; merging the firm with another law firm; closing the existing firm; associating with another lawyer or firm on a part-time basis, with compensation for clients I brought into the new office; or simply shutting down the majority of the existing practice, retaining, as a part-time sole practitioner, a few of the existing clients.
Sale Ruled Out
Ethical considerations quickly ruled out the outright sale of the law practice. The Wisconsin Rules of Professional Conduct for Attorneys permit the sale of a law practice if certain conditions are satisfied. Those conditions include a requirement that the practice be sold in its entirety, and that the seller cease to engage in the private practice of law in the geographic area or jurisdiction in which the practice had been conducted. Because I wanted to continue practice with a few clients, outright sale of the remainder of the practice was not an option.
The Official Comments to the Wisconsin Rules do create a somewhat large loophole by providing that admission to or retirement from a law partnership or professional association does not constitute a sale or purchase governed by the rule, and that a withdrawing partner of a law firm is entitled to obtain reasonable compensation for the value of the practice. These exceptions are obviously necessary to allow a law firm to buy out the partnership or stock interest of a partner or shareholder who is leaving the firm to engage in sole practice or join another firm. It is beyond the scope of this article to provide a detailed analysis of these exceptions.
Transfer to Associates
The most obvious solution to my situation, from a practical basis, was some form of transfer of the practice to my existing associates. Although initially rejected by my associates for a variety of reasons, both personal and financial, my associates ultimately decided that they were willing to become owners of a law practice, and we began exploring the methods by which we could achieve our various objectives. We ultimately made the decision to form a new law firm, owned by myself and my two former associates, and for me to continue my old law firm, with myself as its sole owner. This decision was made primarily as a result of liability and insurance concerns.
Potential liability claims from past activities are obviously an issue with respect to a transfer of ownership involving any small business. This can be a particular concern with respect to a law practice because a mere filing of a professional liability claim can have an adverse impact on malpractice insurance rates and/or the availability of malpractice insurance with adequate liability limits. This is true whether or not the firm ultimately prevails on the liability issue. Although no professional liability claim had ever been filed against the firm, and although none of us was aware of any specific situation that was likely to give rise to such a claim, my associates were apprehensive about the possibility of liability for prior matters.
From my perspective, the continuation and cost of malpractice coverage were a definite concern. Closing my existing firm would have forced me to purchase a tail policy on the existing malpractice insurance policy, at a premium equal to 250 percent of the last annual premium. Because the last annual premium included coverage for all three lawyers, this would have involved a payment in the neighborhood of $15,000. Leaving the existing firm in place with me practicing under it on a part-time basis, I pay an annual premium of approximately $1,500; tail coverage, if I purchase it at the end of the current policy year, will be approximately $3,750-a total savings of more than $10,000.
The malpractice policies for the new firm and the old firm have been placed with the same company. As a result, as long as I maintain coverage under the old firm, there is no additional cost for my coverage under the new firm. Even though I am listed as a named insured under the new firm, the premium for the new firm is based solely on the applicable rates for my two new partners.
We could have covered the issue of tail coverage on the malpractice insurance by designating, for insurance purposes, the new firm as a successor to the old firm; however, this would not have resolved the liability concerns of my associates. Any claim against the old firm would still have had an adverse effect on insurance rates and, possibly, availability of coverage for the new firm.
Physical Assets of the Firm
The new law firm was formed as a service corporation, with my former associates having majority ownership and myself, a minority interest. Although there was a sale to the new firm of most of the furniture, fixtures, equipment, and other physical assets of the old firm, there was no sale of the law practice itself. The purchase price for the physical assets was established to be roughly equal to present market value.
Existing accounts receivable and accounts payable were retained by the old firm, with the exception of a few obligations relating to the personal property transferred to the new firm (such as copier leases, etc.). The existing office lease was cancelled for the old firm, and a new lease was entered into between the new firm and the landlord, with a sublease for a small portion of the space to the old firm.
Transfer of Clients
The transfer of clients from the old firm to the new firm was one of the easiest aspects of the entire transaction. All affected clients were contacted and advised of the situation on an individual basis. We received no objections from existing clients with respect to the transfer of pending matters to the new firm.
All existing closed client files under the old firm were retained by the old firm, and client files involving pending matters were transferred to the new firm, with the consent of the clients involved. For files billed on an hourly or fixed-fee basis, the clients were billed by the old firm for work performed by the old firm up to the date of transition, and by the new firm for work performed after the transition. Bills on pending cases from the old firm were typically sent with bills from the new firm, at the time the client normally would have been billed, with a request that the clients issue separate checks for each bill.
Contingent fee cases were analyzed on a case-by-case basis, according to work performed by the old firm and anticipated by the new firm; we negotiated formulas for the division of fees between firms, if and when recovery was obtained. The files were then transferred to the new firm, with written consent of the clients covering the transfer of files and the fee split arrangement.
We filed Substitution of Attorney forms, signed by the client, with the applicable courts on all pending litigation files. My associates had been the responsible lawyers on all of the contingent fee cases and on all of the other litigation files that were transferred to the new firm. The lawyer already working with client files did not change. Only the identity of the law firm changed. The transfer of pending client files was virtually the same as if a client had chosen to remain with an associate departing to join another firm.
Some of my personal pending client files were transferred to the new firm (with client consent); however, the majority of my personal pending client files remained with the old firm. The transition with my personal clients was relatively easy, because most of my pending files involved either real estate development matters, which I intended to retain and service on a part-time basis, or real estate sale transactions and other matters of short duration that I completed under the old firm. During the approximately six to eight weeks prior to the actual creation of the new firm, most new client matters were undertaken by my associates.
Both the new and the old firm operate out of the same office space and utilize the same telephone number. Former and prospective clients who contact the office and ask for me are advised that my former associates and I have formed a new firm, that I am practicing on only a limited part-time basis, and that I am generally not accepting new client matters. They are then given the option of speaking with one of my partners or leaving a message for me.
Keeping the old firm in existence, and leaving the closed client files in the hands of the old firm, eliminated the need to contact former clients and resolve the disposition of their files. Due to the sheer number of closed files resulting from 18 years of practice, this would have been a major undertaking. This was a substantial factor in our decision to keep the old firm in existence.
My compensation was dealt with as an employment contract. My employment contract with the new firm is for three years, with my compensation determined on a "commission" basis. I receive the majority of all fees generated by my own billings under the new firm, after deduction of amounts calculated to approximate the costs incurred by the new firm for clerical staff and other expenses relating to my work. For my personal client files, including new matters, I have the option to practice under either the old firm or the new one.
Billings under the old firm are retained 100 percent by the old firm. In addition, I receive a bonus based on a percentage of the amount by which the gross income of the new firm (excluding my personal billings) exceeds a base figure, calculated on a quarterly basis. The base figure was calculated roughly to approximate the amount necessary to operate the office and to provide my associates with an income level comparable to their former wages.
By tying my compensation to gross revenues, rather than to net income, we have eliminated possible disputes and disagreements relating to overhead and wage decisions by my partners. By not establishing any form of commission or other direct compensation to me for fees generated by my partners from new clients I bring into the firm, and/or from my former clients, we have eliminated the possibility of disputes as to who was responsible for generating new work for the firm.
So Far, So Good
My practice out of both old and new firms does entail some additional responsibilities. With my personal clients, I need to maintain continuously a clear understanding of the identity of the firm I am working under when performing services for them. Further, both firms need to be vigilant with respect to conflicts of interest. Any situation that would prevent either firm from representing a client due to a conflict of interest would likewise prevent the other firm from undertaking that representation.
The new firm has now been in existence for more than a year, and the relationship has worked out well. My partners and I are in contact with each other on an almost daily basis, and we frequently consult with each other on pending matters. The transition was obviously made easier due to the fact that we had worked together before the formation of the new firm; however, a similar arrangement could have been worked out (and almost was) with another lawyer or law firm. We fully anticipate that the relationship will continue (perhaps with some changes in terms) beyond the expiration of the three-year employment contract.
Daniel R. Heiden is a shareholder in the Brookfield, Wisconsin, law firm of Schober, Bostetter & Heiden, S.C., the sole shareholder in the Brookfield, Wisconsin, law firm of Heiden & Associates, S.C., and a shareholder in and vice president and general counsel of Title West, Inc., a title insurance agency located in Waukesha, Wisconsin.