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Divorcing the firm

Herrick Lidstone //January 8, 2013//

Divorcing the firm

Herrick Lidstone //January 8, 2013//

The practice of law is a mobile profession: “Have computer, will travel.”  Notwithstanding mobility, many lawyers prefer to practice in a firm with other lawyers for a number of reasons, from personal (we like each other) to economic (sharing overhead) to professional (support and assistance).

Wild things can happen, however, when these firms dissolve and the firm’s former partners, creditors and even retirees fight over the assets. Even defining the assets of the law firm can be challenging.

Lawyers as employees, officers, directors, partners or members of law firms have the same duties as non-lawyers employed by businesses, and these actions may impact their relationship with their clients. Here are some things to consider::

Lawyer As Management. Where the departing attorney is a director, manager, general partner, or officer of the firm while he is making plans for departure, he should consider whether (in doing so) he is acting in the best interests of the law firm.  If not, he may be violating his fiduciary duties to the firm and its equity owners. If the departing lawyer attempts to lure other attorneys to join him in his departure before he has departed, once again questions of duty to the law firm and to the other owners arise. Is it appropriate for the departing attorney with duties to the law firm and the other attorneys in the law firm to attempt to deprive the law firm of its assets (employees and clients) while continuing to be compensated by the law firm?  Traditional legal analysis would indicate that management should not be taking actions opposed to the best interests of the law firm and such actions might result in the departing lawyer’s liability to the law firm.

Lawyer’s Contractual Obligations. The departing attorney also needs to consider all contractual obligations that he may have to the law firm he is leaving and to its creditors. These obligations may be included in a partnership agreement, operating agreement, or buy-sell agreement, or they may be included in a bank guarantee or other document. Furthermore, most likely the departing attorney is a party to some written or oral agreement with the other attorneys in the law firm; in Colorado, all contracts include the implied contractual obligation of good faith and fair dealing. 

Lawyer as Employee. According to court rulings, an employee of a law firm, the departing lawyer, whether a shareholder, partner, or associate, owes the law firm a duty of loyalty. The general rule is that an employee is not entitled to any compensation for services performed during the period he engaged in activities constituting a breach of his duty of loyalty even though part of these services may have been properly performed.  Thus all compensation payable to the departing attorney during the period of his preparation for departure may be recoupable by the law firm. On the other hand, notwithstanding the breach of “any duty of loyalty, [the departing attorney] could still recover compensation for services properly rendered during periods in which no such breach occurred and for which compensation is apportioned in his employment agreement.”

Lawyer as Equity Holder. Another issue that needs to be considered in connection with any departure, or any future departure even when one is not currently anticipated, is the ownership of equity in the firm by the departing lawyer. Where a law firm does not have an effective buy-sell agreement that addresses this question, there is no prohibition in the Rules of Professional Conduct or otherwise of the lawyer retaining her equity interest in the law firm. All law firms should address this in advance, or the problems of having a nonemployee minority equity owner could be significant.

Where Other Lawyers Are Involved. If a departing lawyer informs another attorney employed by the law firm his intentions to leave, does that other attorney then owe duties to the law firm to make disclosure of the departing lawyer’s intention to the other owners in order to comply with her fiduciary duties? What if the law firm is formed as a general partnership and the lawyer receiving the information is a partner? What if the lawyer receiving the information is a member of the corporate law firm’s board of directors or is a manager of a law firm organized as an LLC?

In each case, these issues may not only impact the lawyer and the law firm he or she is departing, but also the law firm which the lawyer is joining.  Where the lawyer, the old law firm, and the new law firm can work these issues out amicably, client relationships and client work should not be disrupted.  Where issues remain, client relationships may be at issue.  Ultimately, under the Colorado Rules of Professional Conduct, lawyers and law firms must place the interests of clients first.  Nevertheless, human nature indicates that these issues can impact the lawyer’s relationship with both continuing clients and clients that remain with the old firm.