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New York’s highest court has agreed to hear a case concerning law firms’ ability to withhold capital contributions and compensation from departing partners. The Court of Appeals granted leave at its Oct. 24 session to W. Edward Bailey, the former managing partner of intellectual property boutique Fish & Neave, and Kevin J. Culligan, a former management committee member. They are suing their old firm for allegedly trying to penalize them for defecting to another firm ahead of Fish & Neave’s November 2004 merger with Boston’s Ropes & Gray. The Court of Appeals agreed to hear the case, which was thrown out by a unanimous ruling of the Appellate Division, First Department. A decision by the Court of Appeals could have a major impact on law firm mergers, a number of which have recently been announced in the New York legal market. Most such mergers are attended by large numbers of departing partners, whose financial claims can total millions of dollars. Under the original Fish & Neave partnership agreement, adopted in 1970, departing partners were entitled to receive unpaid shares of firm receivables as soon as the amounts could be ascertained. Capital contributions were to be returned within a year. In May 2004, Fish & Neave partners approved by majority vote an amendment moving the firm to an accrual accounting system from a cash-based system. The amendment also permitted the firm to defer the payment of accrued income to departing partners until they reached age 65 and to spread out the return of capital over a four-year period. Mr. Bailey, who was managing partner from 1994 to 2000, and Mr. Culligan claim the measure was enacted to punish them for leaving Fish & Neave in May and June of 2004 to join the New York office of Atlanta’s King & Spalding. They claim they are owed $2.4 million in withheld compensation and unreturned capital. Manhattan Supreme Court Justice Bernard Fried (See Profile) dismissed the case in May 2005, rejecting the plaintiffs’ argument that the amendment was void because Fish & Neave lacked an amendment provision in its partnership agreement and therefore required unanimity for any changes. Justice Fried said the amendment amounted to a business decision and the firm partnership agreement clearly envisioned such a decision could be decided by a simple majority vote. That decision was unanimously affirmed by the Appellate Division, First Department, earlier this year in a decision written by Justice Milton Williams. In arguing for Court of Appeals review, Jeffrey A. Jannuzzo, the lawyer for Messrs. Bailey and Culligan, called the Appellate Division’s ruling “obnoxious” and said it permitted law firm partners to punish dissent by retroactively invalidating other partners’ vested rights. He asked the Court to determine whether partners’ general right to amend their partnership agreement permitted them to “take” other partners’ vested earnings. “The ultimate result of this case will determine the question that most affects the rights of partners in law firms or other partnerships: whether the earnings they have worked for can be taken from them by ‘amendment,’” Mr. Jannuzzo wrote in his motion for leave to appeal. Mr. Jannuzzo also took aim at the First Department’s reliance on language from the Uniform Partnership Act, which said decisions concerning “the partnership business” could be made by simple majority rule. He argued that this language concerning “business decisions” should not apply to amending the partnership agreement because it would permit a majority of partners to “cram down” amendments on the rest. “As the legal profession continues to change before our eyes, a holding that puts minority partners at the mercy of the majority is an especially bad idea,” Mr. Jannuzzo wrote. “The holding below should not be the law in New York, but it will be unless the Court reviews this case.” Fish & Neave’s lawyer, Roy L. Reardon of Simpson Thacher & Bartlett, declined to comment on the case yesterday, but the firm has stressed in court papers that the amendment was a neutral business decision aimed purely at improving the firm’s finances, not punishing departing or dissenting partners. Mr. Jannuzzo said yesterday that he expected a decision in the case to have national impact because the recent mania for large law firm mergers meant “partners’ rights are under siege all over the country.” Partner contributions Indeed, law firm mergers and lateral partner moves have exploded in recent years. San Francisco’s Orrick, Herrington & Sutcliffe is currently in advanced merger talks with New York’s Dewey Ballantine. A merger was also recently announced between San Francisco’s Thelen, Reid & Priest and New York’s Brown Raysman Millstein Felder & Steiner. There are almost always groups of partners who choose not to participae in mergers, and it can be extremely advantageous to defer or withhold payments to those partners. A firm’s finances can take a strong hit if a major rainmaker departs and demands immediate payment of his or her share of receivables. Several firms have also sought to delay return of capital contributions, which are paid into the firm by all equity partners. Such moves have predictably led to some lawsuits. A number of former partners at Washington, D.C.’s Shaw Pittman, which merged with San Francisco’s Pillsbury Winthrop earlier in the year, sued the combined firm last month over unreturned capital and unpaid compensation. Winston & Strawn also has faced similar partner suits arising from its 2000 merger with New York’s Whitman, Breed, Abbott & Morgan. Coudert Brothers, which dissolved last year after failing to find a merger, is also facing a number of claims from ex-partners. Those claims, however, face the added complication that their old firm filed for Chapter 11 bankruptcy protection in September. Anthony Lin can be reached at [email protected]

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