X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Nothing concentrates the mind of a managing partner like the prospect of paying a huge malpractice award out of his own pocket. With all eyes fixed on the Enron Corp. pileup — and the resulting suits leveled at Arthur Andersen, Vinson & Elkins, and Kirkland & Ellis — several large law firms are considering restructuring to erect stronger legal shields around their partners’ assets. The firms debating a change are general partnerships. That’s an organizational form that offers virtually no protection to equity partners. If a general partnership, such as Chicago’s Kirkland & Ellis, is found liable for damages that exhaust its insurance policies, each equity partner could be on the hook, personally, for the remaining damages. In a worst-case scenario — where damages are so high that the firm itself goes bankrupt — partners in a general partnership could be forced to pay off the damage award over their entire careers. Zuckerman Spaeder’s Mark Foster, who advises law firms on restructuring, says practicing law in a general partnership is “like canceling your car insurance then driving down the highway at 90 miles an hour.” New York’s Kaye, Scholer, Fierman, Hays & Handler became a poster child for law firm liability as a result of its highly publicized role in the Lincoln Savings and Loan scandal during the 1980s. The general partnership eventually agreed to pay $41 million to settle government claims — but the firm’s insurance paid only about half of that. The firm’s 109 partners had to cover the rest. And just last month, a U.S. bankruptcy judge in Chicago ruled that two former partners of Keck, Mahin & Cate are personally liable for $1.6 million in malpractice damages. The two partners had withdrawn from the Chicago general partnership in 1993-before the malpractice claims were filed, and well before the firm was forced into bankruptcy. Doesn’t matter, the judge ruled. They were partners at the time the malpractice occurred. Several firms — including Wilmer, Cutler & Pickering; Latham & Watkins; and McDermott, Will & Emery — now say they are considering ways to limit their exposure to catastrophic liability. One likely route, which many firms have already taken, is reorganization as a limited liability partnership, or LLP. TO LLP OR NOT TO LLP Now permitted in nearly every state, LLPs are designed to protect partners from personal liability. The structure was first developed in Texas in the wake of the savings and loan debacle. Houston’s Vinson & Elkins is an LLP, as is accounting giant Arthur Andersen. The state statutes that define LLPs provide that plaintiffs or creditors can generally reach only the LLP’s assets, not the assets of individual limited partners who were not personally involved in misconduct. The liability issue is likely to be a major topic of conversation at a breakfast meeting of D.C. managing partners, scheduled for this week. “I don’t think this is the agenda item, but I guarantee we’ll be talking about it,” says one invitee. At Wilmer Cutler, which now operates as a D.C. general partnership, managing partner William Perlstein says a cadre of corporate partners has been working over the past several months to develop a new partnership agreement for the firm. “We will look at the LLP option,” says Perlstein. He notes that while the structuring effort predates Enron’s fall, the plight of Arthur Andersen has heightened interest in the protections afforded by an LLP. Eric Bernthal, managing partner of Latham & Watkins’ D.C. office, echoes the point. He says that Latham has previously considered re-forming as an LLP, but opted against it. But now, “we are looking at it again,” he says. “I think most partnerships are in light of Andersen.” Bernthal notes that the firm’s earlier decision to remain a general partnership was due largely to an Illinois State Bar ruling that effectively prohibits law firms from organizing as LLPs. The ruling stems from an ethics canon, similar to others nationwide, that forbids lawyers from prospectively limiting their liability to clients by, for example, demanding that a potential client sign a waiver of future claims against the lawyer. Latham has a large Chicago office, so the only way for the firm to adopt an LLP form would be to reorganize its Chicago operation as a separate, non-LLP, entity. Firm management had been reluctant to do that, Bernthal says, but may now revisit the issue. The unusual punctiliousness of the Illinois Bar also poses a challenge for McDermott Will — and many other Chicago law firms. Timothy Waters, managing partner of McDermott Will’s D.C. office, says the firm has analyzed the issue several times and elected not to adopt a similar limited liability structure, the LLC. But Andersen’s fate in various Enron suits filed in Texas could change that. General partnerships will watch to see if the court recognizes a barrier to personal liability for Andersen’s partners, Waters says. “If there is a blanket decision that an LLC is immune, that would make everybody rethink their partnerships. We’d all become Texas law firms.” Kirkland & Ellis partner Laurence Urgenson, who has been operating as a spokesman for the firm on Enron matters, declined to comment on whether his firm is rethinking its general partnership structure. Like Vinson & Elkins, Kirkland & Ellis has been named as a defendant in a class action filed by Enron shareholders. EARLY CONVERTS Of course, many large firms have already gone the limited liability route over the past decade. Andrew Giaccia, who heads up the D.C. office of Chadbourne & Parke, says the New York firm reorganized as an LLP in 1995, shortly after New York adopted its LLP law. He says that the move was relatively easy for the firm to make, from a public relations perspective, because so many peer firms opted for the new structure at the same time. He suggests that some firms that have remained general partnerships may feel uncomfortable about the way a restructuring could be perceived. “I suspect that the thinking is that what you’re somehow communicating [by limiting partner liability] is the message that you don’t stand behind your work, or you distrust the work of your fellow partners,” Giaccia says. “But I’d be surprised if there were any firms that didn’t want to be an LLP.” Zuckerman Spaeder’s Foster agrees that some firms steer away from limiting their partners’ liability because it seems to them “ungentlemanly.” And some legal ethics experts have condemned the practice, arguing that the benefits it confers on partners often come at the expense of unsophisticated consumers. Lawyers from one general partnership say the firm’s bankers are an obstacle to restructuring. Lenders to some firms have recourse to their equity partners — in other words, loans to the firm are backed by the partners’ personal assets. But that recourse may be limited if a firm retools as an LLP. So the lenders may require those partners to pay additional capital into the firm to cover the risk of the loans. Not surprisingly, some partners are less than pleased with the prospect of ponying up more cash. “A banker could reasonably ask, ‘Why should I allow myself to be in a worse position than I was before the firm converted to LLP?’ ” says William Arthur, director of the law firm division of Barclays Bank of London, a major lender to U.S. law firms abroad. “ But we do not necessarily believe that a change to LLP always automatically puts the bank in a worse position,” he adds. Another issue that partners at some firms struggle with involves the fairness of the LLP structure. In an LLP, just as in a general partnership, a lawyer who actually performs shoddy work that leads to a malpractice claim can always be held personally liable. In some cases, observers say, that makes sense. When a lawyer purposefully does something terrible — like help a client commit fraud — and her partners didn’t have any part in it, then those partners probably feel pretty comfortable sitting behind the LLP shield while their malefactor colleague is forced to sell her house to pay the damages. But what about less-clear-cut cases? “You look at [Arthur Andersen partner] David Duncan, and what he’s allegedly done, and you wouldn’t feel he’s entitled to some protection from his partners,” says one senior partner at a firm that is considering the LLP form. “But if someone’s in a difficult area, like securities, and makes a mistake that’s just simple negligence, not willful negligence, then is it fair for her only to be personally ruined? What about the fact that the other partners have benefited from the work she brought in? “I think that’s a fundamental question that any law firm going to an LLP needs to address,” he says. He adds that he hopes to persuade his own colleagues to contractually commit to sharing the litigation burden in cases where a partner simply makes a mistake.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.