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Nothing concentrates the mind of a managing partner like the prospect of paying a huge malpractice award out of his or her own pocket. Yet it’s a prospect that the Enron Corp. meltdown — and the resulting suits leveled at Arthur Andersen, Vinson & Elkins and Kirkland & Ellis — have made frighteningly real. Partners at large firms around the country say they expect that the pack of litigants scavenging for cash among Enron’s remains will almost certainly try to reach the personal assets of partners at the firms that advised the bankrupt energy company. Now, galvanized by the Enron fallout, partners at several of the biggest firms in the country say they’re considering restructuring to erect stronger legal shields around their partners’ personal assets. Los Angeles’ Latham & Watkins may lead the way. At a meeting on June 7 in San Diego, members of the firm’s executive committee briefed other senior partners on a proposed restructuring of the firm’s sprawling partnership. Lawyers familiar with the discussion say it’s likely the effort will now go forward. “I expect we’ll get it done by September,” says John “Jack” Walker Jr., a senior partner and former firm chairman who is advising Latham’s executive committee on the move. Like Latham, the other 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. Mark Foster, a partner at Washington, D.C.’s Zuckerman Spaeder 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.” Since the early 1980s, most states have adopted laws that permit law firms to reorganize to limit their partners’ personal exposure, and many firms have done so. Yet several of the nation’s most lucrative corporate firms — including New York’s Cravath, Swaine & Moore; Sullivan & Cromwell; and Simpson Thacher & Bartlett — remain general partnerships. New York’s Kaye Scholer became a poster child for law firm liability as a result of its highly publicized role in the Lincoln Savings and Loan scandal of 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 two months ago, 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. Now firms such as Latham; Washington, D.C.-based Wilmer, Cutler & Pickering; Chicago’s McDermott, Will & Emery; and New York’s Shearman & Sterling all say they are evaluating ways to limit their exposure to catastrophic liability. One likely route, which many firms across the country have already taken, is reorganization as a limited liability partnership, or LLP. IS LLP BEST? 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. At D.C.’s Wilmer, Chairman William Perlstein says corporate partners have been working on a new partnership agreement for the firm, with an LLP structure as an option. Kenneth Laverriere, a partner at New York’s Shearman & Sterling, says his firm also is evaluating its options, adding, “You can’t insure against 10-figure liability.” Eric Bernthal, managing partner of Latham’s D.C. office, says that Latham has previously considered re-forming as an LLP, but opted against it primarily because an Illinois state bar ruling 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. 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. Dennis LaBarre, managing partner of the New York office of Jones, Day, Reavis & Pogue, says his firm considered the LLP route a few years ago, but also decided against it largely because of the firm’s presence in Chicago. Now, he says, the firm will likely take up the idea again. The unusual punctiliousness of the Illinois Bar poses a challenge for McDermott, Will & Emery-and many other Chicago law firms. Timothy Waters, managing partner of McDermott’s Washington, 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 the Enron-related 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 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 has been named as a defendant in a securities fraud class action. EARLY CONVERTS Of course, many large firms have already gone the limited liability route over the past decade. In some states, like Texas and Florida, nearly every major law firm is organized as an LLP or in a similar limited liability structure. Andrew Giaccia, a senior partner at New York’s Chadbourne & Parke, says his firm’s reorganization as an LLP in 1995 was made easier, from a public relations perspective, because so many peer firms opted for the new structure at the same time. New York adopted its LLP statue in 1994. Giaccia suggested 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. Lawyers eyeing the LLP option point to several potential roadblocks, including a firm’s prior bank loan agreements, potential tax liability and the fairness issue. If a partner made a mistake based on simple negligence, would partners in an LLP believe it is fair if only that partner is held financially accountable? “I think that’s a fundamental question that any law firm going to an LLP needs to address,” says one attorney. Otis Bilodeau is a reporter at Legal Times . Legal Times’ Wheatly Aycock, The Recorder’ s Renee Deger and Anthony Lin of the New York Law Journal contributed to this story.

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