In the wake of the Dewey & LeBoeuf implosion and bankruptcy, a lot of law firms and their lawyers are becoming sensitized to a whole body of law surrounding partnerships and the fiduciary duties of members of firms when they choose to leave with their clients.
The traditional view that lawyers took to their obligations in partnerships and similar practice arrangements was that regardless of the terms of their business arrangements, the real and only value to a firm, apart from some good will and name value were the clients and their work. Because clients cannot be bought or sold, the idea that a lawyer could leave with her clients struck many of us as a given, and though it seemed unfriendly or unsportsmanlike, walking out the door with one’s clients was an accepted right.
In the last few years, lawyers have become very mobile. Many large firms have expanded by enticing in laterals with good books of business. Sometimes, the remaining partners have been left with lots of debt, huge overhead and little income. The last one left was charged with turning out the lights and filing the bankruptcy.
What some of the departed lawyers have learned in these cases is that the combination of bankruptcy and partnership law may result is very untoward consequences for the departed lawyers. Partnership law recognizes something called the “work in progress” doctrine. Put simply, this doctrine says that when a partner leaves a partnership, the partnership owns the value of the work in progress, whenever it is realized. This has recently been applied to contingent fee cases.
Though this rule, called Jewell in legal circles after a California case that established its’ applicability to law partnerships, can be contracted around in partnership agreements, bankruptcy courts have found that partnership agreements with anti-Jewell provisions violate the one-year preference limitation on insider transactions. Thus, in cases where a lawyer has left with portable files, and a bankruptcy is filed within a year, the departed lawyer and his new firm may have to give up all the fees earned on files taken.
There is an interesting interface between the law of partnerships and fiduciaries and the ethical rules concerning lawyers’ dealings with their clients. While the fiduciary rules and partnership law favors the firm and its creditors, the ethics rules favor clients. But neither trumps the other. Thus, a lawyer wishing to decamp with his clients and their files cannot ignore his contractual and fiduciary duties to his former firm on the basis that clients are free agents and the firm cannot prevent them from following him.
All of this gets very tricky when a lawyer wishes to leave. I recently attended a symposium on this topic called “Lawyers in the Night.” The panelists told of departing lawyers who snuck into their old firms (either in person or through data links) and purloined client files. One enterprising fellow uploaded everything to the cloud and then reversed the process when he opened in his new location.
So how is the partner who wishes to head for greener pastures supposed to balance these competing obligations? One thing is certain; they cannot simply leave and take the client files with them. Rather, the folks who work in this field suggest that they should first meet with their soon to be former friends and colleagues, drop the bomb, and work out a professional manner in which the transition can be accomplished. Florida has gone so far as to pass a rule prohibiting departing lawyers form contacting former clients unless and until they have had such a meeting and attempted to negotiate a reasonable agreed-upon transition scheme.
The ethics rules implicated in such transitions encompass communication, withdrawals, fiduciary responsibility for client property, confidentiality and the prohibition on restricting a lawyer’s right to practice. On the other side of the equation are legal duties arising under fiduciary and partnership law, the law of agency, contracts, and torts. It all gets very complex very quickly.
So what is the bottom line in all of this? Well, probably the most important thing is to realize that contracts matter, and a lawyer who has entered into a contractual relationship cannot vitiate it simply because her client can leave at will. Clients enjoy much more mobility than lawyers. Lawyers who leave with client matters may later find that they have to attorn to their former firm’s creditors for all of the fees earned on the files taken, despite the fact that much of the work was done at the new firm.
Many will welcome a lateral with portable files. Few will be so welcoming when they have to give all of the income to the former firm.•