In 2013, a number of law firms will not survive. Some are already in the process of dissolution. Other practices are teetering on the edge of insolvency. Certainly, some practices like real estate and corporate law have suffered more than others. Most firms have felt the pinch of the economic slowdown.
As the daily legal news confirms, the breaking apart of law firms will impact firms of all sizes, from the very large (like Dewey & LeBoeuf), where practice groups and then whole firms dissolve, to small firms in which the partners quietly close their doors. Some firms will manage the dissolution with the least amount of expense and time. For others, it will lead to ongoing litigation that will cost partners legal fees, time and expense that they can ill afford.
The key to avoiding problems is foresight and planning. Yet, most firms do not consider these issues until it is too late and disagreements or other problems arise. The best practice is to consider these issues long before a law firm's demise becomes inevitable.
Like marriage, no law firm starts with the expectation that it will fail. Also like marriage, the best opportunity to plan for the unexpected (and unwanted) is before the partnership begins. In that way, a partnership agreement acts like a prenuptial agreement. The agreement can prescribe how money and other assets are distributed and what the parties' responsibilities will be during and after the end of the relationship. Unfortunately, many firms do not realize this until it is too late.
Fortunately, the inception of the partnership is not the last opportunity to address dissolution. Instead, until insolvency, law firms can and should adopt specific dissolution procedures.
In the absence of specific provisions in a law firm's partnership agreement, courts will apply general partnership and fiduciary law. Fact-intensive inquiries involved in the application of general fiduciary principles usually make dissolution in those cases expensive and lengthy. Rather than making money in a new law practice, partners spend inordinate time and resources litigating with each other. Nothing good follows.
Healthy law firms and not-so-healthy law firmsincluding those struggling but not yet insolventshould stop now and take a look at their partnership agreements. Make sure that the partnership agreement addresses insolvency and dissolution in an expedient, fair, efficient, economical and tax-advantageous way.
More importantly, make sure that any dissolution procedures included in the partnership agreement comply with the ethical obligations imposed by the Rules and Regulations of the State Bar of Georgia. Procedures that violate bar rules are unenforceableeven if approved unanimously by the partnership.
Even for firms with dissolution procedures in place, new exposures arising out of some recent large law firm failures merit a fresh look at the partnership agreement. As a general rule, absent an agreement to the contrary, all partners have an interest in any income received after dissolution.
But what about fees generated from matters that partners take to other firms upon dissolution? Bankruptcy courts have in some cases applied a new concept for attaching dissolved law firm liabilities to former partners of failed law firms and the law firms that hire them.