Rule 1.17 and the Small-Firm Practitioner, Part 2

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In my last column I discussed various state bar rules that restrict the intent of American Bar Association Rule 1.17 to allow a partial practice sale, including the example of the Illinois attorney who interprets the rule as allowing no transition period after the escrow closes on the sale of a practice.

Interestingly, there has been no discussion in that state concerning the length of escrow; the discussion on time involves the minimum notice of sale to be given to the clients.

What if there were an extended escrow — for example, one year or some other time constraint desired by the buyer and agreeable to the seller?

Without the use of a somewhat unusual alternative that comes close to form over substance, and is not allowed on review, the choices for the seller are bleak under this stricter interpretation. Some alternatives might be:

    Merge with another firm. Develop a buy-out agreement that will take effect in the future but allows the lawyer to continue contributing to both the law and society (assuming the “buying” lawyer honors his commitment at the time of eventual retirement by the “seller”). Do not sell and remain in practice until either death or closing the office doors at a future date. Sell and leave the practice of law to pursue some other activity until death occurs. Whether the activity is of minimal interest or is interesting and exciting to the selling lawyer, it frequently fails to address the psychological issues of the selling type-A lawyer personality.

These are bleak choices and, in my opinion, contrary to the spirit of what the ABA General Practice Section originally advocated for Rule 1.17.

The more reasonable interpretation should be that the rule was intended to assist retirement. And, yes, the sale is complete. But the lawyer should be entitled to work for the buyer in order to assist in the transition of client relationships, remain vibrant and contributing to his own well-being, and contribute to the buyer’s interest in growing the practice.

Remember, we’re talking about a sale and retirement, usually of an older lawyer. We’re not talking about the sale of a law practice by a younger lawyer who might open a competing practice across the road and steal back his former clients (the great fear projected onto the strawman buyer).

Assuming the worst scenario and that the “warped” (no personal attack intended) Illlinois interpretation of Rule 1.17 is valid, how might the parties deal with the desired sale and transfer of client relationships?

One way might be the form versus substance approach followed by many who lived in states not allowing a sale (Illinois was in that camp until recently): merger with a buy-sell agreement. Such a situation creates partners who can enforce an agreement of separation (sale of a partner interest). And, with the new provision in the rule allowing the sale of a practice area, it will be possible to sell part of the practice at an inflated price (to address the real worth of the full practice), the balance of the practice being transferred at a later time when the lawyer wants to terminate his work regimen entirely, but at a lower price.

The combination of the two would represent the actual full purchase price for the firm.

Ultimately, it is the clients who benefit when they are transitioned smoothly to receive competent representation from a qualified buyer.

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