Selling a Law Firm: More Than Inconsequential Consequences

04/01/2013
Reprinted from:
Published 4/13

Litigation among lawyers for failing to honor an agreement to buy or sell a law practice is rare. However, in a recent matter, a solo lawyer thought he had reached such an agreement with his associate. Unfortunately, the lawyer did not live long enough to have the agreement commemorated to writing. A lawyer for the estate drafted the document after his death, but the document was never signed. The associate maintained that the document prepared by the lawyer for the estate had provisions never discussed with the decedent. The long-time associate sought to take advantage of his own relationship with clients and move the entire practice to another firm. The net result was a partnership position for the associate in the second firm, with no payment to the estate of the deceased lawyer.

The scenario raises several issues of major concern:

  • Can the estate retain control of the law practice for a reasonable period of time needed to sell the practice? If so, how should "reasonable" be defined?

  • While it's clear that the estate's representative cannot practice law without being licensed in the jurisdiction, can such a person control the business affairs of the practice, and direct the attorneys in the firm vis-a-vis the business?

  • Does the jurisdiction have an equivalent ABA Model Rule 1.17 allowing the sale of a law practice? If so, how does that impact the continuity of the practice?

  • Can an associate ingratiate him/herself with clients, at the expense of the firm, to the point that clients will transfer their matter to the associate; or must the associate maintain a neutral stance to allow the estate to offer a third-party lawyer/law firm the opportunity to have equal footing on behalf of and for the benefit of the estate in a sale or merger situation?

  • What are the duties of loyalty and fair dealing involved with regard to:

  • The associate in relation to the firm and the estate of the deceased sole practitioner?

  • The law firm that gets the benefit and advantage of the deceased lawyer's law practice?

The Estate Representative

With regard to questions 1 and 2, without offering a definitive answer, it is clear that a representative of the estate has a role. Certainly it is best for a lawyer to have planned beforehand to select a practice representative if the lawyer dies unexpectedly. The ABA's Commentary 5 on Rule of Professional Conduct 1.3 ("Diligence") states: "To prevent neglect of client matters in the event of a sole practitioner's death or disability, the duty of diligence may require that each sole practitioner prepare a plan, in conformity with applicable rules, that designates another competent lawyer to review client files, notify each client of the lawyer's death or disability, and determine whether there is a need for immediate protective action."

In many states, a practice closed due to an attorney's death or incapacity without a previously designated lawyer to handle the details must be wound up by a personal representative, guardian or conservator. For cases or matters not completely closed, the state bar can intervene, assume responsibility for action – and seek reimbursement and compensation from the lawyer's estate or assets. Courts have even ruled that an estate can be directly liable to pay damages to injured clients left in the lurch by a lawyer's death. The lawyer should have known that death was possible and taken steps to protect his clients in the event that tragedy struck. Such instances suggest that an estate representative can play a direct role in practice windup, with that role most likely being defined by the courts in resolving the matter.

The Impact of Rule 1.17

The reference to ABA Rule 1.17 in question 3 is significant because the intent of the rule is to permit the sale of all or a part of a practice. Most states now allow this (at least as the rule was originally formatted for the sale of the entire practice). This provision could directly impact the situation here. The associate in question could have, under Rule 1.17, explored purchasing all or part of the practice from the estate and moved it to his next firm. There could have been an extended escrow to mitigate concerns by all concerned, the estate, the associate and even the clients, that all the clients would be protected and well-served.

The Practice Transition

Question 4 is perhaps best addressed by looking at what the older lawyer in the firm should have done to prepare the associate's future role. In a small firm it is essential to ensure that the client transition process to a successor is not only planned, but noncompetitive. The goal is to maintain and nurture the client relationship, allaying any fears of service gaps or other issues that will jeopardize the quality of legal counsel that the client has received and has a right to expect in the future. The successor must be willing to be part of this process, which should be carried out according to a well-considered and thoroughly researched strategy.

Essential to that strategy is for the successor to attain, with the guidance of the senior lawyer, mastery of all specifics about existing client relationships as preparation for introducing the successor to those clients. There should be an accountability plan and a written timeline for all the discrete elements of the client transfer. This plan should be accepted by the senior lawyer and successor before meeting with each client, so it can be presented as a transition framework that the client can seek to modify. The goal is to avoid mismatches in personalities, perceptions or understanding of what is to happen. Clients should be assured that a mutual effort will be made to continue meeting their needs, one in which all sides will continue regularly to evaluate how well the transition plan is working and to make adjustments as needed. That all this did not occur with the practice in question is the best explanation of why the associate felt justified acting as a free agent.

The Duty of Loyalty

With regard to the associate's duty of loyalty as raised in question 5, if the practice was insured, the estate representative should have raised the issue of whether the associate's conduct was covered by the policy. It is of course likely that this conduct would be more than negligent, bordering on intentional, and therefore not covered. It is possible, however, that a carrier might be willing to offer something to aid a settlement to avoid further litigation. These and other ethical issues are not to be discounted in the context that roguery ultimately will be punished. The associate's conduct was more than just a breach of conduct, more than just a breach of etiquette. It was not equitable, not fair, and a court should be the judge of whether a duty of loyalty was breached.

The duty of the law firm that hired the associate should also be open to court review. A useful precedent can be found in the now frequent occurrence when lawyers leave a failing firm and take their clients with them. When a failing firm needs to come up with cash, the firm (or trustee in receivership) can make a very plausible argument that billables that walked out the door with its former lawyers belong to the originating firm itself. Deciding who gets the benefit from departing lawyers' receivables is already being fought in the courts. The reality of our world is that anyone can sue anyone else, even if wrong. In the meantime, the largest pool of cash available to the trustee in bankruptcy for a defunct firm is the new firm that the defunct firm's lawyers went to – and, perhaps, those individual lawyers themselves. Whether legitimately or not, new firms have been economically compelled to settle many of such claims in order to go on with the new firm business for the lawyers they added. Such could be the case with the associate here.

Afterward

This article raises many questions, and the answers suggested are not completely definitive. One question, however, can be answered with great assurance. The lawyer who has not taken the possibility of his or her untimely death or disability into account for planning a practice's future is playing with fire. Failure to plan for how clients will be taken care of in the event of death equates to reckless disregard for client welfare – a true ethical violation. It is obviously too late to wait until death or disability to let unprepared successors deal with an impossible situation.

This Article is listed under the following categories:

This Article is categorized for the following audience(s):