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What to Do When Your Firm Implodes

By Katerina Milenkovski, Litigation News Associate Editor – January 16, 2009

Recent headlines have heralded the breakup of some large, long-lived law firms. Following significant associate layoffs and partner departures, San Francisco based Heller Ehrman LLP, once an AmLaw 100 firm, announced its dissolution last fall, after more than 115 years of existence. Thelen, LLP (formerly Thelen, Reid & Priest, LLP), another AmLaw 100 firm with over 600 attorneys, followed suit when it announced that it would close its doors before the end of last year.

In this difficult economy, attorneys around the country may find themselves wondering—what should we do if our firm falls apart tomorrow? They continue to have ethical duties to the clients and the firm amidst the wind-up of their business concerns.

Basic Issues
“I think there are three basic issues that must be addressed when a firm dissolves,” says Pamela A. Bresnahan, Washington, D.C., cochair of the Section of Litigation’s Professional Liability Litigation Committee. “What is the breakup going to look like? What are the ethical implications? And what will be involved in winding up the firm’s business?” she notes.

“First and foremost,” cautions Bresnahan, “you have to make sure every client file is accounted for, placed, closed, transferred to a new law firm, or otherwise dealt with. That’s the biggest obligation. You have to do that. Then, you do the best with all of the other issues,” she says.

Henry R. Chalmers, Atlanta, cochair of the Section’s Ethics and Professionalism Committee, echoes this sentiment. “It is important for attorneys to understand that the dissolution of a law practice does not suspend their obligations to clients, courts, creditors, and others,” he says.

“For example, an attorney’s obligation to provide his or her clients with competent representation and relevant information continues after dissolution,” Chalmers says. “That relevant information is likely to include the fact of the dissolution,” he adds.

“It’s all common sense, really,” says Benjamine Reid, Miami, cochair of the Section’s Attorney-Client Privilege Task Force. “It is never pleasant to call clients and tell them that your firm is going out of business. Nevertheless, you have to continue to work really hard, despite what is going on around you,” he says.

“Regardless of where you end up or where your client ends up, you can’t let anything happen that would prejudice the client. You have to give the client enough information to make the right decision,” Reid advises.

“You should even consider hiring counsel to advise you and/or your partners on your continuing ethical duties during and after the dissolution,” Reid says.

If dissolution seems likely, Chalmers advises lawyers to “re-read your state’s ethics rules to be sure you do not run afoul of them in all the mayhem of the moment.”

State-Specific Rules
Some states, like Florida, have specific rules governing procedures for lawyers leaving firms and for dissolution of firms. “I believe its approach is the right approach to follow, even if there is no comparable rule in your state,” Reid says.

Florida Rules of Professional Conduct, Rule 4-5.8 notes that lawyers involved in the dissolution of a law firm should generally not unilaterally contact clients or solicit their representation; rather, efforts should be made to inform the clients of the dissolution by the firm, in an agreed upon manner.

Whatever notice is provided, it should explain the client’s options for choosing representation—be it by the current lawyer or by any other lawyer or law firm of the client’s choosing, the rule says. If the client doesn’t make a choice, the lawyer who provided primary legal service shall be considered the client’s lawyer until the client advises otherwise, under the Florida ethics rule.

Risk Management
Late last year, in Gotay v. Breitbart, a New York appeals court held that a law firm that had dissolved in 1998 could still be held liable for malpractice when it failed to clearly sever its ties to a client at that time, even though the case at issue supposedly had been transferred with one of the departing attorneys to another firm.

“Statistics show that firms that are in distress generally have a greater number of claims filed against them,” says Bresnahan. “Something always seems to fall through the cracks. Consequently, you need good risk management—someone to oversee the dissolution process and make sure that all of the files go where they should, and that files in storage are properly preserved, so that you won’t have extensive liability after the fact,” she cautions.

“One thing we learned from the last round of law firm dissolutions is that it is best for everyone involved—lawyers, banks, creditors, vendors—if you can work out a deal,” Bresnahan says. “Ideally, you want to structure a dissolution plan so that at the end of the process, everybody from the newest receptionist to the oldest partner finds employment somewhere,” she says.

“When Brobeck dissolved, they brought in placement people to help their employees find new jobs. To me, that was pretty classy,” she recalls.

Rules or ethics opinions detailing a lawyer’s obligations to his or her clients during the dissolution of a law firm exist in many states. Some examples are: State Bar of California, Standing Committee on Professional Responsibility and Conduct, Formal Opinion No. 1985-86 (noting that duty is owed to provide fair and adequate notice of dissolution or withdrawal of attorney from firm sufficient to allow client opportunity to make informed choice of counsel); Colorado Bar Association, Ethics Committee, Formal Opinion 116: Ethical Considerations in the Dissolution of a Law Firm or a Lawyer’s Departure from a Law Firm; and Florida Rules of Professional Conduct, Rule 4-5.8, Procedures for Lawyers Leaving Law Firms and Dissolution of Law Firms.

Keywords: layoffs, downsizing, firm dissolution, ethics, attorney-client privilege, Florida Rules of Professional Conduct

  • March 31, 2009 – Great advice for those facing the difficult task of dissolving a practice. I would add that firms in such a situation should look at their malpractice insurance policies very carefully. Most reputable malpractice policies provide for the firm to purchase an extended reporting period option. This allows a firm to file claims to their malpractice insurance carrier after the firm is dissolved. It does not extend the term of the policy - read the language or ask your agent to help if you're not sure how this works. It's a huge benefit to a firm closing its doors, and will also benefit firms in the merger and acquisition process.


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