When Law Firms Dissolve: Dividing Up The Proceeds From Contingent Fee Cases

by Brooks Pierce
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The Court of Appeals in February 2011 ordered Judge Jolly to dissolve Mitchell, Brewer, Richardson, Adams, Burge & Boughman, a law firm organized as a member-managed professional limited liability company. The dissolution was ordered per N.C. Gen. Stat. §57C-6-02, which authorizes judicial dissolution when the managers of the LLC are deadlocked "in the management of the affairs of the limited liability company."

The deadlock, which had existed since June of 2005, concerned how  the profits from contingent fee engagements, concluded after several partners withdrew from the PLLC, should be divided among the partners. Carrying out the directive of the Court of Appeals, Judge Jolly last week in Mitchell v. Brewer, 2013 NCBC 14 resolved the issue of how those profits should be shared.

These former partners have been at war for seven years over the division of these fees. I've written several times about the case, including in May 2007April 2008, and March 2009.

In this latest round in their war, the former partners (the Plaintiffs) and the remaining Partners (the Defendants, who did all the work after the dissolution to resolve the outstanding contingent fee matters) had different approaches as to how the fees should be allocated among them.

Plaintiffs said they were entitled to their share in the profits from the engagements regardless when and by whom they were realized. There is some support for this view in the LLC Act, which

provides that upon dissolution, unless otherwise agreed, an LLC such as [the Company] continues in existence while its managers, or others charged with winding up the affairs of the LLC, have a statutory duty to (a) obtain '[a]s promptly as reasonably possible . . . the fair market value for the [LLC's] assets,' and (b) distribute the net balance of those assets to the LLC's Members, and others.
G.S. 57C-6-04(b), 05(3).

Op. 7. Plaintiffs said that the statute placed a duty on the managers of the LLC "to carry on the firm's unfinished business in order to realize fair market value for its assets." Op. 8.

The Defendants, who had done the work to pursue the contingent fee engagements to resolution, had a different point of view. They said that the only interest that the former partners had in the contingent fee engagements was the value that they had before dissolution.  Since the value that actually materialized thereafter was due solely to the Defendants' efforts after the dissolution, they said that

they should be required to remit to the Company only the value of net profits ultimately derived from the Contingent Fee Engagements less those profits that are attributable exclusively to Defendants' post-dissolution efforts.

Op. 12.

Judge Jolly, as the decider, disagreed with both positions. He observed that contingent-fee engagements "cannot be 'liquidated' in the conventional sense of the term. The only way to realize a tangible value in a contingent fee case is "by ultimately reaching a favorable settlement or verdict in the matter." Op. 19.

Therefore, he said, "dissolution should end the right of members to share in the future profits of their fellow members' personal-service engagements." Op. 22. So profits attributable to "post-dissolution personal services by individual former members should not accrue to the LLC." Op. 22.

The valuation protocol which Judge Jolly dictated was to look to the "percentage of pre-dissolution Time expended relative to the net profit ultimately realized on that matter." Op. 25. He gave this example:

if a total of 100 attorney hours were expended on a particular Contingent Fee Engagement and 50 of those hours were performed prior to dissolution, the net fee ultimately received by Defendants should be shared 50/50 with Plaintiffs.

Id.

It seems doubtful that the contingent fee engagements will fall that neatly into boxes. That may be the reason that the Judge appointed an accountant as a Special Master to conduct an accounting of the contingent fee engagements.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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