Should I Stay or Should I Go? Managing Your Law Firm Separation

Pietragallo Gordon Alfano Bosick & Raspanti, LLP

The devastating financial fallout of the COVID-19 crisis has exacerbated law firm dissolutions and key attorney separations. Firms that were overleveraged, undercapitalized, poorly managed or otherwise unable to adjust to revenue slowdowns have failed outright or have found themselves struggling to adapt. Stakeholders, whether partners or shareholders, have been forced to consider their professional options, including voluntarily (or involuntarily) separating from their firms.

We have counseled dozens of firms and attorneys with respect to professional transitions over many years. In our experience, our attorney clients who successfully forged new careers have followed these five suggestions.

Consider Your Options While Your Practice Is Vibrant

The thought of uprooting your practice and starting over, either in another firm or on your own, is incredibly daunting. Attorneys, by nature, are creatures of well-honed habits. Consequently, you may find yourself succumbing to inertia and waiting until your firm literally is falling apart before planning your future.

This inactivity is a huge mistake, as it is impossible for a practice to thrive in a failing environment. Instead, the consequences of business failure—e.g., working with limited and dwindling resources, dealing with professional and staff departures and the resulting impact on clients and cases, and attempting to manage a caseload despite the distraction of pressing administrative and financial issues—erode the time and energy required for an effective practice. While the icon of the “last man or woman standing” may play well in survival video games, it can be an unmitigated disaster in a failing law firm. If you have considered the issues facing your firm (and the impact on your practice) and have not been able to resolve them, then consider moving on before these issues degrade your career.

Know What You Are ‘Selling’ and Sell Your Strength

This next step requires a critical and honest self-evaluation:

  • What is the strength of your current practice?
  • How many clients are likely to follow you to another firm or take a chance with you if you choose to start your own firm?
  • Have you evaluated potential conflicts of interest if you affiliate with another firm?
  • How many other professionals and support staff will you need to service your clients and at what cost?
  • If you intend to start your own firm, how will you finance it? Do you have a rudimentary business plan?

Our most successful attorney clients all had one very important factor in common—a thoughtful plan to focus their practice in an area of strength serviced by as few professionals and staff as needed. They jettisoned marginal or declining practice areas and deferred plans to expand into others. This disciplined approach stresses focused practice analysis and business development while minimizing administrative expense. It also enhances opportunities for a strategic fit with a potential acquirer.

Before considering you as a lateral partner or shareholder, a firm may impose this discipline by requiring you to complete a detailed questionnaire addressing important metrics such as historical billings and collections, portable business estimates, and staffing requirements. Alternatively, if you intend to start your own firm, this same exercise will provide you with a stronger, more analytical platform for success than a broad “let me see what comes in the door” approach to your career.

Understand These Three Fundamental Documents

These are your firm’s lease, your firm’s operating line of credit, and your partnership or shareholder agreement. These documents inevitably will shape the circumstances of your departure. After payroll, a lease typically is a firm’s next greatest expense. Most attorneys, nevertheless, ignore the significance of the lease, blithely dismissing it as a “corporate” contract. Did you, however, agree to personally indemnify the firm for its lease and other corporate obligations through your partnership or shareholders’ agreement? If so, then you need to address it and any other “corporate” obligations that you may have overlooked.

Did you also personally guarantee the firm’s operating line of credit or other credit facility? If so, will the lender agree to remove your guaranty if you leave? Is the firm in a financial position to satisfy the credit facility if you leave? Will the lender require new underwriting from the remaining partners/shareholders before agreeing to remove your guaranty? These too are critical questions that you must consider in any departure.

Do you know your specific rights and responsibilities under your partnership/shareholder agreement? How much notice is required? Did you make a capital contribution and, if so, how/when will it be repaid? Are you owed repayment of a loan to the firm and, if so, what are the repayment terms? If you are owed repayment of either a capital contribution or loan, did you agree in your partnership or shareholder agreement to stand behind other creditors, such as the bank and landlord?

Finally, is your partnership/shareholder interest redeemable and, if so, under what terms? Older agreements tend to contain more lucrative separation terms for a departing partner/shareholder, including a guaranteed fixed payment or a share of accounts receivables. The modern trend values a partnership/shareholder interest either nominally in the document itself or through a formula that essentially limits one’s interest to a share of cash on hand and fixed assets at a point in time. This formula may explicitly exclude substantial assets such as work-in-process and accounts receivables, while including an offset for firm liabilities such as bank debt and accounts payable. Such a formula may minimize—if not eliminate outright—any substantial value for your shareholder/partnership interest.

Evaluate Any Restrictions on Your New Practice

In any professional transition, client choice is paramount and impediments to a departing attorney’s continued representation of a client are disfavored. For example, Pa.R.P.C. 5.6 prohibits contractual restrictions on an attorney’s right to practice after leaving a firm. If a client chooses to transition its matter to a departing attorney, Pa.R.P.C. 1.16 requires the firm to take reasonable steps to protect that client’s interest in transitioning to the departing attorney.

Nevertheless, you may retain financial responsibility to your former firm for any unpaid fees or costs in contingent matters when a client elects your continued representation. Partnership/ shareholders’ agreements in plaintiff’s personal injury firms typically have “tail” provisions that require a departing attorney to pay the predecessor firm a share of any fee and to reimburse costs in the event of a recovery. Such provisions generally are based either on a fixed dollar amount or percentage or on a “time in the firm” calculation. Under the latter, the fee is allocated based upon the time the case was with the predecessor firm, with that firm entitled to an increased percentage of the fee based upon the age of the case. Other tail provisions may provide for pro rata fee sharing, taking into account the time that the case was with each firm. Regardless, even in the absence of a specific tail provision in a partnership/shareholders’ agreement, the predecessor firm likely will be entitled to a fee for its work based on quantum meruit, payable not by the client but by successor counsel from the overall attorney fee. See Meyer, Darragh, Buckler, Bebenek & Eck v. Law Firm of Malone Middleman, 645 Pa. 362, 179 A.3d 1093 (2018). Accordingly, you must evaluate the financial impact of any legitimate contractual obligations on the viability of your new practice.

Leave Ethically and Professionally

No one should want to start a new practice facing a TRO hearing or a Disciplinary Board complaint over the circumstances of their departure.

Above all else, leave ethically and professionally as your reputation is your stock in trade. To get it right, you have numerous action items to consider, including:

  • Not soliciting clients before announcing your departure.
  • Sending fair and straightforward election letters to clients, preferably jointly with the firm.
  • Arranging for the transfer of client files and materials openly and efficiently only after a client elects your continued representation.
  • Addressing client collections, fee sharing, any allocation of settlement proceeds, and any transfer of retainer funds, as applicable.
  • Arranging for new professional liability coverage and avoiding any gaps in coverage.
  • Arranging for the former firm to provide clients with your new contact information upon request.
  • Updating the Disciplinary Board with any new affiliation and your new contact information.
  • Filing the required substitutions or withdrawals of appearance depending upon a client’s choice for continued representation.

Additionally, to comply with Pa.R.P.C. 7.1 and 7.5, make certain that your former firm removes your name from its letterhead, logo, and website. If you are departing from a corporation in which you were an officer, make certain that amended articles of incorporation are filed removing you as an officer. If the law firm corporation itself is dissolving, then the firm eventually should file an out of existence/withdrawal affidavit with the Pennsylvania Department of Revenue.

While optimal to resolve these matters amicably and comprehensively with your former firm, these issues often settle piecemeal or on a continuum, with disputes over fee sharing typically last to resolve. If that is the case, then you should prioritize resolving any issues impacting your ability to represent clients who have elected you.

Conclusion

In his notes on “The Last Tycoon,” F. Scott Fitzgerald wrote that “there are no second acts in American lives.” He was wrong. If the cycle of law firm mergers and separations over the last 25 years has demonstrated anything, it is that there are many successful second and even third acts (or beyond) in one’s career as a practicing lawyer. Carefully considering these five suggestions has proven a good place to start that next act.

 

Reprinted with permission from the January 5, 2021 edition of the Legal Intelligencer© 2021 ALM Media Properties, LLC. All rights reserved.

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.

© Pietragallo Gordon Alfano Bosick & Raspanti, LLP | Attorney Advertising

Written by:

Pietragallo Gordon Alfano Bosick & Raspanti, LLP
Contact
more
less

Pietragallo Gordon Alfano Bosick & Raspanti, LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.