Highlights

Wisconsin Lawyer
Vol. 79, No. 12, December 2006

Breaking Up is Hard to Do

by Thomas J. Watson

There was a time when a lawyer, after graduation from law school and admission to the bar, would be hired by a law firm and expect to remain with that firm for many years, perhaps even for an entire career. Some lawyers aspired to eventually acquire some ownership in their firm. In today's mobile society, the tradition of a lawyer associating with only one or two firms has been replaced by frequent changes.

Meanwhile, the continuity of most law firms isn't quite as predictable as it was years ago either. Experience has shown that sometimes even well-established law practices eventually dissolve. With the passage of time and management retirements, the dynamics of a firm may change to the point that it is not feasible to continue operations. When the professional liability insurance policy insuring the firm terminates because the firm has dissolved, coverage for the lawyers likewise could end.

When lawyers part ways, the breakup sometimes can be ugly. The issues that often arise include:

• properly severing client relationships,
• handling client files appropriately,
• determining malpractice coverage for the departing lawyers, and
• identifying potential malpractice claims against the firm and the departing lawyer or lawyers.

Good Procedures

There are steps law firms should take before dissolution occurs and before a lawyer leaves the firm. Sally Anderson, vice president - claims at Wisconsin Lawyers Mutual Insurance Co., says, "A good, well-thought-out agreement made when the law firm is getting started can make a huge difference. Then there is a procedure to follow." If a firm doesn't have an agreement in place, now is the time to consider one.

Ripon attorney Steve Sorenson, who saw his law firm break up several years ago, says there are two things lawyers at firms should do to avoid problems: have a mediation agreement in place to deal with any disputes between the lawyers, and be honest with each other. "Don't plan a breakup behind the backs of your partners or associates. If you and a couple other partners are leaving, tell everybody. If everyone is on the same page, it will go much better than a 'surprise attack'."

Hiring a mediator to deal with lawyer disputes will pay for itself many times over, Sorenson says. "Otherwise, you spend too much time and money arguing with each other trying to work out your disagreements."

Madison personal injury lawyer Lee Atterbury agrees. "I heard of some cases in which the lawyers fought over everything, from their office property, to clients and fees."

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"That certainly doesn't help the image of the profession," says Sorenson. "And it's simply bad for business. Whether a client stays with the law firm left behind, or goes with the departing lawyer, that person doesn't care about the arguments between the lawyers. Just get the work done right. If the law firm is in disarray, clients will go somewhere else, and take a pretty negative view of lawyers with them."

Atterbury has gone through two law firm breakups. His firms did not need mediation, the breakups went very well, and everyone was happy. "In one case, my partner said he wanted to go practice with a good friend of his, so we just sat down and made the proper arrangements. We were honest with each other - that's the key."

Those arrangements included perhaps the most important part of any law firm breakup - communicating with the firm's clients.

Severing Client Relationships

Clients must decide whether to stay with the remaining firm, go with the departing lawyer, or hire a new, unrelated lawyer. The file belongs to the client, not the firm or the lawyer working on the case. Atterbury says that makes file disputes easy to handle. "It's up to the client - plain and simple."

When Atterbury's first law firm broke up, he and his partner drafted a letter to each client, explaining the situation. "We simply told them they can stay with the firm, go with the departing lawyer, or find someone else. They made the choice and we lived with it."

Anderson says a good letter can help clients understand the situation and feel confident that they will still get good representation, regardless of their choice. "If the client is leaving the firm and going with the departing lawyer, make sure the letter includes a signed consent form confirming the client's desire to transfer the file. Remember, the client controls the file."

Similarly, Anderson says that if a client wants to stay, the law firm is obligated to continue to represent the client or to assist the client in securing other counsel, if that is the client's wish. Absent a special agreement, a client retains a law firm, rather than a particular lawyer in the firm, to provide legal services. "Communication is the key," Anderson says.

Whether a client stays with the firm or goes with the departing attorney can be a thorny issue among lawyers. While the decision is solely the client's, sometimes a battle is waged within a firm for that client.

"Lawyers are not supposed to solicit clients if they're leaving a firm," Sorenson says, "but it does happen. It's a question of honesty and ethics. I had one lawyer say to me, `I didn't solicit the client, I just told him I was leaving and if he wanted to come with me, he could.' Well, there's a fine line between informing the client and soliciting him."

Anderson says that's why a joint letter is so important. "A joint letter from both the firm and the departing lawyer ensures that everything is being done above board."

Check the Files

When a client does leave the firm to stay with the departing lawyer, it's important that the firm retain copies of files or ensure that it has the right to copy all the files being taken by the departing lawyer. Anderson says it is equally important that those files are audited for potential trouble. "We had a case in which a law firm got sued by a client of the lawyer who had left the firm. When the lawyer left, the firm just let him take the files without keeping copies and without any communication with the client. The firm never bothered to ask the client where he wanted the file to go, let alone obtain a consent form from him and formally end the relationship between the firm and the client. Later on, when the departed lawyer dropped the ball, the client filed a malpractice claim against the firm."

While lawyers sometimes fight to keep clients, there also are times when nobody wants particular clients. One lawyer reports that when his firm broke up, he lost many very good clients, while being left with debt, an old building, and several "troublesome" clients and cases. "The lawyers who left didn't take the messy cases, just the really good ones. That left me with some messes to clean up. I managed to do it, but it took me a long time to dig out and it was costly too."

Fees

One of the areas of dispute that can arise among lawyers is dealing with fees from cases. Atterbury says he knew of a situation in which a law firm was breaking up, and "every time a case settled, the lawyers were in court battling each other over the fees."

Atterbury's firm handles nothing but personal injury cases, all done on a contingency fee basis. When his firms broke up, each firm's lawyers had to come up with a fee-splitting arrangement, determining how much work the departing lawyer had done on behalf of the firm before his departure and agreeing on when and how the departing lawyer would pay the firm back after the case was concluded for disbursements paid out while the case was pending. In every case, Atterbury says, agreements were reached and there was no discord among the lawyers. "As long as we sat down and discussed the issues and put everything in writing, we were fine."

Another fee problem that can arise over a law firm breakup occurs when clients leave with the departing lawyer and the remaining firm wants the client to pay for work already done. Anderson says this has been the source of malpractice claims. "I've seen firms sue clients for fees, wanting to get paid before the clients go with the departing lawyer, only to get hit with a malpractice counterclaim. It becomes a real mess."

Malpractice Insurance Coverage

The liability exposure for claims arising out of professional services rendered by a lawyer while associated with multiple firms often is unrecognized and misunderstood. Dennis Marx, vice president - underwriting at Wisconsin Lawyers Mutual Insurance Co., says that when asked about coverage for potential claims arising out of professional services previously rendered, a lawyer sometimes responds, "That's not a problem. I'm covered by my former firm's policy."

Not necessarily, says Marx. To truly appreciate the potential pitfalls of this assumption, he says it is helpful to remember that professional liability insurance policies for lawyers generally are written on a claims made basis. Under these policies, coverage is provided only for claims made and reported to the insurance company during the policy period. As a result, coverage ceases when the policy expires.

Policies may provide coverage to lawyers formerly affiliated with a firm, but only for claims arising out of professional services rendered by the lawyer when affiliated with that firm. This coverage often is provided through a policy's definition of who is insured. Still, a lawyer may want to carefully evaluate the consequences of relying on coverage provided by this policy.

If you are leaving a law firm, you should consider the following:

• Check to see whether the policy of your former firm covers you after you're gone.
• If a potential malpractice claim arises after you're gone, and you are relying on your former firm's insurance coverage, you will have to report the claim to your former firm - and be sure the firm reports it to its carrier - otherwise the claim may not be covered.
• Consider obtaining a malpractice insurance policy that provides prior acts coverage. Without that protection, a risk created years earlier while you worked at another firm could become a costly surprise years later.

Conclusion

When law firm breakups occur, it is critical that both the departing lawyers and the lawyers remaining in the firm do several things: 1) communicate with each other; 2) communicate with the firm's clients (preferably through a jointly written letter from the firm and the departing lawyer), spelling out the clients' options and rights and seeking directions from the clients about how they wish to proceed; 3) consider drafting a written agreement between all the lawyers of your firm, indicating the process that will be used if lawyers leave the firm or if the firm breaks up; 4) make sure fees are handled properly; and 5) consider the impact on malpractice insurance protection of all lawyers involved.

As Lee Atterbury says, fighting among the lawyers "just isn't worth it. Nobody wins."

Wisconsin Lawyer