The Bottom Line
June 2003 VOL. 24, NO. 4
Statements or expressions of opinion or comments appearing herein are those of the editors or contributors, and not necessarily those of the association or section.
Contents
* Practical suggestions on transition or retirement from a law firm
* Trapped in an insurance defense practice? Two strategic approaches'
Practical suggestions on transition or retirment from a law firm
By John W. Damisch, Chairman, ISBA Law Office Management and Economics (Standing Committe on)
The largest law firm in Illinois is made up of thousands of solo and small law firms. The "Baby Boomer" generation is about to retire. These thousands of solo and small law practitioners will want to sell or recoup some retirement money to reward them for developing a valuable law practice with a great amount of good will in their name and clientele. Can they sell their practice? How can a solo retire and still have money coming in to implement social security? If I am in a law firm how can I be sure that if I retire at age 65 I can still receive my retirement benefits 20 years from now when I am 85 and sitting on the beach in Florida or the Costa del Sol?
These are some of the questions and issues that this article will address. There are practical, professional, legal and ethical considerations that must be given to winding down a law practice. Take the wrong step and it can be a financial disaster.
I. Can I Sell My Practice? The short answer is no! In O'Hara v. Ahlgren, Blumenfeld & Kempster, 127 111. 2d 333, former Congressman Barrett O'Hara had a very successful sole immigration practice. O'Hara died suddenly with a lot of uncompleted immigration files in his office. Robert Ahlgren of Ahlgren, Blumenfeld & Kempster was active in the immigration field. Barrett's widow, Maria, and Robert Ahlgren entered into a written agreement which provided that Ahlgren's firm would take over O'Hara's practice, files, telephone number and the right to use O'Hara's name on stationary and office door. Maria was to be paid a sliding scale of the incoming fees beginning with one-third for the first year and going down to five percent and terminating in the fifth year following O'Hara's death. The O'Hara clients were notified of O'Hara's death and the arrangement with Ahlgren to handle the files and practice. Ahlgren failed to compensate Maria and Maria sued Ahlgren for breach of contract and accounting.
Ahlgren claimed the agreement was unenforceable and contrary to public policy. Maria's complaint was dismissed. The appellate and supreme court affirmed the dismissal. The courts held that fee sharing between lawyers and non-lawyers was contrary to public policy. The court held that Rule 3-102(a) of the Code of Professional Responsibility was put in place to protect the public from the harms of fee sharing by non-lawyers. The court found that if there were fee sharing with non-lawyers it would tempt lawyers to pay more attention to those cases where there was no fee sharing than with those cases where the fee must be shared with a non-lawyer.
Since the O'Hara decision there have been many efforts urging the Illinois Supreme Court to revise the rule and permit lawyers the right to sell their practices. This would also include the right of lawyer's estates to sell the deceased lawyer's practice. A resolution was adopted by your Law Office Economic section urging the Illinois State Bar Association Board of Governors to petition the Illinois Supreme Court to adopt a rule permitting the sale of law practices. The ISBA Assembly adopted this resolution as did the ISBA Board of Governors. A petition was presented to the Illinois Supreme Court and the matter of sale of law practices is now being considered by the supreme court. We do not know when, or if, the supreme court will act op this matter. We do not have a hint whether Rule 3-102 will be changed or not. Perhaps others on this panel will be able to give you a further update.
II. How can I sell my practice? Barrett O'Hara did not plan ahead. Had O'Hara entered into a partnership with Ahlgren with a similar arrangement, or a buy/sell agreement, O'Hara's widow, Maria, would have been able to sit on the beach with the check cowing in the mail monthly from Ahlgren. Rule 3-102 permits an agreement by a lawyer with the lawyer's firm, partner, or associate to provide for the payment of money, over a reasonable period of time after the lawyer's death to the lawyer's estate. Five years of payments would probably be a reasonable period of time and the sliding scale of from one-third of the fee down to five percent by the end of five years and terminable at that time would also probably pass muster.
If there is no agreement, a deceased lawyer's estate is entitled to be compensated for those legal services rendered up to the time of the lawyer's death on a quantum meruit basis. The quantum meruit basis is not usually as rewarding. Most lawyers, who have been "bumped" from a high-profile contingent fee personal injury case, usually feel shorted on a quantum meruit court order. Accounting by quantum meruit is open to extended dispute and litigation. The common attorney fees guidelines such as results accomplished, amount involved, experience of the attorney, etc. are usually ignored in this type of litigation. if you want to sell your practice enter into a partnership agreement with a lawyer that will comport with Rule 3-102.
III. I want to quit but I do not want to retire entirely. "Old lawyers never die, they just fade away." (From General Douglas McArthur's farewell address to Congress after being fired by President Truman). There are many lawyers who reach the ripe age of 60 or 65 who seek to slow down or are being pushed out by their partners. These lawyers have retirement packages in place with their firms but the firm contract provides that the retiring lawyer will forfeit his/her retirement package if he/she continues to practice. In the past several years there have been several suits over the validity of these non-compete arrangements. Most of the non-compete clauses have been struck down until the recent case of Hoff v. Mayer Brown & Platt, _Ill. App. 3d , 772 N.E. 2d 263, 265 Ill. Dec. 225 (First Dist., June 4, 2002) (Petition for Leave to Appeal may be pending). In Hoff, the former partner left the law firm of Mayer Brown & Platt (MBP) at age 60 after being with this mega/international law firm for 36 years. Hoff formed a partnership with new partners. Hoff demanded his retirement benefits of $94,000/year from MBP. MBP refused and Hoff filed suit claiming retirement benefits under MBP's retirement plan. The plan provided for early retirement if the participant was at least 60 years of age and had been with MBP for at least 20 years. Hoff qualified by age and length of service. The plan also provided that the participant had not elected to retire prior to reaching age 65 unless "... he or she substantially ceases the active practice of law on a permanent basis. .."
Hoff claimed that this restriction was a violation of Rule 5.6(a) of the Illinois Rules of Professional Conduct that provides that "A lawyer shall not participate in offering or making (a) a partnership or employment agreement that restricts the rights of a lawyer to practice after the termination of the relationship, except an agreement concerning benefits upon retirement ... (emphasis supplied). Hoff claimed that the plan was a restrictive covenant contrary to public policy and Rule 5.6. MBP claimed that the plan provision restriction against continuing practicing after retirement constituted benefits upon retirement which might be restricted.
Hoff cited Stevens v. Rooks Pitts & Faust, 289 III. App. 3d 991, 998, 225 Ill Dec. 48, 682 N.E.2d 1125 and Williams & Montgomery, Ltd. v. Stellato, 195 III. App. 3d 544, 553, 142 Ill. Dec. 359, 552 N.E.2d 1100. In those cases it was held that any restrictions upon a lawyer upon leaving a firm were contrary to public policy and the restrictions were struck down. In those cases the departing partner was seeking to have certain equities that were provided for in the agreement paid out. The surviving firm refused to pay out, claiming protection with the non-compete provisions of the agreement. Non compete clauses in law firm agreements have been consistently struck down. But the Court in Hoff honed in on the excepted provision of Rule 5.6(a) that benefits from retirement that are being withheld are exempt from the general rule.
Hoff also relied (to no avail) upon Cummins v. Bickel & Brewer, No. 00 C 3703, 2002 WL 187493 (N.D. Ill, February 6, 2002). Cummins sued his former law firm for refusing to pay him his interest in the partnership upon departing the firm. Cummins was awarded his partnership interest because the agreement was an attempt to prohibit Cummins from practicing law after leaving his old law firm. The court also cites the famous supreme court case of the fighting Dowd family (Dowd & Dowd v. Gleason, 181 Ill. 2d at 480, 230 III. Dec. 229, 693 N.E.2D 358. Dowd was similar to Cummins. The departing partner had to forego the partnership interest if he/she left the firm and continued to practice. In Dowd the departing partner (Gleason) left the firm and took the $6 million client, Allstate Insurance Company. When the Dowd family feud started, Allstate made a "pox" on both parties and hired other law firms.
In the Hoff case, MBP went outside Illinois to find supporting cases citing Neuman v. Akman, 715 A. 2d 127 (I). C. App. 1998). Neuman left his law firm and went into private practice. Neuman sued his District of Columbia law firm for his share of net partnership profits which were linked to future earnings of the firm. The D.C. court held that the monies due constituted retirement benefits and as such fell under the exception of Rule 5.6(a).
The Neuman court noted that the leading case in this field is Cohen v. Lord, Day & Lord, 75 N. Y 2d 95, 551 N.Y.S. 2d 156, 550 N.E.2D 510 (1989). In Cohen, the New York court held that a law firm partnership agreement, which conditioned uncollected partnership revenues upon the withdrawing partner's obligation to refrain from competing with the firm, was unenforceable but then went on to find that retirement benefits are separate and distinct from financial penalties that are imposed when a partner leaves the firm and sets up a competing practice.
MBP also drew upon the Iowa case of Donnelly v. Brown, 559 NW 2d 677 (Iowa 1999) which held that the law firm's retirement benefits could be conditioned upon an attorney remaining out of the practice of law.
The bottom line for a law firm that wants its retired lawyer not to compete is to provide in the partnership agreement that any future remunerations are "retirement benefits" and not a share in profits or withdrawal of the capital account. The other side of the coin is for the withdrawing lawyer to make certain that the partnership agreement provides that he is entitled to his part of the future partnership profits that were earned while he/she was still on board and that his post-departure payment is part of his/her capital account for which he/she must be paid and not "retirement benefits" that prohibit the retiring lawyer from continuing to practice law.
IV. Should I have a buy/sell, or partnership agreement? This seems like a very foolish question but surprisingly most small law firms fail to have such an agreement in place. If you were the client you would be guilty of gross malpractice for not having provided your client with a buy/sell agreement. Failing to have a written agreement in place is refusing to provide for your spouse and children in case of your death.
V. Should my retirement benefits be funded with an insurance policy? Many law firm retirement plans are self-funded. Most law firms, large and small, have retirement plans that are funded by the assets of the firm. Law firms such as Isham, Lincoln amid Keck Mahin had self-funded retirement plans. Before these major law firms closed their doors, the retired partner was sitting on the beach with a monthly wire transfer to his/her Florida bank account from the law firm. When the law firms went out of business the wire transfer of funds stopped coming. Litigation followed but to no substantial avail. The retired partner now looks for only his/her social security check which is meager after a brilliant legal career, early retirement at age 60 or 65 and now only a government stipend to live on. Although expensive, retirement benefits should be funded, or partially funded, by an independent insurance policy. With an insurance policy in place, the retiree need not depend on the future existence of the firm. Often the retiree was the major "rainmaker" and without his rain shower the puddle of money dries up very quickly.
VI. Should I buy a malpractice insurance tail? Until the statute of limitations runs, there is always the possibility that a malpractice claim might be made by a client even after you close your law office. To protect against those claims, and give peace of mind in retirement, a lawyer should purchase an insurance "tail" that will cover you against any alleged malpractice claims that may have been committed. Any departure agreement from a law firm should provide for continuation of malpractice coverage for the withdrawing partner for a reasonable period of time. This same type of "tail" coverage is available for the solo practitioner who closes his/her office.
VII. What should I do about my office lease? It seems fundamental that arrangement would be made in advance of retiring that any lease obligations would be considered. Many of the large law firms that have gone bankrupt in the past several years went into Chapter 7 because of onerous lease arrangements. As a partner you are liable for the partnership liabilities incurred while you were a partner. Your withdrawal from the partnership will not terminate that liability. If the surviving partners are unable to keep the law firm going and pay the rent, the building owners will be seeking you out on the beach in Florida and your securities account at Fidelity. A hold harmless may be worthless if the law firm is in receivership and your old partners have gone to France.
VIII. What should I do with the original wills on hand? Lawyers that started their practice 40 or 50 years ago were advised to draw and hold wills in their vaults. Young lawyers were told that the probate of these wills in their later years would provide for the lawyer's retirement. Our office has more than 1,000 wills on hand. One of our sub-tenant lawyers died leaving 150 wills behind in our office. One of our wills is dated 1937. We do not know where these testators are. We hired a law student who spent a summer attempting to locate the makers of these wills so we could return the original wills to these testators. We had some success, but we were still left with nearly 1,000 wills where we could not find the maker by mail, telephone directory, or Internet. We attempted to file the wills with the clerk of the circuit court. The clerk refused to accept the wills unless we could give the testator's date of death. We knew not whether the testator was dead or alive, whether he/she had made another will, or even a current address where we might send the will. The ISBA has proposed legislation to make it mandatory that the clerk accept the wills for filing. To date that legislation has not passed. The adage of holding the will for later possible probate no longer applies to our transitory population. Holding on to original wills can only present an insurmountable problem when trying to close up shop. Maybe you can take the course that our sub-tenant took... he just left the wills behind and passed away.
IX. What should I do with my closed files? Lawyers have an obligation to maintain closed files and settlement statements for at least seven years. Turning the closed file over to the client is the best way to avoid the storage and retrieval expense of the file. If you have made an arrangement with another lawyer you could leave the files with him/her. The files could be a source of law business for the continuing firm. What do you do if the client ignores your request and refuses to take the file? You could send the file to the client provided you have proof that the file was sent and delivered. If the client cannot be located you might store the file on a shelf in your basement or rent storage space at Public Storage. You will have to work out a system of file retrieval if you have retired to Arizona. If you choose Public Storage, make sure the rent is paid or your files could end up in the dumpster. The day after the files have gone into the dumpster your former client could appear demanding the irreplaceable documents that support his or her million-dollar claim.
X. What should I do about notifying my clients of my retirement? Certainly the client should be notified well in advance of closing your office. An arrangement might be made with a fellow attorney in your community or in the same field of your practice. You might consider recommending your colleague by giving the client the name, background information, address, telephone and suggesting that the client contact the new lawyer directly. An offer should be made to the client that his/her file is available and that the client should make arrangements to have the file picked up or transferred to a new lawyer of his choice. Any accounts, client funds, and financial arrangement should be clearly detailed and closed out. Proper withdrawal should be made from any pending litigation in accordance with supreme court rules. After all the rules have been followed there will still be some clients that will not respond to your pleas to make arrangements to have their matters transferred to other lawyers. Those are the most dangerous cases for later possible malpractice claims. That client will claim that they never received notice of your retirement. Be certain that extra care and notice by certified mail, if necessary, is given to those recalcitrant clients. They probably have refused to make contact with you because they owe you money. If there is still doubt or questions about winding up the practice, the Attorneys Registration and Disciplinary Commission is available for advice. You may want to be protected by writing the ARDC with your specific question.
XI. Have you planned for your future? Until you "fade away" there are a lot of miles and services that the retired lawyer may provide. I recently met a "retired lawyer" at the reception desk of Evanston Hospital. He was a hospital volunteer. He was meeting and greeting people, directing them in a complex building, and answering many, many questions---(probably some of them even legal). I have met retired lawyers in court houses volunteering their time and legal expertise to one of the recognized legal services that help the indigent. These volunteer services are repeated over and over by the "retired" members of the bar all over the state. Don't quit practicing law. Your skills, intelligence, and experience are a valuable asset to your community until you finally fade away.
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John W. Damisch was admitted to practice in 1950. He is an active trial attorney with the law firm of Damisch & Damisch, Ltd. He has tried numerous personal injury and condemnation matters to verdict and appeal. He has lectured and has written on many aspects of Eminent Domain, and is the author of a chapter on Eminent Domain published by ICCLE. His present activities in ISBA are: Member of the Assembly; Chairman of the Law and Economics Section of ISBA; Member of the Judicial Screening for the Alliance of Bar Associations; a Trustee of the Illinois Bar Foundation. In addition to practicing law, he is an active grain farmer in Kane and DeKalb Counties.
Trapped in an insurance defense practice? Two strategic approaches
By Dr. John W. Olmstead
Insurance defense practices are under siege. While these practices have always had to deal with low billing rates and unrealistic controls mandated by insurance companies, recent trends have reached levels that threaten the business relationship which has reached an all-time low. The core element of the relationship, mutual trust, is in jeopardy. Many of our law firm clients have dropped insurance defense work entirely and have diversified into other practice areas. Insurance defense law firms must now jump through even more hoops to play in the insurance defense arena. For example:
* Many insurance companies are consolidating the work and using fewer law firms.
* Insurance companies are setting up their own lawyers to handle claims by hiring lawyers full time to represent policyholders.
* Some insurance companies are using staff counsel to handle as much as 50 percent of their cases.
* Strict guidelines established by insurance companies that dictate how the case is handled and managed by the attorney.
* Demands by insurance companies that attorneys provide services on a fixed-fee basis. Some law firms are being forced to invest in expensive special case management and special billing software and hardware in order to be able to electronically interface with their insurance company client--only then to be told by the client that they have changed their mind and won't be using the program. The law firm is left holding the bag.
* Law firms are being required to submit their bills to third-party auditing firms retained by the insurance company to review and audit all their legal bills. In many cases these auditing firms make the final decision as to final payment. Often bills are arbitrarily reduced with little feedback or recourse to the law firms. Payment of bills are often held up for months. This has had a dramatic effect upon the cash flow of insurance defense firms that already must operate on razor-thin profit margins.
* On-site audits conducted by third-party auditing firms of bills and supporting documentation such as original timesheets, copies of vendor invoices supporting client advances, and actual case files. This week-long visit will keep the law firm accounting staff busy full-time just gathering documentation and responding to requests for additional information from the audit team. Actually, the accounting staff will have to begin the collection process a week before the actual visit as well as during the time of the visit itself. At the conclusion of the visit the law firm will be presented with a report of findings and may even be required to remit what the audit team considers excessive payments back to the client.
In the beginning
In earlier times insurance defense firms had very close relationships with their insurance company clients. Many insurance defense law firm clients with whom this author has worked have advised that they used to consider themselves an extension of the insurance company's claim office. In fact, many founding partners of these firms came from the insurance industry and worked in the claims offices of insurance companies. They attended law school at night and upon completion of law school eventually formed law firms and worked out arrangements with various insurance companies to handle their business. For many years the relationship was a good business partnership. The relationship provided the insurance company with discounted on-going legal representation for their policy holders and the law firm with a steady flow of work. There were few restrictions levied by the insurance company as to case handling and billing. The law firm simply handled and managed the case and billed the client by the hour for services rendered with few questions asked.
Unique nature of insurance defense firms
Insurance defense firms face challenges that are quite different than those faced by other law firms. Unlike corporate litigation firms, insurance lawyers must strike a balance between their duty to the insured and the insurance company. A three-sided relationship exists. Who is the client? While the insurance company pays the legal bills the lawyer has an independent professional responsibility to the policyholder. Often the interests of the insurance company and the policyholder are at odds and the lawyer is caught in the middle of a conflict situation. It is interest