When law firms explode

Whether an LLC, PLLC or partnership, comprehensive written agreements are necessary
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John Cunningham

Larger New Hampshire law firms are pretty stable, and many of them have been around for decades. Not so with smaller ones — say, those with two to 10 partners. There are lots of such firms, many of them have been formed within just the past few years, and within a few years, many of them will dissolve. Why so?

There are a lot of reasons, but a major one is that if the professional or life situation of a partner of one of these firms significantly changes after the partner becomes a partner, her affiliation with her firm may no longer make sense to the partner herself, to the other partners, or to all of them together.

But law firm breakups can be messy. And not just messy: they can be outright ugly. The reasons:

  • Significant potential legal fees may be involved
  • Breakups may be greatly complicated because under applicable rules of legal ethics, a lawyer’s clients have total freedom to switch to another lawyer

Incredibly, whether their law firms are LLCs, PLLCs, registered partnerships or professional corporations, many lawyers don’t comprehensively articulate their partnership terms in written partnership agreements.

Law firm lawyers can be even more litigious than owners of other types of businesses.

The best recent discussion I know of concerning law firm breakups is in the most recent post from the best law firm “blawg” I know of. The blawg is “NY Business Divorce,” the link is nybusinessdivorce.com, and the post is “Disputes Abound When Law Firms Dissolve.”

The post discusses only New York case law, but many of these cases will be persuasive in New Hampshire.

Here are a few of the questions addressed in the post:

  • When should tax return data be decisive in law firm disputes?
  • In law firm liquidations, how should lawyers value law firm goodwill?
  • If the law firm is a registered partnership (rather than, say, a PLLC) and if a partner resigns, will her resignation mandate the firm’s liquidation? Partnership law may permit the remaining partners to vote to continue the firm, but even if they do, there may be major valuation questions for the ex-partner and the continuing partners.
  • The valuation of potential contingent fees may be extremely complex.

The bottom line: Every New Hampshire small-firm lawyer should consider studying the above post; and their firms should have comprehensive written law firm agreements.

John Cunningham, a lawyer licensed to practice law in New Hampshire and Massachusetts, is of counsel to the law firm of McLane Middleton. He can be contacted at 603-856-7172, lawjmc@comcast.net or llc199a.com. This article is being shared with partners in the Granite State News Collaborative. For more information, visit collaborativenh.org.

Categories: Law, Legal Advice