Law Firm Dissolution: Ethics and Malpractice
Firm ManagementWhen law firms dissolve, a host of issues must be addressed by firm members. Many of the issues are of a business nature. Who will satisfy lease, loan and other contractual obligations of the firm? How will tax returns, accounts receivables and other accounting issues be resolved? Where will mail go that is directed to the firm? What notices must be given to employees? How long should the law firm entity remain in existence? Who will take care of remaining law firm administrative needs?
These practical issues are complicated by the continuing ethical obligations of individual firm members, and the need to avoid malpractice claims that could result after the firm breakup. This article examines five broad areas of ethical and malpractice issues than need to be addressed by dissolving firms. This discussion assumes that the firm is truly dissolving, and that the law firm entity will not be continuing.
Law firm dissolutions can begin peacefully, or occur in acrimony. As the dissolution develops, the chance of disputes among lawyers rises. Firm lawyers will benefit from taking time early in the dissolution process to agree on a plan for dissolution. Even if there are significant disputes among the lawyers, agreeing early on details will help avoid more serious difficulties.
Proper Solicitation
Both ethical rules and malpractice standards of liability require that lawyers act diligently with respect to client matters. It is important for a dissolving firm to develop a plan that assures that no active matters are abandoned. Commonly, clients follow the lawyers directly involved in their matters to new law practices, but not without solicitation by the lawyers. In a less harmonious breakup, some lawyers may consider soliciting firm clients with whom the lawyers did not work. Lawyers must follow ethical rules that restrict the manner in which firm clients can be solicited.
Generally speaking, solicitation of a firm client by a lawyer in a dissolving firm who worked on a legal matter with that client is permitted by the rules. A number of opinions indicate that contact of firm clients by lawyers who did not work for that client is acceptable if the purpose of the contact is to assure that the client is not being abandoned.
One potential complicating factor for solicitation can be a lack of clarity about whether the firm is actually dissolving, or a portion of firm members are leaving the firm. In such cases, lawyers leaving the firm may have fiduciary duties to the firm with regard to clients and may not be permitted to solicit such clients. Talking to clients about following a lawyer to a new practice before the firm dissolution risks individual lawyer liability for breach of fiduciary duty.
Client Abandonment
With an understanding of the solicitation rules, lawyers can begin the work of assuring that clients are not abandoned. In cases where lawyers in the firm are willing to continue to work with current clients in their new practice, an agreed form letter may be appropriate. The letter should indicate that while the lawyer is willing to work with the client in the new practice, the client is free to seek other counsel.
If no firm lawyer wishes to continue representing certain clients, rules regarding withdrawal from matters must be followed. Litigation and other matters pending before tribunals require permission from the court and compliance with court rules regarding notice to clients. In transactional matters, withdrawal must conform to applicable ethics rules.
A dissolving firm should also consider sending letters to former clients, particularly recent clients. In addition to helping lawyers build and maintain a practice after dissolution, such letters may assist with assuring that a client is not unintentionally abandoned. Some malpractice claims arise from clients who think that a lawyer is still working on a matter when the lawyer considers it finished. A letter from a dissolving firm reiterating the termination of the attorney client relationship can avoid such misunderstandings.
One of the most dangerous aspects of firm dissolution is the prospect that important notices will not be received by lawyers continuing representation. Systematically assuring that changes of address havebeen directed to all appropriate courts and parties is critical.
While the firm is wrapping up business, new representation opportunities may arise. Lawyers should agree on proper procedures for signing up such clients. It may be agreed that these clients can sign contracts with the departing lawyers’ new firm prior to dissolution of the old firm. Whether the old firm will handle billing for these new client matters in the interim should be agreed upon. Additional language in contracts may be appropriate to clarify the old firm will not continue and has no obligations to the client, especially if meetings or phone calls with the client occur at the old firm location, if old firm email addresses are used, or if old firm letterhead is used in the new representations.
Conflict Checking and Protection of Confidentiality at New Practice
Understanding confidentiality and conflicts based on representation at the old firm is important for the departing lawyers. Under the rules of confidentiality, knowledge that a lawyer obtained at the old firm is imputed to lawyers at the new firm. Under Texas ethical and disqualification law, screening mechanisms do not remove the presumption of imputed knowledge. As a result, lawyers at the new firm could be disqualified from current or new cases based upon the work of a lawyer from the old firm.
The conflict rules add to these potential issues for an old firm lawyer at a new firm. An individual lawyer from the old firm cannot represent clients adverse to old firm clients if the lawyer’s work at the old firm is at question, if a risk of breach of confidentiality exists, or if the matters are the same or substantially similar. Any representation of a client, by any lawyer at the new firm, in which the work of the old firm is at issue should be avoided if any old firm lawyers at the new firm are potentially liable, either directly or vicariously. Any member of the new firm has a conflict between the interest of his partner or associate and that of a client who might seek recovery from a current firm member.
In order to accurately assess conflict and confidentiality issues, departing firm members need access to information about prior representations. The exact nature and format of the information provided should be determined early in the dissolution process. For conflict and confidentiality analysis, as well as possible solicitation of old firm clients and prevention of client abandonment, departing members may need client lists. At the very least, departing lawyers should have lists of matters on which they worked and have confidential information.
File Retention and Destruction
When a firm dissolves, storage and retrieval of client files may be a significant source of headaches. Dissolving firms do not want to rent space to store old paper files, and storage of electronic files may require new computer infrastructure. For these reasons, dissolving firms should plan how both paper and electronic files will be kept.
For current representations that will continue with departing attorneys at their new practices, files will of course follow those attorneys. A central record for the old firm should be maintained that confirms the files have been transferred with client permission. For representations that will not continue, in addition to accomplishing and documenting withdrawal, files may need to be transferred to the client. A record of the transfer should be retained.
Prior client representations terminated before the firm dissolves raise more complex issues. If the dissolving firm had a file retention policy in place, the firm must determine whether to continue to abide by that policy. Any destruction of old client files must take into account ethical obligations to preserve client property. Under Texas ethics opinions, client files are considered client property, but can be destroyed after passage of time if harm to the client is unlikely.
Unfortunately, the opinions do not indicate exactly how much time is reasonable. From a malpractice claim management perspective, having a copy of the client file in the event of a malpractice claim is almost always superior to not having the file. The file often helps lawyers establish that they properly handled a matter.
The Texas opinion that permits destruction of files requires some review of files to assure that important client property, such as original documents, is not destroyed. Such items should be returned to clients or retained.
Files can be destroyed with client consent under the Texas opinion, provided clients are given an opportunity to retrieve their files. Letters to former clients can seek such consent. With the firm dissolving, if such a strategy is pursued it is necessary to assure that clients are provided with instructions on how to retrieve files, and to make arrangement for files which cannot be destroyed because there is no client consent.
Any files destroyed must be destroyed in a manner which maintains confidentiality. Reputable file destruction services which shred files can be used for paper files. Electronic media containing confidentiality can be destroyed or overwritten in a way that assures confidentiality. Logs of which files were destroyed should be maintained permanently if possible.
Fee Sharing
If a firm has contingent fee cases, the dissolving firm must consider the ramifications of the way in which the firm is dissolved. If the firm entity is not to remain in existence, the interest of the firm would devolve when the departing lawyers with an interest in the contingent cases depart. Firm lawyers might decide to assign the interest of the firm to individual lawyers or to the lawyers’ new firms. Assignment of firm interests to other law firms or lawyers requires client consent. The uncollected accounts receivable of the dissolving firm present a similar issue. If those accounts are transferred to another firm, client consent is required.
Malpractice Insurance
When a firm dissolves, extended reporting options may exist. Such insurance is often called “tail coverage.” Tail coverage is necessary due to the claims made nature of legal malpractice insurance. Almost all legal malpractice insurance covers only claims first made and reported during a period of insurance coverage, although errors or omissions occurring prior to the policy period may be the basis of the claim.
The bottom line is that a policy must be in effect at the time a claim is made. Simply cancelling the firm’s insurance coverage on dissolution usually eliminates coverage for lawyers’ acts while with the firm.
It may be possible for firm members establishing or moving to new firms to obtain coverage for acts while at the dissolving firm. This is more likely when most of the firm members are transferring to a single firm or when the same insurance company will insure most firm members under new policies with similar terms to the old firm’s insurance. New firms may not want to pay for or take on the risk of covering lawyers transferring from other firms. A new firm’s limits could be called upon to pay for claims at the old firm.
Lawyers leaving dissolving firms should remember to seek coverage for their new practices before leaving the old firm. If claims are made based on cases started at the old firm and continued at the new firm, the exact circumstances of the claim affect whether the old firm or new firm policy applies.
Prior to dissolution, it is critical that firms consider whether there is a reasonable basis to believe that claims might be made against the old firm. If so, such claims should be reported to the insurance carrier prior to cancellation of any firm policies.
Conclusion
Dissolving law firms should carefully consider the ethical obligations of lawyers and potential malpractice issues before dissolution, and develop formal plans to meet these obligations. Letters and notices can avoid many problems that arise from firm dissolutions. Agreement on conduct of firm business prior to dissolution eases productive transitions to new practices. Continuation of the firm entity, employment of personnel, and maintenance of physical or electronic facilities may be necessary to minimize difficulties. The dissolving firm is well advised to discuss dissolution with malpractice insurance carriers, both to assure coverage and avoid claims.
