Review of Cases: Law Firm Relationships & Law Firm Management

By Steven Wechsler

[Originally published in NYPRR December 2001]

[Editor’s Note: Professor Wechsler has prepared a review of recent developments in Professional Responsibility, to be published in the 2000–01 Survey of New York Law in the Syracuse Law Review. The following is an extract from Professor Wechsler’s review. Professor Wechsler is professor of law at Syracuse University College of Law. He teaches Contracts, Professional Responsibility and Negotiation.]

When Firm Breaks Up and/or Partners Depart

In 1995, Chief Judge Kaye characterized “the revolving door” as “a modern-day law firm fixture.” [Graubard Mollen Dannett & Horowitz v. Moskovitz, 86 NY2d 112, 115 (1995).] The practice of partners and associates in changing firms continues to raise questions about the proper limits of behavior on such occasions, which are typically marked by “charges of faithless deserting partners and countercharges of a vindictive abandoned firm.” [Graubard, supra.] It is hornbook law that law partners, like all others, owe one another a fiduciary duty requiring “the punctilio of an honor most sensitive.” [Graubard, quoting Meinhard v. Salmon, 249 NY 458, 464 (1928).] At the same time of course, lawyers owe a duty to their clients that may permit, and indeed, require, taking certain steps to protect the clients’ interests on the occasion of a law firm breakup. The tension between those duties, coupled with the self-interest of both the departing and the remaining lawyers, is what provokes questions about the boundaries of proper behavior.

A First Department case dovetails nicely with Graubard. The case is Gibbs v. Breed, Abbott & Morgan [710 NYS2d 578 (1st Dept. 2000)]. In Graubard, the Court dealt with pre-resignation solicitation of firm clients. The Court held that dissatisfied partners were clearly within their rights to locate new office space and explore new affiliations, even without notice to their current partners. Moreover, they would also be permitted to inform clients they have worked with of their plans to move on and to remind them of their right to choose who will represent them in the future. The Court suggested that notice to clients be given after the departing partner has made his plans known to the firm.

What was not permitted to partners in Graubard, on the other hand, was trying secretly to lure firm clients away; lying to clients about their right to choose who would represent them in the future; lying to the firm about their plans to leave; and abandoning the firm on short notice, taking both clients and files in the process. Those measures constituted an actionable breach of fiduciary duty.

In Gibbs, supra, the First Department was confronted with a variety of other behavior by the departing partners and held that at least some of it was improper. In an action by two of the departing partners for monies due them under the partnership agreement, the firm counterclaimed for breach of fiduciary duty. The firm complained that partner Gibbs had tried to persuade partner Sheehan to leave the firm well before he made his own intentions known to the firm. The departing partners transmitted considerable confidential information about the firm’s associates to their new firm, which subsequently hired several of those associates. The information included the associates’ salaries, billable rates and hours, and details about their education and bar admissions. The memo containing the information was prepared months before the partners announced that they were leaving the firm and was passed on to the new firm before the move. When the partners left, they took with them copies of their client files and subsequently contacted many of their former clients; about half of those clients left the old firm and took their business to the partners’ new firm.

Based on these facts, Supreme Court, New York County, held that the departing partners owed a fiduciary duty to the partnership throughout its life and that they were required to act as fiduciaries even as they left the firm. The firm was awarded $1.8 million in damages. The First Department agreed that the sharing of confidential billing and other information about associates, combined with their subsequent hiring, was “an egregious breach of … fiduciary duty.”

But the Court found no fault with one partner’s seeking to recruit another to leave with him, nor with partners’ taking their desk files even though they contained copies of material in the firm’s individual client files. The Court remanded the case for a recalculation of damages measured only by the act of recruiting firm associates and by the act of disseminating confidential firm information to their new firm. The fact that the departing partners had gathered this information before they gave notice of their departure and had shared it with the new firm weighed heavily in the Court’s decision. The Breed case, taken together with Graubard Mollen, provides New York lawyers with considerable guidance as to how to conduct themselves when leaving a firm for greener pastures elsewhere.

Santalucia v. Sebright Transportation, Inc. [232 F.3rd 293 (2d Circ. 2000)], addresses a related question: Who is entitled to the resulting contingent fee when a law firm dissolves and the case that later produces the fee goes out the door with one of the firm’s departing partners? In Santalucia, the law firm had been retained by plaintiff on a contingent fee basis in a wrongful death action. Subsequently the firm was dissolved and plaintiff entered into a new contingent fee agreement with Premo, one of the departing lawyers. Plaintiff and Premo agreed that any fee due the old firm would come out of Premo’s fees. Premo settled the case for $1 million and sought to apportion the contingent fee between himself and his former firm. The Second Circuit pointed out that although the plaintiff might be liable to the former firm for the value of its work prior to the dissolution only in quantum meruit, this did not affect or govern the duty owed by partner Premo to his former firm. Premo had a fiduciary duty to account to his former firm with regard to the contingent fee. Under New York law, “pending contingent fee cases of a dissolved partnership are assets subject to distribution” [quoting Shandell v. Katz, 217 AD2d (1st Dept. 1995)]. The court ordered that the value of the contingent fee be fixed as of the date of dissolution. The departing lawyer was required to remit to the former firm “the settlement value, less that amount attributable to the lawyer’s efforts after the firm’s dissolution.” The case was remanded for an appropriate finding. The Court also instructed the lower court to determine whether any term of the firm’s partnership agreement might require a different result.

Whisteblowers

A First Department case, Lichtman v. Estrin [723 NYS2d 185 (1st Dept. 2001)], serves as a useful reminder of the principles laid out by the Court of Appeals in Wieder v. Skala [80 NY2d 628 (1992)]. In Lichtman, the plaintiff was terminated from his position as an associate in a law firm after he objected to a partner’s statements of his intention to continue practicing law if and when he was suspended or disbarred. Recalling Wieder, the court held that plaintiff stated a cause of action “for breach of an implied-in-law term of his relationship with defendant law firm, i.e., that both plaintiff and the firm would conduct the firm’s legal practice in compliance with the rules of conduct and ethical standards of the profession.”

Although the partner was not actually suspended from the practice of law until after plaintiff was discharged, plaintiff’s objection was made known to the firm and the implication was that plaintiff would take action under DR 1-103(A) if the partner’s unethical conduct should occur. [Editor’s note: DR 1-103(A) requires a lawyer who has knowledge of a violation that raises a substantial question as to another lawyer’s honesty, trustworthiness or fitness as a lawyer to report the violation to a tribunal or other authority empowered to investigate the violation.] The case confirms the Wieder principle that the core Disciplinary Rules are implied-in-law terms of the at-will relationship between a law firm and its associates. The court distinguished Geary v. Hunton and Williams [257 AD2d 482]. In Geary, the plaintiff associate was discharged before he raised his concerns about a partner’s allegedly unethical billing practices.

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Partnerships Steven Wechsler