Death of a big law?

Larry Ribstein —  2 February 2011

The Recorder (HT ATL) asks (concerning W & S’s rolling takeover of Howrey):

Among the unknowns: What will be left of Howrey once lawyers have made up their mind about Winston, and what will happen with Howrey’s debt if most partners who receive offers accept them and no formal merger with Winston is completed? (In typical merger agreements, an acquiring firm would take on the assets and liabilities of the target firm, but it remains unclear whether a Winston-Howrey merger is officially off the table.)

Howrey supposedly has more than $100 million in accounts receivables, which W & S is giving the firm time to collect.  Good luck convincing the recalcitrant clients who are not looking forward to repeat business with Howrey.  

Thus, one consultant told The Recorder: “The work in process and accounts receivable become worth a fraction of what they are on the books.” And a lawyer said:

“If I was a Howrey partner, I wouldn’t be looking to figure out when I’ll get the rest of the money the firm owes me, I’d be looking to see when I have to pay the firm. Look at the Heller, Brobeck and Coudert dissolutions — that’s what happened there.”

This raises two immediate questions.  First, despite Winston’s best efforts to avoid this result, might there be some sort of de facto merger between Winston and Howrey resulting in Howrey’s assets and liabilities carrying over to Winston? I suspect that Winston has covered this base pretty thoroughly, but the whole area of partnership merger is fraught with confusion. See Bromberg & Ribstein on Partnership, Section 7.21.

Second, will the LLP shield protect all the Howrey partners from personal liability for debts in excess of Howrey’s assets?  This is a rather complex subject covered in detail in Chapter 3 of Bromberg & Ribstein on LLPs.

The broader story here is about the swift collapse of big law firms that have no real assets except the lawyers who, not bound by non-competes and no longer personally liable for the firm’s debts, can walk out the door any time.

For a discussion of the general Big Law death spiral, including the specific stories of the particular firms mentioned in above, see my Death of Big Law.

Update: I added the question mark at the end of the title of the post to clarify that I don’t know and am not trying to predict what ultimately will happen to Howrey.

Larry Ribstein


Professor of Law, University of Illinois College of Law

3 responses to Death of a big law?


    Ohwilleke said: “I am skeptical that liabilities are that big a part of the story in most law firm balance sheets, however. While law firms do have few assets, they also generally have few liabilities.”

    It’s true that most firms have few liabilities as a whole. The problem grows, however, when the few rainmakers begin to leave. When this happens, the liabilities become staggering for service partners who do not have a substantial book of business. For example, when Henry Bunsow left Howrey with his $20 million worth of business, the liabilities per unit of partner revenue took a big hit. And that’s only one partner.


    Law firms generally have been laggards in separating the provision of legal work for fees from the financing of that purchase. The retail industry has almost entirely abandoned consumer finance, leaving that to banks, credit unions and finance companies that specialize in lending. Central to the evolution of factoring of accounts receivable, which spawned commercial banking in the first place, are holder in due course concepts. Third party financed ARs are easier to collect than direct to client ARs because the former segregates disputes over the work done from the debt owed, while the latter does not. Law firms have reputational (and professional ethics) reasons to refrain from using all of their legal rights to collect fees from important clients, while financial firms do not. More robust factoring of law firm AR debts would dramatically reduce the amount of leverage in a typical Big Law firm.

    I am skeptical that liabilities are that big a part of the story in most law firm balance sheets, however. While law firms do have few assets, they also generally have few liabilities. Typically, they have loans for a year or less of working capital (in Big Law partners could afford to finance this, but choose not to do so in favor of bank debt for reasons mysterious to me), lease agreements that have security deposits and the ability to evict and relet the property to mitigate damages (even firms that have partner owned buildings usually own them via a separate entity that leases to the firm for reasons including asset protection, tax reasons, and the ability to include outsider investors), and some leases of office equipment, are typically the only universal liabilities of a law firm — unless the law firm has a defined benefit pension plan (I have yet to see a law firm with one, but hear rumors now and then that such plans exist), or a major excess liability exposure on a malpractice claim. A typical law firm owes little more than a modest amount of trade credit.

    The unimportance of physical assets and lack of substantial financial liabilities to Big Law also makes me skeptical of the relevance of investor owned publicly held companies to the future of Big Law. Unlike the investment banks that followed this model (mostly with bad results in financial crisis), Big Law does not make its money significantly by finding better uses of other people’s financial capital.

    To the extent that the practice of law, even in a large firm, can be arranged to involve few assets and little debt through third party financed pay as you go financing, the need to have law firms that can stand the test of time diminishes. As long as everything is in the black, a law firm that can gobble and spit out practice areas or groups of lawyers frictionlessly do little harm.

    The ugly part of a law firm break up is the squabble over who gets the work of the dying firm. But, as long as all potential disputants over particular kinds of work for particular clients ends up at the same place, a velvet divorce is a viable proposition.

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