Archives For partnerships

The WSJ Law Blog reports that New York Supreme Court Justice Marcy Friedman held that a former Holland & Knight partner wasn’t an employee under city and state anti-discrimination laws and therefore wasn’t entitled to age discrimination protection for his expulsion at age 55. 

Per the Law Blog’s summary, the ex-“partner” argued that he was “utterly unable to influence the firm to do much of anything” (which will ring true to many law partners). But the Justice reasoned that plaintiff “offered no evidence to show that he didn’t have a stake in Holland & Knight, or that he didn’t have a right to elect managing partners or directors.”

A few years ago I blogged an overview of the vague and confused law on the subject, including the views of Judges Easterbrook and Posner in an important case, and the leading Supreme Court opinion.  For the full and up-to-date examination, see Bromberg & Ribstein, §2.02(b)(2).  

Until the Court clarifies the law (as Judge Easterbrook sought to do), these cases will multiply as Big Law disintegrates, dumping partners along the way.

Today’s WSJ covers the Howrey bankruptcy and specifically the ex-partners’ and their new firms’ potential liabilities for unfinished business taken from Howrey.

As the article says, Howrey’s bankruptcy trustee, the custodian of its claims under state law, “has the right to sue for profits generated by work that partners started at their old law firms and took to their new positions, such as continuing cases.” The defendants can include the new firms the partners joined, including Dewey & LeBoeuf, Baker Botts and Arent Fox, which “may have the deepest pockets.”

This may be Howrey’s most important asset because, according to the old saw the article quotes, a law firm’s “most valuable assets of a law firm go home every night.”

A similar fight is happening over the remains of Heller Erhman.  The article says that the defendant law firms in the Heller case are “arguing that clients have a right to take their business where they choose.”

Of course that’s true, but it doesn’t end the legal complications.  As discussed in The Source, §7.08(e) (footnotes omitted):

All of the partners of the dissolved firm, however, are generally entitled to share in fees for pre-dissolution work-in-process paid after dissolution to the dissolved partnership or to withdrawing partners, even if the client has exercised a right to discharge the attorney or attorneys who are sharing in the fees.* * *

Moreover, depending on the applicable law, the partner or firm completing the case may not be entitled to extra compensation for completing the case.  Rather, the case is treated as an asset of the prior firm and shared among the partners of that firm on the same basis that they shared fees while the firm was still alive.  As discussed in Bromberg & Ribstein, this reflects the difficulty of figuring out an alternative basis for dividing the free, the assumption that the partnership continues on the pre-dissolution basis until winding up is completed, and the need to encourage partners to stay with the firm.  Of course there are strong policy arguments on the other side:  giving partners freedom to move and the risks to the client if the lawyer isn’t paid for extra work.

But note that these are only default rules.  Thus, my book notes (footnotes omitted):

The partners can and should anticipate the above problems in their agreement. The partners should be careful to define the situations in which the work-in-process provision applies.

Often, however, there is no clear agreement, and the lawyers and their lawyers are left to hash out the issues at substantial cost.

I have two questions:

  1. Would it really be so bad if the practice of law were put on sounder financial footing by permitting non-lawyer capital? These bankruptcies illustrate the instability and insubstantiality of these weak cooperatives we call “firms.”  See Death of Big Law.  The dissolutions are likely to increase as Big Law devolves, and clients are caught in the middle.
  2. Why aren’t these matters dealt with more definitively in agreements among lawyers who write agreements for others for a living?

Two partners form a business in 1995 for providing dial up internet service to rural Wisconsin.  Their relationship deteriorates and in 1999 one (Bushard) withdraws, writing a letter expressly dissolving the partnership.  (The letter presciently noted that “this is an optimal time for selling the business at maximum value.” Indeed, a firm had expressed a willingness to pay $3.5 million for it.)  The other partner (Reisman) continued to operate the business for 11 years, taking a total of $700,000 in salary for his efforts.  In 2006 Bushard learned Reisman was taking a salary and filed a complaint for an accounting.

The Wisconsin Supreme Court, in Bushard v. Reisman, held that Reisman was entitled to no salary for all those years, despite the fact that he worked hard and did an excellent job maintaining the business while Bushard did almost nothing.  This being Wisconsin there was, of course, a strong dissent.

As the court explained, going to the Source (link added, footnote omitted):

An influential treatise explains that “[u]nless the partners agree otherwise, UPA § 18(f) [which has been codified in Wisconsin as Wis. Stat. § 178.15(6) ] permits compensation of partners for post-dissolution winding-up services, when dissolution is caused by death, but not in other cases.” Alan R. Bromberg & Larry E. Ribstein, Bromberg and Ribstein on Partnership § 7.08(d) (emphasis added.)

One is tempted to say, following Mr. Bumble, that if the law says that, “the law is an ass – an idiot.” Why shouldn’t a winding up partner get compensation?  And why distinguish winding up after partner death from winding up after partner withdrawal?

My treatise goes on to explain the distinction (footnotes omitted):

[O]n inter vivos winding up there is no reason to assume a change in the partners’ expectations concerning participation in the business and compensation, but on death of a partner the allocation of work shifts to the surviving partners to the exclusion of the deceased partner’s estate * * * which changes the partners’ expectations concerning work and compensation.

Surely, you would add, a partner who completely absents himself from the business comparable to one who is dead.  In fact, RUPA §401(h) changed the rule to provide for compensation in both situations.

Whatever the law says, you might insist, the court should have some power, as the plaintiff argued, to give equitable relief in such an egregious case.  But the court here returns to the Source:

“the partnership statute is, to a large extent, a standard form agreement that can be varied by the parties. Because the standard form often produces unwanted results, partners are well advised to give careful advance consideration to dissolution and its consequencesand to draft explicit agreements.” Bromberg & Ribstein, supra, § 7.01(c).

The court adds (footnotes omitted):

If the provisions of the UPA are unsatisfactory, partners can and should protect their interests by agreeing to different terms. In the absence of an agreement modifying the provisions of the UPA, a court should decline from fashioning an after-the-fact remedy in pursuit of an equitable result when that remedy contravenes the public policy choices established by the legislature.

There was another issue concerning whether the partnership continued or dissolved following dissolution (which determines, among other things, whether to value the partnership as of 1999 or a later date). The court held that the trial court could appropriately enter summary judgment based on the leaving partner’s lack of consent to continue the firm.

One wonders how this could be anything other than a continuation in which plaintiff acquiesced when it went on for more than a decade.  In fact, the court failed to consider an easier way to resolve the question:  the partnership must dissolve when there’s only one “partner” left.

So is the law an ass when it leads to the result of one partner running the business without objection by his absent co-partner for many years and then being denied any compensation for doing so?  When it allows a business to “wind up” for 11 years?

Well, consider that you gotta have clear rules.  This is what statutes provide, at least in this case.  If the parties don’t like the rules they can draft an agreement.  If they don’t know the rules they get what they deserve.

Still not satisfied?  I’m not either.  But the problem isn’t with the partnership law discussed above.  Where the law is really an ass is leaving the parties to a small business in a situation where they have to either know the intricacies of the law, driven by non-intuitive policy considerations, or hire an expensive lawyer who may deal with such transactions only rarely and may or may not understand what’s going on or what to do.

There is another way.  The parties could have access to inexpensive software that asks the parties a series of questions and then cranks out an agreement based on the law and the parties’ answers.  The parties might then show the agreement to a human lawyer to get a second opinion.  They would end up with a reasonably clear document that comports with current law that they could consult when events like partner withdrawal happen.

The problem, of course, is that this seemingly sensible approach is illegal.  The software would be engaged in the unauthorized practice of law. A lawyer could choose use such software to advise the client, but then the lawyer would have to forego the bigger fee he can get from customized advice.  The client can’t decide for herself whether to use lawyer, software or both.

Here’s where the law is really an ass.  The result is to frustrate and impede small businesspeople, part of the backbone of our commercial economy. These stories will multiply as people venture to try to rebuild our broken corporate economy by starting small sole proprietorships and partnerships.

Fixing these rules is something we can do to grow the economy without spending trillions of tax dollars.  Surely at some point the logic of this approach will become self-evident.

One is not a partnership

Larry Ribstein —  6 September 2011

Bob Hillman and Don Weidner have a nice little paper in the form of a dialog about what you have when a partner withdraws leaving only one “partner”: Partners Without Partners: The Legal Status of Single Person Partnerships.  Here’s part of the abstract:

Although we have differing views on whether a single person partnership is possible under RUPA, we conclude on common ground that the buyout is appropriate. We also unite in a call for statutory clarification.

Gary Rosin, commenting on the paper, states his position more succinctly, quoting Springsteen: “When you’re alone you’re alone.  When you’re alone you ain’t nothing but alone.”

The basic problem is that the partnership statutes define a partnership as two or more persons, but don’t specify whether withdrawal of the penultimate partner triggers dissolution of the entity or, instead, a buyout plus continuation by the sole remaining partner.

In my view the answer is clear.

In a two-member partnership, the firm necessarily dissolves and is not continued on dissociation of one of the members because the remaining firm would not have the requisite two members to be a partnership.

Bromberg & Ribstein, §7.03(c), n. 13a. Although you can’t get that from the statute, it is a necessary implication of the definition of partnership.

If you insist that the fact that the statute doesn’t define this as a dissolution event, or that the partnership “entity” still exists notwithstanding withdrawal, then here’s some policy for you.  The function of the partnership statute is to serve as a standard form for a particular type of relationship — i.e, among two or more members.  As I point out in my Rise of the Uncorporation (p. 158, fn omitted),

The idea of multiple owners is inherent in the partnership standard form and coherent with partnership’s other provisions. Among other things, partnerships are based on contracts, which seemingly require two or more people: they are associations involving sharing of financial and management rights among the members, and the important partnership concepts of dissociation   and dissolution necessarily imply a relationship from which to dissociate. Moreover, multiple owners distinguish partnership from another standard form—that of agency, which is based on a single party (the principal) getting all of the benefit (i.e., profit) and having all of the control.

I go on to discuss whether people should be permitted to contract for one-member partnerships, which I view as a more complex issue.  But the cases discussed by Hillman and Weidner don’t involve contracts.

H & W are concerned about whether this approach would frustrate buyout rights that would otherwise exist.  Maybe, but this is just a default rule.  The parties can contract for any kind of buyout they want, as long as they don’t end up with a sole proprietorship.  If they don’t contract, they can’t back into a buyout by trying to define a partnership as something it isn’t.

Anyway, the uncertainty costs of the H & W approach exceed the benefits.  Allowing a buyout and survival of the partnership leads to a host of problems, some of which they discuss.  For example, what if the partnership is an LLP — would the liability protection continue for events after the penultimate partner’s dissociation even if it’s a one-member entity and therefore not a partnership (and so technically ineligible to be an LLP)?

This issue and the H & W article raise two broader concerns. First, the problem here is a symptom of uniform lawmaking, which I’ve discussed elsewhere (e.g.). H & W point out (p. 8) that problems with partnership dissolution persist despite “more than a century” of partnership law drafting dominated by the uniform lawmaking process.  This is no wonder given the perversity of the process discussed in my article with Kobayashi linked immediately above.  Weidner’s recollections as RUPA reporter (see p. 9) only confirm the twists and turns of the process and the ad hoc way decisions are sometimes made.  Moreover, even a perfect process necessarily will have glitches or develop problems over time.  Yet uniform lawmaking is designed to lock in a single solution and to eschew the interstate competition that has helped develop LLC and corporate law.

Second, do we really need all of this complexity?  As noted above and in Gary Rosin’s post, part of the problem is the continuing pall cast by the vague and uncertain “entity” concept.  Simply viewing a partnership as a contract subject to a various rules, some of which are default rules provided for in the standard form, provides simpler and more direct answers.  The “entity” concept turns the contract into a mess of a legal construct.  Since the parties can’t be sure how a court will analyze the situation, they may not even be able to settle the issue by contract. The two-member partnership becomes another victim of lawyer-driven over-complexity.

Anyway, all we need to know for now is in Bromberg & Ribstein:  when a partner withdraws from a two member partnership he leaves one owner.  One owner is not a partnership, and can’t become one via a buyout. Hence the partnership dissolves.  If you don’t like that solution, contract around it.

The 2011 Supplement to Ribstein & Lipshaw, Unincorporated Business Entities (4th Edition) is now available in Word and Pdf. It will be posted on the Lexis website in the next couple of weeks.

If you want to teach the law of business associations as many of your students will actually be practicing it — the cutting edge world where contracts and transactional planning matter — and if you want a deep approach to this subject matter rather than just a couple-week add-on to the same old corporations course, then this book is for you.

On the other hand, if you want the latest version of the 19th century “agency and partnership” course, or to continue teaching your grandparents’ corporate law course, with the same old soporific cases (or, maybe, “hip” new cases containing the same old soporific law), then of course you can do that, too, but not with this book.

CALL FOR PAPERS

AALS Section on Agency, Partnerships, LLCs and Unincorporated Associations

2012 AALS Annual Meeting Washington, D.C.

The AALS Section on Agency, Partnerships, LLCs and Unincorporated Associations will hold a program during the AALS 2012 Annual Meeting in Washington, D.C. on the subject of Using Unincorporated Business Entities for Non-Business or Non-Profit Purposes. 

Business entities may be created for purposes that do not include, or at least are not limited to, the pursuit of business or profit activities.  In such instances, unincorporated business entities may offer advantages over incorporated entities.  At the same time, unincorporated entities may create complex issues for the entities’ stakeholders and managers.

We are soliciting papers on a broad range of issues dealing with the use of unincorporated business entities for non-business or non-profit purposes.  Among the topics that might be addressed are:  

The extent to which states compete to be the jurisdiction of organization for such non-business entities and whether this competition is socially efficient.

  • The respective roles of federal and state law in these developments.
  • The comparative advantages (or disadvantages) of unincorporated entities over incorporated entities when used for non-business purposes.
  • The emergence of the L3C or similar ‘social benefit’ entities and their utility (or lack thereof).
  • The implications for management, structural and legal concepts (e.g., limited liability, agency principles, fiduciary duties, and the duty of good faith) when an unincorporated business entity is operated for non-business purposes.

Submission Procedure:   A draft paper or proposal may be submitted via email to:  Professor Rutheford B Campbell, Jr. at the following e-mail address: rcampbel@uky.edu (Please note that in the e-mail address there is only one “l” in “rcampbel”). 

Deadline Date for Submission:   June 1, 2011.

Form and Length of Paper; Submission Eligibility:  There is no requirement as to the form or length of proposals.  Faculty members of AALS member and fee-paid law schools are eligible to submit papers. Foreign, visiting and adjunct faculty members, graduate students, and fellows are not eligible to submit.

Registration Fee and Expenses:  Program participants will be responsible for paying their annual meeting registration fee and expenses.

How will papers be reviewed?  Papers will be selected after review by the section’s Executive Committee.

Will program be published in journal?   The section does not plan to publish the papers in a journal.

Contact for submission and inquiries:    Professor Rutheford B Campbell, Jr. University of Kentucky College of Law     rcampbel@uky.edu     Phone: (859)257-4050     FAX: (859)323-1061

The Recorder (HT Law Blog), discussing the Howrey endgame:

One issue that’s in play is the matter of the prestigious Howrey name. A former Howrey lawyer in California said Winston might pay $2 million or more for the Howrey moniker. The goal had been to name the new firm Winston Howrey, but one lawyer told the Recorder that that price seemed low. “I actually think the Howrey name is worth more like $20 million in terms of client recognition and good will,” the lawyer said.

So what’s “Howrey” worth? Consider Bromberg & Ribstein on Partnership, §7.12(a):

If the partnership name is an ordinary trade name, in the absence of contrary agreement or deception of the public, all partners are entitled to use it and may not enjoin use by the other partners. Because the name itself is available to all, there is no appropriation of a partnership asset for which there is a duty to account, though the partners may have a duty to account for the goodwill of the firm that is related to use of the firm name. * * *

In some cases, continued use by any of the partners of a name that has been identified with particular people in the public mind may involve a fraud on the public by creating the appear­ance that a former partner remained with the firm. * * *

The treatise discusses in the notes litigation involving the names of some string quartets, the “Flonzaley Quartet” and the “Audubon Quartet.”

Since this is a law firm, professional rules apply.  Rule 7.5 of the Model Rules:

(a) A lawyer shall not use a firm name, letterhead or other professional designation that violates Rule 7.1. A trade name may be used by a lawyer in private practice if it does not imply a connection with a government agency or with a public or charitable legal services organization and is not otherwise in violation of Rule 7.1. * * *

Rule 7.1:

A lawyer shall not make a false or misleading communication about the lawyer or the lawyer’s services. A communication is false or misleading if it contains a material misrepresentation of fact or law, or omits a fact necessary to make the statement considered as a whole not materially misleading.

So the question comes back to what “Howrey” signifies. 

My theory (which is not necessarily reflected in current case law) is that the names of large law firm names used to mean more than they mean now because they were associated with a particular reputation which the firm built by monitoring, mentoring and screening its members.  Now, with the Death of Big Law, it’s more likely the name is associated simply with a group of individuals. 

So as Big Law dies, its name goes with it. What does it mean right now?  $2 million or $20 million?