Who 'owns' a departing lawyer's receivables?

By Ed Poll

Dolan Media Newswires

DETROIT, M--Large law firms that went under in the Great Recession became the targets of personnel raids before their demise. Very good lawyers from law firms departed and joined other major, national law firms. The firms that lured them away certainly thought they were scoring a coup.

But how many of these firms asked if their new lateral partners had any unwanted baggage?

In some instances, the new firms accepted partners from the old firm with the understanding that the lawyer would bring over clients from the old firm as well as any "unfinished business." Theoretically, this provides for immediate billing and, therefore, an opportunity to acquire great talent at a very low or zero cost.

Law firms that went into bankruptcy had to collect funds to pay their creditors. Companies that file for Chapter 11 do this by selling off operating assets -- equipment, facilities, entire operations. However, in a law firm, the major assets are the lawyers themselves.

Computers, furniture and real estate are of minimum value, if any, in a law firm. Accounts receivable are a major asset. But what if the lawyers who billed for them are no longer there?

When partners go to new firms and clients follow them, they generally take their books of "unfinished business." Clients of course have a right to seek their own choice of lawyer. But it can be argued that the profit to the new firm truly belongs to the old firm that provided the intellectual property and physical resources to help earn the billing.

When a failing firm needs to come up with cash, it can make a very plausible argument that billables which walked out the door with its former lawyers belong to the originating firm itself.

Deciding who gets the benefit from departing lawyers' receivables is likely a battle that will be fought for years, including in the courts. The reality of our world is that anyone can sue anyone else, even if wrong.

In the meantime, the largest pool of cash available to the trustee in bankruptcy for a defunct firm is the new firm that the defunct firm's lawyers went to -- and, perhaps, those individual lawyers themselves.

Whether legitimately or not, new firms have been economically compelled to settle many of such claims in order to go on with the new firm business for the lawyers they added.

The new firms thought they were getting a steal. This is particularly true because the lawyers who often are the first to bail from a troubled firm are the most successful and work with larger clients.

Lawyers whose clients are local auto dealers will probably not be as aggressive at job seeking or as attractive to hire as someone who has Ford Motor Co. for a client. But the firms who hire such lawyers should be reminded of the old saying that "... if it looks too good to be true, it probably is too good to be true."

There is a cost to everything, even a very attractive, new lateral partner with great talent and a great book of business. Accounts receivable may be the most fluid and important assets that a law firm has, and firms that think they're entitled to that asset may fight to control it.

Ed Poll, J.D., M.B.A., CMC, is the principal of LawBiz Management, a national law firm practice management consultancy based in Venice, Calif. He coaches lawyers, consults with law firms on strategy and profitability, speaks at bar associations and law firm retreats, and has written 11 books. Contact him at edpoll@lawbiz.com or visit www.lawbiz.com.

Published: Thu, Feb 16, 2012


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