By Erin Fuchs
Law360, New York (April 25, 2011) — The recent demise of law firms such as Howrey LLP has ushered in new opportunities for attorneys representing other lawyers and firms in disputes stemming from the collapses, experts say.
The wave of firm failures began with the 2003 implosion of Brobeck Phleger & Harrison LLP and exploded with the dissolution of other big-league players such as Coudert Brothers LLP, Heller Ehrman LLP, Thelen LLP and most recently Howrey LLP.
Collapses from just the past few years add up to more failures than in previous decades, according to Kurt Peterson, a partner with Reed Smith LLP who specializes in legal malpractice.
And these failures are causing an array of legal problems for both dissolving and acquiring firms as well as departing partners, according to Jonathan Hughes, vice chairman of the attorney liability practice group at Howard Rice Nemerovski Canady Falk & Rabkin PC. Recently, Howard Rice has been advising both the partners who left Howrey and the law firms that took them on, Hughes said.
“Law firm dissolutions have definitely led to a lot of work for people who represent law firms,” Hughes said, adding that virtually every major firm has hired a partner from a dissolved one. “Everybody has had to deal with this issue.”
The firms that take on partners can face so-called unfinished business claims from bankruptcy trustees, asserting that the estate has a right to profits from work started at the defunct firm and completed at the acquiring firm, experts said.
Heller launched lawsuits against more than two dozen firms in December alleging they benefited from improper transfers when they snapped up its attorneys. And just last month, a bankruptcy judge blocked an effort by 10 law firms including DLA Piper and Jones Day to obtain an interlocutory appeal of an order refusing to dismiss unfinished business adversary proceedings in Coudert’s bankruptcy.
In addition to unfinished business fights, firms that acquire partners from dissolving firms can inadvertently create conflicts of interest, according to Richard Hoffman, a partner with Duane Morris LLP, whose practice focuses on insurance disputes as well as legal malpractice and legal fees.
“The desire for some law firms to take on some very good attorneys quickly can mean that some conflict issues get overlooked, just in the hustle and bustle of moving quickly,” he said. “Sometimes you just ask the new attorneys to leave, but that doesn’t necessarily take care of the conflict that was created.”
Meanwhile, law firms that are collapsing face their own legal hurdles in the form of fights with clients who grow reluctant to dole out fees to a crumbling or already-defunct firm, according to Peterson, who noted his former employer Crosby Heafey Roach & May even ran into difficulties getting paid when it merged with Reed Smith.
“When a business is going out of business, people feel some liberty not to pay their bills, frankly,” Peterson, who advises both law firms and bankruptcy trustees on collecting fees, said.
These clients could also hit crumbling firms with malpractice allegations to justify the unpaid bills, which often come in the form of demand letters rather than public lawsuits, Hughes said. In some cases, law firms have actually made errors, he said.
“As law firms and their attorneys start acting under more duress because of the collapse of the firm, they get distracted and sometimes they have to make very quick decisions,” Hughes said. “If those circumstances are mishandled they can lead to errors being made … Deadlines can be blown.”
Collapses have indeed ignited fears of malpractice suits that have spurred departing lawyers to consult malpractice attorneys, Hoffman said. But the failures have not necessarily led to a greater number of malpractice suits in their wake, he added.
“Good attorneys are good attorneys even in hard times. They can compartmentalize their problems and still deal with their clients,” he said. “In some cases, they may have more of an incentive to pay attention to their clients’ problems because they want to make sure their clients follow them to the next firm.”
Still, Hoffman advises that dissolving firms protect themselves against malpractice claims by buying so-called tail legal malpractice insurance to cover claims made after the policy period.
These bids to seek coverage can still backfire, Hoffman said, pointing out that a bankruptcy judge blocked Heller from spending almost $3.5 million on a three-year, $20 million tail legal malpractice insurance policy.
For their part, lawyers from dissolving firms will still continue to remain concerned over legal malpractice claims and whether insurance will cover those claims, Hoffman said. He added, “It is something that causes more than a few attorneys in law firms that are dissolving … to lose sleep at night.”
–Additional reporting by Eric Hornbeck. Editing by Eydie Cubarrubia.