Justin Scheck discusses what he views as mistakes Mel Weiss and his firm (Milberg, Weiss) made in planning their partnership affairs, which are haunting them today (HT PoL). According to the lead:
When its California operation split off in 2004, the leaders of Milberg Weiss had a choice: Break up their partnership and form a new firm, or continue as the same entity. Dissolving would have triggered massive capital payouts to former partners, but almost certainly would have saved the new firm from liability for wrongdoing committed prior to the breakup. The firm and its top partners, at the time, had been under criminal investigation for five years. But the probe seemed to be focused on departing California partner William Lerach, and dissolving was expensive. So the New York firm's executive committee, under lead partner Melvyn Weiss, decided to keep the partnership intact, banking that they'd be out of the investigation's shadow once the split was complete. They made the wrong choice, and not for the last time.
The long article is somewhat muddled as to precisely why this was a mistake. I can gather from the article two main problems. First, Mel Weiss's ego and concern for his "white shoe" legacy prevented him from cutting loose, cutting a deal and planning for the continuation of the firm without him. Lerach figured everybody thought he was an outlaw anyway so he made a more hard-nosed economically sensible decisions for himself and his firm. This part of the article provides some planning lessons even for more conventional law firms that are centered around a lead player.
Second, the article criticizes the Milberg firm's failure to dissolve at the time of the split-off:
[I]f the firm were to dissolve, it would have to dole out lump-sum payments that two partners of the pre-split firm estimated at between $40 million and $50 million. "At the time, several of us believed the only reason why they did that was to avoid paying," said one of them. That view isn't held by everyone involved with the case; Edward Hayes, the New York solo who represented Steven Schulman until last year, said he believes firm leaders carefully considered the possibility of reincorporating, and probably made the right decision. * * * Hayes said that from his perspective, the calculus seemed to be not about the liabilities of dissolving, but rather the lack of benefits: The prosecutors, he said, would probably have tried to argue that even a reincorporated firm should be liable for past behavior. "If you reincorporate with the same people and the same receivables, I don't think it would have helped," he said.
Certainly on the civil side it's far from clear the successor firm would avoid liability. See Unincorporated Business Entities at 291-92:
UPA § 41 provides that successor partnerships are liable for the debts of the old firm. This provision applies when a partnership is continuing the business of a prior partnership with some continuity of partners. It does not apply when a wholly new “person,” such as a corporation, continues the partnership business, or after a partnership has dissolved and wound up. See Gillespie v. Seymour, 876 P.2d 193, 201 (Kan. App. 1994), in which the court held that a successor accounting partnership was not liable for the acts of an accountant while he was a partner in the predecessor firm because UPA § 41 does not apply where a firm liquidates instead of continues.
UPA § 41 raises the question of when a firm is deemed to be continuing a prior partnership. Suppose, for example, that a 10-member professional firm breaks up and each partner goes to a different firm. Are all of these firms “successors,” which are now liable for the previous firm’s debts? See Woo, The Business of Law, Wall St. J., September 2, 1994, p. B3, col. 4, noting that, on the dissolution of Lord, Day, & Lord, Barrett Smith, “because Morgan Lewis expects to hire Lord Day lawyers individually, subject to a vote of that firm’s partners, it wouldn’t have to pay the debts of the dissolving firm.”
RUPA does not deal with successor firms. Rather, under RUPA § 801 the partnership does not dissolve at all following a partner’s dissociation in some circumstances (i.e., with the requisite vote to continue). Since the firm continues, there is no “successor” firm. See the Official Comment to RUPA § 703. But what do you suppose will happen if a RUPA partnership dissolves and its assets are sold as a going concern to some of the original partners? A creditor may have to pursue the separate assets of each partner of the original firm by obtaining charging orders (see § 7.02). But creditors may not be able to do even that without exhausting the assets of the old firm under RUPA § 307(d), discussed above in Chapter 6. Courts may find some way to allow recovery against partnership successor firms, whatever RUPA says, just as they have imposed liability on corporate successors of partnerships under a variety of theories, including fraudulent conveyances, disregarding the legal entity, bulk sale law, and implied assumption of liability. See Bromberg & Ribstein on Partnership § 7.19. The partnership agreement may limit the liability of partners and successor firms and will be enforced among the parties to the agreement. See Note 2, § 6.02.
Scheck also examines the allocation of cases at the time of the split-up. While this worked out badly for Milberg, which gave up the Enron case but kept the (in the end) less lucrative IPO case, this split was probably pursuant to the partnership agreement, which often in partnership split-ups allocates the cases to the partners mainly responsible for them with costs allocated to the pre- and post-dissolution firms.
For background of the underlying criminal charges, see Bruce Kobayashi and my newly published Hypocrisy of the Milberg Indictment.
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