Source: http://cclawyer.cccba.org/2011/08/unleashing-the-value-of-your-law-practice-ethically/
Timestamp: 2016-07-30 16:52:11
Document Index: 536738825

Matched Legal Cases: ['§6068', '§6180', '§6180', '§6147', '§6180', '§ 6185', '§6180', '§6180', '§6180', '§6180']

Unleashing the Value of Your Law Practice Ethically : Contra Costa Lawyer Online
Elva Harding | Aug 01, 2011 | Comments 0
Prior to 1989, California’s attorneys were not permitted to sell the good will they built in their law practices [1]. But since California became the first state in the nation to allow the sale of law practices, solo practitioners have been in a position to profit from their legal and business acumen. Just as you thoughtfully prepared to hang your shingle and build your successful practice, the most successful lawyers will thoughtfully plan for the day they close up shop.
While the sale of a law practice may be similar to the sale of many other businesses, the Rules of Professional Conduct (“Rules”) provide the ethical framework for the transaction. (For valuation and contract issues see the State Bar of California’s “Guidelines for Closing or Selling a Law Practice” [2]; see also “Closing a Law Practice” on the CCCBA website.) The Rules work best where the attorney has considered them in advance, even if the potential sale is years away, and put policies and procedures in place that will facilitate a transfer.
Rule 2-300 provides that “all or substantially all of the law practice of a member, living or deceased, including goodwill, may be sold to another member or law firm”. With few exceptions, the Rules do not permit the sale of a portion of a practice. If the selling attorney has a close relationship with one or two clients such that a new attorney could not realistically assume responsibility for the client, the selling attorney may retain those few clients. Additionally, when clients decline to hire the new attorney or where the transfer would result in a conflict of interest or other violation of Rules 3-300 and 3-310, the selling attorney may retain those clients [3].
Outlined below are the conditions under which a law practice may be sold.
The purchase may not be financed on the backs of the seller’s clients. The purchasing attorney must honor the seller’s fee agreements with current clients and may not increase fees as a result of the sale [4]. However, the purchasing attorney may increase fees to returning clients, provided that the fees do not exceed the fees she charges her own clients [5].
The purchasing attorney will want to diligently investigate the practice. However, the selling attorney must take care not to disclose any confidential client information to the purchasing attorney. Although Rule 2-300(E) simply states that the selling attorney must not reveal confidences to non-members, the selling attorney must be mindful of Rule 3-100 and Bus. & Prof. Code §6068(e)(1) which require her to maintain client confidences unless she receives consent from her clients. As an initial step to aid marketability of the practice, the well-prepared seller will offer the buyer certain non-confidential reports including a brief list of the types of cases handled, the fee structure and perhaps the number of each type of case. She will also be able to provide the firm’s financial reports to support the value of her book of business and practice.
Once the parties have decided to proceed with the sale, written notice must be sent to current clients, and should be sent to former clients if their files are to be transferred to the purchaser, at their last known address, at least 90 days in advance of the transfer. The notice should request the client’s written consent to the transfer. The letter must inform the clients that the practice is being sold to the purchasing attorney and that the client has the right to retain a lawyer of her choosing. It must also explain that pursuant to Rule 3-700, the client may take possession of the client’s file. Of course, the communication must comply with the Rules regarding advertising and solicitation [6] and attorney client fee arrangements. If the client does not respond to the letter within 90 days of mailing the notice, it is presumed that the client consents to the transfer until the client otherwise notifies the attorney [7].
Prior to closing the sale, the purchasing attorney should conduct a conflict check to make sure that no conflicts exist with the seller’s clients [8]. If a limited number of conflicts arise, those clients may be retained by the selling attorney or, depending on the situation, it may be possible for the client to consent to a properly disclosed conflict [9].
Transfer of Files and Property
At the completion of the sale, the files and property of those clients who have consented to the new representation should be transferred to the purchasing attorney along with any client funds held in trust. Both attorneys should take care to make sure they properly account for funds in and out of their trust accounts [10]. The files and property of non-consenting clients, however, should be treated as a terminated engagement and returned to the former client [11].
Finally, the purchasing attorney must take appropriate steps to enter a substitution of attorney for any open cases [12].
Sale of a Practice by the Estate of a Deceased Attorney
Ideally, the transfer of the practice is well-planned and the selling attorney has agreed to continue servicing her clients at least long enough to complete the notice process and preferably long enough to ensure a seamless transition. But what if the selling attorney is deceased (or the seller has a conservator or representative) and has not authorized an attorney to act on her behalf in such an event? The practice may still be sold pursuant to Rule 2-300(B)(1) and Bus. & Prof. Code §6180 et seq.
Cessation of a Law Practice
Even while the Rule 2-300 notice is pending, it is important that the deceased attorney’s personal representative, or even a purchasing attorney, take additional steps to protect her clients’ interests and the value of the practice. Bus & Prof. Code 6180 et seq. regulates the cessation of a law practice and provides tools to protect the deceased attorney’s clients and the estate. While it is beyond the scope of this article, certain components are essential to a successful sale.
Petitioning the Court for Appointment
An interested party (or clients and others) may petition the county court where the deceased most recently practiced or resided to assume jurisdiction of the law practice [13]. Upon a finding that the deceased has left open matters and that the clients’ interests may be prejudiced if the court does not act, the court may take jurisdiction and then appoint an attorney to, among other things: create a plan for disposition of the deceased attorney’s practice in order to protect its value as an asset of the estate [14] and examine the files and records of the law practice and obtain information regarding pending matters [15]. Although the Court appointed attorney may not be entitled to compensation for her work reviewing files under the court order [16], she is protected from liability for acts or omissions occurring in the execution of the court’s order [17]. While cumbersome, this process allows the estate and perhaps the purchasing attorney to protect the interests of the deceased attorney’s clients and maintain the practice in the event no other succession plans have been made.
The personal representative or the attorney having custody and control of the deceased’s files is required to send a notice of cessation of law practice to clients, opposing counsel, courts and agencies where the deceased had open matters, her malpractice insurance carrier and others [18]. Depending on the transition, the purchasing attorney may have custody of the files and be the best person to send this notice. Keep in mind, this notice is distinct from the Rule 2-300 notice.
Notice of Sale of Practice
Under the Rules, if the seller is deceased and no attorney has been appointed to act for her pursuant to Bus. & Prof. Code §6180.5, the purchasing attorney is responsible for sending the Rule 2-300 notice of the sale of the practice. The notice is similar to the sale notice discussed at the beginning of this article, except that it must state that the purchasing attorney may act on behalf of the client in the event the client’s rights would be prejudiced by a failure to act within the 90 days or prior to receipt of client’s written consent [19].
An established law practice is a valuable asset that can be sold for great profit if the transition is planned for and managed properly. With some planning, compliance with the Rules of Professional Conduct should not be burdensome and should enable an attorney to maximize the return on a mature practice.
Elva Harding is a Walnut Creek-based attorney specializing in real estate and business law. Elva’s clients include investment firms, property managers and entrepreneurs. She particularly enjoys acting as trusted advisor to her small and family-owned business clients. Prior to starting her legal career, Elva was an asset manager for a national private equity real estate firm. You can reach her at (925) 215-4577.
[1] Geffen v. Moss (1975) 53 CA3d 215, 226-227.
[2] Foonberg, Jay (2002-03). Guidelines for Closing or Selling a Law Practice. Retrieved July 13, 2011. http://www.calbar.ca.gov/LinkClick.aspx?fileticket=Tf1yhS8a2Mg%3D&tabid=233
[3] Cal. Rules of Professional Conduct, rule 2-300, Comments.
[4] Id., rule 2-300(A); Bus. & Prof. Code §§6147 & 6148.
[5] Cal. Rules of Professional Conduct, rule 2-300, Comments.
[6] Id. rule 1-400(D).
[7] Id. rule 2-300(B)(2).
[8] Id. rules 2-300(D), 3-300 and 3-310.
[9] Id. rules 3-300 and 3-310.
[10] Id. rule 4-100.
[11] Cal. Rules of Professional Conduct, rules 3-700 and 4-100.
[12] Id. rule 2-300(C).
[13] Bus. & Prof. Code §6180.2.
[14] Id. § 6185(a)(7).
[15] Id. §6180.5.
[16] Id. §6180.12.
[17] Id. §6180.11
[18] Id. §6180.1
[19] Cal. Rules of Professional Conduct, rule 2-300(B)(1).
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