Welcome back to the Big Law Business column. I’m Roy Strom, and today we preview the final act for Stroock & Stroock & Lavan. Sign up to receive this column in your Inbox on Thursday mornings.
From the outside, Stroock & Stroock & Lavan might look like a firm that fell apart in chaotic fashion. News this week of the nearly 150-year-old firm going belly up was abrupt, following failed merger talks and the swift, mass departure of lawyers to Hogan Lovells.
But there are signs that Stroock’s leaders have been working behind the scenes to try to prevent the worst-case scenario when a law firm collapses: partners facing personal liability for its debts.
An orderly law firm dissolution is a two-part process. Whether Stroock can successfully orchestrate its wind down could have real consequences for its soon-to-be former partners.
Step One: Get Everyone Off the Ship
Stroock’s partnership voted last week to allow a committee to dissolve the firm “at the appropriate time,” Jeff Keitelman and Alan Klinger, its co-managing partners, said in email to partners. They also said the firm would alert partners before the dissolution occurred.
That likely means that everyone hits the exit before the process formally begins, according to John Morley, a Yale Law School professor who’s an expert in law firm failures. Otherwise, partners still at the firm when it dissolves can be subject to attempts from creditors to recover fees from their ongoing work, he said.
That’s thanks to a legal principle called the “unfinished business doctrine.”
When a law firm dissolves, the doctrine dictates that partners who take client matters with them to a new firm are required to account to their former firm—and ex-partners—for profits from those matters. In other words, the work is considered “unfinished business” from the previous firm.
The doctrine has lost some teeth in recent years, with courts in New York and California deciding fees earned by lawyers after they change firms are the property of the new firm.
Still, it makes sense from a strategy standpoint for Stroock to get all of its partners off-ramped before the firm runs aground.
“I read this email announcement from the firm leadership as giving everyone notice that they need to get out as quickly as possible so they’re not caught at the firm at the time it dissolves,” Morley said. “If I were a partner at Stroock, even if I didn’t have a job lined up at a new firm, I would withdraw before the dissolution regardless.”
The strategy has been successfully employed in the past. Bingham McCutchen went belly-up in 2014, but never said publicly when it formally dissolved, according to Morley.
Step Two: Stay Out of Bankruptcy Court
Even after everyone gets out of the boat, an orderly dissolution is no guarantee.
Creditors can still force a firm into bankruptcy. That’s where the biggest risks lie for partners, who could potentially be forced to go into their own pockets to pay off the firm’s debts.
“Bankruptcy is what you want to avoid at all costs,” said Leslie Corwin, a lawyer at Duane Morris who says he’s represented more failed firms than just about anybody in private practice today.
Bankruptcies can get nasty for individual partners.
A key question becomes when the firm became insolvent. A trustee will fight to recover all compensation received by partners after that date.
Trustees and creditors typically try to argue that the insolvent date is sooner than later, a point that tends to be heavily disputed.
Stroock’s creditors might argue the date was around March 2022, when much of the firm’s bankruptcy group departed for Paul Hastings. That could open a lot of partners to claw back attempts for more than a year’s worth of compensation.
It’s the worst-case scenario in a law firm failure, but it happens with some frequency.
Large firms Sedgwick and LeClairRyan were unable to avoid bankruptcy filings when they imploded in recent years, leading to fights over creditors seeking payments from individual partners.
Stroock’s executive committee “is very much trying to keep it out of” bankruptcy, according to one person familiar with the matter.
That will require the firm to convince creditors that they’ll get paid more by collecting from Stroock’s remaining revenues than fighting it out in bankruptcy court.
The firm’s partners have already approved a dissolution plan, which would typically be part of the presentation to creditors to convince them to avoid a bankruptcy filing. The plan is meant to provide a detailed financial breakdown of a firm’s liabilities and assets, including how much revenue it expects to collect from accounts receivable, work in progress, and contingency fee cases.
Of course, the biggest unknown surrounding Stroock is the firm’s liabilities, and whether its assets can come close to covering them.
Either way, the process can drag on for years. Corwin said the dissolution of Wolf Block took nearly 10 years out of court. Sedgwick filed for bankruptcy in 2018, and partners were still reaching settlements on clawback claims four years later.
“A lot of people don’t understand that it doesn’t happen quickly,” Corwin said. “Clients don’t pay. You have to chase down clients and negotiate with creditors.”
The Stroock brand might be over. But the firm’s final act is just beginning.
Worth Your Time
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That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.
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