December 14th, 2008

Will Dreier Partners Be Liable for Stolen Money?

Much has been written about Marc Dreier’s substantial theft of his firm’s assets and the raiding of the attorney escrow fund where client funds were held.; as much as $380 million may have been purloined. Everyone has discussed that he is the sole equity partner holder.

But what of the non-equity partners? As of today their web site lists 49 such individuals. Can they be held responsible for the firm’s losses? Given that the firm shockingly has no malpractice insurance (though the insurance carrier may well have tried to disclaim coverage anyway), this surely must be a cause of sleepless nights for the non-equity partners.

The short answer is, yes, they might be liable under New York law. I happened to have litigated the issue back in the 90’s on behalf of my father after he separated from Fuchsberg & Fuchsberg, where he was an income partner. Fuchsberg tried to claim that, despite 20 years of representing to the world that my father was a partner, he was in reality a glorified employee. The arbitrator disagreed with Fuchsberg’s employee argument, and the final verdict landed on the front page of the New York Law Journal.

So — aside from the details of a written partnership agreement that I obviously don’t have access to — below are the types of issues that will have to be sorted out to determine whether the Dreier non-equity partners are really partners for the purpose of sharing in the losses. Some of the issues listed below come from D’Esposito v. Gusrae, Kaplan and Bruno

Was the individual listed as such in Martindale-Hubble, on the firm’s letterhead, website and/or tax return;
Did the partner receive distributions of net profits from the firm, and if so, was this a fixed amount (indicating more employee-like) or did it fluctuate (more partner-like);
Was the partner responsible for the firm’s rent or losses;
Was the partner a signatory of the partnership and/or operating agreement;
Did the partner make any kind of capital investment;
Did the partner exercise any control over partnership affairs.

Bad times are ahead for those that made partner and might now be on the hook for losses that could throw them into bankruptcy, even though they didn’t own any of the firm’s equity. Rest assured that the partnership agreement is being read today by a gazillion lawyers with a fine-toothed comb.

Addendum: One critical place the lawyers will need to look to sort out the liability issue is the income tax return filed for partners (form K-1). That form lists the percentage of profits that they are entitled to as well as the percent of losses (regardless of whether there were actual losses prior to this). Any non-equity partner that is responsible for losses on that K-1 may be in for particular trouble.

See also:
Dreier Troubles Show Danger of Single Equity Partner Structure (Weiss @ ABA Journal)

Links to this post:

madoff, dreier and blagojevich
madoff, dreier and blagojevich. marc dreier, the big spender and power hungry lawyer, has losses alleged to be $380 million plus a bunch of staff and partners wondering where their next paycheck is coming from (jail? …

posted by Norma @ December 19, 2008 3:20 PM

the accomplishments of marc dreier
even after being jailed in toronto, the litigator managed to grift <0 million from an escrow into his personal account. and he let the malpractice insurance on his law practice lapse, as his horrified colleagues are now finding out. …

posted by Walter Olson @ December 13, 2008 7:38 PM

November 19th, 2008

How One Brooklyn Courtroom Wastes $10M Each Year

This is a story of how one courtroom in Brooklyn is responsible for wasting over $10 million in legal time. Every year. And that calculation is conservative.

The scene for this nightmare is one of our local trial courts, the Supreme Court Building in Brooklyn. The courtroom is called the Central Compliance Part, or CCP as it is known to its denizens. And each day in this massive ceremonial room, a couple hundred hours of lawyers’ time is wasted. When this is annualized, the numbers are truly frightening.

To understand this misery, a little background is in order. All civil litigation starts, after the filing of complaints and answers, in an “Intake Part” where a preliminary conference is held and a discovery schedule is worked out. At that preliminary conference a compliance conference date is also set to mop up any outstanding issues. If your adversary decides to show up on time you could be done in a half hour.

But when you return for that compliance conference, you will not leave in a half hour. No way. The calendar will have over 100 conferences and motions on it. Over the course of a morning some 200 lawyers can easily come and go through this model of epic legal inefficiency. Today’s calendar, for example, had 75 conferences. It looked like this: /ConferencesCCP.pdf
Now add to that the motion calendar with 72 motions and cross-motions involving 54 different cases, which looks like this: /MotionsCCP.pdf

Now ask all the lawyers to show up at 9:30, in one place.

Even if you can work out any remaining issues with your adversary, and you can accomplish what you need in 10 minutes, which is often the case, you may not leave this room for two to three hours. Even if you work everything out and submit a proposed order with no issues that need judicial intervention, you might still wait for an hour for a signed order to be returned to you. And this waste doesn’t count the time going to and from court.

The system is so bad that a cottage industry of “per diem” lawyers has even grown up around it. These folks will, for about a hundred bucks, take care of your conference or routine motion. They make their living by running around from courtroom to courtroom on behalf of others who have conflicts, or who can’t spare half a day to do 10 minutes of work. While this may be seen as a boon to some who want to go this route, it also means that if you are on the other side of a per diem who has booked several different things in different courtrooms, you may be left cooling your heels waiting, and waiting and waiting, while they make their living elsewhere and waste your time.

This is no way to run a courthouse. The lawyers all know it. The judges all know it. The clerks all know it. Everyone hates it. Except for the per diem lawyers running around the courthouse putting their band aides on a septic system.

Having now ranted a bit, let me add my suggestions for fixing this very broken system that is wasting hundreds of hours of legal time every day on matters of simple discovery.

First: The court must create an electronic template for their compliance orders that the attorneys can use, with required dates for completion and a future conference. That is the easy part;

Second: Every Preliminary Conference should have a provision whereby the attorneys are required to have a conference call at least 20 days before the compliance conference so that they can use that template to create a stipulated order to complete outstanding discovery;

Third: All completed orders can be submitted via email to the court, with blanks left for future court dates and a place for the attorneys to note their availability or unavailability due to conflicts. The court then prints, signs, and files and the lawyers retrieve the order via eLaw.

Fourth: Any unresolved issues must be subject to a court conference call with one of the court attorneys. Scheduling is done by email with a specific time to call in;

Fifth: In the event of a real issue that has defied resolution, or an unreasonable or obstreperous lawyer is involved, a court conference is scheduled;

Sixth: Some lawyers don’t, ahem, get paid to move cases efficiently. They get paid to be unreasonable. Wasted time means more billable hours. The court has to start treating the directives in preliminary conference orders more seriously and be stricter with problematic firms as the judges do in the federal system. This will ultimately force lawyers to work things out, or risk the wrath of the court for being unreasonable or routinely ignoring orders.

The system is broken. Badly. It needs to be fixed.

And so, to the Powers That Be in Brooklyn, I beg and beseech you. Fix it. Just 200 hours of wasted time a day — and it is really much more than that — is 1,000 hours a week, which is over 50,000 hours per year. At $200/hour that is $10,000,000/year.

Out of just one courtroom.

November 12th, 2008

Lawyer Layoffs: Problem or Opportunity?

Law firms are laying people off left and right, according to a story in the New York Times today as well as extensive coverage in the legal blogosphere. Above the Law even has a category, Layoffs, dedicated to the subject.

Or at least you would think the layoffs were coming left and right. The reality is that the layoffs appear to come mostly from BigLaw, not necessarily SmallLaw.

Lawyers like to think that, for the most part, we are recession resistant. Because if things go south, there are companies struggling with bankruptcy, litigation among feuding companies over deals gone south, and investigations galore.

But, according to the Times, the legal field seems to be contracting because the companies are so cash poor from the credit crisis, they don’t want to waste their cash on lawyers. According to the Times:

In downturns of years past, law firms exploited corporate failures and bitter, protracted lawsuits to keep busy and keep billing. But in this still-unfolding crisis, the embittered and the bankrupt have been relatively slow to appear, at least in court…

A wave of big company litigation — those suits that pit armies of associates against each other — has also not materialized. A recent survey by one big firm, Fulbright & Jaworski, found fewer large companies reporting new lawsuits against them this year. Although executives may desperately want to sue one another over recent losses, they may not know how big those losses are or want to know how big they are. In any event, cash is precious in this downturn, and litigation is both costly and risky.

And what does that mean for the BigLaw firms that generally handle this stuff? Lost jobs and altered billing practices for those that aren’t nimble enough to change their (high billing) ways. And that includes, interestingly, a contingent fee. More from the Times, buried deep in the article:

“Rather than having hourly rates, we are increasingly negotiating flat fees or fixed fees, or success fees,” which include a premium based on predetermined conditions, said Ivan K. Fong, chief legal officer and secretary at Cardinal Health in Dublin, Ohio, and chairman of the Association of Corporate Counsel. Some law firms have resisted those changes, he continued, but may find they have to accept clients’ wishes.

Success fees? Yeah, I’ve had those for awhile.

The problem with BigLaw is that some things can’t get cut back. Like that big fat rent bill from the Class A accommodations and the fancy wood-panelled offices. A healthy chunk of an associate’s billing goes to overhead, another healthy chunk to the partners and another chunk to the bloated salary of the associate who is two years out of law school.

SmallLaw, by contrast, generally doesn’t have these problems. SmallLaw doesn’t need to charge $800/hour because they don’t need to feed the vast BigLaw machine. And that means an opportunity for some.

Over at Legal Blog Watch, Carolyn Elefant asks this question in Should You Stay or Should You Go Now:

If you’re currently employed as a lawyer, should you stay at your firm or jump ship now? This Dallas Morning News story quotes experts who agree that, in this economy, it’s better to remain at a lousy job and take the paycheck instead of trying to find a new position. But I’m not so sure that’s the best approach.

In a deep recession, with companies looking to cut back on anything possible including ridiculously high legal fees, savvy lawyers might not be so keen on staying with a BigLaw firm with diminishing work. They may strike out on their own if they can grab a client or two to take with them while they build their practices. While no one answer is right for everyone, it seems clear that starting up one’s own firm in a recession might actually be a viable option for some.

My guess is that we are seeing the beginning of a big shake-out in BigLaw. The pressure will come not just from existing clients that may balk at paying the outrageous fees they command, but from below where former others are now hard at work recruiting their former clients (and new ones) with the same talent. But at half the cost.

October 13th, 2008

Recipient of "I’m Sorry" Letter Fights Back with New Website To Regain Reputation

The “I’m Sorry” letter from Dallas attorney Jeff Murphrey raced around the internet last week. It raced because he had very creatively skewered opposing counsel Dale Markland for not having the decency to adjourn a deposition while he suffered the ravages of Hurricane Ike (I’m Sorry You’re A Jerk (Lawyering 101: Professionalism).

It seems that not only was property damaged, but so too was reputation. Markland, it may come as no surprise, was not pleased at being the butt of Murphrey’s letter and its wide dissemination. If you were Googling “Dallas Attorney Dale Markland” you would find a number of unflattering stories on the now famous “I’m Sorry” letter. And that’s bad if you happen to be Markland.

So how does a person you fight back and regain one’s Google reputation? Dan Solove dealt with the subject of easily ruined reputations in the digital age in his terrific book, The Future of Reputation: Gossip, Rumor, and Privacy on the Internet, which I reviewed last year. He would no doubt be interested in the path Markland is now taking to battle back.

If you’re playing a bit of catch-up here, this was some of the substance of the original letter from Murphrey after Markland demanded expenses and attorneys fees for a busted deposition:

I am sorry that a hurricane hit Houston.

I am sorry that I had no power or water at my house as a result of the hurricane.

I am sorry that I had to extend my stay out of state because of the hurricane.

I am sorry that CenterPoint energy did not bend more quickly to your desires and restore power to my home so that I could return to it sooner.

I am sorry that upon returning to my home on Monday, September 22, 2008, I discovered a roughly 50 ft. X 6 ft. swath of human excrement, used condoms and all the other niceties that come with a raw sewage leak in one’s backyard which drains into one of the main bayous in Houston.

I am sorry that I had to threaten City of Houston officials with lawsuits and local news exposure in order to get them to even agree to meet with me about cleaning up the problem.

I am sorry that these city officials chose a date that interfered with our deposition and gave me no other option.

I am sorry that the Houston Public Works Department had to use a fire hose to blow human excrement out of my yard on the day our deposition was scheduled.

I am sorry that the city required my presence at the debacle noted immediately above…

I am sorry that you are the only lawyer in this case that consistently goes out of his way to be unaccommodating and unprofessional with the other lawyers. I am sorry you are from Dallas.

This stuff then appeared not only on my humble little blog, but in far more prominent spaces including Above the Law, the WSJ Law Blog, the Houston Press and elsewhere.

So Markland has now acted, not just escalating a battle between he and Murphrey, but for a far more important reason: to reclaim his name in the event that future potential client’s Google him.

And so the Markland and Hanley website is now up, with the most prominent feature being Markland’s response to “the Hurricane letter.” In fact, this fledgling site only has those two pages (at the moment). Markland notes at one point some of the abuse he has been subjected to:

A telephone call from The Texas Lawyer asking me to respond to all of the scorn I was being subjected to on internet blogs and in emails circulating throughout the country. Not being a blogger, I was unaware of the scorn which had been directed at me by a segment of at least the lawyer populous. Directed to one particular blog site, I found bloggers, apparently some being lawyers, calling me a liar and a scoundrel.

The details of his end of the story are now up there, relying significantly on the assertion that he was unaware there even was a problem with the deposition until he was changing planes while traveling there. He writes at his site:

The hurricane in the Houston area occurred on September 12/13;

Mr. Murphrey cancelled the deposition on September 23 when I was already on my way to Fort Wayne, Indiana for the deposition;

I will offer up one bit of wholly unsolicited advice to Markland: The best way to reclaim your Google reputation is not only by creating that web site (and obviously expanding it to describe your firm and the actual lawyering that you do), but to start blogging. Why? Because by doing so you will be creating more content that will, over time, hopefully bury the hurricane story so that it is but a trifle. When people Google you in the future, you’d rather have that on page five than page one.

You’ve been introduced to blogging the hard way, but having now been forced into that sphere, you may want to make the best of it. Though you’ll have to do it well.

========================================
After posting this, others have weighed in:

The Stars At Night; Are Big And Bright … (Above the Law)

We’re sorry Mr. Markland, but Murphrey’s original letter was funny. Beyond that, it seems like you and Murphrey need to sit down and work things out. Maybe you can even use a “telephone” and talk thing through. But if you insist on using forms of communication that can reach a wider and unintended audience, we’ll continue to do our part.
Lawyers duke it out over post-Hurricane Ike depo (Texas Lawyer)

The upside to the situation, Markland says, is that he’s now in a better position to understand — and to advise clients on — the dangers of the Internet age.

October 7th, 2008

I’m Sorry You’re A Jerk (Lawyering 101: Professionalism)

Over at Legal Antics, Nicole Black has a great letter from Dallas Attorney Jeff Murphrey to his opponent in a case, Dale Markland. The problem stems, apparently, from Markland’s failure to be accommodating on a deposition date when Hurricane Ike blew threw town, causing damage to Murphrey that needed to be attended to. This included excrement and other raw sewage and other nasty details. His apology letter is an instant classic. (Addendum: You can read both sides of the story if you want to decide who was the discourteous one. See update below.)

Contrast that letter to a recent conversation I had with opposing counsel in one of my cases. He made a motion and I needed more time to respond. It went like this:

Me: I need another two weeks on the xyz matter to put in my papers.
Him: Do you have a reason?
Me: Yes
Him: What is it?
Me: I would grant you the same courtesy if you asked.
Him: Good enough for me.

The lesson to all those that think they can gain some litigation advantage when the other side has a problem? What goes around comes around. The professional courtesy you seek two years from now either on this case or an unrelated one, either because you have a conflict or your kid became ill at a very inconvenient time, will not be returned if you fail to extend those courtesies yourselves.

(Also at Above the Law, WSJ Law Blog, Houston Press, and no doubt elsewhere)
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Updated 10/13/08: Recipient of “I’m Sorry” Letter Fights Back with New Website To Regain Reputation