Ethics Opinion 372
Ethical Considerations in Law Firm Dissolutions
Introduction and Scope
Numerous ethical obligations attach to both a law firm and its members in connection with the process of the dissolution of the firm. These obligations include, without limitation, the obligation to continue to competently, zealously and diligently represent and communicate with clients during the dissolution process; the obligation of the members of the firm, after consultation, to notify clients of the dissolution and provide clients with options under such notice; the obligation to facilitate the choice of new counsel by clients of the dissolving firm; and, the obligation to properly dispose of client files, funds and other property. As used in this Opinion, the term "dissolution" means the process of terminating the law firm's existence as a legal entity. Since dissolution of a law firm is a process and not a single event, the term is not limited to the legal or technical action which is required to terminate the existence of the firm as a legal entity under corporate, partnership, bankruptcy or other applicable law. Certain ethical obligations may apply at various points during the dissolution process itself and other ethical obligations may continue to apply after the firm has been dissolved. These ethical obligations may attach either when dissolution of the firm has been agreed to by its members or, absent such agreement, is nonetheless reasonably foreseeable. This Opinion does not address the departure of members of the firm in and of itself, even in significant numbers, absent an expectation that the firm itself will at some reasonably foreseeable time in the future be dissolved.1
Applicable Rules
- Rule 1.1 (Competence)
- Rule 1.3 (Diligence and Zeal)
- Rule 1.4 (Communication)
- Rule 1.6 (Confidentiality of Information)
- Rule 1.7 (Conflict of Interest; General)
- Rule 1.8(i) (Conflict of Interest; Specific Rules)
- Rule 1.9 (Conflict of Interest; Former Client)
- Rule 1.15 (Safekeeping Property)
- Rule 1.16(d) (Declining or Terminating Representation)
- Rule 5.1 (Responsibilities of Partners, Managers, and Supervisory Lawyers)
- Rule 5.4(b) (Professional Independence of a Lawyer)
- Rule 5.6(a) (Restrictions on Right to Practice)
- Rule 7.1 (Communications Concerning a Lawyer's Services)
- Rule 8.4(c) (Misconduct)
Inquiry
The Committee has received numerous inquiries through the ethics helpline and otherwise related to the ethical considerations that arise in connection with law firm dissolution. Unlike jurisdictions which have a specific rule governing law firm dissolution, the D.C. ethical considerations that arise in connection with law firm dissolution are dispersed throughout the D.C. Rules of Professional Conduct. We believe that it will be helpful to members of the Bar to aggregate the ethical principles of the various applicable D.C. Rules and Opinions in one comprehensive opinion.2
Discussion
The paramount principle governing the ethical obligations of a law firm and its members in connection with the process of dissolving the firm is that the law firm and its members must continue to competently, zealously and diligently represent and communicate with the clients during the dissolution process. The Rules of Professional Conduct protect the interests of clients by codifying the responsibilities of the legal profession to the public. Thus, despite the many competing responsibilities and potential difficulties of lawyers during the dissolution process, the ethical duties to clients are paramount. The individual lawyers in the firm have an ethical duty to ensure that the matters for which they are responsible are properly handled with diligence and zeal – including completion of their matters if possible – during the dissolution of the firm.3 Moreover, since engagement letters are typically contracts between the clients and the dissolving firm, and not the individual lawyers, the firm itself has a comparable ethical duty.4
The Dissolution Process
Consultation
When does the process of dissolution of a law firm begin? This question is not susceptible of a bright line test. There are myriad scenarios that lead to the ultimate decision to dissolve a firm. Numerous members of a firm may leave before the remaining partners decide to dissolve the firm. In the Committee's view, the test is: when is there a reasonable expectation that the firm will at some foreseeable time in the future cease to exist as a legal entity? This test may be met by both subjective and objective standards; i.e., the members of the firm may agree to dissolve, or, absent such agreement, a reasonable lawyer considering all of the facts and the conduct of the firm may conclude that dissolution is reasonably foreseeable.
The first step in the dissolution process might well be a decision by the members of the firm, after consultation in good faith, to dissolve the firm. However, we recognize that, in some dissolutions, such consensus and unanimity may be difficult or impossible. Thus, if good faith consultation is impossible or if the authorized members of the firm are unable to agree on dissolution, but there is a reasonable expectation that the firm will at some foreseeable time in the future cease to exist as a legal entity, then individual members of the firm should not be constrained from moving forward.
Notice to Clients
The next step in the dissolution process is to notify firm clients of the dissolution as soon as practicable.5 Although the timing of notice of the firm's dissolution may not be susceptible of precise determination, the ethical mandate is that the notice to clients be timely. Specifically, if after the firm dissolves the lawyer will no longer represent the client, Rule 1.16 (d) requires the lawyer to "take timely steps to the extent reasonably practicable to protect the client's interests, including giving reasonable notice to the client, allowing time for the client to employ other counsel, surrendering papers and property to which the client is entitled, and refunding any advance payment of fees or expenses that has not been earned or incurred."6 Even if the lawyer's continued representation beyond dissolution is anticipated or unknown, under Rule 1.4, the notice should be sent early enough so that, upon receipt by the client, the client has sufficient time to make an informed decision regarding the impact of the firm's dissolution on the client's matter(s) and the client's representation generally.7
ABA Formal Opinion 99-14 (1999) concludes that, once the members of a firm agree to dissolve, notification to the clients "can be accomplished by the [responsible] lawyer herself, the responsible members of the firm, or the lawyer and those members jointly." ABA Opinion 99-14 does, however, state that "far the better course to protect clients' interests is for the departing lawyer and her law firm to give joint notice of the lawyer's impending departure to all clients for whom the lawyer has performed significant professional services while at the firm, or at least notice to the current clients."
Florida Rule 4-5.8 and Virginia Rule 5.8 specifically govern the dissolution of a law firm in those jurisdictions. Under both jurisdictions' Rules, the lawyers of the dissolving firm may not unilaterally contact clients of the firm unless authorized members of the firm have conferred or attempted to confer and have been unable to agree on a method to provide notice to clients. If no method to provide notice to clients can be agreed upon, the unilateral notice from individual members of the dissolving firm must provide options to the clients that they may choose to be represented by any member of the dissolving firm, other lawyers, or other law firms. If a client of a dissolving law firm fails to advise the lawyers of the client's intention with respect to who is to provide future legal representation, the client is deemed to remain a client of the lawyer who is primarily responsible for representation of the client on behalf of the firm until the client advises otherwise.8
In the absence of a specific governing rule in the District of Columbia, and after reviewing the Virginia and Florida Rules, ABA Formal Opinion 99-14, and applicable authority in other jurisdictions, this Opinion provides guidance to members of the D.C. Bar on the best practices for law firm dissolution, including notice to clients.9
Joint notice by all members of the firm to the clients is preferred.10 However, if members of the firm cannot agree to provide notice to the clients, or the terms thereof, then in our view an individual lawyer or group of lawyers in the firm may give unilateral notice to the clients. The lawyer in the firm who had the most significant contact with the particular client, if practicable, should give such unilateral notice. Only if this is not practicable should unilateral notice by other lawyers in the firm be given. This resolution addresses the tension between joint notice by members of the firm to clients about the firm's dissolution and solicitation of the clients by individual lawyers of the dissolving firm for their new firm(s) and also enables lawyers to fulfill their ethical obligations to timely communicate information necessary to allow clients to make informed decisions about their legal representations.
Whether the notice is given jointly by all of the authorized members of the dissolving law firm or unilaterally by individual lawyers in the dissolving law firm, it cannot contain false or misleading statements.11 It should provide the options to the clients to choose representation by any member of the dissolving firm, representation by any other lawyer, or representation by any other law firm. The notice may not restrict any lawyer's right to practice.12
In the Committee's view, the notice should further provide that, if the client does not respond to the notice and choose any of these three options, the client shall be deemed to remain a client of the lawyer who has been primarily responsible for providing legal services to the client until the client advises otherwise. We appreciate that identifying the lawyer in the firm who is "primarily responsible" for providing legal services to the client is not always an easy endeavor and should be determined on a case-by-case basis depending upon the particular facts and circumstances of the representation. For example, a client's overall relationship partner may not be the lead litigation counsel in a particular litigation matter for the client; nonetheless, the lead litigation counsel may well be the lawyer "primarily responsible" for providing legal services to the client in that litigation matter.
Which Clients Receive Notice?
All clients affected by the firm's dissolution should be notified. This always includes current clients with active matters. In our view, as a general rule notice need not be given to all former clients whose matters have been closed. However, notice should be given to former clients even if their matters are inactive and their files are closed if the firm is holding files and other property for the presumptive five year period after a matter is closed or if the firm is holding files or other property of intrinsic value, such as an original will or stock certificates.13 Such clients are clearly affected by the firm's dissolution and should be notified. (See "Client Files" and "Client Trust Funds and Other Property," below, with respect to the ethical requirements for the return of the clients' files, funds and other property.) Moreover, notice to former clients is certainly permissible, although not required.14
Options for Client to Choose Counsel under Notice
A key principle governing the ethical obligations of a law firm and its members in connection with the process of dissolving the firm is that the clients do not belong to either the law firm or its members. It is axiomatic that a client has the right to retain and discharge a lawyer at will.15 When a law firm dissolves, therefore, the client may also discharge counsel and either hire new counsel or not. None of the individual members of the dissolving firm "own" the client. Nor does the dissolving law firm itself, as a separate legal entity, "own" the client.16 It follows, therefore, that as a general rule a client's right to choose counsel may not be impaired by the dissolution of a law firm. The client may choose to continue to be represented by a member of the dissolving firm at her new firm or to be represented by another lawyer or by another firm.
There may be other facts and circumstances, however, which give rise to exceptions to the general rule that the client has the right to choose counsel, and require the consideration of alternatives. For example, a lawyer's former law firm is dissolving and she is joining another law firm. She represents a client at the former law firm who wishes her to continue the representation at the new law firm. However, the new law firm represents another client whose interests are adverse to those of her client, which creates a conflict of interest under Rule 1.7. The conflict of interest cannot be resolved by client consent or otherwise. The lawyer cannot continue to represent the client at the new firm if such representation will result in a violation of the Rules of Professional Conduct or other law.17 Thus, other ethical obligations may preclude the lawyer's ability to continue to represent her client, even if she and the client wish her to continue the representation.18
As another example, a lawyer's former law firm is dissolving and she is joining another law firm that does not have the support and resources with respect to the client's matters as were available at the dissolving firm. This could limit the lawyer's ability to adequately represent her client at the new law firm. This could raise an issue of competent representation under Rule 1.1.
Conversely, there may be situations where the lawyer from the dissolving firm wishes to withdraw from representation of her client, but there are limitations on her right to do so. As a general rule, a lawyer may withdraw from representing a client after her firm dissolves if the withdrawal can be accomplished without material adverse effect on the interests of the client.19 However, the lawyer may be compelled to represent the client at her new firm. For example, the lawyer may notify a court, administrative agency or other tribunal that, upon dissolution of her law firm, she wishes to terminate representation of her client at her new firm, but that tribunal may order the lawyer to continue to represent her client.20
Thus, depending upon the specifics of the lawyer-client relationship and the particular facts and circumstances of each case, a lawyer in a dissolving firm should carefully consider whether she has an ethical obligation which precludes or limits her ability to continue to represent her client diligently, zealously and competently at her new firm.
A corollary to the client's right to choose counsel is the lawyer's right, after dissolution of her former law firm, to form, or move to, a new law firm. As a general rule, any agreement restricting the right of lawyers in a law firm to practice after the firm dissolves is unethical.21 Such an agreement not only limits the lawyer's professional autonomy but also limits the freedom of clients to choose a lawyer.22 A long line of Opinions of this Committee (most recently Opinion 368, Lawyer Employment Agreements – Restrictions on Departing Lawyer Who Competes with Former Firm (2015)) has disapproved various restrictions on the mobility of lawyers as a matter of public policy. Underlying each of these Opinions is the intent to preserve clients' access to lawyers who, because of their background and experience, might be the best available talent to represent them.23 Of course, the ethical obligations discussed above which may limit the client's ability to choose counsel may also limit the lawyer's ability to choose a new law firm.
Notice to Third Parties
In addition to the client, notice must be given to certain third parties. Opposing counsel and the tribunal must be notified.24 In addition, governmental agencies and other non-adjudicative administrative entities before which lawyers of the dissolving firm are appearing may require notification under their own rules and procedures, which are beyond the scope of this Opinion.25
Client Files
As an ethical matter, at the termination of a representation, upon request of the client, the lawyer must timely surrender the entire file.26 Such files may be made available for the client to pick up, delivered to the client, delivered to the client's new (or continuing) counsel, destroyed, or delivered to some other person designated by the client. If the files are not necessary to protect the client's interests or otherwise needed for continued representation, the costs of delivery, storage and review of the files may be charged to the client.27 The lawyer may make a copy of the files at his own cost.28
The question often arises as to whether such files may be withheld if the client has not fulfilled his obligation to pay the firm's earned fees and expenses. The District of Columbia permits lawyers to assert and enforce retaining liens against the property of clients for unpaid fees, as a matter of substantive law on which the ethics rules take no position.29 Rule 1.8(i) provides a narrow exception to Rule 1.16(d): as to files, the lawyer may retain only that portion of the file which constitutes the lawyer's own work product if the client has not paid for the work. Even this narrow exception does not apply if the client has become unable to pay or if withholding the work product might irreparably harm the client's interest. Opinion 250 (1994) states that "retaining liens on client files are now strongly disfavored in the District of Columbia, that the work product exception permitting such liens should be construed narrowly, and that a lawyer should assert a retaining lien only where the exception is clearly applicable and where the lawyer's financial interests clearly outweigh the adversely affected interests of his former client." We stress that a lawyer who relies on the narrow exception of Rule 1.8(i) to withhold any part of a client file does so at his own peril.
For client files maintained solely in electronic form, see Opinion 357 (2010). Absent an agreement to the contrary, a lawyer must comply with a reasonable request by a client to convert electronic records into paper form. In most cases, the client should bear the cost of such conversion, but in certain circumstances the lawyer may be required to bear the cost.
As discussed above, client files are considered "other property" of the client under Rule 1.15(a). Under that Rule and Opinion 283, such files shall be retained for a period of five years after termination of the representation, and under Rule 1.15(c) shall be "promptly delivered" to the client upon direction.
Client Trust Funds and Other Property
Under Rule 1.15(a), client trust funds, including retainers, are to be held in separate trust accounts maintained in accordance with Rule 1.15(b), absent other agreement with the client.30 Other client property is also to be held separately from the lawyer's own property. Under Rule 1.15(c), upon request by the client, the lawyer shall promptly "deliver" to the client any funds or other property that the client is entitled to receive. Under Rule 1.15(e), Rule 1.16(d) applies to require the return to the client of any unearned portion of advanced legal fees and unincurred costs upon termination of the lawyer's representation.
If, after reasonable but unsuccessful attempts to locate a missing client or a former client for whom a dissolving firm is holding trust funds or other property, the client cannot be located, the firm should consider the funds or other property abandoned and, if the circumstances fall within the District of Columbia's Unclaimed Property Act, dispose of the funds or property as directed by that statute.31
Information about the Firm
The dissolving law firm should review its website, firm listings and directories to ensure compliance with Rule 7.1. In light of the pending dissolution, no information can be contained therein which is false or misleading. A communication is false or misleading if either it contains a material misrepresentation of fact, or omission of a fact necessary to make the statement considered as a whole not materially misleading, or it contains an assertion about the firm or its services that cannot be substantiated.32 For example, the website should be updated for a transitional period to disclose the firm's dissolution, to provide contact information for the dissolved firm's former lawyers, and to inform clients how to obtain their files.
If the firm is going to use its firm name and letterhead during the transition period, the letterhead must be updated to accurately reflect the dissolution of the firm and the departure of the firm's lawyers.
Sole Practitioners
The Rules recognize the heightened risk to clients upon the dissolution of a solo practice, where such dissolution is due to the death, disappearance or disability of the sole practitioner. In order to protect the interests of a sole practitioner, and ensure continuity of representation of such clients, each sole practitioner should prepare a plan, in conformity with applicable rules, that designates another competent lawyer to review client files, notify each client that the lawyer is no longer engaged in the practice of law, and determine whether there is a need for immediate protective action.33 The D.C. Bar Practice Management Advisory Service provides confidential consultation services and a checklist for closing a law office which may be particularly helpful to sole practitioners.34
If such a succession plan has not been prepared by a sole practitioner, there is a procedure for appointment of counsel by the District of Columbia Court of Appeals, on motion of the Board on Professional Responsibility, if a sole practitioner dies, disappears, or is suspended for incapacity or disability and no partner, associate or other responsible attorney is capable of conducting the attorney's affairs.35
Dissolution of a Section 5.4(b) Law Firm
A unique issue in the District of Columbia arises upon the dissolution of a law firm that includes both lawyer partners and non-lawyer partners under Rule 5.4(b).
The partnership or other organizational document of the firm may specify the methodology to be followed when such a firm dissolves. In any event, the non-lawyer partners of the firm have ethical duties coextensive with those of the lawyer partners of the firm with respect to clients. Thus, the ethical duties of lawyers of dissolving firms discussed above would apply equally to non-lawyer partners of a Rule 5.4(b) firm.36
The non-lawyer partners of the firm and the lawyer partners of the firm have an initial duty to provide notice of the firm's dissolution to the other lawyers in the firm and thereafter to the clients. If good faith efforts to agree upon such a notice to the clients are unsuccessful, the individual lawyers and non-lawyers in the firm may unilaterally notify clients of the firm of the firm's dissolution, subject to the constraints discussed earlier in this Opinion.
If a Rule 5.4(b) firm dissolves and the lawyer partner who was providing legal services to the client in tandem with the non-lawyer partner's provision of non-legal services no longer wishes to provide legal services to the client, and there is no other lawyer who is capable of providing legal services to the client, the lawyer partner may have an ethical duty to continue to provide legal services to the client consistent with Rule 1.16 because the non-lawyer partner cannot provide legal services to the client.
Death, Incompetence or Disability of Lawyer
Where dissolution of a firm is incident to the death, disability or incompetence of a partner in the firm, so that the partner cannot give notice of dissolution to the clients, one of the surviving, competent lawyers should, in addition to any other ethical duties she may have, provide such notice to clients. This could include a partner, co-counsel, associate or otherwise affiliated lawyer.
Conclusion
A lawyer has numerous ethical obligations in connection with the dissolution of his law practice or a law firm of which he is a member. A lawyer must consider the obligations to continue to diligently represent and communicate with clients during the dissolution period, to notify clients of the dissolution, to facilitate the clients' choice of counsel, and to properly dispose of client files, funds or other property. There are additional considerations for the dissolution of Rule 5.4(b) firms and solo practices.
Published: March 2017
1. Although the ethical considerations which arise in connection with the lateral movement of lawyers between law firms, as well as law firm mergers and acquisitions, overlap with the ethical considerations which arise in connection with law firm dissolution, this Opinion is limited to the latter. See D.C. Legal Ethics Op. 273 (1997).
2. This Committee does not opine on questions of law outside of the D.C. Rules of Professional Conduct. The ethical questions presented in this inquiry, however, may require consideration of the substantive law that may arise and apply in the context of law firm dissolution, including without limitation the law governing bankruptcy, partnerships, corporations and other business entities, contracts, agency, fiduciary duty, real or personal property, tort, trade secrets and unfair competition. Members of the dissolving firm, and the dissolving firm itself, should consider these as appropriate. Nor, for the most part, does this Opinion address the myriad practical, financial and business considerations related to law firm dissolution.
3. Rules 1.1 and 1.3.
4. Id.; see also Rule 5.1.
5. See Opinion 273, in which we lay out in some detail the specifics of the required notice to clients with respect to lateral moves. The same principles should generally govern notice to clients with respect to law firm dissolution.
6. Rule 1.16(d).
7. Rule 1.4(a) and 1.4(b).
8. See Florida Rule of Prof. Conduct 4-5.8 and Virginia Rule of Prof. Conduct 5.8. For purposes of the notice required by the Virginia Rule, "client" refers to clients for whose active matters the lawyer has primary responsibility. This excludes closed matters and includes associates as well as partners.
9. This builds on the guidance provided in Opinion 273. However, we caution lawyers in dissolving firms that every notice should be tailored to the particular facts and circumstances surrounding the firm's dissolution, which can be quite varied. There is no "one size fits all" formula for notice to clients when a law firm dissolves.
10. The ethics opinions of other jurisdictions vary as to whether joint notice, individual notice, or both, is required. See, e.g., Cal. Bar Ethics Op. No. 1985-86, (interpreting the California Rule to require both the departing lawyer and the law firm to provide notice to the client).
11. Rules 7.1(a) and 8.4(c).
12. Rule 5.6(a).
13. See Rule 1.15(a), Rule 1.15(c), Rule 1.16(d), D.C. Legal Ethics Op. 283(1998).
14. For example, a lawyer who has had a long and deep relationship with a client, but who has no active matters and is currently holding no client files or other property, may nevertheless consider notifying the former client of her firm's dissolution, as the client may nonetheless view her as its lawyer.
15. A client has the right to discharge the lawyer at any time, with or without cause, subject to liability for payment for the lawyer's services. Rule 1.16(a)(3); Rule 1.16, comment [4].
16. In this respect, the Committee is aware of Restatement (3d) of the Law Governing Lawyers, §9(3), comment i, which suggests that clients belong to the law firm and not to the individual lawyer. The Committee disagrees with any characterization of clients as property of the law firm.
17. Rule 1.16(a)(1)
18. If a conflict of interest arises under Rule 1.7(b)(1) by virtue of dissolution of a lawyer's firm and her joining a new firm, and the clients do not consent under Rule 1.7(c), a lawyer should consider whether that conflict was or was not reasonably foreseeable under Rule 1.7(d), and thus whether she may or may not continue to represent the client under the "thrust upon" exception to the conflict rule.
19. Rule 1.16(b).
20. Rule 1.16(c).
21. Rule 5.6(a).
22. Rule 5.6, comment [1].
23. See, e.g., D.C. Legal Ethics Op. 335 (2006).
24. Rule 1.16(c).
25. As a practical matter notice of the firm's dissolution should also be given to mandatory state bar associations to which lawyers of the dissolving firm belong, other voluntary professional organizations of which it is a member, the firm's malpractice carrier, its accountant, taxing authorities, its bank and other creditors. The dissolving firm may also be required to file notice of dissolution with the D.C. Department of Consumer and Regulatory Affairs.
26. See Rules 1.16(d) and 1.15(c); see also In re Thai, 987 A.2d 428, 430 (2009) and D.C. Legal Ethics Ops. 250 (1994), 283 (1998), 333 (2005) and 357 (2010). Opinion 333 reaffirms the District's "entire file" approach; i.e., the file includes copies of internal notes and memoranda reflecting the views, thoughts and strategies of the lawyer.
27. Opinion 283
28. See D.C. Legal Ethics Op. 250 (1994).
29. Rule 1.8, comments [16], [17], [18] and [19].
30. Rule 1.15(b) clarifies trust funds which must be held in a D.C. IOLTA account. Rule 1.15(e) provides that "advances of unearned fees and unincurred costs shall be treated as property of the client pursuant to paragraph (a) until earned or incurred unless the client gives informed consent to a different arrangement."
31. See Rule 1.15(c) and D.C. Legal Ethics Op. 359 (2011). Generally, such funds escheat to the Mayor.
32. Rule 7.1(a).
33. Rule 1.3, comment [5].
34. http://www.dcbar.org/bar-resources/practice-management-advisory-service/
35. D.C. App. R. XI, § 15(a).
36. Rule 5.4(b)(2).
