Treatment of Contingency Cases in Law Firm Breakup

The Complexities of Breaking Up –

Treatment of Contingent Fee Cases in Law Firm Dissolutions

LaFond and Sweeney were the two members of a law firm LLC.  They agreed orally to split equally all fees earned but made no agreement as to how firm assets, including contingency fee cases, would be divided upon the firm’s dissolution.  Of course, that dissolution came to pass.  LaFond v. Sweeney, 2012 WL 503655, No. 10CA2005 (Colo. App. Div. VI (Feb. 16, 2012)).

After the dissolution of the LLC, LaFond continued to represent the plaintiff in a contingent fee case on which “considerable work” had been done prior to the LLC’s dissolution.  Cutting to the chase, the Court found that:

·                    Because the contingent fee case was brought into the law firm before the firm dissolved, and because LaFond continued to handle the case until it was resolved, the contingent fee allocated to him as a result of the settlement is the firm’s asset.  Therefore, Sweeney also has rights in the contingent fee.

·                    LaFond owed the dissolved law firm fiduciary duties, including the duty to divide the firm’s assets with Sweeney in accord with the oral fee-sharing arrangement in place when the firm dissolved.  This duty extends to the contingent fee.

Speaking to these points, the Court wrote:

An attorney who carries on the representation of a client on an existing case after a law firm dissolves does so on the firm’s behalf.  Under section 7-80-401(1)(a)(b), C.R.S. 2011, a member must

[a]ccount to the [LLC] and hold as trustee for it any property, profit or benefit derived by the member or manager in the conduct or winding up of the [LLC’s] business

and

[r]efrain from dealing with the [LLC] in the conduct or winding up of the [LLC] business as or on behalf of a party having an interest adverse to the [LLC].

Thus, any income received by a member from winding up unfinished business belongs to the dissolved firm, and any attempt by the member to convert such business solely to his or her own business violates the duty owed to the dissolved firm.

Ultimately, the Court determined that the attorney who, after the dissolution of the firm, completed the contingent fee case was entitled to no more compensation from the fee earned thereon than they would have received under the pre-dissolution of sharing ratio.

It bears noting that as Kentucky utilizes the same statutory formula for a member’s duty of loyalty to the LLC as is utilized in Colorado (see KRS § 275.170(2)), this analysis should be equally applicable in this Commonwealth.