What Does Your Partnership Agreement Say?

One of my colleagues brought a situation in his state to my attention. At a two-attorney firm, the two partners are unable to agree regarding something of significance. They have no Partnership Agreement. There are only the two of them, with equal shares and votes. In other regards they get along well, and do not wish to end the partnership; just the stalemate. What do they do?

I have had the opportunity to assist firms in drawing up or modifying partnership agreements, and am amazed at what is not included more times than not. Of course, there should always be a written partnership agreement. That’s the first step. Better to have a simple one which at least addresses some issues, rather than none at all.

One mid-size firm I know of had no written agreement, and it cost the managing partner the better part of a year’s worth of otherwise billable hours dealing with all of the issues which arose when one of the partners was diagnosed and eventually disabled with brain cancer. They had no established method for dealing with buyout, permanent disability, forcing a partner to retire when no longer competent to practice, and so forth.

If you have a written agreement at your firm, or if you are going to be creating one in the near future, keep in mind both the best and worst case scenarios. There is more to an Agreement than just how to divide the pie.

What about expulsion of a partner? What rights do you have to do so, and under what conditions? What if your partner steals trust funds, makes a serious violation of the Rules of Professional Conduct, gets arrested for illegal conduct, or otherwise becomes a public embarrassment and liability for the firm? Do you and the rest of the partners of your firm have the right to expel the partner? Have you spelled out the procedure, and the financial implications in a written agreement?

What does your Agreement have to say about the dissolution of the firm? Things can get pretty darn messy when one or more partners refuse to agree to purchase the Extended Reporting Liability Insurance Endorsement (“the Tail”), refuse to take any on-going responsibility for the accumulated closed client files, or even refuse to agree to put notice in the newspaper so former clients know how to contact the firm. The fact that a firm dissolves and partners go their own way does not also dissolve their responsibilities from the former firm under tax codes, state and federal regulations, and under the Rules of Professional Conduct.

Returning to the original point, what the firm needed was to have a mandatory mediation clause in a partnership agreement. Without it, the stalemate can continue indefinitely, and opinions can and will become more and more entrenched over time.

The longer a stalemate exists, in my experience, the less likely attorneys are to compromise. And that begins to erode the relationship in other areas. For example, when one of the partners wants something the other might normally agree to, instead the other partner will likely make agreement contingent upon compromise on the other issue. Eventually, the firm stagnates in the pool of its own status quo. Nowadays, a firm which cannot nimbly respond to changes in its marketplace is doomed to failure.

My colleague asked, tongue in cheek, whether the flipping of a coin or a simple game of rock-paper-scissors might be the most suitable solution, since both partners of the firm agreed that a continuing stalemate was not in their best interest. In response, my colleague Jim Calloway of the Oklahoma State Bar, referred to the June 6, 2006 Order of Judge Presnell, U.S. District Judge for the Middle District of Florida, as setting a legal precedent for the use of rock-paper-scissors to settle disputes.

Let’s hope your partnership agreement does a better job of assisting your firm in settling these types of issues.

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