• Home
  • News
  • Dreier Troubles Show Danger of Single Equity Partner Structure

Law Practice Management

Dreier Troubles Show Danger of Single Equity Partner Structure

Posted Dec 10, 2008 8:36 AM CST
By Debra Cassens Weiss

Arrested lawyer Marc Dreier was the only equity partner at the Dreier law firm, an arrangement that spells trouble for other partners there.

Such a partnership structure leaves the firm vulnerable to collapse, yet it may not protect nonequity partners from client and bank lawsuits, the American Lawyer reports.

In a National Law Journal article published last year, Marc Dreier explained that he earns all of the firm’s equity and controls its expenses. He said he pays partners a base salary plus bonuses based on business origination, a system that leaves partners feeling their work isn’t being diluted by subpar performers.

That structure has been called into question since Marc Dreier was charged on Monday with wire and securities fraud. He is accused of tricking investors into paying more than $100 million for phony debt instruments.

Altman Weil legal consultant Ward Bower explains that it’s a bad idea for any law firm to place all of the control with one person. "When that person goes, there goes the business," Bower told the American Lawyer.

"It's that simple. Nobody else has any right to any of the firm's assets. It's just not a business model that makes sense for a 250-lawyer firm. What if Dreier just got hit by a bus? What would happen then?" Bower asked.

Despite Dreier’s control of the firm, it’s unclear if it will protect partners in any suits filed by clients seeking missing escrow money or the suit filed by Wachovia over a $9 million loan default. Liability may partly depend on individual lawyers’ contracts and client billing records, experts told the American Lawyer.

Partners may also be forced to give back bonuses if the firm files for bankruptcy and a court finds Dreier used fraud to obtain the cash to make the payments, the story says.

Comments

1.

B. McLeod
Dec 10, 2008 8:50 AM CST

I sure they would rather he had been hit by a bus.

Flag this comment

2.

B. McLeod
Dec 10, 2008 8:59 AM CST

Sometimes, it can help if you clean the lint screen and then get a long bottle-brush and clean out lint accumulation in the vent hose and vent.  If this does not result in any improvement, check the “trouble-shooting” section in the owner’s manual.

Flag this comment

3.

Anonymous
Dec 14, 2008 5:24 AM CST

PARTNER = PRINCIPAL

Partner has more to do with being a principal of an organization than with profit/loss sharing.  A principal is responsible for how an organization is run, without regard to whether (s)he has a share of the profits.

A partner’s (or principal’s) liability should be what the ordinary Joe client thinks it is: partners have liability, whatever may be the private internal agreement concerning ownership and P/L sharing.

Equity defines ownership and profit/loss sharing.  But being a partner, of whatever sort, defines liability.  If you’re a partner, then you are a principal and you have responsibility for how your firm is run.  Period!  Every aspect.

Seems that Dreier’s law firm “partners” were conned by the same financial psychopath who scammed the hedge fund geniuses.  Makes one wonder just how sophisticated they were.

Dreier scammed his “partners” into giving him unfettered control over them and their clients’ money.

Dreier scammed his own “partners” into playing the role of partner for the outside world to think that they were principals of the firm.  So, that’s excactly what they were—principals.

Sure the consequences are harsh, but the public and the public’s perception of partner responsibilities are what’s important here.

Let this little lesson serve to galvanize partners everywhere to take note that when your name goes on the partner list, your assets go on the line.  When that is made clear in unequivocal terms, “partners” (equity, contract or otherwise) will be compelled to exercise the intra-firm oversight that the public has a right to expect, and assure that checks and balances are imposed on firm operations necessary to protect clients, the public and themselves.

Flag this comment

4.

Anonymous
Dec 14, 2008 5:59 AM CST

The implications for law firm management are immense.  Here’s what I see.

First, partners of whatever denomination (name partners, equity partners, contract partners, junior partners, senior partners or just plain partners) are “cloaked with apparent authority”, to borrow a phrase from agency law.  For some purposes, whether they share in the profits is immaterial.  That’s merely a matter of contract law.  The outside world, to whom such partners hold themselves out as partners, they are partners/owners/principals—persons running the firm, persons responsible for what goes on at the firm.  Perception is reality.

Sure the form of organization of the law firm might affect the rights and duties of partners inter se, but as to innocent third-parties (e.g., clients) partners must be responsible, jointly and severally.  And the consequences of that reality are immense.  For one thing, partners with deep pockets are more vulnerable.  Aggreived clients or creditors (e.g., Wachovia v. Dreier, LLP) can sue all partners, pick and choose those against whom to execute any judgment, and leave it to those targeted for execution to recover by way of contribution, contractual or equitable, against non-targeted partners with presumably shallower pockets.

Now perhaps a commercial creditor will be limited in terms of its ability to pierce the corporate or limited liability company veil and get to the general partner, name partners, equity partners, non-equity partners, etc.  But I don’t think that will be the case for aggreived clients whose escrow funds have disappeared.  The lack of controls over access to those funds could subject all partners, whatever their sub-category at Dreier LLP and related Dreier entities, to liability for loss of escrow funds.  Associates, on the other hand, I think are safe.  The public generally regards associates as employees.  But associates with knowledge or reason to believe could be at risk.

Certainly the Wachovia lawsuit will test the extent of liability of non-equity partners (and associates) for a commercial debt.  It’s the wrong case, however, to test the more important issue—liability of non-equity partners for escrow fund losses.

I think that the Dreier debacle also spells the end of one-man rule at law firms.  Sure, there will always be giants who inspire by charisma and vision.  But there will never again be one-lawyer control over escrow funds.  Similarly for ownership—never again will there be a one-person owner of a large law firm.  The risk of a Dreier-like bus accident is too great, and the potential for exposure too real and catastrophic.

If Dreier did anything, he emphasized the importance of democracy in law firm management.  The case for shared control (and contingency planning) could not have been more eloquently made than by the very person who tried to eliminate it.

Flag this comment

5.

Anonymous2
Dec 17, 2008 8:56 AM CST

Prominent law firm, my tuchas!  How many times have we heard the Dreier dynasty referred to as “prominent” as in “prominent New York law firm”?

There was never anything “prominent” about that law firm.

Notorious would be a better descriptor.

The Dreier firm(s) and the dupes who joined as partners are an embarassment to the legal profession.  And Dreier, well he’s certainly on the short list for the title “Benedict Arnold of the Legal Profession”.  Can’t wait for the Harvard Business School case study on this one.

Flag this comment

Add a Comment

We welcome your comments, but please adhere to our comment policy.

Commenting has expired on this post.