Lesson from Dewey: Look Closely at Your Own Firm's Finances
While the legal market, clients and the media keep tabs on the fallout from the Dewey & LeBoeuf bankruptcy, some lenders and consultants are encouraging lawyers to closely examine their firms’ balance sheets and partner agreements.
Banks and law firms may have short-term memories with regard to lending and borrowing in the years after a major law firm tanks (especially as the heightened scrutiny brought by the event wanes), but for those lawyers who’ve lost significant capital contributions, there are immutable lessons to be learned.
For David Ritter, a partner at Chicago-based Neal, Gerber & Eisenberg, reports of BigLaw’s latest casualty only bring back bad memories of the demise of his former firm, Altheimer & Gray, nine years ago.
“I watched the firm crumble around me, in part because management was not transparent, didn’t give enough information or, when questions were asked, didn’t tell the truth,” says Ritter, who is now a member of his current firm’s executive committee.
“If you’re a partner at a law firm, you should know what your partnership agreement says, have a sense of how the firm operates and know what its liabilities are,” Ritter advises. “Read the monthly financial statements and know what the business is doing; otherwise you can get some very nasty surprises.”
The heightened awareness of law firm balance sheets extends beyond the context of law firm dissolutions, especially as banks more closely examine their portfolios of loans to law firms.
Full disclosure of partner guarantees (which topped $5 million to $6 million a year for some at Dewey, according to media reports) and unfunded pensions (an oft-noted issue of firms that promise significant payouts on future earnings) are key areas that warrant a closer look by partners, lenders and attorneys considering a lateral into the examined firm. Lease obligations and capital contribution levels, which can range from 20 to 60 percent of a partner’s earnings and are often funded by money borrowed from banks, should also top any inquiry into a firm’s financials, particularly as the profession adjusts to permanent shifts in the legal marketplace.
“Anytime a law firm goes under, the awareness of why this happened and any present indicators tend to come back to the forefront and remind partners of the fiduciary responsibility floating around the firm,” says Michael Short, a Washington, D.C.-based principal at LawVision Group who’s advised law firms, large and small, for more than two decades.
“But the whole business of law changed with the most recent recession,” Short says. “So I think the red flags, the level of alert, the level of transparency, the building of trust are going to require extra attention. The next five years will be a time of winners and losers in the business marketplace.”
For those lawyers and firms that do end up in financial peril, Ritter likens their fate to the story of the shoemaker’s kids who haven’t any shoes.
“Lawyers can be so busy attending to client matters that they often don’t look closely enough at their own situations,” he says. “Partners should be aware of what’s going on in their own house.”