Rule 1.17 and the Small Firm Practitioner

Part 1

When the American Bar Association modified Model Rule of Professional Conduct 1.17 in 2002 to permit the sale of part of a practice, it was called the savior of solo and small-firm practitioners.

The modification gave lawyers another way to reap the financial value of what they have built up over the years by their own hard work and creativity, converting the goodwill represented by their practices into a liquid asset.

I am proud to say that I was the catalyst for the ABA Commission on Ethics decision, affirmed by the House of Delegates, to modify Rule 1.17 to allow lawyers to sell a practice area and still remain in practice, although not in the area sold. These lawyers can continue to make valuable contributions.

For example, a probate and estate planning lawyer may sell the estate planning segment, but retain the probate segment. That allows the lawyer to work less but still serve clients. Any other course would require selling or closing the entire practice or continuing the practice while serving clients with less vigor because of aging and loss of interest. With a partial practice sale, clients are better served, both those whose estate plans are handled by other lawyers interested in the segment they purchased and those who are probating estates of decedents.

The practical focus of Rule 1.17 is the sole and small-firm practitioner. Large firms do not sell their practices; they can break up, merge, combine or move entire practice groups from one firm to another, but they don’t “sell” their practices — or at least they don’t call it that — and thus sidestep Rule 1.17.

Partial practice sale has been adopted by the states that follow the ABA model rules and is slowly being adopted by others as well. But the change has not been adopted uniformly. It was not until 2008 that the New Hampshire bar adopted its own version of Rule 1.17, and in so doing asserted that the selling lawyer cannot continue to practice law in the state of New Hampshire, in effect imposing a covenant not to compete.

In 2010, the California bar proposed four pages of changes to its rules on buying and selling a practice that, among other things, would require the selling lawyer to divest all of a practice or field of practice, and to cease engaging in the private practice of law once the sale is complete.

Another example: A managing partner in Illinois gave me his interpretation that the recently adopted Illinois model rule requires the sale of the entire practice without allowing for a transition to occur. In other words, when an escrow for the sale closes after notice is given to clients in accord with the rule, the lawyer must stop practicing, period. That permits no transition whereby the selling lawyer can continue to practice under the aegis of the buying lawyer to facilitate the likelihood the existing clients will stay with the buying lawyer, assuring the value of the practice purchased.

These developments violate the intent of modified Rule 1.17 and hurt only sole and small-firm practitioners. What could be done if such interpretations are to be found beyond the north-central U.S.? I will consider that in my Part 2.

Part 2

In my last column I discussed various state bar rules that restrict the intent of American Bar Association Rule 1.17 to allow a partial practice sale, including the example of the Illinois attorney who interprets the rule as allowing no transition period after the escrow closes on the sale of a practice.

Interestingly, there has been no discussion in that state concerning the length of escrow; the discussion on time involves the minimum notice of sale to be given to the clients.

What if there were an extended escrow — for example, one year or some other time constraint desired by the buyer and agreeable to the seller?

Without the use of a somewhat unusual alternative that comes close to form over substance, and is not allowed on review, the choices for the seller are bleak under this stricter interpretation. Some alternatives might be:

Merge with another firm. Develop a buy-out agreement that will take effect in the future but allows the lawyer to continue contributing to both the law and society (assuming the “buying” lawyer honors his commitment at the time of eventual retirement by the “seller”). Do not sell and remain in practice until either death or closing the office doors at a future date. Sell and leave the practice of law to pursue some other activity until death occurs. Whether the activity is of minimal interest or is interesting and exciting to the selling lawyer, it frequently fails to address the psychological issues of the selling type-A lawyer personality.

These are bleak choices and, in my opinion, contrary to the spirit of what the ABA General Practice Section originally advocated for Rule 1.17.

The more reasonable interpretation should be that the rule was intended to assist retirement. And, yes, the sale is complete. But the lawyer should be entitled to work for the buyer in order to assist in the transition of client relationships, remain vibrant and contributing to his own well-being, and contribute to the buyer’s interest in growing the practice.

Remember, we’re talking about a sale and retirement, usually of an older lawyer. We’re not talking about the sale of a law practice by a younger lawyer who might open a competing practice across the road and steal back his former clients (the great fear projected onto the straw-man buyer).

Assuming the worst scenario and that the “warped” (no personal attack intended) Illinois interpretation of Rule 1.17 is valid, how might the parties deal with the desired sale and transfer of client relationships?

One way might be the form versus substance approach followed by many who lived in states not allowing a sale (Illinois was in that camp until recently): merger with a buy-sell agreement. Such a situation creates partners who can enforce an agreement of separation (sale of a partner interest). And, with the new provision in the rule allowing the sale of a practice area, it will be possible to sell part of the practice at an inflated price (to address the real worth of the full practice), the balance of the practice being transferred at a later time when the lawyer wants to terminate his work regimen entirely, but at a lower price.

The combination of the two would represent the actual full purchase price for the firm.

Ultimately, it is the clients who benefit when they are transitioned smoothly to receive competent representation from a qualified buyer.