The troubles of Marc Dreier raise a lot of interesting questions about partnership law and the structure of law firms.
To begin with, what the heck was Dreier’s firm? The answer: It billed itself as “Dreier LLP” – i.e., a limited liability partnership. But as Marc Dreier wrote last year, this “partnership” had only one equity partner. Dreier himself got all the profits and had exclusive management rights. The other “partners” share in the fees they contribute to generating.
Partnership is generally defined as “an association of two or more persons to carry on as co-owners a business for profit.” See UPA Section 6(1), RUPA Section 101(6) and 202(a). Are non-equity “partners” carrying on the business as co-owners? If not, they’re not actually partners. Then Dreier LLP would not have “two or more” co-owners and would not be a partnership, in which case it couldn’t be an LLP (as to the latter point, see Bromberg & Ribstein on LLPs, Section 2.02).
Although profit sharing and control are very important to the determination of co-ownership it is not absolutely clear they are essential. See generally Bromberg & Ribstein on Partnership Section 2.07. It may be enough that the parties have clearly expressed the intention to be partners.
In Dreier’s case, the parties clearly intended not to have a “conventional” partnership. The website says:
Dreier LLP was founded in 1996 by Marc Dreier to be a more responsive and innovative alternative to conventional "large-firm" lawyering. . . . We are not just an association of attorneys but a collaboration of attorneys, who typically had built successful practices elsewhere but sought in Dreier LLP a more current, more resourceful, more supportive environment to maximize their abilities and results.
So is Dreier a “collaboration” or a “partnership” or both?
Dreier is a NY-based firm, so NY law probably applies, and NY law is based on the UPA, whose definition of partnership is quoted above.
By comparison, Delaware would "clarify" that “[e]ach person to be admitted as a partner to a partnership formed under either § 15-202(a)(i) or § 15-202(a)(ii) of this title may be admitted as a partner without acquiring an economic interest in the partnership.” The cross-referenced section follows the UPA/RUPA definition of partnership except that it permits not-for-profit partnerships “when the persons intend to form a partnership.” So, basically, Delaware would return to the question discussed above of whether the non-equity partners were admitted as partners.
Note that the Dreier website linked above identifies people in the firm as partners, associates, of counsel, and one managing partner -- Marc Dreier. If Dreier is a partnership, then arguably those identified as “partners” would be vicariously liable unless Dreier was a limited liability partnership, which as discussed above and further below depends on its being a partnership.
Even if not vicariously liable, the members of the firm might be directly liable. As discussed in an AmLaw article today about this mess, relying on David Keyko, Pillsbury partner and former chair of the Association of the Bar of the City of New York's Committee of Professional Responsibility:
An aggressive client could claim, for instance, that a Dreier associate should have done a better job tracking the client's payments* * * If the firm files for bankruptcy, some lawyers may have to give back bonuses and other payments made outside the ordinary course of business -- especially if a court finds that Dreier used fraud to acquire the money to fund those payments * * * In simple terms, the level of the alleged fraud -- combined with the unique structure of Dreier's firm --puts the firm's other partners in wholly uncharted territory.
Yet another ripple (did we need another one?): Dreier might not be an actual partnership, but it might be a purported or estoppel partnership on the basis that it held itself out as a partnership. Then it would not be clear if the purported partners would be protected by the LLP shield. But the holding out, including via an LLP filing, might be evidence of an intent to be a partnership. So can an LLP filing bootstrap a non-partnership into a partnership and then into an LLP? Again, See Bromberg & Ribstein on LLPs, Section 2.02(b).
Finally, apart from the partnership issues, Dreier’s article from last year raises some interesting issues about law firm structure. He touted his firm's unconventional structure as a way that the lawyers could serve their own and clients' interests without a law firm getting in the way. His article resonated with rumblings about the current outmoded economic structure of the law business.
There is some perverse logic to his position. If the firm isn’t serving its purpose as a monitor and reputational intermediary, which I’ve argued it can’t effectively do under current ethical constraints, (see Ethical Rules, Agency Costs and Law Firm Structure, 84 Virginia Law Review 1707 (1998)) then maybe this is what it has to come to.
But as I've discussed, e.g, here (with Bruce MacEwen and Mitt Regan), I think there’s a better way.
Anyway, a lot to chew on. See also Gary Rosin.
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