How Structuring a Contract the Wrong Way in NY Can Leave You With Nil

1/1/2016
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Business Group in Shock

Just a few weeks ago, an upstate appeals court handed down a decision that was sure to burn the plaintiff, who, pursuant to an agreement with his former partner, claimed he was owed 50% of the proceeds from any client matters he had worked on while at the firm, only to be told that his claim was barred as a matter of law.

Putting aside the lack of empathy you may have for a fight between two lawyers, the decision raises an important question and lesson: how could this have happened? Didn't they have a contract?

Well, yes, they did, but there are some unique characteristics and ethical requirements when it comes to fee sharing in New York (as is also true in many other jurisdictions). Lawyers can only share fees with other practicing lawyers.

Unfortunately for the plaintiff in this case, immediately upon his turning over of his share of the law practice to his partner, he retired from the practice of law, so he was no longer, techincally speaking, an attorney, and therefore was ineligible to share in the fees generated from those cases.

The appellate court further stated as follows:

The court’s determination that the payments at issue were part of a fee sharing arrangement, rather than a portion of the purchase price

of plaintiff’s former practice, is consistent with “a fair interpretation of the evidence” (Matter of City of Syracuse Indus. Dev. Agency [Alterm, Inc.], 20 AD3d 168, 170), and we see no reason to disturb that determination. Furthermore, because plaintiff resigned from the practice of law, he is no longer permitted to “share in any fee for legal services rendered by another attorney during the period of . . . removal from the roll of attorneys” (22 NYCRR 1022.27 [e]). The provision of the agreement providing for the payments at issue is therefore not binding (cf. Padilla v Sansivieri, 31 AD3d 64, 66-67)."

The takeaway from this case is crucial:

Chances are, had the plaintiff structured his agreement differently, and stated that the 50% net fee arrangement was to compensate him for the work he performed before the sale of his practice, the result would probably have been in his favor.

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