Law Firm Breakups: Whether It's A Withdrawal Or A Dissolution Can Make A Big Difference

Whether the departure of three partners from a law firm LLC was a withdrawal or a dissolution of the LLC was the issue in Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC v. Brewer, 2009 NCBC 10 (N.C. Super. Ct. March 26, 2009), decided today by the North Carolina Business Court.

The characterization of the nature of the Plaintiffs' departure determined whether they were entitled to proceeds from contingent fee cases generated after their departure.

If a dissolution had occurred, Plaintiffs' rights were governed by N.C. Gen. Stat. §§57C-6-04(b) and 57C-6-05(3), which said that the law firm would continue in existence and that its managers would be obligated to obtain "as promptly as reasonably possible. . . the fair market value for the [LLC's] assets" and to distribute the recovery to the members of the LLC.  That interpretation might have yielded a significant distribution from the in-process contingent fee cases.

But if the actions of the Plaintiffs constituted a "withdrawal," the Plaintiffs' rights would be governed by N.C. Gen. Stat. §57C-05-07, and their final distributions would be limited to the fair value of their interest in the firm as of the date of withdrawal.  The value of the contingent fee cases was potentially nothing under this analysis.

Plaintiffs Had No Right To Voluntarily Withdraw

The law firm had no written operating agreement,  and the articles of organization were silent on the subject of withdrawal.  Plaintiffs argued that dissolution was the only remedy;but  the Defendants argued that this interpretation made it impossible for a member to withdraw. 

The Court held in what it described as a case of first impression that the LLC Act does not allow a voluntary withdrawal by a member unless the articles of organization or a written operating agreement provide for a withdrawal.  It rejected Defendants' arguments to cobble together an operating agreement from various documents, though it did hold that "it may well be in a given case, multiple documents viewed collectively could constitute a written operating agreement as contemplated by the Act."

Plaintiffs Were Estopped From Disputing Their Withdrawal

The Court nevertheless ruled that Plaintiffs were estopped from disputing that they had withdrawn from the LLC.  Judge Jolly held that estoppel is "kaleidoscopic," that it could arise "by conduct, deed, or misrepresentation," and that estoppel "is viewed as 'flexible' in its application." 

The factors he considered in concluding that estoppel applied were (a) the Plaintiff's oral and written representations that they intended to withdraw, including one Plaintiff's statement "I am out of here," (b) the treatment by all parties of Plaintiffs' departure as a withdrawal, (c) the Plaintiffs' formation of their own firm, (d) Defendants' detrimental reliance on Plaintiffs' representations of withdrawal, and (e) Plaintiffs' silence "on the pivotal issue [of whether there had been a dissolution or a withdrawal] for approximately one year."

The Court rejected Plaintiffs' arguments that they could not have withdrawn because they "did not appreciate the distinction between withdrawal and dissolution" at the time they left the firm.  Judge Jolly said that "when they unilaterally chose to leave the Firm, and characterized their leaving as a 'withdrawal,' the Plaintiffs were charged with knowledge of the consequences of their actions; and Defendants were entitled to rely and act upon those actions."

Judge Jolly held that "[t]he fact that the unilateral decision by Plaintiffs to leave the Firm subsequently turned out potentially to be to their economic disadvantage is regrettable, but not relevant to whether they are deemed to have withdrawn."

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Reply Brief in Support of Motion for Summary Judgment 

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