Issue: December, 2009
Author: John M. Burman
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Ethically Speaking - Closing a Law Firm: Part 1 - Withdrawal from Representation and File Retention and Destruction
All law firms end eventually. If the firm is a sole proprietorship, it ends when the lawyer retires or dies. If the firm has more than one lawyer, it may continue for a long time, but it will ultimately dissolve, become part of another firm, or come to some other end. If the “firm” is part of a business or an organization of some sort, it may last for a very long time. If the firm has multiple members or is some organization that will last a long time, the issues inherent in closing a practice may not be as crucial as they are to small firms, especially to solo practices. Nevertheless, every lawyer is, according to the Wyoming Rules of Professional Conduct (“the Rules”) a “public citizen.” Accordingly, he or she “should seek improvement of the law, access to the legal system, the administration of justice and the quality of service rendered by the legal profession.” All lawyers should, therefore, be concerned that the closure of a firm does not leave clients out in the cold, throwing the legal profession into even greater disrepute.
Whatever the reason for a firm’s closing, it cannot close overnight. The process will take many months, if not more, and may involve significant expense. Both the amount of time and the expense can be minimized if lawyers will organize their practices properly, and if they will develop a plan to be implemented if the lawyer unexpectedly dies or otherwise becomes unable to practice law. While few of us want to admit that something very bad could happen very suddenly, it may. And there is nothing to be gained, and much to be lost, by not planning for that all-to-real possibility.
The Ethical Framework
The Rules do not address the closure of a firm (the term “firm” includes a solo practitioner). The closest they come is in Rule 1.16, which discusses a lawyer’s duties when the lawyer-client relationship is terminated (which is one result, of course, of a firm’s closing). When such a relationship ends, “a lawyer shall take steps to the extent reasonably practicable to protect a client's interests . . .” The obligation applies regardless of how or why the relationship ends.
As the duty to take reasonable steps to protect a client’s interests applies even when a lawyer is “unfairly discharged,” it seems logical that the duty applies when a firm closes. The firm must, that is, take “reasonable steps” to protect the interests of all its clients (former clients are covered by Rule 1.9, Duties to former clients.)” Perhaps most importantly for a firm that is closing is the duty of confidentiality that is owed to all current and former clients, and which never ends. What to do with client files is a major issue, which is discussed in detail below.
In Wyoming, as in most jurisdictions, the practice of law was traditionally done by solo practitioners or partnerships with a few lawyers (both of which fall within the current definition of “firm” in the Rules.) Now, law firms may be very large, with hundreds, or even thousands of lawyers (the largest private firms in Wyoming still do not exceed 20 lawyers, though much larger firms, such as Holland and Hart, LLC, which has its main offices outside the state, have branch offices in Wyoming.) The largest “firm” is the Wyoming Attorney General’s office. Whether the firm is private or public, large or small, the same general ethical and legal principles apply. (Not only do the Rules not distinguish among types of organizations, with the exception that government lawyers are sometimes held to somewhat different standards, the same issues will arise regardless of the type or size of firm involved if the firm closes).
When a firm closes for whatever reason, it has two types of clients: current ones and former ones. Not surprisingly, lawyers owe more duties to current clients than to former ones, so the category into which a client fits is vital. (Classifying clients as former or current will be much easier if the firm has followed the practice of using engagement and closing letters.) If the status of a client is unclear, he, she, or it, should be treated as a current client since the burden is on the lawyer to clarify the status and nature of the relationship.
The two main duties a lawyer owes to current clients are the fiduciary obligations of confidentiality and loyalty, duties “predating the ABA Canons of Professional Ethics promulgated in 1908.” (The same general duties are owed to former clients, though the parameters of the duties are different.) In addition to the ethical duties, lawyers have a legal duty to exercise “that degree of care, skill, diligence and knowledge commonly possessed and exercised by a reasonable, careful and prudent lawyer . . . in this jurisdiction.”
As noted above, a lawyer’s duties to a client do not end when the lawyer-client relationship ends. “Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests . . . .” The word “reasonably” is in bold as it is defined; it means “the conduct of a reasonably prudent and competent lawyer.”
The Commentary to Rule 1.16 offers little guidance about what the rule really means, saying only that a lawyer “must take all reasonable steps to mitigate the consequences to the client [of the lawyer’s withdrawal].” The assertion that a lawyer must take “reasonable” steps begs the question, what is “reasonable?” The suggestions that follow in this column and the next one are an attempt to answer that question.
Cases in Which the Firm Has Entered its Appearance in Court
The first question to ask when determining what is “reasonable” regarding a current client is whether the firm has entered an appearance before a tribunal on behalf of that client. In answering that question, it is useful to remember that a lawyer in Wyoming may enter an appearance in court: (1) “By attending any proceeding as counsel for any party;” (2) “By permitting the attorney's name to appear on any pleadings . . . ;” or (3) “By a written appearance..” It does not matter how the entry is done. Once in a case, a lawyer “shall be considered as representing the party . . . for whom the attorney appears for all purposes,” and more importantly for a lawyer who wishes to terminate a lawyer-client relationship, the lawyer may not withdraw from the case without the permission of the court. The Uniform Rules for District Courts, which apply to Circuit Courts too, provide that except in “extraordinary circumstances,” withdrawal will be conditioned “upon the substitution of other counsel by written appearance [or] . . . upon a statement submitted by the client acknowledging the withdrawal of counsel for the client, and stating a desire to proceed pro se.” Some judges are more willing to allow withdrawal than others, and the best approach for any lawyer is simply to know how the judge in question views motions to withdraw (timing is critical; the closer to trial, the less likely a court is to grant a motion to withdraw).
One of the benefits of having partners, is that one of them will probably fill in when necessary. Although practicing alone, a solo practitioner should have an arrangement with one or more other lawyers to fill in for each other should that become necessary. (A solo practitioner who wishes to form some sort of arrangement should make sure that any other lawyer with whom he or she gets involved has appropriate malpractice insurance.) When a firm is planning to close, or when a lawyer who is part of a firm intends to leave the firm, for whatever reason, the firm and the lawyer will need to ensure that it, he or she is replaced as attorney of record in every case in which the firm or lawyer has entered an appearance. (Generally, when a lawyer who is part of a firm, enters an appearance for a client, the client is deemed to have a lawyer-client relationship with both the individual lawyer and with the firm.)
The question of who will represent a client in the future (after a lawyer or firm withdraws) is ultimately up to the client. The client should be informed, in writing, of the client’s options (if a lawyer is leaving a firm, it is preferable that the notification be a joint letter from the lawyer who is leaving and the remaining lawyer(s), or if the firm is closing, the notice will be from the firm). The options may include: (1) staying with the remaining lawyer or firm; (2) going with the departing lawyer; or (3) choosing a new lawyer. If the client selects the third option, to obtain a new lawyer, the current lawyer and the current firm should offer to assist the client in obtaining a new lawyer. After all, helping a client obtain a new lawyer is what a reasonable lawyer would do.
If the lawyer is allowed to withdraw, he or she still has obligations to the client. Those obligations are discussed below.
Similar circumstances exist if a lawyer is suddenly unable to represent a client. Either the remaining firm or the lawyer who is taking over for the incapacitated lawyer should assist the client in obtaining a new lawyer.
Non-litigation Matters and Cases From Which a Lawyer has been Allowed to Withdraw
Once a lawyer is allowed to withdraw from a case, he or she has no further responsibility to the tribunal, though responsibilities to the client remain. The client is now in the same situation as clients on whose behalf the lawyer has not entered an appearance. That is, the obligation under Rule 1.16(d) to take “reasonable steps” to protect the client’s interests when a lawyer withdraws from representation still remains.
“Reasonable steps” regarding clients for which a lawyer has not entered an appearance, or when a lawyer has been allowed to withdraw, include: (1) notifying the client in writing that the lawyer is not able to represent the client further; (2) that, if the client still has a pending legal matter, the client should retain another lawyer as soon as possible; (3) that the lawyer will, if he or she is able, assist the client in securing another lawyer; (4) the lawyer is closing the file and will take no further action on the client’s behalf; and (5) the file will be handled (retained, returned to the client, and, if retained, ultimately destroyed pursuant to the firm’s file retention policy. (No Wyoming statutes, rules, or court opinions address the issue of how long files should be retained. The only thing in the Rules is that information regarding former clients may not ever be revealed, and it may be used only under certain conditions. Malpractice insurers recommend that files be retained for seven to ten years, with the exception that files regarding minor children should be kept until all the children have reached age 18, and estate planning files should be kept until the estate plan is fully implemented, which may be a very long time.) Other authorities recommend similar retention periods. In Iowa, for example, the Iowa State Bar Association's Committee on Ethics and Practice Guidelines has opined that lawyers should retain client files “for no less than six years after the last legal service provided.”
The first step, providing certain information to clients, should be done in writing. That written notification should be sent by certified or registered mail, return receipt requested, and should include the information specified in (1) through (5) above (the Disciplinary Code’s requirements for suspended or disbarred lawyers to notify clients, opposing counsel, and courts provide good guidance on how and what to do (except the requirement of Rule 22(b) to return all client files within 15 days). The notice should include what further action, if any, the lawyer will take on the client’s behalf, if the client still has legal matters pending, the advice to get another lawyer, what actions the lawyer will take to help the client obtain a new lawyer, that the client’s file will be handled pursuant to the firm’s file retention policy (if the firm does not have such a policy, it is high time to adopt one).
Client Files and Other Information
A lawyer’s ethical duty not to reveal information applies both to current (Rule 1.6(a)) and former (Rule 1.9(c)(2)) clients; a lawyer has a similar legal duty. After termination of the lawyer-client relationship, even when such termination is required, “the lawyer is required to refrain from making disclosure of the client's confidences, except” as the Rules permit or require.
As the obligation of confidentiality never ends, the duty remains even if the firm closes its doors. The obligation to not reveal information, however, does not mean that the information may not be properly destroyed at some time. The questions thus become when and how should protected client information be destroyed? While neither the Rules nor the ABA have established standards for file retention or destruction, the ABA has, in an informal opinion issued more than 30 years ago, opined that when it comes to storing and, ultimately, destroying client files, “the burden is primarily a question of business management, and not primarily a question of ethics or professional responsibility . . . .” Clients, and former clients, continues the ABA have a “reasonable expectation” that client files “will not be prematurely and carelessly destroyed, to the clients' detriment.” Unfortunately, the ABA did not specify when destruction would be premature, saying only that “[i]n determining the length of time for retention of disposition of a file, a lawyer should exercise discretion. The nature and contents of some files may indicate a need for longer retention . . . .”
Despite the absence of specific guidelines from the ABA or the Wyoming Supreme Court, the second step in closing a practice is how to properly retain or dispose of files. The notification to current clients should give clients the option of retrieving their files or having them saved for a specified period of time, after which the files will be destroyed. If the client elects to have the file, the client should be given the original, as the file belongs to the client. If the lawyer wants to retain a copy of a client’s file, the lawyer may, but at the lawyer’s expense, not at the client’s. There is no way to retire and just destroy files. They should be kept for several years at least, and a retiring lawyer should contact his or her insurance carrier to both get advice on how to close the practice and to inquire about obtaining a “tail.”
A “tail” is not a new policy. Rather, it is the continuation of an existing policy and is more properly known as an extended reporting period endorsement (ERE). A lawyer may not, therefore, obtain more coverage or new coverage. He or she may only extend existing coverage through an ERE. When contemplating retirement, therefore, a lawyer should contact the lawyer’s malpractice insurer (if the lawyer does not have one, the lawyer is asking for trouble.) The same considerations apply if a lawyer becomes unable to practice, but is still living, regardless of how the incapacity occurs.
When a lawyer dies, the situation is substantially different. If the lawyer has partners, they will likely have to pick up the pieces. If the lawyer organized his or her practice well, that will not be especially difficult. If that is not the case, it will. The first call of the surviving lawyer(s) should be to the firm’s carrier, both to seek advice and to discuss coverage (generally, each partner is “jointly and severally liable” for the partnership’s debts.)
If the deceased lawyer was a solo practitioner, some qualified person (probably another lawyer) is going to have to examine each case and determine if it involves a current or former client. If a current one, the analysis will be similar to that discussed above. With luck, the deceased lawyer has a plan in place to deal with such a catastrophe. If not, the survivors, often a surviving spouse, are going to have to hire someone to review and evaluate the files and to take or assist the clients in taking appropriate action. As with a retiring lawyer, the first call should be to the deceased lawyer’s insurer, both to get advice and to discuss extending coverage.
The type of estate planning the lawyer did will dictate, in part, what to do next. If the lawyer left a will or died intestate with enough assets to probate, probate will be the next step. As part of the probate, the estate must publish notice to potential creditors, and “all claims whether due, not due or contingent, shall be filed . . . with the clerk [of court].”Contingent claims may, of course, include possible malpractice claims. Claims that are not timely submitted are “barred forever.” At the conclusion of the probate, the personal representative must submit a final report and accounting to the court, after which a “final decree of distribution” will be approved, and the estate will be closed. After closure, an estate may be reopened “for the purpose of administering after-discovered property . . .” There is no provision, however, to reopen an estate to administer claims that arose or are asserted after the estate was closed. It appears, therefore, that the closure of a deceased lawyer’s estate will bar subsequent claims if all former and current clients were given notice of the probate. Accordingly, if proper notice was given, there seems to be no reason to retain client files to assist in defending against malpractice claims after the entry of the final decree if the lawyer was in solo practice. (There may be other reasons to retain files, such as to provide information to the lawyer who is assisting in closing the deceased lawyer’s practice). If he or she was a member of a firm, the others in the firm may be liable for the now deceased lawyer’s malpractice.
By contrast, if the lawyer left a trust, the assets of which are to be distributed at the lawyer’s death, there is no statutory procedure to make claims or to cut off claims. The only “notice” potential claimants will get is that the will, if there is one (there is often a “pour over” will that grants everything to the trust), should be filed within ten days of death. An actual or potential claimant may then make a claim against the trust and may force the matter into probate. The problem is that the trust assets may be quickly distributed, and the trust effectively terminated, leaving claimants with no effective recourse. At the same time, the estate will not be closed by a final decree of distribution. The question is, what should the survivor do? First, as noted earlier, the reasonable thing for any successor, willing or otherwise, to do to close a practice is to have a qualified person, usually another lawyer, review all active files. Second, if that review reveals any potential problems, the file or files involved should be retained, and the trustee should retain sufficient trust assets to address any such problems. In such circumstances, the trustee could make a partial distribution, and not a final distribution, until all potential problems are resolved.
After final distribution of trust assets, and even without a final decree that may foreclose future malpractice claims, it seems unlikely that the trust for a lawyer in solo practice will need to worry about future claims, about which the trustee had no knowledge or reason to know when the trust’s assets were distributed (assuming the trustee, or someone acting on the trustee’s behalf, reviewed all active files).
Before storing or otherwise saving client files, it is worth discussing what should be saved. The place to begin is with what does not need to be saved. Anything, such as court pleadings, that has been filed and is available elsewhere does not need to be saved. As pleadings typically constitute much of clients’ files, they (the files) can be thinned considerably before they are saved. Copies of correspondence to or from the client, the lawyer’s notes, and other information that is “confidential” under the Rules are typically not available elsewhere and need to be retained and destroyed according to the firm’s retention/destruction policy. An appropriate policy is discussed below under “former clients.”
When client files are finally destroyed, the method of destruction is critical. It is not enough to just throw the files away or recycle them. With either of those methods of disposal, one runs the risk that some person will see otherwise confidential information. Rather, files should be shredded or burned, so that reconstructing them will be impractical, if not completely impossible. Shredders are not particularly expensive these days, and they should be a part of every law office. And while recycling may be morally appropriate, it is not ethically permissible to run the risk that someone will see the information on the recycled paper. Destroying, rather than discarding or recycling files, is what a reasonable lawyer would do, and lawyers are required to “act competently to safeguard confidential information “
The same is true of information stored electronically. “Deleting” information from a computer does not really cause the information to go away. While it is not within my capacity to restore the information, there are plenty of folks who have that capacity. Unless you have the capacity to truly eliminate the information, a reasonable lawyer should hire an expert to destroy confidential information (the same is true when a law firm acquires a new computer system; the old one should not be discarded until an expert has cleaned the hard drives). Once again, a competent lawyer will do more than simply discard computer files.
When a firm is going to close, the firm does not need to worry about conflicts of interest, so the main issue regarding former clients is how to handle client files. The same concepts discussed above will apply. That is, if the firm has followed a practice of sending closing letters which contain the firm’s file retention policy, that policy may just be followed, or modified, as discussed below. If the firm did not send such letters, notification should be mailed to each former client, again, by certified or registered mail, return receipt requested, notifying the former client: (1) that the client’s status is a former client; (2) that the firm will take no further action on the former client’s behalf; (3) that the former client may obtain the file within a specified time; and (4) of the firm’s file retention and destruction policy.
File Retention and Destruction Policies
When a lawyer is retiring from practice, different considerations apply compared to when a lawyer dies. The former situation will be discussed first.
One of the main reasons to retain copies of client files is to allow a lawyer a chance to defend against a grievance of a malpractice case (any original documents should have returned to the client when the matter was closed). In analyzing either possibility, the applicable statutes of limitation should be a primary consideration. For grievances, the statute of limitations in Wyoming is four years, except complaints “involving theft, misappropriation, conviction of a serious crime, or a knowing act of concealment,” or complaints 53 that are part of “a continuing course of misconduct if at least one of the acts of misconduct.” The statute will be tolled, however, while the complainant is “under the age of majority, insane, or otherwise unable to file a complaint due to mental or physical incapacitation . . . .” It is nearly impossible, therefore, to say with certainty that the statute has run.
The same is true of malpractice. While the statute is only two years, which may be extended to two years and six months under some circumstances, Wyoming is a “discovery” state, meaning that the statute begins to run when the claim was “reasonably discoverable.” Again, it is just not possible to know when the limitations’ period has run.
Given the uncertainties of statutes of limitations, the seven to ten year period generally recommended by insurers should be followed. This means that a retired lawyer will have the potential expense and inconvenience of storing old files.
A deceased lawyer may be in a very different situation, as discussed above.
How to properly retain and ultimately destroy client information is really a logistical problem. Lawyers can make life much easier for those who have to pick up the pieces by using appropriate engagement and closing letters. The former can help greatly by defining, as they should, the scope of the representation—what, in other words, the lawyer is agreeing to do for the client. The latter, closing letters, should include a description of the firm’s file retention and destruction policy. If that has already been communicated to the now former clients, the lawyer’s successor has only to implement that policy.
The logistical problem of how to properly deal with client files and other information is not all that difficult. The much more difficult issue is how to persuade a senior lawyer that it is time to go. Demographically, the issue is going to expand significantly as the Baby Boomer generation ages. While most of us can admit, at least intellectually, that the time will come to step aside, many lawyers, and other professionals, identify themselves by their profession, and it is difficult to admit what may be obvious to others. And while all of us will eventually have to stop practice, few of us are prepared to make plans for that unpleasant reality. The result is that “[f]ew [lawyers] make . . . preparations” for their retirement.
While avoidance by not even discussing the issue is common, it is not a good answer. None of us want our survivors to confront what one lawyer left when he died unexpectedly at age 83, “stacks of files and boxes without any semblance of organization.” The least we can do is leave a plan and put our practices in order now, which they should be anyway.
Part of closing a firm is turning the practice to someone else. While the American Bar Association’s Model Rules have long had a rule on selling practices, Wyoming did not have one until recently. That Rule, Rule 1.17, will be the topic of the next column.
John M. Burman is the Carl M. Williams Professor of Law & Ethics and teaches professional responsibility at the University of Wyoming College of Law. If there are issues you would like to see addressed in this column, Professor Burman may be reached by e-mail at firstname.lastname@example.org.
The views and opinions expressed and included in "Ethically Speaking" are those of the author only and do not constitute an opinion, finding or viewpoint, official or unofficial, of the Wyoming State Bar or the Board of Professional Responsibility.
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