Applications for the dissolution of a law firm organized as a professional corporation can be complex and may impact important public policy considerations that affect client choice of counsel and lawyer mobility. In this month's column, we review three decisions concerning the dissolution of a law firm organized as a professional corporation and make suggestions for the consideration of these public policy issues as they relate to whether dissolution should or should not be permitted.

Professional corporations are treated as corporations, but their owners often think of themselves and treat one another as partners. Accordingly, when the bonds of trust erode, or when dissension, or when it's just time to move on, the shareholders often assume that they can, like in a traditional partnership, easily terminate the firm and head for greener pastures.

Dissolving a professional corporation, however, is not so easy. Dissolution of a Professional Corporation is typically sought by application of Article 11 of the Business Corporation Law, which requires a showing of "deadlock," which is sometimes difficult to establish as the standard is not consistently applied.

In August, the Fourth Department in In the Matter of Ross M. Cellino Jr. v. Cellino & Barnes, P.C., 2019 NY Slip Op. 06365 (4th Dept. 2019), required a hearing to be conducted concerning the dissolution of the law firm of Cellino & Barnes, P.C. The court refused to dismiss the petition, despite that the firm continued to be profitable and functioning.

As set forth herein, the judicial determinations concerning whether to dissolve a law firm operating as a professional corporation have been somewhat inconsistent and may impact the public policy considerations applicable to lawyers and clients.

In the context of a law firm, it is suggested that the typical "deadlock" standard be applied flexibly and leniently to facilitate dissolution so that not only the shareholders, who often view themselves as partners, but also the clients' interests and the free choice of counsel are protected from the effects of the parties' deteriorating relationship.

'Molod v. Berkowitz': In 1996, in Molod v. Berkowitz, 233 A.D.2d 149 (1st Dept. 1996), the Appellate Division, First Department granted the petition, pursuant to Business Corporation Law §1104, for judicial dissolution of the law firm of Molod & Berkowitz, P.C. In so doing, the court seemingly took into account that the professional corporation was a law firm and that the relationship of its shareholders was "akin to partners." In affirming the grant of the petition, the First Department held:

In the case of a close corporation the relationship between the shareholders is akin to that of partners and when the relationship begins to deteriorate, the ensuing deadlock and dissension can effectively destroy the orderly functioning of the corporation. Here, evidence of dissension between the two 50% shareholders of the subject law firm leaves no doubt that the firm cannot continue to function effectively, and not alternative exists but dissolution. Dissolution is not to be denied merely because the dissension has not yet had an appreciable impact on the firm's profitability. Nor are any genuine issues of fact raised as to the possibility of reconciliation. Respondent does not deny his differences with petitioned as manifested in the several occurrences described by petitioner, but rather challenges the ostensible adverse impact of the dissension on the firm's continued functioning. That is a legal question that not require a hearing.

Id. at 149 (citations omitted). 

'Matter of Klein v. The Klein Law Group, P.C.': In 2015, In re Proceeding for Judicial Dissolution Under §1104 of the Business Corporation Law Klein v. The Klein Group, P.C., 134 A.D.3d 450 (1st Dept. 2015), the First Department refused to grant dissolution of a law firm. As indicated in the opening sentence of its holding, the First Department applied a more rigorous standard then in Molod and held:

"The ultimate remedy of dissolution and forced sale of corporate assets should only be applied as a last resort." … Accordingly, the motion court providently exercised its discretion when it denied the petition for dissolution of the subject corporation. … The areas of dissension, as alleged in the petition and affidavits, do not impede the ability of the firm to function effectively. … Nor did the motion court abuse its discretion when it dismissed the petition at the pleading stage as "[a] hearing is only required where there is some contested issue determinative of the validity of the application."

Id. at 450 (citations omitted).

'Matter of Cellino v. Cellino & Barnes, P.C.': In August of this year, as previously stated, the Fourth Department denied a motion to dismiss a petition to dissolve the law firm of Cellino & Barnes, P.C. In so doing, it appears that the Fourth Department is suggesting the application of a more lenient standard then the First Department applied in Klein and more aligned with the First Department's decision in Molod which it cites.

In Cellino, the Fourth Department held:

[W]e reject respondents' contention that the court erred in denying their motion insofar as it sought summary dismissal of the amended petition on the ground that dissolution would not benefit the shareholders because the PC has continued to function effectively and prosperously. The determination whether a corporation should be dissolved is within the discretion of the court and "the benefit to the shareholders of a dissolution is of paramount importance" in making that determination (§1111[b][2]). Although respondents submitted evidence demonstrating that the PC has continued to conduct business at a profit, dissolution is not to be denied in a proceeding brought pursuant to Business Corporation Law §1104 simply because the corporate business has been conducted at a profit (see §1111[b][3]) or because the dissension has not yet had an appreciable impact on the profitability of the corporation

Here, the record contains ample evidence of dissension and deadlock between petitioner and Barnes, and we conclude that, in opposition to respondents' showing that the PC continues to operate profitably, petitioner raised issues of fact whether dissension and deadlock have so impeded the ability of the PC to function effectively that dissolution would benefit the shareholders. In a close corporation like the PC, "the relationship between the shareholders is akin to that of partners and when the relationship begins to deteriorate, the ensuing deadlock and dissension can effectively destroy the orderly functioning of the corporation." When a point is reached at which the shareholders who are actively conducting the business of the corporation cannot agree, dissolution may be in the best interests of those shareholders and we agree with the court's determination that a hearing should be held to give the parties an opportunity to present their evidence on this controverted issue.

Id. 

A Suggestion for Applying a Court's Discretion to Dissolution in the Law Firm Context. A determination of whether a professional corporation should be dissolved is within the sound discretion of the court. Matter of Kemp & Beatley, 64 N.Y.2d 63, 73 (1984). Despite their differing outcomes, all of the above cases recognize this discretion.

It is suggested that courts, in the application of this discretion, consider the unique aspects of law firms, lawyers, and clients in determining whether a law firm organized as a professional corporation should or should not be dissolved.

In In re Thelen, 24 N.Y.3d 16 (2014), the New York Court of Appeals, in the context of the dissolution of the law firms of the partnership Thelen LLP and Coudert Brothers LLP, disallowed payments to the dissolved firms of collections from billable hours billed by former lawyers at their new firms after dissolution. The Court of Appeals relied upon, among other things, public policy considerations which, it is suggested, also should impact the exercise of a court's discretion in the consideration of the dissolution of a law firm organized as a professional corporation.

In particular, the Court of Appeals in Thelen identified: "New York's strong public policy encouraging client choice and, concomitantly, attorney mobility." Id. at 32. The court supported its public policy conclusion by relying upon its prior decisions which struck both restrictive covenants and financial disincentives to lawyer mobility. Id. (citing and discussing Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 96 (1989)); Denburg v. Parker Chapin Flattau & Klimpl, 82 N.Y.2d 375, 381 (1993). As the Thelen court noted in Parker Chapin, it found unacceptable a provision in a partnership agreement that "improperly deter(red) competition and thus impinge(d) upon clients' choice of counsel." Thelen, 24 N.Y.3d at 32 (quoting Parker Chapin, 82 N.Y.2d at 381).

It is suggested that these strong public policies of a client's choice of counsel and lawyer mobility be taken account of by a court's considering the dissolution of a law firm organized as a professional corporation. It is suggested that denying an application to dissolve a law firm and strictly applying the standard applied to other corporations may unnecessarily impede both clients' choice of counsel and lawyer mobility. This could occur upon the denial of a petition seeking dissolution, by in essence, requiring lawyers to remain in a firm which cannot be dissolved against their will, thereby eliminating their mobility and thus violating public policy. In addition, clients may be forced to remain represented by a law firm whose services may be suffering from the dissent among its owners, perhaps to the client's detriment, as opposed to permitting dissolution which may permit the warring lawyers to move to new firms with clients who choose their representation.

Conclusion. Determining whether a law firm organized as a professional corporation should be dissolved requires a consideration by the court of all of the facts and circumstances in existence at the time of the petition seeking dissolution. When the corporation is a law firm, it is respectfully suggested that among those important considerations should be the impact such dissolution or the denial of a dissolution petition will have on the important public policy consideration of client choice and lawyer mobility.

Arthur J. Ciampi is the coauthor of the treatise 'Law Firm Partnership Agreements' and is the managing member of Ciampi LLC. Maria Ciampi, of counsel to Ciampi LLC, assisted in the preparation of this article.