Arthur J. Ciampi

Attorneys' departures from their law firms are relatively common place. Lawyer mobility and client choice of counsel have been repeatedly recognized as central elements of the legal profession, particularly in New York, and are also part and parcel of our commercial environment. Nonetheless, all too often lawyers and their former firms engage in contentious disputes concerning these ubiquitous departures which, on many occasions, lead to law suits and arbitrations throughout the state.

Last month, Justice Richard M. Platkin, of the Supreme Court Albany County, issued an opinion that raises some interesting issues concerning, among other things, the contractual and fiduciary obligations of withdrawing lawyers who were members of a Limited Liability Company. In this month's column, we discuss Flink v. Smith, 2020 WL 1037487 (Sup. Ct. Albany County 2020).

Flink involved a dispute between former members of the upstate law firm of Flink Smith Law LLC (FSL). Id. at *1. FSL was organized as a New York Professional Liability Company. Id. Flink, Smith and Dominelli were all members and parties to the firm's operating agreement. Id. Smith and Dominelli withdrew as members of FSL, and FSL and Flink commenced a lawsuit against them. Id. at *2.

In the complaint, the plaintiffs claimed that the defendants violated their contractual and fiduciary duties in their departure, alleging that the defendants, Smith and Dominelli, conspired to unlawfully "collapse FSL" and direct clients to a new law firm, defendant Smith, Dominelli & Guetti LLC (SDG). Id.

On Dec. 22, 2016, Smith and Dominelli, still members of FSL, formed the law firm SDG. Id. On Feb. 8, 2017, Smith and Dominelli gave FSL written notice of their intent to withdraw, effective in May 2017. Id.

In general, the complaint made three factual claims: first, that "SDG hired all but one of FSL's employees," and that Smith and Dominelli presented themselves as the founders of SDG, a "successor of FSL"; second, that SDG "retained FSL's physical assets and intellectual property"; and, third, that Smith and Dominelli "barred Flink from work at the former FSL offices that they continued to occupy, now as SDG." Id. The plaintiffs alleged that FSL "ceased to be an operating entity once Smith and Dominelli 'departed.'" Id. The plaintiffs also claimed that Flink "still owns 60 of FSL's 100 shares," which, despite the terms of the parties' operating agreement, Smith and Dominelli refused to purchase. Id.

In particular, the claims against the defendants were:

(1) "refusing to purchase Flink's remaining shares";

(2) "failing to satisfy the minimum billable-hour requirements from 2014 through 2017";

(3) "conspiring to collapse FSL and redirect its business to SDG";

(4) that defendants breached fiduciary duties owed to Flink and FSL by "secretly forming a competing entity [SDG] for the purposes of soliciting Flink's [and FSL's] clients and diverting [Flink and FSL's] business opportunities and good will";

(5) "SDG wrongfully caused Smith and Dominelli's breaches of the 2010 Agreement and affirmatively assisted Smith and Dominelli in their tortious misconduct against Flink and FSL"; and

(6) defendants' actions entitled the plaintiffs to an order directing Smith and Dominelli "to provide a full accounting of FSL's escrow accounts." Id. at *2-3.

Defendants moved, pursuant to CPLR 3211(a)(1), (7), to dismiss all but the second cause of action, which alleged that the defendants breached the 2010 Agreement by failing to meet their minimum billable-hours obligation as set forth in their operating agreement. Id. at *3.

Concerning the motion to dismiss the first cause of action, which alleged that Smith and Dominelli "breached the 2010 Agreement by … refusing to purchase Flink's shares," the defendants argued that, upon their withdrawal, they were not required, and therefore were no longer obliged, to purchase Flink's shares as set forth in the operating agreement. Id. After a thorough analysis of the New York LLC statute and the parties' agreement, the court found that the withdrawal of Smith and Dominelli did not cause FLS to dissolve. Id. at *4. The court stated:

The 2010 Agreement authorizes members to withdraw prior to dissolution (see pp. 6-8; cf. Matter of Kassab v. Kasab, 137 AD3d 1135, 1137-1138 [2d Dept 2016]), and there is nothing in the agreement providing that the withdrawal of members shall cause the dissolution of the company. Thus, the mere withdrawal of Smith and Dominelli did not operate to dissolve FSL or deprive it of the status of an operating entity. As a matter of law and contract, FSL "continued without dissolution" following Smith and Dominelli's withdrawal (LLC Law § 701 [b] ), regardless of the fact that Flink was left "as the only remaining FSL member" (Complaint, ¶ 53).

Id. The court then discussed plaintiffs' first claim for breach of contract for failing to purchase Flink's shares in the LLC. Id. at *5. The relevant section of the operating agreement provided that Smith and Dominelli "will purchase such shares as remain in the event that the LLC is no longer an operating entity and the other members do not elect to purchase the shares." Id. at *1 (emphasis added).

The court found that the complaint adequately alleged that FLS was no longer an "operating entity." Id. at **4-5. Thus, the court denied the motion to dismiss, stating:

[The Complaint] alleges that FSL ceased operations in or about May 2017, following the withdrawal of Smith and Dominelli (see Complaint, ¶ 54), the departure of all but one of the firm's employees (see id.), the loss of the firm's office space (see id., ¶ 56) and SDG's acquisition of FSL's remaining physical assets and intellectual property (see id., ¶ 57). According to the Complaint, FSL "remains a non-operating entity" to this day (id., ¶ 58). As defendants have not submitted documentary evidence to conclusively disprove the foregoing factual allegations, the Court must assume their truth.

Id. at *5. The court then analyzed plaintiffs' claim for breach of fiduciary duty. Id. at *9. In particular, the plaintiff salleged that:

Smith and Dominelli breached fiduciary duties owed to Flink "by committing misconduct. Their misconduct includes, but is not limited to, secretly forming a competing entity for the purposes of soliciting Flink's clients and diverting Flink's business opportunities and good will" (Complaint, ¶¶ 78-79). The alleged misconduct also is said to include the retention of FSL's tangible and intangible assets, the hiring of all but one of FSL's employees, and the false marketing of SDG to clients as a successor to FSL (see id., ¶¶ 54-57). The fourth cause of action makes the same allegations on behalf of FSL (see id., ¶¶ 83-84).

Id. The defendants, in support of their motion to dismiss, relied upon the Court of Appeals decision in Graubard Mollen Dannett & Horowitz v. Moskowitz, 86 N.Y.2d 112, 118 (1995). Id. at *10. As the court noted:

Specifically, defendants cite the language in Graubard recognizing that, "where an attorney is dissatisfied with the existing association, taking steps to locate alternative space and affiliations would not violate a partner's fiduciary duties" (id., at 120). Defendants also highlight the Court of Appeals' recognition that "departing partners have been permitted to inform firm clients with whom they have a prior professional relationship about their impending withdrawal and new practice, and to remind the client of its freedom to retain counsel of its choice" (id.).

Id. In light of the Graubard decision, and because, in the complaint, the plaintiffs did not "clearly articulate whether they are alleging that Smith and Dominelli engaged in wrongful conduct before their withdrawal from FSL became effective," the court dismissed the plaintiffs' claim for breach of fiduciary duty. Id.

The Flink decision is in accord with other well-established New York case law that also permits partners contemplating departure to take preparatory actions. See Gibbs, 271 A.D.2d at 185 (finding no breach of fiduciary duty with respect to interactions and discussions between equity partners concerning their departure while equity partners); see also Gibbs, 271 A.D.2d at 193 (Saxe, J. concurring in part, dissenting in part) (lawyers can "mak[e] plans while still a member of the firm to compete with it following their departure"); and ("'solicitation' of one's own partners to make a joint move is fundamentally different than the solicitation of firm clients; the analysis which concludes that surreptitious solicitation of clients or secreting client files is improper is irrelevant to partners' conduct toward one another. 'Soliciting' another member of one's firm does not involve the same concerns"); Nixon Peabody LLP v. de Senilhes, Valsamdidis, Amsallem, Jonath, Flaicher Associes, 2008 WL 4256476 at *7 (Sup. Ct. Monroe County 2008) ("Under New York law, it would not be a breach of fiduciary duty for a partner in a law firm, before departing that law firm, to 'discus[s] … a joint move to another firm' with a fellow partner.").

Conclusion

Lawyers considering departing their law firms have the right to speak to one another and to take actions preparatory to their departure. In leaving, however, they may remain liable pursuant to the provisions of their operating agreement.

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.