Sedgwick's bankruptcy has underscored some of the collateral consequences of a law firm's dissolution, especially for general counsel who suddenly have to deal with their outside legal team being scattered to the four winds.

“It's in the best case somewhat disruptive and in the worst case extraordinarily disruptive to the lawyers and their clients,” said Roger Hayse, a Dallas-based consultant at Hayse LLC. Law firms turn to Hayse and his firm when they're facing a difficult transition, such as dissolution, which has been happening a lot in recent years.

When lawyers leave dying firms they generally take their books of business with them. But, under ethics rules, they can't tell their clients anything about what's happening until they've resigned. Then they can ask the client to sign a transfer letter.

Once the letter is in hand, the old firm is required to send over the lawyer's files, which can take time. Still, it's a smoother transition than you might see in other professions bound by restrictive covenants.

After learning that their lawyers are leaving a firm, in-house clients typically want to know if the new firm will have the same capacities, if the entire team is relocating together and if the billing rate is going to change, according to Leslie Corwin, managing partner of the New York office of Eisner.

If the GC likes the outside counsel's answers, it's highly likely that the relationship will remain intact, Corwin said. When Wolf Block was dissolving, the firm hired Corwin, then a partner at Greenberg Traurig, to help relocate lawyers and liquidate assets.

“My sense is the legal profession is such that people hire lawyers, not law firms,” Corwin said. “If I'm your guy, you're going to go with me, short of there's some conflict at my new firm.”

Corwin is right, assuming that the outside counsel in question was handling complex matters rather than low-risk commodity work, which can easily go to another firm or service provider, said Ben Heineman, former GC and senior vice president for General Electric Co.

“If it's a superstar lawyer who can put together a team at the new firm, that's really what matters,” he added.

Ideally, the GC's entire team of outside lawyers would leave the defunct firm and head across the street together to join another firm, where they'd get back to business as usual. But that doesn't always happen.

Health care services and supply company Baxter International Inc. had been using Brobeck, Phleger & Harrison for about a decade as its national coordinating counsel for breast implant litigation involving thousands of cases in the U.S. and internationally when the firm went belly up in 2003.

“While you're going through with it it's hellish,” said Marla Persky who was GC for Baxter at the time.

Persky followed her chief litigation counsel, Debra Pole, from Brobeck to Sidley Austin. But Pole didn't take her entire team of litigators with her, which meant some of the members of Baxter's new team were 10 years late to the party and had to get up to speed in a hurry.

“Everything worked out fine, but it was extremely disruptive,” Perksy said. She added that GCs also have to alert their insurers when they need to switch firms mid-litigation and make sure that the insurer is on board with the decision.

Another potential complication arises when firms break up and legal teams go their separate ways, because there can be “strong competition” between the outside lawyers who once handled a particular client relationship once their old law firm is no more.

Ultimately, it's the client who determines the winner of the tug-of-war. Sometimes the GC sends all the work to one of the new firms. Other times, the GC decides to split up the work between the lawyers at different firms.

“In the end, the client decides where they want their work done,” Hayse said.

In bankruptcy situations, creditors can make the transition more difficult for outside counsel and their clients, which is “what we're seeing in Sedgwick,” Hayes added, referring to clawback claims that could be filed against the firm's former partners.

“Dealing with all that is disruptive to the attorney's life,” he said.

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