Legal Profession Blog

When It Rains It Poors: Now Texas Has Revoked License of Solo Practitioner For Unpaid Student Loan Debt

Posted by Alan Childress

As a follow-up to Mike's story Thursday on the New York bar applicant who was denied admission for student load debt, consider that even existing law licenses are at risk.  The National Law Journal's Leigh Jones reports Monday (found here at law.com) on this harrowing tale:

An appeals court in Texas has revoked the license of a Houston attorney for failing to repay his student loans and other debts. ... The three-judge appeals panel in Austin found that, because Santulli, a Houston solo practitioner, did not adhere to a previous order requiring him to pay his debts, he lacked the trustworthiness necessary to represent clients.

He had been granted conditional admission in 2001 and an extension later, but still owed some $67,000.

A year later, the board found that he had not taken care of his debt and recommended the revocation of his license. A trial court later affirmed the decision.

In arguing against the revocation of his license in the appeals court, ... [he] argued that the board erred in finding that he lacked good moral character. The appeals panel was not persuaded ... Santulli, who represented himself, said that he plans to hire a lawyer to appeal the decision.

As Mike has pointed out many times on this site, based on his experience as a bar prosecutor, there's wisdom to that last sentence.  And in other news, PBS is just finishing up its Masterpiece Classic's presentation of Dickens' Little Dorrit.

Compare Mike's post last month on an Illinois hearing board that "concluded that a lawyer's license should be 'monitored rather than revoked' in a case where the attorney had diverted to himself over $30,000 in fees, half of which were due to his firm." The lawyer's explanation:  behind on house note and bills, from paying debts including "repaying about $65,000 in student loans" and credit cards.  Hmmmm.  Not repay loans = untrustworthy = revoke license.  Repay loans by stealing from firm = worthy of redemption = nine month suspension then probation.  But do not try this at home.  Especially if the home sits in Texas.

Third Party Exception To American Rule

The New Jersey Supreme Court has held that the third-party exception to the American Rule governing counsel fees does not apply in a circumstance where the tortfeasor and the putative third party are effectively the same. The case involved an action to vacate a foreclosure in which an individual was alleged to have breached a fiduciary duty to his entity co-defendant partners. The plaintiffs had prevailed on the theory that the individual and the entity were one. Thus, the entity "was the instrument of [the individual's] deceit, not a separate and distinct party." The plaintiffs may recover attorneys' fees for its legal action against the entity defendant. (Mike Frisch)

Fee Apportionment Affirmed

A decision from the New York Appellate Division for the First Judicial Department in a fight over legal fees between two law firms:

Order...in a dispute between plaintiff's outgoing and incoming counsel as to the division of a $1,000,000 contingency fee earned in a personal injury action, apportioned 70% of the contingency fee to plaintiff's incoming attorneys Finkelstein & Partners, L.L.P. (Finkelstein) and 30% to the outgoing attorneys Trief & Olk (T & O), unanimously affirmed, without costs.

The motion court's apportionment of the contingency fee was a provident exercise of discretion. The court analyzed the relevant factors including the amount of time spent by the attorneys on the case, the nature and quality of the work performed and the relative contributions of counsel toward achieving the outcome. The record shows that T & O laid the foundation for the case in the eight months that they represented plaintiff, and obtained a $900,000 settlement offer, which plaintiff rejected. Finkelstein then handled the case for three more years, adding additional defendants, and obtained a settlement of $3,000,000 prior to the jury publishing its verdict following a 10-day trial. The motion court appropriately recognized the relative contributions of the attorneys in awarding 30% of the contingency fee to T & O. (citations omitted)

(Mike Frisch)

Not Lawyer Or Broker

An attorney admitted in Nebraska and South Carolina was contacted by the attorney of a person who wished to sell real estate in Costa Rica. The seller agreed to pay a 4% finder's fee to the attorney if he was able to find a purchaser. The attorney (named Wiseman) introduced the seller to one of his clients, who eventually made the purchase. The attorney did nothing to facilitate the transaction other than a single phone call. When the seller died, the attorney sought payment of the 4% from his estate.

The Nebraska Supreme Court held that the attorney was not entitled to any fee for legal services to the seller as his claim that he had represented the seller "is not supported by the record." Further, the attorney did not have a real estate license and was precluded by statute from payment for services performed as a real estate broker. (Mike Frisch)

Fee Award Upheld

The New York Appellate Division for the First Judicial Department upheld a judgment for legal fees and dismissed malpractice counterclaims. As to fee entitlement:

The record shows that in December 2003, each defendant signed an agreement with [law firm]plaintiff, acknowledging that it owed plaintiff a certain sum of money for their legal representation and agreeing to pay it within a certain amount of time. Although defendants contend that there is a triable issue of fact as to whether these agreements were signed under duress, "[r]epudiation of an agreement on the ground that it was procured by duress requires a showing of both (1) a wrongful threat, and (2) the preclusion of the exercise of free will" Here, defendants have admitted that the December 2003 agreements resulted from significant negotiations with plaintiff during which they were represented by separate counsel, and even if plaintiff threatened to cease representing defendants unless it were paid, that is not a wrongful threat (id.). There is no need for discovery as to whether the December 2003 agreements are enforceable, as the existence of a wrongful threat and the overbearing of defendants' free will are both matters within defendants' knowledge.

The affidavit of defendants' principal, which claimed that he orally protested plaintiff's services, does not serve to defeat plaintiff's motion. A client's "self-serving, bald allegations of oral protests [a]re insufficient to raise a triable issue of fact as to the existence of an account stated" and defendants do not need discovery as to whether they ever protested plaintiff's bills, since that is also a matter within their own knowledge.

Defendants' contention that the December 2003 agreements cannot form the basis of an account stated because they are not itemized billing statements, is raised for the first time in their reply brief and is not entitled to consideration. In any event, plaintiff's account stated claims are not based solely on the December 2003 agreements, but also on the detailed billing statements dated from January 2004 through August 2004. (citations omitted)

(Mike Frisch)

Contract Language Controls Fee Dispute

In a dispute between lawyers over a $1.9 million award of attorneys' fees in a medical malpractice action, the New York Court of Appeals held that an attorney who had brought in co-counsel to try the case was entitled as a matter of contract to the agreed upon one-third of the entire fee.

Attorney Simal contacted attorney Samuel to serve as trial counsel. They agreed that Simal would get "one-third of the entire legal fee." The client was notified of the arrangement in writing and consented to the agreement. Samuel brought in another attorney to assist in the trial. After three weeks of trial, the matter settled for $6.7 million, resulting in a statutory attorneys' fee of over $800,000.

The two trial counsel moved for an enhanced fee and were awarded $1.9 million. Samuel then sent Simal a check for 1/3 of the fee his firm had received but nothing from the fee award to the firm of the second trial counsel. Simel rejected the amount, demanding one-third of the entire fee. Samuel then sought a declaratory judgment that Simal had violated fee-sharing ethics rules and should get nothing.

The Appellate Division concluded that Simal had complied with ethics rules (the court here agrees) but should only get paid from Samuel's share. The court here concludes that the lower court erred in disregarding the express language of the agreement between Simal and Samuel: "...it is of no moment that Simal did not contribute to that part of the work that resulted in the award of the enhanced fee. In the realm of fee-sharind disputes, 'courts will not inquire into the precise worth of the services performed by the parties.' " The court also noted that Samuel should not be heard to complain about the ethics of an agreement to which he had freely accepted. (Mike Frisch)

Credit Or Debit?

The Legal Ethics Committee of the District of Columbia Bar opines as follows:

A lawyer may accept credit cards from a client for payment of fees, including unearned fees (commonly referred to as a retainer or advance fees), so long as the lawyer ensures that she complies with applicable District of Columbia Rules of Professional Conduct, including ensuring that she does not enter into a merchant agreement with the credit card company that violates the Rules.

The committee notes the issues presented where the fees are paid in advance:

Before accepting credit cards for an advance fee, the lawyer must have a complete and detailed understanding of the agreement imposed on her by credit card companies. In many cases it may prove impossible for the lawyer to deposit advance fees paid by credit card into trust accounts and adhere to the terms of the agreement. Funds in trust accounts belong to the clients, not to the lawyer. As such, they cannot be attached by the lawyer’s creditors. But because many credit card agreements permit the credit card company to invade the merchant’s bank account and charge back monies already paid the merchant if the customer disputes a bill, there is a danger that funds deposited in a lawyer’s trust account might be “clawed back.” Under some circumstances this could result in a situation where there are insufficient funds in the account. 

For example, suppose a lawyer deposits an advance fee of $50,000 into her trust account and, as the fee is earned, transfers $40,000 to her operating account. If the client lodges a protest with the credit card company challenging the lawyer’s right to payment, the credit card company, under its standard merchant agreement, might invade the lawyer’s trust account, and claw back the entire $50,000, pending resolution of the dispute. This would mean that the lawyer had insufficient funds in her account to cover her obligations to other clients whose funds she is holding. In some circumstances, it could even result in the account being overdrawn.

Because the Committee does not and cannot know the details of all contractual arrangements between lawyers and credit card companies, we cannot conclude that credit cards can never be used to pay advance fees into trust accounts. But if a credit card is used in this fashion, the lawyers must ensure that under no circumstances can the credit card company invade her trust account. If that possibility exists, a credit card may not be used. Moreover, the lawyer must understand all the provisions of her agreement with the credit card company to ensure that entrusted client funds are safe and secure. Absent that assurance, a credit card may not be used to advance entrusted funds.

(Mike Frisch)

Uncovered

An insurance company is not obligated to defend claims brought against a law firm that do not involve allegations of negligence or malpractice, according to a decision of the New York Appellate Division for the Second Judicial Department:

Here, Liberty established its prima facie entitlement to judgment as a matter of law declaring that it was not obligated to defend and indemnify the Burkhart Firm in the underlying action, and the Burkhart Firm failed to raise a triable issue of fact in opposition. The basic coverage provision of the Liberty policy clearly limits coverage to claims which are caused by "any actual or alleged act, error, omission or personal injury which arises out of the rendering or failure to render professional legal services." Inasmuch as there is no allegation of negligence or malpractice arising out of the Burkhart Firm's performance, or failure to perform, legal services, the claim in the underlying action does not fall within the ambit of the policy. For the same reason, the Supreme Court properly denied that branch of the Burkhart Firm's cross motion which was for summary judgment.

The allegations against the firm are summarized in the court's order:

In the underlying complaint, Financial Advisors Legal Association, Inc. (hereinafter FA Legal), asserted claims for relief against the Burkhart Firm for "wanton, willful and malicious" breach of fiduciary duty for misappropriating FA Legal's confidential information and trade secrets; tortious interference with contract for using this information to attempt to convert FA Legal's members and prospective members to a newly- formed competing business entity; and for "wanton, willful and malicious" misappropriation of trade secrets.

(Mike Frisch)

Reasonableness Remand

The New Jersey Appellate Division remanded a matter for a proper determination of whether the fees awardrd to class action counsel were reasonable. The underlying class claims had been brought by doctors who had rendered services to patient-members of  the defendant health care plan alleging harm from unfair trade practices. The trial court had awarded $6.5 million in attorneys fees. (Mike Frisch)

Who Pays?

A case decided today by the Massachusetts Supreme Judicial Court holds:

It is well settled that an insured is entitled to recover reasonable attorney's fees and expenses incurred in successfully establishing the insurer's duty to defend under the terms of the policy. See Preferred Mut. Ins. Co. v. Gamache, 426 Mass. 93, 98 (1997) (Gamache ). What happens when the party incurring attorney's fees and expenses to establish the insurer's obligation to defend is not the insured but a different insurer that has defended and provided coverage to the insured? That is the question raised in this case. We answer that the exception to the American Rule in Gamache and its progeny does not extend to allow the prevailing insurer recovery of its attorney's fees associated with an action brought to establish the defense and coverage responsibility of another insurer.

The court found that a contrary Maryland decision was not persuasive on public policy grounds.  The case is Callahan & sons, Inc. v. Worcester Insurance Company. (Mike Frisch)

Beetles, Frogs, and Lawyers

Posted by Jeff Lipshaw

Several weeks ago, I was provoked (in a good way) by Usha Rodrigues' reference to Ronald Gilson's 1984 article on how transactional lawyers create value as the "reigning academic account."   I wrote a quick little essay and let it sit until this weekend when Gordon Smith reported on a clever quip from Professor Gilson about lawyers who become professors, and in the classic line:  "I resemble that remark."  I decided to update the little essay a bit and it is now on SSRN as Beetles, Frogs, and Lawyers:  The Scientific Demarcation Problem in the Gilson Theory of Value Creation.  Here's the abstract:

Recently, Ronald Gilson described a transactional lawyer turned law professor as someone who was a beetle, but became an entomologist. This is not the first non-mammalian metaphor used by an economically inclined legal academic to demarcate those who study and those who are studied. As Richard Posner so colorfully explained rational actors as they appear to economists studying them objectively: "it would not be a solecism to speak of a rational frog." In this short essay, I suggest that both say something about the prevailing view of theorizing that is entitled to privileged epistemic status in the legal academy. I assess Professor Gilson's classic 1984 article on value creation by lawyers in terms of its implicit claims to (social) scientific truth.

Suing Law Students

A former Rutgers law student was sued for alleged failure to pay off student loans. He in turn filed a pro se third-party complaint against the law firm that had initiated the action for alleged violation of the Federal Fair Debt Collection Practices Act. He contended that the proper venue for the original case was where he resided and that the claim had been brought in the wrong jurisdiction. Summary judgment for the firm was reversed by the New Jersey Appellate Court, which found that the initial suit had been brought in the wrong venue. The matter was remanded with instructions to vacate the grant of summary judgment on behalf of the law firm. (Mike Frisch)

Why Early Voting Is Not A Luxury, But An Ethical Duty for Citizens

Posted by Alan Childress

Voting "the day of" is a scarce resource in many precincts, especially those with long lines and for voters whose jobs or responsibilities make it hard or impossible to wait more than a half hour.  So I regard using early voting as a near necessity in states that offer it, and voting the day of potentially as a wasteful exercise or at least a luxury item.  I will go further and make the claim that those who can vote early have a citizen's ethical responsibility to do so, at least in areas at serious risk of having long waits or administrative disruptions that prevent others in good faith from voting.

I don't think that is a Versus issue (democrat: republican, conservative: liberal).  It is a citizen's thing, in a democracy that holds its elections on workdays and cannot equally ensure short lines.  Give Louisiana (yes, Louisiana!) some credit on this front: we have Saturday elections for the local races except when coupled to a mandatory federal date.  That is another one of Huey Long's gifts that keep on giving.  Since states are unable (or unwilling) to give everyone the same feasible wait times, and even in the best of circumstances Muurphy's Lwa may kick in or machines can malfunction -- witness Homer Simpson's efforts to vote this year for a President -- every precinct is at risk of essentially turning away intended voters.  Some predictably more than others, which is where I think the ethical duty lies to vote early if possible.

I came to this conclusion in response to U Miami's Professor Michael Froomkin's interesting musings on his blog as to whether to vote early in Miami.  To me, especially for him in Florida, it is a no-brainer.  I get his point:  he waxes nostalgic about the collective emotional feel of participation that he has long felt the day of elections, walking to his polling place (and makes a nice aside about the fact that it is a Catholic church) and waiting his turn.  He writes, "I’ve never voted early — there’s something about the democratic ritual of the polls, plus the convenience of the local site, only a few blocks from home, that makes it very appealing."  I hope he will develop a new fond memory with the early voting process. 

I actually share that sense of "day of" excitement and do not belittle it.  I totally get that and can easily remember my first time too.  I think many of us feel that way.  But nowadays such participation is a luxury that runs the risk of hording a finite resource at the expense of others.  Think of it this way. It feels luxurious because it is a luxury. If you vote the day of, you will be one extra person in a line. Someone less committed to this election than you (or just someone who has a job that allows a short window of voting time) will see that line and walk away.  (I am not talking about minor inconvenience where you just fail to accommodate the tepid voter who has zero patience.) The more all of us can do to make the lines shorter that day, the more that others can vote. Especially in places like Florida, that matters. Until voting officials make it easy for everyone to vote on election day without lines, the opportunity to vote that day is a scarce resource that should not be horded or enjoyed for the luxury that it is (for anyone who can vote early).

If you can vote early and manage the inconvenience of that, why not help out the voter who cannot, and runs this risk of facing a long line the day of while thinking of their kid sitting on the front stoop at school.

Understanding the Financial Crisis

[By Bill Henderson, cross-posted on ELS Blog]

Like everyone else, I am struggling to get my head around exactly what happened to produce our current financial crisis.  That is a precondition of anticipating the longer term consequences.  In a single paragraph, this is what (I surmise) happened. 

Sometime during the 1990s, momentum began to build on Wall Street for securitizing home mortgages in new and exotic ways.  Residential real estate seemed like an attractive business because the yields were decent, the historical default rates were low, risk of loss was mitigated by pooling thousands of mortgages (which were, themselves, divided into parts), and the underlying assets (homes) generally went up in value, sometimes by a lot in major metropolitan areas. Institutional investors had an insatiable appetite for these debt instruments, which were graded as safe by all the major rating agencies.  Further, respected companies like AIG wrote insurance on these instruments on the theory that they would never have to pay.  All the risk was supposedly hedged by "credits swaps," which are fancy and unregulated contracts between private parties.  So money gushed in. Because virtually any loan could be sold the next day to Wall Street (who, in turn, could repackage them for a large profits within a short time), banks and other mortgage originators could make money with no risk (zero risk!).   This cycle continued even though the pool of mortgage applicants became weaker and weaker--eventually people with (a) bad credit, (b) no assets, and (c) no job.  This had the predictable effect of driving up the price of real estate to a frothy bubble. 

If we want to get back to good old-fashion, sane capitalism where risk is actually assessed before a lender gives a borrower money (and I do), we need to know what the underlying asset (a home) is really worth. 

Here, the news is not good.  According to this story in the New York Times, the price of real estate could tumble throughout 2009.  Frankly, this is where analogies to the 1930s seem like they have some traction.  When an average person's largest asset turns out to be a terrible investment, they have lost a lot of money in the stock market (any opinions on privatizing Social Security now?), and banks are failing left and right, it has a devastating effect on society's ability to pool risk--all the money ends up in the mattress, so to speak.   No surprise, people like my grandparents who lived through the Great Depression tended to be very cautious and risk averse with money.

Frankly, the issue now is not how to regulate Wall Street--the investment banks are gone.  It is how to unwind this mess.  The larger tragedy here is not the loss of money; it is the loss of trust by ordinary people in basic financial and commercial institutions.  They worked hard and played by the rules. Yet many of their homes will be worth less than what they paid for them, and retirement seems beyond reach.   Unregulated capitalism failed.  Like it or not, government is the only entity that can fill the breach. 

These two stories from This American Life, both 1-hour long audios, are the two best resources I have found on these topics:

• The Giant Pool of Money, May 9, 2008
• Another Frightening Show on the Economy, October 3, 2008

The Drift Toward Pure Numbers Admissions

[by Bill Henderson, cross-posted to ELS Blog]

Law schools are part of a production function for entry level lawyers.  Therefore, if law schools alter their admissions practices, the character and complexion of the law school applicant pool can shift in significant ways.  On the input side, the data are crystal clear: over the last 15 years, the rankings arms race has pushed U.S. law schools toward a pure numbers approach to admissions.   The more interesting question, however, is whether prestige-conscious law firms are now, inadvertently, experiencing any fallout.   First the data.

Law schools operate in an environment of supply and demand and are famously counter-cyclical.  When Silicon Valley was booming in the late 90s, law school applicants plummeted.  When the economy faltered in the early 90s or after 9/11, applicants spiked.  Therefore, to examine how admissions practices have changed over time, it is important to pay attention to the underlying applicant pool.  Below are trend lines for median LSAT scores by USNWR rank for 1994 and 2007, which reflect classes that entered in the fall of 1993 and 2006 respectively.  During those two admissions cycles, the number of applicants was virtually identical:  89,600 (class entering fall 1993) and 88,700 (class entering fall 2006).

Obviously the blue line (2007) is higher than the orange line (1994).  In fact, despite slightly fewer law school applicants, the average median LSAT increased by 2.18 points (std. dev. of 1.99). For the record, only three schools fell out of Tier 1 between 1994 and 2007.  And it cannot be explained by the ABA policy shift that instructs law schools to no longer average LSAT scores when reporting 25th, 50th, and 75th percentile figures, thus slightly pumping up the volume of high LSAT scores.  That change was not enacted until the summer of 2006. 

Here is the same analysis for UGPA (1994 data came from the Princeton Review, 2007 from the ABA):

Although we might chock some of the higher UPGAs (avg. of +.17, std. dev. of +.12) on grade inflation between 1994 and 2007, it is likely that schools were also trying to maximize this number. More after the jump ... .

When admissions officers are under constant pressure to beat last year's numbers, something has to give.  I suspect it is students who took challenging majors but have LSAT scores slightly under the target.    Or applicants with impressive work experience, evidence of leadership, or a history of overcoming major obstacles.  Although LSAT and UGPA scores are strongly correlated within the applicant pool, they tend to be very weakly correlated (or sometimes negatively correlated) at individual law schools.  Why?  Because applicants who are above both medians tend to have admissions offers at higher ranked schools. After a school locks down its target LSAT and UGPA medians, the modest overlap between the two groups means there are precious few spots left.  And often those spots are used to improve a school's diversity profile.

Over the years I have talked with many admissions officers.  They corroborate the sea change.  Further, many of the old hands argue that the current fixation on maximizing numbers is misguided--that, based on their experience, great candidates are being passed over for nondescript or unadventurous students with high numbers.   In other words, a large portion of candidates with compelling resumes and personal statements are being systematically pushed down to lower ranked law schools.

At a law firm level, there is a certain irony at work.  Many partners could not get admitted to their alma mater; yet, between 2005 and 2007, as NLJ 250 hiring increased rapidly, 53% of the new jobs went to students at USN Top 20 schools.  Rigid adherence to the elite law school model drove the starting salary cost structure from $125,000 to $145,000 to $160,000--a legacy that is hard to swallow in a down market.  But were these intangibles--now less prevalent at most law elite law schools--part of the firms' secret sauce?   To my mind, this is an interesting question.  Further, a recent Moneyball study by Kerma Partners suggests that the answer may be yes.

Some Thoughts on the Bi-Modal Distribution from a Former Partner and Retainer of Partners

Posted by Jeff Lipshaw

Coming up for air after working on some other stuff, I finally had a chance to digest Bill Henderson's post on bi-modal distribution of starting associate pay.  I have some visceral reactions to the data, as well as some "the sky is not falling" thoughts about how things will play out.  This is all casual empiricism and seat of the pants theorizing, so take it for what it's worth.

1.  Bill's post doesn't talk much about industry consolidation, but there's no doubt that has substantially impacted the law business since I started at a big Detroit firm in 1979.  At that time, there was a big premium to working in a New York law firm - as I recall, as much as $10,000 a year.  This will sound quaint and somehow Great Depression-ish, but my offer letter in the fall of 1978 from Dykema promised a starting salary of $22,000, and I am pretty sure an offer from Cravath at the time would have been in the low $30,000s.  The gold standard of pay at the time was not as a lawyer, but as a consultant at The Bain Company, which was mainly a place for the JD-MBAs.  (I remember this because the starting pay was $44,000, exactly double my offer, but the word was you worked three times as hard.)  What Detroit (Dykema), Milwaukee (Foley & Lardner), Pittsburgh (Reed Smith), St. Louis (Bryan Cave), as exemplars, offered, even then, was a trade-off of life style for dollars:  billable hour goals in the 1700-1900 range, versus 2200-2800, lower cost of living, accessible suburbs, greater assurance of partnership (ratios then were 1:1 in the smaller cities, with the 4:1 or 5:1 leverage even then in New York.)

What seems clear to me is that the midwestern model indeed did not work, and the continued admission of partners created what one of my late partners used to rail about at partner admission meetings:  the creation of negative leverage by admitting so many people as equity partners.  The solution was growth, but organic growth opportunities are cyclical with the business cycles, and consolidation growth is the alternative.  And that's what we've seen.  DLA Piper may be the best example, as a decent firm out of Baltimore turned itself into a global powerhouse over the course of a few years (my late friend Jeff Liss being a major player in that strategy).  Dykema just swallowed up a medium-sized firm in Chicago.

My theory is there's less to distinguish the Am Law 200 now, and hence, less to distinguish in terms of non-monetary compensation, hence the trend to bi-modal distribution.

2.  I want to suggest the banking consolidation model as a prediction of the way the law industry will go.  Banks, like law firms, are natural consolidators.  It's largely a service business, the services are fairly homogeneous, and consolidation offers huge cost synergy opportunities.  But what happened with all the banks turning into Citis or Chases or Keys or National Citys is that market opportunities sprang up for local service oriented banks.  The "private bank" phenomenon is a response to that.  I used to listen to radio ads for a locally-owned bank in the Detroit area, Franklin Bank, that made this the focal point of its value proposition.  (I'm hearing something similar this summer here in northern Michigan from local pharmacies, particularly those that do compounding, as a reaction to the CVS-Walgreen's-Rite Aid-Walmart consolidation.)

As smart and ambitious lawyers get tired of the bureaucracy of the mega-firms (and more importantly, like David Boies, having fruitful and remunerative new business killed by a conflict!), my prediction is we will see a cycle of boutique firms that return to something like the market distinction of the late 1970s.  I can reveal here a not-very-hidden secret:  GCs of big companies know that much of what they purchase in legal services is fungible, and they can get quality work in Albuquerque or Nashville or Birmingham, Alabama or Jackson, Mississippi.

My faith in the corrective power of markets is not quite as ardent as my friend and about-to-be co-author Larry Ribstein (Ribstein & Lipshaw, Unincorporated Business Associations, 4th ed., to be available for the 2009-10 school year, get it while it's hot!), but I think that's where we are going (see Larry's observations on this business acting more like other capitalist businesses).  Like Larry, however, it's the debt that bothers me, and I second his historical observations on that score.

The Mortgage Mess and Conflict of Interest

[Posted by Bill Henderson]

Looking for a primer on the Fannie Mae / Freddie Mac mortgage mess?  Over at Econbrower, UCSD economist James Hamilton has an excellent detailed post that lays out the problem.  In a nutshell, it comes down to market believing that Freddie and Fannie mortgage-backed securities were riskless because the government would never let them fail.  All that extra cash, available at artificially low rate for consumers, subsequently ran up the price of housing to unsustainable levels. Here is Hamilton's bottomline:

The overriding concern in dealing with the current mess is that the process of rapid and radical deleveraging would so impede the flow of new credit that the housing price declines, foreclosures, and bankruptcies significantly overshoot the values that we'd expect in a properly functioning credit market. In addition, I would worry about possible serious repercussions of a flight of foreign capital if there is a sudden perception that agency debt entails heavy risks.

The principle of "make those who caused the problem pay" has a lot of visceral appeal. But the principle of "don't impose severe and gratuitous extra costs on those who had no role in causing the problem"-- in other words, don't make the housing depression much more severe just to teach somebody a lesson-- has to be the basis for our policy decisions.

(HT: Tom Smith at the Right Coast.) The poor organizational incentives at Fannie Mae and Freddie Mac remind me a lot of Enron's go-go culture. Unfortunately, this debacle has potentially staggering macroeconomic consequences. 

To my mind, the legal analogue to the economist's "moral hazard" problem is conflict of interest; lawyers should be able to spot these issues. The peculiar aspect of the mortgage meltdown is that many Wall Street lawyers had clients that, at least in the short run, were benefiting from the conflict of interest.  From this unchecked growth, Fannie and Freddie executives got power, income, and patronage $$ to spend around to their politico friends, and investors got seemingly riskless securities.  But there was no vigilant regulator at the table assessing the risk implicitly being assumed by the government and taxpayers.   We operate in an adversarial system.  If the government lawyer never shows up, that is not the problem of the private sector lawyer. 

I would be interested to know, however, how many Wall Street lawyers perceived the mortgage-backed securities market as an eventual Ponzi scheme. Is it a pipe dream to teach lawyers to spot these types of issues?  And if they do spot the issue, what should they do with the information?

Fee Contract Provisions Enforceable Against Sophisticated Client

A contract between lawyer and client that contains a liquidated damages provision in a fixed-fee, fixed term agreement is enforceable under the jurisprudence and ethics rules of Oklahoma, according to a decision issued yesterday by the Oklahoma Supreme Court. The decision resolved a question had been certified by the United States District Court for the Northern District of Oklahoma. The court noted some "unique facts" that influenced its decision: the client is a "large corporation sophisticated both in  the commercial and legal environment and was represented by its Vice President of Legal Affairs and General Counsel in contract negotiations." The terms were unambiguous and "contains [the client's] express acknowledgment that the firm changed its position by undertaking costs and expenses to meet the demands of the contractual relationship."

The court concludes:

Courts should be reluctant to disturb fee arrangements freely entered into by knowledgeable and competent parties. However, a contract between a lawyer and a client is not an ordinary contract because of the existence of a fiduciary relationship. Nevertheless, we recognize that fixed-fee structures may often be beneficial to large corporations. They may allow the corporation to quantify and control its litigation expenses on an ongoing basis. Clients who regularly retain lawyers bargain for innovative fee arrangements that limit the right of discharge in exchange for lower fees. It would be counterproductive, in an era of increasing concerns over the cost of legal services, to preclude a client from bargaining for a reduction in fees in exchange for a reasonable limitation on the right of discharge.

(Mike Frisch)

IP Litigation, Cease and Desist Letters, and One Good Reply Letter to Monster Cable

Posted by Alan Childress

Jeff recently opined that IP law and lawsuits is one area of practice, he observed, where there are marketing, sales and PR incentives, beyond the lawsuit at hand and its objectives, to pursue expensive and complicated court remedies.  "It's because the fact of the litigation casts a cloud on the allegedly infringing product. ... Indeed, dollar for dollar, it may be one of those instances in which legal fees really do bring some bang for the buck in terms of the top line.  So it's nice to see that a well-respected judge has used the only effective tool there is to regulate this -- a finding under Rule 11." 

Another possible tool, before judges get involved, is the well-turned response to the draconian cease and desist letter.  Consider one that Monster Cable recently received from pesky competitor Blue Jeans Cable, whose president Kurt Denke is a lawyer and not afraid of a lawsuit, after Monster had sent it a lengthy and illustrated cease and desist letter. Audioholics Online A/V Magazine printed the reply in full, in this post, and Miami's Michael Froomkin found it "fun to read" here.  It is full of detail and patent/tech substance, but in any event starts nicely with:

RE: Your letter, received April Fools' Day

Dear Monster Lawyers,

            Let me begin by stating, without equivocation, that I have no interest whatsoever in infringing upon any intellectual property belonging to Monster Cable.  Indeed, the less my customers think my products resemble Monster's, in form or in function, the better.

Then Denke was interviewed yesterday at this site about this whole matter.

In his own post, Jeff added that "I used to swear that in some of our patent cases the lawyers for both sides had a 'nasty discovery dispute letter' quota that they had to fill...."  Maybe some of this can be headed off at the pass with detailed, challenging and inquiring reply letters earlier in the skirmish.  The only thing I might have added is some language to the effect that the writer would of course regard a failure to provide the requested information, and substantiation to the outrageous and sweeping assertions in the cease and desist letter, to constitute a waiver of such claims and certainly of the fact of a valid cease and desist letter itself.

No Payment Of Non-Indigent Legal Fees

The Iowa Supreme Court held that a district court had exceeded its authority in ordering the state public defender to pay the fees of a lawyer appointed to provide legal services to a non-indigent litigant who had been deployed to Afghanistan. (Mike Frisch)