Ethics opinions from the State Bar of Michigan Standing Committee on Professional and Judicial Ethics concerning the duties of lawyers and judges when closing a law practice.

Formal Opinions

R-5 Obligation of lawyer to have a law firm record retention plan

R-12 Distinguishes "reasonable notice" to clients whose files were closed prior to October 1, 1988, when the Michigan Rules of Professional Conduct became effective, and "reasonable notice" to clients whose files are closed after October 1, 1988

RI-19 & RI-30 MCR 9.119(F) prohibits a disciplined lawyer from sharing in any legal fees for services performed by another lawyer during the period of discipline

RI-38 Reasonable efforts to locate a person entitled to funds held by a lawyer

RI-69 Calculating interrupted flat fees

RI-100 Importance of notice to clients regarding the disposition of the client file when the lawyer retires

RI-102 It would not be proper for a lawyer to continue as "of counsel" with the former firm since if the lawyer holds a full-time government position, the lawyer could not also be maintaining a "close, regular and personal" relationship with the firm, as required for an "of counsel" designation

RI-110 A lawyer taking public employment other than as a judicial officer is not per se prohibited by ethics rules from engaging in private practice

By Marcia L. Proctor
[Printed in Counsel's Corner, Vol 71 No 10 MBJ 1056 (1992)]

Q. What ethical rules should I consider when closing a law practice?

There are many reasons to close a law practice, either temporarily or permanently. Some closings are planned, e.g. undertaking a new employment opportunity, entering public office, moving from the locale, merger with another firm, sale, retirement, electing inactive status; other closings are unplanned, e.g. death, dissolution, disciplinary sanction, appointment to judicial office. The ethical duties of the lawyer in each of these situations are similar, and summarized in this article.

NOTICE TO FIRM MEMBERS

A lawyer who is a partner or shareholder owes fiduciary and frequently contractual duties to notify the other partners and shareholders that the lawyer is ceasing practice. Failure to do so may result in liability of the departing lawyer for malpractice or unethical conduct occurring after the lawyer departs, or liability of the remaining partners or shareholders for conduct of the departing lawyer.

A lawyer associate, "of counsel", or other firm member has similar contractual duties to the firm, and ethical duties to ensure that the interests of the lawyer's clients and duties to the administration of justice have been properly see to.

Advance notice to the firm can meaningfully facilitate satisfaction of the departing lawyer's other duties connected to the departure, such as client notification, substitution of counsel, fee collection, and record retention. Since MCR 2.117(B)(3)(b) deems the appearance of an attorney an appearance of every member of the law firm, notice will alert firm members to the possibility of future court appearances. The remaining firm partners/shareholders have a duty to ensure that the notices and conditions required in MCR 9.119 for lawyers ceasing practice under the terms of a disciplinary order are fulfilled. See MRPC 5.1 and 5.3 regarding duties of partners and shareholders to ensure that conduct of members of the firm is compatible with ethics rules.

NOTICE TO CLIENTS

Pursuant to MRPC 1.4, a client must be kept reasonably informed about the representation, and the lawyer must explain matters sufficiently to enable the client to make informed decisions. MRPC 1.16(d) states:

"Upon termination of representation, a lawyer should take reasonable steps to protect a client's interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled, and refunding any advance payment of fee that has not been earned. The lawyer may retain papers relating to the client to the extent permitted by law."

Notice to the client should at a minimum include (1) an explanation for the lawyer's future unavailability, (2) the time frame after which the lawyer's services will not be available, (3) the status of the client's matter, (4) an accounting of all property in the lawyer's possession from the client or third parties relating to the representation, and (5) the current status of fees earned and amounts owed.

Certain types of firm closings have self-imposed time frames to complete wind-up of the practice. Judges are prohibited from practicing law by the Michigan Code of Judicial Conduct, Canon 5F; if the lawyer has been elected to judicial office there is approximately six weeks to wind up law practice. If a lawyer is suspended or disbarred by the Attorney Discipline Board, or is transferred to inactive status for disability pursuant to MCR 9.121 or for failure to timely pay bar dues pursuant to Rule 4 of the Rules of the Supreme Court Concerning the State Bar, MCR 9.119(A) requires the lawyer give clients notice within seven days. Where the closing is due to dissolution, the closing firm's liability for malpractice and unethical conduct is not cut off if there is no notice to clients.

Even though the law firm closes, the lawyer's obligation to protect client confidences and secrets, MRPC 1.6, and to safekeep client property, MRPC 1.15, continues indefinitely. The obligation of the lawyer to have a law firm record retention plan was established in Formal Opinion R-5; Formal Opinion R-12 distinguishes "reasonable notice" to clients whose files were closed prior to October 1, 1988, when the Michigan Rules of Professional Conduct were effective, and "reasonable notice" to clients whose files are closed after October 1, 1988.

Ethics opinion RI-100 highlights the importance of notice to clients regarding the disposition of the client file when the lawyer retires. For closed files, if the law firm record retention plan has required that the clients are advised of the retention period for the client file either at the time the representation has been undertaken, or at the time the representation ceased, and the clients were in fact so advised, the lawyer owes no further duty to contact the clients regarding the firm's closing or the location of the file. Of course if the retention period for the client file has not yet expired, the client still needs to be notified as to the location of the file for the remainder of the retention period, and the lawyer must take steps to safeguard the file throughout that time period.

If the law firm is closing because the lawyer has become a judge, the lawyer should consider placing unclaimed client property in the hands of a custodian who would be the designated contact for future questions about the file. This would minimize the chances of the sitting judge being contacted ex parte concerning the prior representation, being called as a witness, or having other contacts with parties or counsel whose interests are likely to come before the judge.
For open files, RI-100 states:

"The successor lawyer in pending matters will normally need the client representation file in order to assist the client. After consent of the client to the successor lawyer has been obtained, the retiring lawyer should arrange the transfer of the client's file either to the client or to the designated successor lawyer. CI-716, CI-766. The transfer of the file should be made in such a way as to preserve the confidences and secrets of the client, MRPC 1.6, such as by hand delivery."

If the client's bill is in arrears, the lawyer may choose to secure the fee through a retaining lien, charging lien, or other device, which will be discussed, infra, Settling Accounts.

If the practice is closing due to a sale, MRPC 1.17(c) requires additional notices to clients, as follows:

"Actual notice of a pending sale shall be given at least 91 days prior to the date of the sale to each of the seller's clients, and the notice shall include:

(1) notice of the fact of the proposed sale;

(2) the identity of the purchaser;

(3) the terms of any proposed change in the fee agreement permitted under paragraph (b);

(4) notice of the client's right to retain other counsel or to take possession of the file; and

(5) notice that the client's consent to the transfer of the client's file to the purchaser will be presumed if the client does not retain other counsel or otherwise object within 90 days of receipt of the notice.

"If the purchaser has identified a conflict of interest that the client cannot waive and that prohibits the purchaser from undertaking the client's matter, the notice shall advise that the client should retain substitute counsel to assume the representation and arrange to have substitute counsel contact the seller."

If a practice is closing due to the lawyer's death or disappearance, MCR 9.119(G) provides for the appointment of a receiver to inventory the law firm files and fulfill the duties necessary to close the practice. The receiver does not necessarily take over the deceased lawyer's practice, but instead owes fiduciary duties to the court for the proper disposition of the practice. The appointment order authorizes invasion of the client-attorney privilege for the limited purpose of protecting the rights of the clients.

NOTICE TO TRIBUNALS AND OPPOSING PARTIES/COUNSEL

MCR 2.117(B)(3)(a) provides:

"A pleading, appearance, motion or other paper filed by a law firm on behalf of a client is deemed the appearance of the individual attorney first filing a paper in the action. All notices required by these rules may be served on that individual. That attorney's appearance continues until an order of substitution or withdrawal is entered. This subrule is not intended to prohibit other attorneys in the law firm from appearing in the action on behalf of the party." Emphasis added.

In accord, MRPC 1.16(c) states:

"When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation."

For cases pending before tribunals, therefore, the lawyer ceasing practice must file appropriate motions and obtain the consent of the tribunal to withdraw.

In a limited number of circumstances notice to the tribunal will result in a granting of the motion to withdraw, even if there is no substitution lawyer identified, i.e. death, discipline, disability inactive status pursuant to MCR 9.121, State Bar suspension or inactive status. In each of these circumstances except death of the lawyer, allowing the lawyer to proceed in the case would aid and abet unauthorized practice of law, in violation of MCR 9.119(E), MRPC 5.5, and JI-26.

In all other circumstances, the tribunal has discretion as to whether to allow the withdrawal. It is possible the lawyer will be required to postpone retirement, delay a new job opportunity, or put the sale of the practice on hold until the pending matter has been concluded. The Comment to MRPC 1.17 states in part:

"When a lawyer is closing a private practice, the lawyer may negotiate with a purchaser for the reasonable value of the practice that has been developed by the seller. A seller may agree to transfer matters in one legal field to one purchaser, while transferring matters in another legal field to a separate purchaser. However, a lawyer may not sell individual files piecemeal. A seller closing a practice to accept employment with another firm may take certain matters to the new employer while selling the remainder of the practice.

"Although the rule contemplates the sale of substantially all of the law practice, a seller retiring from private practice generally may continue to represent a small number of client while transferring the balance of the practice.

"The seller remains responsible for handling all client matters until the files are transferred under this rule."

SETTLING ACCOUNTS

A lawyer is entitled to be compensated for work performed prior to closing the practice. Although fees for some pending cases might not be resolved or collected until the representation matter is resolved (e.g. contingent fee payable on "recovery", quantum meruit, determination of sanctions), steps should be taken so that the settlement of client accounts is not unduly protracted. A judge due fees for work performed prior to taking judicial office must, when the successor lawyer appears before the judge in unrelated matters, disclose the financial relationship and recuse unless asked to proceed, J-4.

The client is entitled to an accounting and statement of any amounts owed. If a client's obligation to pay has not yet accrued, such as in cases where the amount owed is contingent on the recovery and the case is still in progress, the lawyer may not unilaterally change the contract to obtain earlier payment from the client or successor counsel. A lawyer may be entitled to a referral fee pursuant to MRPC 1.5(e).

In the event a client fails to pay the bill, the lawyer may take steps to secure payment.

1. Proprietary Interest in the Subject Matter of Representation. MRPC 1.8(j) prohibits a lawyer from holding a proprietary interest in the cause of action or subject matter of the litigation the lawyer is conducting for the client except in two instances.

First, a lawyer may "acquire a lien granted by law to secure the lawyer's fee," i.e. a charging lien against the proceeds recovered in the representation matter. If there are no proceeds, the charging lien is extinguished, but not the underlying contractual obligation. For further information on the perfection of a charging lien, see Vol 68 No 9 MBJ 856, 858 (September, 1989).

Second, a lawyer may charge a contingent fee in appropriate cases. If representation has been undertaken on a contingency basis and is interrupted because of the closing of the practice, and the fee agreement does not otherwise provide for calculation of the fee in the event of interruption, the lawyer is entitled to quantum meruit and has the burden of sustaining the amount charged under that calculation, Ecclestone, Moffett & Humphrey, P.C. v Ogne Jinks, Alberts & Stuart, P.C., 177 Mich App 74 (1989). "Quantum meruit" is "the reasonable value of the services performed"; such "reasonable value" is not simply a calculation on the lawyer's normal hourly rate, Crawley v Schich, 48 Mich App 728 (1973), but may involve the weighing of the services of each lawyer representing the client according to the success in fulfilling the client's goals, see, Morris v City of Detroit, Michigan Court of Appeals, 1991 WL 73617 (1991). For appropriate cases in which a contingent fee may be available, see MRPC 1.5(c) and (d) MCR 8.121(E).

2. Proprietary Interest Outside Subject Matter of Representation. MRPC 1.8(j) does not prevent a lawyer from securing the fee by taking a security interest in property other than that involved in the representation, in an amount no greater than the lawyer's fee. To secure a fee in a criminal matter, for example, a lawyer could negotiate a security interest in the client's real estate. A lawyer could not take a security interest to secure a fee for divorce representation, where the property subject to the security interest is part of a property settlement or dispute. Any agreement for such a permitted security interest must conform to MRPC 1.8(a) that requires:

"(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client;

"(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

"(3) the client consents in writing thereto."

3. Renegotiating the Terms. The lawyer and the client may renegotiate the terms of the original agreement. For instance, if the lawyer undertook a business contract matter for a flat fee, and a civil suit has been filed but trial has not been set, the lawyer and client may agree to a value of the work completed to date, and rescind the original retainer agreement. See RI-69 for calculating interrupted flat fees. Or, if the client has simply fallen on hard times and is unable to pay the bill as originally agreed, the lawyer may agree to allow payment over time. For information on charging interest or service charges, see Vol 70 No 9 MBJ 948 (1991).

A frequently used alternative is for the lawyer to arrange with successor counsel for the payment of at least the costs and expenses which may have been advanced in the matter. MRPC 1.8(f) allows a lawyer to accept compensation from someone other than the client as long as the client consents after consultation, there is no interference with the lawyer's independent professional judgment, and confidences and secrets are protected. However, MCR 9.119(F) prohibits the payment of compensation to a disciplined lawyer during the period of discipline. See also, RI-19, RI-30.

A client's obligation to repay costs and expenses of litigation may not be made contingent on the outcome of the matter. Pursuant to MRPC 1.8(e):

"A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) a lawyer may advance court costs and expenses of litigation, the repayment of which shall ultimately be the responsibility of the client; and

(2) a lawyer representing an indigent client, may pay court costs and expenses of litigation on behalf of the client." Emphasis added.

Finally, the lawyer and client may agree to arbitrate any fee dispute. MCR 8.122 and 9.130 provide fee dispute resolution through the Attorney Grievance Commission, although any reputable alternate dispute resolution organization may be elected.

4. Retaining Liens. Although a lawyer has a right to retain possession of documents, money or other property until a general balance due the lawyer for professional services is paid, Kysor Industrial Corporation v D. M. Liquidating Company, 11 Mich App 438 (1968), a voluntary withdrawal, such as the closing of the law practice, generally terminates the lien. A retaining lien is contrary to the lawyer's interests when closing the law practice, since the lawyer's goal should be to conclude communications with clients promptly. Since the value of a retaining lien is principally in the leverage it gives the attorney over the client through embarrassment and inconvenience, it would probably be unethical to exercise the retaining lien until the options already discussed have been exhausted.

5. Suit for Fees. Although initiating litigation to recover fees owed should be a last resort, in some circumstances it cannot be avoided. MRPC 1.6(c)(5) gives a lawyer discretion to reveal confidences and secrets of a client to establish or collect a fee, or to defend the lawyer against an accusation of wrongful conduct.

The successor lawyer on the client's matter is not necessarily retained to assist the client in fee disputes with the predecessor lawyer, CI-263, ABA i910. The preservation of the client's rights and interests in the representation matter should not be "held hostage" while the fee dispute is ongoing.

SAFEKEEPING PROPERTY

Closing bank accounts

If the law practice will be closing, the bank accounts of the practice should also be closed. There may be some time lapse between the actual closing of the doors of the office and the closing of the accounts, in order to allow final checks to clear.

Sometimes the person entitled to funds held by the lawyer will have disappeared without a forwarding address. Opinion RI-38 addresses reasonable effort to locate the party in such circumstances.

"[W]e believe a lawyer should take any steps reasonably indicated by the facts, including at a minimum (1) determining whether the client left a forwarding address with the U.S. Postal Service; and (2) sending a letter to the client'' last known address by regular mail and by certified return receipt.

"Reasonable steps' will vary according to the stage of the case, whether other parties have a claim on a portion of the funds held, and the amount of money held. For instance, if taking steps beyond the required minimum will expend the entire amount held, other steps are not necessary. If, however, a large sum of money is held, additional steps corresponding to the balance are indicated, such as attempting to locate the client through any known relation, employer, neighbor, or friend of the client, publication of notice in locations where the client might be present, hiring an investigator, or tracking the client through the Social Security Administration.

"Judgment should be used in determining methods of locating the client. If the matter for which the lawyer was hired is embarrassing to the client or of a highly private nature, it would not be prudent to contact the client'' employer or neighbor. Similarly, if the fund sum is large, it should be deposited in a segregated trust account and not remain in the commingled client trust account. Reasonable steps should be taken only at the time the representation is concluded, but also at the end of the dormancy period before escheat.

"A lawyer may be reimbursed from the funds held for the expenses and costs of locating a missing client. The lawyer has the burden of showing such costs are reasonable. MRPC 1.5."

In such situations the lawyer is required to safekeep the funds until they escheat to the state. MCL 567.11 et seq.

A lawyer should close the business account of the dissolved law practice and transfer any remaining funds to the lawyer's personal account. The lawyer should not continue to use the account for non-firm purposes in order to "use up the remaining checks" or for other convenience.

COMMUNICATIONS ABOUT SERVICES

MRPC 7.1 prohibits any communications about the lawyer's services which are false, fraudulent, deceptive or misleading; holding out that the practice exists when it has in fact been closed would violate the rule.

In closing the law practice the lawyer should not overlook cancellation of advertising contracts or other listings which would give the appearance that the lawyer is in business when that is not in fact the case. Signs should be removed, letterhead and business cards collected and destroyed, and firm names changed. MRPC 7.5(d). Lawyer and nonlawyer firm members should be advised regarding the departing lawyer's status to facilitate forwarding of appropriate messages. MRPC 5.1, 5.3.

Some firm changes do not require severance of interests with the former firm, but require some consideration of how to reflect the substantial change in status. A disciplinary suspension of 120 days or less, for example, where the lawyer intends to return after the discipline has been served, would not require change in firm name or letterhead; it is not proper, however, to suggest to callers that the lawyer is merely "on vacation" or otherwise unavailable. A lawyer taking public employment other than judicial office is not per se prohibited by ethics rules from engaging in private practice, 1992-1; it would not be proper for the lawyer to continue as "of counsel" with the former firm, however, since if the lawyer holds a full-time government position the lawyer could not also be maintaining a "close, regular and personal" relationship with the firm, as required for an "of counsel" designation, RI-102.

CONTINUING LAWYER-CLIENT DUTIES

Even though the law practice may be closed, a lawyer's duties to former clients continue. MRPC 1.8(b) states:

"A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client consents after consultation, except as permitted or required by Rule 1.6 and Rule 3.3."

MRPC 1.6(b) generally prohibits a lawyer from knowingly revealing a confidence or secret, using a confidence or secret to the disadvantage of the client, or using a confidence or secret to the advantage of the lawyer or a third person, unless the client consents.

A lawyer who learned a client is interested in investing in specific real estate may not seek to acquire nearby property, thereby adversely affecting the client's plan for investment.

Notice to Lawyers:
State Bar of Michigan ethics opinions are advisory and non-binding in nature. This index is a complete historical catalog. Some of the listed ethics opinions, though not expressly superseded in subsequent ethics opinions, may be nonetheless outmoded or no longer sound due to subsequent changes in case law, statutes, or court rules. Practitioners are urged to thoroughly research all sources to determine the current validity of any given ethics opinion.