Dissolving firm calls for split

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There is no such thing as “de facto dissolution” of a law firm when it comes to dividing the firm’s contingency fees in pending cases among its members.

As a result, the partner who unilaterally left the firm is only entitled to reasonable payment for services he performed after leaving to form his own firm. The firm is entitled to payment of the contingency fees from the cases.

Dilley, Schomisch and Associates, LLC, was formed in 1998 by attorneys John Schomisch, Jr., and Lorn Dilley. The firm practiced primarily personal injury litigation.

Schomisch requested dissolution in a letter in February 2009, but the two never reached an agreement regarding winding up the business.

In June, Schomisch moved his practice to a separate location, and obtained permission from various clients to continue with their cases.

Dilley continued the practice, changing the name to Dilley & Associates, LLC, and perfecting attorney liens on the cases Schomisch took with him.

In September, Schomisch and his wife filed for bankruptcy under Chapter 7.

Schomisch moved the bankruptcy court to determine the value of the lien claim, and Dilley counterclaimed for attorney fees collected under the contingency fee contracts Schomisch took with him.

Schomisch argued that the firm was effectively dissolved upon his departure and, therefore, could not render services going forward. Schomisch maintained that, therefore, the LLC is entitled to only the value of the services provided by him prior to its dissolution.

Dilley argued that, because the firm did not dissolve upon Schomisch’s departure, the firm is entitled to its one-third percentage of any settlement or judgment in the cases, minus a reasonable hourly fee for Mr. Schomisch’s services to finish the cases.

U.S. Bankruptcy Judge Margaret Dee McGarity agreed with Dilley, and on Jan. 28 denied a motion by Schomisch for reconsideration.

LLCs in Wisconsin can be dissolved pursuant to state law, under sec. 183.0901, in five ways: (1) the occurrence of events specified in an operating agreement; (2) written consent of all members; (3) administrative dissolution by the Department of Financial Institutions; (4) for LLCs organized before Oct. 1, 2002, dissociation of a member, unless the business is continued by the remaining members; or (5) judicial dissolution under sec. 183.0902.

The court summarily found subsecs. (2), (3), and (5) inapplicable.

The court also found that subsecs. (1) and (4) did not apply, based on the LLC’s operating agreement.

The agreement provided that voluntary bankruptcy did trigger dissociation. However, it also provided that the remaining member could elect to continue the company’s operations within 90 days, nullifying the dissociation.

Because Dilley elected to continue operations within 90 days, the court concluded that there was no dissolution of the LLC under subsections (1) or (4) either.

Judge McGarity concluded, “To date, the LLC still has not been properly dissolved, even though Mr. Schomisch dissociated from the firm on September 29, 2009, and ineffectively tried to dissolve it thereafter. Therefore, the LLC maintains a lien in the contingent fee employment contracts, less a fair allowance for the time and expenses attributed to the services of Mr. Schomisch after dissociation (emphasis added by court).”

With the consent of the parties, McGarity then ordered that an arbitrator determine the value of Schomisch’s legal services provided after the date the bankruptcy was filed.

David Ziemer can be reached at [email protected].

What the court held

Case: In re Schomisch, No. 09-34022

Issues: Can an attorney in a law firm organized as an LLC dissolve the LLC by unilaterally dissociating from it?

Holdings: No. Dissolution of an LLC can occur only pursuant to state statutes and the operating agreement.