Why Law Firms Collapse

Volume 3 • Issue 3 • March/April 2017
Cover
Main Article Image

Caught in the Collapse

The human side of law firm failures

Law firm failures, as John Morley notes in the lead to this issue of The Practice, are sensational events. In recent decades, not only have they involved old-line, prestigious, and often well-known firms, but they have frequently taken place quickly and publicly. Millions—and billions—of dollars are often at stake. There are downtown offices to shutter. Clients scramble to ensure that they retain good representation. And, in today’s hyperactive internet age, this all takes place in front of a watchful legal press. Dozens of articles will be written about what went wrong with the firm’s finances, the problems with guaranteed contracts, and all the other factors that led to its demise. Law firm failures are spectacles, full of high-stakes drama and intrigue—and onlookers just can’t seem to look away.

What often gets lost in these stories, however, is that law firm failures are human events, often with real human casualties. While a lot of news was made during the failure of Dewey & LeBoeuf about its nearly million-dollar art collection going on the auction block, the most important part of any law firm failure is often the part that gets the least attention: the people. David B. Wilkins, the faculty director of the Center on the Legal Profession, notes, “Law firms have what I like to call ‘elevator assets.’ They come in each morning, taking elevators up to their offices to do great work. And they leave each evening, taking elevators back down to return home. They are a firm’s most valuable commodity.”

In an attempt to shift the story to the human side of law firm failures, this article of The Practice profiles two lawyers who went through law firm failures and breakups. The first, Gordon J. Davis, offers the perspective of a partner during not one, but two firm failures. How did he find out? What did he do next? The second, Charles Blackburn, offers insights into what it is like to go through a firm breakup as an associate—a very different story than that of Davis. In the end, one is reminded that law firm failures are human stories—and that they ought to be viewed as such.

The partner’s view

Gordon J. Davis began his legal career in 1967 in his hometown of Chicago as a first-year associate at Mayer, Meyer, Austrian & Platt (known today as Mayer Brown). Davis soon moved to New York, and after forging a career in and out of corporate law firm hierarchy at a time when such movement was rare, he joined the time-tested, white-shoe law firm of Lord Day & Lord as a partner in 1983. If you’d have asked Davis the law student what he thought his odds were of one day landing a job at Lord Day & Lord, let alone making partner, he’d have said, “No chance.” But there he was: one of the first black lawyers to be named partner in a New York City corporate law firm.

Davis settled into the firm and into the city. While at the firm, he cofounded the Central Park Conservancy, was founding chairman of Jazz at Lincoln Center, and continued what was already an active civic life. In the meantime, Lord Day & Lord was a great place to do business, with deep roots, a steady reputation, and a generous retirement plan. In many ways, his professional life was booming. He never imagined that New York’s oldest law firm—or really any major law firm—could collapse. That was before 1994, the year Lord Day & Lord filed for bankruptcy and Davis was out of a job.

The failure of Lord Day & Lord was, no doubt, an unexpected challenge, Davis comments to The Practice. His ostensibly generous pension was unfunded, so it disappeared along with the firm and all the capital Davis had invested in it as a partner. Still, even then, he was not without resources: he was a partner with a book of business. Indeed, Davis was quick to bounce back that same year, signing on as a partner at a large New York City law firm that was on the upswing: LeBoeuf, Lamb, Greene & MacRae. In 2007, LeBoeuf merged with another well-established Manhattan-based law firm, Dewey Ballantine, to become Dewey & LeBoeuf. The rest, of course, is history. “That was the fatal kiss,” Davis recalls. “A year and a half after the merger, the world fell apart financially.”

The merger’s success was predicated on the notion that the good times would continue to roll and the two firms would enjoy a comfortable transition wherein their cultures would blend and their people would come together. That was the dream—that the merged firm would be greater than the sum of its parts. However, when the financial crisis hit, any hopes of a comfortable transition were dashed, and everyone fell back on what they knew and trusted. “The Dewey people stuck with the Dewey people. LeBoeuf stuck with LeBoeuf. And not only that, they all stuck with their practiced silos. The merger never really had time to become a merger in the deepest sense.”

He continues, “I remember my wife and I were on vacation, sitting on a beach, and I was reading the New York Times online. There was a story in the business section about problems at Dewey—this was March 2012. I said to my wife, ‘God, I hope this isn’t placed very visibly in the print edition, because it will scare the hell out of everybody.’ So I called my office. They said, ‘Oh, it’s on the front page of the business section with a red border.’”

This only affirmed for Davis what he was already witnessing on the inside. While not on the management team, he was in the partner meetings. And, like many other partners in the room, he began to worry. When the compensation system changed, partners really began to worry. Then people started to leave. “And one day, you look over, and 10 partners have just moved to Willkie Farr & Gallagher or some other big firm. You ask them why and they say, ‘Well, we’re getting off what seems to be a sinking ship.’ So you don’t learn one day that your firm is in deep trouble. It happens over a period of time.”

By the end of April 2012, Dewey & LeBoeuf told its partners what they already knew: the ship was going down. They had done all they could to bail water off the deck, but now the priority of the firm shifted to the lifeboats. The message to partners: the firm would continue to search for a miracle, but they all had its blessing to seek a safer place for themselves, their associates, and their clients. A few weeks later, Dewey & LeBoeuf formally closed its doors.

“We weren’t a huge group,” Gordon Davis says. “But we all knew and trusted one another. We walked across the street, plugged in our computers, and the next day we were representing the same people in a different office.”

But this was not Davis’s first law firm failure. Even before he was partner at Lord Day & Lord, he had experience moving on from firms before it had become a typical feature of the profession. As a partner, he had developed deep relationships built on trust with his clients and expertise cultivated over the course of a full career. Davis tells The Practice that he had learned that once you establish a reputation with clients, they care more about the quality of your work than the brand name behind you. (For more on the debate over hiring lawyers or law firms, see “Navigating Uncertain Waters.”)

Davis was not about to be caught flatfooted by the collapse of Dewey & LeBoeuf. He had what he needed to go practice elsewhere (and had been here before), so he got together with another partner with whom he had a personal relationship to look around. Two blocks away from the offices of Dewey & LeBoeuf they found the New York office of Venable, a Washington-based law firm on the rise.

The out-of-town headquarters ended up being critical. Davis comments, “Every time we talked to a New York–based firm, we ran into issues over the retirement age, compensation, and all that. The out-of-town firms, they were easy to deal with and eager to make deals. The age thing wasn’t an issue for them at all. That’s how we ended up talking to Venable. They had a New York office, which has now grown considerably since we got here.”

Davis stresses that while he and his partner were the ones to approach most of the new firms, they were not the only two who went. “We weren’t a huge group—a handful of partners, associates, and one of counsel—but we all knew and trusted one another. We walked across the street, plugged in our computers, and the next day we were representing the same people in a different office.” Echoing the comments of Sabine Chalmers, chief legal officer at Anheuser-Busch InBev (see “Navigating Uncertain Waters”), Davis continues, “We shared a significant number of clients—we represented them collectively—and I would say they were reassured that we made the move together as a group.”

What if you don’t have that foundation of strong relationships built on an extensive track record?

Davis remains at Venable to this day. Just as it was with Lord Day & Lord, the collapse of Dewey & LeBoeuf marked a significant blow to anyone with money tied up in the firm—indeed, even more so given the greater order of magnitude—and this made Davis’s mobility critical to his continued success. These were two monumental law firm failures that ruined lives and lost massive sums of money. The only way for him to come out on the other side in one piece was to rely on the foundation he had constructed over the course of his career—his book of business. He emphasizes that his ability to move from one firm to another in times of crisis was built on the strong client relationships he had forged—relationships founded on trust and an extensive track record of solid work. But he also realizes that those things are often linked with being a partner. So, when crisis struck Lord Day & Lord, and then again at Dewey & LeBoeuf, he had already built his foundation, and that made for a relatively smooth transition.

This, of course, raises the critical question: What if you don’t have that foundation of strong relationships built on an extensive track record? What about associates who are in the process of building foundations of their own, who are still aspiring to develop their own books of business and deep client relationships? Among The Practice’s interviews with partners and associates who have gone through law firm failures, there appear to be substantial gaps regarding who knows what and when, as well as the logical next steps in either case. For instance, there is a gap in available information—partners are privy to facts and factors not available to associates. Moreover, and perhaps most critically, there are gaps in both experience and in the strength and depth of client relationships, and therefore gaps in the value an individual might provide to a prospective new firm.

Davis notes, “The question that faces lower and middle associates is: What is the market for them? If the market is strong—or if it’s strong for their sector—then they’re less likely to run into problems. When Dewey collapsed, however, the market was not that strong, and there were a lot of younger lawyers who had trouble finding new places to work.” He also underscores that while partners often try to help the associates around them, whether through connections or bringing them along as part of the team, the problem for associates is bigger than any one partner.

The associate’s view

After graduating from law school in 1997, Charles Blackburn knew he needed experience and focus to make it as a lawyer, so he quickly established his own practice in his hometown of Louisville, Kentucky. His small firm offered just the kind of hands-on experience he was looking for, and it wasn’t long before his efforts earned him an associate position at one of the oldest law firms in Boston.

Blackburn started out working in litigation and after a few years transitioned over to corporate practice. The goal of most law firm associates is to become partner, and it seemed he was well on his way to realizing that goal. “If you’re in a firm,” Blackburn explains, “partnership should be your goal. It should be what you’re working hard toward—the organizing principle for how you go about your work to maximize your efforts and your efficacy.” So, like many associates, he had a clear view of the path set before him.

Things began to change, however, when Blackburn noticed persistent concern among the partners. The firm had a typical business model that drew strength from multiple areas, where each core area could hedge against slow business in the others. The problem was that model relied on certain high-yield practices holding up, and if those core practices could not remain steady through volatile times, there were real financial implications. Unlike Davis, who, as a partner, was more privy to the inner workings of his firm, Blackburn was just an associate (albeit with a few years under his belt). Nevertheless, he was able to feel the rising tensions. “There was an eight-month or so period of uncertainty and a high level of anxiety about what was going on. I had relationships with partners, and I could sense their concern about some of the dynamics that were transpiring.”

This sense of informal uneasiness went on for months before anything formal was relayed to associates. “We were told by a partner in a conference meeting that the firm had been exploring options, but those options were not coming to fruition.”

While one point of uncertainty was finally made formal and clear—the structurally deep problems of the firm—another quickly replaced it: What do I do now? “Associates were naturally in a position of trying to figure out what that meant for them,” Blackburn explains. “We were left asking: Where am I going to go? Will I continue to have a job? Will I have an opportunity if a partner goes to another firm?”

As for processes to help associates land new positions, Blackburn says, “There was nothing formal. At best, you had individual partners who would speak to the associates with whom they worked and provide guidance based on their experience. There were also partners who had opportunities to take associates with them where they were going and they would have a dialogue about it. But at the end of the day, associates were not provided with any sort of structures.” By the time the dust settled, only a fraction of the associates remained at the firm.

“Associates were naturally in a position of trying to figure out what that meant for them,” Charles Blackburn explains. “Where am I going to go? Will I continue to have a job?”

Thankfully for him, he had a few years of experience under his belt and had built strong relationships with those he worked with. He leveraged those relationships with partners across the firm, was referred to others in those networks, and hung on to a set of clients as a consultant during the interim. Blackburn is clear that while he emerged rejuvenated on the other side, this “bridging period,” as he called it, was challenging and stressful. “It was chaotic,” he says, “and I imagine for others who face similar displacement, it has a significant impact on their families and their lives.” It is also clear that his ability to find a bridge was less about formal structures than about networks. “This was all relationship-based.”

Ultimately, Blackburn went in-house, a career path he is grateful he found and one, he notes, he might not have discovered were it not for the turmoil he experienced early as an associate. “Going in-house has been a silver lining. I took a pay cut when I first when in-house. I went to work for a company that was on the downside of its technology cycle, so I went through a period where the company was in distress. But it made me a better lawyer. I don’t look back on that and wish it had gone another way.”

“Associates have to take ownership of their development plan,” stressed Blackburn.

Blackburn’s experience has also left him with invaluable perspective on how law firms and associates can better handle these failures. His advice starts well before the firm is in trouble, and it requires both law firms and associates to step up. “The law firm has to give back to those they are developing. For instance, I think that firms can be more transparent about how opportunities can emerge for associates, whether within or outside of the firm. Everything doesn’t have to be about partnership—the numbers don’t support it, and firms can be more transparent about that. Firms can be more thoughtful about developing paths for associates that lead them to other areas of practice outside of the firm, whether it’s in-house, government, nonprofit, academia, or elsewhere. Law firms have the capability to help associates develop those growth plans for themselves. Seeding those institutions with their lawyers has long-term benefits for the firms.”

However, this shift in ethos would require associates to take on greater responsibility as well. “Associates have to take ownership of their development plan, too. In-house, that’s something that’s commonly understood. You’re responsible for yourself and your career, and senior managers in a law department will help you meet your development plan in a transparent way through an honest relationship. The same should be true in law firms. That’s something associates can do long before they are caught flatfooted by the changing dynamics of the firm.”

A small slice

Davis and Blackburn offer an important, oft-forgotten slice of the very real human impacts of law firm failures. But it’s important to remember they too are just a sample of all those impacted, including the support staff and other professionals. In short, no one should forget that beyond all the public intrigue that accompanies law firm collapses are real people caught up in the chaos.

1 2 Single Page

Why Law Firms Collapse Volume 3 • Issue 3 • March/April 2017

Cover