Capital-contribution disputes increase as partners pay more than ever
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Disputes over the return of capital contributions to departing partners are increasing as law firms increase their capital requirements.
The New York Law Journal (sub. req.) has a story on the trend that is based on interviews with consultants, legal advisers and banks.
“Underlying the disputes,” the article says, “are changing dynamics in the industry: partners contributing more capital than ever, firms paying back capital at a slower pace, and increasing partner mobility.
“When law firms hold on to capital longer, lateral partners can be caught in the middle: they can’t get money back in time to fully pay back a loan or to fund capital contributions at their new firms, sometimes requiring they take out a second loan.” The ABA Journal has an explanation of the capital-contribution system at law firms in this New Normal column.
The average capital level for an equity partner at a firm of 600 lawyers or more was $468,000 at the end of 2014, up from $320,000 in 2008, according to Michael McKenney, head of credit origination for the Citi Private Bank Law Firm Group.
In smaller firms of 75 to 150 lawyers, the average capital level was $130,000 at the end of 2014, up from $94,000 in 2007, McKenney told the American Lawyer.
At about half a dozen law firms, even fixed-income partners are required to contribute capital.
In one recent case, former Otterbourg partner David Posner is alleging the firm refused to return his $382,880 in capital until 13 years from now, at the end of the law firm’s lease. The law firm’s response says Posner is taking a “singularly selfish position” given a shareholder commitment to use the money to bolster the firm’s office and technology.
