Can a law partnership keep paying a former partner a percentage of its gross fees under a buy-out agreement if that former partner resigns, is suspended, or is disbarred and becomes a nonlawyer?

Plain-English summary

A dissolved partnership had agreed, under a buy-out agreement, to pay a former partner 5% of the partnership's gross fees collected over two years. The partnership worried about continuing those payments if the former partner turned in his license or was suspended or disbarred, arguably becoming a nonlawyer, and asked whether that would violate Rule 3-102's bar on dividing legal fees with a nonlawyer.

The opinion explained that dividing fees among lawyers is permitted under Rule 2-107, including, under Rule 2-107(B), payment to a former partner or associate pursuant to a separation or retirement agreement, so the buy-out, if otherwise proper, was permissible while the former partner remained licensed. It then reasoned that the former partner's resignation, suspension, or disbarment did not necessarily affect the buy-out's propriety. Rule 3-102, while barring fee-sharing with a nonlawyer, contains exceptions, including payment over time to a deceased lawyer's estate or specified persons for consideration that flowed to the firm during the lawyer's service. The opinion saw little difference between paying a deceased partner's estate and paying a former partner a percentage of future-collected fees under a buy-out for past services: the services or contributions had occurred in the past, and the former partner was merely receiving deferred payment, which his suspension or disbarment did not prohibit him from collecting.

The opinion cited several out-of-state decisions and opinions supporting recovery by a suspended or disbarred lawyer for services rendered before the discipline, including Reardon v. DeBlasio and Meagher and Marett v. Schneider, and New York and other committee opinions permitting payout to a withdrawing partner for past services or the value of existing cases. It stressed that the crucial issue in any division is that it be in proportion to the services performed or responsibility assumed. Applying the facts, the opinion concluded the payout appeared to be for the former partner's past work with the firm, but cautioned that if the buy-out agreement covered fees in future cases that were not with the firm before his withdrawal, or for which he performed no services and assumed no responsibility, the arrangement would be prohibited under Rules 2-107 and 3-102, whether the attorney was licensed, suspended, disbarred, or had resigned.

Currency note

This opinion was issued in 1985, when New Mexico lawyers were governed by the former New Mexico Code of Professional Responsibility, which the State Bar later replaced with the Rules of Professional Conduct; it also predates the State Bar of New Mexico's November 3, 2008 revisions to those Rules (the New Mexico adoption of the ABA Ethics 2000 changes). The fee-division rules it cites (Rule 2-107, Rule 3-102) are no longer in force. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a firm keep paying buy-out money to a partner who is suspended or disbarred?

A: The opinion concluded the payments were permissible under Rules 2-107 and 3-102 even after suspension or disbarment, because they were deferred payment for services the former partner had already performed for the firm.

Q: Why did suspension or disbarment not break the arrangement?

A: The opinion reasoned the services and contributions had occurred in the past and the former partner was merely receiving deferred payment, which his loss of license did not prohibit him from collecting, analogizing to payments to a deceased lawyer's estate.

Q: When would the buy-out become improper?

A: The opinion concluded the arrangement would be prohibited under Rules 2-107 and 3-102 if it covered future cases that were not with the firm before the partner's withdrawal, or for which he performed no services and assumed no responsibility.

Q: What is the key limit on dividing fees this way?

A: The opinion stressed that the crucial issue in any division is that it be in proportion to the services performed or the responsibility assumed.

Background and rules framework

The opinion interpreted the former New Mexico Code of Professional Responsibility: Rule 2-107 (division of fees among lawyers, including (B) on payments under a separation or retirement agreement) and Rule 3-102 (a lawyer or law firm shall not share legal fees with a nonlawyer, with its enumerated exceptions), as applied to a partnership buy-out paying a former partner a percentage of gross fees.

Citations and references

Rules of Professional Conduct (former Code):

• Model Code DR 2-107 / NM Code Rule 2-107(A), (B) (division of fees; separation or retirement agreements)
• Model Code DR 3-102 / NM Code Rule 3-102 (no sharing of legal fees with a nonlawyer, with exceptions)

Cases:

• Reardon v. DeBlasio and Meagher, N.Y. Sup. Ct. (Apr. 9, 1984): suspended attorney could recover for pre-suspension services
• Marett v. Schneider, Kleinic & Weitz, P.C., N.Y. Sup. Ct. (June 18, 1985): disbarred lawyer could recover a referral fee for pre-disbarment services

Other opinions cited:

• N.Y. Opinions 80-2, 83-5, 343; Tenn. Op. 83-F-50; Ala. Op. 19 (1982); ABA Informal Decision 628 (1962): division must be proportional to services performed

See also

• NM Ethics Op. 1984-13: In-House Bank Counsel Fee Sharing
• NM Ethics Op. 1985-4: Retaining Lien and Fee Division

Source

• Landing page: https://www.sbnm.org/Leadership/Committees/Ethics-Advisory-Committee/Ethics-Advisory-Opinions
• Original PDF: https://www.sbnm.org/Portals/NMBAR/AboutUs/committees/Ethics/1985/1985-12.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Advisory Opinion 1985-12
ISSUE
May an existing partnership split or pay 5% of its gross fees collected by the partnership with a former partner, who either will turn in his license to practice law in an unrelated matter or be suspended or disbarred, in light of the prohibition against dividing legal fees with a non-lawyer?
FACTUAL SITUATION
A legal partnership was dissolved. The remaining members to the partnership entered into an agreement with a former partner under a Buy-Out Agreement to pay the former partner 5% of the gross fees collected by the partnership for a period of two years. The partnership has been paying the former partner 5% of gross fees collected pursuant to the Buy-Out Agreement. Now, a situation arises where the former partner may turn in his license or be suspended or disbarred from the practice of law in New Mexico. The partnership is concerned about continuing to pay a percentage of gross fees collected to a former partner who arguably becomes a non-lawyer if he is unable to practice law in the State of New Mexico. The partnership wants to know if there is a violation of Rule 3-102, which prohibits the dividing of legal fees with a nonlawyer except in certain circumstances.
OPINION
Clearly, a division of fees among lawyers is permitted under the Code of Professional Responsibility. Rule 2-107 states:
(A) A lawyer shall not divide a fee for legal services with another lawyer who is not a partner in or associate of his law firm or law office, unless:
(1) the client consents to employment of the other lawyer after a full disclosure that a division of fees will be made;
(2) the division is made in proportion to the services performed and responsibility assumed by each;
(3) the total fee of the lawyers does not clearly exceed reasonable compensation for all legal services they rendered the client.
(B) This disciplinary rule does not prohibit payment to a former partner or associate pursuant to a separation or retirement agreement.
So long as the former partner remains a licensed attorney, the Buy-Out Agreement, if otherwise proper, is permissible under 2-107.
The propriety of the Buy-Out Agreement is not necessarily affected by the resignation, suspension or disbarment of the former partner. The relevant disciplinary rule is 3-102. It is found in Canon 3 which requires that a "lawyer should assist in preventing the unauthorized practice of law." Rule 3-102 provides that:
(A) A lawyer or law firm shall not share legal fees with a non-lawyer, except that:
(1) An agreement by a lawyer with his firm, partner or associate may provide for the payment of money, over a reasonable period of time after his death, to his estate or to one or more specified persons:
(2) A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer;
(3) A lawyer or law firm may include non-lawyer employees in a retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.
It is contemplated by the disciplinary rule that a lawyer can make an agreement with his partnership to pay him money over time for legal services he performed, or in consideration for other services performed for the law firm, even after his death to his estate or to persons he may specify. The actual payment by the law firm to the lawyer's estate or another specified person would be to a non-lawyer, but the monies paid would be for consideration flowing to the law firm during the time the deceased lawyer performed services. The situation is similar with a lawyer who executes a Buy-Out Agreement with his former law firm that will pay him money over time for services he performed while with the law firm and other consideration flowing to the law firm for which he will be receiving payment in the future. There is little difference between payment of monies by a law firm to a deceased partner's estate and payment to a former partner of a percentage of fees collected in the future for a reasonable period of time as part of a Buy-Out Agreement when the former partner turns in his license, is suspended or disbarred. The legal services or other services performed or contributions made by the former partner have occurred in the past and he is merely receiving deferred payment for those services performed in the past for the law firm as part of a Buy-Out Agreement. His suspension or disbarment does not prohibit his collection for services previously rendered while a licensed attorney.
Several decisions in other jurisdictions support this conclusion. The case of Reardon v. DeBlasio and Meagher, N.Y. Sup. Ct., April 9, 1984, (ABA/BNA Lawyer's Manual p. 200) is directly on point. A suspended attorney who had performed substantial services for a client in a case prior to his suspension and unrelated to his suspension was entitled to recover a portion of a contingent fee from an attorney to whom he had referred the case and who had agreed to pay the forwarding attorney one-half of the fee collected upon final resolution. The forwarding attorney did substantial work on the case prior to its referral and accompanied the client to trial counsel's office and participated in the consultation. He further made himself available to do whatever was asked of him throughout the litigation and continued as the claimant's attorney of record. The forwarding attorney was subsequently suspended temporarily from the practice of law when he acted unprofessionally in another setting. Local appellate division rules in New York specifically allowed payment for services rendered by counsel prior to any suspension as long as the errant attorney's conduct in connection with the case involving the claim for fees was not part of the disciplinary proceedings leading to his suspension. See also, Marett v. Schneider, Kleinic & Weitz, P.C., N.Y. Sup. Ct., June 18, 1985 (ABA/BNA Lawyer's Manual p. 864) (permitting a disbarred lawyer to recover one-third of the net legal fee from a trial attorney where the disbarred attorney had, prior to disbarment, forwarded the tort case to the trial attorney and entered into a contingency fee arrangement with the trial attorney, having completed performance of his agreed-upon services prior to disbarment for conduct in an unrelated case).
In Opinion 80-2, ABA/BNA Lawyer's Manual § 801:6301 (N.Y. undated), it was held that a lawyer may pay a partner, withdrawing from his firm, the worth of the withdrawing partner's services in existing cases and the approximate value of those cases, in the form of a payout over a period of years whether the compensation is for the withdrawing partner's past services to the firm or is based on anticipated future earnings of the firm in cases with the firm prior to the partner's withdrawal. See, e.g., ABA/BNA Lawyer's Manual Opinion 83-5, § 801:6206 (N.Y. 1983); Opinion 343, § 801:6612 (N.Y. 1984); Opinion 83-F-50, § 801:8109 (Tenn. 1983); Opinion 19, § 801:1104 (Ala. 1982) (a division of fees with a suspended lawyer for services rendered before the suspension would not be aiding or encouraging nonlawyers to practice law). The crucial issue in any division is to make sure that such division is in proportion to the services performed or the responsibility assumed. Informal Decision 628 (1962).
In the present request, it appears the Partnership's payout would be based on a Buy-Out Agreement between a former partner and the partnership of a percentage of gross fees to be collected in the future, but paid to the former partner for his work with the former partnership. It further appears that the former partner performed substantial services or made contributions to the firm in connection with the monies he will be receiving in the future as part of being bought out. If the Buy-Out Agreement covers fees in future cases which were not with the firm before the partner's withdrawal or which the former partner performed no services and assumed no responsibilities, the Committee believes this arrangement is prohibited under Rules 2-107 and 3-102 whether the attorney was licensed, suspended, disbarred or had resigned.