New York Law Review

Tag: Law Firm

  • Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 86 N.Y.2d 112 (1995): Fiduciary Duty and Solicitation of Clients by Departing Law Partners

    Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 86 N.Y.2d 112 (1995)

    Departing law partners breach their fiduciary duty when they secretly solicit firm clients for their personal gain before resigning, as this undermines the duty of loyalty among partners and exceeds the scope of permissible client communication.

    Summary

    This case concerns a dispute between a law firm and its departing partners, focusing on whether the partners breached their fiduciary duty by soliciting firm clients before their resignation. The New York Court of Appeals held that such pre-resignation, surreptitious solicitation is actionable, as it undermines the duty of loyalty partners owe each other. The court clarified that while attorneys can inform clients of their departure and remind them of their right to choose counsel, they cannot secretly lure clients away or lie about their rights. The court also addressed claims of breach of contract and fraud, finding material issues of fact that precluded summary judgment.

    Facts

    Irving Moskovitz and Seymour Graubard founded the plaintiff law firm in 1949. Moskovitz brought in F. Hoffman LaRoche & Co., Ltd. (Roche) as a client in 1959, with billings exceeding $1 million per year by the late 1980s. In 1982, the firm adopted a retirement program that included clauses stating retirees would not impair the firm’s client relationships and would integrate clients with other partners. After the phase-down period, Moskovitz, unhappy with the firm, contacted a legal search consultant about moving to another firm with his tax partners, Schiller and Young, indicating Roche would follow. Moskovitz negotiated with LeBoeuf Lamb Leiby & MacCrae, ensuring Roche’s approval before finalizing any arrangement.

    Procedural History

    The law firm sued Moskovitz, Schiller, and Young for fraud, breach of fiduciary duty, breach of contract, and unjust enrichment after they resigned and joined LeBoeuf. The trial court denied the defendants’ motion for summary judgment, except for claims based on guarantees of client retention. The Appellate Division affirmed, granting leave to appeal to the Court of Appeals. Only Moskovitz appealed.

    Issue(s)

    1. Whether a withdrawing partner breaches fiduciary duty by soliciting firm clients before announcing their resignation.
    2. Whether a contractual requirement that an attorney try to “integrate” or “institutionalize” clients into the firm is legally enforceable.
    3. Whether a cause of action for fraud is stated by alleging that a promisor lacked the intention to perform representations when making them.

    Holding

    1. Yes, because pre-resignation surreptitious solicitation exceeds what is necessary to protect client freedom of choice and undermines the duty of loyalty among partners.
    2. Yes, because such provisions do not compromise client freedom of choice or an attorney’s freedom to practice law, but simply obligate partners to use their best efforts to expose clients to other attorneys in the firm.
    3. Yes, because a false statement of intention is sufficient to support an action for fraud, even if it relates to an agreement between the parties.

    Court’s Reasoning

    The Court of Appeals balanced the fiduciary duty partners owe each other with the attorney’s responsibility to clients and client’s freedom to choose counsel. While attorneys can inform clients with whom they have a prior professional relationship about their impending withdrawal and new practice, and remind the client of its freedom to retain counsel of its choice, secretly attempting to lure firm clients to the new association is inconsistent with a partner’s fiduciary duties. The court emphasized that partners must maintain a “punctilio of an honor the most sensitive.” Regarding the breach of contract claim, the court found that the retirement agreement provision did not compromise client freedom. The court also held that a cause of action for fraud may arise when one misrepresents a material fact with no intention of complying with those representations. The court noted, “A false statement of intention is sufficient to support an action for fraud, even where that statement relates to an agreement between the parties.” Because there were material issues of fact the court determined that summary judgment was inappropriate.

  • Hackett v. Milbank, Tweed, Hadley & McCloy, 86 N.Y.2d 146 (1995): Enforceability of Law Firm Partnership Agreements and Arbitration Awards

    Hackett v. Milbank, Tweed, Hadley & McCloy, 86 N.Y.2d 146 (1995)

    An arbitration award interpreting a law firm partnership agreement regarding supplemental payments to withdrawing partners will be upheld unless it is totally irrational or violates a strong public policy, even if the arbitrator’s factual conclusions are incorrect.

    Summary

    Hackett, a former partner at Milbank, Tweed, sought supplemental payments upon his withdrawal to join another firm, as provided in the partnership agreement. Milbank, Tweed denied the payments based on a clause reducing payments in proportion to a withdrawing partner’s new income. An arbitrator upheld the agreement, finding it enforceable and that Hackett’s income precluded payments. The New York Court of Appeals reversed the lower courts’ decision to vacate the arbitrator’s award, holding that the arbitrator’s decision did not violate the public policy against restrictions on the practice of law, and the strong public policy favoring arbitration should be upheld.

    Facts

    Hackett was a partner at Milbank, Tweed, Hadley & McCloy. Upon withdrawing to join Fried, Frank, Harris, Shriver & Jacobson, he sought supplemental payments as authorized by the Milbank, Tweed partnership agreement. Milbank, Tweed’s partnership agreement (30th Amendment) provided for supplemental payments to withdrawing partners, but these payments were reduced dollar-for-dollar to the extent the withdrawing partner’s annual earned income exceeded $100,000. Hackett’s income at Fried, Frank exceeded this threshold, leading Milbank, Tweed to deny the payments.

    Procedural History

    Hackett initiated arbitration proceedings as required by the partnership agreement. The arbitrator upheld the agreement and denied Hackett’s claim. Hackett then challenged the arbitrator’s award in court. Supreme Court initially stayed the arbitration, but the Court of Appeals reversed, ordering arbitration. After the arbitrator’s decision, Supreme Court vacated the award, finding it violated public policy. The Appellate Division affirmed. The Court of Appeals then reversed the Appellate Division’s decision.

    Issue(s)

    Whether an arbitrator’s decision, upholding a law firm partnership agreement that reduces supplemental payments to withdrawing partners based on their new income, violates the public policy against restricting the practice of law.

    Holding

    No, because the arbitrator’s award, even if its factual conclusions are incorrect, does not on its face violate the public policy against restrictions on the practice of law and the strong public policy favoring arbitration.

    Court’s Reasoning

    The Court emphasized the strong public policy favoring arbitration. It noted that under CPLR 7511, an arbitration award can only be vacated under limited circumstances, such as corruption, fraud, misconduct, or if the arbitrator exceeded their power or the award violates a strong public policy. The Court found that the arbitrator’s determination that the supplemental payments were not intended to represent a withdrawing partner’s share of undistributed earned income was a factual finding that shouldn’t be second-guessed by the courts unless it violates public policy. The Court distinguished this case from Cohen v. Lord, Day & Lord and Denburg v. Parker Chapin Flattau & Klimpl, noting that the Milbank, Tweed agreement did not inherently discriminate against partners leaving for private practice, as the reduction in supplemental payments applied regardless of the source of the withdrawing partner’s income. The Court quoted the arbitrator’s finding that the provision was “competition neutral.” The Court also cited the policy favoring the routine enforcement of voluntary settlements, and found a similar public policy supported upholding arbitration awards. The court stated, “[W]here the parties have agreed to submit their dispute to binding arbitration, an award that is not clearly in violation of public policy should be given effect”.