The former partners of now-defunct law firm Brobeck, Phleger & Harrison in San Francisco didn’t let mere bad times stop them a few years ago. According to suits filed in January by Brobeck’s bankruptcy trustee, Ronald F. Greenspan, the 223 former partners maintained their distributions–a total of $264 million in 2001 and 2002–even though the firm was insolvent and income fell dramatically through the period.
How’d they do that? By borrowing heavily. Bankruptcy claims now total $258 million. Their profligate ways have now come back to bite them and serve as a warning to lawyers, accountants and doctors who form limited liability partnerships. Greenspan for the first time used a little-known provision of California law to seek recovery of distributions if made “without consideration” (not in exchange for services performed) while insolvent. Greenspan’s point: The legal services performed by the partners were an existing obligation not performed for salary, and you can’t take money out of a partnership if it’s insolvent. In February, 207 partners agreed to settle their suits for $23.6 million, even though their lawyers insisted Greenspan’s interpretation was cockeyed.
Only six other states have a “take back” provision similar to California’s, but beware: If the LLP is registered in the state, all partners are liable if they take distributions while the partnership is insolvent–regardless of residence or where they practice. Generally under LLPs, which were allowed in most states starting in the mid-1990s, partners are not personally liable for a partnership’s debts.