Much has been written about Marc Dreier's substantial theft of his firm's assets and the raiding of the attorney escrow fund where client funds were held.; as much as $380 million may have been purloined. Everyone has discussed that he is the sole equity partner holder.

But what of the non-equity partners? As of today their web site lists 49 such individuals. Can they be held responsible for the firm's losses? Given that the firm shockingly has no malpractice insurance (though the insurance carrier may well have tried to disclaim coverage anyway), this surely must be a cause of sleepless nights for the non-equity partners.

The short answer is, yes, they might be liable under New York law. I happened to have litigated the issue back in the 90's on behalf of my father after he separated from Fuchsberg & Fuchsberg, where he was an income partner. Fuchsberg tried to claim that, despite 20 years of representing to the world that my father was a partner, he was in reality a glorified employee. The arbitrator disagreed with Fuchsberg's employee argument, and the final verdict landed on the front page of the New York Law Journal.

So -- aside from the details of a written partnership agreement that I obviously don't have access to -- below are the types of issues that will have to be sorted out to determine whether the Dreier non-equity partners are really partners for the purpose of sharing in the losses. Some of the issues listed below come from D'Esposito v. Gusrae, Kaplan and Bruno

• Was the individual listed as such in Martindale-Hubble, on the firm's letterhead, website and/or tax return;
• Did the partner receive distributions of net profits from the firm, and if so, was this a fixed amount (indicating more employee-like) or did it fluctuate (more partner-like);
• Was the partner responsible for the firm's rent or losses;
• Was the partner a signatory of the partnership and/or operating agreement;
• Did the partner make any kind of capital investment;
• Did the partner exercise any control over partnership affairs.

Bad times are ahead for those that made partner and might now be on the hook for losses that could throw them into bankruptcy, even though they didn't own any of the firm's equity. Rest assured that the partnership agreement is being read today by a gazillion lawyers with a fine-toothed comb.

Addendum: One critical place the lawyers will need to look to sort out the liability issue is the income tax return filed for partners (form K-1). That form lists the percentage of profits that they are entitled to as well as the percent of losses (regardless of whether there were actual losses prior to this). Any non-equity partner that is responsible for losses on that K-1 may be in for particular trouble.

See also:
Dreier Troubles Show Danger of Single Equity Partner Structure (Weiss @ ABA Journal)

Labels: Law Practice