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(Inquiry No. 448 )
Valuation of interest in law partnership in buy-sell agreement between partners.
Death, retirement or disability benefits may be paid to a partner in a two-man law partnership in an amount derived from a formula equal to one-half the average of the immediately preceding two years’ gross receipts.
DR 3-102(A) (1)
Inquiring counsel was asked by a twoman law partnership to prepare a buy-sell agreement in the event of death, disability or retirement of a partner. The death benefit will be funded by a life insurance policy; in the event that policy proceeds are insufficient to payoff the purchase of the deceased partners interest, the balance would be paid over five years, beginning one year from date of death. In addition, disability and retirement payments not covered by insurance would be paid over a ten year period.
The partners desire to establish the value of the partnership interest by using a formula equal to one-half the average of the immediately preceding two years’ gross receipts of the practice.
Would the facts as stated above meet the legal and ethical requirements of New York State law and not be deemed improper or inappropriate?
The proposed arrangement would not be violative of recognized principles of ethics.
This Committee notes at the outset that it cannot pass on legal issues; such are beyond the purview of this Committee. See, e.g., Nassau County Opinions #90-28 and #90-24.
Under EC 3-8, a lawyer should not share legal fees with a layman. However, EC 3-8 continues, providing that n[t]his does not mean, however, that the pecuniary value of the interest of a deceased lawyer in his firm or practice may not be paid to his estate or specified persons such as her widow or heirs. In like manner, profit-sharing retirement plans of a lawyer which include non-lawyer off ice employees are not improper.” See also, DR 3- 102(A) (1) (“An agreement by a lawyer with his or her firm, partner or associate may provide for the payment of money, over a reasonable period of time after the lawyer’s death, to the lawyer’s estate or one or more specified persons”); N.Y. state #281 (1973). The manner of determining “pecuniary value” is not defined in the code. See N.Y. County #633 (1974). The issue, however, has been addressed by a number of authorities which, while not necessarily authoritative with respect to New York’s Code of Professional Responsibility, are nevertheless instructive.
ABA Formal opinion #308 (1963) addressed certain provisions of the “Articles of Partnership for Law Firms’ issued by the American Bar Association’s Standing Committee on the Economics of Law Practice. One provision in question dealt with death benefits to be paid to the estate or designated nominee(s) of a partner upon her death. The third category of payment provided as follows:
(c) In a series of forty-two consecutive monthly installments, beginning on or before one hundred twenty days after the date of his death, a further amount which (except as otherwise herein provided) shall be the average of the sums paid to him as a partner of the firm during each of the last three complete fiscal years of the firm during which he was a partner.
The ABA Committee found sUbsection (c) to be a “fair and reasonable method” of “pay [ ing] to the widow or heirs of the deceased attorney, a proportion of the total compensation fairly representing the proportion of the services rendered by the deceased attorney up to the time of his death.” That committee noted, however, that “[o]ther methods could be used.” ABA Formal opinion #308.
As described by inquiring counsel, the payments under the proposed agreement are based on a formula equal to one-half the average of the preceding two years’ gross receipts. We are of the opinion that this would not be ethically improper, if the amount derived would “fairly represent the proportion of the services rendered by the deceased attorney up to the time of his death.” See also N.Y. State #281 (1973); ABA Formal Opinion #327 (1971) (permitting a law firm to pay to a retired partner or to the estate or beneficiary of a deceased partner an amount measured by earnings accrued after the retirement or death of the partner); N.Y. County #633 (1974) (finding a payment to the estate of a deceased partner based on fees of the partnership earned during a reasonable period after the partner’s death when there was no pre-existing agreement among the partners not improper); Mary Ann Altman & Robert I. Weil, How to manage Your Law Office S8. 03, at 8-5, 8-6 (1992) (“Many partnership agreements provide that a multiple of the average earnings of three, four or five years prior to withdrawal or death shall represent the payout for the interest of a withdrawing or deceased partner”); Bradford W. Hildebrandt, Withdrawal, A Practical Primer, Legal Economics, May/June 1987, at 42 (“Another approach for handling deceased partner pay-outs is to base the payment on some multiple of the partner’s earnings prior to the date of death. Payments as much as 200-250 percent of the partner’s average income for the last two years are not uncommon”). For a sample partnership agreement pursuant to which the amount to be paid upon the death of a partner is based, inter alia, on “an amount equal to two-thirds (2/3rds) of the aggregate of the partners allocated share of net legal income prior to any withholding of funds, during the three (3) full fiscal years immediately preceding the date of his death,” see Mary Ann Altman & Robert I. Weil, How to Manage Your Law Office, supra, at App. 23- 24.
[Approved by the Executive Subcommittee on 1/19/93; approved by Full committee on 1/27/93]