Tag Archive: Cash & Finances

New rules for IRS 1099

New rules relating to the issuance of 1099 forms are in place that impact even funds in one’s IOLTA account. If you have oversight and management of the funds such as selecting the expert witnesses or investigators in a personal injury matter, you may have sufficient dominance to be required to issue a 1099.

See Priv. Ltr. Rul 97-44-02 (1997) and 91-02-013. See also Rev Rul 93-70, 1993-2 CD 294.

The threshold amount if $600. Beyond that, consider the consequences of filing/not filing. And if you’re a co-recipient of a settlement draft with your client where a portion of the draft is for attorney’s fees, you will still have to report and/or attach an explanation to your tax return.

Moral of the story:  These laws are complex. Consult your tax adviser.

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Legal services just got more expensive

Not bad enough that legal services are already expensive, but court closures resulting from budget cutbacks will make legal services of all kinds even more expensive. Alternative methods of dispute resolution will need to be engaged.  This is like a bad heart, needing new arteries created from exercise. But, we don’t know yet what the "exercise" will be to enable the cost of legal services to go down.  Will it be technology? Will it be alternative dispute resolution? Will it be "why can’t we all just get along?" attitude changes?

Marlo Van Oorschot talks about the cost of a divorce rising, as just one example. But, she puts it in terms that everyone can understand. 

More budget cuts are going to cause court closures in the family law department this year. This means the time and cost to bring a family law case to conclusion is going to increase. Unless an alternative means of resolving a case is implemented, parties should plan on spending two years and their children’s college education funds waiting to have their day in court.

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Does your lateral partner have unfinished business?

Large firms, more than we care to know, have made news in the last couple of years by "going under," i.e., defunct! Firms such as Howrey and Heller Erhman became the targets of personnel raids. Very good lawyers from these, and similar, law firms departed and joined other major, national law firms. Today’s WSJ comments on the current state of affairs for some of AmLaw 100 law firms.

Some folks are asking whether your new lateral partner have any unwanted baggage? In some instances, the new firm accepted partners from the old firm with the understanding that the lawyer would bring over clients from the old firm as well as his "unfinished business." This provides for immediate billing .. and therefore an opportunity to acquire great talent at a very low or zero cost.

These firms, and others, have gone into bankruptcy to collect funds to pay the firms’ creditors. In a law firm, the major assets "walk out the door every evening. Computers, furniture  and real estate are of minimum value, if any, in a law firm. Accounts receivable are a major asset, though often difficult to collect from clients when they know there will be little serious effort to collect.

But, when the partners from the old, now defunct, law firm went, they generally took "their" book of business with them … and the "unfinished business" of the clients that went with them. One argument is that clients have a right to seek their own choice of lawyer. And the other argument is that the partner and new law firm benefited, resulting in a profit to the new firm that truly belongs to the old firm.

This battle will be fought for years, I suspect. But, the reality of our world is that anyone can sue anyone else, even if wrong. In the meantime, the largest pool of cash available to the trustee in bankruptcy for the defunct firms is the new firm and, perhaps, the lawyers, individually, from the old firm. Whether legitimate or not, new firms have been economically compelled to settle many of such claims in order to go on with the new firm business.

The new firms thought they were getting a steal! Maybe. But, I’m reminded of the old say that "…if it looks too good to be true, it probably is too good to be true." There is a cost to everything, even a very attractive, new lateral partner with great talent and a great book of business.

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Are you sure you have malpractice coverage?

Fee suit exclusions seem to be the latest insurance ploy to cheat unsuspecting lawyers.

An engagement agreement is designed to be a "two way street." The lawyer promises to do certain things… address the needs (and wants?) of the client; represent the client to address the challenge being faced by the client, whether it be a lawsuit or a transactional issue. And, of course, the lawyer is representing that he/she is competent to do so.

The client, on the other hand, promises to tell the truth to the lawyer, provide information and documents relative to the matter when requested by the lawyer to do so … and to pay the fee as billed in accordance with their arrangement.

What are the consequences of failure to honor the respective promises?  For the lawyer, it is a malpractice suit and/or a disciplinary proceeding. For the client, it’s withdrawal by the lawyer (unless on the eve of trial or otherwise would prejudice the client) or a lawsuit for payment of the fee.

BUT, some insurance carriers are lining up with clients, saying that if the lawyer sues for fees, and the client cross complains or counter sues for negligence or files a disciplinary complaint with the state bar, the carrier will not provide defense costs or pay any judgment against the lawyer. The effect of this is to deny the lawyer the ability to collect the fee when the client fails to pay.  Why pay insurance premiums for something you will not receive?  The $64 question.

Fee suit exclusions are a veiled attempt by insurance companies to raise premiums without notice to the lawyer. And, the lawyer generally isn’t even aware of this exclusion.

Both law schools and insurance companies conspire to keep lawyers ignorant of the business nature of their practice. In no other industry do creditors ignore their rights and fail to sue debtors for refusal to pay legitimate debts resulting from their purchases. Why should lawyers be placed in a different position? Why should clients be encouraged not to pay their lawyers’ fees?

The reality is, according to people I’ve spoken with in the industry, that there are few lawsuits filed by lawyers. (Perhaps it’s because lawyers have been scared away.) Further, the reality is that there are few counter suits for negligence. The further reality is that lawyers win most of these lawsuits; the figure I’ve been given is winning 9 out 10.

Seems that the lawyers face a big challenge:  Failure of the law schools to teach business practices so lawyers can more effectively represent clients and efficiently deliver legal services; insurance carriers looking out for themselves, not their customers (lawyers); and bar associations believing their sole function is to protect the public, rather than a dual function of protecting the public AND helping their members (lawyers) to become better practitioners (including business skills).

Lawyers who survive in this environment should be commended.

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Growing law firms

Despite today’s economy, some law firms are growing … by merger and acquisition.

In fact, I had lunch with such a law firm just this last week. They are an 100 lawyers firm that is seeking to grow. They are interested in acquiring my client, a substantial boutique that would add a significant presence for them both in the relevant practice area as well as the geographic area.

We couldn’t seem to connect, however. I made it very clear that my client was talking about selling his firm. Their offer suggested that they were interested in "merging." The reason was simple: No capital outlay was needed for a merger. The "offer" was structured in a way that would pay my client several hundred thousand dollars more than he is currently earning. And 100% of the payment to my client would be tax deductible as an ordinary expense, not a capital expenditure. They structured the offer this way also in order to be sure that the "book of business" follows my client for several years. This, was not what we wanted … we are not looking to become partners in the acquiring firm.

During our conversation, it became clear why we were communicating at different levels…


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Conference You Must Attend – Or Fall Behind

The Business of Lawâ is continuously changing— from fee structures, to marketing strategies, to client preferences. In today’s economic climate, law firms have no way to catch up once they fall behind.

The good news is that the success or failure of your firm is completely in your hands. If you learn the newest practices, develop your business plan, and understand the economic situation you’re operating in, you can achieve financial performances you’ve only dreamed of.

So what’s the fastest, easiest and most innovative way to update traditional methods and boost business to the next level? 

Introducing the 2nd Annual Midwestern Law Firm Management Conference- The New Norm: Understanding How To Thrive in the New Economy.



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Big Firm Salary Model Broken

Is the big firm salary model broken? That’s the topic addressed by Michelle Lore in the Minnesota Lawyer. Associate pay is only one of many areas of cuts in expenses that law firms are reviewing. In our Managing Partners Roundtable, just yesterday, large law firm managing partners said that they are now "lean." They have cut all the "fat" or excess expenses they can, some of which have become evident in 2009 and others which will show up first in 2010 results.

What will the law firm model of 2010 look like? Or will law firms ignore the lessons of 2007-2008 and seek to go back to "normal" as the economy turns around? "Head in the sand" approach usually doesn’t work for long term success.

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Why sell your law practice?

Lawyers, ready to retire, must consider the value of their law practice as an asset that can be sold … With 401 Ks becoming 101 Ks (or less), the revenue from the sale of one’s law practice may provide the revenue stream needed for retirement.

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Law firm revenue is decreasing

In this morning’s session of large law firm managing partners, a group I’ve facilitated for more than 10 years, I heard hand-wringing I’ve never heard before. September 2008 was a watershed benchmark for revenue. Since then, revenues have decreased each month for many of the firms. There are only occasional rays of hope in certain practice areas. There seems to be a significant excess supply of lawyers. This is a significant change. As one lawyer cautioned, though, when the paradigm shifts again (as in the past), there will be an inadequate supply of experienced lawyers available to meet the demand.

How do you see the future both for the profession as well as for your own practice area?

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Expense reduction or investment advance

One of my law firm clients has a lawyer who is what I would call a "reluctant marketer."  This lawyer is a great lawyer, a "worker-bee," but not a great rainmaker. The managing partner considered engaging a coach to help the lawyer improve his skills within his comfort zone. Why is this important? Because the amount of work for this lawyer that is being internally generated is lessening. In other words, this lawyer has to begin helping himself a bit.

Parenthetically, I saw a recent survey that shows the amount of hours being worked by lawyers, generally, is coming down. But more on that later.

But, the management committee has come back and said that "costs" are frozen. No more spending. Is this a backward way to look at the situation?  What about looking at expenditures from the ROI perspective?  If you buy a new piece of equipment and it pays for itself in a couple of months, wouldn’t you move forward? I think you should.  If a coach or marketing director can help the lawyer increase his/her revenue because of improved rainmaking efforts, shouldn’t you invest in the process?

And what would this mean to the other lawyers?  A reduction in their take home pay? When you’re already earning hundreds of thousands of dollars, a collective reduction by only a few dollars in sdthe short run for an ROI building expenditure may be worthwhile.

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