When a New Jersey lawyer leaves a professional corporation, can the firm and the departing lawyer split fees by fixed percentages on the pending and future files?

Plain-English summary

The inquirer asked about a proposed agreement dividing legal fees between a law professional corporation and a shareholder who had withdrawn. The agreement set up a comprehensive plan covering four categories of active files, with fees divided on arbitrary percentage bases that varied by category and did not track the amount of work each side performed. The Committee assumed all necessary client consents had been or would be obtained and that the total fees were reasonable, then analyzed the categories under DR 2-107.

DR 2-107(A) bars dividing a fee with a lawyer who is not a partner or associate unless the client consents after disclosure, the division is in proportion to services performed and responsibility assumed, and the total fee is reasonable. DR 2-107(B) provides that the rule does not prohibit payment to a former partner or associate pursuant to a separation or retirement agreement, or a professional-corporation stock-valuation agreement. The Committee applied that distinction to the file categories.

For the "new files" in Part 3, those coming to the withdrawing member for a year after his withdrawal, with no participation by the association, the Committee held DR 2-107(A)(2) explicitly prohibits any division, and that there was no justification for invoking the DR 2-107(B) separation-agreement exception. The result was different for the files in Part 1 and the first and second sections of Part 2, which originated while the withdrawing partner was still a member: as to those, DR 2-107(B) prevails over DR 2-107(A)(2), so the percentage-division agreement was found proper. The Committee added that its earlier opinions (80, 87, 203), rendered before DR 2-107(B) was adopted, were not inconsistent with these views.

Currency note

This opinion was issued in 1979, before New Jersey's adoption of the 2004 revisions to the Rules of Professional Conduct, and predates the 1984 replacement of the Disciplinary Rules by the RPCs. It applied DR 2-107(A) and (B); in current New Jersey terms the fee-division rule corresponds to RPC 1.5, and the treatment of separation and retirement arrangements has its own current provisions. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can the firm and a departing member split fees on files that began during his membership?

A: Yes. The opinion held DR 2-107(B)'s separation-agreement exception lets the firm and the withdrawing member divide fees by percentage on files that originated while he was a member.

Q: Can they split fees on brand-new files he gets after leaving?

A: No. For new files coming to him only after withdrawal, DR 2-107(A)(2) prohibits any fee division with the firm, which does no work and assumes no responsibility on them.

Q: Did the arbitrary percentages matter?

A: For the originated-during-membership files, the separation-agreement exception allowed the percentage split; for the new files, the proportionality requirement of DR 2-107(A)(2) controlled and barred division.

Background and rules framework

The opinion applied DR 2-107(A) (proportional fee division with outside lawyers) and DR 2-107(B) (the separation/retirement and stock-valuation exception). In current New Jersey terms the fee-division rule corresponds to RPC 1.5. The holding turned on when each file originated: separation-agreement treatment for membership-era files, strict proportionality (and thus no division) for post-withdrawal new files.

Citations and references

Rules of Professional Conduct:

• MR 1.5 / NJ RPC 1.5 (fees; division of fees)
• DR 2-107(A)(1)-(3), DR 2-107(B) (as in effect 1979)

Statutes:

• N.J.S. 14A:17-1 et seq. (professional corporations)

Other opinions cited:

• NJ ACPE Opinion 80, 88 N.J.L.J. 460 (1965); Opinion 87, 88 N.J.L.J. 779 (1965); Opinion 203, 94 N.J.L.J. 298 (1971)

See also

• NJ ACPE Op. 444: Cross "Of Counsel" Listings Between a Firm and a Sole Practitioner
• NJ ACPE Op. 455: A Bar Foundation Legal-Fee Financing Plan

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp420-1.html
• Issuing authority: New Jersey Supreme Court Advisory Committee on Professional Ethics, via the NJ Courts Supreme Court Committees page

Original opinion text

Reproduced from a full-text mirror of the official opinion for research purposes. The linked official source controls.

103 N.J.L.J. 194, March 1, 1979

OPINION 420

Division of Fees - Professional Association and Former Member

The inquirer asks about the propriety of a proposed agreement for the division of legal fees between a professional association of attorneys (professional corporation, N.J.S. 14A:17-1 et seq.) and a member (shareholder) who has withdrawn. The provisions in question are apparently intended to establish a comprehensive plan for the division of four categories of active "files" of the parties and for the division of the fees generated by these files. In each of the four categories of "files" the fee division would be on an arbitrary percentage basis, the percentages varying by category. We infer that all necessary client consents to the allocation of the individual files have been or will be obtained and assume there will be no question of the reasonableness of the total fee of the lawyers involved. See DR 2-107(A)(1) and (3), infra, and our Opinion 203, 94 N.J.L.J. 298 (1971).

The several categories of the files are more particularly described in the inquiry by reference to the parts of the agreement.

Part 1. This part deals with the files which came to the withdrawing member while he was a member of the association and provides that he shall continue to work on them to conclusion. While the withdrawing member was with the association he did all the work on these files and when he left he continued to handle them without assistance from the association. It is proposed that any fees recovered on these files be divided 60%-40%, with the association receiving 60% and the withdrawing member 40%. This is an arbitrary figure and no consideration is given to the amount of work done by the withdrawing member while a member of the association or the amount of work done after withdrawal.

Part 2. The second part is divided into two sections. The first section deals with files which were originally files of members of the association other than the withdrawing member but which were subsequently assigned to the withdrawing member. The agreement proposes that the withdrawing member shall continue to handle these files and that the fees realized at the conclusion of a file are to be divided on the basis of 50% to the association and 50% to the withdrawing member. Once again, these are arbitrary figures with no reference to the amount of work done either by the original member, by the withdrawing member while a member of the association or by the withdrawing member after leaving the association. The second section is the converse of the first section, i.e., these are files which originally were the withdrawing member's but were assigned to other members of the association and remained with the association to be handled by a member thereof. Once again, there is a percentage division with no reference to work done. The percentages are not specified in the inquiry.

Part 3. The third part refers to files coming to the withdrawing member for one year after his withdrawal from the association and provides that a percentage of the fees realized on these files be sent to the association, with no provision for any participation in the work-up of these files by the association or its members.

DR 2-107 provides: (A) A lawyer shall not divide a fee for legal services with another lawyer who is not a partner in or associate of his law firm or law office unless: (1) The client consents to employment of the other lawyer after a full disclosure that a division of fees will be made. (2) The division is made in proportion to the services performed and responsibility assumed by each. (3) The total fee of the lawyers does not clearly exceed reasonable compensation for all legal services they rendered the client. (B) This Disciplinary Rule does not prohibit payment to a former partner or associate pursuant to a separation or retirement agreement, or professional corporation stock valuation agreement.

DR 2-107(A)(2) explicitly prohibits any division of fees between the association and the withdrawing member with respect to the new files which are the subject matter of Part 3. In this instance there is no justification for invoking DR 2-107(B).

The situation is different as to the files mentioned in Part 1 and the first and second sections of Part 2. Those files originated while the withdrawing partner was still a member of the association. With regard to those files, DR 2-107(B) prevails over DR 2-107(A)(2), with the result that, as to them, the agreement is found to be proper. Opinions of this Committee (Opinion 80, 88 N.J.L.J. 460 (1965); Opinion 87, 88 N.J.L.J. 779 (1965); Opinion 203, supra), which were rendered before DR 2-107(B) was adopted are not, in our opinion, inconsistent with the views herein expressed.