Closing a law practice upon retirement
COLUMN > Ethics & the Law
BY MARK J. FUCILE
Over the past decade, both national and state bar organizations—including the WSBA—have studied a key trend in the legal profession: The average age of lawyers is rising as the baby-boom generation grows older.11 The ABA has compiled a number of reports and articles discussing this trend, including here in Washington, at: www.americanbar.org/groups/professional_responsibility/resources/lawyersintransition/agingofthebar/. Although there are many implications from this trend, one of the clearest is retirement. For lawyers at midsize and larger firms, transitioning into retirement usually means simply having other lawyers at their firms step into continuing client relationships. For solos and lawyers at small firms who may be roughly the same age, selling their law practice can provide the functional equivalent.22 RPC 1.17 addresses selling a law practice. See generally Mark J. Fucile, “Grey Area”—Selling a Law Practice, 70, No. 3 NWLawyer 43 (Apr./May 2016). For many solos and small-firm lawyers, however, this transition means closing their law practices altogether.
In this column, we’ll look at three risk management aspects of closing a law practice upon retirement. First, we’ll survey file retention. Second, we’ll address closing the firm’s trust account. Finally, we’ll discuss “tail” insurance coverage.
Before we do, three preliminary points are in order.
First, this column addresses lawyers who are executing a retirement plan developed in advance. Such a retirement plan is to be distinguished from what bar associations nationally have long suggested that solos (in particular) have—the equivalent of law firm “advance directives” outlining business basics and designating trusted colleagues who have agreed to assist in the event the lawyer dies unexpectedly or has a health crisis that prevents the lawyer from practicing.33 See generally ABA Formal Opinion 92-369 (1992) (counseling advance planning for solos). Comment 5 to ABA Model Rule 1.3 also suggests advance planning as being included within the duty of diligence reflected in the text of the rule. Although Washington did not adopt a comparable comment, advance planning—even if done informally—is prudent. The WSBA has a law firm disaster planning guide available at: www.wsba.org/for-legal-professionals/member-support/practice-management/guides/disaster-planning.
For many solos and small-firm lawyers, retirement means closing their law practices altogether.
Second, “retirement” from a law firm does not necessarily mean retirement from the law completely. Many lawyers who have closed their own firms remain active through pro bono and other volunteer work, mediation, teaching, and a variety of other pursuits that draw on their legal training and experience. The WSBA website Status Changes page44 www.wsba.org/for-legal-professionals/license-renewal/status-changes. has information on how these other law-related activities may affect licensing.
Third, we’ll focus on the risk management aspects of closing a law practice. Commercial landlord-tenant law and employment law may also enter the mix to address the business aspects of winding down a practice, such as dealing with the firm’s office lease and its staff. The WSBA’s Practice Management Assistance Program55 www.wsba.org/for-legal-professionals/member-support/practice-management. offers a wealth of resources and personal advice on a wide spectrum of retirement-related topics.
FILE RETENTION
When a file is closed, RPC 1.15A(f) ordinarily requires returning client originals that hold legal significance in their paper form—such as original wills—to the client. Although in the past some lawyers, particularly in the estate planning area, obtained client consent to hold original wills and similar documents having legal significance in their paper form, contemporary risk management practice recommends simply returning these kinds of documents when the initial work of creating them is completed. Otherwise, the lawyer has a continuing duty to safeguard those kinds of paper documents,66 See RPC 1.15A(c)(3) (safeguarding property). and ongoing retention creates the risk in our very mobile society that the lawyer will lose track of the clients over time.77 RCW 11.12.265 also permits original wills for living testators to be filed under seal with “any court having jurisdiction.”
Assuming paper originals holding independent legal significance have consistently been returned to clients throughout a lawyer’s practice, it still makes sense for the lawyer to retain files for a time after they are closed in the event the matter is reopened or questions arise.88 See generally WSBA Advisory Op. 181 (rev. 2009) at 3-4 (discussing file retention). Other than trust account records, the Rules of Professional Conduct do not specify a particular file-retention period.99 RPCs 1.15A(c)(3) and 1.15B(a) generally require trust account records to be maintained for seven years. The WSBA Practice Management Assistance Program instead has a very useful set of online file-retention guidelines that address both particular kinds of documents and specific practice areas.1010 See generally Mark J. Fucile, Spring Cleaning, 74, No. 4 Washington State Bar News 16 (Apr/May 2020) (discussing file retention and destruction). The WSBA’s document retention guide is available at: www.wsba.org/for-legal-professionals/member-support/practice-management/guides/document-retention-guide.
When a lawyer is nearing retirement, files should be assessed to confirm that client originals of the kind noted earlier have been returned and to gauge whether some files may already exceed the recommended file-retention periods. If so on both counts, then those files can be destroyed. Just as we have a duty to protect confidential information when maintaining files, we also have a duty to securely destroy them. This applies to both paper and electronic files—and, with the latter, storage media or devices that are also being disposed. The Practice Management Assistance Program can provide recommendations on both secure paper shredding and electronic recyclers that will destroy hard drives (or the equivalent) and then salvage the remaining components.
Once older files and devices are addressed, most lawyers will still have a sizeable number of files that remain. Again, these should be surveyed and client original documents returned if this has not already been handled when the files involved were closed. To avoid the higher expense of paper file storage, paper files can be scanned into electronic form for long-term storage.1111 See WSBA Advisory Op. 2023 (2003) (discussing converting paper files into electronic ones). Driven by both technology and the recent pandemic, many law firms have already converted their files into solely electronic form and moved them to cloud-based storage.1212 See generally WSBA Advisory Op. 2215 (2012) (discussing cloud-based file storage extensively). Because our duty of confidentiality continues to former clients,1313 See RPC 1.9(c) (continuing duty of confidentiality to former clients); see also Martin v. Shaen, 22 Wn.2d 505, 511, 156 P.2d 681 (1945) (privilege survives death of client); Swidler & Berlin v. United States, 524 U.S. 399, 410-11, 118 S. Ct. 2081, 141 L. Ed. 2d 379 (1998) (same). the advisability of using a reputable commercial storage vendor with appropriate security protocols for both storage and access remains until the files involved are eventually destroyed.1414 WSBA Advisory Op. 2215, supra note 12, includes suggested general factors for assessing whether a vendor’s security protocols continue to meet the regulatory requirements of RPC 1.6 over time. See also ABA Formal Op. 477R (2017) (addressing, in relevant part, the duty of confidentiality in the context of data transmission). The WSBA has a cybersecurity guide for law firms available at www.wsba.org/for-legal-professionals/member-support/practice-management/guides/cybersecurity-guide.
Dealing with a legal malpractice claim isn’t the way most lawyers would like to spend their retirement.
TRUST ACCOUNTS
Under RPC 1.15A(h)(9), only an active WSBA member can maintain a trust account.1515 See also WSBA Advisory Op. 201903 (2019) (citing RPC 1.15A(h)(g) and concluding that a retired lawyer could not maintain a trust account to receive future client settlement proceeds). Therefore, if a lawyer is fully retiring, the lawyer’s trust account will need to be closed. Trust account records must be maintained for seven years following the disposition of the funds involved under RPC 1.15A(c)(3) and 1.15B(a). The WSBA has an excellent trust account management booklet available for download that addresses, in relevant part, closing a trust account.1616 See www.wsba.org/docs/default-source/licensing/iolta/managing-client-trust-accounts-booklet(00455604).pdf?sfvrsn=29a13cf1_10.
Ideally, all disbursements should reconcile neatly and the account can be closed with a zero balance. Occasionally, however, lawyers winding down their practices discover small sums in their trust accounts owed to clients who, after a reasonable search, cannot be located. In that instance, Comment 6 to RPC 1.15A provides clear direction: “If after taking reasonable steps, the lawyer is still unable to locate the client or third person, the lawyer should treat the funds as unclaimed property under the Uniform Unclaimed Property Act, RCW 63.29.”1717 See also WSBA Advisory Op. 2176 (2009) (discussing unclaimed funds in trust and noting that a lawyer is not permitted to include a provision in a fee agreement granting the funds involved to the lawyer in the event the client cannot be found). RCW 63.29.170 and 63.29.190 address, respectively, reporting and payment over of unclaimed funds to the Washington Department of Revenue. The Department of Revenue has a downloadable booklet on its website that walks holders of unclaimed property through the process.1818 https://dor.wa.gov/legacy/docs/pubs/ucp/ucpreport.pdf.
‘TAIL’ COVERAGE
Dealing with a legal malpractice claim isn’t the way most lawyers would like to spend their retirement. Although Washington has a three-year limitation period for legal malpractice claims under RCW 4.16.080,1919 See Huff v. Roach, 125 Wn. App. 724, 106 P.3d 268 (2005) (summarizing the limitation period). it is subject to a “discovery rule.” In other words, the three-year limitation period “does not begin to run until the client discovers, or in the reasonable exercise of diligence should have discovered, the facts which give rise to the cause of action.”2020 French v. Gabriel, 116 Wn.2d 584, 595, 806 P.2d 1234 (1991). Potentially, therefore, a claim might not be asserted until long after a lawyer has retired. In addition to the risk of an adverse judgment, legal malpractice claims can also be expensive to defend due to their complexity.
To address this kind of unpleasant surprise, malpractice carriers typically offer “extended reporting” or “tail” coverage to their insureds when they leave practice. Although details on availability, length of coverage, and pricing vary by carrier, some form of tail coverage is almost always an important element on the risk management side of retirement planning. The ABA Standing Committee on Lawyers’ Professional Liability has useful guidance on its website for tailoring post-retirement coverage to particular practice areas—particularly those, such as estate planning, where the “tail” period may be longer than others.2121 See www.americanbar.org/groups/lawyers_professional_liability/. The WSBA also has a webpage with many malpractice insurance resources.2222 See www.wsba.org/for-legal-professionals/member-support/alps-malpractice-insurance.aba.
NOTES
1. The ABA has compiled a number of reports and articles discussing this trend, including here in Washington, at: www.americanbar.org/groups/professional_responsibility/resources/lawyersintransition/agingofthebar/.
2. RPC 1.17 addresses selling a law practice. See generally Mark J. Fucile, “Grey Area”—Selling a Law Practice, 70, No. 3 NWLawyer 43 (Apr./May 2016).
3. See generally ABA Formal Opinion 92-369 (1992) (counseling advance planning for solos). Comment 5 to ABA Model Rule 1.3 also suggests advance planning as being included within the duty of diligence reflected in the text of the rule. Although Washington did not adopt a comparable comment, advance planning—even if done informally—is prudent. The WSBA has a law firm disaster planning guide available at: www.wsba.org/for-legal-professionals/member-support/practice-management/guides/disaster-planning.
4. www.wsba.org/for-legal-professionals/license-renewal/status-changes.
5. www.wsba.org/for-legal-professionals/member-support/practice-management.
6. See RPC 1.15A(c)(3) (safeguarding property).
7. RCW 11.12.265 also permits original wills for living testators to be filed under seal with “any court having jurisdiction.”
8. See generally WSBA Advisory Op. 181 (rev. 2009) at 3-4 (discussing file retention).
9. RPCs 1.15A(c)(3) and 1.15B(a) generally require trust account records to be maintained for seven years.
10. See generally Mark J. Fucile, Spring Cleaning, 74, No. 4 Washington State Bar News 16 (Apr/May 2020) (discussing file retention and destruction). The WSBA’s document retention guide is available at: www.wsba.org/for-legal-professionals/member-support/practice-management/guides/document-retention-guide.
11. See WSBA Advisory Op. 2023 (2003) (discussing converting paper files into electronic ones).
12. See generally WSBA Advisory Op. 2215 (2012) (discussing cloud-based file storage extensively).
13. See RPC 1.9(c) (continuing duty of confidentiality to former clients); see also Martin v. Shaen, 22 Wn.2d 505, 511, 156 P.2d 681 (1945) (privilege survives death of client); Swidler & Berlin v. United States, 524 U.S. 399, 410-11, 118 S. Ct. 2081, 141 L. Ed. 2d 379 (1998) (same).
14. WSBA Advisory Op. 2215, supra note 12, includes suggested general factors for assessing whether a vendor’s security protocols continue to meet the regulatory requirements of RPC 1.6 over time. See also ABA Formal Op. 477R (2017) (addressing, in relevant part, the duty of confidentiality in the context of data transmission). The WSBA has a cybersecurity guide for law firms available at www.wsba.org/for-legal-professionals/member-support/practice-management/guides/cybersecurity-guide.
15. See also WSBA Advisory Op. 201903 (2019) (citing RPC 1.15A(h)(g) and concluding that a retired lawyer could not maintain a trust account to receive future client settlement proceeds).
17. See also WSBA Advisory Op. 2176 (2009) (discussing unclaimed funds in trust and noting that a lawyer is not permitted to include a provision in a fee agreement granting the funds involved to the lawyer in the event the client cannot be found).
18. https://dor.wa.gov/legacy/docs/pubs/ucp/ucpreport.pdf.
19. See Huff v. Roach, 125 Wn. App. 724, 106 P.3d 268 (2005) (summarizing the limitation period).
20. French v. Gabriel, 116 Wn.2d 584, 595, 806 P.2d 1234 (1991).
21. See www.americanbar.org/groups/lawyers_professional_liability/.
22. See www.wsba.org/for-legal-professionals/member-support/alps-malpractice-insurance.aba.