California Bar Journal
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Law firm hit for failing to register as LLP

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Diane KarpmanA philosopher once said that the reason people become lawyers is because they think they are above the law. I have secretly obsessed about this idea for decades. As lawyers, we all swear to uphold the law, not to pick or choose, ignoring some laws and adhering to others. Human beings constantly exercise free will and sometimes even lawyers make discretionary decisions about which laws to follow. This may imply that they are above the law, but maybe they are just too busy taking care of their clients' needs to take care of their own interests.

This was illustrated recently in Cappiello, Hofmann & Katz P.C. v. Boyle et al. 2001 Cal. App. LEXIS 202, which involved "firmicide." A group of clients left one "law corporation" (Cappiello) to be represented by a new firm (Boyle), consisting of former members of the "law corporation." Cappiello maintained that the clients were improperly solicited and that the Boyle renegades had intentionally interfered with its prospective economic relationship.

The appeal court held that Cappiello was barred from recovery because its contingent fee agreements were illegal. The Cappiello "law corporation" was engaged in the unauthorized practice of law. Cappi-ello was illegitimate because it failed to register with the State Bar as a "law corporation." According to legal principles, the reasoning is valid. However, when public policy is considered, some of the theories supporting the case seem askew and result in a windfall where none was intended. And what about clients denying that fees were earned?

Law corporations are required to register with the bar in order to protect clients from professional negligence. Each shareholder in a law corporation has joint and several liability, arising out of the practice of law. This can be satisfied by a written guarantee or malpractice insurance, but is intended for client protection and not for the resolution of lawyer disputes. Often, if a group of lawyers fails to specify what type of entity they are, the default position is that they are a "partnership."

Unfortunately, the court also stated that Cappiello, by its "unlawful practice of law" (B&PC 6125) had violated B&PC 6126 (misdemeanor) and B&PC 6127 (contempt). Did the Cappiello shareholders aid and abet the "unlawful practice of law?"

Hopefully, the State Bar disciplinary system will not become involved in lawyer disputes involving "bad blood." Shalant v. State Bar (1983) 33 Cal. 3d 485. Also, "the State Bar is not to be used  as an instrument for the furtherance of private grudges, and

.  .  . evidence which bears the earmarks of private spite should be scrutinized most carefully and accepted with extreme caution." Peck v. State Bar (1932) 217 Cal. 47. If the shenanigans are truly heinous, the bar will become involved, since client interests will be implicated.  However, the bar's primary focus is upon client protection and not on acting as an umpire.

Please choose your entity carefully and dot all the i's and cross all the t's. The technicalities are no longer discretionary. Remember the shoemaker's children who had no shoes. I guess he was busy with other people's needs.