With the recent uptick in the economy, more firms than ever are looking to hire lateral partners with books of business. 1According to The American Lawyer‘s March 2013 Lateral Report, in the 12-month period ending September 2012, 2,691 partners changed firms which was the largest number of moves since the “12-month period ending September 2009, when a record 2,775 partners changed jobs, largely because of the failure of four big firms: Thacher Proffitt & Wood, Heller Ehrman, Thelen, and WolfBlock.” See Victor Li, Escape Routes, 35 The American Lawyer 41, 41 (Feb. 1, 2013). All too often, however, those hires fail to deliver on their promised business, resulting in those partners being shown the door. 2Studies show that the vast majority of lateral hires fail to meet their stated billing and collection expectations. See, e.g., William Henderson & Christopher Zorn, Playing Not to Lose, The American Lawyer (online) (March 1, 2013); Amy Kolz, Building a Better Lateral, 35 The American Lawyer 46 (Feb. 1, 2013); Julie Savarino, Successful Lateral Integration for Law Firms, Bloomberg Law (2013), http://about.bloomberglaw.com/practitioner-contributions/successful-lateral-integration-for-law-firms/. In connection with such partings, a law firm may wish to recoup some portion of the amounts that it paid to the lateral partner, particularly where the termination results in litigation. Law firms need to be aware, however, that without proper planning the common-law “voluntary pay doctrine” may bar any such recovery.
The Voluntary Pay Doctrine’s Long History
The voluntary payment doctrine is a long standing doctrine of law which provides that one cannot recover payments made with full knowledge of the facts, even if the payments were made based on a mistaken understanding of the law. See Best Buy Stores, L.P. v. Benderson-Wainberg Assocs., L.P., 668 F.3d 1019, 1030 (8th Cir. 2012) (“one who makes a payment voluntarily cannot recover it on the ground that he was under no legal obligation to make the payment”) (internal quotation and citation omitted). The doctrine is an affirmative defense to the repayment of money to which the defendant presumably has no legal claim. 3See, e.g., Fradis v. Savebig.com, No. CV 11-07275 GAF (JCx), at 18-19 (C.D. Cal. Dec. 2, 2011). It is not an independent cause of action.
The doctrine traces its roots to English common law and is based on the principle that “ignorance of the law is no excuse.” Randazzo v. Harris Bank Palatine, N.A., 262 F.3d 663, 667 (7th Cir. 2001). 4See also Bilbie v. Lumley, 2 East 469, 470 (102 ER 448) (1802) (“Every man must be taken to be cognizant of the law; otherwise there is no saying to what extent the excuse of ignorance might be carried.”). It has since been adopted in most American jurisdictions, and courts and commentators offer various additional rationales in its defense. 5For an excellent discussion of the voluntary pay doctrine and its history, see C. E. Flora, Practitioner’s Guide to the Voluntary Payment Doctrine, 37 S. Ill. U. L.J. 91 (2012). These include:
- (i) “the doctrine allows entities that receive payment for services to rely upon these funds and to use them unfettered in future activities” (Putnam v. Time Warner Cable of Southeastern Wisconsin, Ltd. P’ship, 255 Wis.2d 447, 460, 649 N.W.2d 626, 633 (Wis. 2002));
- (ii) the doctrine “ensures that those who desire to assert a legal right do so at the first possible opportunity; this way, all interested parties are aware of that position and have the opportunity to tailor their own conduct accordingly” (Spivey v. Adaptive Mktg. LLC, 622 F.3d 816, 823 (7th Cir. 2010) (internal citation and quotation omitted));
- (iii) the doctrine “precludes courts from extending relief to those who have neglected to take care of their interests and are ‘in predicaments which ordinary care would have avoided’” (Burnsed Oil Co. Inc. v. Grynberg, 320 F. App’x 222, 231 (5th Cir. 2009) (internal citation and quotation omitted)); and
- (iv) the doctrine prevents recovery when a transfer was made pursuant to an agreement of the parties that allocated between them the risk of any later-discovered mistake” (Restatement (Third) of Restitution & Unjust Enrichment §6 cmt. d (2011)).
Application of the Doctrine: Harsh Results
While there are a few notable jurisdictions that take exception to the general application of the doctrine — such as Florida, New York and Michigan 6Florida has abrogated the doctrine by statute and New York and Michigan allow for recovery of payments, at least in certain circumstances, even where there was a mistake of law. See N.Y.C.P.L.R.§3005 (Consol. 2012) (“When relief against a mistake is sought in an action or by way of defense or counterclaim, relief shall not be denied merely because the mistake is one of law rather than one of fact.”); Hofmann, D.C. v. Auto Club Ins. Ass’n, 162 Mich. App. 424, 429, 413 N.W.2d 455, 457 (Mich. Ct. App. 1987) (“A mistake of either law or fact will entitle a party to restitution unless it is inequitable or inexpedient for restitution to be granted.”). — even in these jurisdictions, firms should be aware of the doctrine and its potentially harsh results.
For example, in Lavin v. Town of East Greenbush, 17 Misc.3d 766, 775, 843 N.Y.S.2d 484, 491 (Sup. Ct. Rensselaer Co. 2007), plaintiff, the Police Chief for the Town of East Greenbush, sued to obtain certain additional compensation to which he believed that he was entitled. The Town counterclaimed, seeking to recover the salary that it purportedly had mistakenly paid to the Police Chief. 17 Misc.3d at 767, 843 N.Y.S.2d at 485.
While the court agreed with the Town and found that it had paid the Police Chief more than it was required to pay, the court rejected the Town’s efforts to recoup the payments, stating as follows: “The undisputed facts of this case support a finding that defendant was operating under a mistake of law or was making payments voluntarily to plaintiff without ever independently ascertaining its legal obligations with respect to such payments.” 17 Misc.3d at 775, 843 N.Y.S.2d at 491.
Similarly, in Gimbel Bros. v. Brook Shopping Ctrs., 118 A.D.2d 532, 536, 499 N.Y.S.2d 435, 439 (2d Dep’t 1986), the court refused to allow a tenant to recoup rental payments that it had made where the tenant “displayed a marked lack of diligence in determining what its contractual rights were,” even though the court determined that the tenant had not been required to make the payments. 7See also Citicorp North-America, Inc. v. Fifth Ave. 58/59 Acquisition Co., LLC, 70 A.D.3d 408, 409, 895 N.Y.S.2d 39, 40 (1st Dep’t 2010) (court rejected commercial tenant’s contention that it was entitled to recoup a portion of its rental payments, stating as follows: “It is undisputed that plaintiffs, highly sophisticated entities, made no inquiry for approximately nine years regarding the amount of rent they were paying, and never compared the rent provisions of their lease to the rent amounts invoiced by defendants in order to determine if they were being overcharged.”); Eighty Eight Bleecker Co. v. 88 Bleecker St. Owners, 34 A.D.3d 244, 246-47, 824 N.Y.S.2d 237, 239-40 (1st Dep’t 2006) (summary judgment granted to landlord where “plaintiff’s failure to make inquiry regarding the tax increase and computations made to arrive at those increases for over 20 years raises the applicability of the voluntary payment doctrine”).
Thus, mere ignorance of the facts is not sufficient to avoid the application of the doctrine. See Home v. Time Warner Operations, Inc., 119 F. Supp.2d 624, 629 (S.D. Miss. 1999) (“when the payor is aware that he lacks [sufficient] information to allow him to determine how much he owes, he is merely ignorant of the facts, but has not made a mistake of fact sufficient for the mistake exception to apply”), aff’d, 228 F.3d 408 (5th Cir. 2000); see also Ergo v. Int’l Merch. Servs., Inc., 519 F. Supp.2d 765, 773-774 (N.D. Ill. 2007) (defendants who had the payroll records could not claim that there was a mistake of fact as the relevant facts were not “obscured or inaccessible”).
Law firms that are hiring lateral partners may want to consider language in their contracts that allow for recoupment should the lateral fail to hit agreed upon benchmarks.
In fact, the more sophisticated the parties, the less a court is likely to sympathize with inaction. See, e.g., Eighty Eight Bleecker Co., 34 A.D.3d at 247, 824 N.Y.S.2d at 240 (“Computation of the taxes was not an overly burdensome task, particularly for a sophisticated entity such as plaintiff…. Review of the tax bills, to which it was entitled pursuant to the terms of the lease, would have allowed plaintiff readily to ascertain the appropriate amount of its liability under the tax escalation clause for each of the years in question.”).
Indeed, the parties’ course of conduct has been perceived as the best measure of their intent and, thus, all the more reason to apply the voluntary pay doctrine. Murray Hill Mews Owners Corp. v. Rio Rest. Assocs. L.P., 92 A.D.3d 453, 454, 938 N.Y.S.2d 59, 60 (1st Dep’t 2012) (“[W]hen viewing the parties’ course of conduct — including respondent’s consistent payment for over eight years, without protest, of rent increases based on a compounded fixed rent figure, and its renegotiation of the renewal lease on the same terms as the original lease — it is clear that petitioner’s construction of the escalation clause comports with the parties’ intent.”) (citations omitted).
Use Against Law Firm
Most recently, in a dispute between Edwards Angel Palmer & Dodge LLP (“EAPD”) 8EAPD is now known as Edwards Wildman LLP. and a partner who was purportedly terminated, EAPD sought to recoup some or all of the draw and other compensation that it paid the former partner. 9See Connoni v. Edwards Angell Palmer & Dodge LLP, Index No. 601295/09 (Sup. Ct. N.Y. Co.) (Schweitzer, J.). EAPD, in essence, argued that its former partner had failed to perform and that his failure only became evident after his departure.
In response, the former partner invoked the voluntary payment doctrine. He argued that EAPD was barred from recouping any of the monies that it paid him, because his lack of performance was well known by the firm and the firm had documents showing those days he was in the office, his hours billed, and his collections (or lack thereof).
While the case settled before the court addressed the substance of the former partner’s voluntary payment doctrine argument, it highlights an issue of which law firm management should be aware.
Conclusion
As the plaintiff argued in the EAPD matter, law firms undoubtedly have the necessary information at their disposal and the sophistication to understand it when determining the revenues being generated by their partners. Thus, it will be difficult, if not quite impossible, for a law firm to claim that its payments to a partner amounted to a mistake of fact.
Accordingly, in order to address the issue and avoid any misunderstandings with respect to either party’s expectations, law firms that are hiring lateral partners may want to consider language in their contracts that allows for recoupment should the lateral fail to hit agreed upon benchmarks. 10While a fairly recent article in the National Association for Law Placement Bulletin noted that “[a]fter two years of year-over-year double-digit increases, the pace of lateral hiring was tempered in most markets in 2012, finishing out the year about 6% lower nationally than in 2011[,] … [t]he exception to the rule was New York City, a market that continued to see double digit growth in lateral hiring, driven by high partner hiring volume in particular.” NALP Bulletin, “Lateral Hiring Slows In Most Markets” (March 2013). However, given the eyebrows likely to be raised by the inclusion of such language, a reasonably common alternative means of compensation is for the firm to
- set a fairly basic draw;
- come to an agreement with the prospective lateral partner upon benchmarks for additional compensation; and
- set time frames (e.g., every six months for the first two years) to review the draw with the understanding that it may be increased based upon success and decreased based on a substantial disappointment with respect to the parties’ mutual expectations. 11In addition to spelling out the parties’ understanding with respect to expectations in the lateral’s agreement, many law firms have also instituted lateral integration programs to better ensure that their lateral hires meet expectations. See Julie Savarino, Successful Lateral Integration for Law Firms, Bloomberg Law (2013), supra n. 2.
Of course, this analysis all goes out the window if there is a particular lateral partner the law firm is desperate to hire and it is willing to incur the risk that the lateral will not succeed in meeting the law firm’s expectations.
