McKee, Nelson to remove E&Y from name

Attorney-CPA, The, 2001

The Washington, D.C. law firm of McKee, Nelson, Ernst & Young will soon remove "Ernst & Young" from its name, and will repay the start-up loan received in 1999 from E & Y, according to the lead story in the Legal Times, May 23, 2001.

These two changes are designed to comply with New York State's ethical rules, so that the firm can open an office in New York City. Whether the New York authorities will find the new arrangement acceptable remains to be seen.

1999 Origins of Firm

The law firm of McKee, Nelson, Ernst & Young was established in 1999, during the national debate on multidisciplinary practice (MDP). Mr. McKee and Mr. Nelson left the law firms in which they had been partners, and formed a new law firm in Washington, D.C. The inclusion of E & Y in the firm name immediately stirred controversy. According to one view, the firm name was an allowable trade name under the D.C. Rules of Professional Conduct, even though E & Y was not a partner in the law firm.

According to another view, however, by including the well-known name of E & Y in the firm name, the firm gave the impression that E & Y was a partner. If E & Y was not a partner, therefore, the firm name was deceptive. If, however, E & Y was a partner, the firm name was not deceptive, but the arrangement may have violated the D.C. rule against partnerships between lawyers and non-lawyers for the practice of law.

The D.C. rule on non-lawyer partners is slightly more permissive than the ABA Model. The D.C. rule allows lawyers to partner with non-lawyers in limited circumstances, but only if the sole purpose of the firm is to provide legal services to the firm's clients. A multi-purpose firm in which lawyers provided legal services, while their partner E & Y provided accounting and other professional services, obviously would not conform to the "sole purpose" test of the D.C. rule, nor to the stricter rules of New York or the ABA.

The firm name was not the only controversial feature of the firm. E & Y made a substantial start-up loan to the firm, and also leased office premises to the firm. The precise nature of the relationship between the lawyers and E & Y was not disclosed. To some observers, the arrangement appeared to contain sufficient linkage between the lawyers and E & Y to constitute a partnership, or at least a de facto partnership. I am not aware of any authoritative decision on the propriety of the 1999 arrangement.

Growth of Practice in 2000-2001

According to the Legal Times story, Mr. Nelson reported the firm's revenues as $26 million in 2000, and anticipated $40 million in 2001. The firm recently recruited 16 "elite" lawyers, to bring the total to approximately 50 lawyers. Although the firm started primarily as a tax practice, it is moving into corporate finance and transactional work.

Meanwhile, the ABA House of Delegates, meeting in New York in July 2000, voted 3 to I to keep the existing prohibitions against partnerships between lawyers and non-lawyers for the practice of law. States continue to study the issue.

Future Plans

The McKee, Nelson law firm plans to open a fourlawyer office in New York City in the summer of 2001, followed by an office occupying an entire floor of E & Y's new building in Times Square in mid-2002. As noted above, the firm name will no longer include E & Y, and the start-up loan will be repaid. These moves, according to Mr. Nelson as quoted in the Legal Times, "in no way signal a backing away from the alliance.... It is ironic that we have to get further apart to get closer together." And the Legal Times quotes William Lipton, E & Y vice chairman for tax services, as saying: "It never was the intention that we would be a lender other than to get them up and running. We're in it to be their alliance partner." (emphasis added)

Comments

The remarks of Mr. Nelson and Mr. Lipton indicate that some continuing relationship will exist, even after the firm name has been changed and the start-up loan has been repaid. But the precise nature of the relationship has not been disclosed. Without full disclosure, it is difficult to assess the propriety of the arrangement, either as it was in 1999, or as it is projected to continue in the future, and whether the applicable -standards are those of D.C., New York, or other jurisdictions.

Sooner or later, the details will probably emerge, either from the voluntary actions of the principals, from bar disciplinary investigations, or from discovery in support of litigation involving motions to disqualify, fee disputes, alleged malpractice, or personnel problems. The arrangement may, in addition, be scrutinized by accounting regulators or private litigants who question whether E & Y's relationship with McKee, Nelson impairs E & Y's independence in performing audits of clients who receive legal services from McKee, Nelson. Details may also emerge on a "need-to-know" basis, in response to prospective partners or employees, or to house counsel or senior management of prospective clients.

Meanwhile, the meaning of E & Y's reference to McKee, Nelson as an "alliance partner" remains uncertain. Perhaps the arrangement is an MDP by another name.