Disaster Recovery and Succession Planning. What happens if . . .

November 27, 2017

By Robert J. Haupt

Law firms are by their nature unusual corporate organizations. Frequently its ‘owners’ are called partners, but the structures are seldom true general partners. Many firms function simply as formalized ‘office sharing’ with each equity owning attorney frequently operating its own mini-business within the firm. With this loose structural arrangement, issue planning such as for disaster recovery and succession planning often are lost.

In 2014, a ‘partner’ and I formed a law firm expressly modeled under a corporate structure with only 2 shareholders/members that grew to more than 160 employees and 50+ attorneys within 3 years. The purpose of the firm was to provide low-cost legal services in a narrow field to a large number of clients. This firm ultimately reached nearly 300,000 monthly subscribing and fee law clients in 40 states and U.S. territories for whom more than 75,000 lawsuits and other disputes involving more than $500,000,000 in resolved matters were handled. At any given time, this firm had nearly 7,000 active lawsuits.

This firm was further unique because it had only 2 ‘owners.’ Among the issues that were most unique and challenging were:

“What would happen if I died or became incapacitated?”

Succession planning is more common in a business environment with corporate executives, officers and managers. Here, I was the only firm executive. What would have happened if I had died? Who would have ‘owned’ the law firm? Who would have signed the payroll checks?

  • First, I appointed a successor manager and incorporated that position in the firm’s Operating Agreement. One of the benefits of a limited liability company’s operating agreement is the flexibility it affords its drafters in working through novel issues that might impact that business. I paid the successor manager, a highly regarded attorney, a monthly fee in exchange for his time and attention in meeting with me once a month to discuss finances, staffing and other issues that might occur in the event of my death or other incapacitation. The Operating Agreement was amended to design much of the core decision making and structure should such a key event occur.
  • Second, I bought key man insurance with a trust named beneficiary for the sole purpose of funding the successor manager and the operation through a liquidation/reorganization process. With this extraordinary amount of activity in such a highly centralized firm, the exposure to attorneys whose appearances were entered into cases could be catastrophic to them personally, and to the firm’s most important party, its clients. A well-funded contingency fund, made with insurance proceeds, would go well in affording the necessary resources and flexibility to work through the operational issues that might subsequently develop.
  • Third, I funded a reserve account. Life insurance provides for funding in the event of death, but is insufficient in providing for other disruptive, but uninsured events, such as disability, change in regulatory obligations or other unforeseen events. Accordingly, we performed an initial and then quarterly reassessment of the ongoing accrued liability that might result in the event of a sudden interruption in the law firm’s income stream. We then funded with post-tax dollars that account. This commitment was essential to protect the integrity of the operation and to provide for the protection of clients, its attorneys and its employees in the event of a business disruption. The actuarial analysis was well considered and constantly evolving. While most insurance, when it isn’t triggered, may seem to be a waste of money—here, its presence was core to demonstrating the integrity commitment essential to the firm’s practice.

“What would happen if my base facility were wiped out by tornado, fire, or other catastrophic event?

With our firm’s high-volume practice, we were aware that we operated under a wavelength of activity that was considerably shorter than what most litigators would experience in traditional litigation. From the point of a lawsuit’s filing to compulsory responses, events would often occur very quickly. Any business interruption could we catastrophic in that hundreds of deadlines could be breached resulting in harm to our clients. Accordingly, we arranged to lease a facility 20 miles away in a heavily secured concrete bunker facility, that we furnished with desks, chairs, computers and phones that sat unused, but were available in the event of a disaster. A parallel (not back-up) service was located in that secured facility. In Oklahoma, we live in both a tornado and an earthquake belt. Catastrophic disasters do occur.

Other tragedies can occur. Last year, following the mass shooting in July 2016 in Dallas, Texas, several downtown office buildings were closed when they become part of a crime scene investigation. The attorneys were not allowed back into their offices for several days. Files were unreachable. In our practice, this would have been catastrophic. Perhaps in theirs, it was as well. Accordingly, we developed policies that in the event of a building shut-down, various security structures would be modified (computer IP address limitations would be loosened and offsite access to systems would be temporarily expanded). Further, a plan was developed whereby certain core staff and management would report to the back-up facility while other attorneys and their support staff would work from their homes, with information immediately exchanged of personal phone numbers (hard line and wireless), personal email addresses, in addition to the opening of access to firm emails.

This planning is expensive, as may seem all ‘insurance’ when not needed. Had it been needed, then nothing could have been so inexpensive. While much of this thinking is common-sensical, it still required some dedicated and purposeful planning to design and implement. The key is to do something and to do it now. What is your business? What is your professional firm doing?

When you next travel, even as you get in your car to go home, ask yourself what will happen if you die today? Is your business prepared?