March 8 (Bloomberg) -- Three directors of a small New York bank, including one who also sells new and used Mercedes-Benzes, want to be the first nonlawyer investors in Jacoby & Meyers, the discount law firm with storefront offices across the U.S.
Jacoby & Meyers, saying it needs capital to expand into communities with working-class and immigrant families, asked federal judges in New York, New Jersey and Connecticut to throw out state laws barring nonlawyers from owning interests in law firms. A judge New York in today dismissed the suit there. One in Trenton, New Jersey, yesterday let that case proceed.
In a court filing in January, Jacoby & Meyers identified its potential investors as Anthony Costa, Philip Guarnieri and Michael Ostrow. The three are directors of ES Bancshares Inc., the holding company for Empire State Bank, according to regulatory filings.
The three “have expressed their commitment to invest significant sums of money in Jacoby & Meyers in exchange for owning an interest,” the law firm said in court papers in New York. Also seeking stakes are institutional investors whose names it has been asked to keep confidential, the firm said.
Jacoby & Meyers is seeking to sue on behalf of other law firms in the three states.
The firm opened its first office in 1972 in a storefront in Van Nuys, California, and was an early advocate of attorney advertising. It said it has opened branches in shopping centers, maintained Saturday hours and became the first law firm to let clients pay with credit cards.
The January filing doesn’t identify the occupations of Ostrow, Costa and Guarnieri, describing them only as “high net-worth individuals.” Nor does it name Newburgh, New York-based ES Bancshares, which has a market value of about $7.9 million, or Empire State Bank, which has two branches in New York’s mid-Hudson region and one on Staten Island.
Jeffrey Carton, a lawyer for Jacoby & Meyers in the case, said the investment would come from the individuals and not the bank. Costa is chairman and co-chief executive officer of ES Bancshares, Guarnieri is president and co-CEO, and Ostrow is a director.
Costa and Guarnieri didn’t reply to phone messages left at the bank. Ostrow, president of Mercedes-Benz of Wappingers Falls, New York, declined to comment on his potential investment. Carton wouldn’t say how much the investors want to put up.
In all three states, Jacoby & Myers is seeking to invalidate laws barring nonlawyers from sharing fees or joining partnerships and corporations that practice law.
“This restriction has been around for a long time,” said Ted Schneyer, an emeritus law professor at the University of Arizona who serves as co-chairman of an American Bar Association group studying alternative law firm structures.
Similar rules exist in every U.S. state. The District of Columbia permits nonlawyers to join law firms in limited instances, Schneyer said. Australia and England allow nonlawyers to own parts of law firms, he said.
“The main concern has been that we don’t want lawyers having their independent judgment on behalf of clients being interfered with by nonlawyers,” he said in an interview.
U.S. District Judge Lewis Kaplan in New York today granted a request to dismiss the suit by New York Attorney General Eric Schneiderman.
Basis of Ruling
He ruled on technical grounds, saying several provisions of state law bar nonlawyer investments and it made no sense to rule on just the one Jacoby & Meyers attacked. Kaplan said the issue might best be decided by legislatures and professional associations.
U.S. District Judge Peter Sheridan in Trenton yesterday denied the state’s dismissal bid and asked the state Supreme Court to decide if the investment is permissible.
“The ruling is disappointing as it seeks to send us back to the very body that enacted the rule in the first place,” Carton said of the New Jersey decision.
David Bookstaver, a spokesman for the New York state court system, whose judges are being sued, and Lee Moore, a spokesman for Attorney General Jeffrey Chiesa in New Jersey, declined to comment. In Connecticut, state judges who were sued filed papers urging a dismissal.
Jacoby & Meyers claimed the bans run afoul of the Commerce Clause of the U.S. Constitution and the firm’s rights of free speech and due process.
If Jacoby & Meyers ultimately prevails, the investors may receive a share of anticipated profits in the entity through which Jacoby & Meyers practices law, the firm said in court papers. They’ll have no say in legal decisions.
Because of the ban on outside investment, Jacoby & Meyers said it must obtain capital from contributions of partners, earnings on fees or commercial bank loans that come with high interest rates. The rule has blocked the firm from entertaining “numerous offers” from prospective nonlawyer investors, according to court papers.
Jacoby & Meyers said in court papers that its bid to allow nonlawyer investment furthers its effort to bring legal services to “the masses.”
Opponents of lifting the ban say they fear that investors wanting to maximize profit will interfere with lawyers who are bound by ethical rules that may conflict.
The ban “ensures that the ownership structure does not diminish the lawyer’s duty of undivided loyalty to the client,” lawyers for New Jersey said last year in court papers.
Profit and Duty
“Efforts to maximize the returns on equity or other economic interests of outside nonlawyer investors could threaten lawyers’ primary duties to the client.”
Jacoby & Meyers called this a “false choice” and said safeguards may be enacted to protect the integrity of attorneys. They might include limits on the percentage of nonlawyer ownership or the creation of firm compliance officers, it said.
An American Bar Association commission voted last year to circulate a proposed change to its rule barring outside investment. The change would allow nonattorney minority ownership as long the firm’s focus is solely on the practice of law, and the services provided by nonlawyers would be consistent with the firm’s mission. For instance, lawyers focusing on land use might team with engineers owning a minority interest.
The ABA continues to debate the proposal, Schneyer said.
The New York case is Jacoby & Meyers v. Presiding Justices, 11-cv-3387, U.S. District Court, Southern District of New York (Manhattan). The New Jersey case is Jacoby & Meyers v. Justices of the Supreme Court, 11-cv-2866, U.S. District Court, District of New Jersey (Trenton). The Connecticut case is Jacoby & Meyers v. Judges of the Connecticut Superior Court, 11-cv-817, U.S. District Court, District of Connecticut (New Haven).
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