From time to time, a law firm stares down a claim or series of claims that threaten the law firm’s very existence. These claims can arise from any number of circumstances but are potentially so large that an adverse outcome will exceed the firm’s resources and likely lead to its demise. Due to the fragility of law firms, however, the mere threat of the negative outcome can be enough to result in a law firm’s collapse. The fear of the “worst case,” the reputational baggage felt, declining morale and the natural aversion to uncertainty can prompt a cascade of departures and prematurely kill the firm before it ever reaches its “day in court.” The “run on the bank” is never far away for the law firm facing this kind of crisis.

The existence of a massive claim or claims can quickly cause a law firm’s death. While facing these kinds of claims is never easy, their existence does not necessarily lead to a law firms’ fatality. The approach of two firms to this kind of crisis is instructive.

In the early 1990’s, Kaye Scholer’s attorney-client relationship with a notorious savings and loan failure subjected it to a federal court order that froze its assets. The order was so sweeping it prevented Kaye Scholer from paying its employees, contributing to ongoing benefit plans or satisfying operating expenses. In every respect, it rendered Kaye Scholer unable to function. Most firms would not survive such a punch to the gut, but Kaye Scholer did.

About a decade later, aggressive tax advice to its clients resulted in Jenkens and Gilchrist being sued or threatened with suit from hundreds of former clients suddenly unhappy with failed tax strategies. The potential damages exceeded billions of dollars. The press presented the firm as under siege and that reporting was not far from the truth. The existence of the claims frayed the firm’s edges and it began to wobble. While Jenkens ultimately went out of business due to other pressures, it was able to resolve the onslaught of client claims in a manner that positioned it for survival.

What did Kaye Scholer and Jenkens do that allowed each to avoid Custer’s fate at the Little Big Horn? Despite differences in circumstance, each was able to find a solution that averted destruction. In next week’s blog, we’ll examine the factors that allowed both Kay Scholer and Jenkens to survive what looked like insurmountable challenges.