WASHINGTON - Two lawyers who recently set up their own public finance law firm in Washington are seeking almost $10 million from their former firm, Arter & Hadden, in an eight-count lawsuit charging fraud and breach of contract.
In a suit filed in October 1992 in the Franklin County Court of Common Pleas in Columbus, Ohio, C. Willis Ritter and Richard A. Eichner charged that Arter & Hadden misrepresented its financial condition and the amount of annual compensation that lawyers could expect to receive after Arter & Hadden merged with the Washington firm of Haynes & Miller in May 1990.
The two lawyers, who had practiced at Haynes & Miller, are also charging that Arter & Hadden failed to return their capital contributions and make other required payments when they left Arter & Hadden to form Ritter & Eichner in November 1991.
Arter & Hadden, in a response and counter-claims filed with the court, denies the charges and is seeking almost $5 million from Ritter and Eichner for alleged violations of the firm's partnership agreement.
Arter & Hadden claims the two lawyers failed to pay their share of expenses when they left the firm. It also charges that Ritter and Eichner used the firm's staff and equipment to further their own business interests and lured clients away from Arter & Hadden.
Ritter and Eichner refused to comment on the lawsuit. They referred all questions to their lawyer, John Sebay of Sebay Shillito &
Dyer in Dayton, Ohio, who did not returm phone calls.
Arter & Hadden's lawyers also did not return phone calls.
The lawsuit is unusual in that the merger of law firms rarely results in litigation, several lawyers said.
Another suit was filed against Arter & Hadden last October in the same court by Roger Kephart and David W. Fisher, two lawyers who had been with the firm. Arter & Hadden had merged with the firm of Kephart, Fisher and Rogers in Ohio in January 1990. The suit involves similar charges.
Ritter and Eicher said in their suit that Haynes & Miller was a "highly profitable law firm" before the merger with Arter & Hadden. Ritter and Etchner said they were the largest contributors to Haynes & Miller's business from 1988 through 1990, and that they had a large number of clients.
The two lawyers said they had been considering leaving Haynes & Miller to start their own firm in the fall of 1989 but were persuaded to stay because of the representations made by Arter & Hadden in the merger talks. But Arter & Hadden's business was declining, and the firm knew that, or should have known that and divulged it during merger talks, Ritter and Eichner said.
The lawsuit does not elaborate on how the firm's business was declining. But according to the publication American Lawyer, Arter & Hadden's earnings dropped dramatically after 1990 because of a new federal policy.
Between 1988 and 1990, Arter & Hadden had been ranked third among firms doing business with the Federal Deposit Insurance Corp. and the Federal Savings and Loan Insurance Corp., earning a total of $26.2 million in fees from those agencies, American Lawyer said. But in February 1991 the Federal Deposit Insurance Corp. adopted a policy limiting the amount of agency fees a firm could receive to $2.5 million a year, the publication said.
Arter & Hadden's partner compensation system was based on a point system. The firm contended during merger talks that partners would receive between $2,875 and $3,050 per point in 1990 and 1991, according to the suit.
Ritter and Eichner said that in 1990 and 1991 they brought clients to Arter & Hadden that paid fees in excess of $2 million per year and that resulted in profits to the firm of more than $1 million per year. Yet they only received $1,722 per point in 1990 and less than $2,000 per point in 1991, they said.
The two lawyers charge that after the merger, Arter & Hadden entered into "secret compensation arrangements with select partners" that included interest-free and forgivable loans, income guarantees, and the awarding of additional points. Some partners were allowed to withdraw money from their capital accounts, they said. When lawyers became partners, they contributed capital to the firm and set up a capital account.
Ritter and Eichner said that when they left Arter & Hadden on Nov. 30, 1990, they should have been able to withdraw the capital from their accounts. Ritter had $91,000 and Eichner had $79,000, they said.
They said they also should have been entitled to a proportionate share of Arter & Hadden's distributable income based on their number of years of service. Ritter, who had been with Haynes & Miller and Arter & Hadden for over 15 years, should be paid $550,000, they said. And Eichner, with five-and-a-half years of service, should get about $10,000.
But Arter & Hadden, in its response to the charges, said that Ritter and Eichner are not entitled to any money because they were not members of the firm for a full calendar year, and because they opened a competing law practice nearby within 12 months of leaving the firm.
Arter & Hadden said that Ritter and Eichner owe the firm money because under its partnership agreement if four or more partners voluntartly leave the firm within six months and continue to practice law, they are obligated to pay a proportionate share of certain of the firm's expenses. Ritter owes the firm over $1.5 million of such expenses, and Eichner owes more than $1.25 million, Arter & Hadden charged.
