Memel Jacobs’ Members Vote to End Partnership : Falling Revenue, Big Debt Led to Demise of ‘Camelot’ for Century City Law Firm

Memel, Jacobs & Ellsworth, a meteoric Century City law firm whose rapid expansion was fueled by borrowed money, only to be curtailed by recently dwindling revenues, burned itself out in the competitive legal atmosphere Sunday as members voted to dissolve the partnership.

Founding partner Sherwin Memel, 56, unable to muster support for continuing the rumor-plagued firm, joined in the unanimous vote.

Memel said all clients--primarily health care providers and insurers--will continue to be served professionally by individuals or groups of lawyers as they move to other offices. Despite rumors about high indebtedness and inability to pay employees, Sherwin said the firm retains significant assets and that “every employee will be paid every dime they have coming to them.”

The dissolution was effective at 12:01 a.m. today.

Meeting ‘Without Rancor’

In Sunday’s 3 1/2-hour meeting described as “friendly, professional and without rancor,” the partners instructed their attorney to file a Superior Court petition to dissolve the partnership. Chief operating officer Al Green will work with a court-appointed receiver to oversee office operation for the several months it may take for attorneys to relocate.

Partners had let nearly a week elapse since their last meeting, providing a cooling-off period to see if any strong sentiment for continuing the firm emerged. It did not.

Several partners contacted during the past few days refused to comment on the firm’s apparent end.

Although they have disagreed for a decade about the degree of expansion, Memel, 56, and co-founding partner Stanley K. Jacobs, 51, cite similar reasons for the firm’s demise:

--Decline in legal work and the profits to pay for it in the health care industry, their principal client base.

--Back-to-back years with skidding profits because of reduced business and failure of clients to pay bills, which made handling the debts for previous expansion difficult.

--Mistakes in acquisitions of individuals or groups of lawyers who produced less revenue than promised.

--Erosion of personnel intensified by rumors of trouble and a competitive legal market which lured their lawyers and support staff away with high salaries.

In a kinder business climate, each said, firm members would simply tighten their belts and get through a couple of lean years, certain that profitable times would return. But with new law offices of Eastern firms opening here and ready to pay almost double the current salaries, they said, younger lawyers--made skittish by rumors of debt and demise--bolted.

“Many are yuppies who are myopic and cannot deal with deferred gratification,” said Jacobs. “It took me 12 years of practice before I bought my first Porsche. Now these kids drive up in them.”

Casualty of Competition

Leaders in other law firms see Memel Jacobs as a casualty of the current competition from New York and Midwestern firms that have opened offices in Los Angeles and raided existing firms, offering huge salaries and hiring bonuses.

“The lesson to be learned here is that you can’t grow too rapidly without keeping in mind that you must retain the ability to pay your partners,” said Robert G. Lane, chairman of the executive committee of Paul, Hastings, Janofsky & Walker, Los Angeles’ fourth-largest firm, with 256 lawyers in seven offices. “Anyone is vulnerable to partners being attracted by other firms who are able to pay more money.

“Growth has its dangers,” Lane said, “in that you become more dependent on financing expansion out of current income. So if the area where you practice doesn’t grow or recedes--as the health care industry did with Memel Jacobs--it is difficult for a firm to retain its viability.”

No loss of legal services for the Los Angeles area is anticipated, they said, because Memel Jacobs attorneys will continue to practice law--albeit with other firms--and new and expanding law offices here will absorb any new business.

Memel, a noted health care attorney, established the firm geared to serving health maintenance organizations, hospitals and health insurers on May 29, 1975, along with Jacobs, a plaintiffs’ personal injury lawyer, and David Gersh.

Obsession for Expansion

Critics claim that Memel had almost an obsession with becoming one of the largest firms in the country and borrowed heavily to do it. Memel claims his goal was simply to serve his clients.

At its zenith, the firm had 144 lawyers in six offices--Los Angeles; Sacramento; Newport Beach; San Francisco; Washington, D.C., and Dallas.

Jacobs argued against the expansion, but had little support among partners until revenue nose-dived. Scrapping Memel’s growth philosophy, partners last summer placed control of the firm in the hands of Jeffrey Lemkin and John McDermott--a plan that Memel claims he instigated on advice of a management consultant.

In recent months, the Dallas operation has been cut back by 75%, Washington and Newport Beach by 60% and Sacramento by 25%. A plan to move into a 22-story office building at 6500 Wilshire Blvd. as an equity participant with Canadian developer Cadillac Fairview was canceled. By Sunday, the firm was down to about 80 lawyers.

During its growth, the firm added two name partners: Anthony Pierno, a corporate law expert, and David Ellsworth, with a respected real estate practice. Both Gersh and Pierno have departed--Pierno says amicably, denying rumors that he had formally sought monies owed.

Jacobs officially left the firm Sunday. He said he decided to set up his own shop some time ago because he prefers to work in a small law office and because he was having conflicts of interest with many Memel Jacobs health care clients. As a plaintiff’s tort lawyer handling bad-faith insurance cases, he was suing the health facilities or their insurers the firm represented.

Uncontrolled Appetite

“I love this place,” Jacobs said, still operating out of Memel offices until his own are ready. “We had a Camelot here a few years ago. If they could have just controlled their appetite.”

Not all departing partners have been so kind. Lawrence Velvel sued the firm for $11.5 million, claiming that it misrepresented its financial position when he joined the Washington office in 1985 and that it promised him “lifetime employment” at $150,000 a year, but fired him only a year later.

“When he left we gave him 60 days. We haven’t been ogres. And then he sues us,” Jacobs responded. “No court has ever held that a partner is entitled to a lifetime salary.”

Many of the 15 partners who departed, the founders point out, were invited to do so because they were not producing revenue. Firm members refer to Jan. 31, 1985, as “Bloody Friday,” when several partners were fired, the entire health law department of the Washington office was moved to another firm and the firm’s books showed that partners’ draws outstripped revenues by $750,000.

‘Black Friday’ Disputed

The firm’s current debts have been estimated as high as $8 million. Jacobs estimates them at $3.7 million, excluding leases. Memel says that is incorrect but will not discuss the actual figure.

Disputing “Black Friday” as a romanticized term, Memel said it was simply the end of the firm’s fiscal year, so a number of people were terminated as of that date, with either 60 to 90 days before or after to find another job.

The loss of the Washington group “was not regarded as a terrible blow,” Memel said, because those lawyers had government hospitals as clients, where Memel Jacobs had concentrated on private health care providers.