Thurs 7/13 - Lewis Brisbois Successor Firm Falters, Musk v. Wachtell Lipton, Senate Confirms Young Judge and IRS Goes After Tax Cheats in Puerto Rico

On this day in history, in 1787, the Congress of the Confederation, the body operating under the Articles of Confederation and precursor to the United States Congress, passed the Northwest Ordinance. 

The Northwest Ordinance, officially titled "An Ordinance for the Government of the Territory of the United States, North-West of the River Ohio," was an act passed by the Confederation Congress of the United States on July 13, 1787. This legislative act created a structured process for territories to evolve into states, outlining the path from political wilderness to full statehood. The ordinance addressed the territories that had been obtained from Great Britain after the Revolutionary War through the 1783 Treaty of Paris, namely the region north of the Ohio River, east of the Mississippi River, and south of the Great Lakes.

On July 13, 1787, the Confederation Congress established this ordinance which served as a prototype for the incorporation of future U.S. territories. The Northwest Ordinance is considered one of the most impactful elements of the Articles of Confederation era because it set forth a policy for the orderly expansion of the United States across North America.

The ordinance provided for the political and civil rights of the inhabitants and banned slavery in the territories. Additionally, it declared that the new states would enter the Union "on an equal footing with the original States," which was a profound statement of democratic principle – if you view the democratic distribution of someone else’s land as true democracy. The ordinance led to the creation of five states: Ohio, Indiana, Illinois, Michigan, and Wisconsin. Thus, the Northwest Ordinance was a foundational policy that shaped the way the U.S. grew and expanded in its early years.

Northwest Ordinance (1787) | National Archives

Daugherty Lordan, a law firm established after a mass departure from Lewis Brisbois, has been facing a series of exits after its leaders were removed due to past racist, sexist, and antisemitic emails. Over 30 people, including a name partner Joseph Lordan, have left the firm. Lordan has joined O’Hagan Meyer as co-managing partner of the San Francisco office, and five other former partners and twenty employees from Daugherty Lordan have also shifted to O'Hagan Meyer.

The situation at Daugherty Lordan echoes the turbulence that occurred at Lewis Brisbois when nearly 140 attorneys left to form the new firm. These changes have led to questions about Daugherty Lordan's future and the need for possible rebranding. The firm had already undergone a name change in June after co-founders John Barber and Jeff Ranen were ousted when their inappropriate emails were released.

Lewis Brisbois disclosed the offending emails, some dating back more than a decade, sent from Barber and Ranen's work accounts. Additional exits include attorneys shifting to Freeman Mathis & Gary, Gordon Rees Scully Mansukhani, and Ogletree Deakins. Lewis Brisbois has noted some attorneys have returned to the firm but declined to provide specific numbers.

Lewis Brisbois Defector Firm Sees Exits After Racist Emails (1)

Elon Musk's recent lawsuit against law firm Wachtell Lipton Rosen & Katz over the Twitter Inc. acquisition brings to light the increasing use of success fees by law firms for handling critical deals. Wachtell, known for its handling of transactions and litigation like an investment bank, is being sued by Twitter's parent company, X Corp, for an alleged "unjust enrichment" through a $90 million payment. Musk's lawsuit, filed on July 5 in the San Francisco Superior Court, seeks restitution of these funds.

Success fees, which are increasingly favored by clients wary of law firms overcharging or unnecessarily expanding work, are growing in popularity in the legal industry. Such a fee model has been especially adopted by large corporations and major companies disillusioned with hourly billings. Wachtell is renowned for its pioneering use of success fees, having one of the highest profits per equity partner in the industry and often linking its fees to the success of the deals it handles.

The suit highlights Wachtell's billing practices, with the firm often receiving fees comparable to 60-80% of those paid to investment advisors. Despite the $90 million fee being a minute fraction of the $44 billion Musk paid for Twitter, Bruce MacEwen, a law firm consultant, argues that the value provided was reasonable. Wachtell has faced similar litigation in the past, but has maintained its stance that in certain cases, charging by the hour makes little sense and that their fees are not necessarily based on the amount involved in a matter.

Musk Suit Against Wachtell Hits Pioneering Use of Success Fees

The U.S. Senate has confirmed Tiffany Cartwright, a civil rights lawyer, as one of the country's youngest federal judges. Born in 1985, Cartwright will join the U.S. District Court for the Western District of Washington, a position left vacant by Judge Benjamin Hale who semi-retired in 2020. This confirmation, along with that of Kymberly Evanson, means President Joe Biden has now appointed all active judges in the Western District. Including Cartwright, Biden has appointed several judges under 40 years old. Some critics, largely Republicans, have expressed concerns over the age and limited legal experience of Biden's appointees.

Cartwright, a civil rights lawyer and former public defender, has had a different career path to the judiciary than many others. Several groups have endorsed her nomination, emphasizing her diverse experiences and commendable litigation and trial skills. Also, Myong Joun, a Boston municipal court Judge, was up for a vote of confirmation. If confirmed, he would be the first Asian-American man to serve as a federal judge in Massachusetts. The Congressional Black Caucus expressed concerns over the nomination of two other candidates, Brandon Long and Jerry Edwards, criticizing a lack of meaningful participation in the selection process.

Senate Confirms One of Judiciary’s Youngest Trial Court Judges

U.S. prosecutors and IRS agents are pursuing investigations into wealthy individuals suspected of illicitly exploiting Puerto Rico's tax breaks. The island has used significant incentives to attract wealthy Americans over the past decade, but authorities are now scrutinizing whether individuals have falsified their residency duration and income sources. Professionals who promoted the tax program are also under investigation. Prosecutors are considering charges of conspiracy and wire fraud, and two criminal investigations could result in charges soon.

Since 2012, over 5,000 Americans have qualified for incentives that exempt them from federal income tax and taxes on dividends, interest, and capital gains. Yet, lawyers indicate that the residency requirements are stringent, leading some to cheat. To qualify, individuals must stay on the island at least 183 days a year and demonstrate a closer connection to Puerto Rico than the U.S.

The tax incentives have attracted many investors, including those from the crypto sector. However, local residents argue that these wealthy Americans are escalating real estate prices and paying fewer taxes than native Puerto Ricans. As a result, local legislation is underway that could revamp the incentives.

IRS Preparing Criminal Cases Against Tax Cheats in Puerto Rico