Executive Q&A with Tom Wolfe: Balancing justice, business savvy

Tom Wolfe is a trial attorney and commercial litigator whose practice is focused on complex business cases including product liability, oil and gas, mass tort and class action defense. Tom is also the president and managing partner at Phillips Murrah.

By Don Mecoy • Published: July 27, 2008

Oklahoma City has several large law firms, and they compete for clients and prestige.

Tom Wolfe, president and general partner of the city’s third-largest firm, Phillips Murrah, has been at the helm of the business since 2002.

In those six years, the firm has added more lawyers and other professional staff, and has expanded to fill new downtown office space.

Wolfe, 50, spends most of his time practicing law. And his law practice has been successful. Most noteworthy was his lead position in the firm’s handling of all Oklahoma litigation involving the anti-obesity drug fen-phen.

“That was the most intense, but interesting litigation I’ve ever been involved in,” Wolfe said of his 10 years of dealing directly as an attorney defending Wyeth, the pharmaceutical company that manufactured the drug.

Wolfe last week sat down with The Oklahoman for an interview in a conference room down the hall from his office. This is an edited version of that conversation.


Q: Do you think lawyers make good businessmen?

A: By reputation, no.

Q: Has that been your experience?

A: I don’t really have a business background so there’s been a learning curve for me and I’ve certainly made mistakes along the way. My background’s actually in journalism. So the business side sometimes is a little bit difficult for me. It’s one of those things where I spend a bit more time than some people.

Certainly the practice of law has changed so much over the years. When I was a young associate just out of law school, one of the partners came in and said “The practice of law is changing. It’s no longer a profession; it’s a business. Everyone needs to get used to it.” I didn’t really understand that at the time. Now you see it with some large national firms that really are run like corporate America. There’s a bit of a trickle-down effect.

We have the same concerns, the same issues — profitability, balance sheet and all that other businesses do. At the end of the day, we like so many other businesses do need to make a profit.

Q: Do you think the traditional law firm business model is the best model?

A: I think for the most part, change is good. I started practicing in mid-1980s, and firms at that point in Oklahoma were not run as a business model. It was, “do the work and we’ll send out the bills at some point and maybe we’ll get paid.”

A lot of firms failed during that period. I think lawyers have become smarter; they’ve become better business people. They’ve had to.

I think today’s model is a lot better than yesterday’s model. Firms have to survive. Larger firms are able to provide services to clients that smaller firms can’t. In Oklahoma City, we’re the third-largest firm. Nationwide, you have firms with 3,000 attorneys. We’re set up just about the same as those firms because we have different departments that handle different things, and we try to be able to service all our clients’ needs. It’s just they have more people doing the same thing.

Q: Is there still a role for the independent lawyer who just wants to hang out his shingle?

A: Absolutely. Those lawyers will always exist. Those lawyers tend to — not in every instance — but they tend to deal with the smaller business transactions. I’ll tell you right up front that’s not the case across the board because there are a lot of individual attorneys who have their own practices that are extremely successful and they’re representing bigger businesses.

Q: Talk about the impact of one of the founding partners leaving the firm?

A: Keith McFall announced (last week) that he was leaving for one of the competitive firms. We’re friends with Keith. Keith was here twenty-something years and we’ll miss him from a personal level.

But our firm is really no different from any other large firm — no one person, whether it be Keith or me or any other attorney in the firm has such a significant economic impact that it makes much of a bottom-line difference. From a personal standpoint, we’ll miss Keith. From an operational standpoint or from an economic standpoint, the impact is minimal.

Q: Do you like television shows and movies about lawyers?

A: Yes. Do you remember “LA Law”? I watched that every week. I also like “Boston Legal.” Over the years I’ve tried to avoid becoming addicted to any of those shows because I can’t commit the time to do it. But I do watch “Boston Legal” from time to time. I’ve always said those shows depict a case comes in in the morning, they have a meeting in the afternoon, they try the case and have a verdict before the end of the day. I wish that’s the situation, but it’s not.

The only TV show I’ve allowed myself to become addicted to in the last few years is “Lost.” We, my wife and kids, watch that religiously. So I guess I’m kind of a “Lost” nerd — figuratively and literally.

Q: Who are your real-life heroes?

A: I have a lot of people that I admire. My wife is a nephrologist, a kidney doctor. She works really hard. She deals with issues that I don’t deal. I have a bad day at work, it’s because a deposition didn’t go well or something. She has a bad day at work, it’s because a patient died or something happened. That’s a hard thing to handle and she handles it well.

My father was an attorney and he’s kind of the reason I ended up practicing law. I knew all along that I was going to be an attorney.

It really wasn’t until I got into law school that I became interested in what I was doing from an educational standpoint.

Wolfe authors column for the Journal Record; Inaugural column focuses on the need for attorneys

When the Journal Record approached Thomas G. Wolfe, President and Managing Partner, to contribute to its “Gavel to Gavel” column once per month, he jumped at the opportunity to provide more information to the community. His initial column, entitled “Send lawyers, guns and money,” expresses the importance of having an attorney on speed-dial because one never knows when he will find himself in a jam. The column, an informative read, was featured in the Journal Record’s Law Day edition.


By Tom Wolfe, Published May 1, 2008 in The Journal Record monthly legal column, Gavel to Gavel.

Wolfe: Send lawyers, guns and money

May 1, 2008

In 1978, when I first heard Warren Zevon sing the lines, “Send Lawyers, Guns and Money. The s**t has hit the fan,” I knew at some point I would find a way to include it in something snappy I would say or write down the line. I didn’t think it would take 30 years to find that perfect opportunity, but it seems to be now. Aside from being a cool thing to say, what did Warren Zevon mean when he wrote those most famous lines?  I can’t be certain (since he never actually told me, and he died in 2003), but I’ll tell you what I think he meant.

There’s an old saying that no one likes lawyers except their own – and then only when they really, really, terribly need them. Lawyers are perceived, portrayed (except by Gregory Peck) and joked about as being fairly useless, fungible, a drain on society and generally, well, boring. That is, until “The s**t has hit the fan.”  Then that otherwise dull, disposable subject of derisive jokes is speed-dialed as if there’s no tomorrow.  He or she must be reached no matter the time of day or night or how much money it may cost.  When something goes wrong – when the deal goes south; when you are injured (or sued by someone who only thinks they’re injured); when you need a contract; when you need a will; when your roof collapses; when you, well, you get the idea – who do you call?  You call your friend, your pal, the person you rely on to protect your life, liberty and property – your lawyer.

All of which brings me, somewhat indirectly, to the greater point. Today, May 1, is Law Day, recognized not just in Oklahoma, but across the country. Originally conceived by attorney Hicks Epton, from Wewoka, Oklahoma, Law Day was later proclaimed by President Dwight D. Eisenhower to be a day that “people of this Nation should remember with pride and vigilantly guard the great heritage of liberty, justice and equality under law which our forefathers bequeathed to us…it is our moral and civic obligation as free men and as Americans to preserve and strengthen that great heritage.” Does this mean no lawyer jokes for a day?  Probably not.  However, Law Day is about appreciating the system of law provided by our forefathers, even if it sometimes seems that the most direct connection to that system is when “The s**t has hit the fan.”

Law Day is recognized in Oklahoma in a variety of ways, including art and writing contests, a TV show devoted to Law Day and 12 nonstop hours of free legal advice provided by   the Oklahoma Bar Association at 800-456-8525. The accompanying TV program, “Ask a Lawyer,” airs tonight at 7 p.m. on OETA.
So, before the day comes to an end, spend a moment to recall how fortunate we are to live in a society governed by the rule of law which protects all we hold near and dear.  But also remember that if someone threatens the things you hold near and dear, do yourself a favor and have your lawyer on speed dial.

Thomas G. Wolfe is the president and managing partner of Phillips McFall in Oklahoma City.

Limited liability companies and family business

Originally published in The Journal Record on Aug. 26, 1999.
Click to see Elizabeth K. Brown’s attorney profile


 

Elizabeth K. Brown’s practice is focused at a strategic level on serving her clients as outside counsel where she assists privately held companies in managing the many legal issues that arise in running a business.

Elizabeth K. Brown’s practice is focused at a strategic level on serving her clients as outside counsel where she assists privately held companies in managing the many legal issues that arise in running a business.

Have you noticed that many new businesses are being formed as limited liability companies instead of corporations or partnerships?

Have you wondered what the reason is for the change?

Have you wondered whether you should explore the possibility of using a limited liability company in your family business?

In recent years, the use of the family LLC has become increasingly popular in the business world as the entity of choice, surpassing the corporation and the partnership.

The reasons for its popularity include that it provides asset protection to the owners of the LLC, has income tax advantages over the corporate form of business and is a convenient vehicle for effectuating a succession plan including giving assets to family members.

Until 1992, there was no such thing as a limited liability company in Oklahoma. Other states had experimented with the concept of creating a business entity that combined the best features of a corporation and a partnership.

In 1992, the Oklahoma Legislature decided to create this new type of business entity and enacted a statute governing its existence and characteristics. Since that time, thousands of new Oklahoma LLC’s have been formed.

The reason for the limited liability company boom is the advantages that the LLC provides over both corporations and partnerships.

Like a corporation, the LLC has the corporate characteristic of providing a liability shield to the owners of the business. Generally, as with a corporation, the creditors of a limited liability company cannot reach the assets of its owners.

For example, if the LLC operates a retail business and a customer slips and falls in the store, the customer may be able to recover from the assets of the LLC, but should not be able to recover from the assets of the LLC owners.

Like a partnership, the LLC provides asset protection to the business itself from the claims of a creditor of the owner of the LLC. While a creditor of a shareholder of a corporation can obtain a judgment against the owner and levy on the stock of the corporation, a creditor of an owner of an LLC can only obtain a charging order against the owner’s interest in the LLC. A charging order only entitles the creditor to receive the owner’s share of distributions from the LLC when made and does not entitle the creditor to become an owner of the LLC or to any voting rights in the LLC.

This asset protection aspect can be quite advantageous to the business owner when the business owner has creditor problems of his own.

For example, if the LLC owner has an outstanding judgment against him personally for $25,000, his judgment creditor would not be able to take his ownership interest in the LLC to satisfy the judgment. Instead, all the creditor would be entitled to receive is the distributions that are made from the LLC to the owner.

Since oftentimes no distributions are made to owners of closely held businesses and instead the profits are reinvested in the business, a creditor of an LLC owner may not be able to collect on any part of his judgment against the LLC interest.

Another advantage of the LLC is that it generally is a flow-through entity for income tax purposes since it is taxed as a partnership.

Many family-owned businesses historically have been operated through a C corporation, which is a separate taxable entity. The problem with the C corporation is that dividend distributions are not deductible by the corporation, so there is the possibility the corporate earnings could be taxed twice before they reach the owner’s hands, once at the corporate level and again at the shareholder level when dividends are paid. As a flow-through entity for income tax purposes, the LLC reports its income on a separate income tax return but pays no income tax. Instead, each owner of the LLC reports his or her prorata share of the income from the LLC on their separate individual income tax returns. The result of partnership taxation is that the income from the LLC is only taxed once.

An important concern for a family business owner is planning for the transition in ownership and management of the family business to the younger generation and the effect of estate taxes on the assets of the business owner. LLCs can help out here, too.

The LLC structure can facilitate the shift in control from the business owner to the child or children who have been groomed to take over the family business when the time arises.

Many family businesses face a cash crisis on the death of the survivor of the business owner and spouse as a result of the estate tax imposed.

With proper planning, the combined estate of a husband and wife are exempt from estate tax up to a value of $1.3 million in 1999. For family businesses that have a value in excess of $1.3 million, business owners need to consider other estate planning techniques to reduce the value of their taxable estates.

One such technique is making annual gifts to children of a portion of their ownership interest in the family business. By making gifts of interests in the family limited liability company, the business owner can substantially reduce the size of his estate and still retain control over the family business.

A big concern of many business owners is that they may lose control over their family business if they give away ownership interests in it. Using a family limited liability company for making gifts can alleviate many of those concerns.

One method for retaining control by the family business owner is by having him or her hold the position of manager of the limited liability company. As the manager, the owner of the limited liability company has authority to control the operations of the business. By a contract called the operating agreement, the business owner can be assured that he will remain as manager for as long as he desires.

Another method for the business owner to maintain control over the family business is by giving away ownership interests that do not have voting rights. By retaining his or her voting rights, the business owner can maintain control over the business but still reduce the value of the estate by gifting the non-voting interests.

With LLCs, more value can be transferred to family members at a reduced gift tax cost by making gifts of an ownership interest in a limited liability company as opposed to gifts of individual assets.

This is because a minority interest in a closely held business is typically not worth as much as the prorata part of the value of the underlying assets of the business. For example, if the business itself is worth $100,000 and the business owner gives a child a 10 percent interest in the business, the gift is worth something less than $10,000.

In determining the value of the gift, the test is what a willing buyer would pay a willing seller for the minority interest. It is well recognized that a buyer will not purchase the minority interest in the limited liability company for an amount equal to the prorata part of the underlying assets of the business — $10,000 in this example. The reason a buyer would pay less than $10,000 for the interest in the limited liability company is that there is no ready market for the minority interest in the family business — discount for lack of marketability — and the minority interest owner cannot control the business — discount for minority interest.

A buyer may substantially discount the amount he would pay for the limited liability company interest because of these factors. Assuming a discount of 30 percent, the buyer would be willing to pay only $7,000 for a 10 percent interest in a limited liability company having assets worth $100,000.

These valuation techniques can be utilized with limited liability companies to provide a bigger benefit to the business owner from certain gift tax exclusions available under the tax law.

One such exclusion, the annual exclusion, allows the business owner to annually give up to $10,000 — $20,000 for the business owner and his spouse — to any one or more individuals without any gift tax consequences. If the business owner wan
ts to reduce the value of his estate by making annual exclusion gifts to his children, he could for example give a child a $10,000 interest in the family limited liability company with no gift tax consequences. A $10,000 gift in the family limited liability company may equal a 13 percent interest in the LLC worth $100,000.

By giving away an interest in the family limited liability company, the business owner can transfer assets which in his hands would be worth about $13,000 for a gift tax cost of only $10,000. Over time, the business owner can transfer a substantial amount of the family business to family members at a reduced gift tax cost and still remain in control of the business.

As you can see, utilizing a family limited liability company in the succession and asset protection plan for the family business can result in tremendous advantages to the business owner and family. The key to designing and implementing a plan that fits your family business is working with your lawyer, accountant and financial planner. Your team of advisers can evaluate your personal situation, recommend a plan that is right for you and your family and then see that the legal documents necessary to effectuate the plan are put in place. Limited liability companies may not be right for every family business, but with the advantages they hold, don’t you think it is worth exploring the possibilities?