It sounds like a simple question but it actually isn’t. When law firms fail, trustees are tasked with recouping money for creditors and one source of assets is the unfinished legal work of former partners which they then take with them to their new firms.

A new federal court ruling out of New York challenges the legal underpinnings for such claims.  The ruling arose out of a lawsuit over profits from unfinished legal business that the trustee for the now defunct firm Thelen LLP brought against two law firms that took in former Thelen partners-Seyfarth Shaw and Robinson & Cole.  The case involved hourly fee matters.  Geron v. Robinson & Cole, 11 Civ. 8967 (S.D.N.Y.)  and Geron v. Seyfarth Shaw, 12 Civ. 1364 (S.D.N.Y.).

Thelen’s partners voted to dissolve the firm during the financial crisis.  Consequently they executed an amended and restated limited liability partnership agreement which provided in part for a waiver of “any claim or entitlement to clients, cases or matters” that are ongoing and expressly waiving any rights to “unfinished business” as defined in the seminal case on the issue Jewel v. Boxer, 156 Cal. App. 3d 171 (Cal. App. 1 Dist. 1984).

Thelen’s bankruptcy trustee claimed that the so-called “Jewel Waiver” constituted a fraudulent transfer of Thelen’s unfinished legal work to the new law firms.  The trustee sought to obviate the transfer of the profits from the unfinished legal work to the ex-partners’ new law firms.

In the opinion, Justice Pauley ruled that such profits are not “property” of the defunct  Thelen firm under New York law.  “Unlike in the contingency fee context, applying the unfinished business doctrine to pending hourly fee matters would result in an unjust windfall for the Thelen estate, as ‘compensating a former partner out of that fee would reduce the compensation of the attorneys performing the work.’”

Judge Pauley reasoned that allowing such unfinished work to be classified as property of the defunct firm would allow a “debtor law firm to sell its pending hourly fee matters to the highest bidder.”  This would abnegate a client’s right to choose attorneys-an underpinning of client’s rights.

Consequently, Judge Pauley dismissed the Thelen estate’s claims against law firm Seyfarth Shaw which were governed by New York law.  The majority of the significant contacts occurred in New York and Thelen filed for Chapter 7 bankruptcy in the Southern District of New York.  Judge Pauley noted that under New York law, “absent agreement to the contrary, pending contingent fee cases of dissolved partnerships are assets subject to distribution.”  However, New York law never applied this doctrine to hourly fee cases and recognizing this doctrine in an hourly fee matter would go against the New York Rules of Professional Conduct which foster an environment where clients are free to retain the lawyer of their own choosing.

The other law firm involved in the case, Robinson & Cole, conceded that California law governed their claims.  Therefore, the case was allowed to proceed against that firm for the unfinished legal work that was brought to Robinson & Cole.

This ruling contradicts a May decision from a different New York federal district court judge that ruled that profits from unfinished legal work were in fact assets of the defunct law firm-in that case Coudert Brothers LLP. DSI v. Akin Gump Strauss Hauer & Feld, 11 Civ. 5994 (S.D.N.Y.)

Since there is a difference of opinion amongst the district courts of New York, the highest New York state court, the New York Court of Appeals, might have to step in to resolve the issue.  Judge Pauley urged the parties to submit an interlocutory appeal because the issues “impact a large number of cases, and they present substantial grounds for difference of opinion.”

The issue of unfinished legal work is a hot button one these days given the infamous failure of Dewey & LeBoeuf LLP which filed for Chapter 11 bankruptcy in May 2012.  That was the biggest law firm failure in the U.S.  Dewey’s bankruptcy advisors have already expressed an interest in pursuing the profits from unfinished legal work that former partners took with them to new firms.

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