Profits from Unfinished Business Belong to Dissolved Law Firm, NY Judge Says

Share This Article!

Written By admin at Tuesday, May 29th, 2012

A U.S. district court ruling on who can claim profits from a defunct law firm’s unfinished cases could mean trouble for firms who take on partners from the ailing New York firm Dewey & LeBoeuf LLP.

At issue is the so-called “unfinished business” claim, which bankruptcy trustees in charge of failed firms such as Brobeck, Phleger & Harrison LLP and Heller Ehrman LLP have used in California and elsewhere to recover millions of dollars from the new law firms where former partners end up.  The argument is essentially this: when partners who leave a dissolved firm bring unresolved cases to their new firms, the money those matters then generate belongs to the original firm.

In this case, the trustee for former New York firm Coudert Brothers LLP had sued 10 firms that hired former Coudert partners in an effort to recover those profits. No dollar amount was specified, as the firms did not provide documents outlining how much money they made.

The defendants, which included Dechert LLP, Jones Day and Arent Fox LLP, argued that Coudert Brothers had no property interest in the unfinished matters.

On Thursday a federal judge in Manhattan ruled that that the proceeds from those cases did indeed belong to Coudert Brothers, whose estate is being administered by the restructuring and financial advisory firm Development Specialists Inc.

“Because the Client Matters belonged to Coudert on the Dissolution Date, and because the Coudert Partnership calls for the application of the Partnership Law to determine the post-dissolution rights of the partners, the Former Coudert Partners have a duty to account for profits they earned completing the Client Matters at the Firms,” according to the decision by District Judge Colleen McMahon.

Generally, the only way to avoid such claims would be if a law firm had inserted a specific waiver into its partnership agreement before it became insolvent, said Peter Gilhuly, a bankruptcy partner with Latham & Watkins LLP.

“This is a very significant opinion,” Mr. Gilhuly said of the Coudert Brothers case. He said the decision is a major affirmation of a ruling from a 1984 California case known as Jewel v. Boxer, which has since been adopted by a number of other states. “Now every case that would file in New York would cite this decision extensively.”

Claire Huene, a partner with Miller & Wrubel P.C. who represents law firm Dechert LLP in the case, said the decision marks the first time in New York that unfinished business claims have been upheld with respect to cases that are billed by the hour. Even in those cases involving post-dissolution ownership of contingency fees—where money is not paid out to a firm until the conclusion of a matter—New York law requires that the fee be split between the dissolved firm and former partner, she said.

The ruling also comes amid the public flameout of Dewey & LeBoeuf, which has hired restructuring advisors in advance of a possible bankruptcy filing that would rank as the largest U.S. law firm failure yet.

“If Dewey were to file for bankruptcy, the firms joined by former Dewey partners could well face these types of claims,” Ms. Huene said.

Dewey & LeBoeuf did not immediately respond to a request for comment.

In her opinion, the rationale of the decision could be extended to departures by partners from healthy firms.  “The concept that a law firm has a property interest in its client matters, and is entitled to profits on hours worked on such matters by its former partners at new law firms, has significance for all law firms, and we believe should be certified for appeal.”

David Adler, a partner with McCarter & English LLP who represents Development Specialists Inc. in the Coudert Brothers case, said “we’re very pleased” with Judge McMahon’s decision, adding that it was “consistent with partnership law for the past 150 years.”

In an interesting twist, Dewey & LeBoeuf itself had hired Development Specialists Inc. several weeks ago as a financial advisor and oversee matters such as the sale of the firm’s Warsaw office, according to DSI President William Brandt. The firm is now passing the baton to another restructuring firm, Zolfo Cooper, which Brandt said had been hired at the behest of lenders and which is readying a possible bankruptcy-protection filing, according to people familiar to the matter.

Law Blog