'Unfinished Business' Claims Zapped by California Supreme Court in Heller Case
In a closely watched law firm bankruptcy case, the court on Monday held that dissolving firms don't have a property interest in unfinished hourly fee matters that departing partners take with them to new firms.
March 05, 2018 at 02:29 PM
5 minute read
The original version of this story was published on The Recorder
SAN FRANCISCO — In a closely watched law firm bankruptcy case, the California Supreme Court on Monday held that dissolved firms aren't entitled to a portion of unfinished hourly fee matters that departing partners take with them to new firms.
“Any expectation the law firm had in continuing the legal matters cannot be deemed sufficiently strong to constitute a property interest allowing it to have an ownership stake in fees earned by its former partners, now situated at new firms, working on what was formerly the dissolved firm's cases,” wrote Justice Mariano-Florentino Cuéllar in a unanimous opinion.
The underlying case stems from Heller Ehrman's 2008 dissolution. The trustee charged with unwinding the Heller estate sued 16 law firms that recruited partners after the firm filed for bankruptcy, claiming that the estate was owed profits from ongoing hourly matters that partners took with them.
All but four of the firms settled. The four remaining firms—Orrick, Herrington & Sutcliffe; Jones Day; Davis Wright Tremaine; and Foley & Lardner—won a ruling in 2014 from U.S. District Judge Charles Breyer of the Northern District of California, who found that attorneys and firms don't have a property interest in ongoing client matters.
Heller's bankruptcy trustee appealed Breyer's ruling to the U.S. Court of Appeals for the Ninth Circuit, which in turn certified the following question to California's highest court in 2016: Under California law, does a dissolved law firm have a property interest in legal matters that are in progress but not completed at the time the law firm is dissolved, when the dissolved law firm had been retained to handle the matters on an hourly basis?
In Monday's opinion, Cuéllar wrote that the Heller estate was asking for an interest in matters that it didn't work on and that, in fact, it couldn't work on since it had ceased operation. “In doing so, it seeks remuneration for work that someone else now must undertake,” Cuéllar wrote. “Because such a view is unlikely to be shared by either reasonable clients or lawyers seeking to continue working on these legal matters at a client's behest, Heller's expectation is best understood as essentially unilateral.”
Cuéllar wrote that a contrary finding would make it difficult for former partners to bring unfinished matters with them to new firms and for clients to choose their own lawyer. The court, however, did hold that the Heller estate should be able to bill and collect on a “narrow category of winding up activities”—things such as filing motions for continuances, and packing and shipping client files, which were necessary to “preserve the partnership business.”
Jones Day's Shay Dvoretzky, who represented his firm at oral argument in the case late last year, said that the law firm defendants were pleased with the decision because it sided with them on an important principle. “As lawyers, we serve our clients' interest and clients own their matters—not lawyers,” he said.
Orrick's Eric Shumsky, who argued on behalf of his firm as well, said that the decision “establishes, once and for all, the commonsense proposition that the firm that does the work is the firm that gets paid.”
“It enables lawyers to move to the firms that are the best fit for them and their clients, and it makes sure that clients have control over who handles their matters and who gets paid for doing so,” Shumsky said.
Diamond McCarthy's Christopher Sullivan, who represents the Heller bankruptcy trustee, said that he was “disappointed by the ruling but proud of the fight that we put up for our clients.”
“This is the death knell to the unfinished business claims” in law firm bankruptcy, said Blank Rome's Leslie Corwin. Corwin, who drafted Heller Ehrman's dissolution plan back when he practiced at Greenberg Traurig, said that recruiting law firms wouldn't be willing to take on lawyers and staff from dissolving firms if they had to hand over profits from ongoing hourly matters.
Unfinished business claims, which had become a staple of law firm bankruptcies over the past decade or so, have recently started to fizzle in the wake of a stream of critical decisions. According to a search of public unfinished business settlements on large-firm bankruptcy dockets by The American Lawyer, firms had paid out $35.5 million to bankruptcy trustees in settlements as of October 2012.
Large law firms, however, started to fight claims rather than settle shortly thereafter. The New York Court of Appeals found in 2014 that dissolving law firms Coudert Brothers and Thelen did not have a right to hourly fees earned by former partners once at their new firms under New York law. Following that decision, two U.S. district judges in San Francisco—Breyer and James Donato—tossed out unfinished business claims in Heller Ehrman and Howrey, which were governed by California and District of Columbia partnership law, respectively. Just last week the Ninth Circuit certified a similar question to the District of Columbia Court of Appeals in the bankruptcy of IP and litigation firm Howrey.
University of California, Davis, School of Law professor Robert Hillman, the author of a treatise on lawyer mobility, said that Monday's decision treats law firms differently than other partnerships. While the decision takes into account the rights of clients to choose their own law firm, he said it ignores the rights of former employees, associates and creditors who face losses when law firms dissolve.
“I think what they've done in the opinion is continue the judiciary's creation of special rules for lawyers,” Hillman said.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllSidley Partner Relocates From D.C. to Miami as Firm Pursues Florida Growth
3 minute readTexas Lawyers and Campaign Fundraising: Which Presidential Candidate Is Leading?
3 minute readKing & Spalding Adds Veteran Antitrust Litigator From White & Case in New York
3 minute readJackson Walker Faces Greater Scrutiny After Disclosure of Texts Over Judge's Relationship
5 minute readTrending Stories
- 1Infant Formula Judge Sanctions Kirkland's Jim Hurst: 'Overtly Crossed the Lines'
- 2Abbott, Mead Johnson Win Defense Verdict Over Preemie Infant Formula
- 3Preparing Your Law Firm for 2025: Smart Ways to Embrace AI & Other Technologies
- 4Greenberg Traurig Initiates String of Suits Following JPMorgan Chase's 'Infinite Money Glitch'
- 5Data-Driven Legal Strategies
Who Got The Work
Michael G. Bongiorno, Andrew Scott Dulberg and Elizabeth E. Driscoll from Wilmer Cutler Pickering Hale and Dorr have stepped in to represent Symbotic Inc., an A.I.-enabled technology platform that focuses on increasing supply chain efficiency, and other defendants in a pending shareholder derivative lawsuit. The case, filed Oct. 2 in Massachusetts District Court by the Brown Law Firm on behalf of Stephen Austen, accuses certain officers and directors of misleading investors in regard to Symbotic's potential for margin growth by failing to disclose that the company was not equipped to timely deploy its systems or manage expenses through project delays. The case, assigned to U.S. District Judge Nathaniel M. Gorton, is 1:24-cv-12522, Austen v. Cohen et al.
Who Got The Work
Edmund Polubinski and Marie Killmond of Davis Polk & Wardwell have entered appearances for data platform software development company MongoDB and other defendants in a pending shareholder derivative lawsuit. The action, filed Oct. 7 in New York Southern District Court by the Brown Law Firm, accuses the company's directors and/or officers of falsely expressing confidence in the company’s restructuring of its sales incentive plan and downplaying the severity of decreases in its upfront commitments. The case is 1:24-cv-07594, Roy v. Ittycheria et al.
Who Got The Work
Amy O. Bruchs and Kurt F. Ellison of Michael Best & Friedrich have entered appearances for Epic Systems Corp. in a pending employment discrimination lawsuit. The suit was filed Sept. 7 in Wisconsin Western District Court by Levine Eisberner LLC and Siri & Glimstad on behalf of a project manager who claims that he was wrongfully terminated after applying for a religious exemption to the defendant's COVID-19 vaccine mandate. The case, assigned to U.S. Magistrate Judge Anita Marie Boor, is 3:24-cv-00630, Secker, Nathan v. Epic Systems Corporation.
Who Got The Work
David X. Sullivan, Thomas J. Finn and Gregory A. Hall from McCarter & English have entered appearances for Sunrun Installation Services in a pending civil rights lawsuit. The complaint was filed Sept. 4 in Connecticut District Court by attorney Robert M. Berke on behalf of former employee George Edward Steins, who was arrested and charged with employing an unregistered home improvement salesperson. The complaint alleges that had Sunrun informed the Connecticut Department of Consumer Protection that the plaintiff's employment had ended in 2017 and that he no longer held Sunrun's home improvement contractor license, he would not have been hit with charges, which were dismissed in May 2024. The case, assigned to U.S. District Judge Jeffrey A. Meyer, is 3:24-cv-01423, Steins v. Sunrun, Inc. et al.
Who Got The Work
Greenberg Traurig shareholder Joshua L. Raskin has entered an appearance for boohoo.com UK Ltd. in a pending patent infringement lawsuit. The suit, filed Sept. 3 in Texas Eastern District Court by Rozier Hardt McDonough on behalf of Alto Dynamics, asserts five patents related to an online shopping platform. The case, assigned to U.S. District Judge Rodney Gilstrap, is 2:24-cv-00719, Alto Dynamics, LLC v. boohoo.com UK Limited.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250