Litigation launched by the estates of two bankrupt firms illustrates the perils of plucking partners from sinking ships, says Ross Todd

The email from Orrick Herrington & Sutcliffe chairman Ralph Baxter to newly-tapped Coudert Brothers chair Clyde Rankin on 12 February 2005 was short, friendly and direct: "Skip, congratulations on your election. I look forward to seeing you this week. Let's talk on Monday."

The message, it turned out, wasn't just an electronic high-five from one firm leader to another. It was also the start of what evolved into talks between Baxter and Rankin about a possible merger of their firms. The email's inclusion in a lawsuit filed in December against Orrick by the administrator overseeing the bankrupt Coudert estate underscores where those talks led.

That complaint, filed in federal bankruptcy court in Manhattan, accuses Orrick of engaging in merger talks while simultaneously recruiting 12 partners from London and Moscow. The lateral moves, according to the complaint, dealt a "fatal blow" to Coudert – which voted to dissolve in August 2005, six months after Baxter's congratulatory email – by pushing the number of equity partners at the firm below what loan agreements with Citibank and JP Morgan Chase Bank required.

At press time, Orrick had not filed a response to the suit. In a December statement, the firm said, in part: "Orrick at all times acted properly in hiring Coudert attorneys who voluntarily chose to leave their former firm and affiliate with Orrick."

The suit against Orrick is the latest – and most explosive – of more than a dozen claims that Coudert administrator Development Specialists has filed against firms that picked up partners fleeing the sinking ship. One suit against Baker & McKenzie settled in August 2010 for $6.65m (£4.1m). (Bakers also agreed to forfeit most of its stake in a potential $17m (£10.6m) contingency fee tied to work by former Coudert partners.)

The Coudert estate was not the only one filing suit in December. In the San Francisco bankruptcy court, the Heller Ehrman administrator sued 48 firms that took on Heller partners in the wake of that firm's 2008 collapse. The suits claim the Heller estate is entitled to proceeds from ongoing matters those partners took to their new firms. McGrane Greenfield partner Christopher Sullivan, who represents Heller's plan administrator, puts the value of the potential claims in the tens of millions of dollars.

Does the litigation launched by the Coudert and Heller estates mean that firms snagging partners and practice groups from failing shops can count on being sued over proceeds from ongoing matters those hires bring with them?

Not necessarily, says UC Davis School of Law professor Robert Hillman. "Most dissolving firms proceed to dissolve without going into a litigation phase," says Hillman, who literally wrote the book on the subject, Hillman on Lawyer Mobility. He notes that "there are just hundreds of law firms that have wound down in an orderly fashion in the last 10 years." The Heller and Coudert estates, he says, are "exceptions to the rule" with one big thing in common: creditors willing to pursue recovery through litigation.

Latham & Watkins partner Peter Gilhuly, who has represented Thelen and Darby & Darby as those firms have dissolved, says that so far both have managed to do so without suing firms that picked up their partners. In many liquidations, Gilhuly explains, a firm's primary bank will step in and take control of the firm's cash and receivables as a secured lender. Other creditors, he says, "have just understood there was no money there" to satisfy any remaining claims. And without creditors pressing for recovery, fading firms tend to slip silently into oblivion.

David Eisen, a partner in the Los Angeles office of Wilson Elser Moskowitz Edelman & Dicker who has represented law firms in dissolution-related matters, agrees that until fairly recently it has been unusual for exposure to liability to turn into actual litigation when law firms dissolve. One reason: "Clients don't like reading about their lawyers fighting in the newspaper," he says. A result of this desire for discretion, he adds, is that conflicts between dissolving firms and those that hire the former partners "just don't result in many reported [cases], which makes the landscape uncertain."

The uncertainty, says Hinshaw & Culbertson New York partner Anthony Davis, weighs on sinking firms and on those that serve as lifeboats. Both, Davis says, must balance partnership law (which generally bars the creation of barriers to partner movement) against laws governing commercial disputes (which state that you can't tortiously interfere with someone else's business). Further complicating matters: those who may have information about a firm's health – the partners being recruited – often have a fiduciary duty to keep financial information confidential. "In many of these instances part of the problem is that there's a game of chicken going on," says Davis, the co-author of a book on risk management for law firms.

The Coudert complaint claims that Orrick was playing such a game. In March 2005, after Baxter began talks with Rankin, the Orrick chair's assistant emailed Peter O'Driscoll, a London-based Coudert partner. "How about breakfast for you and Ralph on 16 March, 8am at Claridge's?" the assistant wrote, according to an email attached to the complaint and cited as evidence that Orrick was "feigning interest" in merger talks to gauge the profitability of partners it sought to "cherry pick". As discussions with individual lawyers progressed, according to the complaint, Baxter said he had an obligation to his own firm to end the merger talks and target the lateral hires.

Without addressing the Coudert-Orrick dispute specifically, Hillman says there is clearly more than just an academic interest in clarifying the law about what's proper when recruiting partners from distressed firms. "People are operating in a Wild West sort of environment – going after each other like a bunch of gunslingers with no guidance."

This article first appeared in the February edition of The American Lawyer, a US affiliate title of Legal Week.