Let’s get the easy part out of the way. If you’re a law firm partner at a failing firm, you want your firm to avoid bankruptcy. That is a no-brainer. The list of reasons is long, and for many law firm partners, their own financial well-being is not at the top of the list. They worry about associates, support staff, clients, disruption in their professional lives, reputational damage and a million other things. But at some point, these partners must also confront the potential threat to their own financial condition. It has become standard operating procedure in law firm bankruptcies that trustees will pursue some variety of “clawback” claims against the partners, which seek recovery of amounts already paid to partners. The claims may seek to reach back months, or even years, and may seek some or all of what the partners have been paid.
So, what determines how sharp these claws are? We can draw some conclusions from comparing the recent partner clawback decisions in the bankruptcy cases of Dewey & LeBoeuf LLP and Thelen LLP. In Dewey, the court relied on unique features of New York insolvency and debtor-creditor law to allow the Dewey Trustee to proceed in his clawback suit to recover all of what former partners were paid by Dewey dating back more than three years. By contrast, in Thelen, the court interpreted the partnership agreement and relied on California contract law principles to permit the Thelen Trustee to seek recovery of some of the amounts the former partners were paid by Thelen, but only in its last year of operation. While both decisions are tough for law firm partners, the decision in Dewey and its reliance on uniquely harsh New York state law exposes partners to much greater risks than the decision in Thelen.
Dewey & LeBoeuf
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