This story originally appeared in sister publication New York Law Journal.
ALBANY – The hourly fees earned on client matters that attorneys take with them when switching firms are not the “property” or the “unfinished business” of their old partnerships, the state Court of Appeals ruled Tuesday in a closely watched case involving the bankruptcies of Thelen and Coudert Brothers.
The unanimous court said finding that lawyers owe a continuing obligation to their old partnerships for work they do for clients after moving to new firms “does not comport with our profession’s traditions and the commercial realities of the practice of law today.”
“A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered,” Judge Susan Phillips Read (See Profile) wrote for the 7-0 court.
Attorneys in the two cases and others involving hourly billings in the wake of recent law firm bankruptcies said the ruling brings clarity to what trustees can seek from former firm attorneys who have moved on to other firms.
Chief Judge Jonathan Lippman (See Profile) and Judges Victoria Graffeo (See Profile), Robert Smith (See Profile), Eugene Pigott Jr. (See Profile), Jenny Rivera (See Profile) and Sheila Abdus-Salaam (See Profile) joined in Tuesday’s ruling.
The court made one ruling in the two cases, (Matter of Thelen) Geron v. Seyfarth Shaw, 136, and Matter of Coudert Brothers, 137.
The court’s analysis of New York’s 1919 Partnership Law and the “unfinished business” doctrine was prompted by certified questions from the U.S. Court of Appeals for the Second Circuit stemming from the Thelen and Coudert bankruptcies. Coudert dissolved in 2005 and Thelen in 2008.
In each matter, Thelen and Courdert trustees sought to hold the firms that employed their former lawyers—including Seyfarth Shaw, Jones Day, Dechert and Akin Gump Strauss Hauer & Feld—responsible to the dissolved firms for fees earned on cases that commenced at Thelen and Coudert.
The cases landed before the circuit after a conflict arose from contradictory rulings in two Southern District courtrooms.
In Thelen, Judge William Pauley ruled that the unfinished business doctrine did not apply to the hourly fees earned by former Thelen attorneys who took work to other firms. But in Coudert, Judge Colleen McMahon decided Coudert’s bankruptcy estate did have a valid interest in the hourly fees generated by matters that are now at other firms.
Read said it has long been a principle in New York that legal clients enjoy an “unqualified right” to end the relationship with their lawyers with no obligation other than for payment of completed services. “No law firm has a property interest in future hourly legal fees because they are ‘too contingent in nature and speculative to create a present or future property interest, given the client’s unfettered right to hire and fire counsel,” Read wrote, quoting Verizon, New England v. Transcom Enhanced Servs., 21 NY3d 66 (2013).
The court Tuesday rejected the argument by the bankruptcy trustees that its ruling in Stem v. Warren, 227 NY 538 (1920), supported the trustees’ view. Stem was a breach-of-fiduciary-duty case involving partners of an architectural firm, Read wrote, not one that defined the assets of a law partnership.
Read said adopting the view of the trustees would have “numerous perverse effects” from a public policy standpoint, among them allowing former partners of dissolved firms to enjoy an “unjust windfall” through legal work they did not perform.
The judges said it might also hasten the demise of struggling firms by encouraging lawyers to leave prior to dissolution, “with clients in tow,” rather than waiting too long and facing a continuing obligation to their former partners when they move to new firms.
Finally, Read wrote that such an arrangement would not be good for clients.
“Clients might worry that their hourly fee matters are not getting as much attention as they deserve if the law firm is prevented from profiting from its work on them,” she wrote.
The Second Circuit asked the state court:
• “Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the ‘unfinished business’ of the firm?”
• “If so, how does New York law define a ‘client matter’ for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?”
The court said “no” to the first question and consequently did not reach the second one.
The fee issue was pursued by the trustees, Yann Geron in Thelen and Development Specialists Inc. in Coudert.
‘Closes the Door’
William Brandt, CEO of Development Specialists, said the ruling “closes the door” on hourly unfinished business claims in New York and present difficulties nationwide.
“This is terrible public policy, but it’s the law,” he said in an interview Tuesday. “The decision says, ‘There is a partnership law, but there is kind of separate partnership law if you happen to be a lawyer.’”
For Coudert, unfinished business claims could have run into the tens of millions of dollars, and these types of claims would have been “the biggest single pocket of recovery for creditors,” Brandt said. “Without these claims being available to Coudert, and I would suspect to other liquidating law firms, returns to creditors will be greatly diminished,” he said.
Howard Magaliff, a partner with Rich Michaelson Magaliff Moser argued for Geron. David Adler, a partner at McCarter & English, represented Development Specialists.
Geron, a Fox Rothschild partner, said it was his duty as trustee to try to collect as much as possible on behalf of Thelen’s creditors.
“Until today, the doctrine of unfinished business included hourly fee matters, as it does in several jurisdictions outside New York applying the same statute,” Geron said in a statement. “On behalf of creditors, we are disappointed by the court’s decision, but respect that it is a unanimous ruling which gives trustees and law firms a clear path forward in New York.”
Scott Reynolds, a partner at Hogan Lovells, which signed onto an amicus brief against the trustees, said Tuesday’s determination “spells the end of these kinds of cases,” at least in New York.
In the Dewey & LeBoeuf bankruptcy, the trustee has subpoenaed law firms that took on Dewey partners for basic information about matters they took with them. The firms challenged the subpoenas but they ultimately had to respond to them while the Court of Appeals case was pending, said Reynolds, whose firm was also the target of a subpoena.
“Now that Court of Appeals has spoken, I think that really should spell the end of the discovery exercise” in the Dewey & LeBoeuf matter, Reynolds said.
The decision “has the effect of diminishing recoveries that might otherwise accrue to those estates,” Reynolds said. “It’s a positive development for lawyers and law firms and clients.”
But Christopher Sullivan, a Diamond McCarthy partner and litigation counsel to the plan administrator in the Heller Ehrman estate, said there are many states where the law is developed on this issue and he does not believe the law will change in those states.
In Heller’s case, a federal judge in San Francisco last month ruled that the bankruptcy estate has no claim to profits earned from client business former partners brought to new law firms. Sullivan said they plan appeal to the Ninth Circuit.
The New York decision does not have a binding impact, Sullivan said. “It’s something we will have to take into account, but I don’t think it’s going to change the … result, where we believe we’re going to ultimately prevail,” he said.
Joel Miller, managing partner at Miller & Wrubel, and Michael Levinson, a Chicago-based partner at Seyfarth Shaw, argued before the Court of Appeals that former Thelen and Coudert lawyers, respectively, were not bound to their former firms by the unfinished business doctrine. Shay Dvoretzky, a Washington, D.C.-based partner at Jones Day, represented his firm before the court.
Levinson said in an interview that the ruling “pretty clearly and definitively recognizes the primacy of the clients’ choice when selecting counsel.”
“I am hopeful that this will put an end to these types of lawsuits that we and other firms have faced” in the wake of law firm bankruptcies, Levinson said.
He noted that the court was concerned largely with the public policy implications of the unfinished business doctrine. The questioning of the judges during oral arguments on June 4 also focused on those issues, especially on how the court’s ruling would serve clients (NYLJ, June 5).
James Catterson, special counsel at Kaye Scholer, said the decision emphasizes the importance of the client in the attorney-client relationships. “The court says unequivocally that it’s only the clients’ interest that counts,” he said in an interview. “The clients are not in any way, shape or form the property of the firm.”
Catterson and Kaye Scholer associate Margaret Rogers were lead authors of an amicus brief from a dozen law firms submitted in Thelen arguing against the trustees’ position (NYLJ, May 12).
“Under the trustees’ view, it would have been very difficult to stay with the lawyer who you may have had for many years,” Catterson said. “Why should the client be on the hook for the pre-existing unrelated debt of a big law firm?”
Michael Cook, a partner at Schulte Roth & Zabel, which signed onto the law firms’ amicus brief, said, “It’s clearly the right result, and it provides the certainty that law firms and partners who move from one law firm to another need.”
Barbra Parlin, a bankruptcy partner at Holland & Knight, said that if the court had ruled the other way, it would have meant that lawyers who moved when their law firms dissolved “would have something hanging over their heads.”
“It would have make it more difficult to take on continuing representation of clients,” Parlin said. “The firms hiring lawyers coming out of dissolved firms will have less risk.”
Holland & Knight was also on the amici brief prepared by law firms seeking a rejection of the trustees’ position.