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Former Heller Partners Face Tug-of-War Over Profits
The Recorder
March 13, 2009
image: Caroline Fong
Lawyers who were partners at Brobeck, Phleger & Harrison can attest that being a former partner of a defunct firm isn't much fun.
Even less fun, for six of them: being the former partner of two dissolved firms. The Brobeck estate this week sued a half dozen of its former partners who'd gone on to work at Heller Ehrman. The suit is aimed at protecting any claims the Brobeck estate may have to profits the partners took from the bankrupt Brobeck to Heller. Heller, of course, is now in bankruptcy court itself.
Adding to the misery potential, Heller's creditors took steps last week to assert their rights to sue that firm's former partners under the same theory: Under Jewel v. Boxer, a law firm can seek to recover profits from cases and clients lost when a partner exits. According to the motion filed by Heller's creditors committee, a financial adviser is already investigating fair settlement amounts for former Heller partners.
The Brobeck defendants include Craig Andrews, who was the co-chairman of Heller's Venture Law Group until leaving for DLA Piper last May. He declined to comment.
"Heller's financial condition essentially forced [the trustee's] hand," said Bennett Murphy, a partner at Hennigan, Bennett & Dorman who filed the suit on behalf of bankruptcy trustee Ronald Greenspan.
"He couldn't wait and find out that the firm had no assets and couldn't pay on a judgment."
The complaint asks that the defendants turn over profits from unfinished Brobeck business but doesn't specify a damages amount. The trustee does not know how much is at stake because the defendants hold the accounting books, the complaint says.
Jewel v. Boxer, 156 Cal.App.3d 171, is a 1984 judicial decision that essentially says that open cases, and profits arising from them, are assets that belong to the partnership, not the partner or his or her new firm.
Almost a year ago, Greenspan's lawyers filed a similar suit against Dorsey & Whitney, Orrick, Herrington & Sutcliffe, and partners who'd gone to each. Murphy said the trustee has entered tolling agreements with three other firms, which he declined to name.
A few days before Greenspan filed the suit, in an apparent coincidence, Heller's creditors committee asked Judge Dennis Montali of the U.S. Bankruptcy Court for the Northern District of California to grant it the authority to proceed against former Heller partners under the Jewel theory.
The motion urges quick action in part because the creditors are concerned that accounts receivable may be reduced by negotiations between the firm's former partners and clients.
Thomas Willoughby, who represents Heller's creditors committee, said he wants to ensure that potential Jewel claims "aren't lost inadvertently in a settlement of an accounts receivable."
A suit isn't guaranteed, said Willoughby, a partner at Felderstein Fitzgerald Willoughby & Pascuzzi. He'd prefer "a consensual plan as opposed to the Brobeck style mass litigation."
Willoughby was referencing Greenspan's settlement with 200 former Brobeck partners for $24 million on various claims. Greenspan also cited Jewel in settling with Morgan, Lewis & Bockius, which paid Brobeck's estate $10.2 million in 2004 to settle claims related to its acquisition of 58 Brobeck partners. Clifford Chance agreed to a similar $3.75 million settlement earlier that year.
Two former Heller partners, who spoke on condition of anonymity, said the moves come as no surprise.
"This is going to be a long, complicated affair that will take probably years to resolve," said one former partner. "It's unfortunate because it might have not been necessary had Heller Ehrman been allowed to dissolve in an orderly fashion and had its assets not been seized, but that's in the past, and here we are. This is probably just one step along the way."
Another partner said the implications of bankruptcy were always clear.
"I don't think it comes as any surprise. Everybody understood there was a risk of such cases being filed if we filed for bankruptcy. It wouldn't be surprising at all if at some point there would be some 'tax' you'd have to pay."
The Recorder reported last month that creditors are eyeing more than $7 million that was distributed to partners that retired from or left Heller between January 2008 and the firm's dissolution.
Attempts to recover those distributions would be unrelated to the Jewel theory and would turn instead on whether the payments amounted to fraudulent transfers.
Ron Oliner, who represented the trustee in the dissolution of Skjerven Morrill, and sued a number of former partners on various theories, said solvency would be a key question in such claims.
"The question of whether partners in the Heller case will be forced to pay something back to the estate hinges on whether the debtor was solvent at the time of the transfers," Oliner said.
Solvency has not come up in Heller's bankruptcy hearings so far, and Montali hasn't made any determinations on it.
Most of the defendants in the Brobeck suit worked in Heller's San Diego office. Aside from Andrews, the suit names Michael Kagnoff and Martin Nichols, both of whom went to DLA Piper's San Diego office last April; Roy Crawford, now at McDermott, Will & Emery in Menlo Park; Hayden Trubitt, now at Stradling Yocca Carlson & Rauth in San Diego; and Richard Parker, who appears to be practicing law in Auburn, according to the State Bar of California.
Kagnoff and Trubitt declined to comment. Parker, Nichols and Crawford did not return a call seeking comment.
