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Brobeck Survivors Argue for Right to Clients
The Recorder
April 14, 2009
Ten former Brobeck partners and their new firms argued Monday that they were completely in their rights to continue to work with their clients, in a hearing closely watched by both sides of the Heller Ehrman bankruptcy.
A suit filed by the trustee for bankrupt Brobeck, Phleger & Harrison claims the former partners stole business from the defunct firm. The ex-partners contend that the firm's last partnership agreement, enacted as Brobeck faced its collapse in 2003, permitted them to take clients and work to their new firms. Arguments on Monday revolved around whether that agreement can waive the rights of partners to sue for profits under the Revised Uniform Partnership Act and case precedent defined by a 1984 judicial decision in Jewel v. Boxer.
Jewel claims are rarely litigated, but the case is often used to squeeze out settlements, and has been instrumental in several settlements in the Brobeck bankruptcy.
On Friday, Judge Dennis Montali, of the Northern District of California Bankruptcy Court, issued a tentative ruling that would grant the defendants summary judgment on five of the suit's nine counts, but left the final four, dealing with fraudulent conveyance, undecided. If the defendants win, undermining Jewel, it would have implications nationwide for hiring practices surrounding partners from defunct firms.
Montali heard three hours of arguments Monday, but did not rule. The judge is well-versed in big firm bankruptcies: He has presided for six years over Brobeck's case and took on Heller's bankruptcy when that firm filed on Dec. 28.
Several lawyers involved in the Heller case were at the hearing on Monday, including estate counsel John Fiero, a partner at Pachulski Stang Ziehl & Jones, and Thomas Willoughby, partner at Felderstein Fitzgerald Willoughby & Pascuzzi, who represents Hellers' creditors. Montali recently granted Heller's creditors standing to sue former Heller partners on Jewel v. Boxer doctrine.
Montali's tentative ruling on Friday said the final partnership agreement douses the trustee's arguments that the former partners took "unfinished business" with them when Brobeck collapsed. After that point, he said, it was new business.
But Montali did not issue a tentative ruling on whether the partners could have fraudulently transferred assets away from the dying firm, causing its demise. And while he stated that the waiver in the final partnership agreement was valid and not unreasonable, the trustee would not accept that Monday.
The enactment of the waiver is what's under attack in this complaint, said Bennett Murphy, a partner at Hennigan, Bennett & Dorman and counsel for trustee Ronald Greenspan. The waiver attempted to relieve the partners of their obligation to hand over profits at the moment the creditors became entitled to them.
"To say that when the moment comes, that those golden handcuffs are no longer useful, because the firm is broke, because it can't pay its creditors, that then and at that point ... partners can go on to their new job without a cloud of having to account back to Brobeck, to the creditors ... I don't think it's counter to a public policy to say that it is a fraudulent transfer," Murphy told the court.
Montali, who is a big fan of creating hypothetical examples with imaginary firms composed of courtroom audience members or counsel, asked both sides repeatedly how the arguments in the case would change if the final agreement had not been enacted.
"If you and I formed a law firm tomorrow ... and we decided to really get around Jewel by [deciding] that from day one nobody had to account for anything, now we are running the risk that one of us might run out the door with a client, but certainly, had we dissolved five years later, there'd be no fraudulent transfer, would there?" Montali asked.
Murphy agreed.
The trustee's complaint, filed March 2008, relies heavily on Jewel, 156 Cal.App.3d 171, which essentially says that open cases, and profits arising from them, are assets that belong to the partnership, not the partners or their new firms. But that case involved a four-partner firm that faced trouble when the two most profitable partners left.
"It is not even clear to the court that the trustee, on behalf of Brobeck, would have standing to complain, because breaches of fiduciary duty would seem to be able to be prosecuted only by partners against partners," Montali wrote in his tentative decision.
It's rare that defendants in a Jewel case fight back instead of settling. Morgan, Lewis & Bockius paid Brobeck's estate $10.2 million in 2004 to settle claims related to its acquisition of 58 Brobeck partners. Morgan, Lewis Chairman Francis Milone said at the time that the issues were "far from clear" but that the firm settled to avoid protracted litigation. Clifford Chance agreed to a similar $3.75 million settlement earlier that year.
The ex-partners named in the suits are Grady Bolding, Frederick Holden Jr. and Jeffery Hermann of Orrick; Dorsey's Patrick Arrington (who has since joined Fortis General Counsel), John Baker, Ellen Bancroft, David Hayes and Gabrielle Wirth; James Baker, who moved from Orrick to Jones Day in 2005; and Scott Santagata, formerly of Dorsey.
Greenspan has also collected an estimated $24 million from suits against 222 former Brobeck partners for various claims. The 10 being sued now were part of that group of 222, which all entered tolling agreements with the trustee in September 2005 that carved out and extended the statute of limitations on the Jewel issues. Greenspan terminated those tolling agreements last year before suing.
How Montali rules will send a message on the potential risks to firms which hire partners of dissolved and dissolving firms. In the past six months alone, three Am Law 100 firms have dissolved, sending hundreds of partners into the marketplace.
The public policy implications were not lost on the defendants.
"What would happen to the lawyer who had one large case for a client that accounted for most of his time. No one would hire that lawyer. It's just common sense," Patrick McLaughlin, a partner representing his firm, Dorsey & Whitney, told Montali. "We've got to think of the next firm."
