Edwin B. Reeser
Jerome Kowalski
A number of Pennsylvania's largest law firms are caught up in a dispute in the Second Circuit over whether "unfinished business" of a disbanding firm from which they've hired attorneys is property of that defunct firm and needs to be returned.
And by "property," the lower court meant profits the new firms earned on cases initiated at a defunct firm — in this case the long-since disbanded Coudert Brothers.
Dechert, Duane Morris and K&L Gates are among 10 law firms asking the U.S. Court of Appeals for the Second Circuit to reverse a Southern District of New York judge's decision that client matters left unfinished by Coudert at the time of its dissolution are the property of Coudert. Based on that finding, U.S. District Judge Colleen McMahon ruled the partners at the 10 law firms sued by Coudert's bankruptcy plan administrator have a duty to account to Coudert with respect to profits on post-dissolution services they performed on client matters after they became partners at the new firms.
The other seven firms involved, which include some with Pennsylvania offices, are Akin Gump Strauss Hauer & Feld, Arent Fox, Dorsey & Whitney, Jones Day, Morrison & Foerster, Sheppard Mullin Richter & Hampton and DLA Piper.
In the July 30 petition for permission to appeal McMahon's ruling, which was certified for interlocutory appeal, the firms said the money they were paid on matters that originated at Coudert was only for work done at their firms and not at Coudert. The profits on that work should remain at their firms, they argue.
The law firms aren't fighting the fight just for themselves. They reference in their petition that a ruling clarifying the law in this case will have an effect on similar disputes in bankruptcies involving Thelen and Dewey & LeBoeuf — two firms from which several Pennsylvania firms poached lawyers around the time of their dissolutions.
In their petition, the law firms accuse McMahon of ignoring New York law and instead adopting the 1984 California case Jewel v. Boxer and its progeny. Under Jewel , when a law firm dissolves, pending client matters remain business of the firm and must be wound up. Therefore, a partner who continues work on a firm's pending matters after joining a new firm is merely winding up those affairs of the former firm.
"This rationale encourages partners of a firm that is having financial problems to withdraw early, and penalizes partners that remain to help the firm recover, if they fail to withdraw prior to dissolution," the firms said in their petition.
The firms also argue that the weight of Jewel is in doubt because California has adopted the Revised Uniform Partnership Act. The revised act makes room for the argument that any partner engaged in winding up a defunct firm's business is entitled to reasonable compensation, not just surviving partners who were at the firm at the time of its dissolution, the firms argue.
Unlike Jewel , New York case law apportions fees between the dissolved firm and the new firm, similar to how a contingency fee would be split when a lawyer switches firms in the midst of a matter, the firms said.
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