Weighing a key issue in the bankruptcy of the now-defunct law firm Howrey, a Washington, D.C., appeals court on Monday grappled with competing views on whether dissolved law firms can claim a portion of hourly fees from matters that departed partners brought to a new firm.
A panel at the District of Columbia Court of Appeals—comprised of Chief Judge Anna Blackburne-Rigsby, Associate Judge Corinne Beckwith and Senior Judge Vanessa Ruiz—heard oral arguments pitting Howrey’s bankruptcy trustee, Allan Diamond, against several large law firms that hired former Howrey partners around the time of the firm’s dissolution in 2011.
Monday’s arguments focused on the so-called unfinished business doctrine, the idea that a defunct law firm’s bills for ongoing matters qualify as assets for the bankrupt firm that can, in turn, be used to repay creditors.
The D.C. appeals court is looking at the issue after the U.S. Court of Appeals for the Ninth Circuit certified three questions in an underlying case, in which Howrey’s bankruptcy trustee sued the law firms in California federal court. The trustee is looking to recover profits from hourly cases that started at Howrey before its dissolution in 2011 but were completed after partners had moved on to new law firms. The Ninth Circuit asked for input on the case because Howrey’s partnership was subject to D.C. law.
Arguing for the Howrey trustee on Monday, Christopher Sullivan of Diamond McCarthy urged the D.C. appeals court to adopt the view that a law firm’s bankruptcy estate holds onto a property interest in client matters that were pending when a law firm dissolved. That interest continues “for the life of the matter,” said Sullivan, meaning that Howrey’s estate deserves a cut of profits from matters that partners took with them when they left the now-defunct firm.
“The hourly engagements are the primary assets of the firm and they need to be protected,” Sullivan said. “When the firm is in dissolution and capital can’t be returned to partners, then it’s the liability of the creditors that has to be satisfied first.”
Jones Day’s Shay Dvoretzky, arguing for his firm and other defendants, including Hogan Lovells, Kasowitz Benson Torres, and Sheppard, Mullin, Richter & Hampton, took an opposing view. He told the D.C. appellate judges that a client matter belongs to the client.
Even though modern-day law firms make investments in establishing client relationships that they hope will secure a given matter and future work down the road, legal ethics rules dictate that clients are ultimately in charge and can choose to take their work elsewhere, said Dvoretzky.
“The partner doesn’t transfer the matter; the client is making the choice,” he said.
That dynamic, he added, makes a law firm’s initial investment into establishing relationships one of the firm’s expenses, more akin to overhead than an asset. So while a firm might account for startup costs when setting its hourly rates for a given client matter, the firm is only entitled to those hourly fees for legal work it actually provides on the matter, according to Dvoretzky.
“The core principle is that the firm has a right to be paid for the work that it did,” Dvoretzky said. He added, however, that, once “a firm has been paid for the work that it does, it has no further property interest.”
Other state appeals courts have ruled on unfinished business questions in connection with other law firm bankruptcies. In March, the California Supreme Court ruled against the bankruptcy trustee for Heller Ehrman, finding that dissolved firms are not entitled to a portion of unfinished hourly fee matters that departing partners take with them.
The California ruling was in line with a New York Court of Appeals decision that arose out of the bankruptcies of Thelen and Coudert Brothers. The New York court decided in 2014 that firms don’t have ownership of client matters and that lawyers are entitled only to fees they earn from working on a specific matter.
All of the unfinished business doctrine cases have been closely watched among many in the legal community. At the D.C. appeals court, the law firms looking to fend off claims for unfinished business have received a spate of outside support in the form of amicus briefs. One of those came from the American Bar Association, which in July told the appeals court that the Howrey trustee’s position was “flatly inconsistent” with legal ethics rules that emphasize client choice.