Update, 8/30/13, 11:30 a.m. EST: The 10th paragraph below has been updated to include information on a settlement approved this week between McDermott, Will & Emery and the Howrey estate.
Two-and-a-half years after Howrey's March 2011 dissolution scattered the firm's partnership across the legal universe, some of those former colleagues have reunited to fight what they view as a common foe—the defunct firm's Chapter 11 bankruptcy trustee, Allan Diamond.
This week, six firms—including Pillsbury Winthrop Shaw Pittman; Ropes & Gray; and Shearman & Sterling—filed a joint defense motion in response to suits Diamond filed against each of them earlier this year in U.S. bankruptcy court in San Francisco. In the suits, Diamond seeks the return of money from client matters that Howrey partners took with them to their new professional homes in the months prior to their former firm's collapse. Based on the hotly contested legal precedent established through the 1984 California case known as Jewel v. Boxer, the suits claim the Howrey estate has an ownership right over work started before the firm dissolved.
For the most part, the firms where former Howrey partners landed disagree.
"Clients are not property," says Nancy Newman, a partner at Hanson Bridgett in San Francisco who represents Chicago's Neal, Gerber & Eisenberg, one of the firms that has signed on to the joint defense. "We agree with all the other counsel; it's not appropriate to apply this doctrine in this context."
In a 75-page memo filed Monday supporting the group's motion to dismiss the suits, the firms, a group that also includes Kasowitz Benson Torres & Friedman and Kilpatrick Townsend & Stockton, argue that because nearly all of the ex-Howrey partners at the six firms in question left before the defunct firm voted to dissolve, "the unfinished business doctrine does not apply here." The firms also say that California's Jewel shouldn't apply because Howrey was formed as a partnership under District of Columbia law. The motion argues that "the District of Columbia imposes affirmative obligations on lawyers to place the needs of their clients first . . . even at the expense of the firm’s profits" and that if enforced, the unfinished business rule could encourage partners in future law firm dissolutions "to abandon unfinished client work knowing that no new law firm would accept a matter only to have to disgorge all profits earned as a result of the new firm’s work."
David Keyko, a Pillsbury partner in New York who is serving as coordinating counsel for the joint defense group, said Thursday that he sees the push by bankruptcy trustees to recover money from unfinished business "very shortsighted" and that application of the rule could pose ethical conflicts for lawyers put in the position of working at a firm that is falling apart.
On Monday, Jones Day filed its own motion to dismiss an unfinished business suit Diamond brought against it, asserting, among other things, that the trustee's interpretation of D.C. partnership laws is unprecedented and flawed. Jones Day has been one of the more vocal opponents of such unfinished business suits, both in the Howrey case and the bankruptcy of now-defunct Heller Ehrman.
All told, Diamond, a name partner at Texas firm Diamond McCarthy, has said he hopes to recover $200 million from 71 firms that hired Howrey partners. He has sued at least 19 firms so far and said earlier this year that he was in settlement talks with the vast majority of the others on his list. The individual suits filed against firms do not specify the sums he seeks to recover.
Diamond McCarthy partner Andrew Ryan, who has been working on the unfinished business suits, said he and Diamond were not able to comment as of Thursday afternoon. In court filings, Diamond dismisses the argument that Howrey's partners shielded themselves from unfinished business claims by agreeing to a so-called Jewel waiver on the eve of dissolution. He calls the move "a textbook fraudulent transfer" that was executed for the partners' personal benefit and "for no consideration or other value to Howrey."
Some firms have already chosen not to fight Diamond. U.S. Bankruptcy Judge Dennis Montali signed off this week on a $105,000 settlement struck between Diamond; McDermott, Will & Emery; and former Howrey partner Martina Maier. The deal releases McDermott from what the Howrey estate estimated at $514,966 in unfinished business claims and releases Maier, a McDermott partner in Brussels, from claims seeking the return of money paid to her when Howrey was allegedly insolvent (For the most part, similar so-called overdistribution claims against the rest of Howrey's former partners are in the early stages).
In March, Holland & Knight and Fenwick & West agreed to pay the estate $26,197 and $15,000, respectively, to settle unfinished business claims. Two weeks ago, Diamond struck a major settlement deal with Baker & Hostetler, which took over two antitrust contingency fee cases when 11 Howrey partners joined the firm. As part of the deal, Baker & Hostetler agreed to pay the Howrey estate $41 million, which includes $3 million in unfinished business claims and other claims unrelated to the contingency fee matter.
That deal alone will help cover nearly all of Howrey's debt to its primary lender, Citibank, Diamond told The Am Law Daily, and increases the potential for a bankruptcy exit.
As Diamond pushes to get money from the rest of the firms, he continues to face challenges mounted by those in the joint defense, as well as several other firms—including Hogan Lovells; Sheppard Mullin Richter & Hampton; and Venable—that the unfinished business suits should be heard in district court rather than bankruptcy court. Similar arguments have emerged—and, in some instances, been successful—in the Heller, Thelen, and Coudert Brothers bankruptcies. All cite a 2012 U.S. Supreme Court case, Stern v. Marshall, which found that district court judges, not their bankruptcy court counterparts, have the constitutional authority to rule on common law questions such as the unfinished business claims.
A hearing related to the Howrey unfinished business claims is scheduled for October 23.